Finan
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Financing the
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implementation of
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em
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regional seas conventions
and action plans
A guide for national action
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www.unep.org
United Nations Environment Programme
PO Box 30552, Nairobi, Kenya
Tel +254 20 762 12 34
Fax +254 20 762 39 27
uneppub@unep.org
www.unep.org
dep/0821/ha isbn 92-807-2707-9
unep Regional Seas Reports and Studies No. 180

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OmslagR5deflow 02-01-2007 22:20 Pagina 2
This report was prepared by the Regional Seas Coordinating Office and the Coordination Office of the
Global Programme of Action for the Protection of the Marine Environment from Land-based Activities
(gpa), both of the United Nations Environment Programme (unep). It is based on a previous 2006 report
prepared in cooperation with the Regional Organization for the Conservation of the Environment
of the Red Sea and Gulf of Aden (persga).
unep/gpa Coordination Office
unep Regional Seas Programme
po Box 16227
po Box 30552
2500 be The Hague
Nairobi
The Netherlands
Kenia
t
+31 (0)70 311 44 60
t
+254 20 762 40 33
f
+31 (0)70 345 66 48
f
+254 20 762 46 18
e
gpa@unep.nl
i
www.unep.org/regionalseas
i
www.gpa.unep.org
Acknowledgements
The unep Regional Seas Coordinating Office and the unep/gpa Coordination Office gratefully
acknowledge the financial contribution to this publication from the Governments of Belgium,
Ireland, the Netherlands, Norway and Sweden.
Compilation
Ulrik Weuder, Programme Officer at unep/gpa and Niels Konstantin Jensen, Consultant, with inputs
from Mirjam Schomaker, Consultant and Soffia Gudmundsdottir, Executive Secretary of pame
Editor
Brandy Vaughan
Design and type-setting
Mijke Wondergem (bno), Graphic designer, the Netherlands
Cover photo
Hong Kong harbour
caro/Lineair
Printing
Grafisch Centrum Mijdrecht, the Netherlands
Printed on wood-free and chlorine-free paper
The contents of this publication do not necessarily reflect the views or policies of unep or the editor,
nor are they an official record.
This publication may be reproduced in whole or in part and in any form of educational or non-profit
services without special permission from the copyright holder, provided acknowledgement of the source
is made. unep would appreciate receiving a copy of any publication that uses this publication as a source.
No use of this publication may be made for resale or for other commercial purposes whatsoever without
the prior permission in writing from unep.
For bibliographical purposes this document may be cited as:
(unep 2006). Financing the implementation of regional seas conventions and action plans:
A guide for national action. unep Regional Seas Reports and Studies No. 180. unep, The Hague
isbn 92-807-2707-9
© United Nations Environment Programme, 2006

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Financing the
implementation of
regional seas conventions
and action plans
A guide for national action
United Nations Environment Programme (unep)
Global Programme of Action for the Protection of the Marine Environment from Land-based Activities (gpa)
Regional Seas Programme

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i
f o r e w o r d
Foreword
The Regional Seas Programme (rsp), launched in 1974 in the wake of the 1972 United
Nations Conference on the Human Environment held in Stockholm, aims to address the
accelerating degradation of the world's oceans and coastal areas through the sustainable
management and use of the marine and coastal environment. At present, there are
18 regional programmes, six of which are directly administered by the United Nations
Environment Programme (unep www.unep.org/regionalseas).
The global Regional Seas Programme coordinated by unep is facilitating the enhancement
of sustainable financing within the rsps. This responds to one of the six global rs strategic
directions agreed upon and endorsed by the chairpersons or their representatives of the
Conference of the Parties and Intergovernmental Bodies of the Regional Seas Conventions
and Action Plans, at their 6th Global Meeting in Istanbul, Turkey in 2004. These strategic
directions aim at strengthening the programme at the global level, while continuing to
implement the work programmes of the individual rsps.
At their 7th Global Meeting in Helsinki, Finland in 2005, the rsps discussed the challenges
of sustainable financing with particular focus on financing at the level of the secretariat,
the programme itself and at the national level. The substantial increase in funding necessary
to reach the goals of the rsps in the sustainable management and conservation of their
marine and coastal environment requires the involvement of all member countries in
close cooperation with international partners and donors. In addition, short-term funding
through grants, donors, and subsidies will be essential until the necessary level of
sustainable, long-term financing has been established.
This report addresses the financing process as a whole: how to determine financing
needs, how to choose the plan that best fits these needs, as well as the challenges Regional
Seas Programmes will face while moving forward with the next phase of activities. Since
programme implementation will largely be at the national level, this report will focus on
domestic resource mobilization and national action plan implementation through National
Programmes of Action within the framework of the Global Programme of Action for the
protection of the marine environment from land-based activities (gpa). The rsps provide
a policy framework for the regional implementation of the gpa. The report identifies
some international and regional examples as well as introduces methods, tools, economic
instruments and mechanisms that can assist the Regional Seas Programmes, their secre-
tariats and member countries in creating a larger pool of long-term sustainable financing.
It is our hope that this report will provide options for regions and their countries to
systematically address the financial constraints that they are facing in the sustainable
management and conservation of the marine and coastal environment.
Dr. Veerle Vandeweerd
Head, unep Regional Seas Programme
Coordinator, unep / gpa Coordination Office

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f i n a n c i n g t h e i m p l e m e n t a t i o n o f r e g i o n a l s e a s c o n v e n t i o n s a n d a c t i o n p l a n s
Table of contents
Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
List of figures, boxes and tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
1
Financing Regional Seas Programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2
Financing a Regional Seas secretariat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
· Secretariat costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
· Financial considerations and options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3
Financing a Regional Seas programme of work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
· Programme costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
· Examples from Regional Seas Programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4
Developing and financing a national programme of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
· Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
· Developing a national programme of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
· Financing a national programme of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
· Challenges in implementing a programme of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.5
Financing for the protection of the marine environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
· Demand for environmental financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
· Effectively financing environmental action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
· Challenges in financing increased environmental protection. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
· Infrastructure investments (in developing countries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
Financing sources and strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1
Types of environmental financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(Grants, loans, bonds, polluter pays principle, economic instruments, subsidies
and public and private sector partnerships)
2.2
Donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
· Domestic and international donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
· The Global Environment Facility (gef) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
· The Kuwait Fund for Arab Economic Development (kfaed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
· The EcoFund ­ Polish debt for nature fund (a national donor fund) . . . . . . . . . . . . . . . . . . . . . 26
2.3
International financial institutions (ifis). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
· The World Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
· The African Development Bank (afdb). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
· The Asian Development Bank (adb) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
· The Islamic Development Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
· The KfW Bankengruppe (KfW Development bank) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.4
Commercial banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.5
Economic instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
· What are economic instruments?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
· Why use economic instruments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
· Types of economic instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
· Problems with economic instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

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t a b l e o f c o n t e n t s
2.6
Focussing on subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
· Subsidies for social or political purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
· Subsidies for environmental purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
· How to remove unwanted or harmful subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.7
Focussing on public-private partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
· ppps ­ a financing strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
· Factors to consider before entering into a partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
· International trends for private partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3
Strategic planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.1
Strategic planning for programme action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
· Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
· Strategic planning concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
· Legislative review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
· Challenges to implementation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
· Environmental financing strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2
Selection and implementation of financing sources and mechanisms . . . . . . . . . . . . . . . . . . . . 57
· Finding the appropriate financing sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
· Finding the appropriate economic instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
· Domestic resource mobilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
· Strengthening efficiency in managing public environmental expenditure. . . . . . . . . . . . . . 63
3.3 In
summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Annexes
1
Environmental challenges and environmental action priorities for the Red Sea
and Gulf of Aden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
2
Possibilities of public-private partnerships (ppps). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3
Legislative review and transposition: step-by-step . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
4
Financing strategy process: 11 action points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
5
Review of the potential of market-based instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6
The World Bank: vehicles to direct loan decisions, and financial products . . . . . . . . . . . . . . . . 73
7
10 Keys for action on municipal wastewater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
8
The persga environmental fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9
Criteria to evaluate the potential effectiveness of environmental taxes and charges . . . . . . 78
10
Dept-for-nature swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
11
Working with the KfW Development Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
12
Financing mechanisms for marine conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

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List of figures, boxes and tables
figures
1.1
Financing demands for Regional Seas Programmes and related activities
1.2 Staff-related
costs
1.3
Costs of accommodation and equipment
1.4
Costs related to meetings and travel
1.5
The npa process cycle
2.1
dac members' net oda in 2004
2.2
Sectoral distribution of adb loans, 2004
2.3
The process in a ppp project
2.4
Private sector infrastructure investments in emerging markets
3.1
Environmental financing strategy process
boxes
1.1
Expenditures of selected Regional Seas Programmes
1.2 Financing
the
ospar Secretariat: allocating contributions
1.3
Funding options for a Regional Seas programme of work
1.4
Programme cycle and specific steps for developing a npa process
1.5
Groups that carry out environmental action
2.1
The Nobaria power plant project in Egypt
2.2
Improving the water supply in Yemen
2.3
KfW financial cooperation with Egypt
2.4
Private sector participation in environmental investment is declining
3.1
Internationally recognized principles of good public expenditure management
tables
1.1
Selected economic indicators
2.1
Net oda receipts 2000-2004
2.2
Total gef allocation by focal area
2.3
gef grants by country, 1991-2005
2.4
Sectoral distribution of kfaed loans
2.5
kfaed grant distribution to member countries of persga
2.6
2004 EcoFund allocations
2.7 Disbursed
adb loans outstanding by country
2.8
Total 2004 commitments in selected countries, administered by KfW
2.9
Allocation of key responsibilities for main types of ppps

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v
a c r o n y m s
Acronyms
adb
Asian Development Bank
adf
African Development Fund
afdb
African Development Bank
boo
Build operate own
bot
Build operate transfer
cac
Command and control
cas
Country Assistance Strategy
cep
Caribbean Environment Programme
dac
Development Assistance Committee of oecd
deg
Deutsche Investitions- und Entwicklungsgesellschaft
eap
Environmental Action Programme
ebrd
European Bank of Reconstruction and Development
ec
European Commission
eca
Export Credit Agency
eecca
Easter Europe, Caucasus and Central Asia
ef
Environmental Fund
efs
Environmental Financing Strategy
ei
Economic instrument
eib
European Investment Bank
epf
Environmental Protection Fund
eu
European Union
3
Euro (currency)
fc
Financial cooperation
fsl
Fixed-spread loan
gdp
Gross domestic product
gef
Global Environment Facility
gni
Gross national income
gpa
Global Programme of Action for the Protection of the Marine Environment
from Land-based Activities
iadb
Inter-American Development Bank
ibrd
International Bank of Reconstruction and Development
id
Islamic Dinar (currency)
ida
International Development Association
idb
Islamic Development Bank
ifc
International Finance Corporation
ifi
International Financial Institution
imf
International Monetary Fund
kd
Kuwait Dinar (currency)
kfaed
Kuwait Fund for Arab Economic Development
KfW
KfW Kreditanstalt für Wiederaufbau
lbs
Land-based sources of pollution
le
Egyptian Pounds (currency)
mbi
Market based instrument
metap
Mediterranean Environmental Technical Assistance Program
miga
Multilateral Investment Guarantee Agency
ngo
Non-governmental organization
npa
National Programme of Action
ntf
Nigerian Trust Fund
oda
Official Development Assistance
oecd
Organisation for Economic Co-operation and Development
ospar
Convention for the Protection of the Marine Environment of the North-East Atlantic
pa
Programme of Action
pac
Pollution abatement and control
padh
Physical alteration and destruction of habitats
pame
Protection of the Arctic Marine Environment
persga
Programme for the Environment of the Red Sea and Gulf of Aden
pip
Public Investment Programme
ppc
Project Preparation Committee
prsp
Poverty Reduction Strategy Paper
pw
Programme of work

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ropme Sea Area Regional Organization for the Protection of the Marine Environment of the sea area
surrounded by Bahrain, I.R. Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates
rpa/lbs
Regional Programme of Action for the protection of the Red Sea and Gulf of Aden
from Land-based Sources
rsp
Regional Seas Programme
sap
Strategic Action Programme
see
South East Europe
sme
Small- and medium-size enterprises
uk
United Kingdom
undp
United Nations Development Programme
unep
United Nations Environment Programme
us$
United States Dollar (currency)
vat
Value added tax
vsl
Variable-spread loans
w to
World Trade Organization

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1
f i n a n c i n g r e g i o n a l s e a s p r o g r a m m e s
Financing Regional Seas Programmes
1
1.1 Introduction
To finance the ambitious activities ahead, the Regional Seas Programmes (rsps) and
member countries must find and develop a solid foundation of long-term sustainable
A solid foundation for
financing by strengthening domestic commitment and resources. Just as the Regional Seas
long-term sustainable
Programmes differ in focus and scope, financial options and solutions vary from region to
financing must be
region as member countries have different economic structures and are at varying stages
developed
of development. But in all cases, the Regional Seas Programmes have certain operational
costs that cannot be avoided. These costs fall under one or more of the following categories:
Funding is required
· Secretariat: The Regional Seas Programme secretariats oversee and facilitate the
for a secretariat, the
development and implementation of Regional Seas Programmes as well as the
programme, and actual
programme of work as agreed at the Conference of Parties. The core costs of running
implementation at
country level
a minimal secretariat included staff salaries and office rental, among others.
· Programme of work: The cost of implementing the agreed Regional Seas Programme of
work (pw) and additional regional projects on an ad hoc basis. Such costs could include
additional staff and programme components like capacity and monitoring projects,
detailed studies, and demonstration projects.
· National implementation of Regional Seas conventions and action plans: At a national level,
Regional Seas Programmes are implemented by the respective national or sub-national
authorities and typically take the form of a national programme of action (npa). npa costs
can include funding institutional and capacity activities as well as the funding of national
and/or local programmes, such as biodiversity or infrastructure investment projects.
Long-term sustainable funding comes primarily from three sources: the domestic public-
sector through direct or indirect transfers, polluter and user-pay schemes, and/or foreign
international grants. While loan financing and other forms of future repayment options
can bridge a short-term funding gap until a sustainable financing framework is established,
these bridging mechanisms will ultimately increase the need for available domestic
resources at the time of repayment.
As the programme of work becomes more ambitious and as the Regional Seas Programmes
are more often requested to expand their scope of activities, the financing necessary to
facilitate the rsps will continue to increase. With current funding deficiencies, the gap
between what is spent and what is required grows larger by the day and can greatly affect
the secretariats' ability to function. To overcome this, some Regional Seas Programmes
have embarked on cost-saving measures and explored creative strategies to secure
in-kind contributions for activities such as translation costs, meeting hosting, and
staff secondment.
Figure 1.1 shows the financing needed (only proportional) to sustain a Regional Seas
Programme, illustrating how the cost for national level implementation far exceeds
the cost of the secretariat and its programmes.

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fi g u r e 1 . 1
Financing demands for Regional Seas Programmes and related activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
s
d
e
e
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ancing n
F
i
n
(fictitious values)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Cost of national implementation
Programme related costs
Secretariat costs
1.2 Financing a Regional Seas secretariat
Secretariat costs
In the current situation, most Regional Seas Programme secretariats suffer from financial
inconsistencies, such as irregular member payments and occasional non-payments, or
funding deficits, both of which drive the secretariats' focus away from its intended activities
and programme-related work toward fundraising. As the programme of work becomes
more ambitious, the core costs to facilitate the secretariat will increase. Therefore, it is
necessary to secure stable and sustainable funding for these activities at all levels, which
will facilitate the activities expected of the secretariat.
Operational core costs
Secretariats have operational costs that cannot be avoided regardless of the financing
for a rsp secretariat are
available. These core costs include: expenses for staffing, meetings, housing and
relatively low but vital...
operational facilities, support for Regional Seas Programme activities in the lower-
income member countries, expert assistance, and limited consultancies (Box 1.1 and
Figures 1.2, 1.3 and 1.4).
box 1.1
Expenditures of selected Regional Seas Programmes
At the 7th Global Meeting of the Regional Seas Conventions and Action Plans, a brief was compiled
analyzing five Regional Seas secretariats with respect to their costs. The review showed that staff-
related costs (including consultant services) was the highest cost expenditure making up 50 to
80 per cent of the total budget from 2000-2004 as illustrated in Figure 1.2. These costs represent
the majority of the secretariats' core costs and reflect the programme of work expenses.
Figure 1.3 compares accommodation and equipment costs as a percentage of the rs secretariats'
total budget. These costs average around 20 per cent of the RS secretariats total budget and have
remained rather stable from 2000-2004.
Figure 1.4 compares costs related to meetings and travel as a percentage of the rs secretariats' total
budget. These costs vary between years and between regions. Reductions in these costs may be an
indication of budget deficiencies (for example pame) as the costs associated with travel represent
the budget item that is typically the easiest to reduce.
<

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...while staff costs
fi g u r e 1 . 2
Staff-related costs
make up 50 to 80 per
(percentage of total rsp secretariat budget)
cent of the total
secretariat budget
80
70
60
50
40
30
ospar
helcom
20
map
pame
10
cep
0
2000
2001
2002
2003
2004
fi g ur e 1.3
Costs of accommodation and equipment
(percentage of total rsp secretariat budget)
40
30
ospar
helcom
20
map
pame
10
cep
0
2000
2001
2002
2003
2004
fi g ur e 1.4
Costs related to meetings and travel
(percentage of total rsp secretariat budget)
30
ospar
helcom
20
map
pame
10
cep
0
2000
2001
2002
2003
2004

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Financial considerations and options
Traditionally, the financing for the rsp secretariats' costs and their programmes has been a
mix of rsp member-country payments, un contributions, gef funding and other multilateral
and bilateral donor contributions. Yet as the challenges and priorities for the rsps evolve
and expand, it is necessary to develop more sustainable long-term financing by increasing
the contribution from member countries.
Potential funding sources can either be in-cash or in-kind (or a combination of both) and
include the following:
Sustainable financing is
· regular contributions to the rsp's Trust Fund from participating member countries
required to successfully
· ad hoc contributions made by participating member countries in addition to annual
run a secretariat...
contributions
· contributions from countries supporting the national programme of action but not
participating in it (such as non-members)
· support from the unep
· support from another United Nations organization on a project-funding basis
· support from regional or global organizations that are not part of the United Nations
system (for example The World Bank)
· support from specific international funds (for example gef)
...while realizing that
When establishing a funding package for secretariat costs, it is important to note that the
a secretariat does not
secretariat will not be generating any revenue from its activities, and thus will have to be
generate revenue from
financed completely by direct payments (member contributions) or grants. On a short-term
its activities
basis, it may be possible to borrow resources to bridge financing gaps but this cannot be
expected. The funding arrangement agreed upon by member countries will need to
produce a stable and consistent stream of financing, with little to no room for late or
missed payments.
As countries have very different income levels, expecting the low-income countries to
contribute equally to the financing of the rsp secretariat is not realistic. However, some
contribution should be made by these countries in order to establish a sense of ownership.
In the short and medium term, it may be necessary for certain (often the wealthier) member
countries to pay a larger share of the secretariat costs but the goal should always be a fair
distribution of member payments.
Several options exist
Inconsistencies in the expected and the actual annual contributions made to the Regional
to obtain a base level
Seas Programmes by the member countries are an illustration the funding uncertainties
of funding
faced by the secretariats. The following options1 could assist rsps and member countries
in determining realistic and equitable contribution levels. The `base figure' refers to the
minimum annual level of funding required to meet the basic operational costs of the
secretariat and a realistic number of substantive activities.

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· Option 1: Arbitrary annual amounts as agreed upon by the participating countries that
equal the proposed `base figure'.
· Option 2: Contributions in accordance with the un scale of assessment as agreed to by
the General Assembly of the United Nations.
· Option 3: Contributions per country that combine two elements:
· an equal amount based on equal sharing of a fixed percentage of the `base figure'
· the remaining amount of the `base figure' to be distributed according to the same
ratios as applied in the un assessment scale.
box
For example: ospar
1.2 Financing the ospar Secretariat: allocating contributions
parties contribute
ospar relies on contributions from its Contracting Parties to fund its budget. There is an ongoing
to the secretariat
debate between two principles:
according to their
· Contracting Parties should contribute according to their economic status ­ it would be unfair for a
economic status but
smaller country with a population of 300 000 to pay the same as a larger country with a population
have equal voices
of 80 000 000
regardless of size
· Contracting Parties have equal voices in the ospar Commission and should therefore contribute
equally
All budgetary decisions require a unanimous vote. Therefore, the basic approach agreed upon for
the general budget2 is a balance between the two principles:
· two-fifths (40 per cent) of the budget is divided in equal shares (the 16 Contracting Parties each
pay 2.5 per cent of the general budget)
· three-fifths (60 per cent) is divided according to the economy size of the Contracting Parties
(derived from the triennial un assessment on the basis of contributions from member states)
Three refinements have been added to this basic approach:
· since the European Community (ec) does not have an economic base separate from its member
states, it pays only the 2.5 per cent share (this approach has now been adopted as standard for
ec participation in other international agreements)
· special arrangements were made when extra work to support the North Sea Conferences was
taken on. When ospar followed up on these commitments made by the member countries in support
of the North Sea Conferences, a special `North Sea tranche' of the contributions was established.
This totalled 16.66 per cent of the total general budget and was divided equally between the eight
North Sea coastal countries, in addition to their share of the remaining 83.33 per cent
· to prevent any one Contracting Party from dominating the budget, a `cap' of 22 per cent of the total
general budget is applied to any one contribution. Excess over this cap is redistributed among the
un-capped countries. In practice, France, Germany and the United Kingdom usually benefit from
this cap
This system, though complex, has been able to achieve, and maintain, unanimous agreement since
the early 1990s. Its strength lies in the fact that small member countries know that they will not have
to meet a disproportionate share, while large member countries know that small ones cannot argue
for increased expenditure without having to accept a reasonable share of the burden.
Source: (ospar 2005)
<
1.3 Financing a Regional Seas programme of work
Programme costs
Most Regional Seas Programmes have developed or are in the process of developing a
Strategic Action Programme (sap), which outlines the environmental problems facing the
region and the actions necessary to address these issues. The rsp secretariat then caries out
programme activities, referred to as a programme of work (pw), that support the actions
outlined in the sap. An important distinction can be made between what can be described
as `secretariat' costs and `programme' costs, which often include the following activities:

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A secretariat carries
· information collection and dissemination
out programme
· review of and assistance with strengthening legislation and monitoring
activities such as
· guideline development
monitoring and
training
· initial investment programming and planning
· regional analysis
· monitoring of hot spots
· development training
· technology advice
· assisting with the development and implementation of national action programmes
· facilitating regional cooperation
The programme of work involves expenses similar to the core costs of the secretariat ­
such as staff, housing and operational facilities, meetings, support for the less financially
established member countries, expert assistance, missions, travel, and consultancies. Some
of these expenses require upfront investment (capital, equipment, and staffing) whereas
others can be undertaken once funding becomes available or not at all if financing is not
sufficient. Most rsps rely primarily on contributions from their member countries to fund
the secretariat's budget but the basis for how much each member country contributes
varies between regions. Additional funding from international organizations, such as the
World Bank and the Global Environment Facility (gef), may also represent a part of the
rsp project portfolio as funding directed toward specific projects.
A Regional Seas
Most Regional Seas Programmes secretariats have an ongoing working relationship with
Programme secretariat
the regional and bilateral donors working in the regions. The individual Regional Sea
and programme of
work are regional
secretariat is a regional public good established for the protection of the shared resource,
public goods
the Regional Sea. Financing the secretariat and the pw is the responsibility of the member
countries and the international community at large ­ no country has the incentive to fund
the total cost of pollution control and resource conservation, while sharing the benefits of
the shared resource with other members.
Financing for programme
The financing for the pw will most likely come from many different sources and involve
activities comes from
blending and matching resources, which at times can be very complex. Similar to funding a
many different sources...
secretariat, the financing arrangement for the programme of work should be agreed upon
by the rsp member countries and should include more long-term sustainable financing
based on the user/beneficiary pays principle (explained in the Section 2.1). The agreement
should also specifically outline how, when and by whom the programme of work will be
financed. Due to the income differences between rsp member countries, it is highly likely
that subsidies from the wealthier members, or external donor funding, will be necessary
to cover the full expenses.
Another option for financing the programme of work is to divide the types of activities to
be undertaken into different categories. An example of this would be seeking financing
for regional assessments and information collection from membership contributions,
but funding more national and training-related activities from user countries. For the less

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economically developed countries, international donor payments can supplement member
contributions. Other sources of financing may also be available through partnerships
and co-funding arrangements with other organizations and institutions. Voluntary
contributions or sponsorships are another alternative for supplementing regular funding
sources. Some possible pw funding options are summarized in Box 1.3.
box
...varying from
1.3 Funding options for a Regional Seas programme of work
membership fees to
Suggested primary sources of financing
grants, subsidies,
· membership fees/contributions
partnerships and
· member country grants/subsidies
sponsoring
· international grants
Possible secondary sources of financing
· bridging capital from a lending institution/country
· the creation of an earmarked regional charge
· the introduction of fees/voluntary payments for environmental service
· partnership arrangements
· voluntary and sponsor funding
<
Examples from Regional Seas Programmes
In the Regional Seas Programme ospar, member countries directly fund all programme
costs. The financing schemes vary: certain secretariat costs are covered regularly by
individual member countries, and certain programme costs are covered from a collective
budget. These flexible financing arrangements play a major role in financing ospar's work.
A similar system operates in the Regional Seas Programme pame, in which pame
programmes are typically financed by a `lead county' (or countries) that assume
responsibility for associated project costs. If the pame Secretariat is then requested to
provide secretariat support to pame-led projects as part of its day-to-day operations, the
additional costs are covered by a proportionate increase in the annual contribution made
by the respective lead country (or countries). With this project structure in place, the
pame Secretariat does not have a separate section for `project costs' in its annual budget.
In the rsp cep (Caribbean Environmental Programme), funding for the programme of work
is distributed across four sub-programmes. Due to insufficient funding, the Officer position
in one of the sub-programmes has been vacant since 1992. To accommodate this, the three
remaining sub-programmes have carried out most of the Officer activities for the sub-
programme in question.
1.4 Developing and financing a national programme of action
Introduction
Implementation of Regional Seas Programme activities at a national level is the sole
responsibility of their respective member countries. The Regional Seas Programmes'
conventions and action programmes clearly outline a wide range of environmental actions
that need to be addressed by these countries. To facilitate this, the rsps have developed
country assessments, which identify and prioritize environmental sectors and activities
by the level of urgency in each country (Annex 1 provides a case study from the Red Sea
and Gulf of Aden region).

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Over 70 countries
To carry out these activities, most countries have developed or will develop a national
developed National
or sub-regional programme of action (referred to here as an npa). Globally, more than
Programmes of Action
70 countries have already developed npas focused on the protection of the marine and
(npas) to implement
rsp activities
coastal environment from land-based activities.
The purpose of a national programme of action is to:
· identify, resource, and implement actions to address specific causes of environmental
degradation to the marine and coastal environments
· increase awareness and understanding of the value, benefits, and vulnerability of
these environments
· provide a flexible mechanism for identifying and prioritizing problems through
partnerships and consensus among stakeholders
· strengthen the public sector's ability to effectively respond to the causes and to
ensure the sustainability of the actions and projects undertaken
· mobilize resources and partners, including the private sector, for implementation
of specific projects
· enhance environmental and financial legal frameworks and regulations
rsp secretariats
The Regional Seas Programmes can assist member countries with the development and
support countries in
implementation of these programmes. The amount of support varies but can include
the implementation of
strengthening capacity and efficiency, monitoring and assessments, facilitating regional
npas in various ways
cooperation, or ensuring the relevant regional mechanisms are in place to support national
implementation. rsp secretariats can also raise the awareness of the environmental costs
of inaction, the value of a vibrant environment, and draw attention to environmental/health
cost-related issues.
Developing a national programme of action
Developing a national programme of action is a coordinated and long-term iterative and
cyclic process that should involve all stakeholders from the beginning. To support rsp
member countries in developing and implementing a national programme of action, the
unep/gpa produced the npa Guide (unep/gpa 2006) as a resource. The unep/gpa npa Guide
outlines the phases and steps involved in the npa process and each step is broken down into
action points that should be taken before moving on to the next phase of development
(Box 1.4 and Figure 1.5).
fi g ur e 1.5
The npa process cycle
1
5
2
4
3

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box
An iterative npa
1.4 Programme cycle and specific steps for developing a npa process
process goes through
Developing realistic npa action
generations of the five
step
major steps
1
Initial preparations
To begin a cross-sectoral and multi-stakeholder process for the protection of the coastal and marine
environment from land-based activities:
· designate the overall lead that will have to carry out initial preparation tasks:
· set up (and chair) a npa Core Group
· define the overall scope and guiding principles
· consult potential financial partners
· hold initial brainstorming sessions with key actors
· develop and agree on an initial work plan
· secure funding for preparatory activities (mainly Step 1 and 2)
· ensure formal endorsement of the npa process by the government
step 2
Identification of problems and of constraints and opportunities for successful solutions
To analyse the current situation:
· assess policy tools, (potential) partners and linkages
· assess data, monitoring and reporting mechanisms
· assess legal and financial frameworks
· For all: identify problems, constraints, opportunities and (capacity building) needs
step 3
Formulating realistic strategies and action
To develop a tailor-made npa programme for step-by-step implementation through a wide network
of linkages, partners and stakeholders:
· set up an institutional network
· set realistic objectives, goals, targets and time-frames
· define prioritization criteria and set priorities
· produce a programme pipe-line and formulate short and medium term activities
· devise a financing strategy
· formulate communication and participation strategies
· designate implementing agencies and assign responsibilities
Towards successfull npa implementation
step 4
Kick-off national level measures and on the ground activities
To begin implementation involving all stakeholders and to ensure support and a sense of ownership
at all levels by creating awareness:
· ensure adoption and acceptance of responsibilities by implementing agencies
· start ongoing awareness and outreach activities
step 5
Monitoring, evaluation and revision
To establish strong monitoring, feedback and evaluation components:
· ensure continuous monitoring, evaluation and revision
· set-up assessment and reporting programmes to evaluate action
· select indicators against which set goals and targets can be evaluated
Source: unep/gpa 2006
<
Financing a national programme of action
From the activities and investments identified in saps/npas, it is clear that the total cost of
compliance is high and exceeds current levels of financing given the political, household,
and private sector priority of the conventions and action plans. For some countries, the
amount of financing needed to implement the conventions and action plans exceeds the
available level of financing ­ even with substantial donor support. For these reasons, it is
crucial to identify which financing sources are most relevant and realistic to the specific
project activities, clarify which organizations are responsible for implementing specific

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activities, and develop a programme of action based on affordability and long-term
sustainable financing.
The problem is not the
Often the challenge to national level implementation of the Regional Seas Programmes
identification of issues
is not a problem of identifying issues that need to be financed but rather a problem of
but increasing available
funding
increasing available funding. In addition, the NPAs often do not prioritize the necessary
actions and are not specific enough when describing how they are to be implemented.
Given the scarce available resources for implementation, actions need to be prioritized
as short, medium or long term.
National level expenses
To implement a national or sub-national programme it is also necessary to cover the
are similar to those of
expenses of implementation and the monitoring and enforcement of the programme as
rsp secretariats: staffing,
research, training,
well as other supporting activities. These expenses, to a large extent, are similar to those
implementation,
of the rsp secretariats and the programme of work, including cost for institutional
monitoring...
arrangements, capacity increases, undertaking research and analytical work, monitoring
and enforcement activities, technical assistance, project preparation, and design and
project implementation activities.
When proposing a programme of action, these different financing needs must be
acknowledged and evaluated for their expected cost. Specific funding arrangements
should be designed for each type of financing need. It is also necessary to identify
actions that create incentives for the users/beneficiaries or polluters to pay for their
activities and ensure that the programme is integrated into public expenditure
programmes (such as fiscal budgets and public-investment programmes). Developing
a medium to long-term strategy on how to establish a framework that will support a
gradual move toward sustainable financing mechanisms is also a high priority. In addition,
arrangements should be made to ensure that household affordability will not become
a problem. Annex 4 lists 11 actions that should be followed during the financing process
for a programme of action.
Long-term financing
For the financing goals to be reached, the long-term strategy needs to be supplemented
needs to include short-
by a rolling two to four-year pipeline of priority investment projects for co-financing from
and medium term
the public budget. In some countries, such a pipeline management mechanism is called a
priority investment
projects
Public Investment Programme (pip). pip is a mechanism through which funding from the
state budget is allocated to public-sector investment projects in the short to medium term.
Challenges in implementing a programme of action
Most developed countries, and increasingly in transitional and developing countries,
have faced serious challenges when developing and implementing national programmes
of action, such as:
Implementation
· lack of widespread political and/or community support for long-term actions and
challenges are: inade-
changes necessary to protect coastal and marine environments
quate support, capacity,
· inadequate institutional capacity and/or human resources to satisfactorily address
coordination, and
financing
the wide range of land-based pressures facing coastal and marine environments

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· the lack of coordination between public investment programmes and national
development/funding programmes ­ pas are often developed by Ministries of
Environment without taking into consideration that other ministries will be
responsible for implementing the pas
· lack of financial resources to adequately plan, design, implement, monitor,
and evaluate firm actions
To address these challenges and to ensure long-term sustainability at the national
level, organizations must:
Address challenges by:
· involve all stakeholders in the preparation and in the development of the pa
involving stakeholders,
· assign clear responsibility for the implementation and the funding of the pa
assigning responsibilities,
· base the action plan on realistic assumptions of sustainable financing and on
and being realistic
realistic expectations of institutional set-ups
· identify potential challenges to implementation
· describe actionable ways to overcome these challenges in the action programme
The Regional Seas Programmes aim to protect regional seas, a shared natural resource,
from threats of pollution and other forms of degradation. As regional seas are a cross-
border resource, no country could or has incentive to provide this protection alone.
Therefore regional cooperation is vital but it is also a challenge to ensure that all countries
participate and that certain countries do not become `free riders' at the expense of
others. The report Financing Regional Seas Conventions: Paying for a regional public good
(unep 2000) presents a thorough analysis of this issue and how it can be addressed.
1.5 Financing for the protection of the marine environment
Demand for environmental financing
The need to increase environmental financing usually arises from a policy process initiated
to strengthen environmental action for various reasons, possibly because an environmental
hot spot has arisen, health concerns have surfaced, or users/polluters have a need for
services that protect the environment. The policy process creates a demand that
requires funding.
Demand for financing
The demand for environmental financing can be viewed from several angles. The national
reflects the willingness
parliamentarian/policy maker will usually define the demand for financing as the amount
of society to pay for the
of funding needed to implement the legislation and policies in place at national and global
environment
levels. The ministries or municipal civil servants responsible for programme implemen-
tation will define the demand based on agreed programmes of work such as time-bound
national action programmes or business plans. From a financial point of view, the demand
for financing reflects the actual willingness of society to pay for the environment.
Demand for financing
Based on these definitions, the demand for environmental financing becomes the result
also reflects society's
of political commitment to the environment through budget transfers, users' willingness
ability to enforce
to pay for services and the use of environmental resources, and the polluter's willingness
regulations and users/
polluters willingness
(or enforced willingness) to clean up and prevent environmental degradation. Largely the
to comply

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demand for financing reflects society's ability to enforce regulations and users'/polluters'
willingness to comply with these regulations, including voluntary approaches and/or
voluntary financing (Box 1.5).
Box 1.5 Groups that carry out environmental action
Three main groups carry out environmental actions and/or investments:
· the public sector in providing environmental services to users (possibly through public-private
partnerships)
· firms/enterprises with pollution abatement actions or actions to clean up inputs to their production
· other stakeholders that may, for varying reasons, wish to secure and maintain the environment (such
as environmental groups and organizations)
<
Environmental degradation will often have a series of external effects (externalities) that
can be difficult or impossible to measure. The demand for environmental financing can be
influenced by increasing the awareness of these externalities (such as the full costs) related
to environmental degradation or non-action. In the process of obtaining environmental
financing studies on the effects of non-action, environmental health costs, and
environmental socio-economic relationships can become a valuable tool to justify
increased financing for environmental action.
Effectively financing environmental action
Environmental financing comes from a variety of sources including the public sector,
private sector, civil society, and international funding sources.
Different financing
When implementing environmental activities, it is always a challenge to select the right
mechanisms fit different
financing option(s) and to identify enough available financing to cover the entire set of
purposes, ranging from...
needs. To overcome this, it is essential to: identify relevant sources of financing, design a
realistic and viable financing package, and find a way to strengthen sustainable financing.
It is also important to understand which financing mechanisms are best for the specific
purpose, which conditions need to be in place for the mechanism to be efficient, and how
these funding instruments are best utilized.
...subsidies and loans to
There are several funding mechanisms available (such as subsidies, public transfers, grants,
taxes and public-private
loans, user and polluter pay revenues). In addition, there are economic instruments (such
partnerships
as taxes and charges) that can be used to increase revenues, increase efficiency gains, and
remove harmful subsidies, which could free up money for environmental activities. Finally,
arrangements such as public-private partnerships (ppps) and decentralization may present
new and interesting financing options that were not previously available.
Each financing mechanism has specific characteristics that can be determining factors
when deciding between options, such as:
· the type of financing that is being considered (for example grants, public transfers,
subsidies, loans)

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· the purpose they may be used for (such as investments, administration,
operational costs)
· whether there is the need for co-funding to operationalize the funding;
· maturity dates and interest rates available
· if there is a need for guarantee and, if so, which type of guarantee
When developing financing packages for environmental programme activities, it is
necessary to take all of these specificities into consideration in order to find the cheapest
and most ideal-financing package for the activity. Another issue to take into consideration
is the cash flow based on annualized costs of the activity to ensure that payment can always
be made. It is also necessary to secure long-term sustainable financing to ensure support of
the project, possibly by using bridging mechanisms until the sustainable mechanisms can
be fully realized.
Challenges in financing increased environmental protection
Different economic
Limited availability of financing is one of the main obstacles to increasing environmental
structures in countries
protection. This is due to the relatively low effective financing available from the public
complicates a regional
sector, enterprises, and users of environmental services (such as low willingness and/or low
approach
ability to pay, and weak enforcement of regulations). The countries in surrounding regional
sea often have very different economic structures and are at very different stages of
development. This complicates a regional approach since a financial solution that would
work for one country might not be appropriate or even possible in another country.
Generally, one size does not fit all. Table 1.1 lists various economic characteristics for
two countries from four different Regional Seas Programmes3.
table 1.1 Selected economic indicators 4 5
Morrocco Egypt
Jordan
Dom. Rep. Jamaica
Russia
Georgia
Thailand
Vietnam
gdp (us$ bn.)
50.1
75.1
11.2
18.7
8
582.4
5.1
163.5
45.2
gni per capita (us$)
1520
1310
2140
2080
2900
3410
1040
2540
550
Aid per capita (us$)*
17
13
233
8
1
9
48
-16
22
gni per capita (us$ ppp)* 3940
3940
4290
6310
3790
8950
2610
7450
2490
Gini
39.5
34.4
36.42
47.4
37.9
31
36.9
43.2
37
Upper 10 decile
30.9
29.5
29.84
37.19
30.3
23.8
27.9
33.8
29.9
Based on most recent data available;* 2003 figures
Source: http://devdata.worldbank.org/wdi2005/Cover.htm

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The majority of financing
Ideally, revenue used for environmental protection comes from user/polluter fees and
for environmental
charges, from investments made by enterprises for pollution abatement and control (pac)
services still comes
practices, and from public-sector resources. Unfortunately, in many regions, the situation is
from the public sector
not ideal and the majority of the financing for environmental services comes from the public
sector as well as enterprises that finance pac expenditures through enforced legislation or
incentives. In a recent Country Environmental Analysis by the Mediterranean Environmental
Technical Assistance Program (metap 2005a) it has been reported that in Tunisia an increa-
sing percentage of the national revenues are allocated to the protection of the environment
and natural resources. From 1997-2001, this amount equalled about 1.1 per cent of gdp.
Domestic environmental
As domestic environmental financing usually does not cover the total expenditures needed,
financing often is not
outside financing needs to be secured in the form of grants, loans, ifi financing or private
enough
sector investments. With the exception of grants, it must be stressed that at some point in
time all of these options will have to be repaid (most often with interest). The end-financiers
(those who repay these futures) will always be domestic users, taxpayers, or companies.
The only international source of funding that does not have repayments are grants from
foreign taxpayers. Therefore, it is essential that any long-term action programme has a
financial plan that is based on realistic expectations of grant transfers and long-term
sustainable domestic resources.
Infrastructure investments (in developing countries)
Infrastructure
For most countries, the main environmental expenditure will be infrastructure investments.
investments are the
As these have to compete with other pressing social priorities, the scarce public funds and
main environmental
donor grants need to be strategically prioritized. As infrastructure investments involve high
expenditures
initial costs, they are usually financed by loans, bond issues, or other sources of financing,
which are based on the postponement of repayment into the future. Revenues from public-
sector transfers and user fees/charges can then pay for the operations and maintenance
costs, annualized capital costs, and debt servicing. However, service providers (providers of
public services, such as public and/or private sector utilities, water supply and wastewater)
face two difficult obstacles in organizing an infrastructure investment.
International loans often
The first obstacle is securing infrastructure investment financing. When domestic
require guarantees...
financial markets are poorly developed and/or there is macro-economic instability,
domestic financing involves high interest rates, if it is available at all. Many service providers
have looked to ifis for loan financing, and these ifis have provided many important loans.
However, ifis usually require national governments to provide sovereign guarantees for
loan repayment. In most developing and transitional economies, governments have
limited possibilities for issuing such guarantees.
...which in turn require
Secondly, though user charges are an important long-term source of finance for operation
domestic or donor funds
and maintenance expenditure, it can be very difficult for low-income countries to raise the
for dept payments
necessary funds to cover the debt payments. For this reason user/polluter fees alone set an
important affordability constraint on the infrastructure investments. The long-term
financing solution will therefore also require domestic or donor funding.

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f i n a n c i n g r e g i o n a l s e a s p r o g r a m m e s
Each financing mechanism has its own criteria and characteristics. Chapter 2 presents more
detailed information on options available for environmental investments, covering specific
types of environmental financing (Section 2.1), donors (both domestic and international ­
Section 2.2), international financial institutions (Section 2.3), commercial banks (Section
2.4) and economic instruments (Sections 2.5), singling out subsidies (Section 2) and public-
private partnerships (Section 2.7).

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Financing sources and strategies 6
2
Finding financial arrangements that will allow for adequate financing of regional
cooperation needs to be addressed based on country affordability while ensuring
its ownership to the process.7 There are several types of financing for environmental
Loans and grants
programmes. Annex 12 provides a summary table listing financial mechanisms for marine
remain the dominant
conservation, including sources of revenue. However, as can be seen from Table 1.1 the
funding source...
countries in the Regional Seas often are very different in terms of wealth and financial
strength, reason why not all of these financial options will be viable for all countries.
Wealthier countries have a wider range of options available for funding environmental
investments than low-income countries. For low-income countries, grants and/or ifi
loans will, at least in the short to medium term, continue to provide the bulk of funds
for environmental programmes.
2.1 Types of environmental financing
Grants
Grants will typically be advanced to finance clear, well-defined projects that match a
specific set of priorities and/or requirements that are laid out by the grant provider.
Grants are the only type of financing that does not require repayment. Grants can be made
available from state, regional, or local authorities, special-purpose funds, multilateral or
bilateral organizations, and other governmental and private sector entities. Grants could
be used to support both commercially viable projects if the subsidy is provided for a non-
commercial element such as pac expenditure as well as projects valued primarily for their
non-financial benefits.
...but grants are not a
Grant financing helps overcome the lack of domestic funding opportunities or the general
source of sustainable,
unwillingness to pay for pollution abatement or use of services. Grants, although attractive
long-term financing
to the recipients, should only be utilized in a smart, well thought out manner. Typically,
a grant will be provided with a co-financing requirement of some form and may also require
a plan for future domestic financing for maintenance, operations, and rehabilitation. If not
used wisely, the downside of grant funding can be a reduced pressure to identify the most
cost-efficient solutions, thereby wasting valuable future resources. Grants are not a source
of sustainable, long-term financing and therefore should not deter the focus away from the
higher priority of securing long-term programme funding. It is important that grants are
not accepted because they are free goods but are accepted because they have a purpose
for financing the priorities of the recipient.
Loans
Loans can take many forms, such as commercial loans, ifi loans, government loans
(domestic as well as foreign), soft loans and loans with guarantees. Despite the variety
of loans, all have common characteristics that can be used for comparison, such as size,
interest rates, grace and maturity periods, and security/collateral requirements. Three
specific forms of loans are described here:
All types of loans have
· Commercial loans are loans based on market conditions and they are issued without
common characteristics
concessional elements. Terms, conditions, and availability will depend on the credit
that can be used for
quality of borrower and/or guarantor. For environmental investments, commercial
comparison
loans will typically be an option only if there is a sovereign guarantee to back up the loan.

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· Soft loans are loans provided on favourable terms ­ the principle usually has to be repaid
in full but with a very low interest rate or with no interest at all. Soft loans are usually
earmarked for a special purpose as decided by the lender, which typically is a donor
(domestic or international) or an ifi.
· Loans with guarantees (sovereign and sub-sovereign) are loans provided by multilateral
banks, bilateral donors, or other international financial organizations. Since this type of
loan is backed with a commitment for repayment, the element of risk is moved from the
borrower to the country itself. For low-income countries that follow imf and World Bank
programmes, there are often restrictions on which guarantees the state can give in order
to comply with the programme.
Bonds
Bonds are only an
Bond financing involves issuing an obligation guaranteeing repayment in the future.
option for well-
In order to issue a bond, the issuer needs to convince investors of its ability to meet the
developed countries
payment obligations specified by the terms of the bond. Bond issuing is only an option for
well-developed countries as it requires detailed and reliable information including a risk
rating from one of the recognized rating institutions such as Moodys, Standard and
Poors, and Fitch.
Rating institutions rate the debt of companies, municipalities, and governments. The
ratings are ranked with alphabetical designation where aaa is the best rating. The rating
is based on extensive financial, legal, and accounting analysis of the entity in question. The
ratings provide a tool to which risks can be compared between companies and countries.
Many capital market participants require little further information than a rating in order
to set a price on a loan given to the rated entity.
Polluter pays principle (ppp)
Forcing polluters to
The Polluter Pays Principle (including the users and beneficies pay principle) provides the
pay provides a strong
framework for environmental financing in market economies. According to the principle,
incentive to reduce
polluters use their own resources to finance measures to comply with environmental
negative impacts
standards. If the polluter, or ultimately the consumer, is made to pay for these costs, they
have a strong incentive to reduce the negative environmental effect and clean-up costs do
not fall on society at large. However, monitoring compliance is a difficult and costly task.
Economic instruments (EIs)
Principle 16 of the Rio Declaration states: `National authorities should endeavour to
promote the internalization of environmental costs and the use of economic instruments,
taking into account the approach that the polluter should, in principle, bear the cost of
pollution with due regard to public interest and without distorting international trade
and investment.'
Economic instruments
Economic instruments for environmental protection are policy approaches that encourage
can indeed encourage
behavioural changes through their impact on market signals rather than through explicit
changes in behaviour
directives regarding pollution control levels or methods or resource use (unep 2002).

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Section 2.5 goes into greater detail about economic instruments (EIs), which can generate
resources for environmental protection programmes. Annex 5 reviews the potential of
market-based instruments.
Subsidies
Subsidies reform
According to a World Bank report (Pagiola and others 2002), the most important potential
can free up available
source of additional revenue comes not from the efforts to generate new revenues, but
resources
from freeing up already available resources. This can be done by improving the efficiency
with which these resources are spent, in particular, by reforming subsidies that are
expensive and, often, environmentally harmful. Subsidies and the removal of unwanted
subsidies are discussed in more detail in Section 2.6 and Annex 9.
Besides subsidies, other reforms might also have a positive effect on increasing revenue
or freeing up of financial resources. Reforms can have significant incentive effects that, in
many cases, will have a more important effect on the environment than on the resource
generation itself. However, as the aim of this report is identifying financial sources and
options, this report does not discuss environmental incentives from reforms and policy
revisions.
Public and private sector partnerships
The private sector
Public and private sector partnerships are often mentioned as a way to increase
typically applies more
environmental infrastructure investments. By having the private sector to invest and
efficient management
operate facilities for public services, such as water supply or wastewater collection/
practices
treatment, the public utility may be able to benefit from lower costs as a result of the more
efficient management practices that typically characterize the private sector. In addition,
in most developing and transitional economies there is the perception that it is more
acceptable to pay service/user charges to a private sector company than to a public sector
company. Section 2.7 and Annex 2 will discuss the different types and possibilities of
partnerships for private sector involvement.
2.2 Donors
Domestic and international donors
For low-income
Donors (domestic or international) are either bilateral or multilateral institutions that
countries donors are
provide grants and/or other forms of financing without cost. For low-income countries,
the main source of
donors are the main source of environmental financing together with ifis. In countries
environmental financing
such as the Kyrgyz Republic, Armenia, Georgia, and Uganda, international transfers
(such as loans or grants) account for between 60-75 per cent of all environmental
funding (oecd eap 2003).
Donors usually require recipient countries to sign a bilateral agreement, which outlines
the sectors that are eligible for support and the general framework and requirements for
co-financing and other policy obligations. Countries should not expect to receive donor
funding in the medium to long term as donors usually provide grants only for specific
sectors and limited to a specified period of time and then phasing out the support. From

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the beginning, recipients should prepare for a gradual shift to self-financing arrangements
and should focus on securing increased sustainable financing. Grants can be a boost and
play a vital, short-term role in country development if used wisely to bridge the gap while
continuing to search for more long-term financing.
Donor funds are particularly attractive but they are not without disadvantages. Donor
grants are usually targeted for specific activities or sectors. Recipient countries will then
have to tailor their funding requests/proposals to fit the donor criteria, which may not have
the same priorities as the recipient country. This is especially a problem if the grant requires
co-financing since re-working the priority list may pull much-needed funding away from
the actual priorities of the recipient country. Other downsides include:
Donor funds are particu-
· the process for obtaining grants may be rather lengthy, especially for grants from
larly attractive but they
multilateral organizations
have several downsides
· there is often a significant time lag between commitment and disbursements
· the Ministry of Foreign Affairs will usually negotiate the focus and priorities of the grant
programmes; the Ministry of Environment and other related Ministries are not always
involved in the decision-making process
· poorly considered grant projects can undermine local efforts for self-sufficiency and
reduce the potential for leveraging user financing
The purposes and mission of the individual donors may vary a lot and some aid will be
tied to products from the country of the contributor. Most of the aid going to the least
developed countries is now untied and the trend seems to be that more and more aid is
untied. Therefore, since each donor programme has their own priorities and funding
criteria, this information should be integrated into national financing strategies for
the environment.
In Table 2.1 the net official development assistance (oda)8 receipts from 2000-2004
to a selected number of countries are listed.
In Figure 2.1 oecd dac members' net oda in 2004 are illustrated9. The overall largest oda
donor is the United States with total average donations of us$19.7 billion, followed by Japan,
France, uk and Germany all with an annual contribution above us$7 billion.
The Global Environment Facility (gef)
gef has provided
The Global Environment Facility (gef), established in 1991, is an independent financial
grants for more than
organization that helps developing countries fund projects and programmes that protect
1 300 projects in
the global environment. Since 1991, the gef has provided grants for more than 1 300
140 countries...
projects in 140 countries.

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table 2.1 Net oda receipts 2000-2004 (in million us$)
2 0 0 0
2 0 01
2 0 02
2 0 03
2 0 04
Morrocco
419
519
487
538
706
Egypt
1328
1257
1239
988
1458
Jordan
552
433
520
1228
581
Dom. Rep.
62
108
145
69
87
Jamaica
10
54
24
5
75
Russia
na
na
1301
1255
1313
Georgia
169
300
313
225
315
Thailand
698
281
295
-967
-2
Vietnam
1682
1450
1277
1765
1830
Source: oecd/dac database
fi g ur e 2.1
dac members' net oda in 2004 In percentage oda/gni
s
t
e
t
a
ed S
Unit
20
18
16
14
12
10
n
pa
e
Ja
y
ed Kingdom
an
F
r
anc
Unit
rm
8
Ge
6
r
l
ands
the
Ne
n
ede
da
4
w
na
S
a
C
aly
y
It
ain
a
w
r
l
and
Sp
ark
e
a
l
Nor
rg
nm
lgium
a
g
u
and
o
2
witz
De
S
Be
strali
t
r
i
a
e
al
u
r
t
u
and
b
e
A
l
and
m
Po
Aus
Finl
w Z
Ire
x
e
Greec
Lu
Ne
0
Source: oecd/dac database

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
Types of projects
gef projects address six complex global environmental issues:
...addressing six
· Biodiversity
environmental issues...
· Climate change
· International waters
· Land degradation
· The ozone layer
· Persistent organic pollutants (pops)
gef funding
...providing
Since 1991, the gef has provided us$4.5 billion in grants and generated us$14.5 billion in
us$ 4.5 billion in
co-financing from other partners for projects in developing countries and countries with
grants and generating
us$
transitional economies.
14.5 billion in
co-financing
gef funds are contributed by donor countries. In 2002, 32 donor countries pledged a
total of us$3 billion to fund operations from 2002 to 2006. The allocation by focal areas is
presented in Table 2.2. Table 2.3, lists the grants provided by the gef to selected countries.
table 2.2 Total gef allocation by focal area (in million us$)
19 91-20 05
20 05
Biodiversity
2062.8
227.5
Climate change
1992.4
143.4
International waters
782.1
62.9
Land degradation
98.2
54
Multiple focal areas
465.8
72.9
Ozone depletion
181.9
4.7
Persistant organic pollutants
146.8
46.9
Source: www.gefonline.org/home.cfm

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table 2.3 gef grants by country, 1991-2005 (in million us$)
1991-2005
2005
Morrocco
69.9
0
Egypt
80
0
Jordan
21.5
0
Dom. Rep.
8.3
4.6
Jamaica
4.9
0
Russia
157.6
21.6
Georgia
20.4
0
Thailand
20.2
0
Vietnam
50.8
11.0
Source: www.gefonline.org/home.cfm
Management of gef projects
gef projects are managed by gef Implementing Agencies:
· the United Nations Environment Programme
· the United Nations Development Programme
· the World Bank
Seven other international organizations, known as gef Executing Agencies, contribute
to the management and execution of gef projects. One of these is the African
Development Bank.
Focal points (country representatives)
Each gef member country has designated government officials responsible for gef
activities. These officials, known as gef `focal points', play a key role in ensuring that gef
projects are country-driven and based on national priorities. There are two types of gef
country focal points:
· Political focal points: responsible for gef governance issues and policies and communi-
cations with their constituencies; all member countries have political focal points10
· Operational focal points:11 responsible for in-country programme coordination of gef
projects and other operational activities; only countries eligible for gef funding are
expected to designate operational focal points
Eligibility criteria and project cycle
There are simple rules
Any eligible individual or group may propose a project, while meeting two key criteria: it
for proposing a project...
must reflect national or regional priorities and have the support of the country or countries
involved, and it must improve the global environment or advance the prospect of reducing
risks to it. gef project ideas may be proposed directly to undp, unep, or the World Bank.

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
...and for receiving
Country eligibility to receive funding is determined in two ways. Developing countries
funding
that have ratified the relevant treaty are eligible to propose biodiversity and climate change
projects. Other countries, primarily those with economies in transition, are eligible if the
country is a party to the appropriate treaty and is eligible to borrow from the World Bank
or receive technical assistance grants from the undp.
Projects
There are three different project types:
· Full-size projects: The three implementing agencies of the gef work with the operational
focal point in each recipient country to develop project ideas that are consistent both
with the country's national programmes and priorities and with the gef operational
strategy and programmes. Regional or global programmes and projects may be
developed in all countries that endorse the proposed activity
· Medium-sized projects: Grants of less than us$1 million are available through expedited
procedures that speed processing and implementation. These medium-sized grants
increase the flexibility of the gef' in providing resources and encouraging a wider range
of interested parties to propose and develop project concepts.
· Enabling activities: Grants for enabling activities help countries to prepare national
inventories, strategies, and action plans in cooperation with the Convention on
Biological Diversity and the un Framework Convention on Climate Change. This
assistance enables countries to assess biodiversity and climate change challenges
from a national perspective, determine the most promising opportunities for project
development, and subsequently pursue full-scale projects.
Project preparation and development facility
Funding for project preparation is available in three categories or `blocks':
· Block A grants (up to us$25 000) fund the very early stages of project or programme
identification, and are approved through the implementing agencies of the gef
· Block B grants (up to us$350 000 for single-country projects and up to us$700 000 for
multiple-country projects) fund information gathering necessary to complete project
proposals and provide necessary supporting documentation. These grants are approved
by the gef ceo, with attention to the gef operations committee's recommendations.
Block C grants (up to us$1 million) provide additional financing, where required,
for larger projects to complete technical design and feasibility work
· Block C grants are normally made available after a project proposal is approved by
the gef Council
Small grants programme
The undp administers this programme, which offers grants of up to us$50 000 to eligible
projects.
Small and medium enterprise (sme) programme
A partnership with the International Finance Corporation (ifc), a World Bank affiliate, the
sme programme finances projects that demonstrate a positive environmental impact and

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have basic financial viability, thus promoting private sector investment opportunities
in developing countries.
The Kuwait Fund for Arab Economic Development (kfaed)
kfaed exists since 1961
The kfaed was established in 1961. The object of the fund is to assist Arab and other
for Arab and other
developing countries in developing their economies and to provide such countries with
developing countries
loans required for the implementation of their development programmes.
The kfaed may extend its assistance to different types of entities, which include:
· central and provincial governments, public utilities, and other public corporations
· development institutions, whether international, regional or national and, in particular,
development finance institutions
· corporate entities that undertake projects which are jointly owned by a number of
developing countries as well as mixed or private enterprises that enjoy corporate
personality, and are of a developmental nature and not merely oriented towards making
of profit (such enterprises must be either under the control of one or more developing
country or have the nationality of any such country)
It requires a state
In order to provide a loan, the fund requires a state guarantee from the beneficiary country.
guarantee and co-
The Kuwait Fund does not finance local costs as a rule, and its share in the financing of a
financing, and does
project must not exceed 50 per cent.
not cover local costs
Assistance from the fund may take any of the following forms:
· direct loans or the provision of guarantees
· joint or parallel financing with other international, regional, or national development
finance institutions
· making of grants-in-aid to finance technical, economic, and financial studies whether in
relation to projects financed by the Fund or otherwise (studies may be of such types as
pre-investment surveys, studies for the identification of investment opportunities and
projects, feasibility studies, project preparation, sectoral studies, and the like)
· advisory services in relation to technical, financial, economic, and legal aspects of
projects or programmes or development policies, or in relation to institution-building
in the field of development
· subscription to the capital or contribution to the resources of development finance
institutions
· subscription to the capital of eligible developmental enterprises (the fund does not
provide financial assistance for budgetary or balance of payment support)
In determining the rates of interest on its loans, the term of each loan and grace period,
the fund takes into account the need for a reasonable degree of concessionality in its loans,
such concessionality being reflected in the significant magnitude of grants in the fund's
loans. The level of grants is determined with respect to the economic conditions of the
recipient country and the particular circumstances of each project.

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A special charter
As common for multilateral institutions, the fund's loans are, in addition to the financial
describes the conditions
conditions, subject to other conditions. The charter requires that the loan agreements
for kfaed loans
between the fund and the borrowers provide for the following:
· an undertaking by the prospective recipient country that no other external debt will have
priority over the fund's loan by means of a lien created on the assets of the borrower or
assets of entities under its control
· an undertaking that all fund's assets and income, which primarily consist of the principal
of the loan, the interest and other charges thereon, shall be exempt from all taxes, dues,
and other levies imposed under the laws of the recipient country
· an undertaking that the loan, interest, and other charges thereon shall be exempt from
any exchange control restrictions
Since 1961 some 680 loans
The total number of loans given is 680 with a total value of almost 3.5 billions kd (over
worth over us$ 11.8 billion
us$11.8 billion). As regards the terms of the total loans extended up to the end of the fiscal
have been given
year under review, the average loan period reached 22 years, the grace period averaged four
years, and the interest rate (including 0.5 per cent service charge) averaged 3.5 per cent
annually. Box 2.1 gives an example of a kfaed loan. The average grant element implied in
these terms reached 45 per cent of the value of each loan. Table 2.4 presents the sectoral
breakdown of the loans for each Regional Seas Programme country in persga.
table 2.4 Sectoral distribution of kfaed loans (amounts in million us$)
Loans in total
Loans per sector
Agriculture
Transportation
Energy
Industry
Water & Sewage
Others
No.
Amount
No.
Amount
No.
Amount
No.
Amount
No. Amount
No.
Amount
No.
Amount
10
98.1
­
­
5
57.2
2
29.7
2
5.9
­
­
­
­
Djibouti
25
1150.3
3
177.3
8
239.1
5
397.2
4
96.1
1
38.0
1
34.1
Egypt
22
391.7
5
81.3
1
10.2
7
136.6
6
110.7
1
23.9
­
­
Jordan
Saudi Arabia
­
­
­
­
­
­
­
­
­
­
­
­
­
­
4
102.5
2
45.5
­
­
2
56.9
­
­
­
­
­
­
Somalia
18
362.7
5
74.7
6
99.0
2
139.8
3
41.5
­
­
­
­
Sudan
29
235.8
14
94.0
8
72.6
2
44.2
1
10.2
2
0.02
­
­
Yemen
Source: www.kuwait-fund.org/e/loanstable.asp
As to the sectoral distribution of the total loans committed, the transport and communi-
cation sector ranks highest (35.1 per cent), followed by the energy sector (22.3 per cent),
the agriculture sector (16.4 per cent), the industrial sector (13.3 per cent), the water and
sewerage sector (11 per cent), and other sectors (1.9 per cent).

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f i n a n c i n g t h e i m p l e m e n t a t i o n o f r e g i o n a l s e a s c o n v e n t i o n s a n d a c t i o n p l a n s
The number of technical assistance grants extended by the fund reached 237 with
cumulative value of about us$332 millions. Of these, almost half is given to Arab countries.
Table 2.5, gives the number and total amount of grants to persga member countries.
table 2.5 kfaed grant distribution to member countries of persga (in million us$)
No. of grants
Total amount of grants
Djibouti
2
0.55
Egypt
5
3.72
Jordan
3
5.69
Saudi Arabia
­
­
Somalia
2
1.81
Sudan
3
1.13
Yemen
17
9.75
Source : www.kuwait-fund.org/e/loanstable.asp
box 2.1 The Nobaria power plant project in Egypt
Recently the kfaed provided a loan to Egypt for the Nobaria Power Plant Project. The Project included
the construction of a combined-cycle power station with a total installed capacity of about 750 mega-
watt. The total cost of the project is estimated at 1,955 million Egyptian pounds (us$441 million), of
which 1 394 million Egyptian pound (us$314 million) is in foreign currency. The fund's loan of kd 30
million covers 23.2 per cent of the project cost and 32.5 per cent of its foreign currency component.
The loan period is 22 years with a six year grace period. The interest on the loan 3.5 per cent p.a. and
the loan must be paid back in 32 semi-annual instalments. The grant element constitutes 46 per cent. <
The EcoFund ­ the Polish debt-for-nature fund (a national donor fund)
EcoFund is funded by
The Polish EcoFund was created in 1992 by the Ministry of Finance in Poland. EcoFund is
debt-for-nature swaps
funded by debt-for-nature swaps, which began as part of the Paris Club agreement Poland
signed in 1991.
In the Paris Club agreement, half of the debt Poland owed to the members of the Paris
Club was written off and the other 50 per cent was rescheduled to be repaid by 2010. The
Government of Poland further proposed that 10 per cent of the debt be forgiven if the funds
were reallocated to support the most urgent environmental protection activities in Poland.
This so-called debt-for-nature (or debt-for-environment) swap was the first of its kind. The
Paris Club accepted the Polish proposal, making it acceptable to reallocate a portion of debt
(up to 10 per cent) for the purpose of environmental protection (as specified in the bilateral
agreements signed by Poland and the individual creditor countries).

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
Six countries agreed to enter into a debt-for-nature swap with Poland. Four of these
countries agreed to swap 10 percent of the total debt owed while two countries swapped
two and four percent of debt owed. The EcoFund received us$350 million (almost
1.15 billion pln12) between 1992 and 2004, which equates to 60 per cent of the total amount
(us$571 million) the EcoFund will receive by 2010 according to the Paris Club agreement.
The EcoFund received us$350 million through dept-swaps with six countries
Allocation of the funds
Grants from EcoFund's resources may only be provided for investment projects directly
related to environmental protection (and only at the project implementation stage). The
sole exception is nature-related projects, which may be eligible for EcoFund grants even if
they are non-investment projects. The EcoFund's resources have the status of non-return-
able foreign aid and, therefore, are subject to the system of preferences arising from the
relevant regulations in force.
The EcoFund does not subsidize projects dedicated to scientific research and development,
monitoring actions, conferences, or symposia, or educational activities in any form. An
exception to this rule is made for educational or instructional tasks carried out as part of
innovatory or nature-related projects.
Table 2.6 lists the five sectors that the EcoFund covers. In 2004, us$41 million was
granted, 221 projects were handled, of which 118 were completed. On average, EcoFund
grants provided 21 percent of the projects' total costs. Since the start of EcoFund, more
than 1100 projects have been awarded grants, totalling more than us$370 million.
EcoFund's largest
EcoFund's largest allocations went to water protection and climate protection. In 2004,
allocations went to
some us$400 000 (37.4 per cent of total project funding) was spent on water protection.
water and climate
An additional us$1.53 million (36.3 per cent of total project funding) was spent on climate
protection
protection projects. Far less was disbursed for waste management projects (some
us$6 million, 14.4 per cent of total funding) and nature protection projects (us$4 million,
11.3 per cent of total funding).
table 2.6 2004 EcoFund allocations
Description
Share of 2004
allocations
Air protection
Reduction of the transboundary transport of sulfur dioxide
1%
and nitrogen oxides and elimination of the low sources of
such emissions
Baltic Sea Protection
Reduction of the pollutant inflow to the Baltic Sea and
37%
protection of drinking water resources
Climate Protection
Reduction of the emissions of gases that cause global
36%
climate changes
>

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Waste Management
Biological diversity protection
15%
Nature Protection
Waste management and contaminated soil reclamation
11%
Source: EcoFund
Since Poland joined the eu, substantial funds now flow from the eu into Poland. eu funds
are primary targeted to the rationalization of water and sewage management systems.
Because of this, the EcoFund will focus all of its support on projects that are ineligible for
eu funds.
EcoFund application process
There are two stages in the EcoFund's application process.
The EcoFund application
Stage one: The applicant submits a standard `project questionnaire' to the EcoFund. The
process involves a
questionnaire provides enough information for the EcoFund Board to make a decision on
questionnaire followed
by a grant application
whether the project is consistent with EcoFund's priorities and should therefore move onto
the next stage. During stage one, it is important to specify in the brief project description
the estimated project costs, the anticipated environmental benefits of the project, and
all the project financing sources expected.
Stage two: For projects that meet EcoFund's criteria, a more thorough application process
begins, during which the EcoFund Board invites the applicant to submit a `Grant
Application', which provides more specifics on the project such as:
· objectives of the project, outlining why the project is necessary
· technologies applied (or proposed) and/or the project organization methods
· anticipated environmental benefits to be gained in result of the project
· contractors and/or suppliers selected or proposed and the contractor/supplier
selection methods employed
· material and financial schedule of project implementation with the financing
sources specified
· economic analysis of the project, showing that the financial liquidity of the project will be
maintained both at the project implementation and the operation stage (such as before
and after the project completion)
· project `feasibility study' or `business plan'
· source documentation related to the economic, financial, and tendering issues
· all the permits as required by law for project implementation and operation
The EcoFund Council
The application is analyzed by EcoFund and/or external experts and if the outcome is
makes the final decision
positive, the application will then be presented to the EcoFund Council. The council makes
on a grant
a final decision on the grant, the grant amount, and the grant terms, which may deviate
from what the application specified. Furthermore, the council might formulate additional
requirements the applicant has to fulfil in order to receive the grant.

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
2.3 International
financial institutions (ifis)
ifi
ifi
s are multilateral
s are multilateral institutions13 that provide a wide range of financial products but
institutions that mainly
are mainly loan providers. Loans such as these can be provided for almost any type of
provide loans
investment/action but will often require a sovereign guarantee, which can be difficult and
time consuming to organize. Furthermore, loans are often denominated in hard currency,
which exposes the project to exchange rate fluctuations.
The World Bank
The World Bank...
The World Bank14 is a multilateral lending agency made up of four closely associated
financial institutions:
· the International Development Association (ida)
· the International Bank for Reconstruction and Development (ibrd)
· the International Finance Corporation (ifc)
· the Multilateral Investment Guarantee Agency (miga)
...financing focuses
The World Bank offers loans at commercial and soft terms, guarantees (through miga),
on agriculture and
and grants. Projects cover a wide variety of sectors. However, the traditional areas of World
infrastructure...
Bank financing are agricultural projects and infrastructure projects (including municipal
infrastructure ­ Box 2.2 is an example). Infrastructure projects increasingly support
rehabilitation and maintenance of existing installations rather than new construction.
...and requires on average
The World Bank does not finance the full cost of a project; co-financing is required. In
40 per cent co-financing
most cases, World Bank financing is limited to the international elements of a project
that are purchased with foreign currency. On average and across many projects, this share
constitutes around 40 per cent of total project costs. The remaining part of the financing
is provided by the countries, donors and commercial banks that co-finance the project in
cooperation with the World Bank. Please note that the World Bank requires co-financing
from governments but not from other development partners (although in many cases
this does exist).
box 2.2 Improving the water supply in Yemen
In August 2002, the World Bank approved a us$ 130 million loan (10-year grace, 40-year maturity) to
upgrade urban water supply and sanitation services in densely populated urban communities of Yemen.
Through improved operation and reduction of water losses, the project will increase water supplies
and provide affordable sewerage facilities, which will enable wastewater to be reused for agriculture.
The urban water and wastewater sector in Yemen is confronted with major challenges in the face of
increased water shortage in the country. The sector has been unable to cover expenses and cost of
new investments. In addition, the National Water and Sanitation Authority and its branches are in
need of more effective managerial and technical capabilities.
In response to these challenges, the Government of Yemen launched an Urban Water Sector Strategy
in 1997 to decentralize services and achieve financial self-sufficiency by establishing water and waste-
water corporations that are state-owned but operate independently on a day-to-day basis. The project
supports the government's sector policy, placing emphasis on improving the financial viability,
autonomy and the creation of opportunities for increased private sector participation. As services from
local corporations improve, it is expected that low-income households will rely less on higher-priced
water supplied by private vendors. This will ease the burden on the household budget and relieve
women and children, in particular, from the time-consuming task of fetching and carrying water.
<

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f i n a n c i n g t h e i m p l e m e n t a t i o n o f r e g i o n a l s e a s c o n v e n t i o n s a n d a c t i o n p l a n s
ida offers loans on an interest-free concessional basis with an average maturity of 35-40
years and grace period of ten years. However, this is extended only to countries classified
as low-income countries. Low-income countries are those that have a gni per capita of less
than us$2 500 per year. ida provides approximately us$6 to 9 billion a year to 81 of the
world's poorest countries. ida's interest-free credits and grants are vital because these
countries have little or no capacity to borrow on market terms.
ibrd, which extends loans on market terms, provides fixed-spread loans (fsl) and variable-
spread loans (vsl) (see Annex 6). A typical maturity period for ibrd loans is 12-15 years and
a grace period extends from 3-5 years.
In general, ibrd does not require any guarantee or security against the loan if borrowed
by a government or a government agency. In certain cases, however, it might require a
guarantee if the borrower is a government agency with a low creditworthiness rating. If
the loan is made to the private sector, then a sovereign guarantee will normally be required
and ibrd may even require that additional security as well as a guarantee.
Both ibrd market-term loans and ida concessional loans are administered by the same
World Bank staff, and the projects they finance must meet the same criteria in order to
qualify for a loan. The main criteria are:
· technically sound projects
· financially sustainable projects
· environmentally sustainable projects
· acceptable financial and economic return
· contribution to the country's economic growth and development
· follow the World Bank procurement procedures
ifc 15 is the private sector arm of the World Bank. Its main purpose is to encourage private
enterprise in developing countries. ifc aims to reach businesses in regions and countries
that have limited access to capital. It provides finance in markets deemed too risky by
commercial investors in the absence of ifc participation. ifc fulfils its mandate primarily
through three types of operations in its member countries:
· financing private sector projects
· helping private companies to mobilize capital in the international financial markets
· providing technical assistance and advice to both governments and private businesses
ifc operates on a commercial basis. It invests exclusively in profitable projects and
charges market rates for its products and services. ifc lend funds on market terms with debt
financing of up to 13-15 years with a flexible grace period of 1-12 years. As a rule, the ifc deals
only with enterprises that are privately owned and controlled. Exceptions can be made for
state-owned enterprises that are in the process of being privatized. ifc finances only part of
the project costs. For new projects a maximum of 25 per cent of the total costs are provided
(can be 35 per cent for small projects). For expansion projects, it can provide up to 50 per
cent of the total cost. Annex 6 give more details on the wide range of financial products.

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
miga16 helps promote foreign direct investment in developing countries by providing
guarantees to investors against non-commercial risks, such as expropriation, currency
inconvertibility and transfer restrictions, war and civil disturbance, and breach of contract.
miga's capacity to serve as an objective intermediary and to influence the resolution of
potential disputes enhances investors' confidence that they will be protected against these
risks. In addition, miga provides technical assistance and advisory services to help countries
attract and retain foreign investment.
Types of foreign investments that can be covered include equity, shareholder loans, and
shareholder loan guarantees, provided the loans have a minimum maturity of three years.
Other forms of investment, such as technical assistance and management contracts, and
franchising and licensing agreements, may also be eligible for coverage. Equity investments
can be covered up to 90 per cent, and debt up to 95 per cent, with lending periods typically
available for up to 15 years, and in some cases, up to 20 years.
Annex 6 among others provides more information on World Bank vehicles and strategies
used to define and direct loan programmes, such as the Country Assistance Strategies (cas)
and Poverty Reduction Strategy Paper (prsp).
The African Development Bank (afdb)
The African Development Bank (afdb17) is a regional multilateral development bank
promoting the economic development and social progress of its regional member countries
in Africa. The bank began operations in 1966 and has 53 member countries in Africa as well
as 24 member countries in the Americas, Europe, and Asia.
Besides the afdb, the Bank Group consists of two other institutions managed by the afdb
but financially independent.
The African Development
The adf (African Development Fund), established in 1974, provides `soft' financing and is
Bank provides `soft'
primarily funded by the 24 non-African member countries. Its cumulative resources total
financing...
us$18.7 billion.
The ntf (Nigerian Trust Fund) is a special fund created in 1976 by the agreement between
the Bank and the Government of Nigeria to assist in the development efforts of low-income
regional member countries whose economic and social conditions and prospects require
financing on non-conventional terms. Total ntf resources amount to us$558 million.
The bank's main responsibilities are:
· offering loans and equity investments for the economic and social advancement of
regional member countries;
· providing technical assistance for the preparation and execution of development
projects and programmes;
· promoting investment of public and private capital for development purposes;
· responding to requests for assistance in coordinating development policies and
plans for regional member countries.

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f i n a n c i n g t h e i m p l e m e n t a t i o n o f r e g i o n a l s e a s c o n v e n t i o n s a n d a c t i o n p l a n s
afdb is also required to give special attention to national and multinational projects
and programmes that promote regional integration.
...for all major sectors
The bank provides financing for all the major sectors, with particular emphasis on agri-
culture, public utilities, transport, industry, and the social sectors of health and education.
Projects also cover poverty reduction, environmental management, gender main-
streaming, and population activities. Most financing is designed to support specific
projects. However, the bank also provides programme-, sector-, and policy-based
loans to enhance national economic management.
The Asian Development Bank (adb) 18
The Asian Development
The adb is a multilateral development financial institution. Its mission is to combat
Bank mainly deals with...
poverty and improve the welfare of the people in Asia and the Pacific. The adb is owned
by 64 members of which 46 stem from the region and 18 from other parts of the world.
The adb has a preferred creditor status and is rated aaa by Moody's rating agency.
adb's main instruments for providing help to its developing member countries are:
· policy dialogue
· loans
· technical assistance
· grants
· guarantees
· equity investments.
As a multilateral development financial institution, the adb mostly engages in public
sector lending for development purposes in its developing member countries. Members
are the banks shareholders.
...public sector lending
The adb's principal tools are loans (see for example Figure 2.2 and Table 2.7) and technical
for development
assistance, which are provided to governments for specific, high-priority development
purposes
projects and programmes. adb funding both supports and promotes investment for
development based on a country's priorities. The figure below shows the sectoral
distributions of the loans given in 200419.

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
fi g ur e 2.2
Sectoral distribution of adb loans, 2004
Education
1%
Finance
5%
Health, nutrition and social protection
1%
Agriculture and
Industry and trade
0%
natural resources
5%
Water supply,
sanitation, and
waste management
Transport and communications
11%
30%
Law, economic
management,
and public policy
13%
Multisector
Energy
15%
19%
Source: adb 2005
table 2.7 Disbursed adb loans outstanding by country (percentage of total disbursed adb loans)
19 9 9
2 0 0 0
2 0 01
2 0 02
2 0 03
2 0 04
Indonesia
24.4
24.7
24.3
26.7
31.7
34
Philippines
9.5
9
8.6
8.7
10.9
11.5
India
16.7
14.9
14.1
14.8
13.6
10.5
Pakistan
8
7.9
7.5
8
10.3
7.7
China
16
18.1
20.6
21
18.2
20.2
Thailand
8.6
7.1
7.2
2.7
2.5
2.3
Malaysia
1.9
1.8
1.5
1.5
1.6
1.6
Korea
14.4
14.1
13.6
13.4
7.5
7.8
Others
0.5
2.4
2.7
3.1
3.8
4.5
Total (us$ million)
2 8 344
2 8 231
2 8 739
2 9 234
2 5 398
24 197
Source: adb 2005
In 2005, the adb approved loans worth us$5.8 billion for 64 projects, most of which went to
the public sector. China was the largest borrower, followed by Indonesia, Pakistan, Vietnam,
and Bangladesh. Multi-tranche financing facilities worth us$1.52 billion, grants worth
us$1.5 billion, equity investments for us$217.1 million, and guarantees for us$68.4 million
were provided. Technical assistance, which is used to prepare projects and support advisory
activities, amounted to us$198.8 million.

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Technical assistance
Technical assistance is a vital element of the adb's development strategy. Through its
technical assistance operations, the adb assists its developing member countries in a
number of fields. In 2005 a total of 299 technical assistance projects were approved
totalling us$199 million, including 271 new projects and 28 supplementary projects.
The adb has several technical assistance instruments, which it finances with grants
and loans, which can be useful for financing Regional Seas National Action Plans:
· project preparatory technical assistance for the preparation of feasibility studies
and detailed engineering for bankable projects
· project implementation technical assistance covering consulting services for project
implementation and initial operation, including the training of project personnel
· advisory technical assistance supporting institutional strengthening, sector and
policy studies, and non-project-related human resource development
· regional technical assistance addressing issues of interest to the region or
a sub-region or a group of individual developing member countries
Private sector operations
Through its Private Sector Operations Department, the adb provides direct assistance
to the private sector in undertaking financially viable projects with significant
development impact.
The adb directly supports private enterprises, private equity funds, and financial
institutions. Its traditional modes of financing are equity investments and hard currency
loans. For projects with revenue in local currency, the adb offers loans in local currency
in order to mitigate the exchange rate risk in the projects. adb's private sector focus is
primarily on two sectors: finance and capital markets, and infrastructure.
In the infrastructure sector, the focus is on telecommunications, power and energy, water
supply and sanitation, ports, airports, and toll roads. Projects may involve various forms
of risk sharing and ownership arrangements including build-own-operate and build-
operate-transfer (bot) structures.
The total support for a project is limited by adb policy to 25 per cent of the total cost of the
project or us$75 million. The bank cannot be the largest single investor in an enterprise.
The Asian Development Fund (adf)
The adf is authorized by its charter to establish and administer special funds. Established in
1973, the Asian Development Fund (adf) is the oldest and largest of the adf existing special
funds whose resources consist mainly of contributions mobilized under periodic reple-
nishments from adb's members. At 31 December 2001, total contributed adb resources
amounted to us$18.18 billion.

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f i n a n c i n g s o u r c e s a n d s t r a t e g i e s
The adf focuses on
The adb is designed to provide loans on concessional terms to those developing member
low-income member
countries with a low per capita gross national product and limited debt-repayment capacity.
countries with limited
At the end of 2003, loans from the adb accounted for around 27 per cent of cumulative adb
debt-repayment
capacity
lending. adb is a multilateral source of concessional assistance dedicated exclusively to the
needs of the region.
As the loans are given on concessional terms the price is very low. For project loans (other
than quick-disbursing program loans) the terms are: 32-year maturity including an 8-year
grace period, 1 per cent interest charge during the grace period and 1.5 per cent during the
amortization period, and equal amortization. For quick-disbursing program loans the terms
are: 24-year maturity including an 8-year grace period, 1 per cent interest charge during the
grace period and 1.5 per cent during the amortization period, and equal amortization.
The Islamic Development Bank
The Islamic
The Islamic Development Bank20 is an international financial institution established in
Development Bank...
pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of
Muslim Countries held in Jeddah in December 1973. The Bank was formally opened on
20 October 1975. The Bank's mission is to foster the economic development and social
progress of member countries and Muslim communities individually, as well as jointly
in accordance with the principles of Shari'ah (Islamic Law).
...finances productive
The Bank participates in equity capital and grants loans for productive projects and
projects and enterprises,
enterprises in addition to providing financial assistance to member countries for economic
and economic and social
and social development. The Bank is also required to establish and operate special funds for
development...
specific purposes, including a fund for assistance to Muslim communities in non-member
countries.
...through methods that
The Bank is authorized to accept deposits and to mobilize financial resources through
comply with Shari'ah
methods that comply with Shari'ah. It is also charged with the responsibility of assisting
in the promotion of foreign trade, especially in capital goods, among member countries;
providing technical assistance to member countries; and extending training facilities for
personnel engaged in development activities in Muslim countries to increase conformity
with the Shari'ah.
idb offers a wide range of financing and development schemes21 such as loans, leasing,
instalment sale, Istisna'a, equity participation, profit sharing, structured finance, and lines
of financing. Furthermore, idb provides technical assistance mainly for pre-investment
studies as well as detailed design and capacity building activities. The financing extended
by the idb is in the form of grant, up to a maximum of id 300,000, or an interest-free loan
over a maximum period of 16 years, including up to 4 years of grace. The following section
describes the loan process in more detail.

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Loans
idb loans provide long-term financing for the implementation of development projects,
mainly in agriculture (such as land development, irrigation networks, small-holders
development and rural water supply) and infrastructure (road transport or social facilities
such as schools and hospitals).
Currently, loans are limited to a maximum of id22 7 million per project. Loans are given
interest-free and bear a service fee to cover related administrative expenses incurred by
idb while formulating and processing the project. Repayment is made in equal semi-annual
instalments and extends over a period varying between 15 to 25 years, with a grace period
of 3 to 7 years, depending on the beneficiary member country and the type of project.
Loan financing with very soft terms is also provided under a special account for the
`least-developed member countries'.
idb financing usually covers (fully or partially) the foreign cost of specific components. In
certain cases, particularly for least-developed countries, it may also cover part of the local
cost. The beneficiary is expected to contribute to the project financing. Co-financing with
other institutions is also possible under certain conditions (usually parallel financing or, if
the procedures are similar to those of idb, joint financing). While loans are mainly given to
least developed member countries, these may also be extended to other member countries,
particularly in combination with other modes of financing (leasing, instalment sale,
or Istisna'a) whenever possible.
Loans are normally extended to governments or public institutions having a government
guarantee. idb provides financing for those projects or programmes that are technically
sound and economically viable and of high priority to the borrowing country.
The KfW Bankengruppe (KfW Development Bank) 23
The KfW Development
KfW Development Bank is one of five separate divisions of the KfW-Bankengruppe. KfW
Bank carries out...
was founded in 1948, and is today the promotional bank of the Federal Republic of Germany.
KfW is owned by the Federal Republic of Germany (80 per cent) and by the federal states
(20 per cent). The total balance sheet is of 3 341 billion as of December 31, 2005, which makes
KfW one of the ten largest banks in Germany. Because KfW provides services and
projects on behalf of the German government, KfW enjoys an explicit and direct guarantee
from the Federal Republic of Germany while it has the same rating as Germany.
...the financial
KfW Development Bank carries out financial cooperation (fc) with developing countries on
cooperation with
behalf of the German Federal Ministry for Economic Cooperation and Development (bmz). It
developing countries
on behalf of the
finances eligible investments in the expansion of the social and economic infrastructure and
German government
for strengthening the financial sector and supports national economic reform programmes
(Box 2.3 is an example).

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The projects promoted via fc funds are selected jointly by the German federal government
and the partner country according to development policy criteria. The local partners are
responsible for the preparation, implementation, and operation of the projects. KfW
Development Bank gives them professional advice in planning and implementing and
also in monitoring the projects. At the same time, it supervises the proper use of the funds.
The projects and programmes are embedded in the development strategies of the partners
in the developing countries. They are closely coordinated with projects implemented
under German Technical Cooperation and other bilateral and multilateral donors. KfW
Development Bank is currently implementing 1 400 projects in more than 100 countries.
For example, some
Box 2.3 KfW financial cooperation with Egypt
5 3.58 billion have
The Financial Cooperation (fc) between Egypt and KfW Development Bank has a long-standing
been provided to Egypt
tradition. The first projects were financed in 1962. Around 3 3.58 billion have been provided since the
since the early 1960-s
early 1960s. The project funds are provided in the form of preferential loans or grants, supplemented
by 3 1.34 billion in market funds guaranteed by the German federal government. This priority area
encompasses the use of water both for water supplies and sewage disposal and for agricultural
purposes. Safe drinking water and environmentally sound sewage disposal are crucial for good health.
One example of where KfW Development Bank has helped to finance environmental projects is the
Tanta oil and soap factory in Banha in the Nile Delta. The daily need for water was not so long ago
5.3 million litres daily for the production of edible oil, soap and animal food. The company operates
in a section of land where the Nile is the sole source of water. It is a source that has to provide for an
increasing population.
After an investment in the production facility the daily need for water has fallen to 240,000 litres per
day ­ only 4.5 percent of what was previously needed for production. The sewage problem has also
been mitigated. Previously 4.4 million litres of polluted water were discharged into the sewerage
system every day. Today, a small volume of sewage is treated. To achieve this, two grants from KfW
were required, one for 3 510 000 and one for 3 230 000.
Since then, German support has helped 130 Egyptian businesses to invest in environmental protection.
KfW Development Bank has already provided 3 85 million in bmz funds for environmental credit lines
in Egypt. The second loan programme is currently being implemented: 3 16.9 million for loans and
3 12.4 million for grants. The recipients include companies from the chemical and pharmaceutical
industries, producers of foodstuffs and plastics, petrochemical companies and paper mills. The funds
are disbursed through a partner bank. Another positive effect for the environment is that the Egyptian
commercial banks can gather knowledge about environmental investments ­ on a sustainable basis. <
Infrastructure projects eligible for support under development-policy terms (for example in
the areas of energy supply, transport, telecommunications, or water supply) can be funded
through mixed financing. For this financial product, KfW assumes part of the country risk.
In turn, KfW is protected by Hermes or another first-class official export credit agency.
Consequently, mixed financing projects also have to meet the requirements of the
respective export credit agency involved. Borrowers may be states or project-executing
agencies in the developing countries that benefit from a state guarantee. Table 2.8 lists
the total commitments given in 2004, which are administered by KfW.

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table 2.8 Total 2004 commitments in selected countries,
administered by KfW (in million 3)
bmz budget Other
donor KfW
funds
deg
Total
funds
funds
Morrocco
69.48
­
192.38
62.14
423.2
Egypt
8.69
0.60
­
1.28
10.57
Jordan
10.06
­
­
­
10.06
Dom. Rep.
7.55
­
­
5.79
13.34
Jamaica
­
­
­
­
­
Russia
0
­
28.7
57.29
85.99
Georgia
7.86
­
­
3.5
11.36
Thailand
­
­
­
3.6
3.6
Vietnam
22.88
­
­
­
22.88
Source: www.kfw.de/en_Home/Presse/PressConfe39/fz_Jahresbericht_2004_englisch.pdf
Loans
The German government has created instruments for mobilizing additional KfW funds
for developmentally sound programmes within the framework of official cooperation
with developing countries. In these instruments, fc funds made available from the
German government are combined with funds raised by KfW. These fc development
loans are available in the form of `integrated composite finance', `mixed finance', or
`interest reduction'.
Composite loans are available for financing projects that are eligible for promotion
according to development policy criteria in the fields of infrastructure (telecommuni-
cations, energy supply, transport, water supply, and waste management), industry and
environmental technology. The loan is only available to developing countries in oecd
categories 2 to 6.
Borrowers may be states or project-executing agencies benefiting from a state guarantee.
The terms of the composite loans are adapted to the project periods. The interest rate for
such a composite loan is either variable or fixed for the entire loan term (upon signing of the
loan agreement or at disbursement). The composite loan interest rate is always below the
market interest level. By adapting this instrument to the economic situation of the partner
countries and the commercial viability of the projects, KfW is able to provide financing
solutions tailored to individual needs.

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Composite loans may either be tied or untied to German supplies. Untied composite
loans must contain a grant element of at least 25 per cent to qualify as oda. Tied composite
loans are available only for projects that are commercially non-viable owing to the oecd
Consensus rules. In other words, they can be granted only for projects with cash flows
insufficient under commercial financing conditions. The grant element required in this
case is at least 35 per cent.
Annex 11 describes the process of working with KfW Development Bank. In principle the
process is the same as for other ifis, though some differences can always be expected.
deg
Within KfW Development Bank, deg improves private sector structures in developing
and transitional countries, thereby making room for private business initiatives. These
initiatives form the basis for sustainable economic growth and a lasting improvement in
people's living conditions.
As specialist for long-term project and corporate finance, deg advises private enterprises,
structures and finances their investments in developing and transitional countries and in
this way mobilizes long-term investment capital, technical expertise, and management
and marketing experience.
deg invests in profitable, environmentally and socially sustainable projects in all
economic sectors opening up to private entrepreneurial activity. Another main focus is
the development of the financial and capital markets.
2.4 Commercial banks
In developing and
In economically advanced countries, policies supporting economic reform and macro-
transition countries
economic stabilization have encouraged the development of domestic capital markets that
commercial loans
can supply financing to both enterprises and municipalities. In developing and transitional
usually require state or
export credit agency
countries, capital markets and institutions have often remained weak and commercial loans
guarantees...
are often available only if loans are guaranteed by the state or by an export credit agency
(eca). In addition, an eca will often require a sovereign guarantee as well. In those countries,
local commercial banks will only play a limited role in the funding for environmental
investments.
For the least-developed countries, a sovereign guarantee might not be enough to secure
commercial financing. In this case, a commercial loan is not an option and these countries
will have to rely on ifi lending and donor funds.
...which is not an option
Generally speaking, the role of commercial banks in financing environmental investments
for the least-developed
is limited. For example, in the persga region only Saudi Arabia, Jordan, and to some extent
countries
Egypt, are likely candidates for commercial bank environmental financing. International
rating institutes as well as the oecd country risk classification24 system have rated many
developing countries as high-risk countries thus limiting their ability to secure financing,
especially commercial.

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Environmental
Most service providers in developing and transitional countries are municipalities, which
investments (with low
are typically not creditworthy. Furthermore, since environmental investments often are
returns) are not attractive
very large, have long-term repayment periods, and have very low returns they are not
for commercial banks
attractive for the commercial banks. In some cases, commercial banks will work together
with the ifis and donors to provide funds for municipal projects but usually the banks
only provide short-term working capital.
When banks are determining loan qualification, the following aspects are considered:
· financial statements and budgets
· borrower stability
· stable income
· financial viability of the project
· environmental impact of the project
· whether the borrower can finance at least 15 per cent of the investment up front,
often 30 per cent is required
· whether the borrower can undertake the currency risk
Credit guarantees
Credit guarantees lower
When the service provider is not creditworthy, a credit guarantee is necessary in order for
the credit risk and thus
the service provider to obtain a commercial loan. Credit guarantees provide a promise or
improve loan conditions
commitment to a creditor that the debt or loan will be repaid even if the borrower is unable
to make these payments. Credit guarantees, either partial or full guarantees, are issued by
sovereign entities (national governments or states), sub-sovereign entities (regions),
commercial financial institutions, multilateral and/or bilateral financial organizations,
or private entities. Thus, credit guarantees lower the credit risk by acting as repayment
insurance. This in turn increases the amount of money available to the borrower(s) and
improves the terms and conditions of the loan.
Export credit agencies (ecas)25
eca guarantees only cover
For many types of investments in developing and transitional countries, ecas play a central
international elements,
role in financing individual projects. Their job is to issue a guarantee to the lending bank
not the local costs
or exporter for the repayment of capital investments. ecas do not guarantee local costs,
only the international elements of a project can be guaranteed. However, for larger
infrastructure investments, it is common to create a package that includes ifi loans,
commercial bank loans, and eca guarantees. In many emerging markets, eca guarantees
are often a prerequisite for commercial loans.
Historically, states have used eca cover to give subsidies to their own exporters. By
charging a very low premium that did not reflect the risk involved, the exporters were able
to increase their market shares or to penetrate new markets by offering a very low price26.
This is considered a state subsidy and is in breech of the oecd and wto rules.

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The `oecd consensus
In order to prevent states to subsidize their exporters, the main ecas (those that were
agreement' fosters a
members of the oecd) signed an agreement known as the oecd consensus agreement. The
level playing field for
objective is to foster a level playing field for official support by encouraging competition
official support
between exporters based on quality and price of goods and services exported rather than
on the most favourably supported financial terms and conditions.
The oecd consensus agreement, also known as the Knaepen Package, aims to ensure that
participants charge premium rates in addition to interest charges that cover the risk of
non-repayment of export credits (such as credit risk). The premium shall also cover the cost
associated with running an export credit scheme, which are the long-term operating costs
and losses associated with the provision of export credits. Another stated purpose of the
Knaepen Package is premium rate convergence27, which although not easily measured
or defined, is a general outcome that can be expected when the two above-mentioned
objectives are met.
One of the key elements of the Knaepen Package is the system used to assess a country's
credit risk. It classifies countries into eight different risk categories (0-7)28 with 0 represen-
ting the lowest risk. Each category includes a minimum benchmark that the oecd countries
are supposed to surpass. The member countries in the European Union are obliged by law
to apply to the oecd rules.
Microfinance
Micro-finance provides
Microfinance provides funds to small enterprises ­ including the `informal' sector ­ village
funds to small enterprises,
banks, farmer groups, and households, which do not have easy access to conventional
including the `informal'
lending sources (such as commercial banks). Valuable experiences and international
sector...
cooperation already exist. Currently, the demand for micro-financing is much higher than
the resources available. Microfinance can contribute to the implementation of gpa-related
...and is much in demand
activities, particularly in the sectors related to agriculture, aquaculture, tourism, small
industries, and small-scale sanitation. High transaction cost, shortage of funds, and the lack
of involvement of the traditional banking sector are some of the major impediments to be
addressed. ngos play a significant role in the development and implementation of micro-
financing schemes. Government, foundations, and international financing institutions are
currently the major founders. Commercial banks have followed the developments, but
have not entered this market segment to a major extent (unep/gpa 2001).
2.5 Economic instruments 29
What are economic instruments?
The best way to explain the features of Economic Instruments is by quoting Panayotou
(1998) who summarized the flexible properties of economic instruments as follows: `Apart
from their market correction qualities and their efficiency or cost minimization objectives,
economic instruments are ideally suited for reconciling environmental concerns with
development needs, and integrating environmental and economic policies by virtue of
their a) flexibility in accommodating heterogeneity, and b) adjustability to changing
circumstances. The key to the promise of economic instruments is their ability to harness

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the power of the market and the self-interest of the individual, and to turn these presumed
adversaries of sustainable development into powerful allies. This is done not by mandated
or prescribed actions, but by changing the economic incentives facing producers and
consumers; by taking full advantage of their self-interest and superior information at their
disposal without requiring the disclosure of such information and without creating large
and costly bureaucracies. Economic instruments in effect transfer from bureaucrats to
the market the responsibility of identifying and exploiting new and additional low-cost
sources of pollution control'.
Economic instruments can
In the 1970s and 1980s, the common approach for dealing with pollution and environment
be seen as complementary
protection was by using `command and control' (cac)30 regulations. cac regulations are
to command and control
concrete regulations and norms that are defined by law. The motivation for compliance
measures...
when cac regulation is applied is the desire to avoid penalty, whether financial or by
exposure for non-compliance. Economic instruments are often described as comple-
mentary to the cac approach or as substitutes of these. However, this view has to be
taken with caution.
...but in reality they often
In reality, command and control regulations and economic instruments often operate in
operate in tandem...
tandem. In fact, for economic instruments to be valuable and enforceable, they have to
co-exist with a complex body of traditional regulations ­ like cac regulations. For example,
governments may set limits on allowable pollution levels for a region or country. Market-
oriented approaches such as tradable permits (an economic instrument) are then used to
allocate the allowable emissions in an efficient manner (unep 2002). Hence, if the cac
approach does not work due to a lack of political will or institutional obstacles, the
economic instrument will not work either.
... and work best in a
Given the complexities of environmental problems and the impact of environmental
`policy mix' of both
policies on social and economic activities, specific environmental problems are usually
addressed by employing a `policy mix' consisting of various command and control
instruments, economic instruments, and persuasive instruments. It is important to stress,
therefore, that using economic instruments alone usually is not the ideal and only solution.
In fact, the effectiveness and efficiency of economic instruments always depends on the
accompanying overall policy mix.
Why use economic instruments?
Economic instruments have a number of benefits compared to other measures. They can
allow internalization of environmental costs, in line with the polluter pays principle, and
give polluters flexibility in the way they respond. Economic instruments can include taxes,
charges, tradable permit schemes, subsidies or tax credits, and/or deposit/refund schemes
(hm Treasury 2002).
Economic instruments can
The main advantage of using economic instruments is that they have the potential to
change the behaviour of
change the behaviour of the users. When environmental costs are fully internalized into the
both users and producers
price of a product or an activity/service, consumers are encouraged to substitute away from

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these products with higher relative prices to alternative products that are relatively cheaper
priced and more environmentally friendly. The same goes for producers ­ if a tax or charge
is put on emissions, then they are encouraged to change their production methods into
less polluting methods because of the tax incentive. The implemented changes might even
lead to technological developments and new production processes to the benefit of the
environment.
Economic instruments are not always the most appropriate option, especially when
quantities of emissions are important or in a situation where it is essential that emissions
do not exceed specified limits on any individual site. In these cases, it will probably be
necessary to address the problem through regulation. Regulation or voluntary agreements
may also be more appropriate where there are a limited number of polluters, so that the
costs of setting up a scheme based on an economic instrument may outweigh the
benefits.31
Types of economic instruments
Examples of economic
The list of economic instruments is long and the literature describing them is abundant. As
instruments are:
the objective of this report is to describe the revenue potential and not the environmental
effects of using EIs, the focus will be on revenue generating economic instruments:
Emission charges/fees/taxes
Emission
Direct payments based on measurements or estimates of the quantity and quality of a
charges/fees/taxes
pollutant. Emission charges typically cover a wide range of pollutants, often in combination
with non-compliance fees (see below). Such instruments are also referred to as `pollution
charges'.
User charges/fees/taxes
User charges/fees/taxes
Payments for the cost of collective services are primarily used as a financing device by local
authorities, for example for the collection and treatment of solid waste and sewage water.
In the case of natural resources management, user fees are payment for the use of a natural
resource (such as minerals, parks, or sporting, fishing and/or hunting facilities).
Product charges
Product charges
Charges applied to products that create pollution when they are manufactured, consumed,
or disposed of (such as fertilizers, pesticides, packaging and batteries). Product charges
are intended to modify the relative price of the products and/or to finance collection and
treatment systems.
Non-compliance fees
Non-compliance fees
Payments imposed on polluters who do not comply with environmental or natural resource
management requirements and regulations. They can be proportional to selected variables,
such as damage due to non-compliance or profits linked with non-compliance. Non-
compliance fees are also commonly referred to as `fines' or `penalties'.

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The following economic instruments are not revenue generating but are cost-covering
instruments:
Deposit-refund systems
Deposit-refund systems
Payments made when purchasing a potentially polluting product (for example batteries or
glass bottles). The payment (deposit) is refunded when the product is returned to the dealer
or a specialized treatment facility for destruction or recycling. It is intended to encourage
individuals and firms to dispose of such items in an environmentally acceptable manner.
Administrative costs are an important consideration when determining whether to create
deposit-refund systems. Such systems appear best suited for products whose disposal is
difficult to monitor and potentially harmful to the environment. When the used item has an
economic value, the private sector may initiate a programme. Deposit-refund systems have
typically been used for beverage containers, pesticide containers, lead-acid batteries, and
tires. They can also be applied to appliances, electronic equipment, and automobiles.
Performance bonds
Performance bonds
Performance bonds are payments to authorities that take place prior to an activity that is
potentially environmentally harmful. To guarantee compliance with environmental or
natural resource requirements, polluters or users must pay a deposit in form of a `bond'.
The bond is refunded when compliance is achieved, and forfeited if it is not achieved. In that
sense, a performance bond acts like a deposit-refund system. If the performance bond is
linked together with the renewal of for example permits and licenses, the environmental
effect can be even stronger. Due to the difficulties in monitoring environmental damage
and legal restrictions while setting up the contracts, performance bonds are used less
frequently than other economic instruments and have been applied mainly where there
is a clear potential for environmental damage, such as mining or oil production.
Liability payments
Liability payments
Payments made under civil law to compensate for the damage caused by a polluting
activity. Such payments can be made to the `victims' (from chronic or accidental pollution)
or the government. They can operate in the context of specific liability rules and compen-
sation schemes, or compensation funds financed by contributions of potential polluters
(such as funds for oil spills).
Problems with economic instruments
For economic instruments
When choosing among instruments, the selection needs to consider local and global
one size does not fit all
priorities. Given the number of possible instruments and the number of possible activities
involved with each instrument, the government must choose where to start and how best
to prioritize the different polluting sources. There is substantial variation in the needs,
opportunities, and constraints facing each developing country. One size does not fit all.
Even within countries, there is a substantial variation in the capacity to implement
economic instruments across different regions or sectors.

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The balance between
Some desired changes are easier to implement through economic instruments while others
regulatory controls and
are easier to implement through command and control regulations. It is not an either or
economic instruments
situation. For each country, the balance between regulatory controls and economic
depends on the local
situation
instruments will depend on local conditions and preferences. In high-income countries
with well-staffed and well-equipped regulatory agencies, as well as strong judicial response
systems, specific regulatory standards may be readily implemented on an equitable basis.
Thus, economic instruments used in these countries may be designed to encourage super-
performance. However, in many developing countries the inspection and enforcement
resources are limited and political influences may lead to inequitable compliance
requirements. In such cases, economic instruments may be designed for the achievement
of more modest standards of performance rather than super-performance.
Finding and implementing an economic instrument is not an easy task as the use of EIs has a
number of preconditions that need to be fulfilled in order for the EI to be successful. Some of
these preconditions are listed below.
Functioning markets and related institutions
A free-market economy
The presence of a free-market economy with property rights, private enterprise,
is required....
competition, price liberalization, equitable judicial systems, and limited price distortions
(subsidies) is crucial32.
Institutional capacity
...and the institutional
To enforce the rights and obligations that follow the implementation of an economic
capacity to enforce rights
instrument, it is necessary to have a well-functioning and competent legal system. As
and obligations
with the command and control approach, economic instruments are not effective unless
supported by consequences or punishments handed down to organizations that deviate
from them. Having successful economic instruments and cac regulations require that the
political institutions punish violators. For example, if the legal system is not capable of
enforcing property rights, then using permits to curb emissions or granting access rights
to indigenous people is not feasible. To implement economic instruments, countries need to
have a minimum level of human and technological capacity. Disputes with the industry over
payments are common and can be costly.
Many economic instruments build on existing institutional infrastructures, such as tax
systems and electricity and water payments. For example, in Denmark, the implementation
of economic instruments has been rather extensive since there is complete tax base where
all households and companies are registered. This allows, for example, the government to
institute user charges in the form of green taxes33. Without a complete tax base, registers
and meters at household level it would be very difficult to implement user charges at all
levels. If this is the case, charges can be levied on the upstream suppliers of the polluting
substance. They will accordingly internalize the charge in the price and thereby pass on the
cost to the end user through an increase in the price of the product or service.

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Setting the right price
All direct and hidden
In high-income regions or countries, the principle is that the `instrument should be
environmental costs
designed to internalize external costs'. Therefore, all direct and indirect environmental
should ideally be
costs that would otherwise be paid by the community in the environmentally harmed
included in the price
area should instead be built into the pricing for the product or service causing the harm.
As this is not always
For developing and transitional countries, a good initial option is to implement a phased
possible, a step-by-step
approach. One approach could be initially to move towards recovering (through user
approach is best followed
charges) only the operational and maintenance costs. At a later stage full cost recovery
of services received including investment costs should be recovered. This may be an appro-
priate way to address willingness and ability to pay. The case in many developing countries
is that user charges only cover administration costs of command and control systems.
Therefore the users and polluters pay only for a small part of the actual cost associated
with the services provided or damage from pollution (Andersen and others 2003).
To determine both the internal and external costs needed to cover the project, it requires
an objective and complex scientific and economic analysis, so that pricing is made as fair as
possible. In developing countries, the burden of such analysis may be too expensive and
sophisticated for existing institutions to undertake. The analysis also requires technical
skills that might not be in place.
Political willingness
A range of actors are
Policy-makers have other objectives than analysts. There is not one unitary governmental
involved in tax policy-
actor that collects information, performs analysis and imposes the proper level of taxes
making; not easy to
or charges. Instead, there are various actors involved in policy making, including interest
reach consensus
groups, bureaucratic actors as well as the formal decision makers. As these groups of actors
have different perceptions of the costs and benefits related to instrument choice, it is
generally difficult to reach consensus on what constitutes the optimal solution (eu 1998).
Competition
One of the arguments often used for not implementing economic instruments is that the
domestic industry will lose competitiveness to industries in countries where such economic
instruments not in place, possibly leading to the relocation of the industries and the loss
of much-needed jobs. For this reason, some of the most polluting and energy-intensive
industries in Europe are given tax exemptions and rebates in return for a negotiated
agreement to make a partial environmental improvement. Experiences in Denmark show
that basically all green taxes levied on the industry are tax neutral (depa 1999, oecd 2001).
Consideration for effects on competition within industry sectors should also be taken
into consideration.
One way to deal with the loss of competitiveness issue is to jointly implement the same
economic instruments in all the countries in the region. Such a harmonized approach
might take some time and effort to be implemented but the rewards can be significant.
Harmonization could help to avoid loss of competitiveness

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2.6
Focussing on subsidies
Subsidies for social or political purposes
Subsidies are often
Subsidies are often used to pursue social or political goals. They can also be used to ensure
used to pursue social
the availability of food, and/or make basic commodities more readily available to the poor.
or political goals, but...
...they often have
Although there are both positive and negative effects of subsidies, subsidizing selected
negative effects on
economic sectors has a number of costs ­ including a direct impact on government
government budgets
budgets, adverse environmental impacts, and lower overall economic activity. Typically
and overall economy...
consumers are not charged at full cost recovery for the cost of providing the goods and
services such as electricity, water sanitation, and water irrigation. In developing and transi-
tional countries, consumers usually pay very little for these services, which are subsidized,
and, in most cases, not even operational costs and maintenance expenses are fully covered.
One of the main problems with this situation is that it usually leaves the institutions over-
seeing the sector chronically short of funds (Pagiola and others 2002). Another downside
of subsidizing these sectors is that most likely the goods being supplied are then used
wastefully because the low prices do not provide users with an incentive to conserve.
...and on environment
A common argument for using subsidies is that they benefit the poor by allowing them
and social equity
access to the product/service as a result of the low costs. However, this is often not the case
in developing countries since most often the subsidized products/services are not available
to the poor due to the weak infrastructure of the country. Subsidies for electricity and water
supply are good examples of this. Often the poor are not connected to the grid for these
services and therefore it is the wealthy that actually benefit from these subsidies. The
subsidy provided for transportation fuels (diesel or gasoline) is another example of a
subsidy that benefits the wealthier car owners, a group that rarely includes the very poor.
As a result, according to a World Bank report, the non-poor sectors of society use 90 per
cent of subsidized products/services (Pagiola and others 2002).
Subsidies for environmental purposes
A carefully designed
Subsidies are not always negative; in fact, some are necessary to ensure consistency in
subsidy can also achieve
country policies. In principle, a subsidy can be used to achieve positive outcomes, like a
positive outcomes
decrease in pollution from a tax or trading scheme. However, careful considerations need
though
to be made before subsidies are introduced. Experience shows that once a subsidy is in place
it is very difficult to remove it. It is therefore wise to place a time limit on subsidies in order
to make it easier to terminate the programmes, if needed.
Using subsidies is only a second-best solution since they set aside valuable economic
resources ­ outside the general process of financial and economic policy ­ thereby reducing
the economic resources available for other necessary expenditures. However, they may
nevertheless play an important role in enhancing the acceptability of the taxes and
fees/charges in question, and in turn provide important funding for environmental
expenditures.

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Subsidies can take many forms, such as grants, soft loans, or tax allowances. Subsidies
may be financed through the general budget or through earmarked revenues. The purpose
of subsidies is to motivate individuals or firms/enterprises to act more environmental
responsible. Examples of tax incentives used in the uk are:
· reduced rates of vat for certain energy-saving products
· enhanced capital allowances for investment in energy-saving technologies which
were introduced with the climate change levy
· reduced duty rates for road fuel gases and for bio-diesel
· a 150 per cent tax credit for costs incurred in the remediation of contaminated land.
Agriculture and energy
The two sectors that are most often subsidized, according to the oecd, are agriculture and
are the most subsidized
energy. Out of 36 subsidy schemes in effect by late 1998 in Denmark,34 14 were for energy
sectors
and four for agriculture. Of the funds used for subsidies, 68 per cent were used for energy
and 8 per cent for agriculture.
Subsidies for
Subsidies for environmental protection can be seen as the flip side of emission taxes.
environmental
Instead of using taxes to encourage firms to reduce emissions, firms will decide voluntarily
protection work,
to reduce emissions if they are granted a subsidy (in essence, an incentive) for doing so.
but could also
backfire
Under a subsidy system, polluters have the incentive to control all units of pollution,
whose marginal control fits within the limits of the subsidy. However, using environmental
subsidies in this way may actually backfire. Potentially, firms that would not normally
engage in the environmentally harmful activity might begin to use it to reap the benefits
of the subsidy. Therefore, subsidies might have the opposite effect than intended and
pollution could actually increase instead of decrease.
How to remove unwanted or harmful subsidies
An important advantage of removing environmentally harmful subsidies is that the
action does not require the design and implementation of new instruments. Furthermore,
removing or reducing environmentally harmful subsidies would provide savings and/or
additional resources for the state budget. There are two ways to remove subsidies:
Removing subsidies does not require new instruments and gives state-budget savings...
· slash the entire subsidy in one move. This one-off approach raises the price of the good in
line with economic costs at once. The big-bang approach capitalizes on the political will
backing the reform. However, this can have social costs since consumers do not have time
to adapt to the new situation. The risk is provoking social unrest that may be able to stop
the reform (as has happened, for example, in Indonesia and Nigeria)
· a gradual change over a number of years. The gradualist approach is risky since reforms
could be reversed as political will erodes with time and as affected constituencies get
organized to oppose the reform

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...but when phasing out
Removing subsidies is never easy as a number of groups may have vested interests. There is
subsidies a safety net
no doubt that removing subsidies will have effect on all users in society. Therefore, phasing
needs to be established
out subsidies requires the establishment of a safety net, in order insulate the poor from the
effects of the price increase. This could be done by targeting the subsidy to those who really
needs it instead of applying the subsidy to all users.
2.7 Focussing on public-private partnerships
ppps ­ a financing strategy
ppps may open the
Public-private partnerships (ppps) are not a direct financing source or instrument but
door to additional
more of a financing strategy. However, in many instances, especially in developing and
financing options for
transitional countries, ppps may open the door to additional financing options for the
implementation
implementation. The rationale behind public-private partnerships is to transfer part of the
responsibility for infrastructure management to private partners while still achieving the
goals or targets set up by the public sector. There are several advantages of ppps since the
private sector can:
· increase cost efficiency through more streamlined management practices, typical of
the private sector, as well as by focusing on lower operating costs and better tracking
of resources
· increase collection rates or user fees/charges since users are more willing to pay increased
prices for services provided by private companies, therefore increasing revenue
· bring in better operational and technical skills, which can have a positive effect on
the project
· provide additional capital for the project giving the project a greater potential for success
Both partners must
In order for a ppp to be successful, both partners must benefit from the project and both
benefit and both must
partners must also share the risk involved. When entering into a ppp, it should be clearly
share risks
stated that there will still be a need for users and the public sector (if subsidized) to pay
for the services desired. This need for public-sector transfers will still be high unless user
charges can be increased. Though ppps seem simple in theory, many examples can be
given where ppps have failed and the projects have been terminated
(PriceWaterhouseCoopers 2001).
Partnerships can take many different forms, including: build-operate-transfer schemes
(bot); contracting private sector firms to commercialize existing services or to manage
renovation or expansion; privatizing part of or all of a municipal service; or providing private
concessions to operate a service while maintaining municipal ownership of assets. Table 2.9
summarizes the allocation of key responsibilities for the main types of ppps. Annex 2 give
descriptions for the six ppp options listed in the table.

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table 2.9 Allocation of key responsibilities for main types of ppps
Option
Capital Commercial
Operation
&
Asset Typical
investment
risk
maintenance
ownership
duration
Service contract
Public
Public
Shared
Public
1-2 years
Management Public
Public
Private
Public
3-5 years
contract
Lease Public
Shared
Private
Public
8-15 years
Concession
Private
Private
Private
Public
20-30 years
bot/boo
Private
Private
Private
Shared
20-30 years
Divestiture
Private
Private
Private
Private or
Indefinite (may be
Shared
limited by license)
Source: Adapted from World Bank 1997, in unep/gpa 2004
Factors to consider before entering into a partnership
From the beginning, a partnership has to be a genuine collaboration between the public
and private partner and the conditions agreed upon have to be acceptable for both parties.
The overall framework must be realistic and both parties must share the risk involved in
the project. The contract should provide a strong foundation for both parties to develop
confidence in the partnership and in each other.
Factors for ppp
The foundation of a successful ppp must include the following elements:
success are:
· A clear outline of the commitments, including political commitments, and contractual
obligations assigned to each partner builds trust and confidence in a ppp. This includes a
Commitment
commitment from the national authorities as well as from the local government. Political
and institutional stability at national and local levels and compliance with long-term
commitments are the basis of a long-term partnership and are often a precondition for
private sector involvement in environmental projects. Even if the local government
changes, commitments made by the previously elected officials should be honoured.
If the countries not are considered politically stable, the main challenge is setting up
appropriate guarantees for the private companies.
Transparancy
· Transparent investment procedures, which have a direct impact on risk allocation and
on the feasibility of the partnership, are required. In addition, ownership rights must be
clearly stated, including a clear definition of the assets contributed by each party and
appropriate concession fees, if any.
Viability
· The project needs to be viable/bankable as an ifi project ­ meaning commitments and
arrangements of subsidies and support must have the same obligations as ifi projects.
Entering into a partnership does not necessarily mean that fewer subsidies will be
needed.

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Public sector
· Solid technical expertise on the public side is crucial for tasks such as designing the
management
contract, negotiating with private companies, or setting the partnership's scope and
capacity
objectives.
Consideration of
Prior to the final investment, it is necessary to complete a thorough analysis that takes into
future demands
account the future demand that may arise from a changing demographic as well as the local
context, which affects the partnership. The project's investments must be adapted to the
population's needs and resources in order to obtain a tariff that is acceptable for the local
population. This means both the population's ability to pay and willingness to pay must be
considered.
Tariff flexibility
Furthermore, is it essential to acknowledge the need for tariff flexibility related to
through local funding
exchange, interest, and inflation rates that may fluctuation over time. This is especially
the case in many emerging markets, where there is no market for local financing and the
financing for investments often is given in hard currency. In this situation, if the currency
suddenly falls, the loan amount and the instalments will increase as measured in the local
currency. This will create a mismatch between the income from tariffs and the debt
obligations. Therefore, if possible, use local funding to respond to this type of financial issue.
fi g ur e 2.3
The process in a ppp project
Thorough
Preparation
Tender
Contract
Operation of
analysis of the
of the tender
the project
needs and set
a strategy
Source: Regeringen 2004
International trends for private partnerships
For most of the 1990s, the private sector played a significant role in financing infrastructure
investments in emerging markets. The financing reached a peak in 1997 when investments
totalled us$127.5 billion. The economic crisis in Asia together with a number of failed
projects in emerging markets led to a sharp decline in these private investments. By 2002
the level had dropped to about one third of the level reached in 1997 (World Bank 2005).
Figure 2.4 outlines the flow of these investments while Box 2.4 lists reasons for this decline.

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fi g ur e 2.4
Private sector infrastructure investments in emerging markets
140
7
9
19
120
1
998
100
2000
1
996
1
1
999
200
80
60
1
995
4
9
2002
19
1
993
Water & Sewage
40
1
Transport
9
1
992
1
990
19
20
Telecom
Energy
0
Source: ppi Database, World Bank 2005
Since 1997 private
box 2.4 Private sector participation in environmental investment is declining
sector investments
The World Bank lists the following reasons for the lack of private sector participation in environmental
are declining
investments:
· capital intensity, with high, up-front investments combined with long payback periods and low
sector returns
· risk of political pressure on tariffs
· weak or inconsistent regulation, lack of transparency, and perceived risk of regulatory capture
· sub-sovereign risk ­ local government entities standing counterparty to bulk water sale agreements
while having a poor collection record, sub-optimal financial condition, and weak credit
· water unaccounted for, water loss, inadequate distribution networks in a state of disrepair, and the
lack of investment funding to remedy the situation, thus threatening long-term project viability
· foreign exchange risk, with a mismatch between local currency revenues and foreign currency
financing
· forms of credit backstop (for example, sovereign counter guarantees for financial obligations of
sub-national entities being scaled back in the face of decentralization, ratings agency reviews,
and downgrades)
· lack of local government access to bank and capital markets due to the absence of central
government authorization and competition for scarce financial resources
· aversion of private insurers and re-insurers to providing bond insurance and political risk insurance
to sub-national entities in developing countries due to lack of transparency, poor financial condition
of reference entity, and absence of credit rating
Source: oecd 2006
<
Chapter 3 describes the more strategic aspects and challenges of planning financing for
programmes of action, discussing in detail the options of matching and blending different
resources to create viable financing packages: strategic planning for programmes of action
(Section 3.1); and how to approach and work with ifis and donors and how to select and
implement financing sources and mechanisms (Section 3.2).

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Strategic planning
3
3.1 Strategic planning for programmes of action
Introduction
In the process of implementing action programmes, there will always be challenges that
must be resolved. Identifying and analysing these potential challenges, and developing
ways to overcome them, requires strategic planning, a crucial element for the success
of any programme of action.
The most visible challenges will often arise in the implementation phase because pa's are
rarely specifically prioritized, financed, time-bound, and are often based on unrealistic
expectations of financing availability. Another common challenge is utilizing the full range
of financing instruments ­ such as an increase in tariffs, charges, or legal barriers ­ to allow
for financing options such as bonds, increased borrowing, and lower interest rates. It is
important to build into the planning process a way to identify and address the perceived
challenges.
Four categories of
As previously mentioned in this report, most developed countries, and increasingly in
challenges are:
transitional and developing countries have encountered the following challenges when
developing or implementing programmes of action:
Lack of commitment
· The lack of widespread political and/or community support for the long-term actions
and changes needed to protect coastal and marine environments
Weak institutional
· Inadequate institutional capacity and/or human resources to satisfactorily address
capacity
the wide range of land-based pressures facing coastal and marine environments
Lack of integration
· The lack of integration into public investment programmes and national development
and funding programmes ­ pas are often developed by Ministries of Environment
without a specific recognition of the other ministries that will be implementing the Pas
Lack of financial
· The lack of financial resources to adequately plan, design, implement, monitor, and
resources
evaluate concrete actions to protect the marine environment from land-based activities.
To address these challenges and to ensure long-term sustainability strategic planning is
crucial. Initial planning must involve all stakeholders in the preparation and in the develop-
ment of the pa, assign clear responsibilities for the implementation and the funding of the
pa, and base the concrete action plan on realistic assumptions of sustainable financing.
The programme of action should also be adapted to realistic expectations of institutional
setups, identify constraints and barriers to implementation, and integrate the elimination
of these challenges into the action programme.
Addressing the challenges
Much experience
In the 1990s, many transitional countries were faced with the challenge of implementing
meanwhile exists in
unrealistic programmes of action in the environmental sector. Several donors, international
addressing these
organizations35, and transitional countries joined forces to address these challenges. Over
challenges
the last ten years or so, methods and tools to deal with these issues have been developed
providing an integrated package to help prioritize actions based on available and potentially
available resources.

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A more realistic
These activities have contributed in changing ways of thinking ­ specifically, they have
`affordability' approach
helped governments realize that they need to take financial constraints and institutional/
is helping countries
capacity-related barriers into consideration at a much earlier stage. This `affordability'
to prioritize
approach has strengthened the countries' ability to prioritize their own resources as well
as strengthening effective leveraging of additional external sources.
Below are some models, methods, and processes that can assist Regional Seas Programmes
member countries in strengthening the capacity to implement pas, strengthen public
institutions and municipalities. They might also help with in prioritizing and undertaking
long-term financially sustainable environmental action plans and environmental capital
improvements. The concrete steps needed to implement these methods are included in
Annexes 3-5.
Strategic planning concept
The strategic
Strategic planning includes activities such as:
planning concept
· legislative approximation
· identification of obstacles to implementation at legal, institutional, capacity,
and financial levels
· financing strategies, including gap assessments and scenario development
(supported by willingness to pay and affordability studies)
· the potential of domestic resource mobilization (identification of sustainable
financing levels)
· the potential of strengthening efficiency in public-sector financing for the environment
· detailed action planning based on realistic implementation scenarios
Strategic planning is
Strategic planning in the context of pa's is used to help organize and plan the necessary
a disciplined effort to
activities at national, sub-national, or municipal levels. The purpose of strategic planning
produce fundamental
is to ensure that all actors have the same knowledge and have been a part of the decision-
decisions and actions
making process when to implement the programmes of action. Strategic planning is a
disciplined effort to produce fundamental decisions and actions that shape and guide
programme implementation and ultimately achieve the programme objectives.
The process involves setting goals (such as defining a desired future development path)
and developing an approach to achieve these goals. The process goes through a series of
activities and studies, which at the end will allow the policy makers to develop realistic
action programmes based on affordability and the obstacles to implementation. Such
planning will ensure that realistic action plans are developed and then can be implemented
systematically. In addition, they reduce the risk of over-implementation or focussing on
the wrong investments or activities.
Legislative review
The objective of a legislative review is to evaluate the necessary legal requirements
to implement the pa effectively and timely. The legislative review does not only cover
environmental and environmentally related legislation, but also legislation that allows

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for framework conditions of these activities (such as financial arrangements, monitoring/
enforcement and institutional arrangements). This also includes `ownership' legislation,
which has an indirect effect on the implementation of the programme of action.
Legislative review
The steps involved (described in detail in Annex 3) in the legislative review process are:
is done in five steps
· Step 1: Determine which legislation should be reviewed
· Step 2: Identify which legislative requirements the programme of action will have
· Step 3: Determine how the programme of action will be implemented and enforced
· Step 4: Decide on the process of legislative transposition
· Step 5: Develop the action plan for the transposition of legislation
In connection with the eu accession process, the European Commission developed a
handbook on the implementation of ec environmental legislation (ec 1997). This handbook
provides a short process description of activities needed to review and adapt legislation.
The handbook also discusses the types of experts that need to be involved with the review
in a step-by-step approach. Although the handbook is eu specific, the method and process
of evaluation are the same for other legislative processes.
Since the development and implementation processes for the pa may change, it may
be necessary to adapt and possibly expand the legislation that has been reviewed.
Challenges to implementation
Challenges and
In the process of implementing action programmes, there will always be challenges and
obstacles will arise
even obstacles to implementation that must be addressed. It is important to build into the
throughout an entire
planning process a way to identify the perceived challenges and design activities to
programme cycle...
address these.
...and need to be
The most visible obstacles are often seen in the implementation phase because pa's are
anticipated as much
rarely specifically prioritized, financed, time-bound, and are often based on unrealistic
as possible
expectations of financing availability. Capacity constraints during the project preparation
and approval phase are often a challenge. Another common challenge is utilizing the full
range of financing instruments ­ such as an increase in tariffs, charges, or legal barriers ­
to allow for financing options such as bonds, increased borrowing and lower interest rates.
Environmental financing strategy
The environmental financing strategy (efs) was developed as a response to the unrealistic
environmental strategies and plans that were developed in the early to mid-1990s. These
environmental action programmes did not take into consideration affordability, realistic
financing sources, and did not involve ministries of planning, finance, and development
adequately ­ the groups that would eventually have to fund and implement the activities
of the programme.

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Environmental financing
The efs serves as a planning tool for assessing the demand and the supply of funds
strategy can be used to...
and evaluating financing gaps for specific sectors, project owners, or types of projects
(Figure 3.1). Using the environmental financing strategy can provide information that
can be used by environmental authorities in the country or region in several ways:
...identify or develop new
· assuming that financing gaps exist, the efs can stimulate a dialogue focused on the
sources of financing...
reassessment of environmental targets, the identification or development of new
sources of financing, and institutions to provide or facilitate financing
...mobilize financing...
· at the project or sector level, this information can help environmental officials mobilize
financing from donors or ifis by providing a clearer picture of where funding is needed
...identify obstacles to
· the efs, in coordination with the legislative review, can help identify the obstacles
implementation...
to programme implementation; the study of the potential of domestic resource
mobilization (see Section 3.2 and Annex 5) can be used to identify policy and resource
implications for public sector institutions trying to mobilize environmental financing
from the private sector
...develop action plans
· the efs can be used to develop detailed short and medium-term action plans and the
longer-term programme of action
fi g ur e 3.1
Environmental financing strategy process
Macro-economic forecast
· Production/income
·
Prices
·
Public revenues
Change
Demand
Supply
Existing
Environmental
`Rules' governing
Sources of finance
environmental
targets
· Public transfers for
U
· ser
charges
infrastructure
· Level
environment
· Public
budgets
and situation
· Year
· User
charges
· Private
financial
· Private
sector
institutions
finance
· Donors
i
and
if s
Change
Expenditure forecast
Projection of available finances for
· Targets
· Investment
expenditure
· `Rules'
· Investment
expenditure
·
Operation and maintenance
· Sources
·
Recurring expenditure
expenditure
·
Technical assistance etc.
Financing gap
Source: dancee/cowi 2000

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Relevant authorities can subsequently use the financing strategy to identify specific
projects or project types requiring government support. Annex 4 lists 11 actions to be
undertaken when formulating a financing strategy process. For further information
and details on financing strategies for the environment, several publications can be
recommended, such as:
· The oecd publication titled Financing Strategies for Water and Environmental
Infrastructure (oecd 2003)
· The depa publication titled Lithuania Environmental Financing Strategy (depa 2001)
· dancee/cowi's The Feasible Model (dancee/cowi 2000)
3.2 Selection and implementation of financing sources
and mechanisms
Finding the appropriate financing sources 36
The difference between
Approaching donors and ifis is similar as they more or less look for the same information
donors and ifis lies in
and use the same approach when deciding whether or not to invest in or give grants to a
the interest in future
project. The main difference is that donors do not have a long-term interest in the future
cash flows
cash flows or viability of projects since they most often provide grants, which are non-
repayable funds. ifis, on the other hand, place a high priority on the expected future cash
flow of the project, as this cash flow will provide the resources for repayment of the loan.
Project prioritizing
It is important to ensure
Before donors or ifis are approached, it is crucial that each country and/or region has
that co-financing does
prioritized the funding areas that most important. Donor grants are usually targeted
not pull funding away
for specific activities or sectors. Recipient countries will then have to tailor their funding
from actual priorities
requests/proposals to fit donor criteria, which may not have the same priorities as the
recipient country. As grants and ifi loans often require co-financing, the project may
pull much-needed funding away from the actual priorities of the recipient country.
Furthermore, as human capital and human resources are always scarce, they should
not be `wasted' on low-priority projects.
Knowledge of ifis and donors
Though donors and ifis have many similarities, they are not identical. It is important that
project investors are aware of the specifics of the ifis, the donors, and the commercial banks
that they approach. Most information needed to evaluate the funding source can be found
on the institution's website. The information should then be analysed before the first
meeting between the ifi/donor and the project proponent.
Make sure you know
What the project investor needs to know:
the donor or ifo before
· eligibility rules
you approach them
· region and sector priorities
· terms of lending
· types of financial instruments offered
· ways and methods of communication and information exchange
· project submission procedures and timing requirements
· procuremen t rule s

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Information sharing
When contact has been made, it is important for the project investor to keep in mind that
ifis and donors are managing taxpayers' money and they have a responsibility to the public
they represent. Therefore, they are obliged to follow a set of specific rules and regulations
and to utilize entrusted funds in the most efficient way. That is why the ifis and donors are
so eager to know all the details of the project and continue asking questions even beyond
the point where the project manager thinks he has answered them all at least once.
ifi
All information, how
s and donors need to know all project details and it is better to give more information ­
trivial it might seem,
and the sooner the better ­ than little information. To avoid creating an atmosphere of
should be revealed
mistrust, all information, how trivial it might seem, should be revealed. Also all project
risks should be disclosed immediately as donors and ifis know and expect project risk.
If the project investor can give a list of risks and perhaps ways to mitigate the risks, it will
increase the chance of establishing a constructive dialogue. Information goes both ways.
If project investors have a question for the ifi/donor on the process or method of work,
the investor should not be afraid to ask the question. Often insecurity arises from
differences in working culture. The best way to overcome this is through communication.
Financial issues and budgets
Donors typically pay less attention than ifis to the financial viability of the project because
grants are non-repayable funds, which are allocated for achieving specific outputs. Donors
are typically more interested in knowing that there are no alternatives to their grants. This
is different for commercial banks and ifis since the key issue for ifis is loan repayment.The
project proponents should be prepared for this through diligence.
Usually more than one
Co-financing: Typically ifis and donors do not provide financing for the entire investment
investor will need to be
and will often require other investors to be involved. This is important. If, for example, an
found...
ifi finances only a maximum of 35 per cent of the project cost, it implies that a minimum of
65 per cent will have to come from other sources. Such other sources include, among others,
the utility's own funds, municipal budgets and loans and/or grants from other ifis, donors,
and/or commercial banks.
...before submitting
Identification of potential additional sources of financing is rather time consuming.
initial financing requests
Therefore the project proponent has to think about this issue as soon as possible ­ before
a project concept is submitted to an ifi that may play a major role in project financing.
Provision of guarantees: ifis usually require a state guarantee. Guarantees involve a political
process in which the project proponent needs to be initiated as soon as possible. It can be a
very time-consuming process as the Ministry of Finance might need to have the entire state
budget in place beforehand. For some developing countries that are running a programme
through the imf, it can be even more difficult as they might have restrictions in the
programme on obtaining new debt or issue guarantees. Guarantors will request the
same basic information as requested by the ifis.

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An ifi will look into the
Ability to repay the loan: In contrast to donors, ifis expect to have the loan repaid. Therefore,
ability and willingness
they want to know if a project is capable of generating sufficient cash flow in order to repay
to repay loans
the loan fully and on time. ifis prefer the support of a financially sound administration,
which is prepared to act as a guarantor. They will look into the ability and willingness to pay.
In addition to budgets and annual accounts, the ifi will be interested in current tariff policy.
Questions to take into consideration are:
· Who is responsible for setting tariffs?
· What is the number of tariffs?
· What are the tariff levels?
· What are the collection rates among different types of consumers?
Risk management
Identify risks at an early
Any project can have risks. The challenge is to identify all possible risks and find appropriate
stage and propose ways
ways to mitigate these in the early stages of a project. The issues that need to be addressed
to mitigate them
as part of risk management include:
· Project costs: Have all possible cost elements been taken into consideration. Do the
project costs include taxes, charges, and duties levied on goods and services required
for project implementation? Such questions have to be asked and answered.
· Local approvals: In most cases there is a need to obtain approvals from local authorities
for, for instance, construction works. This should be fully taken into account. What
approvals will be needed? Is it time consuming to get these? Is there a risk that the
utility will not get the necessary approvals?
· Duration: Is the project timeline realistic given the necessary project steps and
phases? What is the risk that a certain phase will take much longer to complete
than anticipated?
Finding the appropriate economic instrument
Four-phases to help
Since countries and regions vary, the starting point depends on the previous actions
policy makers choose
taken by the individual countries. There is no best way to find and implement economic
and implement the right
instruments. Any solution and policy recommendation will have to take into account the
economic instrument
degree to which the pre-conditions are fulfilled, as described previously. In Annex 9, a
comprehensive list of criteria is provided to help evaluate the potential effectiveness of
environmental taxes and charges (Speck and Özdemirog
lu 2004). The unep has developed
a four-phase approach to help policy makers choose an appropriate economic instrument
and implement it accordingly37.
Phase 1 ­ Problem identification
Through Phase 1 the
To design the best solution, one needs to be familiar with the current situation as well as the
problem is identified...
history. In phase one the existing information is gathered in a structured way. Creating this
structure is a critical step, as it drives the process of assessing the solutions that may work
from those that may not, as well as identifying key data gaps.

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...what is the goal...
Involving local stakeholders in the information gathering process and in the problem
identification phase can become a powerful tool for raising public awareness and
participation. The problem identification phase needs, at a minimum, to answer following:
· What is the goal ­ assessing the problem? Goal definition should include a primary goal
and any secondary goals that may be relevant. In order get to the goal the policy makers
need to know: What is the damaged resource? What is the anticipated severity of
damage? What does the policy makers hope to accomplish? What is the characteristic
of the pollutant?
...what are the baseline
· What are the baseline conditions? The appropriate policy response hinges on a clear
conditions...
and realistic understanding of the baseline conditions. The level of competence and
corruption for any area/institution that will be used to develop, communicate, monitor,
or enforce the policy in question needs to be realistically assessed.
· Institutional baselines: If the institutional capabilities needed to communicate and
enforce the EIs in a fair and unbiased manner are missing, the performance of the EIs
will suffer.
· Mandate and level of power: Many environmental protection packages come from the
environment ministries, which generally have far less political power than finance or
trade ministries. Policy makers need to assess their relative power accurately and plan
how to address their weaknesses.
· Factional analysis: Who are the stakeholders and what are their interests. Policy changes
involve far more than government bodies. Assessing the major players with an interest
in the status quo, and in the projected change, is important. This baseline assessment
should also evaluate which groups are most powerful, and what their primary goal is
likely to be. In many cases, their primary goal will be linked to the protection of their
jobs and/or access to valuable resources. Environmental quality may be a distant second.
Allocation of rights in the baseline is also quite important: groups with existing rights
(whether actual or implied) will often have more power/interest in fighting changes to
existing policies.
...what is the long-term
· What is the long-term viability of the package? Countries may receive external funding to
viability of a package...
conduct policy research or to implement EI-based approaches. However, this money does
not last forever. A long-term plan for implementing and overseeing the policy should be
considered from the beginning.
...what obstacles can
· Identifying potential obstacles: Obstacles may occur that will hamper implementation
be anticipated
and management of the programme. Identifying and addressing potential obstacles
early in the process is important, so that solutions can be found and incorporated into
the programme. Obstacles can be a lack of institutional capacity, lack of funding, or lack
of political will.
Phase 2 ­ Planning38
In Phase 2 an initial
Phase 2 takes the general information provided in Phase 1 and uses it to develop initial
proposal is defined for
policy proposals. The purpose of assembling information in Phase 1 is to help policy makers
instruments with best
develop a shortlist of policy options. This short list includes options that have the most
chances of success
reasonable chance of success given the existing baseline conditions and resources at risk.

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· Environmental effectiveness: Does the instrument lead to the desired environmental
improvements, such as reduction in waste generation, increased waste recycling,
reduced emissions from transport and disposal?
· Economic efficiency: Does the instrument create incentives for investment and innovation
toward the reduction of pollution control costs?
· Administrative cost efficiency: Does the instrument require affordable and available
levels of skill and effort to implement and monitor?
· Revenue usefulness: Can the revenues generated be applied to address the environmental
objectives of the instrument and create measurable improvement?
· Ease of implementation and replicability: Are the relative costs and benefits fairly easy to
assess and the legal requirements for introducing the new instrument reasonable?
· Acceptance: Does the general public and the affected industries accept the instrument
as a viable means of cost-effectively achieving environmental improvement without
adversely affecting competitiveness, employment, income distribution, and trade?
· Distributional effects: Is there distributional disparity or inequity in the application or
impact of the instrument, particularly regarding effects on lower-income households,
small businesses, and disadvantaged parties?
· Short-term results: Does the instrument have the potential to result in sufficient short-
term improvement and motivate political administrators to undertake commitment
to the costs associated with the instrument within their political term?
· Economic development enhancement: Does the instrument provide an environment
that maintains trade competitiveness and encourages industrial development and
employment generation?
Phase 3 ­ Engaging stakeholders and refining policies
In Phase 3 stakeholders
In this phase, stakeholders are involved for feedback on these initial options, and important
are involved to increase
information is collected on how to refine them to increase their likelihood of success or to
the likelihood of success...
gauge any major resistance. The process of organizing stakeholder involvement varies with
the country in question and its cultural traditions and political climate.
...acknowledging the very
· Who are the stakeholders? Though there are many stakeholder groups (such as citizens,
different interests...
businesses, resource users), there are almost always three main stakeholder interests:
those responsible for the problem; those affected by the problem; and those affected
by one of the proposed solutions.
...realizing that there are
· Not all stakeholders will be pleased: Within each of these groups there may be stake-
vested interest in keeping
holders who are well organized and economically powerful and some of these might have
things as they are...
vested interest in keeping things as they are. If the firms are controlled by people with ties
to the government, the potential for them to bias the policy direction will be even larger.
The challenge with the more powerful groups is ensuring they are not able to derail the
policy entirely by influencing the structure of the rules or instruments or by perpetual
delaying tactics.
...and focussing on
· Transparency and early signals: It is important to involve stakeholders at an early stage.
transparent negotiation
Early, continuous, targeted, and transparent communication between all parties is
from the very beginning
required to establish firm partnerships. Because the environmental authorities

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often have less power than many of the affected industries or their political partners,
built-in transparency also protects them from pressure tactics from companies or
other ministries.
Phase 4 ­ Policy implementation and evaluation
In Phase 4 the
The final phase means moving from data gathering and negotiations with the stakeholders
instruments are
to choosing and implementing the instrument. Given the baseline conditions and the feed-
then chosen and
back from the stakeholders, the option with the highest efficacy, lowest side-effects, and
implemented
greatest feasibility given existing power and institutional dynamics is the best choice of
instrument.
...considering
· Flanking measures to mitigate severe effects: Where the implementation is anticipated
transitional measures...
to cause undue hardships on segments of the population, transitional measures need to
be built into the initial policy package. Possibilities include phasing in limits more slowly
to avoid sudden changes in prices or access rights; exemptions for groups who face high
costs but are small contributors to the problem; or transitional subsidies to highly
affected groups.
Besides distributional effects, consideration for the capital stock should also be taken
into account. As the introduction of, for example, a new environmental tax increases the
production cost for the industry, the cost of capital might become unacceptably high given
the current capital stock of the economy, which was put into place in the absence of such
taxes. It may therefore be necessary to introduce taxes at a rate below the economically
efficient level and then increase them over time as the capital stock is replaced in the
expectation of increased tax levels in the future39.
...explaining the
· Marketing and public announcements: It is important to explain what policy package
choices made...
is being implemented, why it was chosen, and what steps are taken to ensure that this
decision makes sense and incorporates the feedback from the stakeholders.
...and monitoring and
· Monitoring and enforcement: To ensure optimal performance, plans should be subject
evaluating performance
to regular monitoring and evaluation, so that timely improvements can be introduced
when necessary. Evaluation should account for experience and for improved knowledge,
building, for example, on improved scientific understanding.
Keep the programme simple. The more complicated a programme is to monitor and
enforce, the less likely it is to succeed, especially in the developing world. Thus, it is very
important that goals and objectives, as described in Phase 1, are unambiguously
formulated and measurable (quantifiable), so that results can be verified.
Domestic resource mobilization
Market-based
In the long run, market-based instruments (mbis) together with national public sector
instruments are the
transfers are the only sustainable source of financing for the environment as donors will
most sustainable source
not continue to finance environmentally related sectors in developing and transitional
of financing for the
environment...
countries. Therefore, analysing the potential benefits of mbis in the medium to long term

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will enable countries to develop policy packages to strengthen the sustainability of their
environmental financing.
...as they change
In recent years, market-based instruments experienced increased attention as an important
behaviour and generate
tool in environmental policy in both developed and developing countries. Their advantages
economic incentives
­ as compared to command-and-control measures ­ encompass the provision of economic
incentives aiming to change behaviour as well as the generation of revenue that can be used
for financing environmental investments.
The process of identifying and evaluating the potential long-term sustainable domestic
financing mechanisms from environmental and environmentally related economic
instruments has been tested in several countries. This is carried out through a review,
which focuses on:
· the specific relevance of the economic instrument in solving the environmental problem
· the institutional framework
· capacity constraints
· the best method of implementing/strengthening the instrument
· analysing the short-term and longer-term revenue potential of the specific instrument
The review also analyse which factors may complicate the effectiveness and efficiency of the
instrument as well as propose the most efficient method of arranging and introducing the
economic instrument revenue flows.
In addition mbis can
The focus of the review is to assess the role market-based instruments can play in reversing
strengthen institutional
the current trend of environmental deterioration and protecting the environment. The
capacity
revenue-generating effect of mbis40 holds a particular relevance because it could create
additional financial resources to be used by governments in developing countries for
concrete actions to protect the environment. The use of market-based instruments can,
as an additional effect, improve and strengthen the institutional capacity and provide
supplementary information for environmental-policy management. Public sector transfers
for the long-term implementation of the pa are decided during the development phase
of the environmental financing strategy.
Strengthening efficiency in managing public environmental expenditure
Domestic financing
Domestic financing is the most important financing source for the protection of the
needs to be supported
environment. Hence, the development of supportive regulatory and management systems,
by optimal management
which utilize these financing sources and mechanisms most efficiently, is essential to
of resources...
maximize the benefits of these resources.
Inefficient management of resources is often due to the lack of well-defined programmes
and unambiguously defined roles. At a project level, issues such as unclear eligibility criteria,
procedures, priorities, and targets could be reason enough to include all possible
environmental measures.

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...through transparent
It is essential that clear and transparent processes are established to support efficiency
processes
in management and disbursements (accountability, transparency, and cost-effectiveness
in the institutions managing public money). For further information and inspiration, the
oecd has developed clear guidelines on Good Practices in Public Environmental Expenditure
Management (oecd 1995). The oecd has also developed a handbook that provides domestic
institutions managing public environmental expenditure with practical guidance and tools
for identification, appraisal, and financing of environmental investment projects.
box 3.1 Internationally recognized principles of good public expenditure
management
Accountability 41 means the capacity to hold public officials liable for their actions and performance.
Accountability implies addressing three questions: accountability by whom, accountability for what,
and accountability to whom. Accountability is achieved through a clear division of responsibilities and
subsequent consequences for both good performance and failures to fulfil prescribed responsibilities.
Transparency entails low-cost access to relevant information. Public sector institutions should use
acknowledged international standards of accounting and disclosure of fiscal and financial information
to report to controlling bodies and to the public. Transparency implies both good internal control
(within the government) and external audits by specialized institutions, including legal, financial,
and performance audits.
Cost-effectiveness is a technical concept and implies achieving objectives at a minimum cost. It requires
managerial autonomy from political ad-hoc pressures over appraisal and selection of specific projects.
It also requires competent individuals recruited on a merit-based and performance-based promotion
system.
Source: oecd/eap 2003
<
3.3 In summary
Having developed a financing strategy and undertaken a review of potential additional
financing source, countries should have a priority list of realistic actions based on long-term
sustainable financing. These priorities should be agreed upon during the programme
development phase with all major stakeholders and should include the identification of
the financing mechanisms required to finance each individual programme activity.
The last step of a
Thus, the results identified through the strategic planning process can be translated into a
strategic financial
priority list of concrete short-term actions, enabling the possibility of designing individual
planning concerns
the compilation of
project components for each initiative to be undertaken. The priority action list also needs
a priority list
to incorporate the following medium- and long-term actions:
· the preparation of investments and detailed design studies
· identification of expected short-term financiers for negotiation
· policy steps to be taken to create long-term sustainable financing mechanisms to secure
these actions (economic instruments, capacity/institution and legislative measures)
· the necessary activities required for the legislative review process
· identification of and initiatives to progress the removal of obstacles
· actions to strengthen the efficiency of public expenditure management

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All these activities identified for programme of action implementation need to be
prioritized in order to ensure efficiency in implementation. Prioritization should ensure
that delays ­ due to the lack of capacity/resources and/or legal or financial obstacles ­
are minimized.
Moving forward
The detailed information in this report covers a wide range of topics involved with
environmental financing, including: financiers, financing options, tools, and schemes,
different financing methods including blending and matching, factual data discussing past
financing projects, the importance of long-term sustainable financing, and the concept
of strategic planning. The framework described in this report should further enable the
Regional Seas Programmes to strengthen and prioritize long-term sustainable financing
for programmes geared toward the protection and conservation of marine and coastal
environments.

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Annex 1 Environmental challenges and environmental action
priorities for the Red Sea and Gulf of Aden
This Annex summarizes the activities to date carried out by persga and its partners in identifying the
environmental problems to be tackled in the region. The Annex builds on Mr. Ljubomir Jeftic's review
of several persga related programmes.
A Strategic Action Programme (sap) was launched at the end of 1998 (a gef project) and was
implemented from 1999 to 2003. The sap was designed around a series of complementary, preventive,
and curative actions as identified in the sap preparatory phase that collectively address the trans-
boundary nature and sustainable development of marine resources for the persga Region as a whole.
These `development objectives' or components functioned as the guiding framework for a wide range
of inter-related activities that were to be realized through this project:
· Institutional strengthening to facilitate regional cooperation
· Reduction of navigation risks and maritime pollution
· Sustainable use and management of living marine resources
· Habitat and biodiversity conservation
· Development of a Regional Network of Marine Protected Areas
· Support for integrated coastal zone management
· Enhancement of public awareness and participation
· Monitoring and evaluation of programme impacts
Although the sap, as formulated in the preparatory phase, identified the threats to coastal and marine
environments and resources in the persga Region ­ such as widespread habitat destruction, non-
sustainable use of living marine resources, navigation risks, petroleum transport and petroleum
production, impacts of urban and industrial development, rapid expansion of coastal tourism, other
concerns, and emerging issues ­ the priority actions that should be taken on a national and regional
level, the gef full project did not include activities directly relevant to land-based sources and activities.
1
sap Country Reports
In 1995 and 1996, a series of national workshops was held to finalize the Country Reports and to develop
priority actions required by each country to address the environmental threats identified. As a result,
those reports served as the first diagnostic tool for the sap in analysing issues of regional, national,
and local significance, and in recommending actions to protect the region's environment and natural
resources. A total of 147 priority actions were identified (between 17 and 25 per country). The titles of
all 147 activities were analysed and all activities that are directly linked with the land-based sources and
activities were selected and are listed below. Activities dealing with coastal zone management and port
reception facilities were not selected because they are either complex (coastal zone management) and
include other types of activities that are dominant or are more concerned with maritime transport
(port reception facilities), although in both cases there is a land-based component in them. In 2000,
the Country Reports were updated and the priorities for land-based sources of pollution, as identified
by countries in 2000, are presented below.
Priorities for land-based sources of pollution as identified by countries (1995/1996)
Djibouti
· Upgrading of wastewater collection and treatment in coastal areas, especially Djibouti town
***
· Upgrading of solid waste management and disposal in coastal areas, especially in
***
the vicinity of Djibouti town
Egypt
· Development of an evaluation of point source pollution from urban and industrial sites
**
· Development of a National Plan for Solid Waste Management in coastal cities on the Red Sea
***
· Shoreline profiling programme and identification of hot spots
**
Jordan
· Recruitment and training of staff for implementation of industrial pollution prevention
***
regulations
· Waste oil contamination monitoring and demonstration project in recovery of waste
**
oil from land-based sources
· Development and implementation of a plan for municipal wastewater conservation and reuse
***
· Development and implementation of a solid waste collection, recycling, and disposal plan
**
>

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Saudi Arabia
· Improved management of air pollution, brine disposal, and thermal discharges from
**
desalination plants at urban areas and industrial ports
· Improved control of emissions from cement plants in coastal areas, especially Ras Baridi
*
· Effective control of dredging and filling for urban and industrial development,
***
port construction, and maintenance dredging of navigation channels
· Upgrading of wastewater collection and treatment in coastal areas, especially Jeddah
***
Somalia
· Introduction of control measures against illegal dumping of hazardous waste by
***
foreign vessels
· Development of wastewater collection and treatment facilities in Berbera and Bosaso,
*
in the medium term
Sudan
· Upgrading of wastewater collection and treatment in coastal areas, especially Port Sudan
**
· Upgrading of solid waste management and disposal in coastal areas, especially Port Sudan
**
Yemen
· Upgrading of wastewater collection and treatment in coastal areas, including Aden,
**
Hudaydah, and Mukalla
· Upgrading of solid waste management and disposal in coastal areas, including Aden,
**
Hudaydah, and Mukalla
· Design and implementation of programme to evaluate potential impacts from
*
agricultural chemicals on the Tihama coastal zone
Of the 20 activities identified, six deal with wastewater treatment and disposal, and five with
solid waste management.
***extremely important; ** very important; * important
Priorities for land-based sources of pollution as identified by countries (2000)
As with priorities identified in 1995/1996, sewage was most frequently selected (6), followed
by industrial activities (3), coastal development (3), organic pollutants (3) and litter (3).
Djibouti
Saudi Arabia
Yemen
· Sewage
· Sewage Discharge
· Sewage
· Heated brine and cooling water
· Industrial activities
· Coastal development
· Litter
· Development of Coastal area
· Bunkering facilities and
· Cooling water discharges
oil refinery
Egypt
· Agricultural Runoff
Somalia
· Tourism and Coastal development
· Organic Pollutants
· Sewage and Nutrients
· Alteration/destruction of habitats
· Agricultural runoff
· Heavy Metals
· Industrial Activities
· Litter
Jordan
Sudan
· Industrial Activities (Phosphates)
· Oil bunkering facility
· Development of Coastal area
· Tourism activities and
· Sewage
coastal development
· Cooling water discharges
· Sewage
· Litter
· Organic pollutants (Insecticides)

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2
sap Annual Reports
Four Annual Progress Reports on the Implementation of the persga sap were published (1999, 2000,
2001, and 2002). All Reports reviewed the progress in the implementation of eight activities of the sap.
Results of most of the activities will constitute an important pool of background information for the
development and implementation of activities for the protection of the coastal and marine
environment from land-based activities.
3
Draft Protocol on Protection of the Marine Environment form Land-Based Sources of
Pollution in the Red Sea and Gulf of Aden
persga has developed, in 1999, the Draft Protocol on Protection of the Marine Environment from
Land-Based Sources of Pollution in the Red Sea and Gulf of Aden. This Protocol was revised both
technically and legally in 2003 with the view of its adoption in 2005.The Protocol covers among others:
· pollution resulting from the discharge of sewage and the different wastewater from the coastal
facilities or the effluents from any land-based sources or activities (Article 1);
· treatment and management of wastewater (Article 6);
· control of solid waste (Article 7);
· control of sedimentation and dredging (Article 8);
· local and regional regulations for waste disposal (Article 10);
· transboundary pollution (Article 17); and
· priorities to be taken into consideration in the process of formulating regional work plans,
programmes, and procedures to eliminate pollution from land-based sources (Annex I).
It is clear that the Draft Protocol is placing the main emphasis on wastewater and solid waste.

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p u b l i c- p r i v a t e p a r t n e r s h i p s
Annex 2 Possibilities of public-private partnerships (ppps)
Annex 2 further explains the concepts and terms presented in Table 2.11: Allocation of key
responsibilities for the main types of ppps. The following list has been adopted from the unep 2004
publication titled `The Use of Economic Instruments in Environmental Policy: Opportunities and Challenges'.
Service contracts: Specific components are contracted out to the private sector while the government
retains responsibility for operation and maintenance.
· Characteristics: Payments can be a fixed fee, but are usually related to achievement of performance
targets. This creates an incentive for increasing productivity.
· Constraints: None
Management contracts: Responsibility for entire operation and maintenance is transferred to contractor.
· Characteristics: Payments can be a fixed fee, but are usually related to achievement of performance
targets. This creates an incentive for increasing productivity.
· Constraints: Setting, monitoring, and evaluating targets is difficult. Achievement of targets may be
related to capital investments, which are not the responsibility of the private contractor.
Lease contracts: Private operator is responsible for operating, maintaining, and managing a system,
including revenue collection for rented assets.
· Characteristics: Government remains sole owner of assets and is responsible for expansion and
upgrading, investments, debt service, tariff setting, and cost recovery policies.
· Constraints: Particularly beneficial if no substantial capital investments are required, and for this
reason, it is not popular in wastewater management sector.
Concessions: Concessionaire has full responsibility for delivery of services: operation, maintenance,
system expansion, collection of revenues, and fundraising for investments. Government is responsible
for establishing and enforcing performance targets.
· Characteristics: Concessionaire has strong incentives to make efficient investment decisions and
to develop innovative technological solutions, since efficiency gains will directly increase its profits.
Full utility concessions are attractive where large investments are needed to expand the coverage
of service or to improve quality.
· Constraints: A critical factor is the quality of regulation, as it concerns a long-term monopolistic
position of concessionaire.
Build-Own-Transfer contracts: Private sector finances, builds, and operates new facility applying
governmental performance standards. Government retains ownership of facility. In construction period,
private sector provides investment capital. In return, government guarantees purchase of a specified
output.
· Characteristics: Operation period should be long enough for contractor to recover its construction
costs and to realize a profit. Agreements mitigate commercial risks for the private sector, because
government is its only customer. Thus, bot contracts are financed with a relatively high debt
component.
· Constraints: Not for existing infrastructure: they do not tackle deficiencies nor do they turn
financially weak utilities into strong ones. Length and complexity: most bots have to be
renegotiated once underway. Size and time frames often require sophisticated and complicated
financing packages
Divestiture: Full divestiture pertains to a situation where utility has been fully privatized. Ownership
of utility rests with private operator. Private operator is responsible for operation and maintenance,
investments and tariff collection. Regulation (to safeguard public interest) is in hands of Government,
so completely separated from ownership and operation.
· Characteristics: Improved incentives for efficient investment decisions and development of
innovative technologies. Low transaction costs compared to costs of tendering and contract
negotiations associated with models discussed above.
· Constraints: Possible conflict of interest: public sector responsible for regulation and company
shareholder responsible for maximizing returns. Could lead to political interference and counteract
private sector management advantages. No competition (as no tendering) can raise transparency
and corruption concerns.

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Annex 3 Legislative review and transposition: step-by-step
Below is a step-by-step approach to the transposition of legislation. The approach is non-specific with
regard to what type of legislation is to be considered. The step-by-step approach builds on the ec 1997
report titled `Guide to the Approximation of European Union Environmental Legislation'.
step 1: Determine which legislation should be reviewed
1
What type: laws, regulations, decisions?
2
What are the aims and objectives of the pa?
3
What relevant authorities are needed?
4
What information must be collected and provided to the decision makers?
5
What planning is required?
6
What scientific or technical knowledge is required?
7
What consultation procedures are required?
step 2: Identify which legislative requirements the programme of action will need
1
Which requirements (in the national legislation) allow choices to be made?
2
Which requirements do not allow for choice?
3
National Laws or administrative measures?
4
New or amended legislation?
5
Content of national legal measures?
(to be identified during financing strategy work ­ see Annex 4):
6
What are the costs and benefits to the economy and to the environment?
7
Which sectors will bear the burden?
8
How should the transition to the new requirements be organized: deadlines, transition
periods, implementation programmes, investments, and reports?
step 3: Determine how the programme of action will be implemented and enforced
1
Central, regional, or local level implementation?
2
What powers will officials need to have?
3
What coordination and consultation among regulatory bodies is needed?
4
What is the need for information, guidelines, training?
5
Costs and benefits of different implementation choices?
6
What financing is needed for administration? For investment?
7
How will costs be recovered and financing be obtained?
8
What monitoring is needed?
9
Who will carry out the monitoring? Do they need training, staff, equipment?
10
What penalties should apply? How will they be applied (administrative, judicial)?
step 4: Decide on the process of legislative transposition
1
Who should be consulted? Government departments, local and regional authorities,
industry representatives, ngos, neighbourhood groups?
2
What form of consultation is needed?
3
At what stage in the process?
4
Other possible roles of organizations outside the national government?
step 5: Develop the action program for the transposition of legislation
1
Legislative schedule
2
Preparation and implementation of administrative rules, decrees, and the like
3
Budgetary schedule
4
Institutions, staff, and resources
5
Training, information materials, meetings with concerned government offices, industry,
public and other stakeholders, and other communication activities
6
Monitoring
7
Information assembly and reporting
8
Enforcement

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f i n a n c i n g s t r a t e g y p r o c e s s
Annex 4 Financing strategy process: 11 action points
Actions to be taken when formulating a financing strategy process are:
1
Review the current list of short-, medium-, and long-term activities identified in the pa. The
review should include an update if activities are currently being implemented and check if information
in pa is aligned (including costs and responsibility).
2
Identify existing sources of financing and financing programmes, which may currently be used
to implement part of the activity areas identified in the pa. This would include reviewing relevant
official budgets, which provide resources for the environment and related areas, public investment
programmes, sub-national governmental budgets, private sector financing, user financing, and
international financing.
3
Update financial costs of the activities identified as short-, medium-, and long-term activities of
the pa. The purpose of the costing exercise is not to develop precise costing data but to get figures of the
magnitude of each of the activities.
4
Based on the information collected under activity c) develop a baseline for the activities identified
in the pa for implementation ­ including legislative, institutional, capacity, and financing overviews.
A financing strategy that reflects the baseline in the current situation should be prepared.
5
For each identified activity, review the needed legislative framework, the institutional setup,
the capacity to undertake the activity, and needed sources of financing for the activity. See Annex 3
and 4 on legislative review and transposition and removal of barriers to implementation.
6
Identify potential new sources of funding for the pa (in coordination with the review of mbis and
the stakeholder meeting) ­ exploring possible realistic future public spending programmes, user and
polluter pay systems, international funding available, and other stakeholders ­ together with inputs
from the study on domestic resource mobilization.
7
Develop a gap assessment (if any) between the baseline and the full pa implementation
with annualized costs ­ the consultant will be asked to make realistic assumptions for timing of
implementation for further discussion with the relevant ministries.
8
Stakeholder meeting to discuss findings and to identify key actors in the iterative process to
minimize the possible gap for the implementation of the pa.
9
Undertake iterative processes with main stakeholders to identify options to minimize the
possible gaps including discussions of increasing resources or limiting the demand for financing.
10
Develop an affordability analysis at household and national levels.
11
Prepare financing strategy (annualized) for the pa based on affordability issues, identification
of additional financing, and possibly including a revised activity plan for the pa established in the
iterative process

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p o t e n t i a l o f m a r k e t - b a s e d i n s t r u m e n t s
Annex 5 Review of the potential of market-based instruments
The study assessing the potential of market-based instruments (mbis) (as well as the potential use of
new economic instruments) should build on international best practices gained in developed as well
as developing countries. The project should further investigate the institutional and regulatory
frameworks for the use of such instruments and a functioning framework must be implemented as
a prerequisite for effective use of market-based instruments. It is necessary to take into consideration
issues such as the hypothecation of revenues of market-based instruments as well as the appropriate-
ness of the current levels and structure of consumer/user charges for environmental services.
The following tasks should be undertaken when analysing the potential (in cooperation with
international consultants and/or national experts/consultants):
1
review existing environmentally related taxes and charges42, and if necessary, propose an
appropriate restructuring of current taxes and charges based on the current political and economical
situation, taking into consideration international best practices (developed world as well as
developing world)
2
investigate the appropriate sphere of government to levy specific environmentally related
taxes (national, provincial, or local);
3
investigate the institutional set-up: such as monitoring of emissions and collecting tax revenues
4
investigate the appropriateness of the current levels and structure of consumer/user charges on
water, wastewater, and waste and suggest a methodology to restructure such tariffs (if necessary) and
how to adjust them on a regular basis
5
ascertain what a reasonable environmental tax/gdp ratio should be for the country (to the extent
that this is an appropriate measurement) in the short term and medium term. Discuss pros and cons
for increased use of environmentally related taxes/charges and additional potential market-based
instruments for environmental policy in developing countries
6
provide overview of international best practices with regards to environmentally related taxes
and user charges for water supply, for wastewater services, and for waste
7
identify which environmentally related taxes and user charges would be relevant for pa related
activities
8
investigate new environmentally related economic instruments, including taxes, for example on
water supply and water pollution (such as water abstraction taxes, wastewater taxes, or effluent taxes);
waste management and recycling, such as landfills and plastic bags; agricultural sector: such as
insecticides, pesticides; other (including tourism, energy, transport and air emissions)
9
investigate the appropriate use of tax/charge revenues from new environmentally related taxes
(and other market-based instruments, such as permit trading or deposit-refund schemes). Assess the
feasibility of replacing some of the current payroll taxes with environmentally related taxes ­ such as
ecological tax reform
10
investigate the feasibility, appropriateness and (fiscal) policy implications of the possibility
of tax revenue hypothecation and the potential for possible ­ the earmarking of environment taxes for
environmental investment

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t h e w o r l d b a n k : v e h i c l e s t o d i r e c t l o a n a n d p r o d u c t d e c i s i o n s
Annex 6 The World Bank: vehicles to direct loan decisions,
and financial products
The main vehicle for defining the Bank's group assistance strategy for loans through ibrd and ida
are the Country Assistance Strategies (cas). These are developed for each client/country and include
a detailed assessment of creditworthiness, overall development priorities, as well as an assessment
of project performance in the past. With this analysis as a base, an overall strategy for financial and
technical assistance for a particular country is developed.
Another vehicle for directing mainly ida lending is a Poverty Reduction Strategy Paper (prsp). This
is prepared annually by the countries themselves with assistance from the World Bank and the
International Monetary Fund (imf). A prsp includes specific poverty reduction plans and actions which
governments propose to undertake within the next three-year period, including specific programs
within economic development, structural, institutional, and social policies. Upon receiving a prsp,
a joint assessment by the World Bank and the imf is conducted to determine whether the prsp actions
are sound enough to be supported by concessional lending. Results of prsp assessment have an effect
on the ida's loan package as well as on loans from the Poverty Reduction Growth Facility of imf.
ifc offers a wide range of financial products:
· Loans: 7-12 year maturity periods with a negotiable grace period, market interest rates plus risk
premium. Co-financing is required.
· Equity financing: as the ifc will subscribe as a long-term investor usually retaining its investment inte-
rest for 8-15 years. Subscribes to between 5 per cent and 15 per cent of a project's equity and is never
the largest shareholder in a project and will normally not hold more than a 35 per cent stake.
However, it does not take an active management role in the company.
· Syndicated loans: the ifc will assist in mobilizing funding from different sources, including the
domestic commercial banking sector.
· Risk management products: the ifc will provide currency and interest rate risks management
products or a package combining several of those products. Such products are common in
developing countries, where private companies use them to reduce risks associated with currency
and interest rate fluctuations (such as swaps, futures and options). In developing countries, due to
higher levels of risks and lower levels of country creditworthiness, use of such products is limited.
The ifc attempts to close this gap and allow private companies into developing countries to take
advantage its product offers.
ibrd fixed-spread loans and variable-spread loans
The ibrd, which extends loans on market terms, provides fixed-spread loans (fsl) and variable-spread
loans (vsl). For both loan types, the interest consists of variable-base-rate and spread. Variable base
rate is equal to the 6-month libor rate, which is revisable. For fsl, the spread is fixed for the loan period
and reflects a project/currency risk premium. For vsl, the spread is tied to the libor rate plus Bank's
standard lending spread.

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1 0 k e y s f o r a c t i o n o n m u n i c i p a l w a s t e w a t e r
Annex 7 10 Keys for action on municipal wastewater
1
Secure political commitment and domestic financial resources
A political climate has to be created in which high priority is assigned to all the aspects of sustainable
municipal wastewater management, including the allocation of sufficient domestic resources.
2
Create an enabling environment at national and local levels
Public authorities remain responsible for water and wastewater services. The `subsidiarity principle',
this is the delegation of responsibilities to the appropriate level of governance, applies to the entire
water sector. National authorities should create the policy, legal, regulatory, institutional and financial
frameworks to support the delivery of services at the municipal level in a transparent, participatory
and decentralized manner.
3
Do not restrict water supply and sanitation to taps and toilets
A holistic approach to water supply and sanitation should be adopted. This incorporates not
only the provision of household services, but also various other components of water resource
management, including protection of the resource that provides the water, wastewater collection,
treatment, reuse and reallocation to the natural environment. Addressing the environmental
dimensions mitigates direct and indirect impacts on human and ecosystem health.
4
Develop integrated urban water supply and sanitation management systems also
addressing environmental impacts
Municipal wastewater management is part of a wider set of urban water services. The wastewater
component is usually positioned at the end of a water resource management chain. Integration of
relevant institutional, technical, sectoral, and costing issues of all major components of the chain is
required. Consideration should be given to the joint development, management, and/or delivery of
drinking water supply and sanitation services.
5
Adopt a long-term perspective, taking action step-by-step, starting now
The high costs of wastewater systems necessitate a long-term, step-by-step approach, minimizing
current and future environmental and human health damage as much as possible within existing
budgetary limits. Non-action imposes great costs on current and future generations and misses out
on the potential of re-using valuable resources. A step-by-step approach allows for the implementation
of feasible, tailor-made and cost-effective measures that will help to reach long-term management
objectives.
6
Use well-defined time-lines, and time-bound targets and indicators
Properly quantified thresholds, time-bound targets and indicators are indispensable instruments for
priority setting, resource allocation, progress reporting and evaluation.
7
Select appropriate technology for efficient and cost-effective use of water resources and
consider ecological sanitation alternatives
Sound water management relies on the preservation and efficient utilization of water resources.
Pollution prevention at the source, efficient use and re-use of water, and application of appropriate
low-cost treatment technologies will result in a reduction in wastewater quantity and in investment
savings related to construction, operation and maintenance of sewerage systems and treatment
facilities. Depending on the local physical and socio-economic situation, different technologies will be
appropriate. Eco-technology is a valid alternative to traditional engineering and technical solutions.
8
Apply demand-driven approaches
In selecting appropriate technology and management options attention must be given to users'
preferences and their ability and willingness to pay. Comprehensive analyses of present and future
societal demands are required, and strong support and acceptance from local communities should be
secured. With such analyses realistic choices can be made from a wide range of technological, financial
and management options. Different systems can be selected for different zones in urban areas.
9
Involve all stakeholders from the beginning and ensure transparency in management
and decision-making processes
Efforts and actions on domestic sewage issues must involve pro-active participation and contributions
of both governmental and non-governmental stakeholders. Actors stem from household and
neighbourhood levels to regional, national and even international levels, and possibly the private
sector. Early, continuous, targeted and transparent communication between all parties is required
to establish firm partnerships. The private sector can act as a partner in building and improving
infrastructure, in operating and maintaining of facilities, or in providing administrative services.

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1 0 k e y s f o r a c t i o n o n m u n i c i p a l w a s t e w a t e r
10
Ensure financial stability and sustainability
10.1 Link the municipal wastewater sector to other economic sectors
Sound and appropriate wastewater management may require substantial construction and operational
investments in wastewater infrastructure and treatment facilities. Relative to the water supply sector,
cost recovery in the wastewater sector is traditionally a long process. Developments in other (socio-)
economic sectors, for instance water supply or tourism, may create opportunities to address sanitation
at the same time. Linking wastewater management with other sectors can ensure faster cost-recovery,
risk-reduction, financial stability and sustainable implementation.
10.2 Introduce innovative financial mechanisms, including private sector involvement and
public-public partnerships
Traditionally, sanitation services have been provided by public authorities. Costs for investments,
operation and maintenance, however, often outstrip their capacities, as do present and future
requirements for serving the un-served. Therefore, innovative, more flexible and effective financial
management mechanisms have to be considered, such as micro-financing, revolving funds, risk-sharing
alternatives, municipal bonds. Public-private partnerships, and also public-public partnerships, are
important tools to assist local governments in initial financing and operating the infrastructure for
wastewater management.
10.3 Consider social equity and solidarity to reach cost-recovery
The employment of principles like `the water user pays' and `the polluter pays' is required to achieve
stable and sustainable wastewater management with efficient cost-recovery systems. These principles
should be applied in a socially acceptable way, considering solidarity and equitable sharing of costs by
all citizens and facilities. Various user groups should be made aware of ­ and be able to identify with ­
concepts such as `water-' and `catchment solidarity'. All users will benefit from environmental
improvement.
Source: unep/gpa 2004

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t h e p e r s g a e n v i r o n m e n t f u n d
Annex 8 The persga environmental fund 43
The Member States of persga are firmly wedded to the idea of establishing an Environmental Fund (ef)
to support ongoing activities. The establishment of such a fund is felt to be timely and appropriate
given that:
· The strategy document agrees on the basic vision and scope of environmental investments to be
covered by the fund.
· The time period being considered in this strategy document is long, at 10 years, and the threats to
the environment that are being addressed are also long-term and require a sustained response over
a number of years.
· Existing national agencies cannot effectively manage the amount of funds and type of activities
needed in the region. There is therefore a need for persga to fulfil this role.
· There is a community of organizations in the Member States able to implement the range of activities
needed to achieve the overall vision.
· There is strong support within the Member States for the fund's establishment.
· Such a fund would promote continuity, flexibility and co-financing collaborations between the public
and private sectors.
· As evidenced by Member State commitments, such a fund would strategically direct and leverage
financial resources to projects and practices that are of environmental significance to the region.
· There is perceived to be a level of capacity development and governance in persga, and in the region,
capable of establishing and managing such a fund.
A number of funding mechanisms are possible to support the activities envisioned through an
Environmental Fund (ef). These are44:
· endowment;
· revolving fund;
· sinking fund; and/or
· a combination of two or more of these structures.
An endowment is a fund whose capital (also called its `principal') is invested in order to generate a
steady annual stream of income. Only the investment income is spent, while the principal is either
maintained or increased. Only under unusual, specifically defined circumstances can the capital
(corpus) of an endowment be invaded (such as spent), and typically the endowment must be
replenished (such as restored to its previous size) within a short number of years afterwards. An ef's
board typically reinvests a portion of the investment income in order to hedge against inflation and
may also decide to reinvest a significant percentage of the investment income in order to increase the
size of the endowment so as to be able to generate higher investment returns in later years, or because
the money is not currently needed. Many ef experts believe that it is not cost-effective to establish
an endowment fund whose capital (principal) is less than us$5 million, because otherwise the annual
investment income will be largely absorbed by administrative and transaction costs. In the case of
persga activities, if an endowment fund was to be used on its own, given yearly budgeted expenditure
of between us$3-5 million and probable investment returns of around 5 per cent on an endowment
fund, the fund would need to be around us$75 million. It is considered very unlikely that this level of
funds could be raised.
A sinking fund is designed to disburse its entire capital plus its income over a designated period of
time. This type of funding can be well adapted to the funding of projects with development or income-
generating potential that are expected to become self-sufficient after an initial seed money or start-
up phase, and it may then be possible to pay interest from such projects into an endowment fund.
In addition, sinking funds offer donors the opportunity to earmark funding for specific projects or
activities. Debt-for-nature swaps have been a major source of sinking funds denominated in local
currencies (see Annex 10).
A revolving fund is periodically (for example annually) replenished through fees, taxes or levies collected
or through donor contributions or swapped interest payments (such as on forgiven debt)45. In the case
of persga, while a large number of potential users' fees, taxes and other charges could potentially be
used to generate revenue, it is not considered likely that realistic levels of user fees would enable the
countries in the region to significantly replenish the revolving fund. In addition, while a large range of
potential sources exist as already demonstrated, it is usually harder in practice, in some cases due to
country-specific financial regulations, to prevent central exchequers from obtaining such funds which
means that specifically earmarking them for conservation purposes can be problematic given other
competing demands. It may therefore be more sensible for monies generated from user fees and
conservation taxes to be used to help fund the national commitments of the Member States to the
proposed budget. Furthermore, given the type of packages outlined in this strategy document, few

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t h e p e r s g a e n v i r o n m e n t f u n d
of the activities to be supported by persga are likely to be of sufficient income generating potential
to allow loan repayments necessary to replenish a revolving fund. However, the levels of user fees
generated could turn out to be greater than expected, and the objective of user payments is one that
should be supported, so the option should not be ruled out. This is especially so given that a revolving
fund would help to ensure greater sustainability of activities than relying solely on a sinking fund.
Indeed, many experts and fund managers now agree that the most effective efs often include a
combination of two or three funding mechanisms. New efs are often under pressure to demonstrate
concrete results and success quite rapidly, in order to secure contributions to the ef from other donors.
It is therefore recommended that an ef be established with a revolving fund portion and a sinking fund
portion. With reference to the proposed budget, it is proposed that approximately 65 per cent of the
funds for each year are spent from the sink funds, with the balance of 35 per cent from the revolving
funds. The exact balance will depend greatly on the requirements of the possible external donor
agencies, and the different packages that they chose to buy into, because some packages will be
more suitable for different types of funds. It might be advisable in the start-up phase to spend a larger
percentage of the total funds represented by sinking funds and finance some priority projects that can
generate immediate impacts and benefit key stakeholders. Then as the 10-year period considered by
the strategy evolves and greater levels of user payments become the norm, to spent greater amounts
from the revolving portion of the fund.

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c r i t e r i a t o e v a l u a t e e f f e c t i v e n e s s o f t a x e s a n d c h a r g e s
Annex 9 Criteria to evaluate the potential effectiveness
of environmental taxes and charges
Tax/charge design
· What are the current levels and past profiles of the economic instrument to be revised or related
economic instruments if a new one is to be designed?
· What is the optimum (and/or feasible) point of application for the tax/charge (such as households,
retailers, and wholesalers)?
· Is there an externality evaluation (in monetary or other units) supporting the design of the tax? If not,
decide if one should be commissioned (if externality taxing in the Pigouvian style is to be followed),
design and commission such a study if a decision is taken to commission one.
Organizational arrangements
· Which institution should have the responsibility to design the tax/charge (Ministry of Environment,
Finance, or other)?
· Who should be responsible for the implementation/administration (tax collection)?
· Who should decide whether there would be any exemptions from tax/charge?
· What are the planned changes to exemptions over time (for example exemptions to expire after
a given number of years)?
· What was the collection efficiency for the existing economic instruments (to be revised or related
to the one to be designed)?
Purpose of tax/charge
· Should/could the tax/charge have a significant incentive effect for environmental protection
and management?
· Should/could the tax/charge raise revenue for particular environmental activities (for example
through earmarking)?
· Should/could the tax/charge raise revenue for the general national budget?
Portfolio of policy instruments ­ Complementarity and substitutability of taxes with
other instruments
· Is the tax/charge to be implemented on its own, or as a part of a whole package of economic or
other policy instruments? If the latter, the whole package needs to be described and analysed to
understand the full scale of the effects of the main tax/charge studied.
· Is the tax/charge a substitute for an existing instrument?
· Which alternative instruments (for example voluntary agreements) been included in the analysis
of the impacts of the proposed tax/charge?
Potential effect and effectiveness of the tax
· Is the tax/charge designed to have an incentive effect?
· Are there any cases of `win-win' effects (environment and economic efficiency) which can be
achieved, for example, by reducing other taxes as a result of generating revenue through the
proposed environmental tax/charge?
· Are there likely to be other effects of the tax/charge such as technology or technical innovation
(dynamic efficiency)?
· Is there any evidence that the tax/charge may create perverse incentives (such as evasion,
relocation of industrial activities from one region to another)?
Effect on producers
· What are the key sectors affected?
· What are the price effects at the different stages of the production or service chain?
· What is the level of tax as a percentage of the cost of production?
· To what extent are the price increases passed on through the value chain? Answering this and the
rest of the questions here requires information about the price elasticity of demand and supply.
Effect on consumers
· Which consumers are affected?
· What is the level of tax/charge as a percentage of the sale price?
· Have any concerns been raised by consumers of the effect of the tax, and if so, what are they and
which are important? In order to answer this question, a reasonably well developed design of the
proposed instrument has to be opened to stakeholder consultation. The same applies for the
responses from producers.

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c r i t e r i a t o e v a l u a t e e f f e c t i v e n e s s o f t a x e s a n d c h a r g e s
Equity and distributional effects
· Are there significant differences of tax/charge burden across different sectors of the economy?
· Are there significant differences of tax/charge burden across different household (income) groups?
· Is there quantitative evidence for significant regional (geographical) effects?
· What are these differences, and are there any specifically disadvantaged groups?
· Is there quantitative evidence for significant distributional effects?
· Are there measures in place to compensate for distributional effects, and what are these?
· If only qualitative data are available, are the distributional effects deemed to be significant by the
stakeholder consultation?
Trade and competition issues
· Have concerns been raised regarding adverse effects on competition (such as in water market if
provided privately or in products and services that cause water pollution), and what are these?
· What evidence is there of adverse effects on competition?
· Who are the likely winners and losers? (this links to the effects of producers and consumers)
Revenue
· What is the projected tax/charge revenue (on an annual basis)?
· What is the level of revenue as a percentage of gdp, and as a percentage of the turnover affected
sectors?
· Who is to determine the use of revenues? Are the revenues earmarked or not?
· What is the mechanism for using the revenues (such as earmarking, say, with an Environment Fund
or through the general budgets)?
· What would the revenues be used for (to finance environmental or other investments, to support
sectors, to replace other taxes)?
· Is the use of the revenues likely to lead to any likely positive environmental effects (linked to
earmarking)?
Employment
· Have any concerns been raised on the employment impacts of the environmental tax/charge during
the technical analysis and/or stakeholder consultation?
· Is there any evidence for this concern (if mainly voiced during stakeholder consultation)?
· Is there any indication/estimation of positive effects of taxes/charges on employment?
· Are there any cases likely to lead to win-win effects (environment benefit and employment gains)?
Administrative and compliance cost
· Who is managing the tax at the level of government?
· Is there an administrative burden and what constitutes this burden? Develop a cost estimate for this
burden.
· If only qualitative evidence is available, would it be fair to say that the administrative burden is (a)
large (b) medium (c) small (d) insignificant, where the brackets of costs for (a) to (d) will have to be
decided during the design process.
Source: Speck and Özdemirog
lu 2004

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d e b t - f o r - n a t u r e s w a p s
Annex 10 Debt-for-nature swaps
Debt-for-nature (or debt-for-environment) swaps allow highly indebted countries to increase their
spending on environmental protection by reducing or converting a country's external debt in exchange
for their commitment to spend an agreed portion of the reduced debt on domestic environmental
improvements. Debt-for-nature swaps first appeared in 1984 and the first agreement was signed in 1987
for Bolivia46. The debt-for-nature swap accomplishes the twin goals of reducing the country's external
debt and increasing the amount of resources available for environmental conservation.
Debt swaps can either be entered into bilaterally, be facilitated by a third party (typically an
environmental ngo or broker), or become part of an overall debt rescheduling.
Debt swaps are not a solution for all indebted countries and many challenges must be addressed before
a debt-for-nature swap is a viable solution, such as:
· debt is sufficiently large to encourage it to seek debt-relief
· debtor country makes the political decision to actively seek debt-relief and use a portion of the
relief for environmental protection
· willingness on the part of creditors to convert the debt to environmental investments in the
debtor country
· the mechanism designed to administer the debt-for-environment swap satisfies the interests of
both creditor and debtor country
· sufficient local capacity exists to effectively supervise and operate the funds
Though a debt-for-nature swap can be very tempting for debtor countries to apply for, they have to
be aware that the solution can end up being very costly for the debtor country as it might change their
credit rating, thereby increasing the cost of obtaining new debt in the future. This is because entering
into a debt swap can be interpreted as a sign of fragility, unstable public budgets, and, in general, poor
economic balances perhaps worse than previously anticipated by rating institutions. It also might
influence the creditors' willingness to roll over short-term debt and thereby causing a real debt crisis
for the debtor country. If the economic situation is in such a poor condition that a default on debt is
unavoidable, or the country already is in a default situation, these concerns are not relevant.
The main challenge facing environmental authorities interested in implementing debt-for-environment
swaps is to design a `win-win' package that will be more attractive to creditors than available alter-
natives. The correlation between bilateral indebtedness and the creditor's environmental interest in
the debtor country may be very weak.
Besides the positive environmental effects for creditor countries, a rationale for creditors to enter a
debt-for-nature swap can include having access to a big export market for environmental equipment or
access to knowledge available from exporters in the creditor country. In the case of the Polish EcoFund,
it is written into the principles of the EcoFund that equipment to institute the swap has to be bought in
one of the contributing creditor countries in order for environmental projects to receive a grant from
the EcoFund.
An additional reason for creditor countries to enter into a debt swap agreement could be to improve
their own environment. If a debtor country is having problems repaying its foreign debt obligations,
it often also has problems financing environmental investments. As pollution is often a cross-border
problem, the creditor countries can benefit environmentally from the environmental investments
made in neighbouring countries. In this case, the benefit of one euro invested in a neighbour country
could be several times higher than the benefit of one euro invested at home. From this perspective,
a debt swap could be a sound investment policy for the creditor country.
A debt-for-nature swap requires environmental agencies to prepare expenditure programs aimed at
solving specific environmental problems, which are often an international priority as well as a national
one (global or trans-boundary environmental problems). Another challenge is to convince creditors
that their money will not be wasted or corrupted and that the debtor country will have the institutional
capacity to manage foreign expenditure in a transparent, effective, and efficient manner, in accordance
with best international standards. This is why, for example, the Polish EcoFund has a rigorous project-
cycle management with a close focus on achieving high benefit/cost ratios. Also, donors will often
require that the funds be considered `additional' to existing budgetary resources allocated to
environmental protection by the recipient state and not a substitute for them (oecd 1998).

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d e b t - f o r - n a t u r e s w a p s
The debt swap mentioned in the main report between Poland and a number of Paris Club member
countries, which established the EcoFund, was the first of its kind in which the swap was used to create a
fund or institution to handle the funds. Another example of a debt-for-nature swap came in 2002 when
Russia fostered an agreement with Finland to swap up to us$50 million in debt ­ 10 per cent of Russia's
Soviet-era debt ­ for specific investment projects implemented by Finish firms that would
reduce pollution in the Gulf of Finland and the Baltic Sea (oecd 2006). The Kyrgyz Republic and Georgia
have also included a swap clause in their framework agreements with the Paris Club.
Georgian debt-for-nature swap47
In 2002-2003, the Ministry of Environment of the Republic of Georgia and the oecd Secretariat of
the eap Task Force produced a pre-feasibility study on establishing a debt-for-environment (and
development) swap in Georgia. The study concluded that a debt-for-environment swap between
Georgia and creditors in the Paris Club is feasible and could generate benefits for Georgia and the
international community, including the creditor countries. The debt-for-nature swap is estimated
to generate between 3 31 and 56 million over the period 2005-2020. Though the estimate seems small,
by 2011 it would nearly double the level of environmental investment compared to 2001.
A review of Georgia's environmental priorities and creditors' preferences suggests that the most
promising projects could be those that aim to:
· reduce emissions of greenhouse gases that affect global climate
· reduce pollution of international waters
· protect biological diversity
· facilitate access to safe sanitation services for the poor, with a focus on small communities
Therefore, carefully selecting the most cost-effective projects and analyzing the requirements for
co-financing from other sources will be critical when prioritizing projects, in order to make a real
difference in any of the priority areas listed above.
The feasibility study recommended key institutional characteristics for managing a debt-for-
environment swap, including:
· The core of the institutional framework should be a locally established financial facility, which
would select projects competitively under the supervision of relevant stakeholders.
· In order to avoid any inflationary impacts and to manage the absorptive capacity of the project
pipeline, the swap would involve the Georgian government transferring the entire flow of future
debt repayments over an agreed period (swap-as-you-repay scheme), rather than a one-time transfer
of the present value of debt.
· The local financial facility should be established as a modular structure with a `core' revolving fund,
which would receive periodic injections of resources equivalent to the amount of forgiven debt in
that period. The facility should however be able to open parallel accounts and financing `windows' ­
some with endowments, some sinking, and others revolving, depending on the preferences of
investors and the nature of the financing demand.
· A prudent strategy would be to finance projects with grants only. As institutional capacity and
financial markets develop, other financial products can be considered. Co-financing should always
be required to achieve financial leverage.
· Accountability to all stakeholders, but freedom from ad hoc political interference, will be necessary
to win international credibility and hence attract resources. Accountability, transparency, and
efficiency must be cornerstones for governance and everyday operations. The Governing Board
of the financial facility should be open to creditors involved in the swap. Professional executive
management should have a high degree of operational independence in project-cycle management,
subject to strict accountability for performance. International good practices in public expenditure
management should be applied.
· The project cycle should have clearly defined stages, responsibilities, procedures, and project
selection criteria. Cost effectiveness should be a key quantitative basis for the appraisal and selection
of projects. Subjective, discretionary elements in project selection should be minimized and subject
to procedures.
· Competition in procurement under the swap scheme should be maximized to boost efficiency.

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w o r k i n g w i t h t h e k f w d e v e l o p m e n t b a n k
Annex 11 Working with the KfW Development Bank
This Annex gives more detail on the procedures of financial cooperation with the KfW Development
Bank. The procedures are in principle the same for other ifis though some differences can be expected.
All projects and programmes realized between the partner country and KfW Development Bank under
financial cooperation go through the same cycle of preparation and implementation. At all stages of the
cycle, the projects are subject to a comprehensive quality assurance system.
Project preparation
Appraisal procedures
Financing agreement
Invitations to tender for supplies and services
Implementation and final inspection
Start-up of operation
Ex-post evaluation
Appraisal
A consultant has gathered information on site, which is presented in the feasibility study. The
consultant submits the study to the project-executing agency and KfW Development Bank.
Once the feasibility study is available, KfW starts the actual project appraisal at the project site.
The appraisal focuses on the following items, among others:
· the legal, institutional and macro-economic framework
· the economic and management capacities of the project-executing agency
· the economic feasibility of the project concept
· the risks and the objectives with regard to development policy
· the general interests of the target group
· environmental constraints
· the technical adequacy of the project
For example, in the specific case of a drinking water supply project, the data provided on the coverage
of future water needs are also examined, as well as investment and operating costs. It is clarified who
will bear the related costs. All parties involved agree on an implementation schedule, which specifies
who has to do what, how and when. After all, once the public standpipes planned have been completed
they are to supply the population and have to be maintained.
KfW presents the results of the in-depth appraisal report, which is submitted to the German
government for its financing decision. The appraisal report also makes a proposal about the volume,
the terms and conditions of the funds to be provided by the German government.

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w o r k i n g w i t h t h e k f w d e v e l o p m e n t b a n k
Financing agreement
If the German federal government takes a positive decision on the appraised project, KfW Development
Bank has the green light to start negotiations with the government of the partner country and the pro-
ject-executing agency on the financing and project agreement.
The financing and project agreement not only states the details of the financing ­ or in the case of a loan
the redemption and interest details ­ but also specifies details concerning project implementation and
future operation. The financing and project agreement comprises measures to be taken by the public
authorities in the partner country, such as:
· the provision of sufficient budget funds to finance the country's own contribution to the project
· the adjustment of tariffs and fees in order to cover future operating costs
With the signing of the financing agreement, the green light is given to the project implementation
phase.
Implementation of the project and final inspection
The project-executing agency is responsible for the implementation of the project; KfW is in charge
of monitoring and ex-post evaluation.
Various protagonists are involved in the project: the project-executing agency, consultants, suppliers,
building companies, the local population, KfW, and possibly other organizations.
All activities, from the turning of the `first sod'to the final inspection after completion, have been
agreed with the executing agency, are specified in the agreements and will now be implemented:
· project activities
· training measures for the project staff
· tendering and award of contract for supplies and services
· supervision of construction and of the adherence to the contracts
· progress reviews of project activities
· final inspection
The phase of financing by KfW Development Bank ends with the final inspection. Immediately after the
technical completion of the project, KfW examines whether the facilities established are functioning
and the start of operation is possible.
The final inspection may reveal that follow-up measures are necessary, for instance, personnel support
in the form of training measures, to ensure the development success of the project. After the final
inspection, the project facilities will officially start operating. Three to four years later, an ex-post
evaluation will determine whether the development objectives originally envisioned have been
achieved.

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f i n a n c i n g m e c h a n i s m s f o r m a r i n e c o n s e r v a t i o n
Annex 12 Financing mechanism for marine conservation
Financing mechanism
Source of revenue
Government revenue allocations
Direct allocations from government budgets
Government budget revenues
Government bonds and taxes earmarked for conservation
Investors, tax payers
Lottery revenues
Gamblers
Premium-priced motor vehicle license plates
Vehicle owners
Wildlife stamps
Postal customers, hunters, fishermen
Debt relief
Donors, government, ngos
Grants and donations
Bilateral and multilateral donors
Donor agencies
Foundations
Individuals, corporations
Non-governmental organisations (ngos)
ngo members and supporters
Private sector
Investors
Conservation trust funds
Multi-source
Tourism revenues
Protected area entry fees
Visitors to parks
Diving and yachting fees
Divers, boaters
Tourism-related operations of protected area agencies
Tourism operators, tourists
Airport passenger fees and cruise ship fees, taxes and fines
Tourists, cruise lines
Hotel taxes
Hotel clients
Voluntary contributions by tourists and tourism operators
Tourism operators, tourists
Real estate and development rights
Purchases or donations of land and/or underwater property
Property owners, donors
Conservation easements
Property owners, donors
Real estate tax surcharges for conservation
Property owners, donors
Tradable development rights and wetland banking
Property developers
Conservation concessions
Conservation investors
Fishing industry revenues
Tradable fishing quotas
Commercial fishermen
Fish catch and services levies
Commercial fishermen
Eco-labelling and prouct certification
Seafood producers, wholesalers,
retailers and end-use purchasers of
ornamental tropical fish and corals
Fishing access payments
Governments, associations of and/or
individual fishermen
Recreational fishing license fees and excise taxes
Recreational fishermen
Fines for illegal fishing
Fishermen
Energy and mining revenues
Oil spill fines and funds
Energy companies, donors
Royalties and fees from offshore mining and oil and gas
Energy and mining companies
Right-of-way fees for oil and gas pipelines and
Private companies
Telecommunications infrastructure
Hydroelectric power revenues
Power producers
Voluntary contributions by energy companies
Energy companies
For-profit investments linked to marine conservation
Private sector investments promoting biodiversity conservation
Private investors
Biodiversity prospecting
Pharmaceutical companies
Source: Spergel and Moye 2004

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8 5
e n d n o t e s
Endnotes
1
Based on the report titled Financing of the East Asian Seas Action Plan.
2
Budget amount after deducting the special contribution from the United Kingdom towards
the costs of office accommodation.
3
Egypt belongs both to the Mediterranean Regional Sea and to Red Sea and Golf of Aden (persga)
4
Data for the Gini index and upper 10 deciles data are from World Development Indicators 2005:
http://devdata.worldbank.org/wdi2005/Cover.htm. As the years in the report vary widely, inter-
pretation of the results should be taken with caution. They are only to be seen as a rough measure
of the income distribution in the countries. The Gini index measures the extent to which the
distribution of income (or, in some cases, consumption expenditure) among individuals or house-
holds within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the
cumulative percentages of total income received against the cumulative percentages of reci-
pients, starting with the poorest individual or household. The Gini index measures the area
between the Lorenz curve and the hypothetical line of absolute equality, expressed as a
percentage of the maximum area under the line. A Gini index of zero represents perfect
equality and 100, perfect inequality. The Upper 10th deciles measure the share of total income
or consumption of the richest 10 per cent of the population.
5
ppp refers to Purchasing Power Parity. ppp statistics adjust for cost of living differences by
replacing normal exchange rates with rates designed to equalize the prices of a standard `basket'
of goods and services.
6
Most of this section is inspired from: ppc Project Financing Workshop; A stand-alone guide:
How to Promote Municipal Infrastructure Projects in the eecca and see countries, September
2004. For further information on the elements discussed in this section, we highly recommend
reading this report.
7
For a more detailed overview of financing regional public goods see unep 2000.
8
See more on www.oecd.org/dac.
9
Source: oecd Statistical Annex of the 2005 Development Co-operation Report. Besides dac
members many other countries like Saudi Arabia, Kuwait, India and China are also known to
have large aid programmes. However, as data from these countries are not collected and reported
systematically they can not be meaning fully comparable to the above data and therefore have
not been included in the figure. Fifteen non-dac donors has reported a total of us$3.7 billion net
oda in 2004, of which us$1 billion was from other oecd members and us$2 billion from Arab
countries.
10
See this website for the list of political focal points.
www.gefweb.org/participants/Focal_Points/Political/political.html#d
11
See this website for the list of operational focal points.
www.gefweb.org/participants/Focal_Points/Operational/operational.html
12
The 31 December 2005 exchange rate: 100 pln = 30.56 us$
13
ifi's are mainly financed by its member countries. The member countries contribute a
specific amount of resources, which together with possible bond issues allow for subsequent
disbursement.
14
See www.worldbank.org for more information on The World Bank and its associated financial
institutions, strategies and programmes.
15
See www.ifc.org for more information.
16
See www.miga.org for more information.
17 See
www.afdb.org for more information
18
For a thorough description of the policies in Asian Development Bank and its affiliates see adbs
Operations Manual: www.adb.org/Documents/Manuals/Operations/default.asp?p=aadb
19
See the annual report 2004 for further information.
20
All persga member countries are also members of the Islamic Development Bank.
21
For a full list of the services provided by idb please refer to www.isdb.org.
22
One Islamic Dinar (id) is equivalent to one Special Drawing Right (sdr) of the imf.
23
For more information see at www.kfw.de
24
At present Egypt is classified in risk group 4, Jordan in 6, Saudi Arabia in 2, Somalia and Sudan in
7 and Yemen in 6. Djibouti is not classified.
25
Only export credits with a maturity above one year is handled in this section. These are typically
capital goods which are sold on long credits.
26
The price for a capital good sold on an export credit is the sum of the cost of the good and the cost
of financing the credit. The financing costs are usually interest for the loan and a premium for the
political and commercial risk. It is the premium for the political and commercial risk that ecas
charge and it is this premium that previously did not reflect the risk involved.

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8 6
e n d n o t e s
27
Premium rate convergence is that all ecas charge the same minimum premiums
(for the political risk). Thereby there will be a floor below which the premium cannot fall.
28
The country classification can be seen at: www.oecd.org/dataoecd/47/29/3782900.pdf.
29
This report focuses on the fiscal elements of environmental and environmentally-related
economic instruments. Issues on the potential environmental effects of these instruments
through changing the behaviour of polluters and users for the benefit of the environment
are not addressed.
30
Typical elements covered by the command and control approach are: waste storage container
design standards; air, water and noise emissions criteria; pollution control design standards,
and the like.
31
In hm Treasury (2002) there are some good examples of where regulation has been the best the
best instrument. These are the eu National Emissions Ceiling Directive, the Montreal Protocol
(ozone-depleting chemicals), and The Building Regulations requirements in the uk. An example
of poor regulation is the eu Directives on bathing waters.
32
Eastern Europe countries in transition have found these preconditions to be particularly
important (iadb 2003).
33
For a list of the economic instruments implemented in Denmark see depa 1999.
34
See depa, 1999 (chapter 9) for a description of the subsidies used in Denmark.
35
Mainly oecd eap Task Force, Regional Environmental Centre in Hungary, Project Preparation
Committee, the World Bank Group, and the European Bank of Reconstruction and Development.
36
This section largely builds on the guidelines and experiences from the Project Preparation
Committee (ppc). The ppc is a network of stakeholders involved in preparing and financing
environmental investments. The network includes over 20 multilateral and bilateral donors, ifis,
regional governments, ngos and t he private sector. Their focus is on Eastern Europe, the Caucasus
and Central Asia and South Eastern Europe. Its Secretariat is located at the European Bank for
Reconstruction and Development (ebrd).
37
Only the headlines and main ideas are presented here. See unep (2004) for a thoroughly
description of the different options and examples of where they have been used. See also
unep/gpa (2004) which also has four phases. In that report, ten key points have been formulated
for local and national action on municipal wastewater. These 10 keys are listed in Annex 7.
The 10 keys for action cover policy issues, management approaches, technology selection,
and financing mechanisms
38
The policy recommendations are also based on iadb (2003).
39
hm Treasury, 2002. In this report, examples are given on how economic instruments have been
implemented in the United Kingdom and which considerations they have made.
40
For further information on mbi studies, please refer to Eunomia (2003).
41
For further information on the whole issue of accountability, please refer to Allen and Tomassi
(2001), Sciavo-Campo and Tomassi (1999), World Bank (1998).
42
The main focus is directed to study taxes and charges. However, we should not exclusively focus
on these market-based instruments but also consider other mbis.
43
Taken from Development of a Strategy and Business Plan for persga (2004-2014) ssa c/2004/0016
44
http://conservationfinance.org/
45
The Belize Protected Areas Conservation Trust for example is a revolving fund whose capital
comes partially from a us$3.75 fee on visitors entering the country, and partially from an
earmarked 20 per cent from fees for pa entrance, recreational licenses and permits, and cruise
ships. Five percent of the collected revenues are managed as a permanent endowment for
emergency purposes.
46
In Pagiola and others (2002) a list of Debt-for-nature swaps entered between 1990 and 1997
is listed.
47
The Georgian debt-for-nature swap is taken from oecd 2006 Annex 6. More information can be
found at: Georgian Ministry of Environment and oecd eap Task Force (2003).

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8 7
r e f e r e n c e s
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Finan
cin
Financing the
g th
e im
implementation of
p
l
em
entation of regional sea
regional seas conventions
and action plans
A guide for national action
s
con
v
en
tions an
d ac
tion p
l
ans
.
A
guide for national ac
tion
www.unep.org
United Nations Environment Programme
PO Box 30552, Nairobi, Kenya
Tel +254 20 762 12 34
Fax +254 20 762 39 27
uneppub@unep.org
www.unep.org
dep/0821/ha isbn 92-807-2707-9
unep Regional Seas Reports and Studies No. 180

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