A Need for Innovative Financing Tools in the Danube Countries

The challenges of river basin management could find no greater watershed to study than that of the Danube River Basin, which encompasses 19 East European countries.

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By Dr. Mihaela Popovici and Philip Weller

The challenges of river basin management could find no greater watershed to study than that of the Danube River Basin, which encompasses 19 East European countries.

The second longest European river, directly flowing over 2,857 kilometres through 10 countries from its source in Germany’s Black Forest to the Black Sea, the Danube River is the most international river basin in the world.

Only in the Danube countries are there 12 other transboundary river basins existing that flow into the Black Sea, Adriatic Sea and Aegan Sea, shared between three or more riparian countries. This justifies these countries’ efforts to jointly manage the shared transboundary waters through quite a large number of multinational and bilateral agreements.

Watershed Level Coordination

To coordinate this work, the International Commission for the Protection of the Danube River (ICPDR) was founded in 1998. The ICPDR is first a forum under which the countries work together on issues of water management. Water quality and control of pollution and floods are central to its tasks.

In 2007, the ICPDR completed the final report on implementation of its Joint Action Programme (JAP). The report summarises achievements realised through work of countries under the ICPDR and the implementation strategy of the Danube River Protection Convention (DRPC) up to 2006. The JAP, adopted in 2000, focused on pollution from point and diffuse sources, wetland and floodplain restoration, reduction and control of priority substances, water quality standards, prevention of accidental pollution, floods prevention and control and river basin management. Particular attention was given to both structural/investment and non-structural/policy reforms measures that address nutrient reduction and protection of transboundary waters and ecosystems.

Under the JAP framework, 251 committed investment projects and strategic measures were identified out of which 140 are in the municipal sector, 56 in the industrial sector and 55 for floodplain/wetland restoration. A reduced number of industrial investments show this category is currently not over-invested. As most of these projects, listed generally as “hot spots” or emission point sources, represent national priorities and take into account obligations to mitigate transboundary effects and meet the challenges of European Union (EU) directives, i.e., the Integrated Pollution Prevention Control (IPPC) Directive, it’s expected a huge increase in funding will take place in the clean technology sector soon.

The total investment foreseen in the JAP period 2001-2005 to respond to priority needs was estimated to be about €3.989 billion. Of this, municipal wastewater collection and treatment plants amount to €3.469 billion, industrial wastewater treatment amounts to €0.296 billion, agricultural projects and land use amounts to €0.113 billion and rehabilitation of wetlands amounts to €0.224 billion. Actual results as of 2006 are shown in Figure 1. More current figures can be found below.

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Of the 224 projects, 86 are fully financed and either completed or in progress. The combined investment cost of the 84 fully financed projects is about €2.268 billion, or roughly 50% of the total. [SOURCE: ICPDR Annual Report 2006, p. 22, www.icpdr.org/icpdr-files/13922]
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Water Institution Challenges

Commitment to EU directives has been central to success and this commitment must be fostered throughout the Water Framework Directive (WFD) implementation. Danube countries faced substantial challenges in establishing and strengthening the policy and institutional framework. Today, progress can be reported with all Danube countries in redesigning policies, programs and regulations, in establishing appropriate incentive structures, redefining partnerships with stakeholders and strengthening financial sustainability of environmental services. Still, the key policy challenge Danube countries face is to identify the most effective ways of implementing EU environmental directives. Central to this is project financing.

There’s an increasing tendency for local authorities in Danube countries to take more responsibility in environmental and water management strategies, due to their increasing role in national policy. Additionally, local water policies will have to consider the transboundary nature of border rivers and the need to take measures and decisions together with neighbouring communities by implementing solutions on a local or regional scale wherever possible.

Still, the role of environmental authorities in most Danube countries at the local level needs to be strengthened by integrating environmental considerations into economic development. There are areas where the absence of adequate policy instruments and institutional capacity to support water use monitoring leads to increased service costs and eventual deterioration of the resource and supporting service infrastructure.

Municipal Investment Projects

JAP results show considerable successes, with many related investments and actions occurring. There has been an improvement in the water quality of Danube rivers since 1995, mainly due to the impact of the investment programme of the water industry and pollution control measures that have dealt with many point sources of pollution such as sewage systems, wastewater treatment plants (WWTPs), industrial sites and agricultural units.

Two Member States, Austria and Germany, have already implemented the Urban Waste Water Treatment Directive (UWWTD) and applied the nutrient removal requirements. The other six Member States are currently implementing the UWWTD in line with the transition periods agreed upon with the European Commission (EC).

There are a total of 140 municipal wastewater sector projects amounting to €3.469 billion. Many of the municipal sector improvements in Danube countries are only now starting to be realised. Tertiary treatment (nitrogen and phosphorus removal) is being applied for a large number of the upgraded and new WWTPs. Furthermore, demands for nitrogen and phosphorus removal for WWTPs in rural communities, representing about 40% of the Danube River Basin, are lower than for urban settlements.

International Investments

Most investment in the wastewater sector has been made in the countries that joined the EU in 2004: the Czech Republic, Hungary, Slovakia and Slovenia. A large proportion of project financing for these investments came from local or national sources. Significant progress has been made in Romania since the last DABLAS Task Force in 2004, and Bulgaria and Croatia have increased project preparatory efforts though they still lack financing. This task force is a platform for cooperation in protection of water and water-related ecosystems in the Danube-Black Sea (DABLAS) region to encourage a more strategic focus on available financing and to ensure coordinated action between all financial instruments operating in the region. As such, limited development in the wastewater sector has been achieved in downstream, non-EU countries, including Bosnia-Herzegovina, Serbia, Moldova and Ukraine.

International financing has been instrumental to development of the municipal wastewater sector in the Danube River Basin. EU grant financing has played a large role in funding several projects throughout the EU countries. The EU provides specific targeted financial aid for candidate and potential candidate countries and limited assistance to new Member States to support their efforts to enhance political, economic and institutional reforms. The European Bank for Reconstruction & Development and the European Investment Bank have extended loans to municipalities for many of these projects, to help cover co-financing requirements. The World Bank-GEF Investment Fund – GEF meaning Global Environment Facility – has participated also in municipal wastewater projects, in addition to agricultural reform and other nutrient reduction efforts. Coming into force on Jan. 1, 2007, the Instrument for Pre-Accession Assistance (IPA) is the new tool, bringing all support into one single, focused instrument. The EU Pariliament regulation establishing IPA was adopted on July 17, 2006, replacing the 2000-06 pre-accession financial instruments PHARE, ISPA, SAPARD – the Turkish pre-accession instrument – and the financial instrument for the Western Balkans, CARDS.

IPA covers the countries with candidate status (currently Croatia, the former Yugoslav Republic of Macedonia, and Turkey) and potential candidate status nations (Albania, Bosnia and Herzegovina, Montenegro, and Serbia including Kosovo).

The presence of the EU, as a Contracting Party to the Danube Convention and an observer to the Black Sea Convention, helps guarantee success by tying concrete environmental achievements directly to EU membership benefits. Large infrastructure investment requirements are essential if countries are to meet EU standards. Overcoming these financial needs is a huge challenge for some lower Danube countries with rather limited financial resources for investment expenditure as compared to upper and middle Danube countries.

Industrial Investment Projects.

The degree of industrial development and importance and amount of pollution caused by the industrial sector varies within each country. Practically all industrial branches are represented: chemical, electrical, engineering works, metallurgical and galvanic, textile, sugar, papermaking and pulp mills, wood-fabricating industry, etc. Still, in some cases, industrial wastewater is discharged into the public sewer network without any or with insufficient treatment. On agricultural point sources of pollution, pig and cattle farms have been identified as significant contributors. These hot spots are generally easy to eliminate by treating the liquid manure.

In developing the Danube River Basin Management Plan, the ICPDR’s role is to encourage all Danube countries to adopt and implement IPPC legislation. The majority of the countries have a mandatory obligation to the EU, while the remaining countries could be encouraged to adopt legislation requiring the application of Best Available Technologies (BAT) as basic measures in the Joint Program of Measures.

Innovative Financing Instruments

The water sector offers a big investment opportunity for long-term investment in infrastructure in the Danube river basin. Evidence from the cooperation of the ICPDR with financing institutions shows attractiveness for investors due to potential high returns on their funding.

The main problem will be how to mobilize the necessary funds, given the fact domestic resources are limited and funds provided by international donors or private companies are insufficient. Additionally, there’s a noticeable decreasing trend in provision of loans by international private investment and commercial banks due to current interest rates and water sector related risks.

The distribution of funding sources in the last decade shows the domestic public sector contributed 65-70%, domestic private sector 5%, and the remaining 30% was equally distributed between international donors and private companies.

The few existing public private partnerships (PPPs) established in some large cities in Danube countries weren’t very successful in ensuring needed financing but only in providing the financing strategy. Still, the effectiveness of Bulgaria’s Sofia Water PPP (EBRD provided €35 million in a long term loan) is due to a strong commitment by the public sector. In addition to financing improved services, the project will also result in new investment into the city’s water and wastewater system. The investors are a consortium, which includes International Water Ltd. (UK), Bechtel Enterprises Holding, United Utilities Plc and the city.

Tariffs Reforms

Most municipal authorities are extremely cautious to support any proposal to increase tariffs. The customers – the municipal authorities’ constituency – often aren’t convinced the tariff increase is either necessary or that any increased revenues will really be used to maintain their service. A common argument against any tariff increases in the Danube countries with weak economies is that: 1) Many residents of the municipality are unemployed and/or have low incomes, and 2) these residents cannot afford any increase. Here, the discussion is whether it should be the municipal utility’s responsibility to provide social support – isn’t that the task of the central government? High sensitivity to this problem suggests any tariff increases must be seen as “fair” to the low income households. In many cases, a tariff increase may have to have, either by design or as a supporting program, a feature to help protect lower income households from excessive tariff increases.

At the same time, industrial customer classes were often much more sensitive to costs. They pressured municipal utilities to reduce the tariff disparity or face a loss of their business. There’s evidence in both the Czech Republic and Slovakia the threat of industrial users to “self supply” their water and wastewater service influenced the trend toward a redesign of tariffs for both water and wastewater. Interestingly, there isn’t a single utility in which industrial consumers would pay less for water and wastewater services than households, while, certainly in the case of water supply, provision of service to industry is almost always less costly than to households.

Conclusion

Sustainable development in the Danube River Basin requires an “enabling environment” that permits and attracts viable long term investment and continuous and enhanced international cooperation. Success will depend on thorough implementation of actions and commitments of the countries as well as on effective and coordinated contributions of the international community. WWi


Authors’ Note:

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Dr. Mihaela Popovici is water management technical expert at the UN-based International Commission for the Protection of the Danube River (www.icpdr.org) in Vienna. Before that, she was head of the Water Strategy Division for Romania’s Ministry of Environment & Water Management. Contact: michaela.popovici@unvienna.org

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Philip Weller has been ICPDR executive secretary since 2003. Prior to this, he was programme director of WWF International (Danube Carpathian Programme, 1995-2002) and served for four years as director of Great Lakes United, with a focus on rehabilitation and clean-up of environmental hotspots within North America’s Great Lakes. Contact: philip.weller@unvienna.org


IWA Biennial World Water Congress

Some 3,000 water professionals, worldwide as well as from the Danube catchment area, will descend on Vienna for the World Water Congress, hosted Sept. 7-12 by the International Water Association. Successful partnerships already established in the Danube River Basin serve as a good model for transboundary watershed management around the globe. How to achieve sustainability in water supply and sanitation under the pressures of managing water resources and river basins is a central question that delegates will explore. For more, see: www.iwa2008vienna.org

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