Intergovernmental Transfers for Environmental Infrastructure Lessons from Armenia, the Russian Federation and Ukraine

105 Pages·2006·0.75 MB·English

by  OECD

Environmental Finance
Intergovernmental
Transfers
for Environmental
Infrastructure
LESSONS FROM ARMENIA,
THE RUSSIAN FEDERATION AND UKRAINE
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
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FOREWORD –

Foreword
This report results from work carried out in the context of the Task
Force for the Implementation of the Environmental Action Programme for
Central and Eastern Europe (EAP Task Force), for which the OECD
Environment Directorate serves as a Secretariat. The work of the EAP Task
Force is focused on supporting environmental policy reform in countries of
Eastern Europe, Caucasus and Central Asia (EECCA). The report is one of a
series of projects on environmental finance in EECCA countries. Work on
environmental finance aims to advise governments in the region on policies
to make the best use of available resources, and to attract additional finance
for environmental policies and projects. This project benefited from the
financial support of the Government of the Netherlands (Ministry of
Housing Spatial Planning and the Environment).
The country case studies have been drafted by the Institute for Urban
Economics. Preliminary versions of the report have benefited from the
comments of members of the EAP Task Force, in the context of the
preparation of the Yerevan Ministerial Conference on Financing of the
Water Supply and Sanitation Sector in EECCA countries (November 2005),
and from experts of the Environmental Finance Network that works within
the framework of the EAP Task Force.
The final version was prepared by Xavier Leflaive, Head of the Finance
Team, under the supervision of Brendan Gillespie, Head of the
Non-Member Countries Division, Environment Directorate, OECD.
Carla Bertuzzi, Nelly Petkova and Alexander Martoussevitch,
Environmental Finance experts in the Finance team, provided valuable
contributions. Dinara Aknazarova provided secretarial assistance. The report
draws extensively on the experience and previous work from the Public
Governance and Territorial Development Directorate of the OECD;
Claire Charbit in particular has provided guidance on the wide literature
available on this issue.
INTERGOVERNMENTAL TRANSFERS FOR ENVIRONMENTAL INFRASTRUCTURE – ISBN-92-64-02503-0 © OECD 2006
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TABLE OF CONTENTS –

Table of Contents
Acronyms…………………………………………………………………7
Executive Summary……………………………………………………...9
Chapter 1. Main Findings from Case Studies........................................13
The magnitude of intergovernmental transfers...................................14
An analytical framework....................................................................15
Recent trends in transfer mechanisms in EECCA..............................19
Intergovernmental transfers to finance water infrastructure
in EECCA...........................................................................................23
Chapter 2. Intergovernmental Transfers for
Environmental Expenditure in Armenia..............................................25
Legislative and regulatory framework governing
intergovernmental transfers................................................................25
The system of intergovernmental transfers.........................................27
Controlling the use of earmarked transfers.........................................33
The structure of local budget expenditure..........................................35
Intergovernmental borrowing procedures...........................................39
State support to the WSS sector at the regional/local level................40
Institutional organisation of WSS.......................................................40
Financial instruments..........................................................................41
The efficiency of intergovernmental transfer mechanisms
to finance WSS services.....................................................................45
Annex 2.A1. The Legal Basis Governing Budgetary Relationships and
Intergovernmental Financial Transfers and Lending in Armenia………..47
Annex 2.A2. The Legal Basis Governing the WSS Services Sector in
Armenia…………………………………………………………………..49
Annex 2.A3. Investment Projects with Financial Institutions in Armenia..51
Chapter 3. Intergovernmental Transfers for
Environmental Expenditure in the Russian Federation......................53
Legislative and regulatory framework governing
intergovernmental transfers................................................................53
The system of intergovernmental transfers.........................................55
Federal Financial Support Fund for Federation Subjects (FFSF).......57
Compensation Fund (CF)...................................................................58
INTERGOVERNMENTAL TRANSFERS FOR ENVIRONMENTAL INFRASTRUCTURE – ISBN-92-64-02503-0 © OECD 2006
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TABLE OF CONTENTS –

Social Expenditure Co-Finance Fund (SECF)....................................59
Regional Finance Reform Fund (RFRF)............................................60
Regional Development Fund (RDF)...................................................61
Other grants and subventions.............................................................66
Transfers made as part of mutual settlements.....................................67
Road maintenance subventions and grants.........................................67
Regional development initiatives.......................................................68
Controlling the use of earmarked transfers.........................................71
The structure of local budget revenues...............................................72
The structure of local budget expenditure..........................................74
Intergovernmental borrowing procedures...........................................75
State support to the WSS sector at the regional/local level................77
Chapter 4. Intergovernmental Transfers for
Environmental Expenditure in Ukraine...............................................79
Legislative and regulatory framework governing
intergovernmental transfers................................................................79
The system of intergovernmental transfers.........................................80
Equalization grants.............................................................................82
Additional grants................................................................................83
Subventions for the purpose of implementation of state social
protection programmes.......................................................................85
Subventions for implementations of investment projects...................85
Other subventions...............................................................................86
Analysis of local budget revenue structure.........................................87
Controlling the use of earmarked transfers.........................................91
The structure of local budget expenditure..........................................91
Intergovernmental borrowing procedures...........................................94
State support to the WSS sector at the regional/local level................95
Institutional organisation of WSS.......................................................95
Financial instruments..........................................................................95
The efficiency of intergovernmental transfer mechanisms to
finance WSS services.........................................................................97
Earmarked and non-earmarked grants..............................................102
Mandatory and discretionary grants.................................................102
Matching and non-matching grants..................................................102
General purpose and block grants.....................................................103
Capital versus current grants............................................................104

Annex A. Institutional Devolution of Water in EECCA………………….98
Annex B. A Typology of Intergovernmental Transfers…………………102

INTERGOVERNMENTAL TRANSFERS FOR ENVIRONMENTAL INFRASTRUCTURE – ISBN-92-64-0250360 © OECD 2006
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ACRONYMS –

Acronyms
AMD Armenian dram
AWSC Armenia Water and Sanitation Company (Armenia)
BCR Department for Budget Control and revision (Armenia)
BEI Budget Expenditure Index
CEE Central and Eastern Europe
CF Compensation Fund (Russian Federation)
EECCA Eastern Europe, Caucasus, Central Asia
FFSF Federal Financial Support Fund for Federation Subjects (Russian Federation)
FTIP/FTP Federal Targeted Investment Programme (Russian Federation)
FTRDP Federal Targeted Regional Development Programmes (Russian Federation)
KfW German Development Bank
IMF International Monetary Fund
MDGs Millennium Development Goals
OECD Organisation for Economic Co-operation and Development
O&M Operation and Maintenance
RDF Regional Development Fund (Russian Federation)
RF Russian Federation
RF BC Budget Code of the Russian Federation
RFRF Regional Finance Reform Fund (Russia)
RMFRF Regional and Municipal Finance Reform Fund (Russian Federation)
SCWE State Committee for Water Economy (Armenia)
SECF Social Expenditure Co-Finance Fund (Russian Federation)
USD American dollar
WFP World Food Programme
WSS Water supply and sanitation
YMSC Yerevan Water and Sanitation Company (Armenia)

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EXECUTIVE SUMMARY –

Executive Summary
Most countries in Eastern Europe, Caucasus an Central Asia (EECCA)
have engaged in a systematic devolution of responsibilities for the
construction and maintenance of urban environmental infrastructure to
subnational levels of government. As owners of the communal service
infrastructure, municipalities are responsible for its rehabilitation,
modernisation, and development. Now, devolution of responsibilities needs
to be matched by ensuring access to the financial resources needed to
implement the new mandates assigned to local and regional jurisdictions.
As EECCA municipalities are still largely dependant on fiscal transfers
from central or regional budgets, they often have to co-ordinate their
infrastructure development plans and capital expenditure budgets with
national/regional plans and budgets. This makes strategic planning and
investment at local level dependant on the policies at the national/regional
level, and generates a risk that local investment plans will not be
implemented due to budgetary constraints at other levels of government.
From a central government perspective, intergovernmental transfers are
instruments that the central government can use to improve the performance
and control of subnational public expenditure, and to create incentives for
better coherence between national and local public policies.
Surveys in OECD countries confirm that the impact of
intergovernmental grants on efficiency, fiscal discipline, and equity, largely
depends on their design. The design varies significantly from one country to
another, and is strongly influenced by policy objectives and the main
features of the institutional context. Important lessons have also been learnt
from European Union (EU) accession countries where intergovernmental
transfers are a key dimension of relations between levels of government and
a major source of finance for local jurisdictions.
EECCA countries mostly rely on inter-governmental transfers to bridge
the financial gap that arises between the costs of local policies and services
and the revenues to which local authorities have access. Each country has
developed an array of instruments to transfer budgetary resources from
INTERGOVERNMENTAL TRANSFERS FOR ENVIRONMENTAL INFRASTRUCTURE – ISBN-92-64-02503-0 © OECD 2006