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

108 Pages·2006·1.6 MB·English

by  OECD

Environmental Finance Environmental Finance
In
Intergovernmental Transfers te
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for Environmental Infrastructure o
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LESSONS FROM ARMENIA, nm Intergovernmental
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THE RUSSIAN FEDERATION AND UKRAINE n
ta Transfers for
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This report draws on three detailed case studies in Eastern Europe, the Caucases a
n Environmental
and Central Asia (EECCA), and on the experience of OECD countries to provide s
f
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guidance on how transfers from central budgets to local authorities could be r
designed to finance environmental infrastructures in transition economies. s f Infrastructure
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Ideally, the costs of water supply and sanitation should be covered by user n
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charges. However, the high investment costs and associated affordability iro
n
constraints mean that governments have an essential role to play in financing m
water services in EECCA and other regions. The report investigates mechanisms e LESSONS FROM ARMENIA,
n
for transferring financial resources for water services from higher to lower levels of ta THE RUSSIAN FEDERATION
government. It looks at three countries with different institutional settings: Armenia, l In AND UKRAINE
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where responsibilities for the water supply and sanitation sector are maintained ra
s
at the national level; the Russian Federation, a most interesting case of fiscal t
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federalism; and Ukraine, which illustrates a variety of situations. c
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The experience of OECD countries has provided valuable guidance to benchmark L
the paths followed by the three countries under review. E
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S
F
R
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The full text of this book is available on line via these links: A
R
http://www.sourceoecd.org/environment/9264025030 M
http://www.sourceoecd.org/finance/9264025030 EN
http://www.sourceoecd.org/transitioneconomies/9264025030 IA
, T
Those with access to all OECD books on line should use this link: H
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ISBN 92-64-02503-0
-:HSTCQE=UWZUXZ:
97 2006 11 1 P

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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© OECD 2006
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3
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

5
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
7
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)

INTERGOVERNMENTAL TRANSFERS FOR ENVIRONMENTAL INFRASTRUCTURE – ISBN-92-64-02503-0 © OECD 2006