copy the linklink copied!4. Institutional arrangements and policy framework

copy the linklink copied!4.1. Institutional arrangements for managing public investment programmes

There are a number of different good-practice institutional forms for managing public environmental expenditure. Simple expenditure programmes (e.g. financing research or education, purchasing simple equipment or standard services) may be managed directly by assigning additional responsibilities to existing government institutions at a variety of levels, using their regular staff and routine budget processes. For larger-scale, targeted programmes – in particular, programmes that involve financing capital investments, such as the Clean Public Transport (CPT) Programme – special institutional arrangements are recommended. These special arrangements may take many institutional forms and involve various types of implementing units (OECD, 2007[1]).

Deciding which form is most appropriate will generally depend on a variety of factors related to the sources of finance, the types of disbursements envisaged, and the legal and political culture of governance in a given country. Regardless of the institutional form, public environmental expenditure management should involve institutional structures and procedures that promote environmental effectiveness, embody fiscal prudence, and use financial and human resources efficiently.

Experience shows that these arrangements can take four basic forms:

1. 1. government implementation units

2. 2. environmental funds or a similar public finance institution

3. 3. directed credit or a line of credit to financial intermediaries (such as commercial banks)

4. 4. outsourcing.

Government implementation units – the most common arrangements – include the following institutional forms:

• government departments with responsibility for procuring goods and services or financing specific projects within the state budget

• project implementation units established in a government department to implement projects within a specific government expenditure programme included in the budget

• autonomous/decentralised government units financed by the budget but created to decouple the delivery of services or administrative tasks from policy formulation.

Regardless of the type of government implementation unit chosen, carrying a programme to completion requires capacity for project selection, implementation and monitoring. This means hiring skilled, trained personnel with a dedicated focus on the programme. Environmental programmes of EUR 50 million (USD 57 million) annually and about 200 contracts per year implemented in Central and Eastern Europe generally need staff of more than 20 people. In the case of the programme discussed in this study, given the relatively small number of contracts and homogenous types of investments required, only 5 people would be needed (see Table 2.6 and Table 2.7 in Chapter 2 for programme implementation costs).

In most instances, the institutional arrangement for large-scale (investment) programmes includes both a management (implementation) unit and a supervisory body. The implementation unit’s management and staff are responsible for the day-to-day project cycle activities (identification, selection, appraisal and monitoring of projects), development of the annual expenditure plan and budget, and monitoring and preparation of reports. The supervisory body usually focuses on taking strategic decisions and approving internal operating procedures and rules (including eligibility and appraisal criteria to guide project selection). This division of responsibilities provides a system of checks and balances and improves the accountability of the programme. The supervisory body retains the final decision-making authority to approve financing of the individual projects recommended by the implementation unit’s technical staff after the appraisal process (see Section 5.1). In the case of the CPT Programme, supervision will be performed by the programming entity (see below).

Outsourcing or contracting out is a further option if the government department does not have the capacities to fulfil its duties as an implementation unit. This allows an implementation unit to enter into a contract with an outside supplier for the provision of goods and services typically provided internally. If this option is chosen, good practice requires that outsourcing be conducted through competitive tendering.

To take one example, since 1993 the Austrian Federal Ministry for Sustainability and Tourism (BMNT)1 has delegated the management of the grant schemes for Austria’s Environmental and Water Management Fund to a private consulting company, Kommunalkredit Public Consulting (KPC) GmbH. KPC is also responsible for the Austrian Joint Implementation (JI)/Clean Development Mechanism (CDM) programme and serves as one of the four managers of the newly established Climate and Energy Fund. KPC manages more than 3 000 projects annually. Its role is to advise the ministry during the programme development phase and on the development of support programmes, as well as to provide technical, economic and legal assessment of support and consultancy projects. KPC also advises the decision-making bodies of these institutions – such as the BMNT in this case – on drafting contracts, monitoring project implementation and managing disbursements. Significantly, when the management of the Environmental and Water Management Fund was outsourced to KPC in 1993, its administrative costs were immediately reduced by more than half and have fallen since 2000 to only 20% of the 1993 cost.

Figure 4.1 presents the management scheme for the Austrian JI/CDM programme.

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Figure 4.1. Management scheme for the Austrian JI/CDM programme

Source: Provided to the OECD by Kommunalkredit Public Consulting

copy the linklink copied!4.2. A proposed institutional set-up for the CPT Programme

In preparing any public investment programme, the public financier needs to ensure that the essential individual elements of the programme are carefully designed and put in place before the programme is launched. This section summarises the main elements of the green public investment programme in Kyrgyzstan designed as part of this study, and explains how and why the project team arrived at the solutions proposed.

Effective programme implementation requires the following elements:

• stable and predictable sources of finance for the programme

• institutional arrangements to manage the programme expenditure, with sufficient resources, qualified staff and instruments to meet its objectives

• well-documented principles, rules and operating procedures for project cycle management (PCM)

• clearly defined and robust criteria for appraisal, selection and financing of investment projects

• clearly defined procurement rules.

To facilitate future implementation of the investment programme, this chapter and the next (Chapter 5) provide detailed information on the following arrangements:

• institutional arrangements comprising three levels: 1) programming entity (PE); 2) implementation unit (IU); and 3) a technical support unit (TSU) – see below

• PCM procedures, including eligibility criteria, project appraisal criteria, project-ranking procedures and financing rules (Chapter 5).

The institutional set-up needs to ensure that sufficient resources are allocated to meet the programme’s objectives, and that qualified staff and instruments to implement the programme are made available. In general, programming and project appraisal should be strictly separated. Programming is the responsibility of the programming entity in the government agency appointed to manage the investment programme. Project appraisal is a technical process conducted by competent technical staff recruited on a competitive merit basis and held responsible for their decisions. The implementation unit should be operationally and technically independent and shielded from political pressures by rules and procedures developed by the programme’s technical staff. It should also be a separate entity from the TSU.

copy the linklink copied!4.3. Fundamental operating regulations

The effective implementation of the programme requires that the implementation unit (IU) define and publicise its operational rules and regulations. At a minimum, the core elements of such rules should include:

• definitions

• general provisions

• definition of eligible projects

• rules for awarding grants

• rules for modifying or terminating a grant contract

• procedures for programme review.

The grant agreement should define in detail the following terms and conditions as a minimum:

• amount of grant award (as an absolute value or as a share of total project investment cost)

• start and end dates of the project to be financed, as well as planned environmental impacts

• date on which the grant, or its instalments, will be transferred to the recipient

• rights of the implementation unit to control the awarded grant as well as the method of recovering the grant if the project fails to meet its stated objectives

• grantee’s specific obligations arising under the contract with the programme implementation unit

• conditions under which the contract loses its force

• consequences of contract dissolution.

Typically, a project grant should not exceed 50% of the funds earmarked for the applicable type of project in the approved IU’s annual financial plan. This is to enable the leverage of resources from other sources and ensure the commitment of the recipients to implementing the project using their own resources.2

Under this particular programme, and given the nature of investments to be financed, it is proposed that the programme can be financed by the state budget within the medium-term expenditure framework (MTEF) process. Financial support should be provided in the form of grants and/or bank guarantees.

There are other procedural rules that need to be considered, for example:

• The grant may be transferred to the applicant all at once or in instalments (tranches).

• A portion of the grant may be transferred in advance (up to 20% of the total value of the project), if project start up is impossible without advance funding.

• The recipient of a grant advance should be required to return to the IU any interest income resulting from holding the grant in its bank account (or the amount could be deducted from future tranches).

• The dates for making grant transfers are determined by the IU, based on funds at its disposal and upon consideration of an applicant’s proposal, as presented in the application.

• Financial resources from the grant are transferred exclusively for the purpose of meeting the payments required by the grantee. The recipient should allow the IU full access to original invoices prepared by contractors or suppliers.

The OECD Handbook for Appraisal of Environmental Projects Financed from Public Funds includes a detailed discussion of all the rules that need to be considered in defining the procedures for the programme IU. It could be useful in further defining procedural rules for the CPT programme (OECD, 2007[1]).

copy the linklink copied!4.4. Promoting the programme

Promotion is essential for the success of the programme; this is the responsibility of the IU. The promotion package might include the following elements:

• sending programme information to local administrations and potential beneficiaries

• distributing programme rules to local administrations and potential beneficiaries

• maintaining the IU’s website with information on rules for awarding grants and application forms

• issuing press releases.

The costs of programme promotion should be included in the programme costs envelope.

copy the linklink copied!4.5. Eliminating policy distortions

Various regulatory barriers may complicate the implementation of even a well-designed investment programme. It is important that before a programme is developed and financed, the Government of Kyrgyzstan reviews the relevant regulatory basis and eliminates any barriers as much as possible. Combining such regulatory improvements with financial support from the state is more likely to lead to the modernisation of the bus fleet in Kyrgyzstan and result in significant reductions in air pollution and GHG emissions.

One of the biggest obstacles for implementing an investment programme in the public transport sector in Kyrgyzstan is the very limited creditworthiness of bus operators. There are several reasons for this, including weak pricing signals for new technologies and fuels (which ultimately favour the old type of buses), a fare system for urban public transport that does not cover the capital cost of new buses, and a tender system that favours short-term contracts and makes it difficult to invest in a new bus fleet.

These distorted policies are the reason why the bus operator market is fragmented, dominated by small companies that lack creditworthiness and that are not attractive to international financial institutions, such as the European Bank for Reconstruction and Development (EBRD). Eliminating these barriers is key for the success of the programme. However, not all of them have to be addressed at the same time and some are interchangeable. For example, a better fare system and long-term contracts will help to increase creditworthiness, but this can also be achieved through loan guarantees or a higher level of public support provided by the CPT Programme.

Some of the key actions needed to remove implementation barriers are presented below.

copy the linklink copied!4.6. Conclusions for the CPT Programme

While there are various institutional set-ups for managing the programme, this chapter has outlined the three most common public support arrangements for providing subsidies (in form of grants) – governmental units, environmental funds and credit lines.

The optimal institutional set-up for managing the resources of the investment programme should be selected only after all elements of the programme are clarified and consensus has been reached on its priorities. Subsequently, the government needs to ensure that resources, qualified staff and instruments are sufficient to implement the programme.

Regardless of the type of institutional set-up chosen, it should involve an institutional structure and procedures that promote environmental effectiveness, embody fiscal prudence, and use financial and human resources efficiently.

It is also advisable for larger (investment) programmes – such as the CPT Programme – to include a supervisory body to adopt strategic documents and take strategic decisions, as well as oversee the implementation capacity of management in terms of project selection, implementation and monitoring (project cycle management). Importantly, both the management and the supervisory body should be protected from political pressures through their operating rules and procedures.

The Government of Kyrgyzstan should also aim to eliminate the policy and regulatory barriers that could hamper the implementation of the CPT Programme. A reflection on other countries’ experience could provide an indicative checklist of measures and approaches to tackle these problems.