National financing tools for local environmental infrastructure Emil Savov Deputy Executive Director National Association of Municipalities in Bulgaria

Enterprise for environmental management Created in 2002 by the state Assists local governments, hospitals, utility companies, business Provides grants and interest-free loans Priority areas - water management - waste management - biodiversity and ecosystems preservation

Enterprise for environmental management Total revenue in 2010 – EUR 43 million Revenue structure Nationally imposed eco fees – on envelopes, tires, batteries, cars, used motor oil etc. Fines defined in 8 laws – on water, protected areas, waste management, subsurface resources etc. State grant

Enterprise for environmental management In 2010 PUDOS provided: EUR 36 mil as grants for investment projects EUR 1.1 mil as interest-free loans Intervention areas Water and sewer management Waste management Air monitoring an management Biodiversity Public awareness

EU membership challenges Available EU resources for municipal investments – EUR 3.2 billion for the period National and sub-national co-funding – 15-20% of project costs Municipal co-financing needs - matching funds required at the municipal level is estimated on the order of about EUR million* per year, which is t wice the level of the total municipal investments in 2006

Creating a Matching Fund for EU Investment Grants Key issues to be considered How much of municipality’s own source revenues should be able to contribute? How much debt the municipality should be able to raise? How much the project can produce in direct cost recovery through user charges? Impact of the fiscal decentralization policy

Funding needs Available funding for municipal investments under the three Operational programs ( ) – EUR 3.2 billion/EUR 460 million per year Municipal funding needs – 36% or EUR million (co- funding, bridge financing + VAT) – both from own-source revenue and borrowing

Number of local governments – 264 Size of average municipality – citizens (largest – 1.2 million; smallest – 1 440) The total municipal Net Operating Surplus is concentrated in 28% of the local governments 40 local governments can borrow freely at the credit market (in 2008, before the world economic crisis) FLAG lends to municipalities having limited creditworthiness or small size which prevents the access to the credit market

Municipal projects’ characteristics Energy efficiency in public buildings – schools, social care homes, libraries etc. Water and sewer systems upgrade Waste water treatment plants Regional garbage collection and disposal systems Renewal of cities’ open spaces – parks, civic centers etc.

FLAG was established by the Government in 2007 as a commercial joint- stock company/non-banking financial institution registered at the Bulgarian National Bank The fund represents a financial instrument of the central government policy for local and regional development. Objective - to provide financial assistance to municipalities in the process of developing and implementing viable investment projects funded by the EU Structural Funds, Cohesion Fund, and European Agriculture Fund for Rural Development Fund for Local Governments and Authorities - FLAG

Fund for Local Governments and Authorities - FLAG Funding sources In EUR million SourceAmount Equity30 EBRD Loan70 Total100

Fund for Local Governments and Authorities - FLAG Types of loans Project development (small loans of EUR 50,000 – 500,000 for project preparation: feasibility studies, technical design, etc.) Bridge financing – fills the gap between payments to construction/suppliers until the reimbursement of the costs from EU Fund Authority; and Municipal co-financing – (5-50% of the investment, depending on the co-financing requirement) as well as financing ineligible costs such as VAT.

Fund for Local Governments and Authorities - FLAG Partnerships Managing Bank - assists FLAG in the lending process; Managing Authorities of OP – overall supervision of the municipal investment projects for compliance with the financial, procurement and monitoring rules; EBRD – provides long-term financing for FLAG’s lending process; assists the development and implementation of FLAG’s policies.

Lending process Project development Municipal Council The municipal council approves the borrowing by setting the loan upper limit, interest rate and fees, type of currency, maturity and repayment schedule/sources. The mayor submits the loan application form to FLAG through the Managing bank. Managing Bank Assesses the application form and the supporting documents. The bank assesses the credit history of the borrower, its financial situation for the last three years and its creditworthiness related to the project to be financed. As a result the bank develops a proposal for approval/rejection of the loan application and sets a proposed risk component. Investment project

Lending process - 2 Managing Bank FLAG Assesses the loan application according eligibility vis-à-vis the respective Operational Program, project costs analysis and the project management capacity. The Board of Directors approves the loan and its terms. Loan Agreement A tri-party loan agreement is signed (between FLAG, the Managing Bank and the borrower). Monitoring The Managing bank monitors the execution of the loan. FLAG and the Managing bank oversee the procurement process and the project implementation.

Fund for Local Governments and Authorities - FLAG Main Results The lending process started in January 2009 Loan contracts: 170 contracts for EUR 90 million, supporting the implementation of municipal investments projects of EUR 250 million Average loan size – EUR 0.5 million Average maturity – 13 months

Fund for Local Governments and Authorities - FLAG Offsetting the borrowing costs Objective: to offset the borrowing costs of resource- poor municipalities Source: earmarked transfer from state budget for Amount – EUR 2 million per year Access criteria – based on 3 indicators: net operating surplus; available local resources for debt repayment per capita and share of municipal own revenues in the municipal budget Offsetting levels: 0-90% of the borrowing costs

Contacts Address: 23 Golash Str Sofia, Bulgaria Tel.: Fax: NATIONAL ASSOCIATION OF MUNICIPALITIES IN THE REPUBLIC OF BULGARIA