The EBRD and The New Europe: MEI

By Volker Ahlemeyer

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Metropolitan trains

Decades of a command economy left their mark on the countries of central and eastern Europe. After the fall of the Iron Curtain, the consequences of persistent under-investment in municipal and environmental infrastructure quickly became apparent.

While the idea of free municipal water or transport services may sound appealing, it is less desirable when in reality the result is derelict infrastructure and inefficient, unreliable services due to wastefulness and lack of resources.

Well-functioning municipal services require planning and investment. For example, to guarantee the supply of drinking water, you need a well-maintained network of pipes; inadequate wastewater treatment can pollute the ground water and cause a serious risk to public health; a poorly managed urban transport system causes traffic congestion and higher CO2 emissions.

“The challenges were immense and the investment needs huge,” explained Thomas Maier, EBRD Managing Director for Infrastructure. “Efficient, customer-oriented and environmentally friendly municipal services are vital to boost private sector activity and support local economic growth. They also have a huge impact on people’s quality of life.”

As these services are targeted at the local level, the EBRD’s first step was to support decentralised decision-making and give more responsibility to municipal entities. Once a restructured institutional framework was in place, the Bank could lend to municipalities and later public utilities, even without recourse to a public entity.

“There are various ways to support efficient municipal services,” said Jean-Patrick Marquet, EBRD Director for Municipal and Environmental Infrastructure. “The main goal is to commercialise the sector to ensure its sustainability. This can be done through reform and capacity building within the public sector or via adequate private sector participation. Whatever the chosen mechanism, transparency, accountability and the monitoring of performance targets are key.”

The EBRD has used a wide range of financial products to support this goal, including loans, equity investments and infrastructure bonds, along with extensive technical assistance generously funded by donors.

At the same time, the Bank has continued its policy dialogue with local authorities to foster regulatory and tariff reforms, and, as experience has shown, it takes a sustained effort over time for these reforms to truly take hold.

Since the early 1990s, the Bank’s investments have been instrumental in replacing old, inefficient bus, trolleybus and tram fleets across the EU8, the countries that joined the EU in 2004: Poland, Latvia, Lithuania, Estonia, the Czech and Slovak Republics, Hungary and Slovenia.

Gdansk, Kaunas, Krakow and Warsaw are just a few of the major cities in the region where run-down, energy-inefficient vehicles have been taken off the road thanks to the EBRD.

Further projects followed that promoted integrated urban transport networks and electronic ticketing systems. In Budapest, for example, the EBRD supported the establishment of an automated fare collection system for public transport users last year. The project includes a design-build-operate-maintain contract, which forms the basis for a long-term, performance-based partnership between the city and a private operator.

“The urban transport sector can serve as a good example of how the EBRD’s activities have developed over time and helped to improve people’s quality of life,” said Matthew Jordan-Tank, Head of the Bank’s Infrastructure Policy Unit.

“This started with investments in the physical infrastructure and continued with more innovative and integrated approaches. At the same time, the Bank encouraged tariff reform and cost recovery for municipal services.”

The same approach applies to the Bank’s water and wastewater projects. For example, an EBRD investment helped modernise the sewerage system in Slovenia’s second largest city, Maribor, where wastewater used to be discharged untreated into the Drava River.

In the Czech Republic, the Bank successfully invested in a new treatment plant in Brno, which now provides the citizens with better water services and protects the river Danube from pollution. In Poland, the EBRD was an anchor investor for an infrastructure bond issued by the Bydgoszcz water company.

Over more than 20 years the Bank has invested almost €1 billion in 64 projects in central Europe and the Baltic states, approximately 40 per cent of which are in water and wastewater, 30 per cent in urban transport, 20 per cent in district heating and the remaining 10 per cent in solid waste and other municipal services.

“Thanks to the progress over the last 25 years, the remaining transition gaps are relatively limited for these municipal services in central Europe and the Baltic states when compared with other countries where we invest,” said Mr Marquet. “But there are still challenges, especially when it comes to fostering a more environmentally sustainable infrastructure.”

Green urban transport, energy efficient buildings, “waste to energy” – these are but a few examples of how to make the sector more sustainable, while acting as a model for other investments in the region and beyond.

In this regard the EBRD is again a frontrunner. A recent loan to Warsaw Metro will help the company expand its network and finance 35 new energy efficient trains. They consume about a third less energy than existing trains and are expected to reduce CO2 emissions by almost 50,000 tonnes a year, while providing a true alternative to private car travel.

Many future business opportunities are related to energy efficiency – the main area of business for energy savings companies. These so-called ESCOs design, finance and construct energy-saving projects. The proposed measures are provided at no cost to municipal beneficiaries, as the ESCOs recover their investments through the achieved energy cost saving. So there is potential for the Bank and other investors to help finance improvements in municipalities’ building stock or other areas by supporting these companies.

A quarter of a century after the fall of the Iron Curtain, the EBRD continues to support improvements in municipal and environmental infrastructure to tackle the remaining challenges in the sector and support a sustainable environment for future generations.

 
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