The proposed project will support the Government in establishing a funding vehicle to facilitate the identification, development and implementation of local infrastructure projects. The types of project to be supported include local water utilities, waste management, municipal building and local road rehabilitation. The project will focus on developing environmental and revenue generating projects.
The source of transition impact are:
Demonstration effects from new forms of infrastructure finance
The FLAG funding vehicle is expected to have demonstration effects in terms of its governance mechanisms and project eligibility criteria for other new EU member states, but also for other future initiatives or programs involving the management of infrastructure public expenditure programmes. By creating a structured financing vehicle in the municipal sector focusing on small and medium-sized municipalities, the project will encourage banks and other institutions to analyse the potential for similar pooled financings from their existing and future portfolios or to enter the municipal finance market directly.
Private sector participation and commercialisation of infrastructure service delivery
The project will facilitate the participation of the private sector in the finance, building and provision of infrastructure services: (i) by involving private commercial banks in both the management of the Fund and in co-financing infrastructure projects; (ii) through the involvement of private companies in the construction of infrastructure or in the provision of services, which, depending on the service, might involve private sector operators; and (iii) by providing finance for revenue-generating projects with associated programmes for cost-recovery and commercialisation at the level of each municipality and public utility.
The client is the Bulgarian Fund for Local Authorities and Governments (“FLAG”). It is registered as a joint stock company fully-owned by the Government which provided EUR 30 million for its share capital.
The Bank provided a EUR 35 million senior loan to FLAG in 2008. In 2013, it is contemplating another EUR 35 million, which will also be syndicated with commercial banks.
FLAG provides co-financing to municipalities utilising EU grants to co-finance infrastructure projects, including sub-loans for project preparation. It is expected that most of these projects will be for financing infrastructure projects including energy efficiency, municipal infrastructure, road refurbishment, and water and wastewater investments. Since its start up, FLAG has contributed to a successful process of absorption of funds provided under the following OP’s: the European Regional Development Fund, the European Social Fund and the Cohesion Fund by providing both bridge and long term financing. FLAG’s management estimates that in the 2013-2015 period the demand for bridge loans and long-term investment loans related to EU-financed projects will be BGN 669 million (EUR 347 million) and BGN 131 million (EUR 67 million) respectively.
There are no environmental issues directly associated with the proposed special purpose vehicle. However, it would be instrumental for selected municipalities to meet national and EU environmental standards.
An Environmental Checklist has been developed to assist FLAG with an environmental appraisal of all projects. As part of its due diligence, FLAG checks all relevant documents related to social and environmental issues, including horizontal issues, such as equal access of beneficiaries and target groups, contribution to social inclusion by participating municipalities/companies, risk prevention as well as the impact on the environment. To date, FLAG has not received any reports on a breach of environmental or safe working conditions for the projects it has financed. Finally, the EBRD existing loan agreement includes an environmental checklist and representations on compliance with all relevant environmental, health and safety regulations and standards. This practice will be continued under the second loan.
TC is expected to be provided by Technical Cooperation funds available from the European Commission to the Bulgarian Government for project development and implementation.
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