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 2007-2013

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

130-150 million* per year, which is twice 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 (2007-13) – EUR 3.2

billion/EUR 460 million per year

• Municipal funding needs – 36% or EUR 1 152 million

(co-funding, bridge financing + VAT) – both from

own-source revenue and borrowing

• Number of local governments – 264

• Size of average municipality – 30 000 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 sourcesIn EUR millionSource Amount

Equity 30

EBRD Loan 70

Total 100

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 developme

nt

Municipal CouncilThe 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 BankAssesses 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 - 2Managing

Bank

FLAGAssesses 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).

MonitoringThe 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

2009-2011

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.1111 Sofia, Bulgaria

Tel.: +359 2 943 4467

Fax: +359 2 943 4431

www.namrb.org

NATIONAL ASSOCIATION OF MUNICIPALITIES

IN THE REPUBLIC OF BULGARIA