Municipal and environmental infrastructure policy

A country's ability to provide efficient infrastructure and services at local level is an important contributor to private sector development. Environmental improvements and remediation at local level make industrial and commercial growth sustainable. Local infrastructure and service improvements enhance the quality of life for residents and makes them more willing participants in a democratic society and support a workforce that is better equipped to dealing with the challenges of economic transition. Finally, the linkage between local fiscal and political accountability promotes and deepens democratic principles and promotes a sense of ownership within civil society.

Within this context, the core objective of the Bank's MEI operations is to promote greater efficiency and higher quality in the provision of local authority services through investment and the promotion of independent, well-managed and financially sustainable operations provided on commercial principles and in a market-oriented institutional and regulatory framework.

The EBRD's approach is strongly supportive of transition towards decentralisation of service responsibilities to local or regional levels; commercialisation of the operating companies providing local services; and environmental improvement as a consequence of investments that conserve environmental resources and reduce pollution.

Decentralisation

Decentralisation is a key element in improving the quality and cost efficiency of local infrastructure and services. Experience has shown that, by placing responsibility closer to the point of delivery in the context of a democratic system, decentralisation provides a motivation for the public sector to be responsive to the needs of their constituents. At the same time, to the degree that decentralisation leads to costs being borne at the local level, the public sector is encouraged to be rational in its choice of investments and to implement efficiencies in their operations. In this context, economies of scale in service delivery and managerial responsibilities may occasionally lead to regional concentration in the provision of local services.

Effective decentralisation is associated with:

• Clear and predictable sources of local government revenue and clear rules governing tax sharing and transfer payment arrangements between national governments and local authorities;
• Control of local government borrowing through disclosure, reporting and statutory limits rather than ad hoc political decisions;
• Improved corporate governance of local operating companies allowing commercialisation of the provision of local services;
• Independent regulatory arrangements governing the setting of tariffs and commensurate quality of service standards.

Commercialisation

Commercialisation means that local government focuses on ensuring good quality services as cost effectively as possible through the use of more effective public sector management, competitive or regulatory pressure and the use of private sector participation (PSP) where appropriate and feasible, subjecting the affected entities (whether local government or service utilities) to the incentives and disciplines of the market. This involves changes to internal organisations and management approaches to enable the entities to respond to these new conditions.

Commercialisation is associated with:

• Making rational investment choices where resources are limited by hard budget constraints
• Employing cost recovery approaches to maximise user based revenues to the extent possible and within affordability constraints
• Ensuring managerial independence while holding utility managers accountable for delivering an acceptable quality of service
• Transparency and competition in the procurement of goods and services to ensure good value for money and to avoid opaque practices and corruption
• Promoting appropriate regulatory supervision by contract or otherwise whenever business activities are not subject to competitive pressure, in order to protect consumer interest and stimulate efficient provision of services
• Facilitating efficient PSP through an adequate range of options, including management contracts, concessions, outsourcing, “Build, Operate, Transfer” (BOT) contracts and privatisation.

Environmental Improvement

The Bank’s projects in the MEI sector have a direct positive impact on the environment by:

• Achievement of environmental standards that are in line with best international practice, in compliance with European Union (EU) directives
• Appropriate pricing of environmental goods encouraging conservation
• Higher quality infrastructure and technology which reduce losses, energy use and pollutants together with sustainable institutional structures for meeting, maintaining and enforcing higher environmental standards.