Chapter 1: Regional Overview

1.1 Overview of the Environmental Market

Political and Economic Situation

Most of the countries are still struggling with economic turmoil caused by the loss of markets after the break-up of the Council for Mutual Economic Assistance (CMEA). After the split, member countries had to reorganize economic agreements, identify new markets and restructure their major industries.

Industrial production immediately began falling and overall was hit the hardest. The decline in production in Croatia and Slovenia stopped only recently, and output is still below the 1990 level. The economic situation in Romania and Bulgaria is much more severe, mainly due to the weak financial institutions and the collapse of the banking system, especially in Bulgaria. These countries are slowly recovering, but they are far behind original expectations. However, aside from Croatia, where mass privatization is about to begin, the sell-off of government-owned industry has proceeded at a rapid pace and should be completed in the next few years.

During the first phase of economic reforms, environmental concerns received a low priority. Now, as the countries move forward in their transition to market economies, private investment is expected to increase significantly and bring with it an increase in environmental investments.

Environmental Expenditures

It is important to note, however, that the calculation of environmental expenditure as a percentage of GDP is complicated, and the use of such an indicator to assess a country's "environmental commitment" must be qualified. Governments use different definitions for environmental expenditures. Some types of expenditures included in such calculations may have only marginal environmental benefits, while others might be considered more environment-unfriendly than beneficial. Either way, the figures presented in Table 1.1 reflect the most optimistic current status of environmental expenditures.

There is already a huge demand for investments in many sectors within the countries, not just the environmental sector. One of the most pressing problems for those active in environmental protection in Central and Eastern Europe is securing the necessary financing for environmental projects. In general, there are six sources of environmental funding:

• state, regional and municipal budgets;
• extra-budgetary funds (state environmental protection funds, "ecofunds" or other earmarked funds);
• environmental investments of commercial enterprises, both private and state-owned;
• commercial credit, both domestic and foreign;
• foreign environmental investments;
• assistance programs and donations from abroad (bilateral cooperation agreements, PHARE Programme, etc.).

At the moment, almost 90 percent of the environmental funding comes from the first three sources. However, governments of the surveyed countries plan to decrease their spending in the coming years. As state funding declines, environmental expenditures from local governments and environmental funds will become more important. Furthermore, the role of polluting industries is expected to increase significantly as the "polluter pays principle" becomes fully implemented in the countries.

Most of the current state financing is used for the construction of wastewater treatment and sewage facilities, as well as for the construction of public water supply networks. Funding for air protection and waste management projects is mainly provided by international assistance programs (particularly in the energy sector), private enterprises and municipalities.

In conclusion, the low public and political support for environmental protection and the weak financial footing of governments, municipalities and industries are probably the most significant obstacles to increasing environmental spending. Unstable macroeconomic conditions, an uncertain regulatory environment and weak economic and regulatory incentives further impede environmental protection activities.

State Environmental Funds

Although the funds are common in the region, only two of the four surveyed countries operate environmental protection funds. Bulgarian legislators established the National Environmental Protection Fund with the Environmental Protection Act of 1991. Two years later, Slovenia's government created the Environmental Development Fund (called EcoFund) after passing its own Environmental Protection Act. Croatia and Romania do not currently operate such funds. The Romanian government has been discussing the establishment of an environmental fund since 1995, but a decision has still not been made. Table 1.2 shows the breakdown of spending by the Bulgarian and Slovenian environmental funds in 1996. As shown in the table, the largest portion of the fund expenditures in Bulgaria was allocated to water-related projects, followed by investments in the national monitoring and information system and in air protection-related activities. In Slovenia, the bulk of the fund's expenditure was allocated to air pollution control projects, followed by water-related projects and waste management programs.

Legislation and Enforcement

Each of the surveyed countries has put in place its own general environmental act together with various pieces of specific environmental legislation (e.g. regulations related to air, water and waste management). Bulgaria introduced its Environmental Protection Act in 1991, followed by Slovenia's Environmental Protection Act in 1993. Croatia and Romania implemented their Environmental Protection Acts in 1994 and 1995 respectively. These environmental acts and their amendments force the countries to adopt basic principles such as the requirement for polluters to pay, the focus on prevention and precautionary measure, free access to environmental information and public participation in environmental decisionmaking. Although the regulatory systems are still undergoing changes (mainly related to enacting specific pieces of waste legislation), the level of enforcement is inconsistent in all the countries. The responsible authorities (e.g. the environmental inspectorates) are often understaffed or do not have the necessary equipment and training to carry out their duties as required.

Three of the surveyed countries - Bulgaria, Romania and Slovenia - have signed association agreements with the European Union to seek full membership in the near future. As part of the integration process these countries must harmonize their environmental laws and policies with EU legislation. Formal approximation will involve the adoption of more than 200 environmental laws. In most cases, stricter environmental legislation and enforcement can be expected in these countries as well as new standards which will benefit the environmental business sector.

• The rate of compliance with waste management regulations, which averages 21 percent in the three associate countries, is generally lower than compliance with all other environmental regulations and must be improved.
• Regulations regarding chemical, industrial risks and biotechnology are also underdeveloped, with an average compliance level of 27 percent.
• Regulations regarding noise emissions reach on average 39 percent compliance.
• Air quality regulations showed an average compliance level of 43 percent. It should be noted that emission regulations for motor vehicles are generally well-developed in Bulgaria and Slovenia. However, major changes are still needed regarding regulations related to air pollution from stationary sources.

The main policy instrument currently applied to industries is the permit system, including pollution charges and fines for non-compliance. The charges and fines collected are most often earmarked for environmental purposes and administered through the national environmental protection funds when applicable. In general, companies pay pollution charges for regulated substances they emit into the air and/or water, for natural resources they extract and for waste disposal. Fines are collected when a polluter exceeds emissions standards set forth in their operating permits. One problem, though, is that the pollution charges and fines are often too low and do not fulfill the function of correcting the polluting behavior. Charges and fines are generally so low that it is cheaper for polluting industries to continue paying them than to is for them to make investments that would reduce or eliminate emissions. Enforcement of environmental regulations remains the most critical issue in environmental protection activities within these countries.

In addition, a number of economic and regulatory incentives which should encourage environmental expenditures are often not as effective as expected. For example, energy is still subsidized in most of the countries, which encourages inefficient and wasteful use of natural resources. In particular, this hinders environmental investments in energy efficient technologies that would contribute to less consumption and pollution emissions under "normal" market conditions.

Environmental Administration

Also, local authorities are receiving an increasing amount of responsibility, particularly related to waste management, water supply and water treatment. Except for Slovenia, where regional responsibilities are covered by local authorities or the Ministry of Environment, the countries have established three levels of environmental administration:

• national level (e.g. Ministry of Environment, State Directorate for Environmental Protection or other ministries with environmental related duties);
• regional level (e.g. environmental department of regional authorities, inspection bodies, water management authorities, etc.); and
• municipal level, overseen by local authorities.

Environmental ministries are usually in charge of determining the national environmental policy and of implementing specific environmental programs. For example, in Slovenia the Ministry of Environment's responsibilities include a wide range of tasks: environmental and nature protection; water and waste management; geological, seismological, meteorological and other geophysical monitoring; land development; physical planning; nuclear safety; and survey and mapping responsibilities.

The regional environmental authorities are in most cases in charge of regional policy development, issuing environmental permits, imposing penalties and developing local standards. The environmental inspectorate conducts site visits to assess compliance with the law and retains the right to stop any production process which violates environmental regulations.

Physical planning and construction permits are generally issued by the municipalities, which are increasingly responsible for waste management, wastewater treatment (including operating the system) and calculating and collecting charges.

Free access to environmental information is guaranteed by law, but in practice ensuring this openness is extremely difficult. Governments collect information, such as records of compliance, environmental monitoring and discharge monitoring. However, most of the data are not published or announced publicly. The main information sources for obtaining environmental information are generally the State of Environment reports and bulletins published by the ministries of environment. The quality of information varies significantly from country to country. In addition, national statistical offices process and disseminate environmental information.

Environmental Priorities

According to the statistical yearbooks of the surveyed countries, Bulgaria devoted the largest portion of its environmental expenditure (34 percent) to water and wastewater projects while Romania and Slovenia devoted their largest shares (41 percent and 71 percent respectively) to air pollution programs. The complete breakdown is shown in Table 1.4.