Programas Estratégicos del Plan de Manejo Ambiental PMA de la Finca el Paraíso

LITHUANIA: THE ENVIRONMENTAL INVESTMENT FUND

Zilvinas Martinkus

Director, Lithuanian Environmental Investment Fund

1. Background and Objectives

In Lithuania, as in all other Central and Eastern European countries, past and present neglect of the environment has created health risks for citizens, damage to nature and a significant economic challenge for the nation. As Lithuania transforms its political, social and economic systems there is a huge need for investments of many types in many sectors, including environmental protection. Recognising that the need for environmental investments greatly exceeds the resources available to finance such investments, the Lithuanian Ministry of Environmental Protection (MoE) established the “Lithuanian Environmental Investment Fund” to increase the financial resources available for environmental investment projects and to use those resources more effectively and efficiently in addressing the country’s environmental priorities. The Lithuanian Environmental Investment Fund (“LEIF” or the “Fund”), was officially registered in December, 1996 under the Law on Public Enterprises as a public non-profit enterprise.

The majority of environmental investments in Lithuania have been financed by resources allocated from the State Budget (e.g. through the Public Investment Programme); other finance sources have included loans and grants from foreign countries and international donor organisations, municipal funds and enterprises’ own resources. Today, most finance for environmental investments is spent on the construction of wastewater treatment plants and other municipal environmental infrastructure. However, the prevailing system for providing subsidies to municipal authorities has not been sufficient to ensure that the needed investments are implemented nor that the financial resources are used efficiently.

The LEIF was established to overcome some of these weaknesses in the environmental financing system. The Fund should accumulate financial resources which are additional to those traditionally available from the State and should provide financial incentives for waste minimisation and pollution prevention projects in both the public and private sectors. It is expected that the Fund will principally finance projects with soft loans. Hence, the Fund is envisioned as functioning to a large degree as a “revolving” fund. The Fund is also seen as a mechanism for facilitating greater involvement of the private sector in the financing of environmental protection in the country. In addition to providing soft loan finance for investment projects, the Fund is also able to provide grant support for activities such as protection of biodiversity, environmental education, and environmental monitoring and research. At this time, however, it is envisioned that such activities will be financed only from domestic sources of revenues to the LEIF.

In pursuit of its goals the Fund can engage in the following range of activities:

• issuance of loans on favourable terms (with low or no interest rates), loan guarantees and interest subsidies on commercial loans for environmental investment projects;

• provision of grants for environmentally beneficial activities and projects; • preparation and evaluation of investment project proposals;

• participation in international investment funds/schemes;

• organisation of conferences, seminars, meetings and workshops;

• other activities helping to achieve the goals of the Fund which are in accordance with Lithuanian laws and the Fund’s Statute.

In July 1998 a Financing Agreement was signed between the MoE and the LEIF stipulating:

• conditions on the use of the capital grant committed to the Fund by the EU’s Phare Programme; • requirements for the Fund’s operational manual and accounting procedures;

• the need for the Fund to be sustainable and, to the extent possible, to revolve;

• the appointment of a Supervisory Board to consider and approve the provision of loans and to provide the Fund with a substantial degree of independence from the MoE;

• other requirements brought forward by both parties to the Agreement. This Financing Agreement has been approved by the Phare Programme. The Fund’s Supervisory Board contains representatives of:

• MoE (the Vice Minister, the Secretary of the MoE, Director of the Environmental Strategy Department and Director of the Environmental Quality Department);

• Ministry of Finance; • Ministry of Economy;

• Association of Lithuanian Municipalities; • Lithuanian Green Movement;

• Lithuanian Tradesmen’s and Employer’s Association; • Lithuanian Confederation of Industry;

• Advisory Board to the MoE.

Members of the Board are appointed by the Minister of Environment. The major tasks of the Supervisory Board include: approval of action plans and lists of priority projects which contribute to implementation of the National Environmental Strategy; establishment of principles and criteria for the appraisal and selection of project proposals; deciding which projects receive financial support from the Fund, what sort of support those projects receive (e.g. loan or grant) and the conditions of such support; approval of annual reports on the Fund’s operations submitted by the Fund’s Director.

The Fund is managed by a Director (appointed in March 1997) and a staff of 5-7 people. The organisational structure of the LEIF is depicted at the end of this chapter in Figure 7.1. The day-to- day activities of the Fund can be divided into two areas:

• technical - appraisal of the environmental and technical aspects of project applications;

• financial – appraisal of the economic and financial aspects of project applications, structuring financial agreements with successful applicants, disbursement, monitoring of long term loans, as well as maintaining the Fund’s financial accounts.

It is envisioned that the Fund will contract the services of a commercial bank to help it carry out certain financial activities, including the financial evaluation, provision and administration of soft loans. In the case of loans, collaboration with a commercial bank may involve an agreement under which financial risks are shared.

3. Revenues

The EU committed to support the establishment of the LEIF with start-up capital of EUR 2.148 million. A high priority has been placed on maintaining the value of the EU’s contribution, thus it is expected that these resources will be disbursed only as soft loans which will eventually be repaid to the Fund. The Fund’s domestic revenues are expected to be generated largely by pollution charges. The Parliament has very recently approved new legislation prepared by the MoE on pollution charges and waste management which directs 20% of the revenues be allocated to the Fund (in 1997, 20% of

MoE to the Fund (MoE’s preference), or through the National Budget to the Fund, upon annual approval of the Parliament.

The new law also involves other changes to improve the effectiveness of Lithuania’s environmental charge system. It has been recommended to change the list of regulated pollutants by decreasing their number and grouping them into toxicity categories. Charge rates should also be modified to better meet environmental protection objectives. In addition, the creation of new sources of revenues (e.g., product charges) is being considered.

4. Spending Strategy

At the end of each year, the Supervisory Board establishes spending priorities for the coming year based on the environmental priorities established by the MoE and elaborated in the Lithuanian National Environmental Strategy. The following priorities are defined in the Strategy:

• reduction of air emissions;

• protection of surface and ground water;

• improvement of household and hazardous waste management; • clean-up of polluted areas, including former military sites; • biodiversity protection and improvement of land-use planning.

5. Expenditures

The Fund is expected to begin disbursing financial support for projects from May 1999. Domestically registered public and private (small and medium sized) enterprises can apply for funding for projects which demonstrate a clear environmental benefit. Initially, the Fund will only provide financing for capital investments (e.g., the purchase of equipment, expansion and/or modernisation of facilities, etc.).

Interest rates on loans offered by the Fund will be determined on a case-by-case basis, taking into account the financial risks and other factors. It is anticipated that the Fund’s interest rates will fall within the range of 4 % to 11 % per annum (interest rates in the banking sector at the beginning of 1999 varied from 9 % to 15 % p.a.). The Fund’s interest rates will be fixed (i.e. will not change during the term of the loan). As a general rule, loan repayment periods will be up to 5 years. A grace period of up to 2 years can be granted before principal payment begins, based upon the individual cashflow condition of the borrower. Interest payments, however, will continue to accrue during the grace period. Loans extended by the Fund will not exceed 80% of total project costs. In general, the maximum loan amount will be 1,500,000 Lt. (~ 380 000 USD).

Grants cannot exceed 40% of total project costs. The maximum value for any grant will be set each year by the Supervisory Board. The aggregate value of grants awarded by the Fund in a given year cannot be more than 30% of the Fund’s income in the previous year.

6. Funding Cycle

Considering that the Fund is expected, at least in its first years of operation, to principally provide soft loan finance, the funding cycle for loan applications is summarised here. The Fund may receive, and will consider, applications for loans from any source. Eligible Loan applications shall be evaluated according to four criteria:

• the environmental impact of the proposed investment in the target areas identified above; • the technical soundness of the proposed investment;

• the financial viability of the project proposal and the borrower.

The financial appraisal of loan applications includes an assessment of cashflow and debt service coverage of the project.

The appraisal process consists of three main stages:

Stage One: Eligibility Screening

Involves an initial screening of applications to ensure that the applicant is eligible according to the Fund’s eligibility criteria, the application meets the lending conditions and the proposed project is feasible and worthy of technical appraisal. Applications which pass this stage of screening pass on to stage two for technical appraisal.

Stage Two: Technical Appraisal

Involves an initial technical analysis of all proposals which passed stage one and development of a “short-list” of proposals; this is followed by a detailed evaluation of short-listed applications. The detailed evaluation will focus on: (i) technology assessment; (ii) environmental impact; and, (iii) state of preparedness of projects.

Stage Three: Financial Appraisal and Final Lending Decision

Involves appraisal of the financial viability of the proposal, credit-worthiness of the borrower as well as cashflow and debt service assessment.

In March 1999 the EU Phare Programme transferred the first tranche of its capital grant of EUR one million. Through spring 1999 the LEIF committed 1.5 million litas (about EUR 350.000) to be disbursed as soft loans to finance two investment projects in the air pollution prevention sector.

Figure 7.1: Organisational Chart of the Lithuanian Environmental Investment Fund.

Founder

Supervisory Board

Chairman, Deputy, 9 members

Association of Municipalities Advisory Board to MoEP Ministry of Env. Protection Ministry of Finance Ministry of Economy Lithuanian Industry Confederation Other NGO’s

Fund Management