Environment in emerging and transition economies

Local Investment Capacity


Strengthening Local Governments’ Capacity to Invest in Environmentally-Related Infrastructure

Most EECCA countries have engaged in a systematic devolution of responsibilities for the construction and maintenance of urban environmental infrastructure to sub-sovereign levels of government. As owners of the communal service infrastructure, municipalities are responsible for its rehabilitation, modernisation, and development. Now, devolution of responsibilities needs to be matched by ensuring access to the financial resources needed to implement the new mandates devolved to local and regional jurisdictions. 

As EECCA municipalities are still largely dependant on fiscal transfers from central or regional budgets, they often have to coordinate their infrastructure development plans and capital expenditure budgets with national/regional plans and budgets. This makes strategic planning and investment at local level dependant on the policies at the national/regional level, and generates a risk that local investment plans will not be implemented due to budgetary constraints at other levels of government. In this context, the EAP Task Force has engaged in two lines of activities:

1. It has reviewed the mechanisms of intergovernmental transfers in selected EECCA countries (Armenia, the Russian federation, Ukraine), and drawn lessons on how to design such transfers to better fit the needs of environmental infrastructures. The recommendations (forthcoming) extensively draw upon the experience of OECD in improving the performance and control of sub national public expenditures, and in creating incentives for better coherence between national and local public policies.

2. It has tried to promote multiyear investment planning in EECCA municipalities. The EAP Task Force projects in Ekaterinburg (Russia) and Lutsk (Ukraine) have demonstrated the value of multi-year investment plans (MYIPs) for municipal infrastructure. Such plans could enhance the effectiveness of expenditures and the creditworthiness of municipalities by rationalising the management of local capital and operational budgets. The lessons learnt from these demonstration projects have led to the development of a toolkit for multi-year investment planning in municipalities, which consists of guidelines, instructions, software applications, templates of documents and administrative procedures.

Although many EECCA have prepared national/regional environmental action plans and some of them even financing strategies, the link between these plans and municipal budget planning, especially with regard to investments, remains weak. Good financial management is key in any municipal investment in EECCA, where financial resources in municipal budgets are very limited, and very small expenditures are allocated to investments. Reforming financial management in EECCA municipalities needs to involve regulatory, institutional and psychological changes on both the revenue and expenditure management side of municipal finance.

The overall objective of the project is to help strengthen the investment and borrowing capacity of local governments in EECCA by introducing more rational long-term programming of capital investments in municipal and environmental infrastructure. In addition, this project will focus on further regional dissemination, training and capacity building in the Western EECCA countries and Central Asia based on tools developed in the previous work programme, such as the toolkit for multi-year investment planning in municipalities.

Environment Ministers at the Fifth “Environment for Europe” Ministerial Conference in Kiev, Ukraine (May 2003) noted that more efforts were particularly needed to strengthen local finance and investment capacity by improving fiscal arrangements with higher levels of government, better budget management and multi-year investment plans in municipalities. In this context, the new 2004-2006 EAP Task Force Work Programme on Environmental Finance envisages several major activities, namely:

Short descriptions of the above activities, including specific tasks, outputs and benefits are attached. For more information on strengthening local governments’ capacity to invest in environmentally-related infrastructure, please contact Xavier LEFLAIVE at