Environment in emerging and transition economies

Local Credit Markets


Facilitating Access of Environmental Projects to Local Capital and Financial Markets

More than a decade of neglecting the maintenance of environmental and water infrastructure has led to the accumulation of significant needs of capital investments. Operational revenues of water utilities (e.g. from user fees) will not be able to contribute much to meeting these needs, as users can hardly afford paying for operation and maintenance alone. Public budgets will continue to play an important role in financing investments, social safety nets and in facilitating access to credit. However, budgets are stretched by necessary fiscal consolidation and will face expenditure constraints for several years to come. Private sector utility operators can contribute to management and operation of utilities rather than to equity financing of capital investments.

Until recently, the local financial sector and local capital markets, knocked down by the 1998 Russian financial crisis, have been unable to provide debt financing adequate to infrastructure investments. Important constraints on the demand side also continue to undermine the willingness of municipalities and utility operators to use debt to finance investments. However, several signals seem to indicate that the investment climate in this sector is improving and the capital and financial markets start showing signs of maturity. Opportunities for using local currency debt to finance local infrastructure investments are emerging, in particular in the largest and/or strongest economies in the region – Russia, Ukraine and Kazakhstan.

Since 1998, some EECCA countries have made significant progress in strengthening their banking sectors. The credit rating of several municipalities has also increased. Credit and bond markets are beginning to offer new opportunities for substantial debt financing of environmental projects. More information and facilitation is needed to accelerate these positive developments and harness opportunities for water and environmental infrastructure.

In this context, as part of its new 2004-2006 Work Programme on Environmental Finance, the EAP Task Force has developed a project whose main objective is to provide EECCA with a sound and realistic roadmap for facilitating access of municipalities and utilities to local capital and financial markets for financing water and environmental infrastructure investments. More specifically, this project will focus on the implementation of two activities, namely:

• Analysis of Opportunities for Harnessing Local Capital and Financial Markets to Support Water and Environmental Infrastructure Investments in EECCA Countries (English, Russian) and,
• Demonstration Project(s): Capacity Building in Using Public Funds to Leverage Debt Financing of Water and Environmental Infrastructure Investments. (English, Russian) 

The final report includes country case studies of China, Kazakhstan, Russian Federation and Ukraine. A more detailed description of these activities, including specific tasks, outputs and outcomes is attached. For more information on this project, please contact Xavier LEFLAIVE at xavier.leflaive@oecd.org