This chapter proposes some institutional arrangements for managing the Clean Public Transport Programme as an investment programme. It begins by outlining good practice in setting up institutional frameworks for large environmental investment programmes. It suggests a three-level institutional structure comprising: 1) a programming entity; 2) an implementation unit; and 3) a technical support unit. It also suggests a possible division of responsibilities across these three entities, and describes the minimum operating regulations required to manage the programme. Finally, the chapter reviews the barriers to implementation in the form of regulations and policy distortions and suggests ways of addressing them.
Promoting Clean Urban Public Transportation and Green Investment in Kyrgyzstan
Green Finance and Investment
4. Institutional arrangements and policy framework
Abstract
4.1. Institutional arrangements for managing public investment programmes
There are a number of different good-practice institutional forms for managing public environmental expenditure. Simple expenditure programmes (e.g. financing research or education, purchasing simple equipment or standard services) may be managed directly by assigning additional responsibilities to existing government institutions at a variety of levels, using their regular staff and routine budget processes. For larger-scale, targeted programmes – in particular, programmes that involve financing capital investments, such as the Clean Public Transport (CPT) Programme – special institutional arrangements are recommended. These special arrangements may take many institutional forms and involve various types of implementing units (OECD, 2007[1]).
Deciding which form is most appropriate will generally depend on a variety of factors related to the sources of finance, the types of disbursements envisaged, and the legal and political culture of governance in a given country. Regardless of the institutional form, public environmental expenditure management should involve institutional structures and procedures that promote environmental effectiveness, embody fiscal prudence, and use financial and human resources efficiently.
Experience shows that these arrangements can take four basic forms:
1. government implementation units
2. environmental funds or a similar public finance institution
3. directed credit or a line of credit to financial intermediaries (such as commercial banks)
4. outsourcing.
Government implementation units – the most common arrangements – include the following institutional forms:
government departments with responsibility for procuring goods and services or financing specific projects within the state budget
project implementation units established in a government department to implement projects within a specific government expenditure programme included in the budget
autonomous/decentralised government units financed by the budget but created to decouple the delivery of services or administrative tasks from policy formulation.
Regardless of the type of government implementation unit chosen, carrying a programme to completion requires capacity for project selection, implementation and monitoring. This means hiring skilled, trained personnel with a dedicated focus on the programme. Environmental programmes of EUR 50 million (USD 57 million) annually and about 200 contracts per year implemented in Central and Eastern Europe generally need staff of more than 20 people. In the case of the programme discussed in this study, given the relatively small number of contracts and homogenous types of investments required, only 5 people would be needed (see Table 2.6 and Table 2.7 in Chapter 2 for programme implementation costs).
In most instances, the institutional arrangement for large-scale (investment) programmes includes both a management (implementation) unit and a supervisory body. The implementation unit’s management and staff are responsible for the day-to-day project cycle activities (identification, selection, appraisal and monitoring of projects), development of the annual expenditure plan and budget, and monitoring and preparation of reports. The supervisory body usually focuses on taking strategic decisions and approving internal operating procedures and rules (including eligibility and appraisal criteria to guide project selection). This division of responsibilities provides a system of checks and balances and improves the accountability of the programme. The supervisory body retains the final decision-making authority to approve financing of the individual projects recommended by the implementation unit’s technical staff after the appraisal process (see Section 5.1). In the case of the CPT Programme, supervision will be performed by the programming entity (see below).
Outsourcing or contracting out is a further option if the government department does not have the capacities to fulfil its duties as an implementation unit. This allows an implementation unit to enter into a contract with an outside supplier for the provision of goods and services typically provided internally. If this option is chosen, good practice requires that outsourcing be conducted through competitive tendering.
To take one example, since 1993 the Austrian Federal Ministry for Sustainability and Tourism (BMNT)1 has delegated the management of the grant schemes for Austria’s Environmental and Water Management Fund to a private consulting company, Kommunalkredit Public Consulting (KPC) GmbH. KPC is also responsible for the Austrian Joint Implementation (JI)/Clean Development Mechanism (CDM) programme and serves as one of the four managers of the newly established Climate and Energy Fund. KPC manages more than 3 000 projects annually. Its role is to advise the ministry during the programme development phase and on the development of support programmes, as well as to provide technical, economic and legal assessment of support and consultancy projects. KPC also advises the decision-making bodies of these institutions – such as the BMNT in this case – on drafting contracts, monitoring project implementation and managing disbursements. Significantly, when the management of the Environmental and Water Management Fund was outsourced to KPC in 1993, its administrative costs were immediately reduced by more than half and have fallen since 2000 to only 20% of the 1993 cost.
Figure 4.1 presents the management scheme for the Austrian JI/CDM programme.
Figure 4.1. Management scheme for the Austrian JI/CDM programme
Source: Provided to the OECD by Kommunalkredit Public Consulting
4.2. A proposed institutional set-up for the CPT Programme
In preparing any public investment programme, the public financier needs to ensure that the essential individual elements of the programme are carefully designed and put in place before the programme is launched. This section summarises the main elements of the green public investment programme in Kyrgyzstan designed as part of this study, and explains how and why the project team arrived at the solutions proposed.
Effective programme implementation requires the following elements:
stable and predictable sources of finance for the programme
institutional arrangements to manage the programme expenditure, with sufficient resources, qualified staff and instruments to meet its objectives
well-documented principles, rules and operating procedures for project cycle management (PCM)
clearly defined and robust criteria for appraisal, selection and financing of investment projects
clearly defined procurement rules.
To facilitate future implementation of the investment programme, this chapter and the next (Chapter 5) provide detailed information on the following arrangements:
institutional arrangements comprising three levels: 1) programming entity (PE); 2) implementation unit (IU); and 3) a technical support unit (TSU) – see below
PCM procedures, including eligibility criteria, project appraisal criteria, project-ranking procedures and financing rules (Chapter 5).
The institutional set-up needs to ensure that sufficient resources are allocated to meet the programme’s objectives, and that qualified staff and instruments to implement the programme are made available. In general, programming and project appraisal should be strictly separated. Programming is the responsibility of the programming entity in the government agency appointed to manage the investment programme. Project appraisal is a technical process conducted by competent technical staff recruited on a competitive merit basis and held responsible for their decisions. The implementation unit should be operationally and technically independent and shielded from political pressures by rules and procedures developed by the programme’s technical staff. It should also be a separate entity from the TSU.
4.2.1. Defining the programming entity
The programming entity is responsible for designing the programme, including (adapted from (OECD, 2007[1]):
Defining priority environmental objectives for the investment programme that are specific, measurable, realistic and time-bound.
Developing an investment programme that responds to the overall environmental and climate-related objectives. This programme should include specific targets, cost estimates, descriptions of eligible project types and beneficiaries, terms of financing, procedures, principles and criteria of project appraisal and selection, procurement rules, programme timeframe and indicators of performance.
Determining sources of funds and the size of the financial envelope of the investment programme.
Selecting the best institutional arrangements for managing the investment programme – in particular, deciding whether the programme can be managed directly by existing government institutions at different levels, or whether special institutional arrangements are required.
Selecting, contracting and monitoring the implementation unit to manage the investment programme.
Selecting and monitoring the technical support units required to implement the programme.
In Kyrgyzstan the Ministry of Economy should perform the role of the PE. It can use its available staff and resources to undertake its programming duties in consultation with relevant bodies, including other relevant government agencies, professional associations, local municipalities and non-government organisations as appropriate. In addition, representatives of these bodies may be invited to sit on and have an advisory role on the programme supervisory board.
4.2.2. Deciding on an implementation unit
The implementation unit (IU) is charged with drafting the programme’s operating regulations, as described in Section 4.3 below. The IU needs to consult with the technical support unit(s) in the drafting and using its operating regulations. Because programming is a political process, it is important that the responsibilities for programming and project cycle management are separated and distinct. The latter role could be fulfilled by a local bank or banks, which would sign a co-operation agreement with the Ministry of Economy based on a successful public tender bid. Other potential IUs include the Investment Promotion and Protection Agency (IPPA), the State Agency for Environmental Protection and Forestry (SAEPF), and the Regional Environmental Centre for Central Asia (CAREC). The IU would provide the Ministry of Economy with information on the forecast number of beneficiaries and their financial needs. It would also manage the project cycle – conducting marketing activities for the programme, identifying beneficiaries and conducting eligibility appraisals of beneficiaries. The IU would communicate to the Ministry of Economy beneficiaries’ loan and grant needs so that the ministry can monitor the CPT Programme budget for the given year (or programming cycle) and project types (project “baskets”).
4.2.3. Appointing a technical support unit
The technical support unit (TSU) would give specialised assistance, advice and expertise in the areas of energy and fuel efficiency compressed natural gas (CNG), liquefied petroleum gas (LPG), modern diesel buses/trolleybuses, and air pollution and GHG emission reductions. The Investment Promotion and Protection Agency (IPPA), the State Agency for Environmental Protection and Forestry (SAEPF), or the Regional Environmental Centre for Central Asia (CAREC) could play this role – although they cannot act both as IU and TSU. Other TSUs may be identified, as deemed necessary and prudent.
4.3. Fundamental operating regulations
The effective implementation of the programme requires that the implementation unit (IU) define and publicise its operational rules and regulations. At a minimum, the core elements of such rules should include:
definitions
general provisions
definition of eligible projects
rules for awarding grants
rules for modifying or terminating a grant contract
procedures for programme review.
The grant agreement should define in detail the following terms and conditions as a minimum:
amount of grant award (as an absolute value or as a share of total project investment cost)
start and end dates of the project to be financed, as well as planned environmental impacts
date on which the grant, or its instalments, will be transferred to the recipient
rights of the implementation unit to control the awarded grant as well as the method of recovering the grant if the project fails to meet its stated objectives
grantee’s specific obligations arising under the contract with the programme implementation unit
conditions under which the contract loses its force
consequences of contract dissolution.
Typically, a project grant should not exceed 50% of the funds earmarked for the applicable type of project in the approved IU’s annual financial plan. This is to enable the leverage of resources from other sources and ensure the commitment of the recipients to implementing the project using their own resources.2
Under this particular programme, and given the nature of investments to be financed, it is proposed that the programme can be financed by the state budget within the medium-term expenditure framework (MTEF) process. Financial support should be provided in the form of grants and/or bank guarantees.
There are other procedural rules that need to be considered, for example:
The grant may be transferred to the applicant all at once or in instalments (tranches).
A portion of the grant may be transferred in advance (up to 20% of the total value of the project), if project start up is impossible without advance funding.
The recipient of a grant advance should be required to return to the IU any interest income resulting from holding the grant in its bank account (or the amount could be deducted from future tranches).
The dates for making grant transfers are determined by the IU, based on funds at its disposal and upon consideration of an applicant’s proposal, as presented in the application.
Financial resources from the grant are transferred exclusively for the purpose of meeting the payments required by the grantee. The recipient should allow the IU full access to original invoices prepared by contractors or suppliers.
The OECD Handbook for Appraisal of Environmental Projects Financed from Public Funds includes a detailed discussion of all the rules that need to be considered in defining the procedures for the programme IU. It could be useful in further defining procedural rules for the CPT programme (OECD, 2007[1]).
4.4. Promoting the programme
Promotion is essential for the success of the programme; this is the responsibility of the IU. The promotion package might include the following elements:
sending programme information to local administrations and potential beneficiaries
distributing programme rules to local administrations and potential beneficiaries
maintaining the IU’s website with information on rules for awarding grants and application forms
issuing press releases.
The costs of programme promotion should be included in the programme costs envelope.
4.5. Eliminating policy distortions
Various regulatory barriers may complicate the implementation of even a well-designed investment programme. It is important that before a programme is developed and financed, the Government of Kyrgyzstan reviews the relevant regulatory basis and eliminates any barriers as much as possible. Combining such regulatory improvements with financial support from the state is more likely to lead to the modernisation of the bus fleet in Kyrgyzstan and result in significant reductions in air pollution and GHG emissions.
One of the biggest obstacles for implementing an investment programme in the public transport sector in Kyrgyzstan is the very limited creditworthiness of bus operators. There are several reasons for this, including weak pricing signals for new technologies and fuels (which ultimately favour the old type of buses), a fare system for urban public transport that does not cover the capital cost of new buses, and a tender system that favours short-term contracts and makes it difficult to invest in a new bus fleet.
These distorted policies are the reason why the bus operator market is fragmented, dominated by small companies that lack creditworthiness and that are not attractive to international financial institutions, such as the European Bank for Reconstruction and Development (EBRD). Eliminating these barriers is key for the success of the programme. However, not all of them have to be addressed at the same time and some are interchangeable. For example, a better fare system and long-term contracts will help to increase creditworthiness, but this can also be achieved through loan guarantees or a higher level of public support provided by the CPT Programme.
Some of the key actions needed to remove implementation barriers are presented below.
4.5.1. Strengthen technical regulations in transport
Many of the policy and regulatory barriers identified by this study are similar to challenges experienced in other countries. To ensure the programme’s successful implementation, the government will need to:
Strengthen (diesel) engine emission norms and bring them closer to European standards. The Kyrgyz Republic has still not adopted modern emission norms for passenger cars or heavy-duty truck and bus engines. The emission norms are based on old diesel emission standards (Euro IV – introduced in the European Union back in 2005 – and lower). Euro 5 standards are to come into effect in 2019, but only for fuel, not engines. In contrast, Europe instituted the Euro VI standard in 2014 (see Table B.16 and B.17 of Annex B).
Strengthen (diesel) fuel standards. Modern diesel engine emission norms cannot be introduced if the available fuel does not meet certain standards. The engines include equipment sensitive to low-quality fuel, and sulphur dioxide (SO2) emissions directly depend on the fuel’s sulphur content. It is possible to find Euro 5 fuel in Kyrgyzstan, but by and large the available diesel fuel in the country meets only Euro 3 standards.
Strengthen technical inspection standards. Although buses and minibuses in the country must pass technical inspections (twice a year), these inspections are not strict on emissions. Public transport operators thus have no incentive to improve emissions standards. Standards for technical inspection need to be better enforced.
4.5.2. Introduce adequate financial and pricing signals
The analysis in Chapter 3 shows that the average price of CNG and LPG fuels is much lower than the average price of petrol and diesel, which are also subject to an additional excise tax (see Section 7.1.12).
Although CNG and LPG fuels are cheaper than diesel, CNG and LPG-fuelled buses are more expensive (as they require the installation of additional equipment). Bus operators have not been given clear incentives to shift to cleaner fuels (either from renewable resources or cleaner fossil fuels). Given the significant efficiency gains (and environmental and health benefits) of replacing ageing and inefficient diesel and electricity-powered vehicles,3 the investment programme (through the government) should provide the necessary financial incentives to attract investment into the sector.
The experience of EU countries shows that the uptake of fossil gases in transport is highest in countries with the lowest tax rates, i.e. where CNG or LPG enjoy tax rates below the EU minimum. In some countries (such as Italy) this can make them half the price of diesel. This support has continued despite the declining EU domestic fossil gas production and increasing dependence – as in Kyrgyzstan – on energy imports from the Russian Federation4 (T&E, 2018[2]).
The government could therefore consider introducing targeted tax exemptions (including value added tax and import duties) on CNG/LPG vehicles and for owners of refuelling stations. Such fiscal measures could act as a complementary state support mechanism in addition to grants, loans or loan guarantees provided by the government until critical mass is achieved and the system becomes profitable.
4.5.3. Adjust the fare system for urban public transport
Fares should be aligned with good international practices and designed to maximise the social welfare of both passengers and public transport providers (subject to budget and capacity constraints).
The benefit for public transport service providers can be defined as revenues minus costs. The benefit for the user of these services can be expressed as the generalised price citizens are willing to pay before switching to non-public transport alternatives, minus the actual generalised price of the ticket (see Box 4.1). To some extent, the producer benefit and user benefit may be negatively correlated.
Given the economic and financial situation of public transport providers in Kyrgyzstan, the focus should be on the providers’ benefits. The user benefit should be minimised as much as possible (ideally close to zero).
In Kyrgyzstan, operators of minibuses are private, whilst trolleybus and bus services tend to be provided by the municipality. Private operators provide business for profit, so passenger fares need to cover their capital and operating costs. As fares on public transport are so low in Kyrgyzstan (see Section 3.2.3), the quality of service provided by private operators is also low, favouring the use of very old buses in order to minimise capital costs (and depreciation).
Box 4.1. Proposing a sensitivity analysis
A sensitivity analysis into how many new buses/trolleybuses could be bought by increasing fares by KGS 2 (USD 0.03), for example, could be very informative.
Generally, the sensitivity analysis should take into account the fact that an increase in the price of tickets may discourage people from using public transport and may make them switch to using private cars, for instance, which can result in higher levels of air pollution. In economic language, public transport fare increases lead to an exposure-response relationship with a high price elasticity of demand; that is, a price increase leads to a decrease in demand for a given service.
Therefore, in order to achieve the desired environmental effects, it is important that private car transport does not substitute for public transport. Further, such an analysis depends, among others, on local circumstances, including the length of routes and the number of passengers. This type of analysis requires significant additional data collection and discussion with the government and municipal authorities, and therefore could not been done during this study – it should be carried out as part of a different study.
An increase in fares is clearly needed and could theoretically be used to co-finance the CPT Programme. The current fare of KGS 6-10 (USD 0.09-0.15) per journey by bus, trolleybus or minibus in Bishkek and Osh – not considering various discounts (as listed in Section 3.5) – is extremely low and would not be sufficient to guarantee the repayment of any eventual loan by bus or trolleybus operators. Thus, if the fares are kept at their current level, the programme and the public budget will be exposed to default by operators and will have to consume the guarantee, implying significant actual costs for the programme.
In addition to higher single fares, subscription fares could also be considered. This option is usually favoured by passengers who do not own a car and are therefore less price sensitive. On the other hand, in developing countries, people who do not own a car usually belong to lower income groups than in the developed world.5
Such changes in the fare system, coupled with the introduction of separate bus lanes and smart traffic lights, could improve the overall management of the public road transport sector in the country (see Section 2.2).
Regardless of the fare system, improvements in the payment system should also be implemented. Trolleybus and bus travel times are greatly increased by the “pay upon exit” system. Although electronic payment systems have been tested, they have not yet been successfully implemented (see Section 3.2.3).
4.5.4. Change public tenders for providing public transport in urban centres
Currently, most public transport operators are awarded short-term (one to three years) contracts. This approach encourages a short-term perspective among operators and motivates them to minimise investments so they can make a return in the short contract period. Operators thus tend to choose cheaper – hence, older and more polluting – buses and minibuses.
Shifting to the use of medium to long-term contracts (at least 10 years) would make it possible to award contracts to operators that will invest in a modern bus fleet. This approach, together with an adjusted fare system, regulatory improvements and financial support from the state, is more likely to lead to the modernisation of vehicle fleets.
The review of the urban public transport system in Bishkek and Osh revealed that the majority of operators are private entities: 41 private companies versus 2 public companies in Bishkek, and more than 20 private entities versus 1 public company in Osh (see Section 6.2). In 2016 private companies accounted for 92% of passengers transported in Bishkek (see Table 6.8) and 82% in Osh (see Table 6.11). This indicates that the programme financing needs to be tailored to the private sector, or at least a public-private partnership (PPP).
4.5.5. Encourage (energy) efficiency in public transport
Public transport in Kyrgyzstan is dominated by minibuses; regular buses only service a small number of urban and inter-city routes. While minibuses are needed to close the gap in public transport, they are generally are less efficient than regular buses (in terms of megajoules/passenger-km). Both Bishkek and Osh intend to begin to replace minibuses with modern, higher capacity buses (primarily trolley and CNG buses) that can carry up to five times more passengers.
It doesn’t make economic sense to invest in public transport if streets are congested with traffic. Under such conditions, given there are only single-journey fares in Kyrgyzstan, it would not be financially viable for public transport operators to improve the quality of public transport services as foreseen in the recently adopted Development Programme 2018-2022 “Unity. Trust. Creation.” (GoK, 2018[3]).
Journey time (and related fuel) savings can be achieved by increasing the operating efficiency of public transport. For example, dedicated bus lanes can reduce the need for inefficient mechanical braking. Kyrgyzstan has a few dedicated bus lanes, though they are often occupied by waiting cars. Eco-driving – i.e. a driving awareness technique that can reduce fuel consumption – can be introduced and taught to trainee bus drivers.
Combining such regulatory improvements with financial support from the state is more likely to lead to the modernisation of the bus fleet in Kyrgyzstan and result in significant reductions in air pollution and GHG emissions.
4.6. Conclusions for the CPT Programme
While there are various institutional set-ups for managing the programme, this chapter has outlined the three most common public support arrangements for providing subsidies (in form of grants) – governmental units, environmental funds and credit lines.
The optimal institutional set-up for managing the resources of the investment programme should be selected only after all elements of the programme are clarified and consensus has been reached on its priorities. Subsequently, the government needs to ensure that resources, qualified staff and instruments are sufficient to implement the programme.
Regardless of the type of institutional set-up chosen, it should involve an institutional structure and procedures that promote environmental effectiveness, embody fiscal prudence, and use financial and human resources efficiently.
It is also advisable for larger (investment) programmes – such as the CPT Programme – to include a supervisory body to adopt strategic documents and take strategic decisions, as well as oversee the implementation capacity of management in terms of project selection, implementation and monitoring (project cycle management). Importantly, both the management and the supervisory body should be protected from political pressures through their operating rules and procedures.
The Government of Kyrgyzstan should also aim to eliminate the policy and regulatory barriers that could hamper the implementation of the CPT Programme. A reflection on other countries’ experience could provide an indicative checklist of measures and approaches to tackle these problems.
Bibliography
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[3] GoK (2018), Development Programme of the Kyrgyz Republic for the period 2018-2022, Government of Kyrgyzstan, Bishkek, http://www.un-page.org/files/public/the_development_program_of_the_kyrgyz_republic_for_the_period_2018-2022.pdf.
[1] OECD (2007), Handbook for Appraisal of Environmental Projects Financed from Public Funds, OECD Environmental Finance Series, OECD Publishing, Paris, http://www.oecd.org/env/outreach/38786197.pdf.
[2] T&E (2018), CNG and LNG for vehicles and ships – the facts, European Federation for Transport and Environment, Brussels, http://www.transportenvironment.org/sites/te/files/publications/2018_10_TE_CNG_and_LNG_for_vehicles_and_ships_the_facts_EN.pdf.
Notes
← 1. Known as the Federal Ministry of Agriculture, Forestry, Environment and Water Management (BMLFUW) until January 2018. The new website of the Federal Ministry for Sustainability and Tourism (BMNT) is at: www.bmnt.gv.at.
← 2. Given the nature of the projects to be financed, the grant should be determined at a level at which the net present value (NPV) for the project is equal to zero (see Section 3.4 and Annex B).
← 3. Unlike these (cleaner) fossil fuels, electricity-powered vehicles have the advantage of cheap electricity.
← 4. . In 2016, the EU imported 86.7% of its petroleum products and 70.4% of its natural gas, so its energy dependence on natural gas is not significantly lower than on oil, especially given the larger share of imports natural gas from the Russian Federation (39.9%) than oil (31.6%) (EC, 2018[4]).
← 5. Usually, a single or monthly ticket fare system is considered more operator friendly, and a distance-dependent fare system seems more customer-oriented (and more technically demanding for the operator). A single or monthly ticket fare system is generally more attractive for passengers travelling longer distances, and a distance-dependent fare system more attractive for passengers travelling shorter distances. Finally, with a distance-dependent fare system, the operator can gather information both on the number of trips per route over a defined period and the average length of the route that a passenger travels in a given period. This information may be useful for making better management decisions.