Promoting Clean Urban Public Transportation and Green Investment in Moldova

Executive summary

At less than 5%, transport makes a small contribution to Moldova’s gross domestic product. Yet the sector is responsible for 22% of the country’s greenhouse gas emissions – the second biggest contributor after the energy sector. The transport sector is the main source of air pollution, in particular in urban areas, accounting for at least 86% of total emissions. According to World Health Organization (WHO) data, the number of deaths in Moldova caused by ambient air pollution have more than tripled over the last 15 years. The Municipality of Chisinau in particular is experiencing a substantial increase in air pollution-related diseases.

In 2016, the Organisation for Economic Co-operation and Development (OECD) and Moldova joined forces to analyse how a public investment programme could spur the development of cleaner public transport, and reduce air pollution and greenhouse gas (GHG) emissions from the public transport sector in large urban centres in the country. It was agreed that the main focus of the Clean Public Transport (CPT) Programme would be on supporting the shift to modern buses powered by cleaner fuels, such as compressed natural gas and liquefied petroleum gas.

The preparation for the programme involved four main activity areas and outputs: 1) an initial scoping and analytical stage; 2) development of a programme costing methodology; 3) design of a programme in line with international good practices; and 4) preparation of an analytical report and training. This report is the culmination of the preparation process and presents the results of the four main activity areas.

What will the Clean Public Transport involve?

The CPT Programme is designed to be implemented in two phases. The first (pilot) phase targets Moldova’s two biggest cities – Chisinau and Balti – where the public transport networks are the most developed. The second (scaling-up) phase is designed to cover the suburban areas of the pilot cities (under Scenario 1) and inter-city transport on the main (most frequent) routes in Moldova (Scenario 2).

• The pilot phase foresees replacing 77 old vehicles (60 in Chisinau and 17 in Balti), involving a total investment of USD 19.1 million over one year (after a one-year preparatory phase).

• Scenario 1 of Phase 2 envisages renewing 658 urban and suburban transport vehicles, at a cost of USD 131.1 million.

• Scenario 2 of Phase 2, aiming to replace 2 433 urban, suburban and inter-city vehicles will require USD 479.5 million of investments over a two to five-year period.

In total, Phase 1 together with Scenario 1 of Phase 2 would result in 735 urban and suburban transport vehicles, at a cost of USD 150.2 million. Phase 1, followed by Scenario 2 of Phase 2 would replace 2 510 urban, suburban and inter-city vehicles, at a cost of USD 498.6 million.

In all phases and scenarios, public support is estimated to be between 25-75% of the total resources required, depending on the financing options chosen.

What does it aim to achieve?

The environmental objectives of the CPT Programme are expected to be accomplished by using budget support to replace the existing public transport fleet with modern vehicles powered by cleaner fuels or technologies, including compressed natural gas (CNG)/liquefied natural gas (LNG), liquefied petroleum gas (LPG), diesel Euro 5/6 and electricity. In terms of emissions reductions, the most significant improvements are expected to be in nitrogen oxides (NO_x), whose annual cutback could amount to 30.7 tonnes in the pilot phase and between 403.8 and 1 444.1 tonnes in the scaling-up phase. Carbon monoxide (CO) emissions could decline by 6.8 tonnes annually (Phase 1) and between 85.4 and 300.6 tonnes (Phase 2), respectively. Particulate matter (PM) emissions should be reduced by 0.7 tonnes and between 9.9 and 35.1 tonnes annually, respectively; and sulphur dioxide (SO₂) by 0.6 tonnes and between 8.4 and 29.4 tonnes, respectively. Carbon dioxide (CO₂) emissions are likely to fall by 2.28 kilotonnes of CO₂ a year following Phase 1, and between 20.81 and 73.94 kilotonnes a year following Phase 2.

The public service objectives will be achieved – in line with the country’s transport strategies (municipal and national) – by purchasing modern (brand-new) vehicles (to increase reliability and comfort) and extending/improving service delivery outside of cities (to increase outreach). By modernising the urban transport fleet, the CPT Programme will also contribute to the socio-economic development of municipalities and, ultimately, of the country. This will be achieved for instance through increasing the efficiency, reliability and radius of public transport networks. Improved mobility not only fosters productivity (access to jobs, markets), but also social inclusion (access to hospitals, schools) especially for low-income groups. The CPT Programme could also stimulate the domestic market to produce, or at least assemble, modern buses and trolleybuses through supporting the purchase of new buses, rather than the modernisation of engines. This could also generate new employment opportunities.

How will it be run and financed?

Implementing the CPT Programme will require institutional arrangements that ensure transparent and cost-effective decision making. The report suggests a three-level institutional structure comprising: 1) a programming entity, 2) an implementation unit and 3) a technical support unit. It also lays out clear project cycle management procedures.

There are a number of institutions in Moldova that could potentially be selected to manage the programme. Whatever the choice, the implementing entity should have a degree of independence to ensure that decisions be made using rules and criteria in line with the programme objectives, and not subject to undue political influence.

There are several financing mechanisms available in Moldova that can be used to support the transition to clean public transport. It should be noted, however, that it is not necessary for the programme to be completely grant-financed. The nature of the public transport sector – in which operating cost savings can be achieved by replacing old fleet components with new models and the use of clean fuel – means that financing should be designed to increase investment, without having to support profitable projects that would have occurred regardless of government involvement.

The analysis identifies two possible options for funding the CPT Programme pipelines; the first would be with the involvement of the local banking sector, while the second would not. The proposed combinations of financing instruments are as follows:

1. Commercial loans, combined with public support in the form of loan guarantees and a relatively smaller subsidy (a grant) to help public transport operators to repay a portion of the loan.

2. Public support in the form of a relatively larger subsidy (a grant) to motivate public transport operators to allocate more of their own financial resources to purchase cleaner vehicles – which generally require a higher initial investment (in terms of purchase cost) but are less expensive to operate (in terms of fuel costs).

Creating the policy framework for green investment

There are various policy barriers to the implementation of the programme, listed below. It is important that before the programme is developed and financed, the Government of Moldova reviews the relevant regulatory basis and eliminates any barriers to the extent possible.

• Inadequate resources for programme preparation and management. The CPT Programme requires significant work on programme preparation (including fundraising) and implementation. This will require building capacity for project selection, implementation and monitoring (project cycle management).

• Limited creditworthiness of private operators in public transport. Regardless of how the CPT Programme is co-financed, bus owners will need to use loans or leasing for the programme co-financing. However, their creditworthiness is limited. One solution would be for the Ministry of Finance (as the main guarantor of public debt) to issue guarantees on bank loans.

• Inadequate passenger fares. Fares for public transport are low in Moldova – as low as USD 0.11 for a single ride ticket – and some of them have not been adjusted since 2007. A fare increase is obviously needed (based on a sensitivity analysis to determine the optimal fare levels); otherwise, fleet operators may not be able to repay their loans.

• Insufficient co-ordination and changes in urban public transport. On the municipal level, the intent to improve the public transport service and to reduce traffic congestion and air pollution in the urban centres – mainly by limiting the number of minibus operators – is visible but not clearly communicated to all stakeholders. A co-ordinating role by the Ministry of Finance – which is also involved in project preparation for external financial assistance – could ensure inter-ministerial co-operation.

• Low engine emission norms/technical inspection standards. Moldova’s emission norms are based on old diesel emission standards (Euro IV and lower) and the system of technical inspections of vehicles does not function properly. On the other hand, the availability of (imported) high-quality fuels (Euro 5) on the Moldovan market seems to be sufficient for a country-wide fleet upgrade. However, Moldova needs to introduce European standards. Currently, the only requirement is that new buses and trucks be Euro 0 or Euro I-compliant by 2020.

• Weak pricing signals for the use of CNG and LPG-fuelled buses versus diesel. Although CNG and LPG are cheaper than diesel, there are no other pricing signals, such as VAT or duty tax exemption for clean(er) transport or infrastructure. As the initial investment in alternatively fuelled/powered buses is higher, the decision to invest can be influenced by financial stimulus. Until critical mass is achieved (i.e. a sufficient market share and revenues), tax incentives could complement state support mechanisms such as grants, loans and loan guarantees.

• Lack of proper financial products tailored to the needs of the sector. Although Moldova’s financial sector is dominated by banks, their function as financial intermediaries is limited due to high interest rates and collateral requirements. Banks, on the other hand, face constraints such as a lack of bankable projects and low rates of loan recovery (which, in the case of public transport operators, might be caused by the low passenger fares mentioned above).

• Lack of interest in purchasing more fuel-efficient vehicles. Apart from setting the right policy incentives, the government also needs to tackle consumer uncertainty about new technologies (e.g. their useful life) and fuels (e.g. future fuel prices). This would be helped through providing correct, sufficient and timely information – a possible role for the government implementation unit of the CPT Programme.