37955 E n v i r o n m e n t S t r a t e g y Getting the Most for the Money -- How Public Environmental Expenditure Reviews Can Help Anil Markandya, Kirk Hamilton, and Ernesto Sanchez-Triana No. ublic environmental expenditure reviews (PEERs) offer a way of systemati- cally assessing the equity, efficiency, and effectiveness of public environ- 16 P mental spending. A PEER may be a stand-alone analysis, or it may be part of a wider public expenditure review or country environmental analysis (CEA). The S E data and insights it yields can be valuable for the design of government budgets, P policy reforms, and investment projects. T The starting point for a PEER is an understanding of a government's appro- E M priate role in managing natural resources and regulating environmental quality in B a particular country. A low level of public environmental spending is not in itself an E argument for more expenditure; the question is whether government expenditures R are effective in meeting environmental priorities. Managing natural resources and 2 controlling pollution emissions present very different challenges for governments. 0 Some problems, such as conservation, entail short-term expenditures but yield 0 benefits only in the longer term. These characteristics must be taken into account 6 when assessing public expenditures. This note introduces the basic elements of PEERS and presents good practice examples as illustrations. What Does PeeR IncluDe? a Box 1 PEERs can cover a huge range of issues, but DEFINING AND CLASSIFYING ENVIRoNMENTAL ExPENDITURE the following may be considered core ele- · Control of outdoor air pollution ments. · Water supply, sanitation, and hygiene Definition of environmental expenditure. · Reduction of vulnerability to natural disasters This is not as straightforward as it seems. · Control of indoor air pollution Box 1 provides an example of a framework the · Control of soil degradation World Bank has used in PEERs conducted in · Watershed and water resources management Colombia and Peru. · Control of deforestation; reforestation Levels and trends in environmental expendi- · Protection of biodiversity, landscape, and national protected areas ture. The proportions of total environmental · Public space and urban environmental management expenditures to gross domestic product (GDP), · Wastewater treatment and of public environmental expenditures to · Hazardous waste management total government expenditures, can be calcu- · Municipal solid waste disposal lated, and these ratios can be compared with · Mitigation of emissions of greenhouse gases and ozone-depleting benchmarks for similar countries, allowing substances · Other environmental protection expenditures for differences in the scope and definition of activities. Disaggregation of environmental expen- Box 2 ditures by type of activity. Data permitting, CoLoMBIA PEER environmental expenditures should be broken Matching environmental spending with environmental priorities down by functions such as analysis, research, Colombia, a middle-income country, has significant problems with air pollution, monitoring, investment in facilities, policy waterborne disease, and natural disasters, yet allocations of public environmental spending to priority problems have been very low. A study conducted as part of the design, and enforcement. CEA found that the costs of environmental degradation--which were mainly attribut- Distribution of environmental expenditures able to increased mortality and morbidity and to decreased productivity--amounted in relation to environmental priorities. It is not to more than 3.7 percent of GDP. The burden fell most heavily on vulnerable seg- uncommon to find that the allocation of public ments of the population, especially poor children under age 5. expenditures is not aligned with the priorities In a survey of more than 2,600 people countrywide conducted for the CEA, expressed in national strategies and public 79 percent of the respondents identified air pollution as a very serious problem. opinion surveys (see the example of Colombia When the results were broken down, however, significant differences in priorities in box 2). A remedy is to increase allocations emerged. Low-income groups named air pollution, noise pollution, and vulnerabil- for priority sectors. Policy measures should be ity to natural disasters as major problems, while upper-income groups were more concerned about loss of biodiversity, global warming, and inappropriate land use prioritized so as to achieve development ob- in urban areas. jectives, taking into account human resource The PEER, which was part of the CEA, looked at spending by central and limitations, political constraints, and the time regional environmental authorities. The review found that Colombia's environ- horizon of the strategy. mental management framework had focused on three main priorities: river basin Efficiency and effectiveness of environmental management and conservation of water resources; reforestation; and conservation expenditures. Comparison of targeted and of biodiversity. Meanwhile, environmental health and reduction of vulnerability actual outputs and performance provides in- to natural disasters had received minimal attention. This misalignment was largely attributed to the absence of an integrated data system that could provide analytical formation on cost-effectiveness and promotes support for decision making; to the failure to consult vulnerable groups; and to the emphasis on program delivery and on the lack of a formal mechanism for allocating financial and human resources according effective use of public resources. to clearly defined environmental priorities linked to poverty alleviation and social Government capacity for budget execution. objectives. Financial management capacity is often a The government subsequently requested that its Sustainable Development constraint on effective budget execution and Policy Loan from the World Bank, as well as a complementary Investments for therefore should be assessed as part of a PEER. Sustainable Development Loan, focus on issues related to environmental health, environmental governance, and better alignment of resources with developmental Key issues to be examined include whether ex- objectives. penditure controls and procurement processes are adequate and whether budgeting systems Fiscal decentralization. PEERS look at the equity of resource distribu- that track variances between planned and tion, local and national sources of financing, and the efficiency of planning, actual expenditures are in place. allocation, and monitoring of central and decentralized spending. Sustainability of the environmental budget. Developing cases the amounts collected for the provision of environ- countries generally depend heavily on donor grants to mental services or in the form of pollution charges are support their environmental budgets, particularly con- much smaller than is desirable. Although public finance servation activities. This raises questions of ownership specialists frown on earmarking revenues for particular and of sustainability, should donor support diminish or sectors, in practice earmarking for the environment sec- end. It is particularly important to calculate environmental tor often offers the only way to finance much-needed expenditures with and without donor grants and so arrive expenditures. Good public finance practice does require at a measure of the government's use of its own resources that such sources of revenue not be off-budget; otherwise, for the environment (see the Madagascar example in box they can create hidden liabilities for the government and 3). PEERs can examine resource gaps and assess potential make it difficult to assess the government's true fiscal sources of revenue (pollution fees or environmental position. It is important to include all environmental protection levies, for example) for sustaining the required expenditure (as well as donor financing) in a consolidated level of protection. government account. Ratios of current to capital expenditures and of salary to Institutional capacity for environmental planning and nonsalary expenditures. A very high ratio of current to capital management. The capacity to set priorities is often key expenditures may mean that the state is not investing to effective use of public resources. If the PEER is being enough in the sector and is incurring large recurrent costs. carried out as part of a CEA, assessment of processes for And, if a large part of the operating budget is absorbed setting priorities would typically be undertaken as part of by salaries, government employees will not have the tools institutional analysis within the CEA (cf. Pillai and Lunde, (such as fuel for vehicles) needed to do their jobs. 2006). For stand-alone PEERs, this can be an important Links between funding sources and environmental ex- area of analysis. penditures, and the potential for increasing revenues. In many challenges Box 3 PEERs are information-intensive products, and their MADAGASCAR PEER implementation in countries with weak administrative Ensuring sustainable funding for environmental protection systems can be challenging. For example-- In Madagascar, with its rural economy, the natural resource · A framework that defines environmental expenditures base is of great importance for the sustainable development of consistently and ensures comparability may not exist. the country. The main environmental problem is deforestation, A prior exercise in data classification may be required which leads to losses of forest resources, biodiversity, and tourism before the PEER is carried out, and institutional capac- revenues, as well as to downstream soil degradation, erosion, ity to manage such a database needs to be built. flooding,andsiltation.Donorshaveworkedwiththegovernment · Detailed budget and expenditure data may be lack- tobuildenvironmentalinstitutionsandfinancetheestablishment ing. Careful reclassification of expenditure items is ofaprotectedareassystem,butthemagnitudeofdonorfinancing desirable but may not be possible within the time raises concerns about the sustainability of the program. available. Among other tasks, the Madagascar PEER, which was · Donor finance in government budgets may be managed prepared as a sectoral input to the 2004 public expenditure off-budget, creating significant problems of transpar- review, examined the finances of the protected areas system. ency and financial control. Consolidation is necessary Over the period 1997­2001 donor grants amounted to 50 per- but is time consuming. cent or more of total spending on the environment. During the · Governmentexpendituredataoftencannotbemapped period 1997­2003 expenditures by the Environment Ministry to classifications that permit a fine-grained picture of and environmental agencies averaged more than 4 percent of expenditure by function and by subsector. The PEER the government budget--but when grant finance was deducted, team will frequently have to rely on partial evidence the share was only 2.5 percent. The expenditure review pointed and their own judgment to assess what is going on at to an impending shortfall in development funds required to the sectoral level. complete the protected areas system. It found, however, that · Measurement of efficiency and effectiveness may be difficult enough additional revenue could be generated from ecotourism in the absence of expenditure data by output and of (by increasing park fees for foreigners and raising hotel taxes) effectiveness measures for the environment sector. to finance needed investments and make the operation of the Some administrative functions, such as timeliness of protected areas system a net source of fiscal resources for the permit issuance or number of charges imposed under government. environmental legislation, may be quantifiable. Again, the team has to make use of whatever on budget execution. It should provide a Reduction." Report 30331- information is available. context for environmental policy, including MG, World Bank, Washing- ton, DC. · Institutional capacity for priority setting, key issues, and links to development strate- ------. 2006. "Colombia: Mitigat- analysis, and execution and manage- gies such as poverty reduction strategy ing Environmental Degrada- ment of spending is highly relevant but papers (PRSPs). PEERs should be seen as tion to Foster Growth and Reduce Inequality." Report may be difficult to assess. complementary to other types of analytical 36345, World Bank, Wash- work. Ideally the combination of a PEER ington, DC. and the policy and institutional analysis conclusIons embedded in the country environmental Authors The information provided by PEERs can analysis should lay the basis for sectoral Anil Markandya is a professor of eco- greatly increase the visibility of environ- reforms. The analyses can then inform nomics, University of Bath, U.K. and mental issues. The Madagascar review, for the design of operations related to the director of Applied research, FEEM, Italy. Kirk hamilton is lead environ- example, highlighted a financing gap for environmental sector, whether at the level mental economist in ENV; and Ernesto the protected areas system but also found of policy loans, technical assistance, or Sanchez-Triana is a senior environ- that the system could become a net source specific investments. mental engineer in SASES, both of the of fiscal resources. In Ukraine (box 4) the World Bank. PEER provided guidance to the environment RefeRences Reviewers and finance ministries on areas where re- This Note was reviewed by Peter de- forms were urgently needed. The Colombia Pillai, P., and L. Lunde. 2006. "CEA and Institutional Assessment: A Review of International and wees, lead environmental specialist, PEER, along with other analytic work done World Bank Tools." Environment Strategy ECSSd; and by Anand rajaram, lead economist, PrMPS, both of the World as part of the CEA, laid the analytical base Paper 11. World Bank, Washington DC. Bank. for a Sustainable Development Policy Loan World Bank. 2003. "Financing the Environment: Ukraine's Road to Effective Environmental that has enabled a shift in government Management." A Public Environmental Expen- The Environment Strategy Notes series environmental policy. diture Review. World Bank, Washington, DC. aims to provide a forum for discussion on a Ultimately, a public expenditure ------. 2005. "Madagascar. Public Expenditure range of issues related to the Environment Review 2004: The Challenge of Poverty Strategy, to help the transfer of good prac- review is about much more than statistics tices across countries and regions, and to seek effective ways of improving the Bank's environmental performance. Box 4 The views herein are those of the author(s) UkRAINIAN PEER and should not be considered official policy of, nor attributed to, the World Bank Pinpointing areas for reform Group. Ukraine, an industrial country, has serious air and water pollution problems, but the main chal- lenge facing its environmental sector is the transition to environmental management within a T market-based economy. A stand-alone PEER carried out in 2001 found that total and public Executive Editor environmental expenditure had fallen sharply during the transition. Even among the transition Kulsum Ahmed countries of Central and Eastern Europe, Ukraine appeared to be on the low side, and its spending Managing Editor on environmental investment was unusually low. In 1999, for example, total investment by the Poonam Pillai public sector on environmental protection was only 0.4 percent of GDP, while in neighboring Po- Editor land, which was also in difficult economic circumstances, the figure was around 1.4 percent. Nancy Levine The review determined that the pattern of public environmental expenditure was broadly Designer / Production Manager consistent with national objectives. The water sector, which posed the country's most serious Jim Cantrell environmental problems, took the largest share of budget resources. Selection of programs for implementation was less satisfactory. Many projects were ap- proved, but only about 10 percent of them--not necessarily the most urgent ones--were funded. The review also cited the difficulty of tracking expenditures and determining when a spending unit had failed to deliver or had incurred cost overruns. In addition, it pointed to the need to T h E W o r L d B A N K rationalize the more than 1,600 environmental funds, each of which received allocations from Environment department 1818 h Street, N.W. the meager resources available and each of which had its own administrative costs. The PEER thus Washington, d.C. 20433 USA highlighted areas where improvements in allocation of resources and in the budgeting system Tel: 202 473 1000 were needed. Finally, the review recommended that the real value of pollution charges (which Fax: 202 477 0565 E-mail: eadvisor@worldbank.org are earmarked for environmental activities) be increased and that the numerous exemptions be Web: <>