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Public Environmental Expenditure Reviews _PEERS_


  • pg 1


                  Public Environmental
                  Expenditure Reviews (PEERS)

                  Experience and Emerging Practice

                  AuPhil Swanson and Leiv Lundethors

                  May 2003
The International Bank for Reconstruction
and Development/THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.

Manufactured in the United States of America
First printing May 2003

In 2001, the World Bank completed the comprehensive two-year process of preparing its Environment Strategy,
Making Sustainable Commitments: An Environment Strategy for the World Bank. It was endorsed by the Bank’s
Board of Directors and published in October 2001. The Environment Strategy Paper series includes reports
prepared to facilitate implementation of the Strategy.

The Environment Strategy emphasizes the need to strengthen the analytical foundation of environmental work at
the country level. Country Environmental Analysis (CEA) has been identified as one of the key environmental
diagnostic tools for systematically evaluating the environmental priorities of development and poverty reduction
strategies in client countries, the environmental implications of key policies, and countries’ institutional capacity
and performance to address their priorities.

This report, together with other papers on various aspects of CEA, was prepared as part of the stocktaking
exercise for developing guidance on CEA. The recommendations made in this paper represent the views of the
authors and not those of the World Bank.

 v    Abstract

vii   Acknowledgments

ix    Acronyms and Abbreviations

xi    Executive Summary

 1    Chapter 1: Introduction
 1    Public Expenditure Management
 1    Environmental Management
 2    PEERs in the CEA Context

 5    Chapter 2: Experience with PERs and Their Relevance for PEERs
 5    PER “Best Practice”
 7    Coordination of PEERs with PERs

 9    Chapter 3: Experience with PEERs
 9    World Bank PEERs
16    Outside the World Bank
20    Conclusions

23    Chapter 4: Definition and Typology of Environmental Expenditures
23    OECD Definition and Classification Systems
31    World Bank
35    Toward a Definition and Typology of Environmental Expenditure for PEERs

45    Chapter 5: Main Elements of a Guidance Note
45    Creating an Expenditure Database
46    Allocation
47    Magnitude and Trends
49    Efficiency and Quality

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

     51   Other Issues

     55   Chapter 6: Suggested Areas for Further Work


     57   Appendix A: Examples of Environmental Projects from the Asia Environmental
     59   Appendix B: OECD Checklists for Measuring Performance of Public Environmental
          Expenditure Management
     59   Checklist 1. Performance in terms of environmental effectiveness
     60   Checklist 2. Performance in terms of fiscal prudence
     62   Checklist 3. Performance in terms of management efficiency

     65   Appendix C: Environmental Financial Flows to Developing Countries
     71   Appendix D: Guidelines for Using World Bank Thematic Codes Regarding Environment
          and Natural Resources Management

 75       Notes

 79       References


     18   BOX 1. Examples of common analyses carried out in OECD EPRs
     68   BOX C.1. Methodological note regarding use of the CRS database


      3   Figure 1. Key building blocks of the CEA
     65   Figure C.1. Direction of net official flows, 1998/99
     69   Figure C. 2. Estimates of environment-related ODA commitments as a percentage
          of total ODA using four CRS purpose code environmental screens


     17   Table 1. Summary of issues covered by World Bank PEERs
     27   Table 2. Environmental protection purpose codes in the Creditor Reporting System
     29   Table 3. Natural resource management activities and exploitation activities, SEEA
     40   Table 4. Draft examples of accounts for the various dimensions of environmental
     66   Table C.1. Official development finance (ODF) from DAC member countries and multi-
          lateral agencies to aid recipients, 1993–2000
     67   Table C.2. Four environmental screens based on CRS purpose codes
     68   Table C.3. Environmental aid as a share of total aid, 1990 and 1995–2000

iv                                                                               Environment Strategy Papers

        he existence of externalities, market         work developed by the Organisation for
        failures, and complex transboundary           Economic Co-operation and Development
        and transgenerational issues linked           (OECD), the Creditor Reporting System (CRS),
with environmental challenges means that              and the Eurostat Classification of Environmen-
public sector institutions have an important          tal Production Activities and Expenditure
role to play in environmental management.             (CEPA). In addition, the report summarizes
Public expenditures and their effective man-          findings of a review of 10 World Bank PEERs.
agement are key aspects of a country’s envi-
ronmental policy, regulatory, and institutional       The report provides a definition for PEER, and
framework.                                            discusses the principal recommendations
                                                      regarding procedures for conducting a PEER
As part of country-level environmental analy-         and some of the methodological issues and
sis, this report examines the definitions and         problems likely to be encountered. Issues
classification frameworks for environmental           covered include policy priorities, the spending
expenditure that have been used outside and           envelope, expenditure allocation, magnitudes
within the World Bank, reviews experience             and trends, international and regional com-
with PEERs, and outlines a methodological             parisons, expenditure efficiency and quality,
framework for carrying out PEERs .                    program-level and project-level analysis,
                                                      potentially environmentally damaging subsi-
Among the international tools reviewed are the        dies, and foreign aid. The report concludes
pollution abatement and control (PAC) frame-          with a list of suggested areas for further work.


        his paper was prepared as part of the           Brandon, Rob Crooks, Adriana Damianova,
        work program of the Strategy Team of            Peter Dewees, Giovanna Dore, Kirk Hamilton,
        the World Bank’s Environment Depart-            Hans Olav Ibrek, Andreas Liebenthal, Magda
ment (ENV) under the guidance of Magda                  Lovei, Poonam Pillai, Stefan Schwager, and
Lovei, lead environmental economist and team            Vinaya Swaroop. The paper benefited from
leader. It is part of a broader effort to learn         peer review and comments by World Bank
from experience and help develop guidance for           staff (Carter Brandon, Robert Crooks, Adriana
applying country environmental analysis more            Damianova, Giovanna Dore, Kirk Hamilton,
systematically in the Bank’s client countries.          and Anil Markandya) and OECD staff (Myriam
The work was coordinated by Poonam Pillai               Linster and Grzegorz Peszko). The authors
(ENV), who also provided inputs and com-                thank Nancy Levine, Rita Lohani, and Nanako
ments.                                                  Tsukahara for editorial assistance and Jim
                                                        Cantrell for design and production.
The authors of the study are Phil Swanson and
Leiv Lunde; both are affiliated with the ECON           Thanks are due to the governments of Den-
Center for Economic Analysis, Norway. They              mark and Norway for their generous financial
are grateful for interviews with the following          support for the preparation and publication of
World Bank staff: Richard Allen, Carter                 this paper.

Acronyms and Abbreviations

AFR     Sub-Saharan Africa Region
CAS     country assistance strategy
CEA     country environmental analysis
CEPA    Classification of Environmental Protection Activities and
            Expenditure (Eurostat/UNECE)
COFOG   Classification of the Functions of Government
CRS     Creditor Reporting System (OECD/DAC)
DAC     Development Assistance Committee (of the OECD)
EAP     Environmental Action Programme for Central and Eastern Europe
EASES   East Asia Environment and Social Development Unit (World Bank)
ECSSD   Environmentally and Socially Sustainable Development–Europe
            and Central Asia (World Bank)
EFS     environmental financing strategy
EPER    Environmental Protection Expenditure and Revenues
            (OECD/Eurostat questionnaire)
EPR     environmental performance review
ESW     economic and sector work
EU      European Union
GDP     gross domestic product
IMF     International Monetary Fund
ISIC    International Standard Industrial Classification of All Economic Activities
NACE    Statistical Classification of Economic Activities in the European Community
NEAP    national environmental action plan
NEMAP   national environmental management and action plan
NGO     nongovernmental association
OA      official assistance
ODA     official development assistance
OECD    Organisation for Economic Co-operation and Development

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

OFA               official development finance
OOF               other official flows
PAC               pollution abatement and control
PEEM              public environmental expenditure management
PEER              public environmental expenditure review
PEM               public expenditure management
PEIR              public expenditure and institutional review
PER               public expenditure review
PRSP              poverty reduction strategy paper
R&D               research and development
SEEA              System of Integrated Environmental and Economic Accounting
SERIEE            European System for the Collection of Economic Information on the Environment
SSPR              structural and social policies review
UNECE             United Nations Economic Commission for Europe
WPEP              Working Party on Environmental Performance (OECD)
WRI               World Resources Institute

x                                                                                Environment Strategy Papers
Executive Summary

        he existence of externalities, market            the past and attempts to distill best practice
        failures, and complex transboundary              lessons from them. In doing so, it draws on
        and transgenerational issues linked
                                                         best practice in general public expenditure
with environmental challenges means that
                                                         reviews (PERs) and notes the possibilities for
public sector institutions have an important
                                                         coordination between PEERs and PERs in the
role to play in environmental management.
Public expenditures and their effective man-             context of the CEA goal of integrating the
agement are key aspects of a country’s envi-             environment into wider economic analysis.
ronmental policy, regulatory, and institutional
                                                         EXPERIENCE      WITH   PEERS
framework, since most policies are linked to a
need for public expenditure of some kind.                Experience with PEERs is still rather limited.
Consequential, public environmental expendi-             PEERs have usually been ad hoc documents
ture review (PEER) can be an important part of           not related to a particular series, or they have
country environmental analysis (CEA).                    appeared as sections within other documents
                                                         or as publications of the client government
This paper examines how PEERs can contribute
                                                         rather than of the World Bank. Because the
to CEA in evaluating environmental manage-
ment capacity. It assesses experience with               coverage of these reviews is often quite
PEERs, both within and outside the World                 different, any current definition of PEERs must
Bank, as well as with the more general public            be rather broad. This report reviews a set of 10
expenditure reviews (PERs), and examines                 PEERs chosen on the basis of consultations
various definitions and classification systems           with World Bank staff. It also examines several
for public environmental expenditures. The               products outside the World Bank that could be
report concludes with a discussion of the main
                                                         considered PEERs, notably the environmental
recommended components of a PEER.
                                                         performance reviews conducted by the

To date, there are no guidelines for PEERs. This         Organisation for Economic Co-operation and
report is a first step toward filling the gap. It        Development (OECD) and the United Nations
examines PEERs that have been carried out in             Economic Commission for Europe (UNECE).

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

DEFINITION AND CATEGORIZATION                  OF       On the basis of a review of current interna-
                                                        tional and Bank practice regarding classifica-
                                                        tion systems, and of the analytical needs of
Defining environmental expenditure is an                PEERs, a multidimensional, modular classifi-
important initial step for any PEER. The                cation system is proposed. Depending on data
definition guides the selection of expenditures         availability, a review team could choose to
to be included in the review’s database,                use only particular dimensions. The underly-
which in turn feeds into the expenditure                ing principle is that total expenditure should
analysis. A standardized definition and                 be the same for each dimension. The pro-
categorization will help enable more mean-              posed dimensions, with examples of coverage
ingful comparisons across countries, although           for each, are:
the limitations of international comparisons            ! Agency (department or other institution)
must be kept in mind.                                   ! Economic (capital or recurrent expenditure)
                                                        ! Functional role of government (policy
The present report reviews the definitions and            development, regulation)
classification systems for environmental                ! Environmental domain (air, water)
expenditure that have been used within the              ! Regional (or countrywide)
World Bank and elsewhere. These include the             ! Financial (source of funds such as foreign
OECD pollution abatement and control (PAC)                aid, earmarked taxes).
framework and the related definitions of
environmental expenditure developed with                MAIN ELEMENTS OF A GUIDANCE
Eurostat; the OECD Development Assistance               NOTE
Committee (OECD/DAC) Creditor Reporting
                                                        Finally, the note discusses the principal
System (CRS); and other international classifi-
                                                        recommendations regarding procedures for
cations—the System of Integrated Environ-
                                                        conducting a PEER and some of the important
mental and Economic Accounting (SEEA), the
                                                        methodological issues and problems likely to
Classification of Environmental Protection
                                                        be encountered. It is meant to be the forerun-
Activities and Expenditure (CEPA), and the
                                                        ner of a more detailed guidance note, to be
Classification of the Functions of Government
                                                        developed as part of a future project. Issues
(COFOG). The report concludes by recom-
                                                        covered include policy priorities, the spend-
mending consideration of a general definition
                                                        ing envelope, expenditure allocation, magni-
based on the internationally accepted OECD/
                                                        tudes and trends, international and regional
Eurostat definition of environmental protec-
                                                        comparisons, expenditure efficiency and
tion activities, supplemented by reference to
                                                        quality, program-level and project-level
selected natural resource management
                                                        analysis, potentially environmentally damag-
activities. The general definition would be
                                                        ing subsidies, and foreign aid. The report
accompanied by lists of examples of what is
                                                        concludes with a list of suggested areas for
specifically included and excluded from the
                                                        further work.
definition, for the guidance of users.

xii                                                                              Environment Strategy Papers
Chapter 1


          he objective of this report is to exam-       According to the World Bank’s PEM Handbook
          ine how public environmental expendi-         (1998), the generally accepted objectives of
          ture reviews (PEERs) may contribute to        public expenditure management are:
country environmental analysis (CEA) in
evaluating environmental management capac-              ! Fiscal discipline: Maintaining sustainable
ity. It reviews experience so far with PEERs              fiscal discipline
within and outside the World Bank, discusses            ! Allocative efficiency: Facilitating strategic
methodological problems, and examines the                 prioritization of expenditures across
main issues to be considered in developing a              policies, programs, and projects to promote
guidance note for conducting PEERs in the CEA             efficiency and equity
context.                                                ! Cost-effectiveness: Encouraging better use
                                                          of resources to achieve outcomes and
This report is based primarily on desk re-                produce outputs at the lowest possible cost.
search. It also draws on interviews with PEER
and public expenditure review (PER) practitio-          Methods for evaluating public expenditure
ners at the World Bank in Washington, D.C.,             management have included diagnostic toolkits
June 3–7, 2002, and at the Organisation for             and checklists (e.g., the PEM Core Diagnostic)
Economic Co-operation and Development                   that focus on the existence of particular
(OECD) in Paris. This version of the report             institutions and organizational processes, and
incorporates the World Bank’s comments on               tools that focus more on the outcomes of those
an earlier (June 2002) version.                         processes, such as public expenditure reviews.
                                                        In practice, there has been some overlap
                                                        between the institutional and functional
PUBLIC EXPENDITURE MANAGEMENT                           focuses of the various instruments.
In recent years a substantial amount of work
has been done on developing guidelines for
and evaluating public expenditure manage-
                                                        ENVIRONMENTAL MANAGEMENT
ment (PEM), notably by the World Bank, the              Environmental management is a process that
OECD, and the Asian Development Bank.                   entails (a) the recognition of environmental

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

problems; (b) the emergence of public                         The third building block, “capacity/perfor-
awareness and political commitment to                         mance assessment,” evaluates the country’s
address these problems; (c) the formulation of                capacity for managing environmental priori-
environmental policies; (d) the expression of                 ties. PEER is one element of this block.
policies in regulations and legislation; and (e)
the implementation and enforcement of
                                                              Public environmental expenditures
                                                              The role of public environmental expenditures
One important task of environmental manage-                   is to put into practice the government’s
ment under point (e) is the management of                     environmental management policy. Although
financial resources with the aim of accom-                    in one sense public expenditures can be said
plishing the other tasks. This involves ensur-                to supplement other policy tools, such as
ing that:                                                     legislation and regulation, this paper takes a
                                                              broader approach. The starting premise is that
! Expenditures match policy principles and                    most policies will result in public expendi-
  priorities                                                  tures of some kind. For example, policies that
! The activities that the expenditures repre-
                                                              are based on the “polluter-pays” and “user-
  sent are the most appropriate way of
                                                              pays” principles will result in few subsidy
  handling the issues the activities purport to
                                                              expenditures but may lead to larger regulatory
                                                              and monitoring expenditures.
! The appropriate activities are carried out
  efficiently and effectively.
                                                              How a PEER helps evaluate environmental
                                                              management capacity
                                                              The PEER helps evaluate a government’s
Country environmental analysis (CEA) is a
                                                              environmental management capacity by
country-level analytical tool that can help
                                                              looking at the results of this management as
assess the environmental priorities of coun-
                                                              reflected in public expenditures. It does this
tries’ development and poverty reduction
                                                              by asking three questions:
strategies, the environmental implications of
policies, and countries’ institutional capacity
                                                              ! Do the expenditures address policy
to address their challenges. The objective of
CEA is to help integrate environmental
considerations into early stages of planning                  ! If so, does a particular expenditure address

and to guide capacity building and opera-                         a policy priority in the most appropriate
tional priorities in development assistance.                      way? This involves asking (a) whether there
The CEA is also to be used as a framework for                     is a rationale for government involvement
closer donor coordination, by helping avoid                       in the first place (e.g., a market failure) and
duplication of environmental analyses.                            then (b) whether the instrument chosen to
                                                                  address the problem is appropriate.1
The CEA will be made up of three building                     ! Granted that a particular expenditure is
blocks (Figure 1). Guidance notes on key                          addressing a policy priority and is taking
modules will form a toolkit for each block.                       an appropriate approach to it, is the

2                                                                                      Environment Strategy Papers

                                                     Figure 1
                                          Key building blocks of the CEA

                             Country Environmental Analysis
     State of Environment and
     State of Environment and                       Policy Analysis                     Capacity/ Performance
     Priorities for Development                                                             Assessment

 • Key environmental and                     • Identification key                    • Institutional and organizational
   sustainability indicators with focus        macroeconomic or sector                 capacity assessment
   on priority issues identified by            policies and reforms that may         • Methodology and processes for
   NEAPs, national strategies or               have significant environmental          priority setting and cross-sectoral
   other previous documents                    implications (e.g. energy and           coordination
                                               water pricing issues,                 • EA capacity assessment                .
 • Environmental trends in priority
   areas and sectors                           privatization, trade                  • Environmental public expenditure
 • Links of environmental issues                                                       review
   with economic growth and poverty          • Lessons from strategic                • Indicators for measuring public
   reduction (key environment and              environmental assessments               sector capacity
   poverty indicators)                       • Suggested measures or areas           • Data gaps
 • Data gaps                                   for strategic environmental           • Areas for intervention

                                                     Business Plan
 §    Stocktaking of and lessons learned from the Bank’s and development partners’ past environmental assistance to
      client country
 §    Review of the Bank’s planned lending and non-lending activities in key sectors and their links with environmental
 §    Review of development partners’ ongoing and planned environmental support activities
 §    Assessment of the Bank’s comparative advantage vis-à-vis development partners
 §    Suggested Bank assistance in the form of lending and non-lending assistance and partnerships

Source: CEA Concept Note, June 5, 2000.

     program being carried out efficiently? This                   It may be desirable for a PEER to focus
     involves determining whether the funds are                    especially on key environmental regulatory
     being managed correctly and whether they                      and management functions such as monitor-
                                                                   ing, regulation, and enforcement. For ex-
     are producing the desired results.
                                                                   ample, benchmarks could be developed for
                                                                   expenditures on particular types of activities,
The implication is that a large environmental
                                                                   perhaps in relation to gross domestic product
expenditure program is not necessarily a good                      (GDP) or other appropriate indicators.
thing in itself; what is more important is how
the funds are used.                                                Care should be taken in making international
                                                                   comparisons because of important contextual
On the basis of experience with PEERs and                          differences among countries. Ultimately, the
PERs, and the needs of the CEA, it is recom-                       amount spent on particular activities should
mended that a PEER not be used to assess                           depend on the country’s policies. Although
                                                                   outlying figures for a country in international
policy, which is the domain of the CEA’s
                                                                   comparisons could highlight problems in
“policy analysis” block. The main goal of the
                                                                   policies or in their implementation, policies
PEER should be to evaluate how well environ-                       and recommendations for changes in policies
mental policies are being carried out, as                          should ideally be examined before the PEER is
reflected in the expenditure program.2                             carried out.

Phil Swanson and Leiv Lunde                                                                                                      3
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

A few recent PERs (but no PEERs, so far)                      Another important element for consideration
appear to have expanded into the domain of                    in a PEER is the budgetary process, which has
the PEM diagnostic toolkit by examining                       both functional and institutional aspects.
institutional issues, even going so far as to be              Ideally, a PEER could look at both budgeted
termed “public expenditure and institutional                  and actual expenditures, comparing them
reviews” (PEIRs). Institutional issues could                  with policy priorities and with each other. In
include the policymaking process, and these                   practice, some PERs have based their analysis
reviews have been extended to such issues as                  on budget figures only, owing to the difficulty
adequate remuneration of personnel. There                     of finding information on actual expenditures.
may be some merit in following what seems                     The most important budgeting issues, how-
to be evolving PER practice by including some                 ever, are arguably institutional—the formal
institutional assessment in PEERs, especially                 and informal procedures that determine how
where such an assessment is not being                         much money is allocated to which programs
performed as part of another exercise. An                     and projects. Since the budgetary process
institutional review could help put the                       involves going beyond the environmental
expenditure review into context, and a tighter                sector, it might ideally be addressed outside
connection between the two can help the                       the CEA. But, as noted above, there may be a
government better use the expenditure                         need for the PEER and CEA tools (including
analysis to measure and correct related                       those under “capacity/performance assess-
institutional failures. Or, since assessment of               ment”) to be flexible enough to accommodate
institutions and of expenditures can be                       this important and essential analysis, when it
regarded as distinct (with the former looking                 is not performed elsewhere.
at institutional procedures and the latter at
the results of those procedures), it may be                   Although this report raises for consideration
conceptually attractive to keep them as                       the possibility of widening the scope of PEERS
separate exercises. For the purposes of this                  by including these institutional and budgetary
report, institutional issues will be discussed                issues, it focuses on evaluating capacity
in the CEA building block “capacity/perfor-                   through expenditure results.
mance assessment.”

4                                                                                     Environment Strategy Papers
Chapter 2

Experience with PERs and Their Relevance
for PEERs

        ublic expenditure review is a manage-            ! “Public Expenditure Reviews: Progress and
        ment tool that has become one of the               Potential,” PREM Note 20, April 1999
        World Bank’s premier economic and                ! “Public Expenditure Management and
sector work (ESW) products, especially as the              Accountability: Evolution and Current Status
Bank has moved from project-level assistance               of World Bank Work” (Rajaram and
toward assistance for more macro-level budget              Krishnamurthy 2001)
reform and support activities. The World                 ! “Public Expenditure Reviews: Extended
Bank’s Public Expenditure Management                       Draft Version,” available at
Website (<http://www1.worldbank.org/                       <www.worldbank.org/participation/
publicsector/pe/pem1.htm>) notes that,                     PERfindings.html>.3
ideally, PERs evaluate public spending on
three levels:                                            Evolving PER best practice should be highly
                                                         relevant for the development of PEER guide-
! Overall fiscal balance                                 lines, since a public environmental expendi-
! Allocative efficiency within the overall               ture review can be thought of as a “sectoral”
  budget envelope                                        PER. (A limited number of sectoral PERs have
! Technical efficiency of expenditures.                  been performed—for example, for the health
                                                         and education sectors in some countries.) But
As a number of recent studies have noted,                since the environment is not so much a sector
there are still no PER guidelines per se. (This is       as a cross-cutting theme, the PEER usually
also the case for PEERs.) Among the World                must look at expenditures across the economy
Bank internal publications that come the                 and not just at the expenditures of a particular
closest to guidelines are “Evaluating Public             ministry. This feature arguably makes the PEER
Spending: A Framework for Public Expenditure             closer to a PER than is the case for other
Analysis” (Pradhan 1996) and the PEM Hand-               sectoral PERs.
book (World Bank 1998).

Several studies of PERs go some way toward
                                                         PER “BEST PRACTICE”
providing guidelines, or at least highlight best         The authors reviewed the reports listed above,
practice. These include:                                 as well as several PERs, and talked to PER

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

practitioners within the Bank. On the basis of                    the review’s being client-led, if possible.
these sources, they developed a list of issues                    Client participation is seen as building the
regarding evolving PER best practice that                         government’s capacity to review itself
could be highly relevant for PEERs.                               eventually and as ensuring ownership of
                                                                  the resulting recommendations. There is

General issues                                                    also emphasis on the PER as not just a
                                                                  product but a process designed to foster an
! Rationale for the review. Given the cost of
                                                                  ongoing dialogue with the government. A
    PERs (averaging US$200,000 for a full
                                                                  fully in-house PER may be justified for the
    review), the review’s rationale should be
                                                                  first review, when baselines are being
    clearly determined and stated. Important
                                                                  determined and when local capacity and
    reasons for undertaking a PER could
                                                                  interest may be low.
    include provision of input to the CAS,
                                                              ! More focus on institutional issues. More
    future adjustment operations, or the
                                                                  attention should be paid to institutional
    country’s budget process. Ideally, the PER
                                                                  issues, such as budget management and
    should be timed to feed into these pro-
                                                                  incentives, which have an important
                                                                  impact on expenditure outcomes. Improve-
! Determination of content. The content,
                                                                  ments in institutions can help improve
    scope, and level of analysis should be
                                                                  expenditure allocations on a sustained
    based on the most pressing issues in the
                                                                  basis. As noted above, several recent
    client country, the content of past reports,
                                                                  reviews have actually been termed “public
    the type of information available, and the
    resources available for undertaking the                       expenditure and institutional reviews.”
    review.                                                   ! Need for tailoring to country circum-

! Trend toward more focused, less formal                          stances. Many observers have stressed that
    reviews. Large, comprehensive PERs are                        there is no unique prescription for the level
    thought to have had relatively little impact,                 or composition of public spending. PERs
    as they have often taken a long time to                       need to be tailored to the local situation on
    complete and as a result usually did not                      the basis of a thorough understanding of
    provide timely inputs into the country’s                      country-specific public sector mandates,
    budgetary process. Consequently, there is a                   institutions, and constraints. It was noted
    trend toward shorter, less formal reviews,                    that a PER framework (guidelines) can
    sometimes undertaken on a yearly or two-                      really only outline broad principles.
    year cycle. It is recommended that each                   ! Limitations of international comparisons.
    periodic PER focus on a particular sector or                  Since there is no optimal ratio or norm for
    theme rather than attempt to cover every-                     expenditure allocations, international
    thing.                                                        comparisons (including benchmarks) can at
! Participation of the client government.                         best only help reveal gross anomalies and
    PERs can be wholly in-house; Bank-led                         should be followed up by further analysis.
    participatory; joint; or client-led. Most                     Difficulties with international comparisons
    critics emphasize the importance of greater                   are attributable to such factors as differ-
    government involvement, to the point of                       ences in relative prices, the state of the

6                                                                                     Environment Strategy Papers
                                                       Experience with PERs and Their Relevance for PEERs

   infrastructure, and the roles of the public     ! Integrated analysis of capital and recurrent
   and private sectors.   4                            expenditures. To minimize waste of capital
! Discussion of problems encountered. Most             stock and to better determine the
   PERs do not adequately discuss the data,            sustainability of a given capital investment,
   methodological, and other problems                  it is important to analyze such investments
   encountered in conducting the review.               along with their actual and required
   Such discussion can, for example, provide           recurrent expenditures.
   a better context for the data presented in      !   Expenditure management. More attention
   the report and facilitate follow-up reports         should be paid to expenditure management
   in the country (as well as reviews in other         issues, including budget implementation
   countries, to the extent that similar prob-         and the efficiency of expenditures—for
   lems may be encountered elsewhere).                 example, via expenditure tracking. (This is
! Dissemination. An appropriate dissemina-             related to the more general institutional
   tion strategy of the review to all stakehold-       point under “General issues,” above.)
   ers should be pursued to enhance the            !   Outputs and outcomes. Most PERs focus
   transparency and effectiveness of the               on monitoring inputs, but more compari-
   process.                                            son is needed between these inputs and the
                                                       activity’s outputs and outcomes. Lack of
                                                       adequate data, however, is usually an
Issues related to project-level analysis               obstacle.
In general, the studies note that PERs need to     !   On-site assessment. When expenditure
go beyond allocation issues and look more              data are poor, they should be supple-
closely at the efficiency of individual pro-           mented by on-site inspections and surveys.
grams (the third of the three levels of analy-     !   Actual and budgeted spending. Many PERs
sis). Given resource constraints, program-             look only at budgeted spending. Ideally,
level analysis will typically only be under-           PERs should compare budgeted with actual
taken for the most important programs, that            spending or should concentrate on the
is, the largest budget items.                          latter.

                                                   COORDINATION OF PEERS
! Rationale for government expenditures.
                                                   WITH PERS
   More attention should be paid to analyzing
   the rationale (externalities, provision of      Most PEERs so far have been conducted
   public goods, and so on) for government         separately from PERs. Only one World Bank
   involvement in particular expenditure           PEER (that for Mongolia, completed in 2002)
   programs, as well as the appropriateness of     has been done as part of a PER.
   the involvement mode (e.g., regulation,
   outright provision). Best practice in the       Coordinating PEERs with PERs may offer
   division of public and private sector roles     several advantages. The PER can provide
   has evolved significantly over the years,       important inputs to the PEER, notably con-
   and assessing the appropriate role of the       cerning the macroeconomic context and the
   public sector should therefore be an            overall picture of government expenditures
   ongoing process.                                and institutions. In this case it is usually

Phil Swanson and Leiv Lunde                                                                            7
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

desirable for the PEER to follow the PER.                     tures by entities other than the core environ-
Several PEER practitioners noted, however,                    mental ministries and agencies. Coordination
that it might be useful to undertake the PEER                 of PEERs with PERs could also help meet the
and the PER simultaneously to take advantage                  CEA goal of integrating environment into
of the entrée that the PER process provides to                wider economic analysis. Most of the World
central government bodies outside the                         Bank PEER and PER practitioners consulted
ministry of environment, especially the                       were less sure about the value of information
ministry of finance. The cooperation of the                   flows in the other direction—that is, the
finance ministry is often crucial for tracking                contribution that PEERs could make to PERs.
down information on environmental expendi-

8                                                                                     Environment Strategy Papers
Chapter 3

Experience with PEERs

       xperience with PEERs within the World              ! The purpose of the report
       Bank is still rather limited, as is experi-        ! The definition of environmental expenditure
       ence with “sectoral PERs” in general.                 (if any)
Those PEERs that have been performed have                 ! The scope of expenditure included in the
usually been ad hoc documents not related to a               analysis (e.g., whether it includes the
particular series or have appeared as sections
                                                             capital/investment budget only or takes in
in other documents or as publications of the
                                                             recurrent expenditures, and whether it
client government rather than of the World
                                                             covers only the environment ministry or
Bank. Moreover, the coverage of these reviews
                                                             nonenvironmental ministries as well)
often differs greatly. It is therefore difficult to
come up with a definitive list of “World Bank             ! The main comparisons and analyses made,

PEERs.” In practice, the authors of this report              and whether expenditures were compared
relied on interviews with World Bank staff to                with policy priorities and with trends in
develop the nonexhaustive list presented                     other countries
below.5                                                   ! The time span—single year, or multiple
The authors also examined several products                ! Whether any analysis of expenditure quality
outside the World Bank that could be consid-                 or other project-level evaluation was
ered PEERs. The premier such product is                      performed.
perhaps the OECD environmental performance
review (EPR), but the OECD has several other
types of review as well, and the UNECE also               Philippines (1996)
conducts EPRs.                                            Title. “Philippines: Scope for Integrating
                                                          Macroeconomics and the Environment—Some
WORLD BANK PEERS                                          Suggestions,” Ronald T. McMorran and Kirk
                                                          Hamilton, IMF Fiscal Affairs Department and
This section presents a brief review of each
PEER found in the study, in chronological                 World Bank Environment Department, Septem-
order. (See Table 1 for a synopsis.) The                  ber 1996. A limited PEER was performed as
parameters examined include:                              part of the report.

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Purpose. The main purpose of the report as a                clear which of these projects, if any, were
whole was to evaluate the impact of the                     donor funded. There was no analysis of issues
country’s macroeconomic strategy on the                     related to foreign aid.

                                                            Bangladesh (1997)
Definition of environmental expenditure
                                                            Title. “Priority Framework for NEMAP Imple-
Scope. The report looked only at expenditures
                                                            mentation,” prepared jointly by the
by the Department of Environment and
                                                            Bangladesh Ministry of Environment and
Natural Resources. Expenditures were not
                                                            Forest and the World Bank, May 1997 (discus-
broken down between capital and current
                                                            sion draft). A PEER was performed as part of
                                                            the report.

Comparison with policy priorities. The report
                                                            Purpose. The aim of the report as a whole was
took policy priorities as a base and looked at
                                                            to create a framework for developing priority
the extent to which these were covered by
                                                            actions to improve environmental manage-
expenditures. It did not analyze expenditures
                                                            ment and monitor progress toward that goal.
that fell outside the policy priorities.

                                                            Definition of environmental expenditure. The
Other key comparisons and analyses. The
                                                            report notes that a “standard definition of what
PEER expressed expenditures on individual
                                                            does and does not constitute an environmental
priority programs as a percentage of the
                                                            expenditure was developed, based on World
environmental (i.e., departmental) budget and               Bank standard practice,” which in turn is
of the overall government budget, and it                    based on the definition used in Toward an
compared these expenditures with revenues                   Environmental Strategy for Asia (Brandon and
from the environment and natural resources                  Ramankutty 1993). This definition, which
sector. A large part of the report dealt with               actually consists of explicit lists of projects and
ways of increasing revenues from the natural                project components that may or may not be
resources sector—for example, by introducing                counted as environmental expenditure, is
or raising user charges—and with the macro-                 discussed in greater detail in Chapter 4.
economic effects of doing so.
                                                            Scope. The report created a database combin-
International comparison. None.                             ing the mainly donor-funded annual develop-
                                                            ment plan and the three-year rolling budget.
Period covered. One year; thus, the PEER did                This included projects from several different
not examine expenditure trends.                             ministries but was apparently limited to capital
                                                            expenditures. To be included in the database,
Quality/project-level analysis. No project-                 over 5 percent of the project had to be
level analysis was carried out.                             “environmental,” although only the environ-
                                                            mental portion was included. Apparently, the
Foreign aid. The report was confined to                     report looked at budgeted rather than actual
expenditures by the Department of Environ-                  expenditures. Codes in the database included
ment and Natural Resources, and it was not                  economic sector, type of expenditure (invest-

10                                                                                    Environment Strategy Papers
                                                                            Experience with PEERs

ment or technical assistance), source of         Purpose. To assess the functions and expendi-
funding, and geographic area in which the        ture patterns of the Forestry Department for
investment was made.                             use as an input when determining future
                                                 resource requirements.
Comparison with policy priorities. The report
compared expenditures with priority issues       Definition of environmental expenditure.
identified by the national environmental         Examined all “forestry” expenditures, which
management and action plan (NEMAP).              implicitly were all expenditures by the
                                                 Forestry Department.
Other key comparisons and analyses. The
environmental expenditures of each economic      Scope. Examined both the capital and the
sector or ministry were compared with the        recurrent expenditures of the department.
total development budget for that sector.
                                                 Comparison with policy priorities. None.
International comparison. None.
                                                 Other key comparisons and analyses. Com-
                                                 pared official budgets with original requests
Period covered. One year (1995/96).
                                                 and with actual expenditures. Within recurrent
Quality/project-level analysis. None.            expenditures, looked at trends in shares of
                                                 personal emoluments and other recurrent
Foreign aid. The report database combined        transactions. Examined trends in different
                                                 expenditure categories by cost center.
expenditures from the ordinary (three-year
rolling) government budget and the mainly
                                                 International comparison. None.
donor-funded development plan. Within the
mainly donor-funded part of the database, it
                                                 Period covered. 10 years (1988–98).
compared the amount for “environmental”
projects with the total development budget in
                                                 Quality/project-level analysis. Followed up
each major economic sector as an indication
                                                 evidence of funding anomalies for some
of the extent of environmental mainstreaming.
                                                 projects/cost centers with field visits.
No conclusions were drawn regarding the
targeting of donor aid. Project effectiveness    Foreign aid. No indication of whether donor-
was not examined, either for government-         funded projects were considered in this
funded or for donor-funded projects.             analysis, but the comparison between budget
                                                 requests and actual budgets would seem to
Malawi (1998)                                    indicate that they were not.

Title. “Review of Public Expenditure by
Function in the Forestry Department,” R. W. S.   Kenya (1998)
Nyirenda, consultancy report apparently          Title. “Ministerial Public Expenditure Review,”
commissioned by the World Bank and the           Ministry of Natural Resources, Kenya, Septem-
Department of Forestry, Malawi, March 1998       ber 1998; funded by the World Bank, accord-
(not final draft).                               ing to Peter Dewees, lead environmental

Phil Swanson and Leiv Lunde                                                                    11
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

specialist, Economically and Socially Sustain-              Foreign aid. Examined donor-funded projects
able Development–Europe and Central Asia                    in the course of reviewing projects that passed
(ECSSD), World Bank.                                        through the Ministry of Natural Resources. A
                                                            table containing information on “donor
Purpose. To identify ways of achieving greater              development expenditures” showed funding
efficiency in the use of resources prior to a               for various programs over several years. There
likely budget cut. The Treasury requested all               was, however, no analysis of aid effectiveness,
ministries to perform such a review in the run-             the ministry’s management of the aid, or
up to development of a medium-term expen-                   whether the assistance matched policy
diture framework.                                           priorities.

Definition of environmental expenditure.
                                                            Thailand (1999)
                                                            Title. “Building Partnerships for Environmental
Scope. Looked at all expenditures of the                    and Natural Resource Management,” Royal
Ministry of Natural Resources, broken down                  Thai Ministry of Science, Technology and the
by program and economic type (capital,                      Environment and the World Bank’s Social
recurrent operations, wages, etc.).                         Development Sector Unit and Thailand
                                                            Country Management Unit, 1999.
Comparison with policy priorities. Although
                                                            Purpose. To promote dialogue and build
one of the objectives of the report was to
                                                            partnerships with government and civil
create stronger links between expenditures
                                                            society; to provide a framework for World
and policy priorities, no comparison between
                                                            Bank involvement in the energy sector; and to
the two appears to have been made.
                                                            contribute to the structural and social policies
                                                            review (SSPR) under way at the time. Another
Other key comparisons and analyses. No
                                                            important goal was to examine the impact of
comparison of environmental expenditures
                                                            the Asian financial crisis on the environment
(those by the environmental ministry) with
                                                            and on environmental expenditures.
those of other ministries and sectors was
made, nor was there an analysis of the trends               Definition of environmental expenditure.
in capital and recurrent expenditures in                    None given, although expenditures were
particular programs, although this probably                 categorized as water pollution, air and noise
could have been done with the data available.               pollution, solid and hazardous waste, and
                                                            other (management).
International comparison. None.
                                                            Scope. Expenditures from seven ministries
Period covered. Several years.                              were reviewed. Capital and recurrent expendi-
                                                            tures were not disaggregated. Private sector
Quality/project-level analysis. Although an                 expenditures were examined to some extent,
aim of the report was to relate resources to                although separately from public expenditures.
outputs, little output analysis was actually
performed.                                                  Comparison with policy priorities. None.

12                                                                                    Environment Strategy Papers
                                                                              Experience with PEERs

Other key comparisons and analyses. Trends       fared in comparison with the budget as a
in expenditure on various environmental          whole during the Asian financial crisis.
problems (media) tracked over the three years
covered.                                         Definition of environmental expenditure. An
                                                 explicit definition was not provided, but
International comparison. None.                  implicitly environmental expenditure included
                                                 expenditures for tap water and sewage
Period covered. Three years (1996–98).           treatment; waste treatment; policy develop-
                                                 ment and research and development (R&D);
Quality/project-level analysis. No project-      nature conservation; air quality; and environ-
level analyses were provided, other than         mental management and miscellaneous.
comments regarding cost recovery for some
services such as wastewater treatment. In a      Scope. Primarily concentrated on expendi-
discussion of environmental sector revenues,     tures by the Ministry of Environment. (Forestry
the report noted the extent to which the         issues were added to this ministry during the
polluter-pays principle and market-based         review period, and the relevant expenditures
instruments, such as product taxes, user         of the ministry that previously handled forestry
charges, input taxes, royalties, and pollution   were included for the period that they were
                                                 not under the Environment Ministry.) Both
charges, had been introduced.
                                                 capital and recurrent expenditures were
Foreign aid. Not addressed specifically,
although one of the stated purposes of the
                                                 Comparison with policy priorities. Done to
report was to develop dialogue for further
                                                 some extent, in that the report noted that
World Bank involvement in the country. The
                                                 programs which were not cut were generally
main goal, however, was to examine whether
                                                 high priorities for the government.
environmental spending had declined as a
result of the Asian financial crisis, and the    Other key comparisons and analyses. Com-
report accordingly focused on the                pared trends in different environmental
government’s own expenditure priorities.         “programs” (as listed under Definition of
                                                 environmental expenditure) with those for the
Republic of Korea (2000)                         budget as a whole.

Title. “The Environmental Dimension of the       International comparison. None.
Crisis: A Step Back or a New Way Forward?”
World Bank, Environment and Social Devel-        Period covered. Three years (1997–99).
opment Unit for the East Asia and Pacific
Region, and Korea Institute for Environmental    Quality/project-level analysis. None.
Security, 2000.
                                                 Foreign aid. The focus was on the
Purpose. The report included a review of the     government’s own expenditure in the context
government’s “environmental budget” in order     of the Asian financial crisis; foreign aid issues
to examine how environmental spending had        were not examined.

Phil Swanson and Leiv Lunde                                                                     13
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Indonesia (2001)                                            that were also affected by the Asian financial
Title. “Public Environmental Expenditure in                 crisis.
Indonesia,” Jeffrey R. Vincent and others for
                                                            Period covered. Examined trends over a
the World Bank East Asia Environment and
                                                            number of years.
Social Development Unit (EASES) Discussion
Paper Series, June 2001. Prepared as part of
                                                            Quality/project-level analysis. None.
the World Bank study “Indonesia: Environ-
ment and Natural Resource Management in a
                                                            Foreign aid. Because of data availability
Time of Transition.”
                                                            problems, the study only looked at (invest-
                                                            ment) expenditures funded by the Indonesian
Purpose. To examine changes in environmen-
                                                            government, and it specifically noted that it
tal expenditures following the Asian financial
                                                            did not analyze donor-financed projects.
crisis and to provide baseline information for
future examination of trends and patterns.
                                                            Uttar Pradesh, India (not yet completed)
Definition of environmental expenditure.
                                                            Title. “Environmental Review of Budgetary
Developed three categories of environmental
                                                            Expenditures in Uttar Pradesh” (from draft
expenditure—core, mitigating, and inciden-
                                                            terms of reference).
tal—but because of data availability problems,
examined only core expenditures. (The
                                                            Purpose. To review environmental expendi-
threefold typology is discussed in detail in
                                                            tures across sectors and over time to deter-
Chapter 4.)                                                 mine whether expenditures are commensurate
                                                            with the economic cost of degradation and
Scope. The study was limited to “core” capital              correspond to the state’s environmental
expenditures financed by the government; it                 priorities and to the underlying environmental
did not cover recurrent expenditures or                     problems.
projects financed by donors.
                                                            Definition of environmental expenditure. As
Comparison with policy priorities. None.                    in the Bangladesh PEER, based on the defini-
                                                            tion used in Brandon and Ramankutty (1993).
Other key comparisons and analyses. Com-                    Although the terms of reference refer to
pared amounts and trends of environmental                   expenditures under this definition as “core
expenditures with those of nonenvironmental                 environmental expenditures,” they do not
programs and with macroeconomic variables                   mention the core/mitigating/incidental typol-
such as GDP. Also compared expenditures                     ogy used in the Indonesia and Mongolia
across provinces to determine the main                      PEERs.
variables accounting for differences in spend-
ing patterns, such as population, amount of                 Scope. Covers expenditures by “core” envi-
protected land, and average income.                         ronmental agencies, as well as by
                                                            nonenvironmental agencies in the state
International comparison. Some comparisons                  government. Looks at both developmental/
were made with other countries in the region                capital and operating/routine expenditures.

14                                                                                    Environment Strategy Papers
                                                                                Experience with PEERs

Comparison with policy priorities. Yes.             which it was intended. The current goals of
                                                    the study are somewhat different from the
Other key comparisons and analyses. Com-            original terms of reference. This overview is
parison of environmental expenditures by            based on the revised goals as stated by
economic sector and with overall budget             Adriana Damianova, senior environmental
expenditures and GDP. The study will also           specialist, ECSSD, in an interview with ECON.
summarize available information on poten-
tially “environmentally damaging” state             Definition of environmental expenditure.
subsidy programs.                                   Primarily uses the OECD pollution abatement
                                                    and control (PAC) definition discussed in
International comparison. No.                       Chapter 4.

Period covered. Budget years 1995/1996              Scope. Looks primarily at money distributed
through 1999/2000.                                  from a fund located within the Ministry of
                                                    Environment and financed mainly by ear-
Quality/project-level analysis. The original        marked pollution charges. The ministry
terms of reference state that this review will be
                                                    distributes this fund to local governments,
a first step in exploring the “efficiency and
                                                    which in turn provide grants to primarily state-
quality” of expenditures in order to determine
                                                    owned enterprises for PAC-type expenditures.
whether public resources are being used most
                                                    The report also examines direct environmental
cost-effectively. According to Carter Brandon,
                                                    expenditures by the Ministry of Environment
the project manager, an examination of
                                                    and other ministries.
expenditure quality will be included in the
terms of reference for an additional part of this
                                                    Comparison with policy priorities. The report
                                                    will give some indication of the degree to
                                                    which expenditures meet broad priorities.
Foreign aid. The terms of reference note that
the report should “review and analyze trend
                                                    Other key comparisons and analyses. Be-
information on foreign funding sources for
                                                    tween planned and actual expenditures.
core environmental expenditures, typically,
funding from donor and other agencies.”
Actual aid coverage will be reviewed once the       International comparison. Some comparison
World Bank completes the Uttar Pradesh              with neighboring countries, in particular
PEER.                                               Belarus and Poland.

                                                    Period covered. Several years may be cov-
Ukraine (not yet completed)                         ered, but the purpose of the report does not
Title. “Policy Options for Financing Sustain-       appear to be to examine trends.
able Development: Review of Environment
Public Expenditure” (from terms of reference).      Quality/project-level analysis. Much of the
                                                    study appears to be a tracking exercise to
Purpose. To determine whether money                 follow money to the project level. The study
distributed from a fund within the Ministry of      apparently will not analyze whether indi-
Environment actually went to the purposes for       vidual projects are efficiently managed.

Phil Swanson and Leiv Lunde                                                                        15
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Foreign aid. The Ukraine PEER is focusing on                environmental projects with the development
traditional pollution abatement and control                 budgets of other “social expenditure” catego-
expenditures originating from a special fund                ries such as education, health, and housing.
within the Ministry of Environment. Issues
relating to donor financing apparently will not             International comparison. Comparison of
be considered, since the fund has received no               amounts and trends with other countries in the
donor support.                                              region (for example, share of GDP, share of
                                                            total public expenditure per capita).

Mongolia (expected 2002)
                                                            Period covered. Several years.
Title. “Mongolia Environmental Expenditure
Review” (the draft was reviewed for this                    Quality/project-level analysis. The report
study). To be a chapter in a full PER—appar-                specifically notes that it does not examine the
ently, the first time that a review of environ-             cost-effectiveness either of expenditures or of
mental expenditures will be included in a                   the benefits they generate.
                                                            Foreign aid. Analyzes expenditures from both
Purpose. To provide baseline information on                 the current budget and the development
trends and patterns in environmental expendi-               budget. Although the latter presumably
tures.                                                      includes a high degree of donor financing, this
                                                            is not indicated specifically in the report, and
Definition of environmental expenditure.                    aid issues per se are not discussed.Table 1.
Looks at public expenditures for “environment               Summary of issues covered by World Bank
and natural resource management,” using the                 PEERs
same core/mitigating/incidental categories as
in the Indonesia PEER.
                                                            OUTSIDE THE WORLD BANK
Scope. Like the Indonesia PEER, limited to                  This section describes the various instruments
“core” expenditures. Reviews expenditures by                used by the OECD, the UNECE, and indi-
“core” environmental and natural resource                   vidual countries that could be considered
management agencies and by nonenviron-                      similar to PEERs.
mental bodies but notes that data for line
agencies other than the Ministry of Environ-
                                                            OECD environmental performance reviews
ment are very limited.6 Covers both recurrent
and capital expenditures.                                   The OECD Working Party on Environmental
                                                            Performance (WPEP) began conducting
Comparison with policy priorities. Yes.                     environmental performance reviews (EPRs) in
                                                            1992. The purpose of these peer reviews is to
Other key comparisons and analyses. Com-                    help OECD countries improve their individual
pares totals and trends of environmental                    and collective performance in environmental
expenditures with those for total public                    management and to stimulate policy dialogue
expenditures and basic economic indicators.                 and accountability. EPRs systematically review
Compares the development budget for                         the performance of individual OECD countries

16                                                                                    Environment Strategy Papers
                              Table 1. Summary of issues covered by World Bank PEERs
Phil Swanson and Leiv Lunde

                                                                            Definition of
                                                                           environmental                     Comparison                                                             Foreign aid
                                                                            expenditure                      with policy     International                    Project-level    included/specifically
                               Country (year)           Purpose                 used            Scope         priorities     comparisons     Period covered     analysis             examined
                              Philippines       Determine impact of    Not explicit         Selected        Yes             No               Single year      No              Not clear/no
                              (1996)            macroeconomic strategy                      departments
                                                on environment
                              Bangladesh        Improve environmental     Brandon and       Capital         Yes (NEMAP ) No                  Single year      No              Yes/no
                              (1997)            management                Ramankutty        expenditure
                                                                          (1993)            only, across
                              Malawi            Determine future          Forestry          Department      No              No               Multiyear        Yes             No/no
                              (1998)            resource requirements     Department
                              Kenya (1998) Prepare for budget cut         Not explicit      Ministry        No              No               Multiyear        No              Yes/no
                              Thailand          Examine impact of Asian   Not explicit      Across          No              No               Multiyear        No              No/no
                              (1999)            financial crisis                            government
                              Korea, Rep.       Examine impact of Asian   Not explicit      Ministry        Some            No               Multiyear        No              No/no
                              of (2000)         financial crisis
                              Indonesia         Examine impact of Asian   “Core”            Capital         No              Some             Multiyear        No              No/no
                              (2001)            financial crisis                            expenditure
                                                                                            only, across
                              Uttar             Compare with priorities   Brandon and       Across state    Yes             No               Multiyear        Yes (revised    Yes/yes
                              Pradesh,          and problems              Ramankutty        government                                                        terms of
                              India (to be                                (1993)                                                                              reference)

                                                                                                                                                                                                       Experience with PEERs
                              Ukraine (to       Track funds               OECD              Primarily fund Some             Some             Not defined      Some            No (no foreign aid
                              be                                          pollution         within                                                                            goes to fund)
                              completed)                                  abatement and     ministry
                                                                          control (PAC)
                              Mongolia          Provide baseline on       “Core”            Across          Yes             Yes              Multiyear        No              Yes/no

                              (expected         trends and patterns in                      government
                              2002)             expenditure
                               Note: NEMAP national environmental management and action plan; OECD, Organisation for Economic Co-operation and Development.
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

in meeting domestic policy objectives and                       economic information such as environmen-
international commitments in the environmen-                    tally relevant subsidies and taxes, water and
tal sphere. The reviews are largely modeled                     energy prices, and official development aid.
on the methodology of the OECD’s well-                          EPRs also review environmental institutions
known economic surveys (see OECD 1997;                          and individual programs, although not neces-
similar sectoral review programs exist for                      sarily as part of the expenditure analysis.
energy, agriculture, and environmental
assistance). Although EPRs look at environ-                     In recent years the OECD has reviewed
mental expenditures, expenditure analysis is                    expenditures in a number of non-OECD
not the focus of these reports, which also                      countries, notably in Central and Eastern
review environmental policies and commit-                       Europe and the former Soviet Union. Most of
                                                                this work has been part of a special OECD
                                                                program for nonmember countries (see the
                                                                next section). Reviews under this nonmember
The expenditure analysis (usually found in the
                                                                program have not always closely followed the
“economic” chapter) covers both public and
                                                                EPR format. Much work has concentrated on
private expenditures, based on pollution
                                                                the management of special environmental
abatement and control (PAC) data that the
                                                                funds, which are prevalent in these countries.
OECD collects and publishes on a regular
basis, independent of the EPR process, and on
additional information collected during the                     OECD environmental expenditure reviews
EPR process. (A discussion of EPR methodol-                     of nonmember countries
ogy is presented in Box 1.) In addition to                      Several analytical products on environmental
traditional PAC expenditures, the reviews                       expenditure have been developed in the
have also looked at expenditures for nature                     framework of OECD cooperation with non-
protection and, occasionally, for water supply.                 member countries, notably in Central and
This is complemented by other types of                          Eastern Europe, the former Soviet Union, and

Examples of common analyses carried out in OECD EPRs
!    Changes in PAC expenditures—for example, between two reviews, in real terms or as a propor-
     tion of total expenditure (e.g., of total business expenditure)
!    Shares of total PAC expenditures by the public and private sectors; changes in these shares over
     time; and the difference in growth rates between sectors
!    Shares of different media (e.g., “air management”) within total or sector PAC expenditure; changes
     in these shares over time; and the difference in growth rates between media
!                                                            ,
     Total or sectoral PAC expenditure as a share of GDP a share of total gross fixed capital formation,
     and in per capita terms; changes in these shares over time
!    Division of total PAC expenditures between investment and current expenditure; changes in real
     terms and in shares over time· Environmental taxes: lists of taxes, related revenues, and share of
     total tax revenues
!    Agricultural subsidies as a share of total agricultural spending.
Source: Based on a review of the Norway and Portugal EPRs. OECD (1996) notes that in order for PAC expenditure data to
be useful for policy purposes, they must be related to other variables.

18                                                                                          Environment Strategy Papers
                                                                            Experience with PEERs

China. This work has usually been carried out    Environmental Financing Strategies. Environ-
with the support of external consultants,        mental financing strategies (EFSs) analyze
financed by several member countries (to         available and committed expenditures related
date, mainly Denmark, but also Australia,        to the implementation of selected environ-
Germany, and Japan, as well as the European      mental programs and compare them with
Commission). The most relevant products          detailed estimates of costs (expenditure needs)
include:                                         in a long-term strategic planning framework.
                                                 EFSs also analyze scenarios and policies
! Environmental expenditure reviews in           aimed at financing expenditure deficits by
  selected countries of Central and Eastern      mobilizing additional expenditure or revising
  Europe and the former Soviet Union             the targets and designs of environmental
! Environmental financing strategies             programs. They use existing environmental
! Performance reviews of institutions manag-     expenditure reviews or are developed in
  ing public environmental expenditure           parallel with those reviews. So far, financing
! Analysis of environmental finance flows in     strategies for urban water and wastewater
  Central and Eastern Europe and the former      have been completed for Georgia,
  Soviet Union.                                  Kazakhstan, Moldova, and two oblasts of the
                                                 Russian Federation, Novgorod and Pskov.
Environmental Expenditure Reviews in             EFSs are under development in Armenia
Selected Countries of Central and Eastern        (wastewater only); Sichuan Province, China
Europe and the Former Soviet Union. The          (wastewater only); East Kazakhstan oblast,
most recent publication in this category,        Kazakhstan; Latvia; and Russia’s Kaliningrad,
“Overview of Environmental Expenditure in        Rostov, and Yaroslavl oblasts (in addition to
the NIS,” covers environmentally related         the EFSs for Novgorod and Pskov). Novgorod,
expenditure in two oblasts (regions) of Rus-     Rostov, and Yaroslavl oblasts are also develop-
sia—Novgorod and Pskov—and in Georgia. It        ing solid waste financing strategies.8
is based on surveys of major polluting enter-
prises, together with data from government       Performance Reviews of Institutions Manag-
budget reports and other sources, to improve     ing Public Environmental Expenditure.
and supplement official expenditure data.        Performance reviews of institutions that
                                                 manage public environmental expenditure
The special issue examined in Russia was the     focus on reviewing the quality of specific
use of money surrogates in public environ-       public environmental expenditure programs.
mental expenditure. In Georgia, with the         For the most part, they have concentrated on
financial support of the Danish Environmental    the management of the special budgetary and
Protection Agency, the OECD/Environmental        off-budget environmental funds that are
Action Programme for Central and Eastern         prevalent in many transition economies,
Europe (EAP) Task Force assisted the govern-     including the Czech Republic, Estonia,
ment in designing and implementing a revised     Kazakhstan, Moldova, Poland, and Slovenia.9
system for the regular collection and dissemi-
nation of environmental expenditure data         Analysis of Environmental Finance Flows in
compatible with international standards.7        Central and Eastern Europe and the Former

Phil Swanson and Leiv Lunde                                                                   19
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Soviet Union. The OECD is currently prepar-                 systems, which are usually based on those
ing a report entitled “Analysis of Environmen-              mentioned above. It should be noted that a
tal Finance Flows in the CEE and the Former                 goal of the World Bank in the context of PERs
Soviet Union” for the upcoming Environment                  is to develop countries’ ability to eventually
for Europe Ministerial Conference, to be held               evaluate their own expenditures.
in Kyiv, Ukraine, in May 2003. The report
analyzes trends since 1996 in environmental
expenditure in all Central and Eastern Euro-
pean and former Soviet Union countries. It                  This section summarizes the findings from the
includes additional country surveys to trace                review of PEERs and similar tools used within
trends in domestic public and private expendi-              and outside the World Bank.
tures, and it uses the OECD/DAC Creditor
Reporting System (CRS) database, comple-
                                                            Reasons for performing PEERs
mented by additional surveys by individual
donors and international financial institutions,            PEERs have had a wide variety of purposes.
to trace trends in environmentally related                  These include measuring the impacts of the
official development assistance (ODA) and                   Asian financial crisis, preparing a ministry for
official assistance to the region.                          budget cuts, tracking funds, and determining
                                                            future resource requirements. Measuring
                                                            environmental management capacity has not
UNECE environmental performance reviews
                                                            usually been one of their purposes. Although
The OECD helped the UNECE set up its                        the OECD and UNECE environmental perfor-
environmental performance review program,                   mance reviews cover this issue, they do not
which is based on OECD methodology. The                     explicitly use expenditure analysis to do so
main difference between the two series is                   (except perhaps for some reports on nonmem-
geographic coverage: the UNECE program                      bers). This wide variety of purposes presum-
was set up to cover member countries that are               ably accounts for much of the similarly wide
not members of the OECD.                                    variety in coverage and in the types of analysis
Country internal reporting
A number of OECD countries have established                 Definitions of environmental expenditure
regular reporting or accounting systems on                  Definitions of environmental expenditure
environmental expenditure. Such reporting is                have varied greatly, and some PEERs have not
mainly of a statistical nature and is often based           provided any explicit definition.
on ongoing data collection using satellite
accounts under the System of Integrated
Environmental and Economic Accounting
(SEEA), the related European System for the                 Most PEERs have significantly limited the
Collection of Economic Information on the                   scope of the expenditures they cover. This is
Environment (SERIEE), or the OECD’s original                the case not only for the OECD and UNECE
PAC methodology. Several countries, includ-                 EPRs, which concentrate mostly on pollution
ing Canada, have developed their own                        abatement and control expenditures, but also

20                                                                                    Environment Strategy Papers
                                                                              Experience with PEERs

for World Bank PEERs. Some World Bank              Use of international comparisons
reviews have limited their coverage to capital     In contrast to the OECD and UNECE reviews,
expenditures or to expenditures by particular      most World Bank PEERs have not engaged in
ministries. Most of the limitations appear to be   international comparisons. Because of the
attributable to data availability problems in      differences among countries, comparisons
particular countries. While some differences in    should be used with caution. At best, they
scope are probably unavoidable, the develop-       should serve only to identify gross anomalies
ment of common guidelines may make it              that could be followed up in more detail using
                                                   other analytical methods. Used properly,
possible to eliminate some differences that are
                                                   however, international comparisons and
not strictly due to data availability.
                                                   benchmarks can be helpful. As increasing
                                                   numbers of PEERs are performed according to
According to the OECD, the main reason for
                                                   more uniform guidelines, more international
the initial focus on PAC expenditure in OECD
                                                   comparisons and the development of bench-
reports was the importance of PAC-related          marks should become possible.
policy decisions and investments in the 1970s
and 1980s. Nature protection expenditure was
                                                   Comparison with policy priorities
added in 1996, but a major constraint has
been the quality and comparability of such         Although the OECD and UNECE reviews
                                                   cover policy priorities and make comparisons
data and hence their interpretability. The
                                                   between these priorities and aggregated
OECD states that keeping PAC expenditure as
                                                   expenditures, they do not perform such
a core data set helps maintain certain time-
                                                   evaluations at the program or project level.
series and ensure a minimum of coherence
                                                   (An exception has been some OECD reports
among countries. When used in country
                                                   on nonmembers.) Fewer than half of the
environmental performance reviews, PAC data        World Bank PEERs compare expenditures with
are completed systematically, using informa-       policy priorities. In the CEA context, this
tion about other types of environmental or         should be an important component of PEER
related expenditure that is relevant for the       analysis.
reviewed country’s specific situation.

                                                   Types of analysis performed
The OECD notes that difficulties in defining
                                                   Other analyses performed in the World Bank
which part of expenditures for nature protec-
                                                   PEERs varied from one report to another,
tion or natural resource management should
                                                   presumably because of data availability. The
be regarded as environmental expenditure
                                                   most common comparison was between
pose an obstacle when it comes to data
                                                   overall environmental expenditures and the
collection, leaving much room for interpreta-
                                                   budget as a whole. The usefulness of compari-
tion. These differences create important           sons with economic indicators was question-
boundary issues that can distort the results and   able in those reports that examined only one
hamper comparability among countries and           year. Most World Bank reports reviewed
over time.                                         expenditures over more than one fiscal year; 3

Phil Swanson and Leiv Lunde                                                                     21
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

of the 10 did not. Typical analyses performed               guishing between them. Since most PEERs
by OECD and applied as well in World Bank                   have not analyzed the appropriateness or
and UNECE EPRs are presented in Box 1. It                   effectiveness of projects in relation to policy
would appear that there is a set of core ratios             priorities, in practice this means that little has
that are used for each EPR report.                          been done in PEERs to look at these issues
                                                            with respect to donor projects. It is thus
                                                            difficult to determine from most PEERs such
Examination of the quality of expenditure
                                                            basic and potentially important questions as
Almost none of the reviews examined the                     how much expenditure is accounted for by
quality of expenditure at the project level.                donor financing and the extent to which
Project-level analysis has been recommended                 donor-funded projects in the environmental
as an important component of general PERs                   field match the government’s policy priorities.
(see “Issues related to project-level analysis” in
Chapter 2).                                                 Perhaps the main reason for the relatively
                                                            limited coverage of aid issues is that the
Discussion of data and methodological issues                primary concern of most PEERs has been the
                                                            use and prioritization of the government’s
Apart from the EPRs, most reports did not                   own funds. This is especially true for those
describe the data or methodological issues                  studies that examined the effects on environ-
encountered. As noted in Chapter 2, such                    mental expenditure of the Asian financial
discussion provides a better context for the                crisis. The World Bank may wish to consider a
data presented in the report and facilitates                more comprehensive examination of foreign
follow-up reports in the country, and possibly              environmental assistance in the context of
in other countries to the extent that similar               PEERs, for the following reasons:
problems are encountered elsewhere. It may
be useful for future PEERs to include such                  ! The government’s ability to handle foreign
discussions and for these to be reviewed                      aid and incorporate such assistance into its
periodically for summary in a regularly                       environmental program could be an
updated section within the PEER guidelines.                   important indicator of its management
                                                              capability in the environmental sector,
Discussion of foreign aid                                     which is ultimately what the CEA and
                                                              PEERs are trying to measure.
Some World Bank PEERs do not include donor
                                                            ! One goal of the CEA is to contribute to
projects in the database of environmental
                                                              better coordination of aid. The PEER could
expenditures considered for analysis. Of those
                                                              play a key part here by evaluating the
that do, most do not single out donor projects
                                                              current extent of such coordination and
for special consideration; they perform the
                                                              providing important background data for
same analyses on donor projects as on other
                                                              further coordination.
environmental expenditures without distin-

22                                                                                    Environment Strategy Papers
Chapter 4

Definition and Typology of Environmental

            efining environmental expenditure           and other international work has progressed.
            is an important initial step for a          Currently, it covers both PAC expenditure and
            PEER.The definition guides the              nature protection expenditure and is harmo-
selection of expenditures to be included in the         nized with the SERIEE framework developed by
review’s database that then feeds into the              Eurostat. It defines and categorizes environ-
analysis. Standardization of the definition and         mental expenditures and provides rules for
the classification will facilitate more meaning-        mapping their flow (for example, transfers via
ful comparisons across countries (keeping in            fees and subsidies between the public and
mind the caveats about international compari-           private sectors). The purpose is to provide a
sons mentioned earlier).                                “general indication of a country’s financial
                                                        efforts directed at pollution abatement and
This chapter reviews definitions and classifica-        control and other environmental protection
tion systems for environmental expenditures             activities.” The OECD uses PAC and other
that have been used within the World Bank               environmental expenditure data extensively in
and elsewhere. It concludes with a suggestion           its environmental performance reviews of
for developing a definition and classification          OECD member countries and also publishes
system for PEERs.                                       separate cross-country comparison studies.

OECD DEFINITION AND                                     The OECD PAC framework
CLASSIFICATION SYSTEMS                                  The OECD defines PAC activities as “purpose-

The framework developed and used by the                 ful activities aimed directly at the prevention,
OECD to collect comparable environmental                reduction and elimination of pollution or
protection expenditure data from its member             nuisances arising as a residual of production
countries derives from the OECD pollution               processes or the consumption of goods and
abatement and control (PAC) expenditure                 services” (OECD 1996). The PAC framework’s
framework that was elaborated in the 1970s              concept of purposeful and direct expenditures
and refined in the 1980s. The scope of the              is somewhat analogous to the concept of
framework has evolved over time as national             “core” expenditures used in the Indonesia PEER

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

(Vincent and others 2001) and also includes                 however, be too aggregated for the purposes
the concept of “mitigating” expenditures used               of PEERs. The OECD/Eurostat Questionnaire
in that PEER. (In fact, most PAC expenditures               on Environmental Protection Expenditure and
by the private sector are likely to fall under              Revenues (EPER), which is used to collect PAC
that definition of “mitigating.”) The methodol-             and other environmental protection data, only
ogy does not directly refer to government                   asks governments to break down public
regulations but notes that in some cases                    expenditure by economic category (recurrent,
reference to government regulations can help                capital, transfer) and by medium or “domain”
define what is meant by “mainly for environ-                (air, wastewater, waste, soil and groundwater,
mental protection purposes.” Otherwise, it                  noise, biodiversity and landscape, and
assumes that such expenditures have been                    “other”), building on the 2000 Classification of
made primarily for nonenvironmental reasons.                Environmental Protection Activities and
This would mean the exclusion of, for ex-                   Expenditure (CEPA) developed by UNECE and
ample, energy-saving expenditures made for                  Eurostat.10
purely commercial or technical reasons. Such
expenditures are somewhat analogous to                      PAC and other environmental protection
Vincent’s concept of “incidental” expendi-                  expenditures are normally categorized by the
tures. The PAC definition specifically excludes             sector carrying out the activity (the “abater
natural resource management and nature                      principle”). Adding or subtracting transfers
protection. The PAC framework’s focus on                    such as fees and subsidies to or from the
“brown,” as opposed to “green,” environmen-                 aggregated sector totals yields figures for the
tal issues reflects its origin as a system for              total expenditures financed by each sector.11
mapping expenditures in OECD countries.                     In practice, few countries provide enough
                                                            information on transfers to enable expendi-
The PAC framework is designed to capture                    tures to be listed by the “financing” principle.
expenditures by three sectors: the public
sector, the business sector, and households                 The most relevant transfers in the context of
(the last two being subdivisions of the private             PEERs are likely to be those from a higher to a
sector). The business sector is further divided             lower level of government. Given the highly
into agriculture, hunting, fishing, and forestry;           aggregated nature of reporting, the OECD
mining and quarrying; manufacturing; electric-              framework provides little guidance on trans-
ity, gas, and water; and “other.”                           fers within sectors—for example, within the
                                                            public sector. (Other relevant transfers may
In theory, most government expenditures                     include those proposed for “specialized
could be accounted for under the PAC frame-                 producers” of environmental goods and
work—which explicitly includes regulation                   services, as described in “The OECD/Eurostat
and monitoring, as well as general administra-              questionnaire,” below.)
tion of the environment—as long as these
expenditures are not aimed at natural resource              It should be noted that fines or penalties (and
management or other activities not within the               the related interest) for noncompliance with
PAC definition. The coverage of public                      environmental regulations, and compensation
expenditures by the PAC framework may,                      to third parties for environmental damage, are

24                                                                                    Environment Strategy Papers
                                                   Definition and Typology of Environmental Expenditures

not treated as environmental expenditures, “as     CEPA. The activities and the outputs of the
they are not directly linked with an environ-      first level of the CEPA classification are listed
mental protection activity” (OECD 1997).           in the “CEPA” section, below.

                                                   The questionnaire combines domains 7 and 8
The OECD/Eurostat questionnaire
                                                   (radiation and R&D) of the CEPA with domain
Since 1996, the OECD has collected PAC data        9 (“other”). The OECD notes that a potential
using a joint questionnaire with Eurostat.12 In    problem for cross-country comparison can
2000 and 2001 the two organizations held           arise when country data sources do not cover
meetings to further harmonize data defini-         all domains or when they include additional
tions, categorization, treatment, and collection   domains (such as biodiversity) under “other.”
and to integrate the OECD PAC framework            In such cases, the OECD states that the
and the Eurostat SERIEE framework. Although        reporting party should specify coverage in an
some changes might be the result of harmoni-       accompanying note. (A conceptual way
zation, the main drivers appear to be develop-     around this may be to replace the “other”
ments in the emphasis, organization, and           category with “general” or “general/other,” as
structure of environmental protection over the     proposed in the “Definition and typology”
past decade. These include, notably:               section, below.)

! Greater emphasis in OECD members and             The current OECD definition of environmental
  other countries on nature protection             protection activities continues to exclude
! Increasing privatization and outsourcing of      water supply. (The World Bank’s Bangladesh
  environmental services such as manage-           and Uttar Pradesh PEERs, which follow the
  ment of waste and wastewater.                    definition in Brandon and Ramankutty 1993,
                                                   also specifically exclude water supply
The OECD’s EPRs also provide information on        projects, arguing that they “do not have
environmental expenditures, defined as             unambiguous impacts on the environment.”)
expenditures on PAC activities plus nature         In addition, the OECD definition excludes
conservation plus water supply.
                                                   natural resource management.

The definition of “environmental protection
                                                   In recognition that several important environ-
expenditure” currently used by the OECD
                                                   mental services such as waste collection and
includes PAC plus protection of biodiversity
                                                   wastewater management are being outsourced
and landscape (nature protection) and R&D.13
                                                   and privatized, a new sector, “specialized
It describes environmental protection activities
as “purposeful activities aimed directly at the    producers of environmental services,” has
prevention, reduction and elimination of           been added. It apparently is to be distinct from
pollution or any other degradation of the          both the public sector and the business sector,
environment resulting from the production          although it can be divided into public and
processes or from the use of goods and             private actors to account for the various
services.” The domains covered have been           ownership and organizational structures in this
revised and are now fully harmonized with          field. (An example of a public specialized
the 2000 revision of the Eurostat/UNECE            producer might be the waste management

Phil Swanson and Leiv Lunde                                                                          25
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

department of a municipality.) This new sector              proper comparison of data among countries.
is primarily designed to capture activities                 The questionnaire provides specific instruc-
under ISIC/NACE 90, that is, waste collection               tions for such information next to the relevant
and wastewater treatment.14 It would also                   tables and also in a separate, more general,
include environmental consultancies. Regard-                methodological part.
ing the latter, it is not clear to what extent
other public sector activities that potentially             In the framework of cooperation with non-
could be privatized or outsourced (for ex-                  member countries, the OECD has extended
ample, nature protection services and parks                 the coverage of expenditure classification to
administration) should be included in this                  cover four categories of environmentally
sector. The OECD states that expenditures by                related expenditure:
enterprises for producing market environmen-
tal goods such as environmental protection                  ! Pollution abatement and control (PAC).
equipment, materials, and other parts of the                  Expenditure for deliberate investments and
environment industry should not be accounted                  actions to reduce pollution levels, calcu-
for in the specialized producers sector.                      lated using the OECD’s internationally
                                                              accepted methodology
A variation of the economic category “current               ! Technological improvements. Enterprise
expenditures” excludes services outsourced to                 investments and actions taken for commer-
specialized producers. The new category,                      cial reasons that nonetheless have environ-
“internal current expenditure,” includes                      mental benefits
expenditures on such things as energy,                      ! Nature protection activities
material, use of own personnel for internal                 ! Drinking water supply and other natural
measures, and maintenance (apparently even                    resources management investments and
when such maintenance is outsourced, since                    operations, a category not classified as an
                                                              environmental expenditure in most OECD
maintenance of a vehicle fleet, for example, is
                                                              countries or in current statistics of the
arguably not performed by “specialized
                                                              newly independent states (NIS).
producers of environmental services”). All
purchases of environmental services, as well
as expenditures on permits, surveillance fees,              OECD/DAC Creditor Reporting System
and earmarked environmental taxes, are
                                                            The Creditor Reporting System (CRS), adminis-
recorded under another economic classifica-                 tered by OECD/DAC, is the premier interna-
tion, “fees/purchases.”15 This category does                tional source of data on bilateral and multilat-
not include fines and penalties or “payments                eral aid commitments. The CRS database
of general environmental or green taxes (such               includes fields that enable users to screen for
as energy taxes).”                                          environment-related aid. Each transaction
                                                            includes a purpose code highlighting the
The OECD/Eurostat questionnaire also calls for              specific area of the recipient’s economic or
increased provision of methodological infor-                social structure that the transfer is intended to
mation by reporting countries, notably with                 foster. The 188 purpose codes include 7
respect to the scope, coverage, and quality of              within the category ”general environmental
the data. This information will facilitate the              protection,” as shown in Table 2.

26                                                                                    Environment Strategy Papers
                                                          Definition and Typology of Environmental Expenditures

Table 2. Environmental protection purpose codes in the Creditor                 codes, which are based
Reporting System                                                                consistently on environ-
         Code                               Description                         mental domains. The
                                                                                categories used in the CRS
DAC 5: code 410        General environmental protection
                                                                                database are also perhaps
     CRS code
                                                                                a bit dated, which could
                       Environmental policy and administrative
     41010                                                                      impede the recording of
                                                                             more recent trends in
     41020             Biosphere protection
                                                                             environmental expendi-
      41030             Biodiversity
                                                                             ture. It should also be
      41040             Site preservation                                    pointed out that “flood
      41050             Flood control/preservation                           control/preservation”
      41081             Environmental education/training                     probably would not be
      41082             Environmental research                               considered an environ-
                                                                             mental expenditure in
Each transaction also includes a purpose code          many classification systems, including those
prefix that identifies the flow as follows: (1) an     that have been used in most World Bank
“investment project,” (2) “other resource              PEERs, since it relates to protection of human
provision including commodities and sup-               beings from the environment rather than vice
plies,” (3) “technical cooperation,” or (4)            versa.
“program aid/cash.”

It is also possible to draw on other fields in the
CRS database to disaggregate environmental                The System of Integrated Environmental and
aid by donor (bilateral, multilateral) and by aid         Economic Accounting (SEEA) grew out of the
                                                          environmental accounting movement that
instrument (loan, grant, grant component).
                                                          followed the 1992 United Nations Conference
Another field indicates whether an environ-
                                                          on Environment and Development (the Rio
mental impact assessment was required. An
                                                          “Earth Summit”). The SEEA, directed by the
“environmental marker” field can be used to
                                                          London Group on Environmental Accounting,
record whether environmental objectives are a
                                                          attempts to account for the environment and
primary objective of the transaction (= 2); are
                                                          natural resources in a way that can be inte-
a significant objective (= 1); or are not
                                                          grated with the System of National Accounts.
targeted (= 0). In practice, most donors do not
                                                          (The London Group is an informal group
appear to report an environmental marker.
                                                          composed of experts from countries and
                                                          representatives of international organizations,
A potential problem with using the CRS
                                                          including the United Nations, the World
purpose codes is that they are a mixture of               Bank, the OECD, and Eurostat.) The European
government functions (for example, “policy                System for the Collection of Economic Infor-
and administrative management,” “education/               mation on the Environment (SERIEE) is essen-
training,” “research”) and environmental                  tially a more detailed subset of the SEEA that
domains (“biosphere protection,”                          was developed for European Union (EU)
“biodiversity”). This contrasts with the CEPA             countries by Eurostat.

Phil Swanson and Leiv Lunde                                                                                 27
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

A draft revision of the SEEA handbook was                       management authorities at various
approved by the UN Statistical Commission in                    levels as well as temporary costs for
March 2002, subject to minor changes.                           facilitating structural adjustments of
Chapter 5 in the revised handbook covers                        sectors concerned. . . . Activities and
“economic activities and products related to                    transactions specifically for environ-
the environment.” It (informally) defines                       mental protection, for example man-
environmental activities as “those which                        agement of protected forests, are not
reduce or eliminate pressures on the environ-                   included [but are included under
ment and which aim at making more efficient                     environmental protection] . . . Simi-
use of natural resources.”16 Under this defini-                 larly, qualitative protection activities of
tion it includes those activities “which are not                natural resources, for example activities
necessarily carried out for environmental                       for biodiversity and landscape protec-
protection reasons but which nevertheless                       tion or activities aimed at preserving
produce clear, measurable environmental                         certain functions or the quality of the
benefits.”                                                      natural environment (air, water, soil
                                                                and groundwater), are also included
The SEEA report also proposes a classification                  under environmental protection.
of environmental activities by purpose, as                      (London Group on Environmental
follows:                                                        Accounting 2002)

!· Environmental protection activities                      Table 3, based on the SEEA report, illustrates
! Natural resource management and exploita-                 the division between natural resource man-
   tion activities                                          agement and exploitation activities.
! Environmentally beneficial activities
! Minimization of natural hazards.                          The SEEA report also explores criteria that may
                                                            be used to determine whether particular
It defines environmental protection activities              expenditures should be included under its
as “those where the primary purpose is the                  definitions:
protection of the environment, that is the
avoidance of the negative effects on the                    A. The pure purpose criterion. “Activities and
environment caused by economic activities.”                    expenditure where the main objective is
The classification suggested for this group of                 protecting the environment are included in
activities is the CEPA (see the next section).                 full. This criterion works best when the
                                                               main objective of protecting the environ-
“Natural resource management activities”                       ment is clear and unambiguous, for ex-
appears to be less firm as a category. It                      ample, end-of-pipe capital expenditure.”
includes:                                                   B. The extra-cost criterion. This “is used to
                                                               identify the portion of the cost of more
     research into management of natural                       environmentally friendly technologies and
     resources, monitoring, control and                        changes in processes and products to be
     surveillance, data collection and                         attributed to environmental protection. The
     statistics, cost of the natural resources                 investment and operating expenditure are

28                                                                                    Environment Strategy Papers
                                                               Definition and Typology of Environmental Expenditures

  Table 3. Natural resource management activities and exploitation activities, SEEA classification

   Resources                                        Management                           Exploitation
   Subsoil assets                        Administration of permits,       Exploration and extraction
                                         planning, supervision, research,
   Inland waters                         Administration of waterways          Exploration, extraction,
                                         and water bodies, supervision,       treatment, distribution
                                         research, elaboration of plans
                                         and legislation, water police
   Forest resources                      National forest inventories,         Silvicultural activities, including
                                         research for pest control,           harvesting and reforestation
   Wild flora and fauna                  Supervision and control of       Harvesting, fishing, hunting
                                         fishing fleets, assessment of
                                         stocks, administration of quotas
                                         and licenses, research,
   Source: London Group on Environmental Accounting (2002): 5-9, Table 5.3.

   compared to a ‘standard’ or less environ-                   CEPA
   mentally beneficial alternative, if there is                The Classification of Environmental Protection
   one, or the estimated additional cost of                    Activities and Expenditure (CEPA) is a “ge-
   incorporating the environmentally benefi-                   neric, multipurpose, functional classification
   cial feature. Only the extra cost expendi-                  for environmental protection . . . used for
   ture is included.”                                          classifying activities but also products, actual
C. The net cost criterion. “Only expenditure                   outlays (expenditure) and other transactions”
   undertaken for environmental protection                     (Eurostat 2001). It was prepared jointly by
   purposes which leads to a net increase in                   Eurostat and the UNECE in 1994 and was
                                                               revised in 2000 as CEPA 2000. In June 2001 it
   cost (that is where spending exceeds any
                                                               was accepted as a member of the UN Family
   savings or income arising before the net
                                                               of International Economic and Social Classifi-
   cost was actually incurred) is included.
                                                               cations and was recommended by the relevant
   When expenditure is recorded, this crite-
                                                               UN expert group for approval as an interna-
   rion only applies to operating expenditure.”
                                                               tional standard. The CEPA is fully integrated
D. The compliance criterion. “Expenditures                     into the Eurostat SERIEE process (and, by
   undertaken with the main objective of                       extension, into the SEEA) and is consistent
   protecting the environment but specifically                 with the questionnaire that the OECD sends
   in order to comply with environmental                       out jointly with Eurostat.
   protection legislation, conventions or
   voluntary agreements. This can be further                   The first level of CEPA classification is as
   sub-divided to show those activities and                    follows:
   transactions undertaken in order to comply
   with legislation only. A variant of A.”                     1. Protection of ambient air and climate

Phil Swanson and Leiv Lunde                                                                                         29
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

2.   Wastewater management                                  Division 05 deals with expenditures aimed at
3.   Waste management                                       environmental protection, which is divided
4.   Protection of soil and groundwater                     into the following groups (some of which have
5.   Noise and vibration abatement                          two or more subgroups):
6.   Protection of biodiversity
7.   Protection against radiation                           05.1   Waste management
8.   Research and development                               05.2   Wastewater management
9.   Other environmental protection activities.             05.3   Pollution abatement
                                                            05.4   Protection of biodiversity and landscape
Each class has from four to eight subcatego-                05.5   R&D environmental protection
ries, some of which are further broken down.                05.6   Other environmental protection areas
Classes 1 through 7 are referred to as environ-
mental domains. Administration and manage-                  These groups are similar to those provided in
ment, as well as education, training, and                   the draft CEPA 2000 classification, although
information, are categorized as “other.”                    the latter has codes for additional activities
Classification is to be made according to “the              that might be captured under 05.6 in the
main purpose taking into account the techni-                COFOG system. Eurostat notes that the 1999
cal nature as well as the policy purpose of an              revision of COFOG “follows CEPA principles”
action or activity.”                                        (Eurostat 2001).

Eurostat notes that the CEPA specifically does              Country classification systems
not cover prevention of natural hazards or
                                                            A number of countries have developed their
resource management but also that the
                                                            own definitions and classification systems for
London Group, which oversees SEEA, “re-
                                                            environmental expenditures. Usually, these
quested the development of an additional
                                                            are based on one or more international
classification for natural resource management              systems, adapted for domestic use.
complementing the CEPA.” It further states
that “separate classifications, e.g., resource              In the United Kingdom, for example, environ-
management should be set up which, together                 mental expenditures are defined as “capital
with the CEPA, would be part of a family of                 and operating expenditure incurred by
environmental classifications.”                             government, industry, households and other
                                                            organizations, which can be clearly identified
                                                            and explicitly attributed to directly improving
                                                            and maintaining the quality of the environ-
The Classification of the Functions of Govern-              ment.”18 For domestic purposes, the govern-
ment (COFOG) is part of the United Nations                  ment classifies its environmental expenditures
family of international classifications. It is used         by “module,” “medium,” and “actor.” For the
“to classify the purpose of transactions such as            first two, the classification is similar to that of
outlays on final consumption expenditure,                   the PAC framework. Actors are government,
intermediate consumption, gross capital                     enterprises, and households, plus an addi-
formation and capital and current transfers, by             tional category, nongovernmental organiza-
general government.”17                                      tions (NGOs). Media refers to waste, air,

30                                                                                    Environment Strategy Papers
                                                   Definition and Typology of Environmental Expenditures

water, noise, land, and “other.” “Modules” are     ! Two (Indonesia and Mongolia) used the
somewhat like those in the CEPA classifica-          core/mitigating/incidental categorization,
tions but are not specific to a particular           although they covered only core expendi-
medium. They are:                                    tures.

!   Pollution abatement                            The two main explicit definitions of environ-
!   Environmental conservation                     mental expenditure in World Bank PEERs are
!   Research and development                       thus those used in the reports for Bangladesh
!   Education and training                         and Uttar Pradesh and for Indonesia and
!   General administration                         Mongolia.
!   Profitable waste recycling
!   Management of natural resources
                                                   The PEERs definitions
!   Improvement of amenities.
                                                   Bangladesh and Uttar Pradesh PEERs. The
The U.K. system is apparently aimed at             definition used in the Bangladesh and Uttar
capturing both private and public sector           Pradesh PEERs is based on the definition of
activities. Some of these might not be relevant    environmental projects found in Brandon and
to the public sector, while some important         Ramankutty (1993) and reproduced in Appen-
public sector activities are perhaps too           dix A of this report. It actually consists of two
aggregated to be used as a model for a system      explicit lists of projects and project compo-
focusing on that sector                            nents that may or may not be counted. In
                                                   other words, if an actual project is either on
                                                   the list of disallowed projects or cannot be
WORLD BANK                                         matched with one of the projects on the list of
                                                   allowed projects, it cannot be included in the
As noted in the review of World Bank PEERs
                                                   review’s database of environmental expendi-
in Chapter 3, the various PEERs have used
different definitions and classification systems
for environmental expenditure:
                                                   Whereas the list of explicitly included projects
                                                   is comprehensive, the list of explicitly ex-
! Three of the PEERs examined (Kenya,
                                                   cluded projects merely clarifies whether
  Malawi, and the Philippines) did not
                                                   certain borderline projects should be ex-
  provide an explicit definition but included
                                                   cluded. Examples of projects explicitly
  all the expenditures of a particular depart-
                                                   excluded are:
  ment or ministry.
! Two (Korea and Thailand) did not provide
                                                   ! Water supply and hydropower (because
  an explicit definition, but the categories
                                                     such projects often have adverse effects on
  used constituted an implicit definition.
                                                     the environment)
! One (Ukraine) primarily used the OECD
                                                   ! Disaster relief and reconstruction (because
  PAC definition.
                                                     they mitigate the effect of nature on people,
! Two (Bangladesh and Uttar Pradesh) used
                                                     rather than the other way around)
  the definition suggested in Brandon and
                                                   ! Human resettlement (except for biodiversity
  Ramankutty (1993).

Phil Swanson and Leiv Lunde                                                                          31
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

The use of the word “project” seems to imply                    (c) routine expenditures on conserva-
that only investment (capital) expenditures                     tion, protection, and rehabilitation
should be included and that general expendi-                    units in natural resource management
tures, such as the overhead of the environ-                     agencies . . . Examples of “routine”
ment ministry, should be excluded. In prac-                     expenditures by environmental agen-
tice, while not explicitly excluding recurrent                  cies . . . and environmental units in line
expenditures, Annex A of the Bangladesh                         agencies include monitoring and
PEER (“Database of GOB Environmental                            enforcing environmental standards; and
Expenditures”) refers only to “capital expendi-                 institutional strengthening and capacity
tures” in the database.                                         building of staff responsible for environ-
                                                                mental activities.
Whereas the Bangladesh PEER bases its
definition only on these lists of included and              and
excluded projects, the later Uttar Pradesh
PEER (or at least its terms of reference) pro-                  Developmental expenditures include
vides a more general definition that is then                    expenditures on projects and programs
backed up by the lists. The general definition                  that are totally or primarily for environ-
(core environmental expenditures) used in the                   mental management. . . . Examples of
Uttar Pradesh terms of reference is as follows:                 “developmental” expenditures in State
                                                                Departments/agencies include budgets
     expenditure on activities that pertain                     for national parks and protection of
     solely or primarily to environmental                       forests; social forestry budgets; expendi-
     management of a particular sector . . .                    tures on reforestation, sewerage and
     The primary purpose of these core                          sanitation projects; government-
     environmental expenditures is either to                    sponsored industrial pollution control
     provide environmental public goods or                      programs, etc.
     to address adverse environmental
     impacts.19                                             The section providing examples of environ-
                                                            mental development expenditures ends, “also
In contrast to the silence of the Bangladesh                see the attached terms of reference.”
PEER on the issue of recurrent expenditures,
the Uttar Pradesh terms of reference note that              The main differences between the approaches
environmental expenditures consist of both                  in the Bangladesh and Uttar Pradesh PEERs
“operating or routine and development or                    seem to be that:
capital expenditures.” The terms of reference
then go on to provide some specific examples                ! The Bangladesh PEER apparently uses the
of such expenditures:                                         list of allowed projects as a screen, while
                                                              the Uttar Pradesh terms of reference use it
     Operating expenditures include: (a)
                                                              only as examples to amplify a more general
     routine expenditures by agencies that
                                                              definition. In other words, the Uttar
     exist solely for environmental manage-
                                                              Pradesh terms of reference do not necessar-
     ment, (b) routine expenditures by
                                                              ily exclude projects that are not on the list
     environmental units in line agencies;

32                                                                                    Environment Strategy Papers
                                                   Definition and Typology of Environmental Expenditures

  of allowed projects, as long as they con-        ! Routine expenditures on conservation,
  form to the more general definition and are        protection, and rehabilitation units in
  not on the list of specifically excluded           natural resource management agencies (but
  projects.                                          not units that primarily support resource
! The Uttar Pradesh terms of reference               production)
  clearly allow routine and recurrent expen-       ! Development expenditures on projects and
  ditures, whereas the Bangladesh PEER               programs that are totally or primarily for
  implicitly seems to reject such expendi-           environmental management.
                                                   Examples of core environmental expenditures
The Indonesia and Mongolia PEERs. The              by core environmental agencies and environ-
Indonesia PEER starts with a classification        mental units in line agencies include:
scheme of environmental expenditure based
on the general aim and intention of the            ! Monitoring, analyzing, and disseminating
expenditure:                                         information on environmental quality and
                                                     pollution sources
! “Core” expenditures are discrete budget          ! Setting environmental standards
  allocations whose sole or at least primary       ! Enforcing environmental standards
  purpose is either to provide environmental       ! Institutional strengthening and capacity
  public goods or to address adverse environ-        building of staff.
  mental impacts (i.e., negative externalities).
                                                   Examples of core environmental expenditures
! “Mitigating” expenditures are those aimed
                                                   by natural resource management agencies
  at preventing or mitigating the negative
  environmental externalities of
  nonenvironmental development projects
                                                   ! Budgets for national parks and protection of
  that potentially deplete natural resources or
  generate pollution.
                                                   ! Budgets for “integrated conservation-
! “Incidental” expenditures are those that
                                                     development” projects and social forestry
  supply environmental benefits despite
  being undertaken primarily for
                                                   ! Expenditures on reforestation.
  nonenvironmental reasons.

                                                   Examples of other core environmental expen-
In a sense, each class is a general definition
                                                   ditures include:
that is amplified with examples. Since the
Indonesia PEER only looks at core expendi-         ! Government-sponsored industrial pollution
tures, however, most of its examples are for         control programs
that class. Such expenditures include:             ! Sewerage and sanitation projects.

! Routine expenditures by agencies that exist      As can be seen, the Indonesia text is basically
  solely for environmental management              the same as in the examples provided in the
! Routine expenditures by environmental            Uttar Pradesh terms of reference. (Given the
  units in line agencies                           chronology, it would appear that the Uttar

Phil Swanson and Leiv Lunde                                                                          33
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Pradesh terms of reference consciously used                 from PAC methodology and stating that only
the language from the Indonesia PEER.) The                  expenditures made in response to regulations
main difference between the two seems to be                 can be counted (i.e., defined as “mitigating”
that the definition of core environmental                   according to the Indonesia methodology). The
expenditures used in the Uttar Pradesh report               others may not be counted as PAC, since the
could allow what the Indonesia definition                   primary motivation for the investment cannot
terms “mitigating” expenditures. This is                    be known for certain in such cases, but they
because the list in Brandon and Ramankutty                  are regarded as “incidental” in the Indonesia
(1993) explicitly mentions “industry and                    methodology.
energy projects: components addressing all
forms of industrial pollution abatement . . .”              In a sense, core and mitigating expenditures
                                                            can be considered as distinct from incidental
The “Core/Mitigating/Incidental” Typology.                  expenditures in that for the first two types,
Arguably, mitigating expenditures, which                    helping the environment is a primary purpose
presumably are meant to be distinguished                    rather than only incidental. But core can also
from classic PAC projects, could be consid-                 be viewed as in opposition to mitigating and
ered a subset of core expenditures, since the               incidental if it is assumed that the latter two
definition for “core” could also be used to                 deal primarily with classic PAC expenditures
describe them.20 If the purpose of the distinc-             that are usually undertaken by the private
tion is to determine whether the government                 sector, while core activities are those that will
is involved in things that should be left to the            almost always be carried out by the govern-
private sector, it is important to remember that            ment.
some activities under the core category could
also be carried out by the private sector—for               The mitigating category is potentially problem-
example, waste management and parks                         atic; even regulation could be defined as
administration. Admittedly, there may be an                 mitigating, since it too is designed to “prevent
important distinction between public environ-               or mitigate the negative environmental
mental services that may be contracted out as               externalities of non-environmental develop-
a “natural monopoly” and those that private                 ment projects that potentially deplete natural
companies perform to mitigate the negative                  resources or generate pollution.” The main
environmental effects of their own activities.              distinction, then, seems to be between direct
                                                            mitigating actions and those actions designed
There may also be an important distinction                  to make other parties take direct mitigating
between activities undertaken by the private                actions.
sector in response to regulations, and activities
that involve making and enforcing such                      Finally, and despite its name, the core cat-
regulations. The core/mitigating/incidental                 egory covers a wide variety of activities that
framework does not explicitly address this,                 arguably are as different from each other as
since it could define as “mitigating” expendi-              any of them are from mitigation, such as
tures that are not necessarily made in response             regulation and waste treatment. Waste treat-
to regulations. This distinction, however,                  ment, for example, can be viewed as closer to
could easily be incorporated by taking a cue                mitigation than to regulation.

34                                                                                    Environment Strategy Papers
                                                   Definition and Typology of Environmental Expenditures

In conclusion, the core/mitigating/incidental      TOWARD A DEFINITION AND
typology is potentially useful but may need
                                                   TYPOLOGY OF ENVIRONMENTAL
some refining. Moreover, there may be more
useful distinctions to be made between types
                                                   EXPENDITURE FOR PEERS
of environmental expenditure.                      It is probably useful to differentiate between
                                                   definition and typology. We understand
                                                   typology to mean a system for classifying or
World Bank thematic and sector codes
                                                   categorizing environmental expenditures.
World Bank projects are codified according to
sectors and themes. Each project must have at      As shown in several PEERs, it is possible to
least one sector and one theme code and may        arrive at a definition implicitly, on the basis of
have up to five of each. The World Bank            the categories of expenditures that are used.
considers the environment to be a “theme”          This may, however, only work for some sets of
that cuts across different sectors. (Examples of   categories—for example, those referring to
other themes are rule of law; social develop-      environmental media or to fairly specific types
ment, gender, and inclusion; and rural devel-      of action such as waste management. Other
opment.)                                           sets of categories could be used with various
                                                   definitions of environmental expenditure or
Within the environmental theme, projects are       even with nonenvironmental expenditures.
classified according to the aim of the project     Such systems include economic categories
(the numbers are project codes):                   (capital, recurrent), functional categories
                                                   (regulation, policy development), and agency
80. Biodiversity                                   categories (ministry of environment, ministry
81. Climate change                                 of energy).
82. Environmental policies and institutions
83. Land management                                This report first addresses the definition and
84. Pollution management and environmental         then typology or categories.
85. Water resources management
86. Other environmental and natural resource
    management.                                    The authors’ recommended approach for
                                                   defining environmental expenditure is to start
These subcategories are similar to those in the    with a fairly general definition and, as in the
draft CEPA 2000. Some subjects are covered         Bangladesh and Uttar Pradesh PEERs, supple-
explicitly by the World Bank system but are        ment it with nonexhaustive lists of examples
missing in the CEPA, and vice versa, and some      of expenditures that are specifically included
are aggregated differently.                        or specifically excluded.

To guide the task team leader in assigning the     The authors’ survey of various accounting
project to the proper subcategory, the code        systems indicates that most organizations have
guidelines provide a list of examples of project   not used a comprehensive definition of
activities under each subcategory.                 environmental expenditure. This is generally

Phil Swanson and Leiv Lunde                                                                          35
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

because there are a number of areas (notably                needs for country environmental performance
the “environmental” aspects of natural re-                  reviews.) Besides the greater international
source management) on which there is no                     acceptance that may come from basing the
consensus and that are not yet very well                    World Bank’s definition on an existing stan-
defined. Instead, organizations have tended to              dard and a fairly well-defined data set, using
focus on one or several reasonably well-                    the OECD definition as a base could make it
defined subcategories of environmental                      easier to refine the definition in light of future
expenditure, depending on their needs.                      OECD/Eurostat revisions.

The likelihood of widespread use of a World                 The following is a proposed general definition
Bank definition outside the World Bank may                  for public environmental expenditure:
increase if it is harmonized with the defini-
tions used by other international organiza-                     Expenditures by public institutions for
tions. In view of the international acceptance                  purposeful activities aimed directly at
and well-defined boundaries of the OECD/                        the prevention, reduction, and elimina-
Eurostat definition of environmental protection                 tion of pollution or any other degrada-
activities, which has evolved from the OECD’s                   tion of the environment resulting from
established PAC methodology, the World                          human activity, as well as natural
Bank could consider taking it as a basis for a                  resource management activities not
more general definition of environmental                        aimed at resource exploitation or
expenditure.                                                    production.

A number of activities, notably natural re-                 The main differences between this and the
source management, are specifically excluded                current OECD/Eurostat definition of “environ-
from the OECD/Eurostat definition of environ-               mental protection” activities are the following:
mental protection activities. Given the likely
prevalence of natural resource management                   ! “Public institutions” are specifically men-
expenditures in many World Bank client                        tioned.
countries, a reference to them should prob-                 ! The potentially broader term “human
ably be added to the World Bank definition.                   activity” is used instead of the OECD’s
                                                              phrase “production processes or from the
The OECD, in conjunction with Eurostat, may                   use of goods and services.” This change
consider further expanding its work on                        responds to comments from within the
environmental expenditure to take selected                    World Bank that the OECD formulation
aspects of natural resource management and                    might not take into account all relevant
minimization of natural disasters into account.               impacts on the environment.
In general, the authors recommend that the                  ! Reference is made to selected natural
World Bank follow or contribute to this                       resource management activities.
process. (Although nature protection has been
included in the definition, expansion to other              Acceptable projects under natural resource
aspects is not yet decided and would be part                management may be the most difficult to
of longer-term work, closely linked to data                 define. The development of examples of such

36                                                                                    Environment Strategy Papers
                                                   Definition and Typology of Environmental Expenditures

expenditures for the lists of specifically         ! It should be flexible enough to adapt to
included and excluded projects will be               differences in data presentation and avail-
particularly important with respect to this          ability among countries.
item.                                              ! It should be able to capture the differences
                                                     that are most relevant for the analysis that is
Other potentially important expenditures in          to be performed.
the context of World Bank client countries
will be activities related to nature protection    Based on a review of current international and
and biodiversity. “Prevention . . . of degrada-    Bank practice with classification systems and
tion of the environment” should be general         of the analytical needs of PEERs (discussed in
enough to include such activities, which are       Chapter 5), a draft classification system is
specifically covered by the OECD’s definition      proposed, as described in detail below. This
                                                   approach is multidimensional and modular. In
of environmental protection activities. To
                                                   theory, it should be possible to classify each
make this coverage more explicit, examples
                                                   environmental expense under each dimension
could be noted in the suggested list of specifi-
                                                   of the system. The expenditure total under
cally included projects. The same observations
                                                   each dimension will be the same.
can be made for relevant educational and
awareness-raising programs.
                                                   The modular approach is intended to allow
                                                   flexibility in the face of differing availability
As a starting point for preparing the lists of
                                                   and formats of data among countries. That is,
examples of projects that are specifically
                                                   the number and selection of dimensions to be
included in or excluded from the general
                                                   used, as well as the degree of detail within
definition, it may be possible to combine
                                                   each dimension, could be adjusted in view of
those used in the Bangladesh and Uttar             the needs and circumstances of the PEER in
Pradesh PEERs with the list of core expendi-       question. To facilitate comparability, it is
tures in the Indonesia PEER. These lists do not    recommended that all PEERs use at least a
appear to be inconsistent. The preparation of      minimum set of the most important dimen-
such lists, as well as a further elaboration of    sions. As a guide to the selection of dimen-
the general definition, could be the subject of    sions, the dimensions are presented below in
a follow-up project.                               order of importance, based on the authors’
                                                   understanding of the needs of PEERs.

Classification system
                                                   Data availability and format will influence the
Ideally, a classification system for environmen-   degree to which the different dimensions can
tal expenditures should meet the following         be integrated or joined up (e.g., the degree to
requirements:                                      which primary categories in one dimension
                                                   can serve as subcategories in another dimen-
! It should be relevant to the types of expen-     sion). The needs of the PEER should determine
   diture likely to be found in World Bank         which parts of which dimensions are linked.
   client countries but flexible enough to
   adapt to differences in expenditure patterns    In theory, a multidimensional computer
   among these countries.                          program could be designed to allow each line

Phil Swanson and Leiv Lunde                                                                          37
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

item (if expenditure information is presented               category is conceptually different from “other”
this way by the government) to be classified                in that it could contain elements which
under each dimension as it is entered into a                normally could be classified under one or
database. This could allow a large number of                more of the specific categories. (To avoid
very specific aggregations to be made—for                   double counting, a particular expenditure
example, a total for all nonwage recurrent                  should not appear under both a specific
expenditures made by noncore line agencies                  category and “general/other.”)
aimed at waste management in geographic
region X. It is unlikely, however, that such                Another way of approaching the aggregation
detailed input information will be available in             problem would be to provide a total for each
most cases. Moreover, observations of expen-                dimension, noting the subcategories for each
diture magnitudes and trends will not always                important category listed within the dimen-
need to be that detailed in order to be mean-               sion. Some nonspecified expenditures will
ingful.                                                     appear in the total for the dimension but not in
                                                            any subcategories, even though some of that
Boundaries. It will be important to set the                 nonspecified aggregated expenditure actually
boundaries of each dimension early in the                   was for one of the specified subcategories.
process, on the basis of such considerations as             Theoretically, an expenditure may appear
local data limitations. For example, the                    under only one subcategory, but in practice,
analysis could be limited to those expendi-                 this rule may not be feasible, and relaxing it
tures made by core environmental agencies                   may actually provide more information. The
under the “government level and agency”                     more important point is that the totals for each
dimension or to capital expenditures under                  dimension are identical.
the “economic” dimension. The limits set for
each dimension of the classification system                 Tracking Foreign Aid. A potentially important
effectively determine the scope of the defini-              link to make across many sectors will be
tion of environmental expenditure used by the               foreign aid. In the sample breakdowns pre-
PEER. Any aggregation of standardized                       sented in Table 4, foreign aid is shown only
categories within dimensions should be                      within the financial dimension, although it
clearly noted. (Given a definition of environ-              could also be a subcategory under other
mental expenditure set by the boundaries of                 dimensions, notably the environmental
the various dimensions being used, the totals               domain and functional ones. To assist in
for the dimensions should be equal, as noted                tracking foreign aid, OECD/DAC CRS codes
above.)                                                     have been supplied for some of the equivalent
                                                            categories in these two dimensions in Table 4.
Aggregated Expenditure Data. Each unit of                   It should be noted, however, that there is not a
environmental expenditure should be classifi-               very good correspondence between the
able under one category within each dimen-                  arguably more advanced CEPA codes, which
sion. In some cases, however, expenditure                   are more consistently based on environmental
data will be too aggregated to be classified                domains, and the CRS codes, which mix
under a specific category; then it should be                domains and functions. The authors recom-
placed in a “general/other” category. This                  mend CEPA as the basis for the “environmen-

38                                                                                    Environment Strategy Papers
                                                  Definition and Typology of Environmental Expenditures

tal domain” dimension. In practice, this means    performed for the national level; for example,
that use of the OECD/DAC CRS database,            it might contain fewer dimensions.
while also recommended, will require a
certain amount of judgment by the review          Transfers between agencies should be counted
team.                                             only once, under either the account of the
                                                  agency making the transfer (using the “financ-
                                                  ing principle,” in PAC jargon) or the account
Government level and agency dimension
                                                  of the agency receiving the transfer and
Some PEERs practitioners have suggested that      making the expenditure (the “abater prin-
a distinction be made between expenditures        ciple”). Given the difficulties that OECD
by “core” environmental agencies and other        governments have had in carrying out ac-
line ministries or agencies. This can help in     counting according to the financing principle,
examining the degree of environmental             it is recommended that expenditures under the
mainstreaming within the government.              agency dimension be recorded on the account
                                                  of the agency receiving the transfer and
A number of subcategories could be created        making the expenditure.
that correspond to particular agencies within
each main category. These are likely to be
country-specific, although several general        Economic dimension
categories could be developed.                    It is important to distinguish between one-off
                                                  capital expenditures that augment the capital
Another important distinction that could be       base that the government has to work with
made within this dimension is the level of        and recurrent expenses. Types of recurrent
government at which the expenditure is made       expenditures should also be distinguished—for
(central, regional, or local). In the example,    example, wages (or total emoluments, which
however, it is assumed that only expenditures     can include additional nonwage payments to
by central government agencies will be            staff) versus nonwage expenditures (mostly
included.                                         operations and maintenance). This is impor-
                                                  tant because a common problem can be
Based on the general practice with respect to     overstaffing, with wages squeezing out
PEERs and PERs to date, it is assumed that        operations and maintenance expenditures
most PEERs will not look at all regional and      over time.
local expenditures in a comprehensive
manner but will perhaps review expenditures       It is also important to determine whether the
in one or a few regions in order to derive a      budget for operations and maintenance is
picture that may be extrapolated for an overall   sufficient to cover the needs of capital invest-
estimation of environmental expenditures at       ments. As noted in Chapter 2, an analysis of
lower government levels. In such cases it is      some individual projects should also be
recommended that a separate exercise be           performed, and this should include a review
performed for each region or local govern-        of the adequacy of project operations and
ment level examined. Such a regional or local     maintenance expenditures.
PEER may be less thorough than the review

Phil Swanson and Leiv Lunde                                                                         39
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

  Table 4. Draft examples of accounts for the various dimensions of environmental

     Agency dimension
     Total public environmental expenditures
     By core environmental agencies
           Of which, by the ministry of environment (or by particular units)
           Of which, by agency X
           Of which, by agency Y
     By noncore environmental agencies
           Of which, by “agency Z” (e.g., the environmental unit of the ministry of industry)
     Transferred to levels of government not covered
     Economic dimension
     Total public environmental expenditure s
     Capital expenditures
     Recurrent expenditures
           Of which, wages and other personal emoluments
           Of which, operations and maintenance
     Transferred to levels of government not covered
     Functional dimension
     Total public environmental expenditures
     For policymaking, including the development of regulations and standards
           Of which, for studies reviewing policies or the environmental situation
     For regulation, monitoring, and enforcement
     For technical R&D related to environmental protection or natural resource management (CRS
           Of which, contracted to the private sector
     For environmental education (external) and information dissemination (CRS 41081)
     For internal education/capacity building/staff training (CRS 41081, 41010)
     For provision of environmental services (to be defined, but likely to include only waste and
     wastewater management)
           Of which, contracted to the private sector
     For physical infrastructure to mitigate harmful environmental effects of nonenvironmental
     activities or for impact studies relating to the need for such investments (i.e., “classic” PAC;
     designed to capture the mitigating activities in the Indonesia and Mongolia PEERs)
           Of which, made by state-owned companies operating in the private sector
           Of which, provided as a grant to private entities
     Transferred to levels of government not covered.
     Environmental domain dimension
     Total public environmental expenditures
     Protection of ambient air and climate (CEPA 1)
     Wastewater management (CEPA 2)
     Waste management (CEPA 3)
     Protection of soil and groundwater (CEPA 4; CRS 41020)
     Protection of biodiversity (CEPA 5; CRS 41030)
     Natural resource management (not included in the draft CEPA)
     Transferred to levels of government not covered

40                                                                                    Environment Strategy Papers
                                                                  Definition and Typology of Environmental Expenditures

  Table 4. Draft examples of accounts for the various dimensions of environmental
  expenditure (continued)
   Regional dimension
   Total public environmental expend itures
   Primarily for region A
         For biodiversity
   Primarily for region B
         For biodiversity
   Financing dimension
   Total public environmental expenditures
   Financed from the investment budget or similar budget that is not integrated with the central
         Of which, from foreign sources
               Of which, earmarked
   Financed from (or passed through) the central budget (or the regional budget, in the case of a
   regional PEER)
         Of which, earmarked from domestic government sources
               Of which, earmarked from donors
   From donors and not passed through the central budget (but not including special funds)
   Earmarked from special taxes or fees (but not including special funds) and not passed through the
   central budget
   From an off-budget special fund
         Of which, from donors
         Of which, from a special (environmental) tax or fee
   Financed from a transfer from another level of government
   Program/policy issue dimension
   Total public environmental expenditures
   For program/policy issue X
         Of which, recurrent
               Of which, for wages and other personal emoluments
   For program/policy issue Y
   For program/policy issue Z
  Note: All the “total” lines for the dimensions should be the same. To facilitate tracking foreign aid, OECD/DAC CRS codes
  have been supplied for some of the equivalent categories in the functional dimension and the environmental domain

Functional dimension                                              management, which are increasingly con-
The proposed functional dimension is an                           tracted to the private sector.
attempt to account for the main approaches
that government can take in dealing with an                       Environmental domain dimension
environmental problem. It attempts to incor-
                                                                  The environmental domain dimension con-
porate the distinction in the Indonesian PEER
                                                                  cerns the specific environmental medium that
between core and mitigating expenditures
                                                                  the expenditure is aimed at protecting. The
while disaggregating some of the rather
                                                                  subcategories are based on categories in the
heterogeneous “core” activities. It also incor-
                                                                  draft CEPA, although not all CEPA categories
porates the OECD/Eurostat notion of environ-
                                                                  are likely to be relevant. A natural resource
mental services such as waste and wastewater
                                                                  management category has been added but

Phil Swanson and Leiv Lunde                                                                                                   41
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

would not be used in cases where it was                     Many developing country governments divide
decided not to include such expenditures in                 their budgets into an ordinary, or recurrent,
the review. Cross-references to OECD/DAC                    budget and an investment budget. In practice,
CRS codes are provided in the Table 4 listing               the investment budget is often wholly fi-
when the equivalence is fairly clear, although              nanced by donors. In theory, it comprises
the two systems are not extremely compatible                capital expenditures only, although actually
and judgment would have to be used when                     this is not always the case. In many instances
tracking projects via the CRS database.                     the split between the two budget categories
                                                            serves little real purpose and acts as a false
In practice, it may be possible to use the                  dichotomy. Yet because there may be a great
environmental domain dimension as a proxy                   difference in data quality between the two
for the program/policy issue dimension,                     budgets, it may be decided to limit the review
discussed below.                                            to expenditures from one or the other. It
                                                            should be kept in mind that distinctions
                                                            between capital and current expenditures
Regional dimension
                                                            should be captured in the economic dimen-
It may be possible to classify some central                 sion, as the investment budget often contains
government expenditures by region—for                       both.
example, if most of the benefits of a particular
project are reasonably likely to accrue to one
region. (In the case of projects that cover two             Program/policy issue dimension
or more regions, a division of expenditure                  An important role of the PEER will be to
between them could be estimated.) Such a                    examine expenditures according to policy
classification should also include transfers to             priorities. A “program” is basically a group of
local and regional governments. Regional                    expenditures that are aimed at the same thing.
classification can be an important aid for                  Ideally, a program will correspond to a policy
developing benchmarks for comparing                         priority.
expenditures on particular issues. For ex-
ample, a comparison of biodiversity expendi-                Since few governments actually report their
tures per protected hectare in region A and                 expenditures by program, in most cases the
region B (as outlined in Table 4) might reveal              review team would have to create program
that region A spends twice as much per                      categories, guided by whatever document is
hectare, signaling an anomaly that could be                 taken as a basis for environmental policy
further investigated. The subcategories used                priorities.
will depend on the issues identified as impor-
tant for the review.                                        It may be possible to use the environmental
                                                            domain dimension as a proxy for the program/
                                                            policy issue dimension. It may also be desir-
Financing dimension
                                                            able for the World Bank to create a standard-
The proposed financing dimension is designed                ized list of policy issues (a policy dimension)
to examine sources of funds, including foreign              to replace the environmental domain and
and off-budget sources, and how much is                     program/policy issue dimensions presented
earmarked.                                                  here.
42                                                                                    Environment Strategy Papers
                                                  Definition and Typology of Environmental Expenditures

The use of several economic subcategories is      expense to maintain capital investments and
suggested as a way of analyzing the               that the wage bill is not crowding out other
sustainability of particular programs (e.g., to   recurrent expenses).
see that there is enough nonwage operational

Phil Swanson and Leiv Lunde                                                                         43
Chapter 5

Main Elements of a Guidance Note

        his chapter discusses the recommended            decision may be made to eliminate certain
        procedure for conducting a PEER and              categories within particular dimensions, that is,
        some of the important methodological             to narrow the scope of expenditure types
issues and problems likely to be encountered.            considered.
It is meant as the forerunner of a more detailed
guidance note, which could be developed as               Among the main problems with data encoun-
part of a future project.                                tered by PEER practitioners are a high level of
                                                         aggregation and shortcomings in quality and
                                                         consistency, including often opaque records
CREATING AN EXPENDITURE DATABASE                         and sloppy classification between capital and
In order to evaluate expenditures, the review            recurrent expenditures. Compilation of a
team will need to create an appropriate                  database often involves a time-consuming
database. It probably would be difficult to              process of poring over lists of expenditures
come up with a model database for PEERs                  from various ministries.
because of the large variations among countries
in the availability, quality, and format of              An important step will be to understand where
expenditure data. To a great extent, the sophis-         environmental expenditures are made. At the
tication of the database and the type of analysis        central government level, spending units
that the team is able to perform will be limited         include core environmental agencies such as
by these factors. (Suggested expenditure                 the ministry of environment (if one exists), as
analyses are discussed below.) The first step,           well as nonenvironmental agencies such as the
therefore, is to survey the data that are avail-         ministry of industry or the ministry of agricul-
able in order to determine what types of                 ture.
analysis can be carried out and the most
appropriate way of collating the data to aid the         Examination of line-agency environmental
analysis. It is suggested that the multidimen-           expenditures can be important for determining
sional categorization system presented in                the degree of environmental mainstreaming
Chapter 4 be used to guide this process.                 within the government. A number of PEER
Depending on the information available, a                practitioners have noted that a major problem

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

is tracking down expenditures outside the core              consultation with the government, what
agencies. Close cooperation with the ministry               should be considered the policy priorities.
of finance could be important in this regard.               These may be contained, for example, in an
                                                            environmental policy document produced by
If it is found that that sufficient expenditure             the government, by the government in
information outside the core central govern-                partnership with the World Bank, or in
ment environmental agencies is difficult to                 fulfillment of Agenda 21 or the country’s
come by or is of inadequate quality, the                    Millennium Development Goals.
review team, as part of its scoping phase, may
wish to examine the extent to which expendi-                Ideally, it should not be within the scope of a
tures by a core environmental agency such as                PEER to judge policy priorities, although this
the ministry of environment could serve as a                could be done as part of the wider CEA
proxy for public environmental expenditures.                process. In cases where the review team
A number of PEERs have used this approach.                  considers the government’s policy priorities
                                                            inappropriate, (so that comparison of spending
An important future area of work for a guid-                with such priorities appears to serve little
ance note will be to provide practical advice,              purpose), it may be necessary to sit down with
based on the experience of PEER practitioners,              the government to determine a more appropri-
on how to locate relevant expenditure infor-                ate set of priorities, based as much as possible
mation.                                                     on the country’s actual environmental prob-
                                                            lems. This should ideally take place under the
Information-gathering problems increase when                “policy analysis” building block of the CEA
expenditures by regions are considered. The                 process.
degree to which public expenditures by
regional and local governments are taken into
                                                            Costing of policy priorities and examination
account will depend on the share of such
                                                            of the spending envelope
expenditures in overall public environmental
expenditures. If the scoping phase reveals that             There are a number of ways of comparing
expenditures by regional or local governments               actual expenditures with policy priorities. One
are significant, the review team ideally should             is to estimate the costs of fulfilling the policy
perform one or more regional case studies                   priorities and of translating these costs into a
(regional PEERs). Depending on resources, the               set of annual budgets for comparison with
regional PEERs might be performed in less                   actual expenditures. This exercise is some-
detail—for example, using fewer dimensions                  what analogous to the first of the three levels
of the categorization system or fewer distinct              of analysis suggested by Pradhan (1996) and
items within dimensions.                                    by others for general PERs; that is, analysis of
                                                            the aggregate levels of spending and deficit
                                                            (see Chapter 2). Although a number of PEER
ALLOCATION                                                  and PER practitioners have mentioned this as a
Among the main goals of the PEER will be to                 desirable exercise, very few World Bank
compare expenditures with policy priorities.                PEERs have actually done it, usually because
An important initial step is to determine, in               of time and resource constraints.

46                                                                                    Environment Strategy Papers
                                                                   Main Elements of a Guidance Note

If a significant gap is found between the cost    environmental financing strategy (EFS) meth-
of reasonable policy goals and the actual         odology could be a useful framework for
amount of money being made available for          conducting scenario analyses for increasing
environmental expenditures (the “environ-         available funds as well as reducing expendi-
mental envelope”), the team could suggest         ture needs at the program level.
ways in which the government could increase
the envelope. It should be noted that the size
                                                  Allocation by program within the environ-
of the envelope may not be known until the
                                                  mental envelope
team has collected information on actual
expenditures and that the monies available for    Using the expenditure data collected, the
environment are likely to be spread over a        review team should attempt to compare actual
number of environmental and                       expenditures with policy priorities. Ideally,
nonenvironmental departments and agencies.        expenditures should be arranged according to
                                                  programs that can be matched with priorities
Since it probably will not be within the          with relative ease.21 Since most governments
competence of the review team to suggest cuts     do not present expenditures in terms of
in programs in other sectors, the envelope-       programs, the categories may have to be
adjusting exercise should perhaps be limited      created by the review team. PEER practitioners
to ways of raising more revenue from the          have sometimes had to do this by carefully
environmental and natural resources sector        going through line-item expenditure informa-
(and possibly other sectors). Such efforts        tion while creating a database. As described in
should concentrate on putting into effect the     Chapter 2, the database could create a pro-
polluter-pays and user-pays principles through,   gram dimension based on policy priorities, or
for example, appropriate charges for the use of   the environmental media dimension, perhaps
various natural resources; appropriate taxes on   in combination with the functional dimension,
inputs such as fuel to account for negative       may be able to provide a reasonable proxy.
environmental externalities; and the elimina-
tion of potentially environmentally damaging      At a very basic level, it may be useful to list
subsidies, notably on fuel and on agricultural    policy priorities and actual expenditure
fertilizers and pesticides. To promote good       programs in a table. This can help in determin-
fiscal practices, the review team should          ing which policy issues are in fact covered by
caution the government against specifically       expenditures.
earmarking such new revenue sources for the
environment.                                      MAGNITUDE AND TRENDS
Suggesting cuts in inappropriate projects         Comparing the amount of expenditure with
within the environmental envelope is another      policy priorities helps show in a very rough
                                                  way the coverage of different priorities. But
way to free funds for priority environmental
                                                  amounts alone do not convey much about the
projects. Such cuts, which do not increase the
                                                  degree of coverage, which is less dependent
overall envelope for the environment, are
                                                  on how much is spent than on how it is spent.
dealt with in the discussion of allocative
                                                  That is, the best way of addressing a particular
efficiency, below. The OECD/EAP Task Force
                                                  issue may be relatively inexpensive compared

Phil Swanson and Leiv Lunde                                                                     47
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

with other ways. Countries differ in their                  health and education). In addition, expendi-
financing structures and their reliance on                  tures for particular activities could be com-
public transfers. Too much public funding                   pared using ratios based on factors more
(even on infrastructure) can be as inefficient as           specific (and thus, it would be hoped, more
too little.                                                 relevant) to that activity. For example,

The surest way to determine whether a                       ! Wilderness protection expenditures per
particular issue is being adequately covered is               hectare of protected land
to perform a detailed analysis of the expendi-              ! Air pollution regulation and enforcement
ture programs aimed at that issue. The envi-                  expenditures in relation to energy input in
ronmental financing strategies carried out by                 industry
the OECD/EAP Task Force could provide                       ! Wastewater treatment expenditures per liter
guidance. Because of cost and time consider-                  of water input or wastewater output.
ations, it is not feasible to carry out such an
analysis for all programs. In practice, only a              These are only examples. The degree to which
few expenditure programs should be exam-                    these ratios are actually meaningful will
ined in detail.                                             depend on the degree to which there is an
                                                            observed statistical connection between the
                                                            two parts of the ratio. This process will require
International comparisons of magnitude
                                                            the collection and review of data followed by
A rough way of determining whether a                        regression analysis, which could be an
particular issue is adequately covered is to                important area for further study.
compare the magnitude of expenditures on it
with that in other countries or with best                   An immediate task could be simply to broaden
practice benchmarks. International compari-                 the list of examples above for use as a prelimi-
sons, of course, should be treated with care.               nary set of suggested ratios for the first edition
The OECD, in the context of comparisons                     of the guidelines. As more PEERs are per-
between even its relatively homogeneous                     formed, and as more information becomes
member countries, advises that international                available, the validity of these ratios could be
comparisons be limited to orders of magni-                  tested and more refined ones developed,
tude. At best, therefore, such comparisons can              along with benchmarks to produce a revised
be used to signal potential problems that                   set of guidelines.
would then have to be examined in more
                                                            Regional comparisons within a country
In order to compare expenditures across                     Comparison of expenditures between regions
countries, meaningful ratios must be devel-                 within a country can provide important
oped. The ones most commonly used by                        information about the comprehensiveness and
World Bank PEERs and by OECD EPRs                           equity of environmental protection. Moreover,
include the ratios of expenditures to GDP per               they may be more accurate than comparisons
capita and to other government expenditures                 between countries because many differ-
(total, or for other social programs, such as               ences—in relative prices, state of the infra-

48                                                                                    Environment Strategy Papers
                                                                      Main Elements of a Guidance Note

structure, the roles of the private and public     collection and use. The first is data availabil-
sectors, and so on—are less pronounced             ity; it is often very difficult to obtain data for
within a country. (Only the Indonesia PEER         one year, let alone for several. Furthermore,
made comparisons across provinces. It also         definitions and data collection methods may
used regression analysis to test the validity of   not have been consistent from one year to
the ratios employed.)                              another, posing comparability problems.

                                                   A different sort of problem relates to the
                                                   significance of trends. It has been pointed out
Comparisons of magnitudes and ratios over          that many World Bank client countries
time, including time-series comparisons with       (especially those without a medium-term
other regions or countries, can be particularly    expenditure framework) are likely to exhibit
meaningful. One reason is that data collected      shifts from year to year in particular expendi-
over time for the same country or geographic       ture programs as a result of a large number of
region may be even more comparable than            nonpolicy factors, including, notably, the
data for different regions in the same country.    inadequacy of the budget process. One way to
Moreover, time-series comparisons enable the       handle this problem may be to compare shifts
analyst to determine whether the government        in the environmental envelope (or in particu-
is being consistent in its pursuit of policy       lar expenditure items) with shifts in the
goals. A change over time in a ratio (for          envelopes (or in particular expenditure items)
example, in the ratio of expenditure on            for other sectors to determine whether envi-
regulation of air pollution to industry energy     ronmental expenditures vary more than the
consumption), in the absence of a stated           average. (This too may be an area for further
change in policy, could signal that the govern-    research.) Shifts in environmental expendi-
ment is falling behind in its coverage of the      tures could then be corrected to factor out
issue. Significant changes in such ratios could    those changes that could reasonably be
flag areas that should be followed up by in-       attributed to unintended general vagaries in
depth analysis.                                    the budget process. But if these unintended
                                                   shifts are relatively large compared with those
Comparison of ratios internationally or with       in other countries, it could signal a weakness
international best practice benchmarks could       in budget management that could undermine
reveal even more information. For example,         even a relatively competent public environ-
although the ratio of expenditures to GDP in a     mental management team.
particular country on a particular issue may
have risen, a time-series comparison of this
ratio with international trends may reveal that    EFFICIENCY AND QUALITY
the country is falling significantly behind        The only way to be certain that a particular
compared with the trend in best practice           expenditure is adequately directed toward a
countries.                                         particular policy goal is to look at what the
                                                   money is being spent on. Assuming that it is
While time-series can be useful, PEER practi-      being spent on an appropriate program, the
tioners noted several problems with their          next step is to look at whether the program is

Phil Swanson and Leiv Lunde                                                                         49
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

being efficiently and effectively executed. So              periodically updated review of best practices
far, program-level analysis has played a very               in environmental policy.
minor role in World Bank PEERs and PERs.
                                                            In practice, it may be possible for the PEER to
In general, because of the time and budget                  analyze the appropriateness of a fairly large
constraints of the PEER, program-level or                   number of programs or projects in the envi-
project-level analysis will usually have to be              ronmental budget on the basis of stylized
limited to a small number of programs. The                  facts, while analysis of efficiency and effec-
main selection criteria should be the signifi-              tiveness may be reserved for a smaller selec-
cance (size) of the program in the overall                  tion of projects. A list of potentially inappro-
environmental envelope, with priority going                 priate projects could help indicate the amount
to programs in areas that orders of magnitude               of money that could be reallocated to priority
analysis and trends analysis have shown may                 programs.
be underfunded or overfunded.
                                                            Assuming that a project or program is appro-
The first thing to look at when examining a                 priate, efficiency (as the term is used in this
program or project is whether it is appropriate.            report) refers to whether it is well managed.22
This is done by determining whether there is a              Analysis of efficiency should cover at least:
rationale for government involvement (e.g.,
market failure) and whether the instrument                  ! Whether the funds are being managed so
chosen to address the problem (direct provi-                  that they get where they are supposed to go
sion, regulation, and so on) is the right one.                (this could involve tracking inputs)
                                                            ! Whether the project is producing results (in
This evaluation will have to be based on the                  terms of appropriately chosen output
review team’s knowledge of evolving best                      indicators) at low cost.
practice. One way to simplify the procedure
could be to use a set of stylized facts. Pradhan            The indicators for the second point ideally
(1996) suggests this approach for PERs in the               should have been chosen beforehand by the
areas of education, health, and transport                   project designers in order to guide the project.
infrastructure, and it may also work for the                In cases where indicators have not been
environment. For example, a number of                       selected or are inappropriate, the review team
studies have indicated that there is a rationale            may wish to use others. An area for future
for the government to help address industrial               research may be the development of a set of
pollution problems stemming from negative                   appropriate indicators for different types of
externalities that industry has no incentive to             common programs and projects in the envi-
take into account on its own. Studies have                  ronmental field. This could be included as an
also shown that government subsidization of                 annex in the PEER guidelines and periodically
pollution abatement and control expenditures                updated to take into account evolving best
by industry is an inappropriate instrument for              practice.
addressing the problem. A set of similar
stylized facts could be developed as an annex               Most PEERs and PERs have not looked at
to the PEER guidelines on the basis of a                    efficiency questions, mainly because it can

50                                                                                    Environment Strategy Papers
                                                                     Main Elements of a Guidance Note

require significant effort, as well as data that    OTHER ISSUES
often have not been available. In some cases
                                                    The final elements to be considered in the
proper project evaluation will require site
                                                    PEER guidance note are foreign assistance to
visits. Again, the guiding principle should be
                                                    the environment and subsidies that could
to concentrate efforts on the most important
                                                    undermine positive actions for environmental
(largest) budget items.

Related to efficiency is the notion of effective-
ness—whether the project is achieving the           Foreign assistance
desired outcomes. An example will help              In general, it is recommended that examina-
clarify the difference: an efficiency (output)      tion of donor-funded expenditures form a
measurement for a regulatory program might          discrete part of the PEER process. Although it
be the amount of factory waste being released       is important for many parts of the PEER to
into a river, while an effectiveness (outcome)      analyze government and donor-funded
measurement might be the quality of the river       expenditures in an integrated manner in order
water. It may turn out that the outputs being       to get the big picture, it is also important to
measured have little bearing on the strategic       segregate donor-funded expenditure for some
outcomes that are desired; for example, most        portions of the analysis, to answer questions
of the pollution in the river could be from the     that are specific to aid or that could not be
use of agricultural chemicals such as pesti-        examined without such segregation.
cides and fertilizers.
                                                    Coordination of Aid with Policy Priorities.
Almost no World Bank PERs and PEERs have            The PEER should analyze the extent to which
addressed outcomes.23 This is because, in           aid projects are coordinated with the
practice, it is very difficult to isolate the
                                                    government’s policy priorities. Such an
different influences on outcomes. In a sense,
                                                    exercise could be an important indication of
the notion of effectiveness can be incorpo-
                                                    coordination among foreign donors. The
rated in the PEER through stylized facts in the
                                                    analysis could be performed at the same time
appropriateness-measurement stage.
                                                    as the analogous step for domestically funded
                                                    expenditures. The review should then go on to
The OECD has developed a set of good
                                                    distinguish the coverage of the two types of
practices in public environmental expenditure
                                                    funding source.
management that cover the evaluation of the
performance of expenditure programs as well
                                                    Examination of the proportion of environmen-
as that of the agencies managing them. These
                                                    tal aid within total aid for the country could
checklists, presented in Appendix B, evolved
                                                    help determine the extent to which donors
from earlier guidelines for evaluating special
environmental funds in Central and Eastern          view the environment as a relative priority in
Europe and the former Soviet Union. Some            the country. This proportion should be
items in Checklist 3 may be especially rel-         compared with the relative priority of the
evant for examining institutional arrangements      environment in the government’s overall
regarding funds management for various              policy goals, to determine whether donors are
agencies or projects.                               allocating enough to environmental and

Phil Swanson and Leiv Lunde                                                                       51
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

natural resource themes in their overall aid                ! The proportion of environment-related aid
envelopes.                                                    earmarked for specific projects or programs
                                                              regardless of whether it passes through the
Mainstreaming. As was done in the                             central budget
Bangladesh report, the PEER could analyze the               ! The proportion of environment-related aid
distribution of environment-related aid                       with a designated purpose of technical
projects across economic sectors. Such an                     assistance or capacity building
analysis, especially over time, could help                  ! The composition of environment-related aid
determine the extent to which the environ-                    (its allocation to specific sectors or environ-
ment has become mainstreamed in donor                         mental domains such as forestry, waste
assistance.                                                   management, or water resource develop-
Substitution of Foreign Aid for Government
Funding. Trends in donor funding within total               Where aid flows are clearly documented in
environmental expenditures help show how                    client country data sources, it should be
the environmental envelope has changed with                 possible to track magnitudes and trends for
trends in environment-related aid. This can                 most of the areas noted above, using the
help determine to what extent donor-funded                  multidimensional categories proposed in this
projects are seen as additional to financing by             paper. Where donor information is less clear,
the government or are viewed as a substitute.
                                                            or where the review team wishes to compare
Such an analysis could be part of a discussion
                                                            in-country receipts with donor intentions,
of the government’s use of aid and its environ-
                                                            valuable information can be gleaned from the
mental management, including the degree to
                                                            OECD/DAC Creditor Reporting System, which
which it views the environment as a priority in
                                                            provides a reliable source of data on bilateral
                                                            and multilateral aid commitments. Each
                                                            transaction in the database includes a project
Other Aid-Related Issues. Important aspects of
                                                            title and a short and long project description.
the aid–client country interface that may be
                                                            In most cases there is sufficient information to
explored should include, at a minimum:
                                                            make a reasonably accurate assessment of the
                                                            environmental significance of these flows and
! The contribution of environment-related aid
                                                            to generate a list of environment-related
  in relation to total aid revenue
                                                            bilateral and multilateral donor ODA commit-
! The contribution of environment-related aid
                                                            ments to the recipient country under investiga-
  in relation to total domestic environmental
                                                            tion for a given time period. The review team
                                                            may then attempt to trace the flow of these
                                                            ODA commitments through the budgetary
Other issues relating to donor-financed
                                                            process in the recipient country. This study
environmental assistance that may warrant
                                                            need not be exhaustive; exploring just a small
investigation include:
                                                            sample of environment-related aid transactions
                                                            through the domestic environmental finance
! The proportion of environment-related aid
                                                            system could help inform the study about
  (and aid in general) that passes through the
                                                            many of the issues noted above.
  central budget

52                                                                                    Environment Strategy Papers
                                                                     Main Elements of a Guidance Note

The discussion of the CRS database in Chapter      mental externalities. A concept of subsidies
4 describes some of the manipulations and          that takes into account such “passive” policies
collations of data that may be performed using     would pose a number of practical difficulties
the CRS. Although there are significant            for the review team, not least the problem of
methodological challenges associated with          tracking down instances of failure to tax,
using the CRS data (including the tension          which would entail looking for a negative. (A
between reporting commitments as opposed           related concept that a PEER might look at is
to actual disbursements, and the reliability of    the adequacy of scarcity pricing for natural
single-purpose code descriptors), generally        resources, as discussed below.)
speaking, the CRS database should provide a
                                                   “Active” subsidies are created by a specific
good resource for developing a more detailed
                                                   government policy and can flow through
account of the relationship between interna-
                                                   several different channels:
tional aid and domestic environmental
                                                   ! Direct payments
                                                   ! Provision of in-kind services
Potentially environmentally damaging               ! Tax preferences
subsidies                                          ! Trade preferences (for example, import
                                                     barriers to more environmentally friendly
Expenditures aimed at environmental im-
                                                     foreign technologies or products)
provement can be undermined by other
                                                   ! Regulatory mandates, such as a requirement
government policies. One of the most impor-
                                                     to use certain products or technologies.
tant such policies is subsidies for the produc-
tion or consumption of potentially environ-
                                                   The last two do not involve government
mentally damaging activities or products.
                                                   expenditures or tax benefits and so may be
These subsidies increase the production or
                                                   difficult to compare with environmental
consumption of such goods or activities and        expenditures in the context of a PEER. Never-
therefore increase the potential damage to the     theless, the PEER could note such policies that
environment. Of the reviewed PEERs, that for       come to the attention of the review team. In
Bangladesh looked at the issue of environmen-      examining consumption of products, it may be
tally damaging subsidies, but it only noted        more useful to concentrate on direct payments
which sectors had “potential policy conflicts      and tax preferences. Provision of in-kind
with environmental objectives” and did not         services (and, to some extent, tax preferences)
attempt to measure such subsidies or their         could be most relevant for looking at potential
effects.                                           undercharging for the exploitation or use of
                                                   natural resources.
The definition of subsidy, let alone how to
measure subsidies, is fraught with difficulty      Measuring the cost of environmental damage
and is the subject of ongoing research.24 A        can be extremely difficult and is the subject of
broad definition could include the failure of      much research. In principle, it may be pos-
government to ensure that environmental            sible to use stylized facts or rule-of-thumb
damage in various activities is internalized—in    calculations distilled from various studies (e.g.,
other words, failure to tax or fine a good or      one dollar of subsidy to agricultural fertilizers
activity to compensate for its negative environ-   results in x dollars of environmental damage).

Phil Swanson and Leiv Lunde                                                                       53
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

It is relatively simpler to measure the size of             direct subsidies and effective tax breaks in
the subsidy, though even this is often quite                these fields. Since each type may affect
difficult in practice. In general, as noted by              behavior in a different way, they should be
Fischer and Toman (1998), “the easiest                      differentiated, but for illustrative purposes in
environmentally harmful subsidies to identify               the context of a PEER, they probably could be
are those that involve more or less conven-
                                                            summed for a rough total. This is because in
tional market goods and services, without too
                                                            theory subsidies to producers can be passed
large a fixed infrastructure component, and
                                                            through to consumers, and a dollar not paid in
which benefit a well-defined subset of con-
                                                            tax can be thought of as equivalent to a dollar
sumers or producers.”
                                                            received (although tax may have to be paid on
For simplicity, it is recommended that a PEER               the latter).
stick as much as possible to subsidies that can
be directly taken from an expenditure line in               In addition, the PEER could compare charges
the budget or calculated as tax forgone,                    for natural resource use and exploitation with
comparing the total spent on subsidies that                 estimated ideal scarcity prices based on local
undermine the environment with expenditures                 estimates or international benchmarks. The
designed to protect it. Given that calculations             two most important areas to concentrate on
of environmental cost are likely to be greeted              will probably be timber-harvesting charges
with skepticism by nonenvironmental                         (“stump prices”) and water use charges,
decisionmakers in government, the simpler                   notably for irrigation. Which are the most
comparison of subsidy amount with expendi-                  relevant sectors to observe will depend on the
ture amount may even be politically more
                                                            country. Estimated undercharging could be
effective. It could then be noted that the actual
                                                            added to the rough total but should also be
costs in terms of environmental damage and
                                                            noted separately.
economic efficiency will likely be greater.25

                                                            In addition to comparing total potentially
The standardized list of subsidies relating to
potentially environmentally damaging prod-                  environmentally damaging subsidies with total
ucts should include:                                        environmental expenditures, more targeted
                                                            comparisons may provide interesting illustra-
! Subsidies for the production and consump-                 tions of the extent to which particular expen-
  tion of energy, notably motor fuels, coal,                ditures may be undermined by particular
  and electricity. (Subsidies for motor fuels               subsidies. For example, agricultural chemical
  and coal have been reduced significantly                  subsidies could be compared with the amount
  over the past decade in many countries.)                  spent on water treatment, and energy subsi-
! Subsidies for the production and consump-                 dies for industry could be compared with
  tion of agricultural chemicals, notably                   grants or tax breaks for PAC expenditures or
  fertilizers and pesticides.                               with air pollution monitoring costs. Subsidy
! Subsidies for the exploitation or harvesting              amounts should also be referenced in the
  of natural resources, in particular, timber.
                                                            discussion of ways of increasing the overall
                                                            envelope for environmental expenditures.
Ideally, the PEER should look at subsidies both
to consumers and to producers, as well as

54                                                                                    Environment Strategy Papers
Chapter 6

Suggested Areas for Further Work

This report has mentioned a number of areas                notably the inadequacy of the budgetary
for further research related to producing and              process.
updating a set of guidelines for PEERs. Many of          ! A set of stylized facts to aid in the review of
these concern suggestions for annexes in the               the appropriateness of government involve-
PEER guidelines that could assist the review               ment and the mode of involvement in a
team in constructing a database, analyzing                 particular program. Such stylized facts, as
allocations, and analyzing particular programs             suggested by Pradhan (1996), would be
and projects. These suggestions are briefly                based on a distillation of best practice
summarized here:                                           studies in the environmental field.
                                                         ! Development of a set of appropriate output
! A set of draft guidelines for PEERs, as a                indicators for different types of common
  follow-up to this report.                                programs and projects in the environmental
! Suggested procedures for handling common                 field.
  data availability and quality problems,
  including practical advice on ensuring that            The World Bank and its partners have initiated
  information on environmental expenditures              preparation of CEAs in a number of countries
  is comprehensive (that significant public              on a pilot basis. These pilots will allow for the
  environmental expenditures have not been               testing of various approaches and tools. The set
  left out of the database).                             of draft guidelines should be tested in CEA
! The development and testing of appropriate             pilot countries, and a mechanism should be set
  ratios for use in expenditure analysis, as well        up to collect experiences and ensure that the
  as best practice benchmarks.                           lessons learned are used to develop the PEER
! Work on how to monitor and adjust trends               guidelines further, with the aim of arriving at
  for shifts in environmental expenditures that          an agreed-on PEER toolkit.
  are attributable to nonpolicy reasons,

Appendix A

Examples of Environmental Projects from
the Asia Environmental Strategy

The following extracts from Toward an Envi-              energy sector emissions, energy efficiency,
ronmental Strategy for Asia (Brandon and                 demand-side management, and institutional
Ramankutty 1993) were used to help define                strengthening (standards setting, regulation,
environmental expenditures in the PEERs for              monitoring and enforcement).
Bangladesh and the Indian state of Uttar
Pradesh.                                                 (c) Agriculture and natural resource projects:
                                                         project components addressing soil conserva-
[from page 189]                                          tion and restoration, forest conservation,
                                                         watershed areas, and conservation of
ENVIRONMENT PROJECTS?                                    (d) Other projects: population programs;
In this report, the World Bank’s environmental           environmental health and education; environ-
activities are divided into the following catego-        ment-related policy reform; and cross-cutting
ries:                                                    activities, such as environmental assessment
                                                         capacity-building, [national environmental
(a) Urban and infrastructure projects: project           action programs], natural resource accounting;
components addressing sewerage and sanita-               and environmental institutional strengthening
tion; solid waste management; pollution                  in general.
monitoring, regulation, and enforcement;
urban institutions and strategies for pollution          Notably absent from this narrow definition of
control; and transport-related environmental             “environmental projects” is lending for urban
issues (vehicle standards, fuel efficiency and           and municipal water supply, disaster relief/
modification, marine pollution).                         reconstruction, resettlement, and hydro-power.
                                                         These activities are not considered to be
(b) Industry and energy projects: project                environmental for the following reasons:
components addressing all forms of industrial
pollution abatement, waste reduction, recy-              (a) Water supply projects, while beneficial for
cling, control of hazardous waste, reduced               people, do not have unambiguous impacts on

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

the environment (i.e. large water supply                    Two examples show how project expenditures
systems such as dams, canals, groundwater                   for the environment were estimated:
and transfer schemes may have some adverse
environmental impacts). On the other hand,                  (a) The Second Jabotabek Urban Development
urban and industrial sewage, sanitation, and                Project in the greater Jakarta area, Indonesia,
wastewater treatment projects are included                  has nine components. . . . Three of these
here as environmental, in that they lead to less            components deal directly with drainage,
pollution of surface, ground, and coastal                   sanitation, and sewerage; three deal with
waters.                                                     water supply; and three deal with manage-
                                                            ment review, miscellaneous studies, and
(b) Disaster relief and reconstruction projects             overall project coordination. The expenditure
may mitigate the negative effect of the envi-               allocations for this project were: 100 percent
ronment on people, but they do not generally                of the drainage, sanitation, and sewerage
mitigate the negative effect of people on the               activities were classified as environmental; the
environment. Disaster “prevention” projects,                water supply components were not classified
such as the Bangladesh Flood Protection                     as environmental; and half of the review,
Scheme, similarly are not classified as environ-            study, and coordination activities were
mental, since they may have environmentally                 considered to be environmental.
negative impacts on natural ecological
systems.                                                    (b) The West Bengal Forestry Project in India
                                                            has eleven components, divided into eight
(c) Resettlement activities are designated to               that support commercial agriculture, pastoral,
minimize the negative social impacts of                     and forestry activities (such as farm forestry,
certain development projects, but have no                   fodder development, plantation forestry, and
direct environmental benefits. The exception                support to extension), and three that address
to this rule is the case of resettlement activities         environmental degradation (mangrove protec-
associated with biodiversity projects.                      tion, rehabilitation of degraded forests, and
                                                            support to wildlife and protected areas). Only
(e) Hydroelectric projects may have local                   the latter three components were considered
negative environmental impacts in spite of                  to entail environmental work, as narrowly
their regional and global clean energy ben-                 defined in box B.1.

[from p. 190]

58                                                                                    Environment Strategy Papers
Appendix B

OECD Checklists for Measuring Performance
of Public Environmental Expenditure
The OECD has developed several good                       items in Checklist 3 may be especially relevant
practice checklists for evaluating the perfor-            for examining institutional arrangements
mance of institutions managing public environ-            regarding funds management for various
mental expenditures. These checklists evolved             agencies or projects. Elements of Checklist 1
from earlier guidelines for evaluating special            may be useful for determining whether the
environmental funds in Central and Eastern                government’s role in a particular project or
Europe and the former Soviet Union. Some                  program is appropriate.26

Checklist 1. Performance in terms of environmental effectiveness

 C heckpoint              Description

 1. Public expenditure    Aid is provided after solid analysis has demonstrated that the assistance is
 needs to be              necessary to achieve environmental policy goals. If administrative instruments,
 considered in            economic instruments, or private expenditure can achieve these goals, public
 connection with          financial resources should be saved for other uses. Independent, external
 other environmental      auditors periodically review the value added of public expenditures.
 policy instruments.

 2. Public financing is   Public financing is committed to well-targeted and well-defined expenditure
 committed to a well-     programs established as a part of a wider environmental program. These
 defined expenditure      programs have specific, measurable, agreed, realistic, time-bound objectives;
 program.                 eligible beneficiaries; specified financing needs; eligible project types; and a set of
                          written rules that guide the financing decisions which enable the objectives to be
                          met. These environmental program objectives are established through a political
                          process led by the appropriate government agency and are justified by the high
                          ratio of social benefits to social costs.

 3. Environmental         Standard application forms are used to solicit quantitative information on
 effects are              projects’ environmental effects. Once obtained, the accuracy and reliability of
 meaningfully             this information is verified. Unambiguous indicators of environmental effects are
 considered in project    essential inputs to project appraisal and selection. Actual environmental effects
 appraisal.               are monitored throughout the project cycle and after implementation. If the
                          project fails to achieve its predicted effects, as listed in the application form,
                          effective sanctions are enforced in proportion to the violation.

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

 C heckpoint                 Description

 4. Cost-effectiveness       Project selection criteria ensure that limited public funds achieve the greatest
 is an essential             environmental effect. Quantitative information on project costs is requested
 quantitative basis for      from applicants in a standard application form. The accuracy and reliability of
 project selection.          cost information are verified. Properly discounted full lifetime costs (investment,
                             operational, and current maintenance) are duly considered in the appraisal
                             process. A unambiguous cost-effectiveness indicator (unit cost of achieving
                             environmental effect) is an essential quantitative basis for appraisal, scoring,
                             ranking, and selecting projects. Consistency of information on costs is checked
                             throughout the project cycle and is monitored after project implementation. If
                             actual costs are higher than those in the application form, effective financial
                             sanctions are enforced proportional to the deviation.

 5. Cost-effectiveness       Project-level environmental and cost data are tracked and stored in a database
 and environmental           format in a way that allows unambiguous ex post verification and analysis.
 effectiveness are key       Information on the cost of achieving environmental effects is periodically
 indicators of               reported to governing bodies and to the public. External independent reviews of
 institutional               cost-effectiveness and environmental effectiveness are periodically conducted.
 performance.                When problems are identified, governing or executive bodies take adequate
                             corrective or preventive action.

 6. Limited public           Public funds cover less than 100 percent of project costs. The ratio of leverage of
 funds leverage              private and foreign finance in the entire portfolio is a formal requirement and a
 private and foreign         performance indicator. The full financial plan of the project is requested from
 finance.                    applicants in a standard form. Data on financing from other sources are verified.
                             No disbursement is made until full financing for the project is adequately

 7. Social equity            The type of beneficiary should not influence the rate of assistance for social
 considerations do not       equity purposes. This is especially the case when socially motivated
 undermine                   environmental subsidies could trigger implementation of projects that a re only
 environmental               marginally important to the environment. In principle, equity issues are
 effectiveness.              separately addressed through targeted instruments of social policy.

Checklist 2. Performance in terms of fiscal prudence

 Checkpoint                  Description

 1. Environmental            Implementation of environmental expenditure programs does not lead to
 expenditure                 deficits. In particular, contingent and implicit liabilities (such as loan guarantees)
 programs comply             are not incurred without explicit, prior approval from fiscal authorities. Medium-
 with high standards         term financial forecasts, including contingent and implicit liabilities, are regularly
 of fiscal discipline.       prepared and are disclosed in financial statements.
                             The institutional setups for managing environmental expenditure programs
                             facilitate fiscal transparency. Mandatory internal and external independent audits
                             (financial, legal, and performance) are regularly carried out. Both cash and
                             accrual accounting systems, based on international standards, are introduced and
                             approved by finance authorities. Ex post reporting, according to a transparent
                             expenditure classification system, is regularly conducted and publicly disclosed.
                             An estimate of the revenue and the corresponding expenditures of all

60                                                                                     Environment Strategy Papers
     Appendix B — OECD Checklists for Measuring Performance of Public Environmental Expenditure Management

Checklist 2. Performance in terms of fiscal prudence (continued)

 Checkpoint                   Description

                              extrabudgetary funds is provided in the budget, at least as an annex. Statements
                              on debt and contingent liabilities, especially of all extrabudgetary environmental
                              institutions, are presented to the ministry of finance along with the budget of the
                              ministry of environment.

 2. Environmental             If the revenues managed within the program come directly or indirectly from
 expenditure                  compulsory transfer payments (taxes, charges, fees), they are treated as public
 programs do not              funds in the meaning of the laws of public finance, public procurement, and state
 drive public money           aid. As such, this money is subject to the usual fiscal discipline in the entire public
 out of the public            finance sector even if it is managed outside the budget. The revenues flow
 finance system.              through treasury accounts before they are allocated to the environmental
                              expenditure program.

 3. Negative impacts          If the environmental authorities propose to earmark some taxes and compulsory
 of earmarking on             charges for an expenditure program, they need to demonstrate that the benefits
 allocative efficiency        of earmarking outweigh the risks of limiting the government's flexibility in
 are minimized.               allocating current spending according to priority social needs. Further
                              earmarking within earmarked schemes (e.g., subfunds within earmarked
                              environmental funds) is avoided, since it further infringes on efficiency. If internal
                              earmarking is unavoidable, safeguards prevent inefficient resource allocation and
                              the creation of perverse incentives.

4. Creation of vested     The legal documents underlying the expenditure program include provisions to
interests is              ensure that public funds are phased out after they have fulfilled their role. To this
prevented.                end, mandatory reviews of the true need for public expenditure programs are
                          conducted. In addition, an incentive structure is in place to prevent perpetuation
                          of public expenditure programs longer than needed on efficiency grounds.

5. Governance bodies      All individuals involved in managing expenditure programs are held accountable
of expenditure            for decisions within their distinct lines of responsibility. Accountability systems
programs are              are based on acknowledged international standards. Arrangements involving
accountable for           conflicts of interest are eliminated. Public funds are guarded against corruption
performance to the        and fraud. This is facilitated politically by effective checks and balances on various
government,               interest groups in governing bodies.
parliament, and the
                          Accountability systems are supported by transparent and meaningful information
                          provided to potential beneficiaries on the key terms and rules of the expenditure
                          program. Ex post reports on decisions made and results achieved (in terms of
                          specified performance criteria) are periodically disclosed.

6. Collection of          Collection of public revenue and direct procurement of equipment and
revenues is separated     construction services are institutionally separated from expenditure management
from expenditure          (e.g., appraisal and selection of projects for financing). Collection of revenue
management.               from fiscal or quasi-fiscal instruments is normally done by relevant fiscal
                          authorities under the control of treasury services. Direct procurement of
                          equipment and services needed to implement projects is the responsibility of the
                          project owner. Public procurement rules apply to all purchases from public funds
                          even if a purchasing agent is a private entity.

Phil Swanson and Leiv Lunde                                                                                        61
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Checklist 2. Performance in terms of fiscal prudence (continued)
 C heckpoint                 Description

 7. Public                   Public expenditures are not used to support projects that could be implemented
 expenditures are            on commercial terms. Financial support is limited to what is necessary to make
 used for projects that      environmental projects financially viable to the beneficiary, given prevailing
 are economically            market conditions and the cash flow profile of the project. The rate of assistance
 efficient but not           (share of grant equivalent in total project cost) is also adjusted to the value of
 commercially viable.        public benefits generated by a project. Subsidy equivalents in all projects and
                             financial instruments are regularly calculated and are disclosed to the public.

 8. Competition with         Subsidies to environmental projects do not distort competition in financial
 private financing           markets and do not obstruct the development of private financial institutions.
 institutions is             Financial products used in environmental expenditure programs do not compete
 avoided.                    with financial products offered by commercial banks or investment funds to the
                             same customers and in the same project categories.

 9. Special                  Special environmental expenditure programs are generally not used to subsidize
 environmental               operational costs of environmental installations, which should be recovered from
 expenditure                 users, beneficiaries, or polluters as appropriate. Running costs of environmental
 programs focus on           administration are financed through a regular budget process. Special
 financing capital           expenditure programs are normally focused on financing investment in fixed
 investments.                assets or in precisely defined noninvestment projects, which are not the regular
                             duties of administration. In exceptional instances, when cash flow problems
                             threaten the projects’ operations or existence, assistance may be given for a
                             strictly limited period, during which the assistance declines.

Checklist 3. Performance in terms of management efficiency
 Checkpoint                  Description

 1. Governance of            Terms and conditions of financing, decisionmaking and administrative
 expenditure                 procedures, internal policies, and algorithms for project appraisal and selection
 programs is subject         are written and are released to the public. They are coherent and consistent
 to consistent rules         over time (they do not change frequently and randomly). At the same time, they
 rather than ad hoc          are periodically reviewed to identify areas for improvement. Needed refor ms
 discretion.                 are implemented without delay.

 2. Executive                Lines of responsibility of governance and management bodies are clearly defined
 management of an            and separated from each other. The gov erning body is responsible for
 expenditure program         programming, priority setting, performance evaluation, supervision, and control.
 is depoliticized and is     Political interference in the selection of specific projects and beneficiaries is
 accountable for             strictly limited and is governed by rigid procedures.
                             A professional executive management body has a high degree of operational
                             autonomy but is subject to strict accountability for performance. Its
                             responsibilities focus on project cycle management—in particular, on impartial
                             project appraisal.
                             Executive managers are held accountable for performance. Performance
                             indicators are clearly written and are used in regular performance management.
                             International quality management systems (such as the ISO 9000 family) are used
                             as the benchmark for performance of the executive management standards.

62                                                                                    Environment Strategy Papers
     Appendix B — OECD Checklists for Measuring Performance of Public Environmental Expenditure Management

Checklist 3. Performance in terms of management efficiency (continued)
 C heckpoint                  Description
 3. The project cycle         Applications for financing are accepted only on standard forms tailored to
 is subject to                different project types. They are supported by clear, user -friendly instructions.
 intelligible and             They are available to all potential applicants in an electronic version. All
 transparent written          milestones, procedures, responsible bodies, and additional required documents
 procedures.                  are communicated to applicants up front and in writing. The project cycle
                              guidelines for applicants are clearly written and widely available. The project
                              cycle manual for the staff is binding and is used in practice.

 4. Information               Proactive communication informs potential applicants of funding opportunities
 provision and                and of the terms and conditions of the application and appraisal processes.
 communication with           Applications solicit all project information essential for appraisal but avoid
 applicants is                overburdening applicants by demanding irrelevant data. Communication with
 proactive and fair.          applicants is organized in a transparent and fair manner, giving all applicants equal
                              access to information. Communication policy ensures equal opportunity for
                              applicants to have their projects impartially reviewed on the basis of merit.

 5. Project                   Project identification implies an effective search for the best project
 identification is            opportunities in a given expenditure program. Project identification follows from
 proactive and is             the environmental expenditure program established by the administration
 based on the                 responsible for environmental policymaking and priority setting.

 6. Project appraisal         Project appraisal criteria and procedures are specified in legal or operational
 criteria and                 documents. They are binding on governance and executive bodies and accessible
 procedures are               to the public. Appraisal systems are tailored to the size and complexity of
 objective,                   different project types. For large investment projects, a two-stage appraisal
 transparent, and             process is used: (1) screening against eligibility criteria, and (2) ranking of eligible
 unambiguous.                 projects. The appraisal system meaningfully compares comparable projects with
                              each other and against objective benchmarks. The appraisal system is kept
                              relatively simple and allows for ex post verification of the selection process,
                              including tracking of personal responsibilities for important judgments and
                              decisions. Appraisal reports are lucid and are publicly available. Discretionary,
                              subjective elements of project appraisal and selection are subject to explicit
                              written procedures. Their records are kept in publicly available files.

 7. Expenditure               Expenditure programs have a staff assigned to their management. The skills of
 management staff             the staff adequately match the technical requirements of a given expenditure
 have the right skill         program. The recruitment and remuneration of staff are based strictly on merit.
 set and a high level of      They are adequate for attracting and retaining highly qualified people.
 competence and               Performance management of personnel rewards high levels of integrity and
 motivation.                  commitment. The staff has a professional but friendly and welcoming attitude
                              toward beneficiaries.

 8. Financial products        The sophistication of operations and disbursement instruments is proportional to
 are adjusted to risk         the institutional capacity to manage the associated risk. Typically, grants are used
 management                   first. As in-house capacity to manage financial risk increases, other financial
 capacity.                    products are explored in the order of increasing risk: interest subsidies, indirect
                              loans, leasing, direct loans, equity investments, and loan guarantees. Before a
                              new financial product is applied, its feasibility is checked through an assessment
                              of market needs and a business plan.

Phil Swanson and Leiv Lunde                                                                                          63
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Checklist 3. Performance in terms of management efficiency (continued)
 C heckpoint                 Description

 9. Outsourcing is           External entities (e.g., commercial banks and consulting companies) are
 competitive and does        contracted to provide certain services, such as loan management, risk
 not lead to perverse        assessment and coverage, creditworthiness analysis, and technical advice on
 incentives.                 project appraisal. This outsourcing should always be conducted through a
                             competitive process and retendered periodically. Conflicts of interest are
                             prevented (e.g., the same consultants cannot both prepare projects and appraise
                             them). All relations with external stakeholders (beneficiaries, intermediaries,
                             consultants) are handled in a transparent, fully unbiased, arm’s-length manner.
                             Training and assistance in project preparation should ensure equal acces s
                             opportunities for potential beneficiaries.

64                                                                                    Environment Strategy Papers
Appendix C

Environmental Financial Flows to Developing

The OECD and the World Bank compile data                Figure C.1 illustrates the IMF’s estimates of the
on flows of official development finance (ODF)          direction of ODF flows in fiscal year 1998/99,
into developing countries. ODF is composed of           based primarily on OECD/DAC data. Table C.1
three categories:                                       provides additional detail on the composition
                                                        of ODF for the period 1993 to 2000. The table
! Official assistance (OA) to middle-income
  countries                                                                     Figure C.1
! Official development assistance (ODA) to                        Direction of net official flows, 1998/99
  developing countries                                       PROVIDERS                                             RECIPIENTS
! Other official flows (OOF).                                                                  Other OOF
                                                              DAC countries                                               Developing
ODA refers to grants or loans to developing                                                ODA $35bn/$38bn                 countries
countries (Part 1 of the DAC List of Aid Recipi-                      ODA                          Other OO F              ODA            ODA
                                                                      $17bn/$19bn                 $21bn/$19bn             $15bn/         $0.6bn/
ents) that are undertaken by the official sector                                                                          $13bn          $0.4bn
with the promotion of economic development                    Multilateral
and welfare as the main objective and are
extended on concessional terms (i.e., with a
grant element of at least 25 percent).                       Other non-DAC
                                                          industrial countriesb                            Official aid            Other official
                                                                                                           $5bn/$5bn                  flows
OA refers to flows that meet the criteria for                                                                                      $12bn/$7bn
                                                                                                  Other OOF
ODA but are extended to aid recipients on Part                 Developing                         $3bn/$2bn
                                                               countriesc                                              Countries
II of the DAC list (middle-income countries).
                                                                                                                     in transitiond
OOF consists of flows for development pur-                                                        Official aid
poses with too small a grant element to qualify                               ODA flows                     Other official flows
as ODA. OOF includes officially supported
                                                         a. Multilateral disbursements differ from DAC countries’ contributions
loan insurance and export credits, although the             to multilateral institutions.
                                                         b. Flows have been negligible since 1992.
latter are often excluded on the grounds that            c. Mostly Arab countries.
                                                         d. Detailed breakdowns of official flows to countries in transition are
they are primarily trade promoting rather than              not available.
development oriented (IMF 2001).                         Source: IMF (2002), Figure 2.1.

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Table C.1. Official development finance (ODF) from DAC member countries and multilateral
agencies to aid recipients, 1993–2000 (billions of current U.S. dollars)
                                                            1993 1994 1995 1996 1997 1998 1999 2000a
Official development assistance                             55.5 59.6 59.1 55.8 47.9 50.1 52.1 49.5
Bilateral component                                         39.4   41.3   40.6   39.1    32.4   35.2   37.9   36.0
Multilateral component                                      16.1   18.3   18.4   16.7    15.4   14.9   14.2   13.5
Official assistance to middle-income countries               6.0   6.9    8.4    5.6      5.6   7.0    7.8    7.8
Bilateral component                                          5.2    5.5   7.1    4.0      4.0   4.5    4.9    4.9
Private component                                            0.7    1.3   1.3    1.5      1.6   2.5    2.9    2.9
Other official flows                                        21.0 18.1 20.1 12.2 22.0 31.7 26.1                8.2
Bilateral component                                         11.4   12.2   14.0   5.7      5.9   12.8   10.4   –1.4
Multilateral component                                       9.6    5.8   6.1    6.5     16.0   18.9   15.6   9.7
Total ODF                                                   82.4 84.5 87.6 73.5 75.4 88.8 85.9 65.5
a. Estimated.
Source: OECD DAC tables.

highlights the general decline in ODF during                Each transaction includes a purpose code
the 1990s and the rebound in 1998, which is                 highlighting the specific area (sector) of the
generally attributed to financial support to                recipient’s economic or social structure that
countries affected by the 1997 Asian financial              the transfer is intended to foster. The 188
crisis.                                                     purpose codes include 7 within the category
                                                            of general environmental protection (codes
The size of the environmental component of                  41010–41082 in Table 2, Chapter 4).
aid depends on the definition of environmen-
tal project. A recent report by Donge and                   Table C.2 details the purpose codes for four
others (2001) notes that various organizations              environment screens applied in Donge and
have used different definitions of financial aid            others (2001). These screens were developed
flows. Translation of these into “screens”                  on the basis of the definitions of environmen-
applied to the OECD/DAC Creditor Reporting                  tal project used by the organizations.
System (CRS) leads to an environmental
component of total international aid flows of               Drawing on the four environmental screens
between 2 and 13 percent in 2000.                           highlighted in Table C.2, The authors con-
                                                            structed pivot tables for several years of data.
The CRS database includes basic details                     (Methodological problems encountered are
regarding each commitment, including the                    described in Box C.1.)
donor name and agency, the recipient coun-
try, the project title, and long and short                  The variable results in Table C.3 illustrate the
descriptions of the project. It includes fields             effect of differences in environment screen
that enable users to screen for environment-                construction. The OECD, World Bank and
related aid flows and that can accommodate                  WRI narrow screens generate estimates of
alternative definitions and typologies of                   environment-related aid ranging from 1.5 to 6
environmental expenditure.                                  percent, whereas the WRI broad screen

66                                                                                      Environment Strategy Papers
                                                 Appendix C — Environmental Financial Flows to Developing Countries

                Table C.2. Four environmental screens based on CRS purpose codes
       CRS                                                                         Environmental screen
     purpose                                                                        World     WRI
       code                              Description                          OECD   Bank    narrow WRI broad
      14010     Water resources policy and administrative management                                           Included
      14015     Water resources protection                                    Included              Included   Included
      14020     Water supply and sanitation, large systems                                                     Included
      14030     Water supply and sanitation, small systems                                                     Included
      14050     Waste disposal/management                                     Included              Included   Included
      14081     Education and training in water supply and sanitation                                          Included
      23030     Power generation/renewable sources                                                  Included   Included
      23066     Geothermal energy                                                        Included Included     Included
      23067     Solar energy                                                             Included Included     Included
      23068     Wind power                                                               Included Included     Included
      23069     Ocean power                                                                         Included   Included
      23070     Biomass                                                                  Included Included     Included
      23081     Energy education/training                                                Included              Included
      23082     Energy research                                                          Included              Included
      31130     Agricultural land resources                                                         Included   Included
      31140     Agricultural water resources                                                                   Included
      31192     Plant and postharvest protection and pest control                                              Included
      31210     Forestry policy and administrative management                                       Included   Included
      31220     Forestry development                                                     Included Included     Included
      31281     Forestry education/training                                                         Included   Included
      31282     Forestry research                                                        Included Included     Included
      31291     Forestry services                                                        Included              Included
      31320     Fishery development                                                                            Included
      41010     Environmental policy and administrative management            Included Included Included       Included
      41020     Biosphere protection                                          Included Included Included       Included
      41030     Biodiversity                                                  Included Included Included       Included
      41040     Site preservation                                             Included              Included   Included
      41050     Flood control/preservation                                    Included              Included   Included
      41081     Environmental education/training                              Included Included Included       Included
      41082     Environmental research                                        Included Included Included       Included
      43030     Urban development and management                                                               Included
      43040     Rural development                                                                              Included
   Source: Donge and others (2001): 6 (Tables 1–4).

generates estimates of between 11 and 18                            aid by donor (bilateral, multilateral); by aid
percent. Most of this difference can be attrib-                     instrument (loan, grant, grant component); by
uted to the inclusion of water resources and                        purpose code prefix; or with reference to a
water supply–related purpose codes in the                           number of other fields, including an environ-
WRI broad screen. Figure C.2 plots environ-                         mental marker and a field that indicates
mental aid for the period 1990–2000 accord-                         whether the development of the ODA com-
ing to these definitions.                                           mitment involved environmental impact
It is also possible to draw on other fields in the
CRS database to disaggregate environmental

Phil Swanson and Leiv Lunde                                                                                               67
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

Methodological note regarding use of the CRS database
The CRS database details between 6,000 and 30,000 official development finance transactions a year.
Data are available from 1973, but for the purposes of this study only data for 1991–2000 were exam-
ined. According to OECD/DAC (2002), this represents some 212,385 records. Some significant difficul-
ties arose in analyzing this data set. For example, the 1998 file included a number of formatting errors
such as the use of commas in text strings within comma-delimited data sets. In addition, almost every
year file included a small number of transactions with no grant component data or no total grant/loan
amount. A cleanup of these files yielded 211,340 viable transactions (99.5 percent, based on the OECD/
DAC data) as a basis for environmental screening.

  Table C.3. Environmental aid as a share of total aid, 1990 and 1995–2000

                                                Share of                                               Share of
                                                total aid                                              total aid
     Year and screen   Amount (U.S. dollars)   (percent)    Year and screen   Amount (U.S. dollars)   (percent)

     1990                 42,741,155,825                    1997                 42,972,591,527

     OECD                     890,047,209           2.08    OECD                   1,223,695,573           2.85

     World Bank             1,416,136,772           3.31    World Bank             1,628,565,636           3.79

     WRI narrow             1,698,309,673           3.97    WRI narrow             2,572,611,656           5.99

     WRI broad              5,794,719,659         13.56     WRI broad              7,616,385,220         17.72

     1995                 49,544,036,715                    1998                 49,891,587,929

     OECD                   2,094,128,141           4.23    OECD                   1,236,490,847           2.48

     World Bank             1,244,751,288           2.51    World Bank             1,285,522,476           2.58

     WRI narrow             3,275,659,746           6.61    WRI narrow             1,992,149,445           3.99

     WRI broad              8,075,863,075         16.30     WRI broad              6,807,914,331         13.65

     1996                 48,756,311,755                    1999                 55,467,344,569

     OECD                   2,050,973,180           4.21    OECD                   1,890,620,269           3.41

     World Bank             2,011,367,893           4.13    World Bank             1,699,375,582           3.06

     WRI narrow             2,824,032,474           5.79    WRI narrow             2,341,544,935           4.22

     WRI broad              8,451,694,260         17.33     WRI broad              6,890,177,132         12.42

68                                                                                      Environment Strategy Papers
                                                             Appendix C — Environmental Financial Flows to Developing Countries

                                                                 Figure C. 2
                                     Estimates of environment-related ODA commitments as a percentage
                                       of total ODA using four CRS purpose code environmental screens


      share of total ODA (percent)
         Environmental ODA as


                                     10                                                           World Bank
                                                                                                  WRI Narrow
                                      8                                                           WRI Broad




                                      1990   1991   1992   1993   1994    1995    1996     1997    1998        1999   2000

           Note: ODA, official development assistance; OECD, Organisation for Economic Co-operation and Develop-
           ment; WRI, World Resources Institute.
           Source: CRS database, 1990–2000.

Phil Swanson and Leiv Lunde                                                                                                  69
Appendix D

Guidelines for Using World Bank Thematic
Codes Regarding Environment and Natural
Resources Management
Biodiversity: ENV-BD

   In-situ conservation (establishment of protected areas, management of   AGRICULTURE, FISHING &
   existing protected areas)

   Ex-situ conservation (ex situ collections, germplasm and genebanks,
   arboretums, zoos)

   Targeted biodiversity training, research and assessments
   Ecosystem management approaches (including payment for ecological
   Freshwater/marine biodiversity protection
   Wetlands/mangrove/coral reef protection

Water Resources Management: ENV-WR
  Freshwater/coastal/marine water resource management                      AGRICULTURE, FISHING &
  Groundwater management
  Watershed and river basin protection, management, and rehabilitation
  Water quality management
  Flood protection and management

  Bulk water allocation and pricing; water rights                          WATER & SANITATION

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

      Reservoir management improvement                                                ENERGY & MINING
      Dam safety measures

      Coastal zone and marine water management                                        TRANSPORTATION
      Flood protection and management (e.g., inland navigation)

     Land Management: ENV-LM
     USE FOR :
     Control and mitigation of land degradation, desertification, and drought         AGRICULTURE, FISHING &
     Land policies and administration (including titling, registration, tenure,
     Land rehabilitation, protection, and conservation
     Sustainable land management practices
     Access to land resources, markets, information and technologies, and
     capacity building
     Impact monitoring of land use and land use changes and interventions
     Rural cadastres

      Climate Change: ENV-CC
      USE FOR:
                                                                                      AGRICULTURE, FISHING &
      Carbon sequestration

      Alternative and renewable energy technologies                                      ENERGY & MINING
      Gas flaring abatement
      Energy conservation and efficiency improvements

      Nonmotorized transportation                                                        TRANSPORTATION
      Cleaner transportation technologies

72                                                                                     Environment Strategy Papers
 Appendix D — Guidelines for Using World Bank Thematic Codes Regarding Environment and Natural Resources Management

 Environmental Policies and Institutions: ENV-PI
    Establishment/strengthening of environmental regulatory institutions               ALL RELEVANT SECTORS
    (national, subnational, local)
    Environmental policies, regulations, monitoring, and enforcement
    Environmental assessment and management capacity improvement
    Financing mechanisms and economic instruments for environmental
    Environmental awareness building, education, and training

 Pollution Management and Environmental Health: ENV-PM
    Mitigation of pollution and health effects from pesticide use                     AGRICULTURE , FISHING &
    Reduction/elimination of the use of persistent organic pollutants and
    ozone-depleting substances
    Mitigation of non-point-source pollution from agricultural runoff

   Cleaner fuels                                                                         ENERGY & MINING
   Oil spill contingency planning and remediation
   Rehabilitation of contaminated production sites and surrounding areas
   Improved environmental management in mining and energy operations

    Cleaner production/eco-efficiency                                                    INDUSTRY & TRADE
    Industrial pollution control and prevention
    Hazardous waste treatment, management, storage, and disposal
    Reduction/elimination of the production of persistent organic       pollutants
    and ozone-depleting substances

Phil Swanson and Leiv Lunde                                                                                    73
Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

     Pollution abatement from shipping activities                                       TRANSPORTATION
     Vehicle emissions monitoring and maintenance

     Water pollution abatement                                                          WATER & SANITATION
     Sanitation and sewerage
     Wastewater management and treatment
     Solid waste management
     Surface and groundwater quality management and monitoring

 Other Environment and Natural Resource Management: ENV-XX
     USE FOR :

     All other environmental activities that do not fall under other subthemes

74                                                                                     Environment Strategy Papers

1.   For example, an expenditure program              6.  The report notes that in developing
     aimed at pollution abatement in the                  countries, core environmental agencies
     private sector that consists primarily of            typically account for most or all of the
     subsidies for the purchase of abatement              “pure” environmental expenditures such
     equipment will generally be considered               as environmental assessment, monitoring,
     an inappropriate way of addressing the               and enforcement, while environmental
     issue.                                               units in line agencies (if they exist)
2.   Chapter 5, “Main Elements of a Guidance              participate only minimally in such
     Note,” below, discusses the use of other             activities. That is, there is usually little
     policy standards as a basis for judging              mainstreaming of environmental expendi-
     expenditures when the standards used by              tures.
     the country are considered inappropriate.        7. Details are available at <http://
3.   According to this document, in November              www.oecd.org/EN/about_further_page/
     1999 PREM established a subcommittee                 0,,EN-about_further_page-499-
     of the Public Sector Board to develop PER            nodirectorate-no-no—8-no-no-
     guidelines; the authors were unable to               2,00.html>.
     determine what came of this.                     8. Additional details are available at <http://
4.   The OECD cautions about comparisons                  www.oecd.org/EN/about_further_page/
     even among its relatively homogeneous                0,,EN-about_further_page-499-
     member countries: “In many instances,                nodirectorate-no-no—8-no-no-
     however, definitions and methodologies               3,00.html>.
     remain diverse across Member countries.          9. Additional details are available at <http://
     International comparisons should, there-             www.oecd.org/EN/about_further_page/
     fore, be limited to orders of magnitude”             0,,EN-about_further_page-499-
     (OECD 1997: 6).                                      nodirectorate-no-no—8-no-no-
5.   It should be noted that although the                 6,00.html>.
     ImageBank allows searches by document            10. Data for expenditures on the category
     type, the terms “PER” and “PEER” are not             biodiversity and landscape are not
     included in the very long list of types.             included as part of PAC but are collected

Public Environmental Expenditure Reviews (PEERs) — Experience and Emerging Practice

      as part of environmental protection                         ment collected fees for waste collection
      expenditure.                                                but contracted out actual waste collec-
11.   Note that both the PAC definition and                       tion activities).
      the environmental protection definition               16. Final draft, Handbook of National
      of environmental expenditure exclude                        Accounting, Integrated Environmental
      natural resource management. Expanding                      and Economic Accounting 2003 (SEEA
      the framework to cover natural resource                     2003), p.5-5, paragraph 5.25, available at
      management could in fact mean that                          <http://unstats.un.org/unsd/environment/
      expenditure totals arrived at by the                        seea2003.htm>. The handbook will be
      financing principle would be negative for                   jointly published by the United Nations,
      the public sector in countries with large                   the World Bank, the International
      natural resource rent income.                               Monetary Fund, the OECD, and Eurostat.
12.   Eurostat has for some time supplemented
                                                            17. Available at <http://esa.un.org/unsd/cr/
      its needs for additional environmental
      protection data with its SERIEE question-
                                                            18. Ecotec Research and Consulting
      naire. The joint OECD/Eurostat question-
                                                                  Ltd.(1993), cited in Fulai Sheng (1997).
      naire is issued every two years, and the
                                                            19. The reason for the phrase “a particular
      SERIEE is issued in the alternate years. It
                                                                  sector” in the definition is not clear. It
      includes the elements of the joint
                                                                  seems to imply that projects aimed at
      questionnaire plus additional elements.
                                                                  environmental improvement in general
13.   R&D had already been covered but was
                                                                  cannot be counted, although examples of
      excluded from the scope of the question-
                                                                  some fairly general activities are noted in
      naire, since the information was avail-
                                                                  the explicit list of inclusions, e.g.,
      able from other OECD sources.
                                                                  “environment-related policy reform” and
14.   The International Standard Industrial
                                                                  “cross-cutting activities such as environ-
      Classification of All Economic Activities
      (ISIC) and Statistical Classification of                    mental assessment capacity-building.”
      Economic Activities in the European                   20. As indicated above, “PAC expenditures”
      Community (NACE) classification systems                     could include government activities such
      have been harmonized, at least at the                       as regulation. Here, however, the
      higher levels of aggregation. The most                      informal use of “classic PAC expendi-
      relevant activities are probably NACE                       tures” refers to cleanup or installation of
      90.01, “collection and treatment of                         infrastructure designed to physically
      sewage”; 90.02, “collection and treat-                      prevent or diminish harmful environmen-
      ment of solid waste”; and 90.03, “sanita-                   tal effects.
      tion, remediation and similar activities.”            21. “Programs,” in public expenditure terms,
15.   When calculating expenditures accord-                       are groups of expenditures aimed at the
      ing to the financing principle, the money                   same thing—for example, environmental
      received from selling these services is                     education.
      recorded under the variable “revenues”                22. The terms “efficiency,” “effectiveness,”
      for specialized producers (or for the                     and “quality” appear to be used some-
      public sector if, for example, the govern-                what variably in PEER and PER practice.

76                                                                                    Environment Strategy Papers

23. The environmental finance strategies and          are difficult to target in practice and often
    performance reviews of public environ-            stimulate expansion of the eligibility pool
    mental expenditure management institu-            while driving people away from poten-
    tions by the OECD/EAP Task Force have             tially more productive activities. Thus,
    addressed outcomes.                               the removal of most environmentally
24. See for example the Van Lennep                    damaging subsidies will have an eco-
    Programme on Economics and Sustain-               nomic as well as an environmental
    able Development, available at <http://           benefit.
    www.ecouncil.ac.cr/econ/keyissue/>.           26. The checklists have been minimally
25. For example, even when they are aimed             edited to conform with World Bank
    at correcting a market failure, subsidies         publications style.
    are generally inefficient instruments; they

Phil Swanson and Leiv Lunde                                                                     77

Brandon, Carter, and Ramesh Ramankutty.                 Ross, Doris C., and Richard T. Harmsen,
   1993. Toward an Environmental Strategy for              editors. 2001. “Official Financing for
   Asia. World Bank Discussion Paper 224.                  Developing Countries”. World Economic
   Washington, D.C.                                        and Financial Surveys. International
Donge, Lily, Masaru Kato, and Crescencia                   Monetary Fund. Washington, D.C.
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   of Recent Trends in International Financial             2002. “SEEA 2002: Draft for the Statistical
   Flows with a Special Focus on Japan. World              Commission.” New York.
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Rajaram, Arnand, and Mallika Krishnamurthy.                  (EASES) Discussion Paper Series. Published
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  Accountability: Evolution and Current                      Resource Management in a Time of Transi-
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  World Bank, Washington, D.C.                              World Bank. 1998. “PEM Handbook.” Wash-
Vincent, Jeffrey R., Jean Aden, Magda Adriani,               ington, D.C.
  Giovanna Dore, Vivianti Rambe, and                        ———. World Bank. 1999. “Public Expendi-
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80                                                                                    Environment Strategy Papers

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