Second Meeting of Council of the President of the Republic for Energy Transition Held

The second meeting of the Council of the President of the Republic for Energy Transition was held in the Office of the President of the Republic. Members of the Council for Energy Transition, headed by the Special Adviser to the President for Energy and Climate Julije Domac, drafted guidelines for the sustainable absorption of EU funds. These guidelines concern programming operational programmes for the 2021-2027 financial outlook, and a Plan for the Absorption of the Recovery Fund aimed at stimulating necessary reforms, accelerating investments and creating conditions for sustainable economic development in accordance with the European Green Deal.

The objectives of this document define new models for the development of the Republic of Croatia within the context of the European Green Deal. Concrete activities have been proposed that would enable the realization of this vision and answers have been provided on how to fund the realization of this vision, and generate the interest of private entrepreneurship to invest in green projects.

“Croatia must quickly adopt the ambitious National Development Strategy – Croatia 2030, which will be based on climate neutrality by 2050 and on the Sustainable Development Goals focused on strengthening domestic production. It is necessary to significantly improve the efficiency of the programming process and to simplify procedures. The Council has therefore proposed to introduce a national model of work performance for all institutions in terms of the percentage of absorption of earmarked funds. The EU funds that are available have to be invested wisely as to mobilize the funds of the private sector and of the citizens in order to jointly create a new value here, locally, for us. This is not money for a one-time and short term use. EU funds have to be a catalyst for change and for improving Croatian society in the interest of its people, in a sustainable way, adapted to climate change and resilient to every crisis”, Julije Domac, Chair of the Council of the President of the Republic for Energy Transition and Special Adviser to the President for Energy and Climate, stated.

Also attending the meeting were representatives of the Ministry of Regional Development and EU Funds who indicated their willingness to cooperate.

Guidelines for Programming the Operational Programme for the 2021-2027 Financial Outlook and Plan for the Absorption of the Recovery Fund

Summary

These Guidelines have been drafted by the Council of the President of the Republic for Energy Transition and a group of independent experts, with the purpose of encouraging necessary reforms, expediting investments and creating conditions for sustainable economic development in accordance with the European Green Deal. The goals of this document have provided the following guidelines:

– How to define a new development model for the Republic of Croatia? In the context of the European Green Deal a framework and terms of reference have been proposed for a new development model for the Republic of Croatia;

– How to plan and realize the vision? Very concrete steps and activities by which to realize this vision have been proposed;

– How to realize cooperation efficiently and transparently between the public and the private sectors? Answers were provided on how to fund the realization of the vision and how to generate interest of private entrepreneurship for investments in green projects.

1. How to define the new development model for the Republic of Croatia?

1. Framework and environment for considering a new model of development for the Republic of Croatia

The European Green Deal turns Europe into a progressive and modern society founded on an effective resource-based economy that will be climate neutral by 2050. By the end of 2020, commitments from the European Climate Law have be assumed, which will ensure that climate neutrality by 2050 and a strategy for adapting to the effects of climate change are defined as a legal obligation with regular supervision of the implementation of measures and their correction by 2023.

The new financial package – the Multiannual Financial Framework and the Next Generation EU, is an opportunity to fund the development of a sustainable economy and focus on the green and digital transition within the framework of the new European Industrial Strategy and Action Plan for the Circular Economy. The European Commission will implement regulation related to energy performance in building, transport and mobility, food production, preservation of biodiversity and preventing environmental pollution with chemicals primarily in food production.

The recently adopted EU Taxonomy Regulation establishes strict criteria for assessing projects related to their impact on sustainability. The criteria are – preventing climate change, adaptation to effects of climate change, circular economy, prevention of pollution, sustainable usage of water and maritime resources and healthy ecosystems. The EU taxonomy is a regulation that has one of the most significant impacts on the development of sustainable finance and will have signification implications on all investments in the EU, and broader. The projects that will be delivered in the 2021-2027 programme period should be socially justified, economically rational, financially sustainable, inclusive, affordable and scalable, and before entering the sustainable finance system, the following three criteria should be assessed and fulfilled (in accordance with the UN Sustainable Development Goals):

1. Significant contribution to at least one of the six defined environment themes;
2. No negative impact on any of the five remaining environment-climate themes;
3. Have at least a minimum of integrated social protection.

The Government of the Republic of Croatia should stimulate industrial development that creates a new value based on energy efficiency and new technologies. This is an opportunity for the increase of the GDP to separate from the increase in energy consumption and resources, thereby essentially increasing energy efficiency, which will create conditions for the long-term progress of the Republic of Croatia while preserving its resources, the environment, and economic and social activities that depend on them.

1. Which strategic and implementable framework lacks in Croatia?

In order to be ready to absorb the funds that will be available, the Republic of Croatia must quickly adopt the ambitious National Development Strategy – Croatia 2030, which will be based on climate neutrality by 2050 and Sustainable Development Goals focused on strengthening domestic production (agriculture, industry, energy, etc.). The Strategic Goals should be integrated in sectorial strategies and operational plans as to ensure a horizontal connection and coordinated action.

Some of the key documents that must be coordinated with the new European agenda are the National Energy and Climate Plan (NECP) and the Long-Term Low Carbon Development Strategy (NUS). Special emphasis should be put on quality preparation of individual projects and the development of project plans. Lessons learned from the financial period almost over would be beneficial to all users and should be presented through key documents for expediting the implementation of good projects, especially those with a clear innovative and research component. With the documents mentioned one should communicate a clear economic and energy-climate vision that will help coordinate the energy, scientific and research sectors, the business sector, innovators, investors and citizens. Joint vision and coordination is imperative for a quick recovery based on new technological solutions instead of a return to old ways with slow progress, low ambitions and the domination of uncoordinated policies.

1. Terms of reference of new development models

In the Republic of Croatia, a change is imperative, including other reforms, in the approach to economic growth and development aimed at creating inclusive and environmental sustainable growth. Economic reform relies on investments, and a green economy can be its driving force. In this context it is necessary to:

• Open sectors and provide incentives for attracting foreign and domestic private investments in the green economy (e.g. sustainable agricultural production, etc.),
• Keep cash and capital flows in the Republic of Croatia and locally, i.e. develop economic activities focused on circulation of material, resources, energy and revenues,
• Develop new know-how, investment and entrepreneur infrastructure and services (entrepreneur incubators, startup accelerators, centres of excellence) and substantially advance cooperation between the Government and the innovative part of society (not exclusively linked to the academic community).
• Stimulate small and medium enterprises as the driving forces of development and providing them significant relief;
• Introduce models of assessment and stimulation of projects related to their climate footprint.

• How to Plan and Realize this Vision?

In order to realize this vision and reach the defined goals, the Croatian Government should take the following steps and adopt the documents as soon as possible:

1. Supplement and adopt the National Development Strategy – Croatia 2030 (further: NRS2030), as the key strategic state document by 2030 in the framework of which it is necessary to identify clear and unequivocal goals, priorities and projects that will help achieve the European Green Deal goals. The NRS2030 must clearly define the position of the Republic of Croatia in 2030, take into account the National Energy and Climate Plan goals, as well as lay the basis for the operational programming of the funding of projects in the 2021 – 2027 financial outlook. In addition to EU funds that represent one source of funding, the Republic of Croatia must offer other methods of funding projects and operations that will contribute to the fulfillment of NRS2030 goals, which requires consultations with all interested stakeholders.

2. Draft the National Plan of Reforms and Operational Programmes for the 2021 – 2027 Financial Outlook, as well as the Plan for the Absorption of the Recovery Fund and other available funding sources. It is necessary to significantly enhance the efficiency of the programming process, expedite it and include all interested stakeholders, and especially users who have mostly been excluded from these procedures, which is the reason why the operational programmes have not adequately recognized the needs and did not respond with appropriate measures. In the entire process, it is necessary to focus on the necessary preconditions (urban planning, administrative procedures, environment protection measures, construction season, frequency of public budgets, etc.) aimed at the optimum realization of projects and the expected pace of project developments.

3. Carry out a complete revision of the legal framework that regulates the establishment of a system of administering and supervising European structural and investment funds and carry out a reform of the system aimed at increasing efficiency and expediting the flow of non-refundable grants from EU funds. Despite the growing number of employees in the administration and supervision systems in question, it is characteristic for the Republic of Croatia that the system is cumbersome and inefficient because it comprises three interdependent levels. Within changes in the system’s operation, it is necessary to do away with the three-level procedure, which will increase the legal protection of the user, concentrate the power in the relevant coordinating institution and strengthen its coordination role as well as transfer employees to positions where there is an increased workload – the procedure to award non-refundable grants, ex ante and ex post control of the public procurement process, examination and approval of reimbursement requests and the speed of implementing approved payments.

In this sense, it is proposed to introduce a national model for evaluating work performance of all institutions in Quality Assurance and European Structural and Investment Funds that will  relate to the percentage of absorption of earmarked funds, and to abolish the present model of fines for users due to irregularities in preparing and implementing projects that mostly result from criteria and conditions that are ambiguous and institutions that due to a lack of know-how and/or experience do not explain them well to users. This model should be replaced by a model of continued institutional support and prevention of financial irregularities. The implementing institutions that publish the tenders should have organizational units that would be in charge of continued institutional support to users in the preparation of project applications, and of the review of project applications prior to being presented for tender. It is possible for the work of such organizational units to be paid from EU funds.

4. Simplify project application documentation, implementation as well as more flexibility in changing agreements on the awarding of non-refundable grants in order to simplify and expedite the preparation of projects as well as simplify the implementation. For this activity, it is imperative to revise the documentation of the calls as well as the general and special conditions of the agreement on the awarding of non-refundable grants, forms and proof with which the fulfillment of indicators and the realization of goals are confirmed, as well as equalize all the forms for all operational programmes, i.e. funding instruments.

5. Identify other models and sources of funding investments and projects that are part of the NRS2030, through the identification of funding instruments and alternative procurement models. The traditional model of contracting and realizing investments from the foreign public sector essentially represents a public-private partnership in which the liabilities and risks have been erroneously defined. The contracting authority first agrees on the drafting of the project documentation for which, ultimately they assume the risk (in theory the liability is assumed by the contract-designer, however in practice this is rarely the case), after which they agree on the completion of the work for which the public sector also in practice assumes a large part of the risk (frequently a situation arises whereby the work is not carried out according to the rules of the profession despite supervision), and in the end assumes the responsibility for maintenance and operational costs of the investments (e.g. buildings). The correct definition of risks and liabilities implies that the risk is assumed by the participant of the project that best manages it (most efficiently).

6. Draft and make aware the long-term vision of absorbing EU funds as leverage for mobilizing investments

EU funds should be perceived and recognized as means for achieving development goals of the Republic of Croatia, not as goals per se. In the economic sense, the multiplication factor represents one of the strongest instruments for achieving maximum effects of investments, and the concept of financial leverage in this context means that public money is seen as capital to which private funds are tied multiplying the total financial potential of the projects so that the ratio of private and public capital in the investment is as large as possible. The absorption of non-refundable funds in the former model is a 1:1 leverage or even less, which results in low multiplicational effects of such investments. It is certain that with such public funds absorption there will not be sufficient investments to achieve all the development goals of the Republic of Croatia, which were imagined to be realized through EU funds, green and digital projects.

Models of public-private partnership make possible big enough leverage in achieving needs in the public sector (building, infrastructure, energy) although they should be critically examined and implemented taking into account all past experience and limitations. This model is based on public funds not being utilized for funding the complete investment, the preparation is covered by the private partner, and for paying regular fees to the private partner for a long period of 20 years or more. In this way it is possible to expedite the dynamics of the investments, i.e. the absorption of EU structural funds. For this it is necessary to ensure a systematic and methodically equalized approach to the preparation of projects through the drafting of national standardized documentation and sustainability of projects with the economic and material side and plan the funding of project preparations through programmes of technical assistance.

• Effective and transparent cooperation between the public and private sectors as the foundation for development

• How to finance the realization of the vision?

The benefits of involving private entrepreneurship in the establishment and construction of public infrastructure lie in a shorter preparation period, fewer individual procurements, higher quality documentation, a shorter construction period, lower construction budget overrun costs, lower operating costs, better price-quality ratio of a public service, and particularly greater efficiency in the use of EU funds and financial instruments. This benefit for contracting authorities is based on experiences showing that private entrepreneurship is generally more innovative in business processes, more efficient in cost management and more sensitive to customer satisfaction. More intensive involvement of private enterprise reduces the total cost of public projects in the duration of the operation, thus reducing public expenditure and increasing the competitiveness of public services.

Of the known forms of association of the public sector with private entrepreneurship, it is possible to program equity and mezzanine financial instruments that would strengthen the competitive position of domestic entrepreneurs in the market of public, social and economic infrastructure. Guarantee financial instruments can increase the interest of private sector investors, especially those whose focus is on social infrastructure such as schools, hospitals, police and fire departments, preschools, prisons, unclassified roads and the like, and reduce the risk of return on investment, making them of particular interest to contracting authorities with reduced fiscal capacity. Debt financial instruments can reduce the cost of project financing and extend the amortization period, which has a positive effect on the financial plausibility of the public project.

The impact of more intensive cooperation with private entrepreneurship on public debt should be especially emphasized. Properly prepared contracts between contracting authorities and entrepreneurs involved in PPPs can contribute to increasing public investment projects, while reducing public debt at the same time. Standardized contracts could significantly expedite the completion of public projects.

• How to stimulate the interest of private entrepreneurship in investing in public social and economic infrastructure?

The Government of the Republic of Croatia should encourage the involvement of private entrepreneurship in investing and financing public social and economic infrastructure. The readiness and ability of (domestic) private entrepreneurship in building, maintaining, and managing the financing of public investment projects exists, but thus far there has always been a lack of political support.

The political message should be – neutrality towards the procurement model as well as a clear position that the choice of the procurement model should be the result of a value-for-money expert analysis. Value-for-money should be the basic criterion of a modern public administration. The best value-for-money procurement model guarantees the lowest public expenditure, the highest quality of public services, transparency in procurement and implementation, and quality control of public services and customer satisfaction in the duration of the investment. This is best for both the contracting authorities and taxpayers. Precisely because of the imperative of excellence of public management in the completion of public facilities, it is proposed that in the public facilities delivery process, contracting authorities do not opt for a procurement model in advance. Instead, they should decide on the procurement model after a comprehensive professional, social and financial analysis, ensuring that a model with the best value-for-money is selected.

The Government of the Republic of Croatia should also insist on excellence in public management and place public procurement entities in the position of protectors of the quality of services provided to citizens. The key task is to protect taxpayers from the risk of losing the value of their money due to corruption and unauthorized inefficiency. It is necessary to define the basic guidelines for the use of financial instruments, i.e. grants in combination with alternative procurement models. A ‘blending’ process is at hand here, i.e. of EU sources with alternative procurement models encouraged by the EU and its institutions. Such procedures have already been elaborated in greater detail in Croatia as part of several projects financed from EU sources.

For efficiency in approaching strategic planning, programming and defining the procedures for the expert preparation of projects, the urgent adoption of the Regulation on the method of evaluation and approval process of public investment projects is hereby proposed. The preparation of this document is already underway.

• Recommendations

1. Quickly adopt the ambitious National Development Strategy – Croatia 2030, that will be based on a green economy, a climate-neutral society and sustainable development goals in line with the European Green Deal;

• Form an expert advisory team composed of independent experts on EU funds and investments at the level of the Government of the Republic of Croatia with the aim of increasing the EU fund absorption rate;

• Fine-tune the legal, planning and operational framework of the management and control system of the European Structural and Investment Funds in order to:
  • Expedite the programming process,
  • Ensure that the needs of end-users (in the economic sector) are recognized and adequate measures are established,
  • Simplify the documentation and verification process, and expedite payment of funds.

• Encourage effective and transparent cooperation between the private and public sectors with the best value for money procurement and encourage green public procurement in order to encourage eco-innovation in the economy. The main advantages of this procurement model as opposed to the traditional one:
  • Administrative and operational easing of burden on the public sector (simpler project preparation and implementation), along with a more efficient implementation of projects with a better price-quality ration;
  • Greater and easier absorption of EU funds and implementation of projects with minimal unexpected costs and predictable and feasible conditions that are equal and acceptable for all investors;
  • Launching a larger number of projects in a significantly shorter period of time with a direct positive impact on public finances (revenues from taxes, surtaxes and contributions are growing intensively due to increased economic activity in the construction and other sectors).

• Starting as early as 2021, facilitate a wave of investments through the use of available EU funds in:
  • Thorough energy renovation of buildings, including the reconstruction of the City of Zagreb and its surroundings in the aftermath of the earthquake, as well as construction of new buildings, taking into account the problem of energy poverty;
  • Domestic and clean energy sources, large solar and wind power plants that mobilize public and private capital, but also rooftop power plants (citizens, entrepreneurs and public buildings) and geothermal energy, with priority given to investments that can be easily duplicated, instead of pushing large infrastructure projects;
  • Bolstering and revitalizing the energy infrastructure (distribution and transmission network) and introducing advanced systems such as energy storage, which is a prerequisite for increasing the capacity of renewable energy sources and their integration into the electric power network, in order to increase energy efficiency of infrastructure (e.g.: losses in district heating);
  • Decarbonisation of the transport sector (especially electro mobility, for which a special law is proposed, rail and water transport of goods, improving the functioning of public transport in cities with increased intermodality, gradual introduction of green hydrogen, pedestrian, cycling and green infrastructure);
  • Introduction of modern technologies and innovations in agriculture, local and ecological food production, increasing the resistance of agricultural crops to extreme weather conditions, food production and empowering small farmers;
  • Strengthening resilience to the effects of climate change (strengthening resilience of infrastructure, use of green and blue technologies, adaptation by the healthcare sector);
  • Science, research and innovation, education and retraining of new staff, encouraging the start-up scene and the development of start-up incubators in all major city centres, including accelerated programs for entrepreneurs and innovators;
  • Digitization of the public administration and the business sector in order to build smart management systems and more efficient processes, and to increase business resilience in crisis situations;
  • Quality, innovative educational extracurricular programs in schools for students, education and professional development of teachers and increasing the role of civil society organizations for their work in local communities, in order to provide additional services that increase quality of life, social equality and justice, while increasing the citizens’ active role in local community development.

The guidelines were adopted at the 2^nd Session of the Council of the President of the Republic of Croatia for Energy Transition, held in Zagreb on 12 October 2020.

Apart from members of the Council, external experts participated in drafting the Guidelines for Programming Operational Programmes for the 2021-2027 Financial Outlook and the Plan for the Absorption of the Recovery Fund:

– Ariana Vela, Director of AVELANT Ltd. and Chair of the Board of Directors of ‘Učilište EU PROJEKTI’;

– Damir Juričić, Ph. D., Deputy Head of the University of Rijeka Centre for Support to Smart and Sustainable Cities;

– Velimir Šegon, Ms. Sc., Deputy Managing Director of the North-West Croatia Regional Energy Agency (REGEA);

– Mirjana Matešić, Ph. D., Director of the Croatian Business Council for Sustainable Development;

– Miljenko Sedlar, Coordinator, EIT Climate-KIC Hub Hrvatska and Assistant Director of the North-West Croatia Regional Energy Agency (REGEA);

– Slavica Robić, Executive Director of the Society for Sustainable Development Design – DOOR;– Ivan Pržulj, Deputy Managing Director of the North-West Croatia Regional Energy Agency (REGEA).