Cleaner production financing: possibilities and barriers

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<ul><li><p>Cleaner production financing: possibilities and barriersJurgis K. Staniskis, Zaneta Stasiskiene</p><p>Abstract There are several players who could facilitate thepromotion of cleaner production (CP) by establishing aneffective financing mechanism; for instance, government,international assistance bodies, banks and other financingorganizations. In a few developing countries in South EastAfrica and Latin America and in Vietnam several inter-national organizations, development banks and donorshave initiated and implemented projects to facilitate theintroduction of CP investments. Most projects have beenin the form of technical assistance grants and training toindustries and/or loans at below market rates from dedi-cated trust funds. Yet the present level of lending throughsuch projects is far from sufficient to trigger widespreadadoption of CP. Therefore, experts from The Institute ofEnvironmental Engineering, Lithuania performed an in-vestigation to create a CP development scheme for devel-oping countries.</p><p>IntroductionCleaner production (CP), as a concept, has expandedrapidly in recent years. Internally, the adoption of CPmeasures is driven by pressure to reduce the costs ofwaste, to reduce the costs of compliance with changingregulations, and to position the enterprise as a greenenterprise in the local, national, or global marketplace.Externally, investors, financial analysts, regulatory bodies,and the public at large increasingly question corporateenvironmental performance. Generally, CP is a recognizedand proven strategy for improving the efficient use ofnatural resources and minimizing wastes and pollutionrisks to human health at the source rather than the end ofthe production process. CP also brings tangible economicsavings by improving the overall production efficiency andfacilitating new markets. Therefore, CP serves as a toolthat brings tangible economic savings and environmentalbenefits by improving the overall production efficiencyand facilitates competitiveness (Hammer 2001). Despitethe above-mentioned advantages of the strategy, the</p><p>financing problem is an important constraint in makingCP widely adopted. Companies that have identified cost-effective and technically feasible CP options may still notbe able to make the necessary CP investment to realize thefinancial benefits and environmental advantages. The ob-stacles to financing CP investments could be describedunder two major groups:</p><p> On the demand side, enterprises have insufficient ex-perience in preparing a real CP project which is sys-tematically evaluated from an environmental,economical, and technical point of view and to prepareproper applications for the project financing. Lack ofknowledge in CP assessment, evaluating the financialaspects of the project efficiency and investments oftenblock implementation of CP projects. Even when cap-ital exists, CP is one option among a range of invest-ment options.</p><p> On the supply side, there are obstacles in capital mar-kets such as a lack of environmental expertise andunattractive loan rates to enterprises. Also, costly ad-ministrative requirements result in international fi-nancial institutions establishing loan thresholds, whichare sometimes significantly higher than costs of CPinvestments; it is difficult to receive financing for smallprojects. Generally, there is little experience with theimplementation of economically viable CP projects.</p><p>In this regard two processes are crucial, i.e. the selec-tion and priority setting among alternate investment op-tions (the capital budgeting process), and the collectionand allocation of capital to finance the prioritized invest-ment options (the financing process).</p><p>Lithuanian experience on CP financingThe Institute of Environmental Engineering (APINI) is themain provider of CP services for companies, governmentaland financial institutions in Lithuania. In terms of CPinvestment financing, APINI plays a crucial role in CPproject identification, evaluation, implementation andreporting. It can:</p><p> Prepare a loan application on behalf of the applicant,including assistance in calculation of costs savings andenvironmental benefits</p><p> Assist a financing institution in communication withthe applicant and preparation of loan documentation,project description, and reporting requirements</p><p> Prepare project progress and completion reports to bepresented as a part of borrowers disbursement request</p><p>Clean Techn Environ Policy 5 (2003) 142147</p><p>DOI 10.1007/s10098-003-0182-2</p><p>142</p><p>Received: 10 June 2002 / Accepted: 6 January 2003Published online: 27 February 2003 Springer-Verlag 2003</p><p>J. K. Staniskis (&amp;), Z. StasiskieneThe Institute of Environmental Engineering,Kaunas University of Technology,K. Donelaicio 20, 3000 Kaunas, LithuaniaE-mail: jurgis.staniskis@apini.ktu.ltTel.: +370-37-300760Fax: +370-37-209372</p><p>Original paper</p></li><li><p> Assist in project monitoring and supervision of pro-curement and project implementation progress ascompared to budget and implementation plans, as wellas project objectives</p><p>In 1998, Nordic Environment Finance Corporation(NEFCO) established the Revolving Facility for CP Invest-ments. The objective of the Facility is to finance, onfavourable terms, implementation of high-priority CPinvestments with rapid pay-back that yield environmentaland economical benefits (winwin projects). The invest-ments should be commercially viable with an identifiableand secure stream of earnings that is to be used to repay theloan. According to APININEFCO methodology, environ-mental issues in the CP investment project development ofprojects focus on the following:</p><p> Location of the project with respect to populationcentres, sensitive local land uses, and the existing levelsand sources of pollution</p><p> Pollution category (air, surface water, ground water,hazardous waste, etc.)</p><p> Scale of the pollution impact Effects associated with the pollution, including possible</p><p>toxicity to human health, impact on climate change, anddamage to the natural ecosystems and habitat</p><p>Most of the Lithuanian companies provided withNEFCO soft loans for CP project implementation gradu-ated from the LithuanianNorwegian CP training pro-gramme. Therefore, full CP assessments were performed inthe companies. CP assessment is one of the basic groundsfor CP investment project development according toAPININEFCO methodology, which covers:</p><p> CP planning and organization in a company (obtainingmanagement commitment, identification of barriersand solutions, setting plant-wide goals, and organizinga project team)</p><p> CP pre-assessment (CP audit preparation, division ofprocesses into unit operations, and construction ofprocesses flow diagrams linking unit operations)</p><p> Material balance (determination of process inputs andoutputs, derivation of a material balance assemblinginput and output information, deriving preliminarymaterial balance, evaluating and refining materialbalance)</p><p> Synthesis (identification of CP options; environmental,technical and economic evaluation of CP options; anddesign of CP action plan)</p><p> Companys economic health analysis Development of CP investment project</p><p>APINIs practical experience in CP investment projectdevelopment and implementation shows that environmen-tal protection can be efficient if a companys material flowsare transparent and well known. Finally, it can be concludedthat a CP investment project developed and implementedaccording to the methodology developed by APINI:</p><p> Increases profitability and lowers production costs Provides a rapid return on any capital or operating</p><p>investments required</p><p> Leads to the more efficient use of energy, natural re-sources, and raw materials</p><p> Increases staff motivation through reduced workerrisks</p><p> Reduces the risk of environmental accidents Reduces/avoids regulatory compliance costs signifi-</p><p>cantly (Hammer 2001; Staniskis and Stasiskiene 2000a)</p><p>During the UNEP project Strategies and Mechanismsfor Promoting Cleaner Production Investments Lithua-nian experience was transferred to several countries inSouth East Africa, Central America, and South East Asia.</p><p>Analysis of CP investment promotion possibilitiesin developing countries</p><p>Industry levelIn every country where the CP concept has been intro-duced, the progress depends on many different factors andon shifts in their configuration that take place over time.After detailed CP project analysis in developing countriesis carried out, most environmental issues are not explicitlytaken into account because people do not have basic un-derstanding or practice in CP project development andimplementation. Therefore the environmental impacts andtheir economic consequences are often underestimated.The fact that some environmental issues are and others arenot taken into account leads to confusion and misinfor-mation.</p><p>The experts from The Institute of EnvironmentalEngineering (Lithuania) were responsible for all issuesrelated to the development of CP investment projects inthe Zimbabwean and Vietnamese companies. CP assess-ment was performed in 18 industrial companies. Toprovide the companies with the ability to evaluate thefinancial viability of a CP project and the whole companysactivities, the course Financial Engineering was includedin the training. That training aided companies insuccessful analysis of the decision-making process andprocedures in the selection of alternative investmentoptions. It was mapped out how investment selectionregularly takes place and how this process can be affectedin favour of CP investments (Staniskis 2000b).</p><p>At the end of the project, Local Capacity for CPfinancing was built. A very important conclusion wasthat the CP Investment Projects development method-ology proposed by APINI in a country where the CPprogram does not exist appeared to be very effective.From the CP demand side, companies from developingcountries are keen to ensure sustainable development,but the lack of professionally developed projects, casestudies, and training in CP significantly deceleratesthe process. This leads to difficulties in raising thenecessary funds for making the investments in recom-mended economically and technically feasible CPopportunities.</p><p>Financial institution levelCommercial banks are the main formal providers offinancial services to the business community. They act asfinancial intermediaries by mobilizing deposits and sav-</p><p>J.K. Staniskis, Z. Stasiskiene: Cleaner production financing: possibilities and barriers</p><p>143</p></li><li><p>ings and then lending these resources for personal andbusiness loans.</p><p>Commercial banks by and large do not distinguishfinancing opportunities by project type, e.g. CP versuspollution control or regular equipment loan. Instead, thestrength of the loan application is reviewed on the basis ofconventional considerations such as creditworthiness ofthe firm and generation of sufficient cash flow to makerequired loan payments. The average interest rate is about20%; therefore, it is not surprising that most commercialbanks in developing countries prefer dealing with largertrading companies rather than with small strugglingmanufacturing enterprises. Governments and communi-ties have to do more to influence the commercial banks,the main sources of financial flows to the business com-munity, to recognize the importance and value of the CPbusiness sector as an expanding clientele for their services(Staniskis 2002a, 2002b).</p><p>In developing countries, there is little experience ofventure capital, although there has been a start in somecountries. Venture capital investors expect their main re-turn through the sale of the equity share after a number ofyears growth. However, in the region, many entrepreneursexpect that they will be able to buy out outside investorsfor close to the sum of money that was originally invested.This, of course, is totally unacceptable to venture capital-ists as it would mean that they would share in the risk offailure and would not benefit from the capital gains fromsuccess and growth (Stasiskiene 2001; Staniskis and Sta-siskiene 2001).</p><p>Therefore, further investigation to reach the mainoutcome development of The Regional CP RevolvingFund which will integrate financial and non-financialservices in order to make the credit line cost-efficient was performed in Tanzania, Zimbabwe, Nicaragua andGuatemala.</p><p>As was indicated many times at the different meetings,financial services alone will not be able to ensure sustainedCP development. In such cases, non-financial supportservices are expected to be offered by other service pro-viders. Synergy between financial services and businessdevelopment services (BDS) can make credit schemesmore effective and can produce a more successful outcomein lending programmes.</p><p>Institutions in developing countries complain of ashortage of good investment proposals. There is somevalidity in this comment; but maybe there is not really ashortage of projects, but a lack of well presented pro-posals in bankable form. Some banks try to solve thisproblem by organizing their own advisory and consul-tancy services. Inevitably, this is costly. Apart from thecost, there is a potential conflict of interest between thosewho help draw up the business plan and those who dothe loan approval process, which has to remain objectiveand independent (Stasiskiene 2001; Staniskis and Sta-siskiene 2001).</p><p>Generally, the borrower has to go elsewhere to find aBDS provider private consultants, a business association,or some private or public business centre. It is rare thatNGOs can provide such services effectively. Working withBDS providers can reduce the transaction costs of a bank</p><p>in handling loan requests. This makes such lendingfinancially more attractive.</p><p>There is a technological element which is important inall CP investment proposals. Technological capacity is theability of producers to identify product opportunities; tosource, install and operate the right equipment; and tohave knowledge and technical experience to implementchanges in the production processes. These complex fac-tors can be vital in determining the success or failure of aproject and it is this field of capacity building that gen-erates clear synergies between financial and non-financialservices. At the same time, credit schemes may benefitfrom working together with BDS providers in recom-mending enterprises to obtain outside advice when en-countering problems resulting in poor loan repayment.However, BDS providers must not become debt collectors.</p><p>Loan officers can benefit from networking with BDSproviders as partners when needing to become more fa-miliar with data on the sector involved and identifying therisk involved in new product development or expansionprojects. Cooperation with BDS providers can also helploan officers become more familiar with the personalityand background (and creditworthiness) of the entrepre-neur seeking the loan.</p><p>Finally, access to financial services is only one ingre-dient for sustained enterprise development, albeit animportant one. The minimalist credit approach has clearlimitations, and for credit schemes to be...</p></li></ul>