Opportunities for Private Sector Environmental Investment

Opportunities for Private Sector Environmental Investment This unpublished prĂŠcis lists noteworthy market opportunities in the environmental sector and suggests ways to promote private sector environmental investment.

Olivier Serrat 01/08/1993

1 Introduction 1.

The private sector plays an important role in the provision of environmental goods and services1 in industrialized countries. This experience can be transferred to developing countries to enable the private sector to use its technical, financial and managerial resources to make substantial contributions to environmentally sound development. This lists noteworthy market opportunities in the environmental sector and suggests ways to promote private sector environmental investment.

Determinants of Private Sector Environmental Investment 2.

Private sector environmental investment is driven by several factors, including the severity of environmental problems, increasing public awareness of environmental issues, growing political support and international pressure on countries to harmonize and enforce environmental laws and regulations.2 As governments respond with environmental legislation, strengthened environmental protection institutions and more stringent enforcement, opportunities will be generated for private investments in environmental goods and services. Constraints on public resources in providing customary public utilities will generate additional opportunities for the private sector to extend these services.

Market Opportunities in the Environmental Sector 3.

Market potential and opportunities for private investment in environmental goods and services exist in water and wastewater treatment, management of solid and hazardous wastes, air and renewable resources. In developing countries, the market for environmental goods and services is still small but it is likely to expand rapidly in the near future. These environmental goods and services would be demanded by several buyer groups, for example, local authorities, state governments, central governments, parastatal enterprises, large and small private sector manufacturing concerns, developers and private consumers.

A.

Water

4.

The most promising market for environmental goods and services is in the water sector, where the need for potable water supplies and wastewater treatment facilities is often critical.

Market opportunities exist in: (i) municipal and industrial water treatment, distribution and disposal; (ii) water conservation and recycling; and (iii) consulting and monitoring.

B.

Air

5.

Major sources of air pollution include vehicular exhaust gases and industrial emissions.

Efforts to improve air quality will generate market opportunities in: (i) emission control equipment for industry; (ii) clean energy technology and associated energy substitution; (iii) public transport; (iv) catalytic converters; (v) vehicular emission filters; (vi) gas combustion systems; (vii) natural gas distribution infrastructure; (ix) solar power equipment; (x) vehicle inspection; and (xi) consulting and monitoring.

1 2

Environmental goods and services are defined as the embodiment of input efficiency technology, which requires less natural resources inputs, and end-of-pipe technology, which reduces discharges into the environment.

Key environmental issues and concerns include: (i) water availability and water quality; (ii) soil erosion and sedimentation; (iii) urban and industrial environment impacts, such as soil and hazardous waste generation and management, liquid waste management, air pollution control and management, slum problems; (iv) deforestation and forest management; (v) coastal zone management; and (vi) tourism.

2

C.

Waste

6.

Economic growth and industrialization coupled with urbanization and population growth have exacerbated the problem of solid and hazardous waste management in most developing countries. Particularly in metropolitan areas, market opportunities exist in: (i) waste collection equipment; (ii) waste sorting and recycling; (iii) waste treatment equipment and installations; and (iv) hazardous waste treatment and disposal.

D.

Renewable Resources

7.

Development of market opportunities in the renewable resources sector is less dependent on legislation and its enforcement than waste management and pollution control technologies.

This is an advantage where legal and administrative systems for environmental protection are not yet fully developed. Market opportunities include: (i) eco-tourism; (ii) plantation and sustainable forestry; (iii) integrated pest management; (iv) wildlife management; (v) agro-industrial waste treatment; and (vi) renewable energy.

Initiatives to Promote Private Sector Environmental Investment 8.

Public utilities, state enterprises and parastatal enterprises are increasingly found to be major polluters and inefficient users of energy and environmental resources. In several developing countries, these entities absorb a large portion of central and state budgets. Privatization of such entities and promotion of private sector environmental investment have been proposed as an important contribution to reduce these problems.

A.

Privatization

9.

Privatization is the process of reducing the role of government in owning and managing commercial enterprises and public utilities that appear to be suitable for commercial management.

There is a wide range of modes for involving the private sector in the provision of environmental goods and services. Some retain public ownership and control of assets and concentrate on competitive bidding among private operators for service, management or lease contracts for a defined period. In the Build-Operate-Transfer mode, a private company finances investments in addition to working capital, builds the project, operates it long enough to repay debt and achieve a return on equity, and then transfers the project to the host government. In the final and most farreaching privatization mode, divestiture, the government sells all or some of its shares to private sector investors.

B.

Supportive Actions

10.

A number of supportive actions can be taken by governments in the short term to harness private sector environmental investment to reduce further degradation of essential natural resources and expand efforts to improve the management of natural resources. For example, governments can: (i) provide greater incentives for improved waste treatment by private enterprises and support measures aimed at increasing the accountability of the private sector for negative environmental impacts; (ii) remove obstacles to private sector involvement in reforestation so as to promote tree-planting on under-utilized or vacant lands; (iii) provide the training and support needed to enable the private sector to expand its role, in cooperation with government programs, in the reclamation and rehabilitation of degraded public lands, sustainable agriculture, aquaculture and fisheries management, environmentally sound industrial

3 development, and in the use and marketing of products derived from renewable natural resources; and (iv) increase the access of the private sector to pollution control and abatement technologies and support programs aimed at raising awareness within the private sector of the need for more environmentally benign technologies.

Bank Assistance 11.

Asian Development Bank assistance is available to developing country governments in their efforts to privatize public utilities, state enterprises and parastatal enterprises and harness private sector environmental investment. Bank assistance can also be provided directly to private enterprises and indirectly through development finance institutions. In addition, Bank participation in a new fund to provide equity capital for enterprises that are environment-friendly is being considered.

A.

Privatization and Supportive Actions

12.

The Bank can offer policy advice to developing country governments in the context of privatization for environmentally sound development and actions to promote private sector environmental investment. Furthermore, complementary technical assistance can be extended to formulate and implement policy reforms, to examine privatization possibilities and to create and improve a legislative and institutional framework in which private sector environmental investment can emerge and thrive.

B.

Direct Financial Assistance

13.

Direct financial assistance to private enterprises for environmentally sound development can be extended through loans without government guarantee and underwriting and investment in equity securities. Under this approach, Bank assistance can be used to promote private investments in any of the markets identified in water and wastewater treatment, management of solid an hazardous wastes, air and renewable resources. Where suitable, technical assistance can be made available to create and strengthen concerned institutions assisting the private sector and for studies of relevant Build-Operate-Transfer or Build-Own-Operate projects.

C.

Indirect Assistance through Development Finance Institutions

14.

Given the extent of their developmental functions, Asian Development Bank assistance to promote private sector environmental investment can be channeled through development finance institutions. The Bank's environmental concerns would in this case be addressed normally through a covenant in the Line of Equity Agreement to ensure compliance by sub-borrowers of the environmental regulations and requirements of the government and the Bank. Where the Bank's involvement in a development finance institution is in the form of a credit line to be utilized by the institution for sub-projects, the Bank's environmental concerns should be addressed at two levels, namely, at the policy and sub-project levels.

D.

Asia-Pacific Environmental Fund

15.

The Bank, a number of donor countries and institutional investors are working toward the establishment of the Asia-Pacific Environmental Fund, a $100 million fund for environmental projects. The fund is being structured as a broad-based investment vehicle which would provide equity capital for enterprises providing environmental goods and services.

4 The views expressed in this prĂŠcis are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent.