Financing of environmental projects in Central and Eastern European Countries (CEECs) has been extensively discussed lately, specially as part of the 'Environment for Europe' process. The discussion has moved from the issue of new and additional external financing to how to mobilise and channel domestic resources and how external resources can be used more effectively to facilitate and complement domestic financing. Industrial pollution in the CEECs has generally reduced in intensity due to a decline in economic activity. The abolition of government subsidies for raw material and energy, and a market led orientation, have provided a major impetus to more effective and cleaner production. The essence of the new approach lies in good housekeeping and improved management.
Cleaner production is defined as the continuous application of an integrated preventive environmental strategy to processes and products to reduce the risks to human and the environment.
Experience with cleaner production programmes reveals that a 20% reduction in waste and emissions is achievable with nil investment. A further 10-20% reduction is possible with minor investments, with a pay-back period of less than six months. Even though these cleaner production investments are highly profitable few enterprises that have participated in cleaner production programmes have been able to implement them. This is mainly due to lack of effective and applicable financing mechanisms.
As a means towards improving this situation NEFCO has set up a Revolving Facility for financing of priority cleaner production investments targeted at a specific region in its area of operation, in the first instance North-western Russia and the Baltic Countries.
The objective of the proposed Revolving Facility is to finance on favourable terms' implementation of high-priority cleaner production investments with rapid payback (not more than three years) that yield environmental and economical benefits ("win-win projects"). Such investments would provide enterprises with encouraging model projects to upgrade business and environmental performance through low-cost measures.
The Facility is expected to have considerable catalytic effects by demonstrating to other financiers and enterprises that financing of priority cleaner production investments yield environmental and economical benefits. The Facility is intended to address the needs to enhance financing of cleaner production projects that otherwise would not have been implemented.
Cleaner Production Investments
Cleaner production is defined as the continuous application of an integrated preventive environmental strategy to processes and products to reduce the risks to human and the environment. For production processes cleaner production includes conserving raw materials and energy, eliminating toxic raw materials, and reducing the quantity and toxicity of all emissions and wastes before they leave the process. For products the strategy focuses on relating impacts along the entire life cycle of the product, from raw material extraction to the ultimate disposal of the product. Cleaner production is achieved by applying knowledge, by upgrading technology, and/or by changing attitudes.
On the basis of this definition cleaner production investments can include a wide variety of actions. In this context a cleaner production investment is defined widely. It includes environmental projects designed to capture commercially valuable emissions and wastes from existing production facilities or the reduced use of inputs and does not include the financing of installation of additional production equipment, or direct expansion of existing production facilities.
Examples of cleaner production investments are installation of new and more efficient heating boilers, new pumps and valves, dust recovery systems, recovery of hydrocarbon vapours, recovery of material from waste tailings, oil recovery, recirculation and reuse of water, chemicals etc., installation of new, more resource-efficient equipment, installation of regulation and monitoring equipment, etc..
Through cleaner production programmes normally three types of actions are :
A. Housekeeping actions, with nil or minor investments and payback of investments in less than one year.
B. Short-term (< one year) investments to be financed over operating budget or small loans.
C. Long-term (> one year) investments, requiring external loans.
Actions of type A and partly B can normally be financed out of the enterprise's operating budget. Financing of actions of type C, and partly type B, has to be provided by external sources, either as a loan or as a grant. The Revolving Facility will be targeted at investments of type C primarily and partly of type B.
Revolving Facility for Cleaner Production Investments
Identification and Preparation of Projects
The donor-supported cleaner production programs offer a vehicle for identification of sustainable projects, requiring both small and larger investments, as a spin-off of the conducted training and environmental reviews of processes and equipment. Costs for project identification and preparation will then be kept to a minimum.
The Cleaner Production Centres or centres with similar environmental objectives are envisaged to play an important role in project identification, preparation, appraisal and monitoring. Preliminary technical, environmental and financial appraisal of the projects can be performed locally by the Centres or other institutions supported by foreign advisors. The initial appraisal aims to select projects that:
- are technically feasible;
- are capable of meeting the specified objectives;
- are environmentally acceptable;
- represent value-for-money in terms of delivering environmental benefits at least cost;
- have acceptable financing plans;
- are financially viable e.g. through the generation of savings
- have acceptable arrangements for implementation, including project
- management and procurement.
The NEFCO Revolving Facility for Cleaner Production Investments
The objective of the Facility is to finance on favourable term's implementation of high-priority cleaner production investments with rapid payback that yield environmental and economical benefits ("win-win projects"). The investments should be commercially viable with an identifiable and secure stream of earnings that is to be used to repay the loan.
The Revolving Facility addresses the needs to enhance financing of cleaner production projects that otherwise would not have been implemented due to the factors mentioned above, with a high leverage for donors and an effective use of scarce resources. The Facility enables financing of smaller investment projects in the target countries. This constitutes a needed further development of various cleaner production programmes and projects which donors have supported in CEECs.
Cleaner production investments will per definition reduce emissions and wastes and as such contribute to achieving sustainable production and consumption. Eligible projects should have relevant environmental effects, which entails that the projects should demonstrate reduction of adverse environmental impact and/or restoration of natural resources by the use of modern resource-saving processes. Priority will be given to projects that have environmental effects for the Nordic region, that is projects leading to reduction of pollution in the Baltic Sea and the Barents Sea or reduction of transboundary and global air pollution.
The environmental effects (local, regional and global) of all projects are to be quantified and verified through ex-post evaluation.
Implementation of investments will not necessarily ensure that the borrowing enterprises will comply with prevailing rules and regulations regarding emissions' standards in the target countries. However, it will be a significant step in that direction since cleaner production investments imply a substantial reduction in emissions and wastes.
Environmental appraisal of projects will focus on the following considerations; (i) the location of the project with respect to population centres, sensitive local land uses, and the existing levels and sources of pollution, (ii) the pollution category (air, surface water, ground water, hazardous waste, etc.); (iii) the scale of the pollution impact; (iv) the effect associated with the pollution including possible toxicity to human health, possible impact on climate change, and damage to the natural ecosystems and habitat.
Eligible cleaner production investments should be economically beneficial. They will entail direct economic benefits, such as savings in consumption of raw materials and energy, and reduced fees (payments for use of natural resources) and fines (emission charges and costs for disposal of polluting substances, e.g. solid waste). Moreover, cleaner production investments may have some non-quantifiable benefits, such as improved quality of the product.
The proceeds of the Revolving Facility should be used for environmental projects designed to capture commercially valuable emissions and wastes from existing production facilities or the reduced use of inputs and can generally not be used to finance the installation of additional production equipment, or direct expansion of existing production facilities.
The technical solutions used in the various projects should be based on the best available technology, taking into consideration the economical conditions and suitability for local conditions. Cleaner production investments normally involve upgrading and retrofitting of existing production equipment and the selected technical solution should be cost effective.
Revolving Facility for Cleaner Production Investments
Technical appraisal of projects will focus on inter alia, (i) ensuring that the project is technically feasible, technical solution is cost effective, and that no experimental technologies are being applied; (ii) confirming that the environmental and economic benefits are achievable; (iii) establishing that the timescales are reasonable; and (iv) confirming that the procurement approach is acceptable and that the price estimates are realistic.
The Revolving Facility will lend to state owned enterprises, local or foreign private entities, and joint ventures. Legal appraisal of the borrower has to confirm the legal status of the enterprise, the enterprise's possibility to receive loans in foreign currency and the eligibility of the proposed security scheme to secure the repayment of the loan.
Terms and conditions
The Revolving Facility will provide loans that are tailored to the particular requirements of cleaner production investments. The basis for providing a loan is the cash flow of the cleaner production investment and the ability of the enterprise to repay the loan over the agreed period.
The maximum loan size is equivalent to DKK 1.5 million (about US$ 200,000). The maximum commitment for one project is less than 10 per cent of the Facility's total capital. The minimum loan size is equivalent to DKK 350,000 (about US$ 50,000), unless otherwise deemed necessary to implement high priority projects.
As a rule the Facility does not finance the total investment cost. The borrower is expected to finance part of the costs with their own financial resources, normally at least 10 per cent. Exceptionally the Facility can finance up to 100 per cent of the total project costs. Local taxes and fees should be included in the financing plan.
The repayment period of the loan from the Revolving Facility will be linked directly to the investment's payback time, i.e. the period it takes for the investment to generate sufficient cash to recover in full its original capital outlay. For this purpose the total costs and the annual net savings will be determined for each investment. Net savings can be derived from reduced costs of inputs and wastes, e.g. chemicals, materials, and energy, reduced maintenance costs, reduced emission charges, etc. Simple and consistent methods will be applied in determining the payback time. To provide an incentive to the enterprises loan maturities can be 20 per cent longer than the investment's payback time. The maximum repayment period is 3 years. The borrower has to agree that the profits of the implementation of the cleaner production project are to be used in the first place to execute the payment obligations. Loans are offered with a grace period including three months after completion. Loans are to be repaid in equal quarterly instalments according to a predetermined repayment plan.
For short term loans borrowers are charged an up-front management fee covering the Facility's direct operating expenses. Medium term loans carry an annual interest rate. The Facility does not charge appraisal, commitment or supervision fees.
The borrower bears the foreign exchange risk, i.e. loans are denominated in foreign currencies.
Loans can, to the extent practicable, be secured with project assets which can include a mortgage on fixed assets (land, plant and other buildings), a floating charge on movable assets (equipment, other business assets), the assignment of the company's hard currency and domestic currency earnings, a pledge on the shares in the company, and the assignment of the company's insurance policy and other contractual benefits.
Primarily loans will be secured through assignment of the borrowers' earnings (savings) from the project. Borrowers will be required to deposit the earnings in an escrow account established in a reputable commercial bank, according to a pre-determined payment schedule.
The Facility's policy on procurement is to have open and fair competition for the procurement of goods, works and services procured under Facility-financed operations. Contractors and suppliers can be selected through local shopping when necessary goods at competitive prices are available from local suppliers.
When goods and services financed by proceeds of the loan have to be procured internationally, procurement should be undertaken on Nordic basis (limited international bidding). International shopping can be used if the procurement involves goods and raw materials with standard specifications in limited volumes.
Supervision and Monitoring
For each project a supervision and monitoring plan will be prepared as a part of the loan application. Each borrower has to provide NEFCO or a party entrusted by NEFCO, with a possibility to inspect, independently or jointly with other financiers, goods, sites, factories, installations and construction sites included in the investment project, and to supervise the project implementation and any related documentation.
Financial and physical performance indicators will be specified in the loan agreements.
For each project the realised savings will be verified and compared with the expected savings. A standardised reporting format is provided, with focus on savings in energy use, water use, use of chemicals, etc..
The environmental effects of each project are to be verified. This verification should document reduction in emissions and wastes and reduction in inputs (water, energy, chemicals, etc.).
The companies or entities receiving loans should obtain adequate insurance against normally insurable risks.
The Revolving Facility will be administered by NEFCO. Cleaner Production Centers will assist as described. Local commercial banks will be appointed for handling payment transactions on behalf of and under agreement with NEFCO.