THE TRANSFER OF ENVIRONMENTALLY SOUND TECHNOLOGIES TO SMALL AND MEDIUM SIZED ENTERPRISES A FINANCING PERSPECTIVE EXECUTIVE SUMMARY Environmental Sound Technologies (ESTs) offer advantages to business as well as to the environment. Yet their uptake has been hampered by limited availability of finance, and this is particularly the case among small and medium sized businesses. This report seeks to find the views of financiers on ESTs, to identify why they might be reluctant to provide finance to ESTs, and to identify ways in which the public sector could encourage financiers to supply finance for the purchase of ESTs by SMEs. The report starts by summarising the different sources of general finance available for ESTs and emphasises the very significant differences between medium, small and micro businesses in their access to finance. The report looks at both international and domestic sources of finance to SMEs. Internationally the most relevant source of direct finance for SMEs is venture capital, mostly for medium sized business. Here a sample of over 60 international venture capitalists (IVCs)were surveyed, representing a substantial proportion of the international supply of venture capital. The survey found that while there was some interest in EST among IVCs, there was a shortage of information on ESTs from a business perspective. A significant proportion of IVCs were sceptical about the relevance of ESTs. In examining deals, many but not all investors looked at the process technology and eco-efficiency of the business, (whereas nearly all looked at environmental risk). Lack of information was appeared to be an important constraint. Few investors helped the companies they invest in access information on environmental sound technology. However, a majority expressed interest in doing so, if adequate information were made available to them, and this is an area worthy of further support and action. There was a high level of interest in receiving possible deals from sources such as technology centres, suggested another area for future action. However, investors were generally concerned about the quality of deals they received (rather than the quantity) and put a high level of emphasis on aspects such a good business plan and experienced management, and so these matters should be addressed before prospective deals are passed to IVCs. Government financial support in this areas would be useful. In terms of the measures that IVCs thought would improve the attractive of ESTs to them, investors were most in favour of fiscal measures such as tax allowances and grants - given the immediate financial benefits to investors, this is unsurprising. Other measures received mixed responses, with EST Rights banks receiving least support. In terms of sources of domestic finance, a country study was made of India, where a number of initiatives to support the financing of ESTs have been established. For smaller businesses, domestic finance will always be more important than international finance (although international capital may be directed through intermediaries). A number of lessons can be drawn from these examples: - Achieving substantial impact requires persistence and ideally a high level of government support. - A degree of focus in terms of industry and/or region is recommended - Reducing transaction costs to an acceptable level, for instance, through standardising procedures, is often important. - Outside financial players, while becoming interested in EST related business, need clearer indications of the potential extent and profitability in financing ESTs - In some areas, particularly with micro enterprises, while the finance may be viable, support activities such as advice may continue to need direct assistance. The report then examines the role of the public sector in helping to improve access to finance for ESTs by SMEs. These can include both fiscal measures and financial measures. Fiscal measures such as tax allowances or tax incentives for green investment can be very effective at "kick-starting" a market, but they are expensive and their use should be carefully controlled. Improvements in the tax system to internalise environmental costs and remove subsidies are very effective in encouraging the use of ESTs, but are subject to political constraints. Financial measures can be more targeted in their application, but can be expensive and bureaucratic. Grants and direct subsidies are flexible and powerful, but because of their costs should only be used to kick start markets, or where other finance is unavailable. Making existing export finance programmes more applicable to the needs of ESTs is a clear way that governments could contribute to sustainable development and support their own industries. Loan guarantees are effective at encouraging lending to SMEs and could be linked to the acquisition of ESTs. Leasing is a major source of financing for SMEs, and potentially could be very useful in EST financing, thus supporting the develop of leasing initiatives in this area appears sensible. EST rights banks appear to only have limited application, as they involve the public sector undertaking many activities which are best left to the private sector. More complex mechanisms such as performance contracting are worth supporting, but success may prove elusive. The report finds that while official support has made substantial progress in supporting areas such as technology demonstration and partner-finding there is now both potential and need to involve the financiers of SMEs, and in particular to build linkages between them and EST owners and centres. In doing this attention must be paid to the needs of financiers, including deal quality and hard financial information. Two models are proposed to encourage financiers to provide capital for SMEs to acquire ESTs. An environmental problem based model works up from selected environmental problems through the identification of technical solutions to involvement of financiers in developing financial solutions. The objective is the development of lines of business which are attractive to financiers. Public sector support is involved in funding feasibility and start up costs, identifying partners, and potentially on-going support through risk-sharing. A summary of relevant financing mechanisms is provided in the report. The alternative approach is a macro-level approach which aims to involve financiers on a wider scale, through the dissemination of information on ESTs and the establishment of linkages between financiers and technology centres. As a next step, the provision of concessional finance to provide funds to package individual deals and projects to the level of quality expected by financiers offers the potential of achieving a very high level of leverage, and accelerating the uptake of ESTs. These models, taken in conjunction with continued developed of a supportive business framework for SMEs, and adequate incentives to improve environmental performance, offer the potential to greatly improve the access and use of ESTs by SMEs. TABLE OF CONTENTS Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . .i 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. EST, BUSINESS SIZE, AND ACCESS TO FINANCE. . . . . . . . . . . . . . . .2 3. DESCRIPTION OF INTERNATIONAL SURVEY. . . . . . . . . . . . . . . . . . 10 4. RESULTS OF INTERNATIONAL SURVEY. . . . . . . . . . . . . . . . . . . . 11 5. DESCRIPTION OF DOMESTIC FINANCING. . . . . . . . . . . . . . . . . . . 17 6 ASSESSMENT OF DOMESTIC FINANCING . . . . . . . . . . . . . . . . . . . 18 7. ANALYSIS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . 21 8. RECOMMENDATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 APPENDIX 1: Questionnaire and briefing note APPENDIX 2: Respondents 1. INTRODUCTION Environmentally sound technologies (EST) provide a valuable opportunity for the developing world to raise standards of living while protecting its natural resource base. ESTs make sense for an individual business, as they simultaneously reduce impact on the environment while saving money over the long term. On a macro level, widespread adoption of EST enables rapidly industrialising regions to -leapfrog■ to state-of-the-art clean designs, rather than undergoing the extended phase of heavily polluting industrial patterns from which Western countries are only now emerging. As the UN Commission on Sustainable Development (CSD) has recognised, the opportunity provided by ESTs has yet to be fully exploited, as adoption of these technologies in developing countries has lagged behind expectations. A chief obstacle may be lack of access to finance, particularly for small and medium-sized enterprises (SMEs). Unlike larger companies, SMEs are limited in the scope that they can rely on internal financing and are therefore much more dependent on private external sources, whether through joint ventures or third parties. The inherent limitations on private capital acquisition are made even more binding due to ignorance about the financial advantages of ESTs. A key aim of this study, therefore, is to advance understanding of the relationship between finance and adoption of ESTs in developing countries. To identify current private financial flows for ESTs (which are often indistinguishable from broader general purpose finance), Delphi undertook two surveys of private sector financial organisations: an international survey of venture capitalists and a survey of domestic finance in India. Drawing upon the results from these surveys, this paper analyses to what extent existing private financial flows are taking account of the potential for environmentally sound technology, and explores and evaluates mechanisms through which EST finance can be accelerated for small and medium-sized businesses in the developing world. Key issues under analysis include the following: (1) What are the principal sources of finance currently available to enable small and medium-sized enterprises to acquire ESTs? (2) What is the current state of awareness of the chief financial players with respect to investment in environmentally sound technology? What is the potential for greater financial sector involvement in encouraging the uptake of ESTs through, for example, assessment measures, links with other forms of finance, and the use of public-private partnerships? (3) Are there promising policy mechanisms or new institutions available to bring about increased financial flows for ESTs? 2. EST, BUSINESS SIZE, AND ACCESS TO FINANCE 2.1 Definitions Environmentally sound technologies are difficult to define up front, as they are more distinguished by the end results rather than particular design features. Indeed, some of the best ESTs on the market are not even identified as such. For purposes of this analysis, however, ESTs are defined as technologies, including necessary support and services, which enable functions to be fulfilled with reduced impacts on the environment yet still make sense in business terms. There are two principal types: those designed to improve the manufacturing process (including both -end of pipe■ clean-up technology as well as clean process technology that prevents pollution from being generated in the first place) and the technologies needed to manufacture environmentally superior products, such as energy efficient light bulbs and CFC-free refrigerators. The investment needs for EST fall into three general categories. At one extreme are the simple housekeeping and efficiency improvements available requiring little or no increase in cost. Almost by definition, there are few financing issues involved here, although access to information about these improvements remains important. At the other extreme are the high-cost investments which, although they make economic sense when all societal costs are taken into account, are impossible to justify financially from the perspective of the individual firm (at current resource prices). Policy action (such as a subsidy) is required to make these sorts of investments sensible. In the middle are those measures which involve up-front investment in return for cost savings down the line, and it is essentially these measures which form the basis of this analysis. Examples of the potential financial benefits include: - reduced cost of raw materials and resources, including power and water - reduced waste and disposal costs - improved compliance and reduced regulatory interference - reduced future liabilities - improved quality products and reduced defects - improved working conditions and employee motivation. ESTs in this category often encounter difficulties in gaining acceptance within business, in part because current accounting systems may fail to capture all the real benefits. For example, waste disposal costs are often treated as general overhead, rather than related to the production process that actually produced them. 1/ In terms of EST transfer, there are a number of situations in which finance is needed. Most important are the companies buying EST from a domestic or overseas supplier of EST (e.g. for plant modernisation or expansion). Many types of industries can benefit from incorporating ESTs into their operations, with some of the most notable being the chemical, textiles, cement, and semiconductor sectors. Companies that manufacture and/or distribute EST also need capital. While these are often joint ventures (with some capital coming from the overseas partner), the companies may still face difficulties in obtaining additional equity, particularly if they are small and medium-sized enterprises (as many are). As well as their own capital needs, these technology companies are also potentially helping their customers finance the technology. Finance of EST transfer is also relevant to companies producing -green■ products for the retail market. As the products are proprietary, additional funding needs may arise to cover the intellectual property rights. Joint ventures and licensing are important ways such ventures can be developed without these costs becoming prohibitive. These companies may also need to consider providing consumer finance for their customers -- an example is rural electrification through solar power, where finance is an important part of the package. The final area where EST may be of relevance is in financing infrastructure development. However, the sums involved are often large and most financing in this sector falls outside the scope of this report. 2.2 Technology co-operation and ESTs Much research has been done on the issues surrounding technology transfer. It is now generally accepted that the technology -hardware■ or physical equipment cannot be looked at in isolation. From the perspective of a business, the whole package that goes along with the technology, including installation, training, servicing, and other -software■ items, is relevant. In many cases, this software may be as important as the hardware. This raises two key issues with respect to SMEs and environmentally sound technology. First, assisting with the financing should be regarded as an important part of the software. This help can range from clearly articulating the business benefits of the EST (thus making it easier for the purchaser to raise finance) to providing a complete financing package with the EST -- for instance, providing the equipment at a favourable rate. Second, the importance of the software raises problems for financing, because it is generally easier to finance hard physical assets (e.g. through secured loans or leasing) than services or intellectual property, and further innovation may be needed here. 2.3 Finance and Access to ESTs Various sources of finance are available for small and medium-sized companies, each with its unique combination of advantages and disadvantages. Banks, for example, are typically asset-based lenders, and focus strongly on security and downside risk, rather than the upside potential. Thus, for an asset-poor company in the early stages of development, bank financing on reasonable terms will often be difficult. By contrast, a less risk-averse type of investor, such as a venture capitalist, may be more willing to consider investing, particularly if the business is offering good opportunities. Here, the obstacle may be more the size of the investment, as the amount of analysis involved often precludes small capital needs. For small and medium-sized companies, key sources of finance (and their relevant attributes) include the following: Debt Overdraft: Overdrafts provide a flexible, but limited and short-term, source of finance. The drawback of this form of finance is the high cost for the funds drawn, making it an impractical source for regular expenditures or long- term planning. Guarantees may also be needed. Secured Loans: Compared to overdrafts, secured loans are a less expensive source of finance. The drawback is that the business must have hard assets to use as collateral. This type of financing can pose problems for service or technology-dependent businesses that can lack such assets. Sometimes, government-guaranteed bank loans are available, which help small businesses get around the collateral problem (although these sources also frequently carry restrictions against the use of soft assets, such as intellectual capital, as security). Personal Loans: Personal loans are one of the most generally available sources of finance, but usually require the individual to have sufficient assets to serve as collateral. A major drawback of relying on personal loans is that the owner is prevented from sharing the risk inherent in his business operations. Leasing: Leasing finance is a short-term loan secured on a particular piece of hardware, often initially arranged by the vendor. This type of finance is often tax-driven, as it may allow a company to use accelerated depreciation of assets. A related advantage is the ability to efficiently allocate these tax allowances (i.e. a company that does not yet have the income generation to take advantage of allowances can still recoup some of the benefit by leasing to companies that can). Export finance: As the name suggests, export finance assists companies with the risks associated with selling their product in foreign markets. This type of finance is often provided by governments as a means by which to improve overall export earnings to improve a trade balance or increase foreign exchange reserves. Securitised debt: Securitised debt includes bonds, loan stocks, and note programs, and are tradable on the capital markets. This is a good source of low-cost finance, but is generally only available to large companies. Equity Personal: Personal equity is the capital put up by the founder and his family. This type of capital has the advantage of flexibility and a low imputed cost (given the limited alternatives to use the funds in other income- earning pursuits). If large sums are involved, it may pose a problem for the family■s liquidity, however, and it also carries a high degree of personal risk. This may have the effect of preventing the entrepreneur from taking the essential long-term perspective towards the business. High Net Worth Individuals: These types of investors generally fund projects of special interest to them. Often, these investors hope for a relatively high rate of return before committing funds. On the other hand, they are often willing to accept variable conditions and invest for the long term. The level of analysis required is less rigorous than for professional investors. Venture capitalists: Venture capitalists are investors seeking high-growth, high-return investments. Whilst they are often willing to accept a high degree of risk to earn these expected returns, venture capitalists aim to reduce these risks whenever possible and conduct rigorous analysis to apprise them of the risks. Venture capitalists take a hands-on approach, and add value to the firms in the process. Typically, they expect to hold their assets between three and seven years. Institutional Investors: Institutional investors (mutual funds, pension funds, and so forth) are normally only interested in large, publicly traded companies with earnings of over $10 million. Institutional investors are under pressure to perform well in the near term, which means they often lack the patience to invest in private companies. Some investors, however, are prepared to allocate a certain portion of funds to this type of company. Strategic Investors: Strategic investors are existing large industrial companies seeking operational synergy in technology, markets, and products. They will typically be interested in joint ventures and will usually provide a technology as part of the deal. They have a long time horizon. Typically, strategic investors expect a rate of return comparable with their other internal businesses. Corporate ventures: Corporate venturers can be thought of as a hybrid between venture capitalists and strategic corporate investors. These are quasi- independent profit centres within a larger company. Their mission is to invest in other businesses where there may be some synergy, although the links are generally not as strong as for a joint venture. Note that the type of finance required for EST will also depend on circumstances. If a company is making a relatively modest outlay, for instance, to improve one part of a factory, it may be able to finance internally; if external finance is needed, it will either be incremental (e.g. drawing down existing facilities) or stand-alone (e.g. leasing). However, if a business is undergoing large-scale modernisation or expansion and makes major purchases of EST, it will need core capital including equity. In this case, the extent to which finance is available will depend on the overall strength of the business, and the advantages of EST will form only a small factor in the investors■ decision as to whether to invest. 2.4 Business Size and Access to Finance for ESTs As the Commission on Sustainable Development has identified, gaining financing for environmentally sound technologies is particularly problematic for small and medium-sized businesses, compared to large companies which benefit from well-developed capital markets. In development literature, small and medium-sized enterprises are often grouped together for purposes of analysis. When it comes to access to technology, however, the issues faced by the medium-sized business are quite distinct from those of the smallest businesses (often called microenterprises) made up of either sole traders or those employing a handful of people. It is more meaningful to consider separately the capital needs of these very different classes of business. Medium-sized businesses can be classified as having approximately $2-100 million 2/ in turnover, and 100-1000 employees. These firms have capital needs in the order of millions of dollars, which they obtain from a variety of sources including venture capital, strategic investors (companies with a long- term interest in the business area of the investee company), the founders, and individual investors. Businesses of this size typically have access to lines of credit and term finance from banks, usually secured on the company■s assets. They may also have access to other finance sources, such as leasing for new capital equipment, sales finance such as factoring, and trade credits. To a more limited extent, they may have access to export finance. However, these more innovative forms of finance are not always available in developing countries. The finance side of the business is typically under the control of specialists with reasonably high levels of expertise, as are the marketing, managerial, and other business functions. Medium-sized businesses usually have a relatively good understanding of international competition and practices, and are likely to already be exporting their products or investigating how to do so. By contrast, small companies have turnovers of up to a few million dollars per annum 3/, and have tens of employees. Their capital needs are likely to be in the order of hundreds of thousands of dollars. Staff may not be specialised by key business function (finance, marketing, etc.), and the firm may not have all the necessary skills within its staff. Compared to medium- sized companies, small firms have greater difficulty securing capital. Equity capital typically comes from private individuals, often known by the founders. Venture capital or investment by strategic corporate investors is only occasionally available. Bank finance may be available from a few, local institutions, and usually in exchange for a personal guarantee. Small businesses may have access to some of the more innovative financing described above, but will often have problems managing cash flow. The difficulty that small companies experience in obtaining equity in the amounts they need from mainstream financial sources (e.g. venture capitalists) has been identified as the -capital gap■. At the lowest rung of the ladder are the numerous microenterprises, often working in the informal economy with a handful of employees. Without access to virtually any formal finance, these business are almost completely dependent on the owner for capital needs. (Some of the socially oriented banks, such the Grameen Bank in Bangladesh, have provided small loans to this market, and in many areas informal finance systems exist.) Thus, any access to mainstream finance will typically be asset-based, such as leasing, or consumer finance (personal loans). Although the capital needs of this group are undeniably important, this group has not been the major focus of this study. The following table summarises the types of finance available for medium- sized, small, and micro-enterprises. Type of Finance Medium Small Micro- -sized enterprise Equity Personal * ** ** Private Investors * ** (*) Venture Capitalists ** * -- Institutional * -- -- Strategic Investors ** * -- Debt Banks Overdraft * ** *(*) Secured Term Loans 1/ ** * -- Personal Loans 2/ -- ** ** Leasing * ** *(*) Factoring * * -- Export Finance * * -- Securitised Debt * -- -- Major sources of finance are indicated with two stars and minor sources with one star; no stars means that it would be very difficult for a business in this category to obtain finance from this source. 1/ Loans secured on the assets of the company. 2/ Loans secured by the owner/manager or taken out by them. 3. DESCRIPTION OF INTERNATIONAL SURVEY The International Survey was designed to elicit a general view of the level of understanding and interest in environmentally sound technology among providers of international finance. The survey focused on venture capitalists as the most important source of international finance for medium-sized companies, and of increasing relevance in the developing world. Venture capitalists are also interesting because they maintain a high degree of hands-on involvement in the investee company, resulting in some influence when it comes to technology decisions. Thus, they may have a useful role in investing in (or disseminating information on) environmentally sound technology. In addition, Delphi surveyed a number of corporate venturers as well as some financial advisors, investment banks, and development banks involved in private equity. The survey was sent to 62 organisations drawn from Delphi■s database. While not complete, it represents a significant proportion of international venture capitalists interested in emerging markets. The geographical distribution is shown in the table below. REGION NUMBER OF SURVEYS SENT Southeast Asia 19 UK/Europe 12 Eastern Europe 5 US/North America 10 Africa 5 India 15 TOTAL 66 Note that the venture capitalists in OECD countries are those investing or considering investing in emerging markets. Note also that there may be a small element of bias in the list, with the list members reflecting a higher degree of environmental sophistication than venture capitalists at large. Indeed, the survey should not be taken or interpreted as an accurate statistical poll, but instead as a series of illustrative discussions. The main part of the survey covered five areas: general knowledge about ESTs; current investment practices; value added to investee companies with respect to providing EST information and services; the deal-making climate; and possible policy mechanisms to encourage ESTs. In addition, respondents were asked to provide general information about their operations and whether they were willing to participate in a follow-up telephone interview. (See Appendix I) The questions were worded carefully to reflect the language used in the investment community, rather than the policy world. The survey itself was accompanied by a two-page briefing note explaining environmentally sound technologies and their cost-saving advantages, and the potential role of finance as a limiting factor for adoption of these technologies. 4. RESULTS OF INTERNATIONAL SURVEY Responses were returned by 28 respondents, and 25 of these submitted completed questionnaires. This represents a satisfactory response rate in view of the peripheral nature of the survey to their core business of the respondents. The quality of responses was very good, however, as many of the largest and most important emerging markets venture capitalists were among the respondents. From the supplementary information provided it is clear that the total assets managed by the respondents is several billion dollars. Section One: Overview -- Knowledge of Environmentally Sound Technologies OVERVIEW QUESTIONS Yes No Don■t Know Q1.1 Are you familiar with the concept of environmentally sound technologies? 21 4 N/A Q1.2 Do you think that the advantages of EST are significant from a business/ investment perspective? 18 2 5 Q1.3 Do you have adequate access to information on ESTs? 8 15 2 The first part of the survey attempted to elicit the general state of awareness of environmentally sound technologies. As indicated above, awareness of the concept is high, and it is considered a significant issue from a business and investment perspective. It is possible, however, that the high degree of awareness represents some degree of self-selection bias, with those venture capitalists most familiar with the concept the most likely to respond. Less than a third felt that they had adequate access to information on these technologies, however. This strongly suggests that venture capitalists would be receptive to receiving additional information on this topic to aid their decision-making. Section Two: Investment Practices The next section asked investors to describe the level of assessment made of the operational plans of the businesses in which they invest. INVESTMENT ANALYSIS QUESTIONS Yes No Q2.1 Do you conduct due diligence on the process technology being used by companies you are involved with? 22 3 Q2.2 Does this due diligence specifically look at and compare the resource efficiency or cleanliness of the process technology? 20 5 Q2.3 Do you assess, at present, whether companies you are involved with are efficient in their use of raw materials, energy and water, in comparison with their competitors? 16 9 Q2.4 Do you assess whether companies you are involved with may be running significant environmental risks? 23 2 While environmental risk is the most important for venture capitalists, there is also a high level of assessment of clean technology and eco-efficiency. But as only five respondents felt their access to information on EST was adequate, information scarcity appears to be a limiting factor constraining the level of rigour of these assessments. Section Three: Adding Value to Companies The third part of the survey asked venture capitalists whether they were currently helping the companies in which they had invested to access information on environmentally sound technology, and if so, to describe the sources of information they provided. ADDING VALUE TO COMPANIES Yes No Q3. 1 Are you currently helping companies you are involved with access information on ESTs? 8 17 Of the 13 investors surveyed, less than a third indicated that they provided such assistance. This is interesting in light of the response to Q2 in which 20 companies reported conducting due diligence on the resource efficiency and cleanliness of process technology. Of the companies that provided assistance, two reported using all the listed categories of information 4/, one used all but business sources, and one indicated that it used only trade press/commercial information sources and business sources. The respondents that answered no to Q3.1 were then asked whether they would be interested in helping investee companies access information on ESTs if they themselves had better access to information. Yes No Q3.1B If you answered no to Q3.1, would you be interested in helping companies access such information if you had access to it? 9 3 A significant proportion were interested in helping companies access information, and as a result this suggests an area for further action. Respondents were then asked to assess the usefulness of four types of information -- regulatory, technological, managerial, and marketing -- on a scale of one to five, with one being the most useful. Very.......................Not Q3.2: How useful would the following types of information be? 1 2 3 4 5 - Regulatory 8 6 3 1 1 - Technological 11 5 1 1 2 - Managerial 7 5 5 0 2 - Marketing 2 5 0 4 1 The slight pattern that emerged from this question was that technological information is thought to be the most useful, and marketing information the least useful. Overall, this section indicates that there is scope for venture capital companies to provide information to investee companies and a reasonable degree of willingness to do so. Section Four: Finding Deals The next part of the survey focused on the deal-finding process. Q4.1 How significant are the following Large Some No constraints on the development of your business? - Quantity of deals you receive 2 11 11 - Quality of deals you receive 12 10 2 - Availability of capital 5 12 7 - Internal resources (e.g. experienced professionals) 8 12 4 The first question in this section sought to determine the constraints on deals. The respondents indicated that they are generally satisfied with the quantity of deals that present themselves. By contrast, the quality of the deals they receive is the most significant constraint. Availability of capital was only a moderate or no constraint in most cases. The exception was the more difficult markets of Africa and Eastern Europe -- and this is probably due to macroeconomic factors and the need for further reform in these markets. Interestingly, while many SMEs may feel capital is difficult to obtain, there is no shortage of capital per se. Rather, venture capitalists are constrained from allocating capital because of deal quality. In other words, the factor which limits SMEs■ access to capital is the way in which they present their business propositions to venture capitalists. Internal resources were a more significant obstacle, particularly with those venture capitalists operating in emerging markets. In the following question (Q4.2), the respondents were asked whether they would like to receive deals from a third party source, such as a technology transfer centre involved in promoting ESTs. Yes No Don't Know Q4.2 Would you like to receive deals from a third party source, such as a technology transfer centre involved in promoting ESTs? 18 3 2 Respondents expressed a very high degree of interest in learning more about deal opportunities associated with environmentally sound technology. This suggests that there is scope for such centres to establish links with the financial community to help promote deals, keeping in mind the critical importance of deal quality. Very.......................Not Q4.3 If such an organisation were to send you deals, how important is it that they ensure potential deals have the following attributes? 1 2 3 4 5 Avg. - Good business plan/well-packaged proposal 16 2 4 0 2 1.8 - Good financial prospects/rate-of-return 15 7 1 1 1 1.6 - Strong partners and existing backers 11 9 3 0 1 2.3 - Experienced/professional management 16 6 1 0 1 1.9 - Strong technology rights (e.g. patents) 7 9 6 1 1 2.3 - Good business agreements (e.g. licence/JV) 8 7 7 1 1 2.3 - Good marketing proposition 11 10 1 1 1 2.2 Question 4.3 presented a list of potential attributes inherent in such hypothetical deals and asked respondents to rate the importance of them. With the one exception (who did not believe that any of the listed factors were important!) the respondents generally thought that all of the attributes were relatively important, again emphasising the importance of deal quality. The most important factors were `experienced management', 'good business plan' and `good financial prospects'. The least important factors (although still important) were `strong technology rights', `good business agreements' and `strong partners'. It is interesting to note that technology rights, a major concern to the international community, is less important to investors than good management and a strong business proposition. Question 4.4 sought to assess the level of interest in investing in various types of environmental companies. High.....................Low Q4.4 Assess your level of interest in the following classes of company: 1 2 3 4 5 a. General companies requiring capital to invest in EST (e.g. for modernisation or expansion) 6 6 6 0 4 b. Companies developing and manufacturing EST, including joint ventures 8 6 6 0 2 c. Companies producing 'clean' retail products, including through joint ventures 5 7 7 3 1 d. Companies/projects requiring capital for infrastructure projects 8 5 3 3 3 The responses to this question suggests that there is no strong preference for a given type of company -- all types generated strong interest from some venture capitalists. On average, companies seeking capital to develop and manufacture ESTs and those requiring capital for infrastructure elicited slightly more interest than those seeking either to modernise/expand or to produce clean retail products. Because of the small sample size, however, the key conclusion that can be drawn from this question is the importance of tailoring a particular proposal to the individual venture capitalist■s preference. Section Five: Encouraging the Use of Environmentally Sound Technologies The final section in the survey asked respondents to evaluate possible policy options in terms of their effectiveness in increasing the venture capitalists■ interest in environmentally sound technology. It should be borne in mind that most venture capitalists are unlikely to be fully aware of all the policy ramifications involved in this measure. Nonetheless, their first reactions are relevant and useful. Very......................Not Q5 How effective do you think the following policy mechanisms would be in increasing your interest in investing in ESTs? 1 2 3 4 5 5.1 Improving information on the availability and benefits of ESTs 9 4 3 5 3 5.2 Technical assistance and pre- investment financial assistance, for instance, to help companies improve their documentation 7 6 7 1 3 5.3 Tax allowances on installing ESTs 7 7 8 1 1 5.4 Public sector subsidies/grants for ESTs 6 7 6 3 1 5.5 Tighter regulation and enforcement of environmental matters 8 8 1 4 3 5.6 Specialised financial mechanisms such as leasing 5 5 7 4 2 5.7 EST Rights Banks 4 6 5 4 4 All of the first five measures were assessed a relatively high level of interest. Improving information and tighter regulation were seen as the most effective. The need for tighter regulation seen by two-thirds of the sample highlights the need for measures to improve the demand for ESTs. It was not surprising to see the relatively high degree of interest in direct fiscal measures (tax allowances and public sector subsidies/grants). Clearly, from the immediate perspective of investors (who see only the benefits of such measures), such measures are quite attractive. On a policy level, of course, these measures would have to be weighed in terms of their fiscal costs and benefits. Nonetheless, these views confirm that such measures can accelerate the uptake of EST, as has been demonstrated in a number of cases. Specialised financial instruments, such as leasing, were given a slightly lower rating. There is undoubtedly potential to use innovative financial mechanisms to provide additional sources of capital, particularly if it is tailored to the requirement of EST. The respondents here, however, may regard such sources as potentially competitive, or less relevant to the overall financing need they are usually considering. EST Rights Banks received the lowest effectiveness rating overall. This reflects the fact that while EST Rights Banks may help to decrease the cost of technology overall, from an investor■s perspective they fail to create businesses attractive to investors. EST Rights Banks supplant the potential for attractive EST ventures, and reduce the scope for EST users to gain competitive advantage. 5. DESCRIPTION OF DOMESTIC FINANCING Unlike the international survey, the domestic survey concentrated largely on players within one country, India. This was designed to get a more complete picture of the relationship between access to finance and access to ESTs in one region. India provides a good test case for the following reasons. First, as one of the major emerging markets, the results are important in and of themselves. India is undergoing rapid industrialisation under severe resource constraints. It is a good example of both the urgency and the opportunity provided by the rate of change. The differences between markets make it quite difficult to apply the results across countries, so it was thought to be critical to select a country for which the results would be useful. With that disclaimer, however, it is hoped that some of the results from this survey will help advance understanding of developing countries in general. In reviewing the results of this section, it is useful to keep the following characteristics about India in mind. First, India is a large and heterogeneous country. Alongside the many entrepreneurs, established businesses and well-educated middle classes are vast pockets of poverty little affected by the rapid economic growth rates. Thus, ensuring that macroeconomic growth also yields higher living standards for the masses is of urgent concern. Compared to many developing countries, India benefits from an established and strong legal and finance system. Contract law is established and in the Anglo-Saxon tradition, there are several thriving stock markets and, for instance, some 40,000 companies involved in leasing. Moreover, there is now tremendous opportunity to put into place a more environmentally sound infrastructure. Much of the equipment in use in India■s business is outdated, due largely to previous policies. The current liberalisation and modernisation underway means that the nation■s businesses have the opportunity to leapfrog the technological mistakes of the West and adopt state-of-the-art technology. The India survey was not as homogenous as the international survey of venture capitalists. It consisted of a number of elements: - a survey of domestic India venture capital firms along the lines of the international survey - discussions with participants in the Indian financial markets, including commercial banks and leasing financiers - three relevant Indian case studies - a case study from the UK of relevance to India and other markets. 6. ASSESSMENT OF DOMESTIC FINANCING One general comment is that the overall level of response from the Indian financial community was lower then expected. Out of 15 venture capital houses only 4 responded, and only 3 returned questionnaires, despite telephoned and faxed reminders. Similarly, some 16 financial organisations were formally contacted for information about their general activities in terms of financing ESTs in SMEs, but only 6 responded, 4 usefully. This represents a lower level of response than the international questionnaire. In view of India's reputation as a leader in this area, the reaction from the Indian financial markets was disappointing, and may indicate that despite some leading edge initiatives, much of the Indian financial community remains unconvinced about the merits of ESTs and the opportunities to provide finance. However, some useful informal information and intelligence was also obtained and has been used below, together with the formal responses received. Compared to the overall results of the international survey, the Indian venture capitalists■ responses were fairly similar. Notable differences include a slightly increased focus on technology rights as a key attribute of deals (Q4.3) and a stronger interest in technology-based companies (Q4.4). Indian venture capitalists also felt a particularly strong need for better information. However, more significant was the fact that many private sector venture capital institutions declined to respond. The venture capital scene in India is very rapidly developing and so many organisations may have higher priorities than ESTs at present. Changing this perception is the first challenge in seeking to encourage financing of ESTs. The banking scene in India is also fast changing, as newcomers challenge the role of the state owned financial institutions. The main state owned financial institutions such as ICICI and IDBI (with its smaller companies subsidiary SIDBI) are aware of and sympathetic to potential of ESTs and the need to provide suitable finance. They have established some targeted programs, although much of the finance for ESTs is dependant on their general financing arrangements. Case study 3 highlights the work of the Indian Development Bank of India. Despite substantial interest in the idea of ESTs, it appears the level of practical awareness and use of information was lower than that of the international venture capitalists. The need for better information is clearly very strong and there is particular scope to expand activities in this area, particularly with information related to financial aspects of ESTs. As the financial market in India is further liberalised, there is a danger that in the more competitive market that will result financial institutions will be reluctant to focus on ESTs unless their advantages are apparent, there are profitable lines of business, or appropriate support is provided by the public sector for particular actions. However, if the advantages are apparent, for instance in the better quality of businesses that result from the use of ESTs, then banks can justify action to support their transfer. For instance, one approach which banks could adopt is for banks to support the development of networks of technical experts in ESTs and actively refer customers to them. Such a model is provided by Cooperative Bank in Britain (see case study 4 below). This model is particularly interesting as it is was done independently of public sector intervention and in a competitive financial market, albeit by a institution with a high sense of public duty. India has a particularly large leasing market. Leasing companies are generally receptive to EST, and are specifically quite interested in the idea of providing integrated leasing facilities for such technologies. For leasing to be effective in promoting the uptake of EST, however, the market must be large enough to ensure that leasing companies■ costs are reasonably low. Thus, there was a strong feeling that EST-related programmes need to demonstrate a sufficiently large market to ensure a good business for leasing companies. If this is done, leasing could prove to be very effective in increasing capital flow to EST. It should be noted that although the purchaser assumes responsibility for the contract, normally the initial contact with the leasing company is arranged by the vendor. Thus, links need to be built between leasing companies and the technology vendors, possibly though technology centres. In addition, flows of leasing (and other forms of finance) to smaller, riskier businesses could be further enhanced if guarantees were to be provided by third parties, such as governments. Case study 2 illustrates such a relationship. This type of policy measure has the additional advantage of targeting government support toward specific and preferred technology. 6.1 Case Study 1: Indian Micro Enterprise Development Fund The premiere global business associations dedicated to the environment, the Business Council for Sustainable Development 5/, has recognised the potential contribution of smaller enterprises to sustainability in India and helped establish a promising mechanism to assist them. The BCSD realised that, although smaller companies are currently responsible for a disproportionate share of industrially caused pollution, they represent a tremendous opportunity to further sustainability, due to their flexibility to remain at the cutting edge technologically and move quickly into new areas of business. Sustainable Project Management (a spin-off organisation of BCSD) is preparing to launch the Indian Micro Enterprise Development Fund (IMEDF), a for-profit financial institution to serve technology-based micro, small, and medium-sized enterprises. In late December, Sustainable Project Management published the first business plan for the IMEDF. In the initial stages of operation, IMEDF will target businesses with capital needs on the order of $750 to $7500. Services on offer to businesses include the following: - credit (through loans, loan-guarantees, or a combination) - technological, managerial, financial, and entrepreneurial assistance, with particular emphasis on eco-efficiency - assistance with procuring raw materials and technology - links with trade organisations and other financial institutions, both within India and abroad. The IMEDF will be divided into two entities, a charitable foundation to provide the technical assistance services and the fund-manager itself to handle the financial aspects. The fund management will be split between a private sector financial organisation (Escort Financial Services) focusing on small businesses and experienced NGOs focusing on microenterprises. In addition to Sustainable Project Management, other major promoters of IMEDF include the Asian Development Bank and the International Finance Corporation. Promoters provided the initial funds to finance administration and set-up costs; within several years, IMEDF aims to go public and become financially self-sufficient. If successful, the IMEDF could provide a valuable model of a country-specific, self-sustaining mechanism geared to provide EST finance for microenterprises and small and medium-sized enterprises. 6.2 Case Study 2: Solar Electric Light Company (SELCO) SELCO is a innovative project designed to mobilise capital in acceptable form to provide relative poor off-grid households and microenterprises with access to technology - in this case photovoltaics. It shows how a combination of financial resources can be brought to bear to help provide finance for a particular problem. Background. The Indian government is keen to increase the use of renewable energy and in particular is interested in off-grid power systems, such as small scale photovoltaics. The World Bank and the GEF have provided a $55million line of credit to the Indian Renewable Energy Development Authority to finance small solar electricity systems (SES). These funds are made available at concessional interest rates to "empanelled" intermediaries such as Tata Finance Limited (TFL). However, TFL in itself is not in a position sell systems directly to all potential customers and so relies on distributors and others to bring it acceptable business. SELCO has been set up to accelerate the sales of solar electricity systems to households, and to offer a complete package of finance including finance and maintenance. Backing has been provided by the Solar Electric Light Fund (SELF), an initiative of the Rockerfeller Brothers Foundation, a charitable foundation based in the United States. SELCO intends to operate as follows: 1. SELCO signs up a block of 25 or 50 SES customers for solar systems and collects a 25% deposit. 2. SELCO forwards the deposits to TFL and applies for lease financing of the systems (with SELCO as counterparty). 3. SELCO arranges underwriting of the leases using a Letter of Credit from SELF as a credit enhancements/guarantee. 4. SELCO orders solar systems from TATA BP Solar at a special pre-arranged distributor price as exclusive agents for specified districts. 5. TFL approves leases and forwards payment to TATA BP which ships the systems to SELCO. 6. Selco arranges for head of household to sign a 3 year purchase agreement with SELCO, and this is endorsed by TFL (who continue to own the systems until they are paid for in full). 7 SELCO installs the systems and provides a 1-year maintenance contract. 8 Local SELCO agents make monthly payment and collection visits. 9 Collections are pooled and sent to TFL. SELCO is essentially "on-leasing" the systems to its customers and charges an interest premium as well as its margin as a SES supplier. As such it is hoped to establish a profitable, growing business that will no longer need external support. SELCO has currently demonstrated the system and is looking to raise external finance to accelerate the program. The project is built around a core of lease financing as the most appropriate financing arrangement, but external support, from government agencies or in this case a charitable foundation (through SELF), is helping in three areas: - Reduced interest costs for TFL, using the IREDA funds. - SELF is covering the start up and business development costs of SELCO - SELF is providing guarantees through its Letter of Credit. The case study demonstrates the development of a complex response to a particular financing problem. Similar types of models could be developed for other problems. 6.3 Case Study 3: Industrial Development Bank of India IDBI focuses on medium and large scale sector, and thus is relevant to the bigger companies in the SME sector. It has not formulated specific programmes for the support of ESTs in SMEs as such. However, IDBI has always funded EST related projects which are found financially viable. In addition, projects based on ESTs are supported under a number of specific programmes of the IDBI. The IDBI has contracted two specific lines of credit from the World Bank/IDA, one of $90m under the Industrial Pollution Control Project (IPCP), the other of $95.5m under the Industrial Pollution Prevention Project (IPPP). The IDA component of $4m in the former is for grants in the are of waste minimisation, resource recovery, or pollution abatement, and a number of innovative projects have been supported, including a plant to treat distillery spent wash by a "Drying Incineration and Energy Generation" technology, offering significant cost and environmental advantages, and a plant to treat dry sugar waste and press mud from a sugar mill based on anaerobic composting. The lines of credit also include a component for Common Effluent Treatment Plants ($16m under the IPCP line, $18m under the IPPP line). This is intended to help finance the establishment of effluent treatment plants for groups of SMEs based in individual estates or clusters. They are seen as an important way towards achieving pollution mitigation among SMEs who are unable achieve this objective individually. So far IDBI has extended loans aggregating $14.7m to 20 such plants around the country. IBDI has also established a venture capital fund to finance more risky ventures, including those involving comparatively unexploited technologies, and a number of projects involving ESTs have been financed from the fund, including a plant to process municipal solid waste and produce organic manure, and another to process rice straw liquor, with energy and chemical recovery. IDBI has also helped project finance a number of ESTs, including 22 wind power generation projects, and various bagasse co-generation projects. 6.4 Case Study 4: Cooperative Bank■s National Centre for Business and Ecology Although financial players have been somewhat slow to recognise the benefits of EST, their broad business knowledge and contacts place them in an excellent position to bring companies into contact with EST expertise. In Britain, an interesting case study of such involvement is provided by Cooperative Bank■s National Centre for Business and Ecology, launched in October 1995. The concept is eminently transferable to the developing world. The Centre provides businesses with access to low-cost, high-quality advice and assistance on environmental technology and practices by pooling the resources of four universities. The Bank recognised that the universities harboured a vast amount of expertise of great use to businesses, but lacked a mechanism to make this expertise available to the outside world. Cooperative Bank serves as an intermediary link, referring its customers and other interested businesses to the Centre. The Centre is designed to fill a gap in existing environmental services for small and medium-sized businesses. As a socially oriented financial institution, Cooperative Bank encourages all of its corporate customers to take a responsible attitude towards the environment. At the same time, it recognised the difficulty that smaller businesses often have in obtaining technical assistance since many private environmental consultants are geared toward the needs of large businesses. Cooperative Bank is investing ť1 million (around $1.5 million) in the Centre over five years. The services of the Centre will be available to all businesses at low cost, with Cooperative Bank customers receiving preferential rates. Key areas of emphasis include improving the ecological quality of products, reducing costs, and where applicable, developing new, ecologically sound products. Areas of expertise include ecosystems, waste disposal, energy conservation, climate change, and numerous other environmental issues that affect industrial processes. The Centre is based at Salford University in Manchester, and also involves Manchester University, Manchester Metropolitan University, and UMIST. The Centre is directed by a noted environmentalist with expertise in ecologically renovating some of the most polluted sites in Britain. 6.5 Conclusions A number of conclusions can be draw from these examples: Given the scale of the problems, achieving substantial impact can require persistence. Finding the right approach can be take several attempts, and even then may take time to have the desired effect (e.g. in case study 2, even if successful SELCO will have only tapped 5% of its potential market in five years). A high level of government support and commitment can help here. Success is more likely to be achieved, particularly with more involved financing mechanisms, if there is a degree of focus in terms of industry and/or region, as this will ensure that actions can be tailored to specific needs most successfully. Transaction costs, both for financial organisations and their clients, can be an obstacle to providing finance. Reducing them to an acceptable level, for instance, through standardising procedures, is often important. Private sector financial organisations, while becoming interested in EST related business, need clearer indications of the potential extent and profitability that will arise from financing ESTs before they are prepared to commit their own resources. In some areas, particularly with micro enterprises, while some aspects of financing may be viable on their own, support activities such as advice may continue to need direct assistance. 7 PUBLIC SECTOR FINANCE AND ESTS The previous sections have indicated that there is a potential role for the public sector in providing support in the financing of ESTs. This section looks in more detail at some of the mechanisms the public sector can use to support EST transfer. Firstly, it is worth reviewing why governments may feel they have some justification in becoming involved financially in supporting the uptake of ESTS by SMEs. The more important reasons appear to be: Levelling the playing field - subsidies are often difficult to remove for political reasons, yet may encourage unsustainable behaviour. Unsupported ESTs, whose benefits include saving subsidised resources, are at a competitive disadvantage. Gaining a public good - Using ESTs may generate a major public good (e.g. clean air), but the user of the technology does not directly benefit. Opening the market - existing market structures may be prejudiced against new technologies or methods, creating high barriers to entry, so supporting measures get the market started makes sense. These justifications suggest that governments have a valid role to play. In suggesting where they should take action, it is necessary to consider where SMEs, or their financiers, may be failing to invest in ESTs, and for what reasons. The following four areas appear most important. Capital Costs The initial costs of ESTs can be prohibitive for SMEs and the returns insufficient to justify investment. If there are wider public benefits, the government can justify actions which effectively reduce the costs of EST to SMEs, thus making ESTs attractive investments for small businesses. Required Returns Similarly, small businesses often require very quick paybacks and seek high rate of return on their capital. Governments can help with actions to reduce the cost of financing for such business. Most effective are measures which involve dedicated finance or make it possible to pay for EST on a "pay as you go" basis, particularly through off-balance sheet financing. Transaction Costs From the perspective of financial institutions, the costs of dealing with a large number of small financing requests (i.e. analyzing individual deals, administration etc) can act as a major deterrent to significant investment in small businesses and ESTs. Action to reduce these "financial overheads" can make loans to SMEs more attractive to financiers. Similarly, from the perspective of the small business, unless the EST under consideration is central to the business, they will not want to spend substantial time arranging finance, so streamlined financial procedures can also increase their willingness to acquire ESTs Reducing Risks In addition, financial institutions can be deterred from lending for EST use by SMES, because the risks (real or perceived) are seen as too high - these may include both business risks and technology risks. Financial institutions tend to place a high premium on new or unknown areas of business. Thus governments can help private finance by taking direct action to reduce the risks, through a variety of mechanisms. Below we analyse some of the mechanisms that the public sector can use to encourage the financial sector to increase investment in ESTs in small businesses, by addressing one or more of these obstacles. Government action can take the form of either fiscal measures, involving changes to the tax code, or financial measures, involving direct expenditure by the public authorities. FISCAL MEASURES 7.1 TAX ALLOWANCES Offering 100% allowance on "green" capital expenditure is one mechanism which can make it much more attractive to invest in ESTs, by reducing the effective capital costs to business. It has been tried in a number of different regimes, and in certain cases the effect has been dramatic. Advantages: Can be very effective in opening the markets Relatively easy to administer (does not need specific administration) Disadvantages: Expensive to the government (although the costs are hidden) Often results in quantity not quality Does not reward operational performance. Limited to hard technologies, and can be difficult to focus. Does not, in itself, provide addition capital. Less effective in the informal economy or where businesses are already not paying much tax. Recommendations: Tax allowances are a very effective way of kick starting markets, and can lead to a rapid growth. However, in the longer term they can distort the market and are expensive, and so should not be maintained indefinitely. However, it is important to ensure that the tax regime is not prejudiced against ESTs, and indeed a moderate bias in favour of ESTs can be useful. 7.2 TAX INCENTIVES FOR GREEN INVESTMENT Many countries have favourable regimes for investment in SMEs, including reduced tax rates, special allowances and the ability to offset SME investment against income tax. These regimes have proved useful in attracting investment in SMEs. There is scope for these incentives to be extended or focused on environmentally sound investments in particular. For instance, the Dutch Government has recently created a major green investment scheme where investment, through approved funds, in areas such as organic farming and renewable energy, receives very favourable tax treatment. Advantages: Attracts external finance Can mobilise large sums of capital quickly. Disadvantages: Can again cause a focus on quantity not quality Need to define eligible areas carefully. Recommendations. If specific areas can be clearly identified where substantial external financial needs exist, then green investment incentives can be very effective. Overwise, a general focus on a favourable tax regime for investment in SMEs generally is likely to be more appropriate. 7.3 RESOURCE TAXATION/SUBSIDY ELIMINATION There is widespread recognition that the governments should improve the working of market mechanisms through ensuring that environmental costs are included in prices. This can be done through a variety of ways, the two most common being subsidy removal and environmental taxation. Such mechanisms will have a direct effect on the attitude to SMEs to ESTs, as they directly improve the bottom line benefits that ESTs can bring. Advantages Enhances Market forces Revenue generating Address the end result directly, rather than the means to that result Disadvantages Political difficult to implement On their own, are negative than encouraging. Recommendations Correcting market prices to account for environmental externalities is an essential part of progress towards sustainable development. Practical limitations will dictate the rate of movement in this area, and indicate the need for other activities and mechanisms. In seeking to implement such changes, authorities should aim to recycle any revenue generates to reduce the immediate impact on SMEs, and so enhance their acceptability. FINANCIAL MEASURES 7.4 GRANT AND AID FINANCING The public sector can directly support the costs of Environmentally Sound Technology. While there is a general consensus that governments are best advised to move aware from subsidies and grants, direct financial support can be justified in the area of ESTs if the benefits are large enough. Advantages: Effective at eliminating financial obstacles Can be useful in opening new markets Can apply to "soft" technologies Can be integrated with bilateral or international aid programs. Disadvantages: Expensive to the public sector Can be difficult to define suitable areas for support Often bureaucratic in administration (to prevent fraud) Recommendations: With "hard" technology, grant finance is best used to open markets and to achieve critical mass in particular industries. It is particularly important to achieve maximum leverage, for instance by getting commitments from industry, or by applying grants high up the value chain. Carefully evaluation of the benefits is essential. Plans for a gradual withdrawal of support should be developed and made public from the start, to avoid industry developing dependency on government support. With "soft" ESTs, i.e. knowledge based, grant financing may be more useful. Supporting activities such as advice centres, or providing partial support for advisory services, such as environmental audits, can be useful and effective, and is likely to help in areas where other finance is not really available. In most cases, the recipient business should make a contribution to costs. Often a number of phases of support may be needed, but the contribution of the SME should increase in subsequent stages, as the benefits to the SMEs are increasingly identified. A useful extension or alternative to pure grant financing is the idea of a revolving fund where the grant funds are returnable if profitable use is made of them - e.g. if an environmental audit identifies saving greater than its cost. The advantage of revolving funds is that they can be used several times over, thus making much greater use of the available resources, although eventually they will still be depleted. 7.5 EXPORT FINANCE Most OECD countries offer forms of government supported export finance. At a minimum, such support involved covering most of the country risk involved with payment. However, most export finance agencies go beyond this and offer financial packages to the overseas purchaser, which not only makes exporting more attractive for the domestic company, but also enables them to win business by offering a more complete package. However, little has been done to focus export finance schemes on ESTs in general. In particular, SMEs rarely benefit from such programs as sums involved are generally too small (i.e. less than $1m). Advantages: Supplier focused Links to trade promotion Disadvantages Applies to international traded products. Size limitations. Can be bureaucratic Recommendations: Export finance offers substantial potential for financing ESTs, and would enable the sponsoring governments to support both their own industries and sustainable development generally. Appropriate mechanisms are needed to work with the smaller amounts required, for instance, using standardising contract terms and using approaches such as leasing. 7.6 LOAN GUARANTEES A number of governments have introduced schemes to guarantee loans made by banks to small companies, with the intent of encouraging greater lending to the sector. Such schemes normally involve the government providing a guarantee for the majority of the sum lent in exchange for a premium. Such schemes removes much of the risk of lending to the small business sector from banks, and thus encourages them to increase lending. There is potential to focus loan guarantee schemes on ESTs and other areas of particular eligibility. Advantages Can increase lending significantly Can be applied across a wide range of businesses Disadvantages: Often limited to "hard" assets Avoids banks having to analyse risks properly Can be expensive if guarantees activated. May freeze out companies who don't meet requirements. Recommendations A loan guarantee scheme can be a highly effective way of encouraging lending to small businesses. There would appear to be substantial potential for targeting the loan guarantee schemes at key technologies or industries, or making environmental factors a key element in approving applications. In additions, loan guarantee schemes could be linked to some of the other programmes suggested here - for instance, the guarantee premium could be paid out of a grant scheme if the funding was for ESTs. 7.7 LEASING SUPPORT MECHANISMS Leasing is one of the most popular ways of providing finance for SMEs. The key features of leasing are that security comes from the asset being financed, and it is often initially offered by the equipment supplier, as part of its sales effort. It has been widely used in areas such as computer equipment, motor vehicles telephone systems. If leasing of ESTs could be encouraged and established as viable, it would make it much easier for SMEs to acquire ESTs. However, before offering lease finance on ESTs, leasing companies need to be convinced that the markets are large enough to justify the effort involved in establishing new lines of business and that the risks are acceptable (note that if the technology fails to perform, companies will not make their payments). Public sector finance can help overcome these risks by helping to underwrite the initial costs of new leasing programmes and by proving forms of risk protection. Advantages: Offers substantial leverage. Can be distributed through the equipment seller, reducing bureaucracy and overhead charges. Intrinsically a low cost form of finance. Disadvantages: Largely limited to physical goods Recommendations: Where applicable this is one of the most effective ways of leverage and using public sector funds to transfer ESTs. For certain issues and technologies (two key examples are small scale renewable energy systems, and low pollution motor vehicles), they could be a very potent way of leveraging millions of dollars of private sector capital. However, leasing cannot generally be used for "soft" technology. 7.8 TECHNOLOGY GUARANTEES Public funded technology guarantees have been suggested as an effective way of encouraging the uptake of new technologies, by explicitly absorbing the technology risks which a major obstacle to finance. Technology guarantees could be particularly important in project financing, where investment cycles are long, and concern over technology risks can act as important barrier to finance, such as in the energy sector. However, this is likely to be relatively rare with SMEs. Where technology guarantees may be important in terms of with SMEs is indirectly in areas such as leasing, where there may be some concern over the performance of new technologies. By including technology guarantees as part of the overall support package, the potential to attract finance can be greatly enhanced. However, in providing guarantees of new technology, the public sector guarantor should undertake a very careful evaluation of the technology and the risks involved, include indemnities from the technology vendor. 7.9 EST RIGHTS BANKS The idea of Environmental Sound Technology Rights Banks have been suggested as a way of encouraging the dissemination of EST technology. The suggestion is for public sector bodies to purchase the rights to key technologies, where cost is seen as an obstacle to their wider use. The technologies would then be disseminated at a lower cost to a wider range of businesses. Underlying this, is a sense that developers of ESTs may be interested in profit maximisation by selling to a limited set of customers at high profit "cherry picking" rather than selling to a wide range of customers at a low profit, which is clearly in the broader public interest. For EST Rights Banks to make sense, the "intellectual property" component of the price has to be significant (if the EST is expensive to produce anyway, then the ability of an EST rights bank to reduce costs will be limited without grants or subsidies), and there has to be clear evidence of "cherry picking". In most areas of EST the markets are fairly competitive, as a number of different technologies compete for market share, and rarely does a new technology appear which is dramatically better than its competitors, thus competition tends to limit the scope for profit maximisation. Even where new technologies emerge, prices tend to be limited by the need to make the product attractive to purchasers, and indeed technology suppliers are increasingly adept at creating selling strategies to both make high margin, low volume from key customers and low margin, high volume sales from the mass market if the potential exists. Advantages Reduction in costs to end purchaser Disadvantages Lack of commercial pressures driving product dissemination Difficulty in selecting appropriate technologies Risk of technology being superseded. Potential for conflicts of interest, if government is both technology owner and regulator. Recommendations It does not appear immediately apparent that there are many cases where an EST rights bank would act as a significant incentive to dissemination of ESTs. Even should cases arise, better mechanisms are likely to exist for ensuring the accelerated develop of ESTs, including use of some of the other mechanisms discussed here. In general, if technologies are identified where there is a concern over technology dissemination, it is likely to be most appropriate to develop a partnership approach to solving the problem - most companies are likely to be interested in working with governments if the mutual goal is to accelerate market penetration. 7.10 VENTURE CAPITAL SUPPORT PROGRAMS Venture capital provides equity capital to medium sized companies seeking to expand and develop. Venture capital is normally a high risk, high return investment and is normally best undertaking by the private sector with little government involvement. The public sector can help indirectly by ensuring there is an appropriate regulatory framework, supporting training, helping with the initial costs of fund development and provide some investment. There is some interest in ESTs by venture capitals, and governments can help increase this by explaining the business advantages of ESTs to venture capitalists, supporting linkages between venture capitals and EST technology centres, and providing pre-investment grants to enable EST related deals to be prepared to a high quality. Advantages High level of leverage Applicable to most industries Able to attract external finance, including international Disadvantages Primarily relevant to medium sized business Less relevant to non-core expenditure Recommendations While venture capital is only appropriate in certain cases, action to increase the awareness of the venture capital industry of the benefits of ESTs would be an effective way using public funds. However, any activities should be very sensitive to the needs of venture capitalists themselves. 7.11 ENVIRONMENTAL PERFORMANCE CONTRACTING Performance contracting involves an intermediary providing a complete package to the customer, which may include equipment sales, financing, training, monitoring etc. In many cases the intermediary is paid out of the benefits accrued. For SMEs, by offering them a complete package, such contracting is often very attractive. It is most developed in the area of Energy Service Companies. A highly entrepreneurial activity, some successful models have been developed, but many others have struggled - the challenge is to find a robust, profitable and highly replicable model. The public sector can help support such initiatives through, for instance, supporting initial costs and feasibility studies. Advantages Potential to have a major impact Addresses business needs Disadvantages High risk Requires entrepreneurs and successful formula Not appropriate in all circumstances. Recommendations Despite the risks, supporting the development of enterprises in this area appears well worth considering, given the high risks and costs involved and the potential for major public benefits. In providing support funds, the public sector will need to ensure that applicants have the right entrepreneurial streak, are highly ambitious, and want to create a wide ranging business. Suitable applicants may not always emerge. SUMMARY While there are a wide variety of different of financing mechnaisms for ESTs that can be supported in various ways, public sector assistance for these mechanisms comes in a relatively small number of different forms. These are summarised below. Direct Funding Grants, full or partial to cover EST costs Information Dissemination Supporting the costs of information gathering and disemmination Partner Identification Supporting the costs involved in searching for partners (technical or financial) Start up costs Covering the costs involved in developing new financial products and programmes Deal Packaging Funding the costs of preparing individual deals or projects to a level where they are "bankable" Risk Sharing Sharing the risks involved in certain financial products, either directly or through third parties. 8. CONCLUSIONS AND RECOMMENDATIONS The findings of the survey are encouraging in that they show there is significant interest in ESTs among financial organisations involved in supporting SMEs and the case studies demonstrate that there are already a variety of possible ways that financial institutions can become involved helping to accelerate the transfer of ESTs to SMEs. It appears probable that appropriate action by the public sector authorities to develop linkages between financial institutions and those interested in promoting ESTs will yield positive results. There is also scope for the public sector to support the development of a number of more direct financing mechanisms, which would aim to encourage financiers into this area and help overcome obstacles such as financial market inertia and risk-aversion. The result of such actions should be to help achieve the objective of increasing the flow of capital into ESTs. While improving linkages and support mechanisms can help enhance the functioning of the current system, there is only so far that such measures can go. For further progress, the "playing field" has to be shifted, by improving the overall climate both for small business finance and for EST use. The greatest impact is likely to come from a co-ordinated approach involving the "carrot" of support mechanisms to enable the acquisition and use of environmentally sound technologies, combined with the "stick" of measures to prevent use of polluting practices, whether market based or regulatory. If effective measures to improve the financing of environmental sound technology are in place, they will increase the impact of regulatory or other measures which address the environmental problem directly, as well as potentially reducing the level of opposition to stronger measures. It is therefore appropriate to repeat two general recommendations that have been made on many other occasions, but are still relevant in the context of financing of ESTs transfer to Small and Medium sized businesses. Recommendation Increase the market for ESTs There is no doubt that the uptake of EST would be enhanced if the reasons to install them were strengthened. Promising strategies include more effective and consistent enforcement of existing regulation and full-cost pricing of resources. Judicious further regulation and reforms may also be needed, but while not bowing to the needs of industry, industry should be consulted and involved to ensure environmental objectives are achieved at least cost. A predictable, systematic and gradual tightening of standards can be particularly effective. Recommendation Improve the financial regime While EST financing faces particular constraints, many of the obstacles are similar to the conventional difficulties faced by small and medium-sized businesses in the emerging markets. Thus priority should be placed on improving the overall availability of finance to SMEs, through deregulation, capacity building, and favourable tax regimes. Focus should be placed on venture capital and other risk-taking investors, lease financing, and microenterprise financing. These two measures will not only help improve the macro-economic framework to encourage the acquisition and financing of ESTs by SMEs, they will also help ensure that more direct intervention is not needed permanently and as a result does not become a drain on public resources. Thus, in directly supporting the creation of linkages and other mechanisms to promote the financing of EST acquisition by SMEs, the aim of public sector sponsors should be to be catalytic: to help to open new markets, bring together participants and overcome start up risks. As we have identified, there are clearly many different ways that public sector support could take place. However an analysis of the various different mechanisms suggests they fall into two broad categories: Information related Mechanisms These aim to improve the level of information on the financial benefits of ESTs, to channel that information to the financial community (to improve there internal analysis), and to encourage the financial community to disseminate that information to their SME customers (to help SMEs access ESTs) - at the very least, financial institutions should be able act as a referral agency, advising companies on where they can get help on ESTs. In addition, support could be provided to mechanisms which aim to identify potential financiers for ESTs, for instance by building links between technology transfer centres and financial institutions. Deal related Mechanisms In contrast there are a number of more specific mechanisms where public support is more directly involved in the preparation of deals and the mobilisation of finance. These include funding start-up costs of new financial mechanisms, covering the costs of deal packaging and other transaction costs, sharing risks financial markets are reluctant to assume, and even action to reduce capital costs (through either direct funding or tax allowances). These two different types of mechanism suggest (but do not equate to) to two different approaches to public sector support to improve the financing of ESTs in SMEs. Because the more specific measures are relatively expensive and require a high level of commitment their use is best restricted to areas where there is a strong need. In contrast, the broader, information based measures can be applied much more generally. As a result, we recommend the use of the following two models to develop programs to support and encourage the financing of ESTs: 1: The environmental problem driven model This "bottom up" model identifies key environmental problems and then mobilises finance in response to them on a detailed, specific level. 2: The macro model This "top down" model aims to generally encourage the flow of ESTs to SMEs by improving information and financial market awareness, and by helping to create linkages. The two models are described in more detail in the final section. A third approach might be a technology driven model which focused on particular technologies and sought to accelerate their dissemination. Such a model is not seen as appropriate as a basis for public support, because without first justifying the need, appropriateness and importance of a particular environmentally sound technology there is no particular reason why such technologies merit special support. PRINCIPLE RECOMMENDATION: Develop mechanisms to encourage the Financing of ESTs by SMEs There is substantial scope to develop mechanisms to encourage the financing of EST acquisition by ESTs. Such mechanisms should be based on one of two models outlined above. In addition, account should be taken of the key points outlined below to ensure a positive response from financial institutions. Finally, success more likely to be achieved if there is a degree of focus, but even so will take persistence and commitment. Key considerations in dealing with financing institutions - The financial market is probably even more impatient and intolerant of bureaucracy and delays than general industry. Thus, any proposed mechanisms need to be efficient and as user-friendly as possible - for instance, it is preferable for the management of any mechanisms to be done by the private sector. - If deals or financing propositions are presented to potential investors, emphasis must be placed on ensuring they are of sufficient quality. While general training and support can help, deals may need individual support to ensure they meet investor needs. - Information on ESTS should be targeted to the needs of financiers. This means a 99% focus on the business/finance-related benefits and 1% focus on the environmental benefits. While progress has been made in this area, there is room to increase the demonstration of the overall impact on the business of EST and the competitive advantages gained. - In many cases a focus on building partnerships with EST suppliers and financiers may be better than focusing on the users/purchasers. particularly if the EST is not central to the business of the purchasers. This offers the advantage of concentration: far fewer organisations need to become involved. If suppliers can offer a packaged service including finance, they are much more likely to win sales. The finance involve export finance, lease finance arrangements or more complex techniques such as performance contracting. Even using the two models, there are clearly a wide variety of ways of actually implementing linkages and support mechanisms. The most appropriate financial mechanism will vary depending on both the size of the business and the scale and type of EST being contemplated. Then the most appropriate form of public sector support will vary depending on the financial mechanism. In following section, a table is provided which summarises the most appropriate financial mechanisms for different types of EST needs, and the most appropriate public sector response, and will help provide an overview for policymakers of the options applicable to them. However, in view of the potential complexity and variety of the possible financial mechanisms, it is important that the international community shares and compares information on the practicalities and effectiveness of various initiatives. As a result the final recommendation is: Recommendation: Co-ordinate information on EST financing mechanisms An international organisation should take the lead in sponsoring a centralised source of information on establishing linkages to the financial markets. The different types of linkages should be gathered, and their performance monitored. Ongoing analysis should be conducted on the success factors of individual linkages, and advice provided to those seeking to develop new linkages. In conclusion, this report has found that while official support and funding over the transfer of ESTs has reasonably successfully moved into areas such as technology demonstration, information dissemination, and partner-finding, there is now both potential and need for such action to build linkages between financiers of small and medium enterprises and EST owners and centres, and provide support mechanisms to encourage the development of financial flows. Such linkages offer the potential to accelerate the transfer of ESTs, and to enhance the leverage obtained by public sector finance in a time of budget reductions. 8. RECOMMENDED MODELS FOR SUPPORTING THE FINANCING OF EST TRANSFER 8.1 ENVIRONMENTAL PROBLEM DRIVEN MODEL Applicability: Major environmental problems associated with relatively narrow sectors of industry or small regions. Ability to be addressed by technology. Outline: 1 Identification of critical environmental problems for action and intervention, 2. Identify priority areas to address in terms of industries. Ideally should be relatively few sectors involved. Begin industry dialogue as to how to address these problems. 3 Identify key solutions, including ESTs. Assess for appropriateness and cost-effectiveness. Analyse whether EST are currently financial viable in their own right, if not, consider what regulatory or fiscal action is required. 4 Identify key financial sources, given the industry type and the proposed EST solutions (See table below). Assess total market potential, key suppliers etc. 5 Begin dialogue with financiers, possibly in conjunction with EST supplier and/or industry. Develop financial proposals that are: - Potentially large (in total volume) and profitable. - Well packaged and of high quality: this may involve financial support 6 Identify additional support mechanisms that may be necessary - risk sharing, guaranteed markets etc. Assess cost effectiveness. 7. Monitor and review performance against specific environmental problem. 8.2 MACRO DRIVEN MODEL Applicability Broad development of market for financing of ESTs. Outline 1 Identify broad market areas of concern - e.g. general sectors known to be have significant polluters, cross-sectoral issues of importance (e.g. energy efficiency) 2. Identify what the role of ESTs is likely to be and gather both general information and specific, practical examples of the financial benefits of ESTs. 3. Disseminate information on financial benefits of ESTs in case studies to financiers. Thus could include seminars and workshops, but emphasis must be on the financial bottom line. Demonstrations of competitive advantage should be given. Also focus on the negative - businesses losing competitiveness through failure to invest in ESTs 4. Establish links between EST dissemination bodies and financiers - including: educating those responsible for technology dissemination about the needs of financiers. 5. Provide funds for deal packaging (a revolving fund model appears most sensible here), to ensure deals are developed to high standard, if technology centres are to send deals to financiers. 8.3 SUMMARY MATRIX OF EST FINANCING NEEDS AND SUPPORT MECHANISMS Business size Type of EST Appropriate type Public support need of finance mechanisms Medium Major Venture capital DP, ID, PI Sized (strategic investors PI Enterprises (Bank Financing) ID, RS Minor, hardware Leasing SU, RS, (DP) Performance cont'tg SU, DP, (RS) (Balance sheet) ID Minor software Balance sheet ID Revolving funds DF (grant funding) DF (bank financing) ID (Performance cnt'g) SU, DP, RS Small Major, plant Bank financing RS, ID Sized modernisation (venture capital) DP, PI, ID Enterprises (strategic investors) PI Minor, hardware Leasing SU, RS, (DP) (Performance con) SU, DP, (RS) (Balance sheet) Minor, software Grant funding DF Revolving funds DF (Balance sheet) ID Micro- Major/ general Special lending SU, DF Enterprises Bank financing ID, RS Hardware Leasing RS, SU, (DP) Software Grant funding DF Recommended sources of financing are indicated, with additional sources in brackets. Balance sheet funding means through companies existing financial resource mechanisms. The public sector support mechanisms are: DF Direct funding of costs ID Information dissemination, especially on financial benefits of ESTs PI Partner identification (Financial, technical as appropriate) SU Funding start up costs of new financial initiatives. DP Funding deal packaging or proposal development costs RS Risks sharing, including technology or business risk. APPENDIX 1 QUESTIONNAIRE AND BRIEFING NOTE Enclosed is the questionaire as sent to the international venture capitalists. A slightly modified version was sent to the India based venture capitalists. ACCESS TO FINANCE FOR ENVIRONMENTALLY SOUND TECHNOLOGIES BRIEFING NOTE As a professional involved in the finance of high growth companies in the emerging markets, you are well aware of the commercial pressures companies are under to reduce costs and improve performance. You may be less aware of the environmental pressures that rapid development can produce, except as a source of additional costs and bureaucracy. Reconciling these pressures is a significant challenge. However, technological developments are starting to offer a solution by making it possible for businesses to reduce environmental impacts while reducing business costs. These technologies are called Environmentally Sound Technologies (ESTs). A substantial body of evidence is emerging to illustrate the business benefits of EST. However, despite this, the uptake of ESTs by business has been disappointing, particularly among small and medium sized businesses. One potential reason may be access to finance, as acquiring ESTs can involve additional capital expenditure. Obtaining this finance can be difficult, even if there is a rapid payback on the investment. This study is looking at the financial markets to assess whether this is the case and if so what actions can be done about. What are Environmentally Sound Technologies? Technologies, including necessary support and services, which enable functions to be fulfilled with reduced impacts on the environment, while making sense in business terms. There are two principal types of EST. Firstly, there are those technologies which help improve the manufacturing process - this includes both "end of pipe" technology and clean process technology, but with an emphasis on the latter. Secondly, there are those technologies which are needed to manufacture environmentally superior products, for instance, energy efficient light bulbs or CFC free refrigerators. It should be noted that the best environmental technology may not even be perceived as environmental, it is merely the best technology. Clean technology is a term sometimes used instead of ESTs. What are the advantages of ESTs? - Reduced costs of raw materials and resources, including power and water - Reduced wastage and disposal costs - Improved compliance and reduced regulatory interference - Reduced future liabilities - Improved quality products, reduced defects - Improved working conditions and employee motivation. Some of these advantages will have immediate bottom line benefits. Others may be of more indirect advantage but should still result in improved business performance. Note that there is emphatically no altruism here: companies are not expected to use ESTs if the benefits are purely external. Note also that there are clear links to many other management themes such as quality, cost minimisation, and employee motivation. However, it should also be noted that the advantages of ESTs, while real, may not be readily apparent in many companies accounting systems - (for instance, waste disposal costs may be treated as a general overhead, rather than related to individual costs of production). What are financing needs for ESTs? For the use of ESTs to become widespread, there are a number of different types of financing needs. These include: - The general manufacturing company needs capital to finance its acquisition of ESTs which improve its manufacturing process. Modernisation or expansion can provide an opportunity to incorporate ESTs. Normally these technologies will be purchased from industrial suppliers. Most industries have the potential to use ESTs, including important sectors such as: Chemicals, textiles, cement and semiconductors. - Companies involved in manufacturing and distributing ESTs have capital requirements for business development. It should be noted that we are not here interested in funding the development of new technologies, but instead the distribution of proven technologies, particularly into new markets. One area of special interest is the funding of joint ventures to accelerate access to specific markets. - Companies involved in manufacturing clean products also need capital for business development and for the acquisition of technology. Because the technologies are often proprietary, licensing and joint ventures are an important way of distributing these kinds of technology. - Companies involved in developing infrastructure such as power, water and mass transit are often significant users of ESTs, with special funding needs (however the bulk of the investment required will be not usually be for ESTs). Note also that our focus is particularly the small and medium sized companies, rather than the largest companies where access to finance is less of a problem. We are also primarily interested in such companies in the emerging markets. About Delphi International Delphi International is a financial advisory group specialising in the sectors of clean energy and environmental businesses, with particular expertise in the emerging economies of Asia. We help companies and projects secure equity and debt finance, notably for strategic business alliances and joint ventures. We also work with sponsors on the development of private equity funds, growth funds and other innovative funding vehicles. Please contact us if you would like more details about our activities. About the United Nations Commission on Sustainable Development The UN Commission on Sustainable Development was set up as the official follow-up to the Earth Summit in Rio de Janeiro in 1992. One of the "leaner" UN organisations, it is responsible for developing policies to implement sustainable development. It has direct ministerial access in most countries, and its policy recommendations carry significant weight. ACCESS TO FINANCE FOR ENVIRONMENTALLY SOUND TECHNOLOGIES. Once you have completed this questionnaire please fax it to Mark Mansley on (44) 171 404 0326 by the 16th December 1995. Name: ________________ Organisation: _________________ Position: ________________ Fax no: _________________ 1. OVERVIEW 1.1 Are you familiar with the concept of environmentally sound technologies (EST)? Yes: ■ No: ■ 1.2 Do you think that the advantages of EST are significant from a business/investment perspective? Yes: ■ No: ■ Don't know: ■ 1.3 Do you have adequate access to information on ESTs? Yes: ■ No: ■ Don't know: ■ Comments: __________________________________________________ __________________________________________________ 2. YOUR INVESTMENT PRACTICES 2.1 Do you conduct due diligence on the process technology being used by companies you are involved with? Yes: ■ No: ■ 2.2 Does this due diligence specifically look at and compare the resource efficiency or cleanliness of the process technology? Yes: ■ No: ■ 2.3 Do you assess, at present, whether companies you are involved with are efficient in their use of raw materials, energy and water, in comparison with their competitors? Yes: ■ No: ■ 2.4 Do you assess whether companies you are involved with may be running significant environmental risks? Yes: ■ No: ■ Comments: __________________________________________________ __________________________________________________ 3. ADDING VALUE TO COMPANIES YOU ADVISE/INVEST IN 3.1 Are you currently helping companies you are involved with access information on ESTs? Yes: ■ No: ■ 3.1A If Yes what sources of information on EST do you currently use? International Organisations (e.g. World Bank, UN) A lot Some Not Government / regulators Universities / Technology centres Trade press / Commercial information sources Trade associations / Chambers of commerce etc Businesses Other (please specify) 3.1B If you answered No to 3.1, would you be interested in helping companies access such information if you had access to it? Yes: ■ No: ■ 3.2 How useful would the following categories of information be? Very Not Useful Regulatory 1 2 3 4 5 Technological Managerial Marketing Other (please specify) Comments: __________________________________________________ __________________________________________________ 4 FINDING DEALS 4.1 How significant are the following constraints on the development of your business? Large Some No Constraint Quantity of deals you receive Quality of deals you receive Availability of capital Internal resources, e.g. experienced professionals 4.2 Would you like to receive deals from a third party source, such as a technology transfer centre involved in promoting ESTs? Yes: ■ No: ■ Don't know■ 4.3 If such an organisation were to send you deals, how important is it that they ensure potential deals have the following attributes before contacting you? Very Not Important 1 2 3 4 5 Good business plan / well packaged proposal Good financial prospects / rate of return Strong partners and existing backers Experienced / professional management Strong technology rights (e.g. patents) Good business agreements (e.g. license/ JV) Good marketing proposition Other (please specify) ________________________ 4.4 Assess your level of interest in the following classes of company: Very Not Interested 1 2 3 4 5 4.4a General companies requiring capital to invest in EST, e.g. for modernisation / expansion: 4.4b Companies developing and manufacturing EST such clean process technology, including joint ventures: 4.4c Companies producing "clean" retail products, including through joint ventures: 4.4d Companies/projects requiring capital for infrastructure projects Comments: __________________________________________________ __________________________________________________ 5. ENCOURAGING THE USE OF ENVIRONMENTAL SOUND TECHNOLOGIES How effective do you think the following policy mechanisms would be in increasing your interest in investing in ESTs? Very Not Effective 1 2 3 4 5 5.1 Improving information on the availability and benefits of ESTs 5.2 Technical assistance and pre-investment financial assistance, for instance, to help companies improve their documentation 5.3 Tax allowances on installing ESTs 5.4 Public sector subsidies/grants for ESTs 5.5 Tighter regulation and enforcement of environmental matters. 5.6 Specialised financial mechanisms such as leasing 5.7 EST Rights Banks. (these are public owned bodies which would acquire the rights to various ESTs and then distribute the technologies at a reduced cost to businesses in a particular country). Comments: __________________________________________________ __________________________________________________ 6. INFORMATION ON YOURSELVES This information will be kept strictly confidential and only used for analytical purposes within the scope of the project. 6.1 What type of companies (e.g. start up, expansion) do you invest in? ___________________________________________ 6.2 What is your deal size range? ___________________________________________ 6.3 Which sectors are you most active in? ___________________________________________ 6.4 In which sectors do you avoid involvement? ___________________________________________ 6.5 Which countries and regions are you predominately active in?___________________________________________ 6.6 How many companies do you invest in / have you helped (approx)?___________________________________________ 6.7 How much funds / assets do you have invested / have you placed?___________________________________________ 7 FOLLOW-UP 7.1 Would you be prepared to take part in a telephone interview of approximately twenty minutes? Yes: ■ No: ■ THANK YOU VERY MUCH FOR YOUR TIME AND CO-OPERATION. (If you have any additional comments or suggestions please enclose them on a separate sheet) APPENDIX II RESPONDENTS TO QUESTIONNAIRE CONFIDENTIAL The following is a list, and brief summary where possible, of those organisation who responded to the questionnaire. The information has been provided on the understanding that it would be treated as confidential. UK RESPONSE LIST: Equator Bank Equator Investment Bank is UK based, and interested in start up & expansion companies. They are predominantly active in Sub Saharan Africa, concentrating in mining, agriculture and industrial sectors. Equator avoids the military sector. Their deal size ranges between $4.5k - $100k, to date they have invested and helped well over 30 companies . Advent International Advent is an independent venture capital firm based here in the UK. They have over $1bn under direct management in the UK with a portfolio of more than 200 companies . They invest in all stages of company development, deal size ranging between $5-$50M. The respondent was predominantly active in E and Central Europe, but Advent covers most markets. Advent International engages in all sectors with the exception of armaments, tobacco and alcohol. Oxford International Associates Their main interest is the emerging markets and venture capital. Deal size ranges between $2-$5m, and they are active in infrastructure and manufacturing sectors. Oxford is active in South Asia, Southern Africa and the Caribbean. To date Oxford has helped over 120 companies and has over $200M invested (1993- 1995). Murray Johnston Based in the UK, their deal size ranges between ť500k-ť15M. Active in a number of sectors however they avoid high technology. They have helped over 500 companies since 1980 and invested well over ť500M. Mainly active in the UK although with interest in the emerging markets. DEG The DEG (German Development Bank) active in a number of sectors, particularly manufacturing, mining, energy. DEG focuses on the emerging markets, their deal size ranging between 2-45m Dm. The DEG has invested in well over 300 companies, funds invested to date is well over 2,366mDm. Commonwealth Development Corporation (CDC) The CDC focuses on the emerging markets, their deal size ranges between ť2m- ť3m and they are active in the agriculture and industry sectors, avoiding armaments and broadcasting. They have helped directly well over 380 companies and invested over ť1.5Bn. Hancock International Private equity management company, with the emerging markets as a growing area of interest. Have worked on a number of development projects, deal size ranges between $10-$100m. Have helped or invested in over 30 companies. US RESPONSES Oppenheimer & Co A large venture capital house covering most markets. First Analysis First Analysis is an investment research organisation managing the oldest environmental private equity fund in the US. Interested in companies at different stages of development, operating mainly in the environmental sector. Active in the US and Europe they have helped / invested in over 70 companies. (Invested funds over $250m) Increasing interest in Eastern Europe and the emerging markets Global Environment Fund The Global Environment Fund is an investment partnership, engaged in development , manufacturing, and distribution of environmental products, technologies sectors. Their deal size ranges between $1--$10m, to date they have invested in well over 50 companies and invested over $140m. Intermatch Corporation Intermatch Corporation is a developer / promoter of business opportunity and financial advisor. Main area of interest is the emerging markets. Active in mining, manufacturing among others. They did not disclose funds placed. India Responses TATA Industries Interested in start up / expansion companies, area of interest telecom, electronics aviation etc. Active in India they have invested in over 10 companies (did not disclose funds placed to date). Commonwealth Development Corporation (India) Invest in start ups / expansion companies Deal size ranges between ť3m-ť30m in India To date they have invested well over ť140m in India and have invested in /helped over 30 companies. Industrial Credit Investment Corporation of India ICICI Indian based financial institution, they invest in start up/expansion companies. Deal size ranges between ť.2m-ť1m and they have helped well over 10 companies to date. Engage in paper, steel, leather sectors and have invested over ť3m. South East Asia Responses Preferred Energy Investments Environmental / financial advisory company. Deal size ranges between $2-$5m Most active in renewable energy, water/solid waste sectors. To date have invested in about 7 companies (however did not disclose amount of funds placed) Philippine Venture Capital Investment Group Venture Capital group based in the Philippines, deal size ranges between $1- $10m. To date they have invested in over 10 companies, in both services and the manufacturing sector. H & Q Asia Pacific Singapore based venture capital group, interested in start up/expansion companies. Deal size ranges between $2-$6m, engaged in technology sector. Operate in the ASEAN region, well over $320M invested. Part of one of the largest venture capital groups. Yayasan Binausaha Lingkungan Interested in expansion companies, deal size ranges between $125.000-$350.000. Most active in renewables, ecotourism sector avoiding sustainable forestry and agriculture. Have invested/ helped about 5 companies, funds invested to date total $600.000. Transpac Capital Interested in companies at all stages of development, their deal size ranges between $1m-$50m. They are active across most sectors e.g. manufacturing. Invested in over hundred companies. $400m invested to date. Africa Responses Cavemont Merchant Bank Small Zambian based Merchant Bank, active in export oriented sectors. Cavemont is interested in start up/expansion. Deal size ranges between $100.000-$5m. Have over $10m and have invested in about 10 companies. Zimbabwe Development Bank Development Bank, interested in start ups /expansion. Minimum project size Z$ 200.000, active in a number of sectors agriculture, mining, manufacturing etc. 1995 approved over 71 loans, loans valued at Z$14.6m. NOTES 1/ A US-based organisation, the Tellus Institute, has been working with the USEPA and several large companies to develop an alternative ■total cost assessment■ approach to evaluating clean technology investments. See Allen White, Deborah Savage and Monica Becker, Total Cost Assessment: Accelerating Industrial Pollution through Innovative Project Financial Analysis, USEPA, 1993. 2/ The figures are based on developed country figures; those for developing countries will be correspondingly lower. 3/ Again, these are figures for developed countries. 4/ International organisations, governments/regulators, universities/technology centres, trade press/commercial information sources, trade association/Chambers of Commerce, and businesses 5/ The Business Council for Sustainable Development is now the World Business Council for Sustainable Development.
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Date last posted: 3 December 1999 10:27:35