Cleaner production financing: possibilities and barriers

Cleaner production financing: possibilities and barriersJurgis K. Staniskis, Zaneta Stasiskiene

Abstract There are several players who could facilitate thepromotion of cleaner production (CP) by establishing aneffective financing mechanism; for instance, government,international assistance bodies, banks and other financingorganizations. In a few developing countries in South EastAfrica and Latin America and in Vietnam several inter-national organizations, development banks and donorshave initiated and implemented projects to facilitate theintroduction of CP investments. Most projects have beenin the form of technical assistance grants and training toindustries and/or loans at below market rates from dedi-cated trust funds. Yet the present level of lending throughsuch projects is far from sufficient to trigger widespreadadoption of CP. Therefore, experts from The Institute ofEnvironmental Engineering, Lithuania performed an in-vestigation to create a CP development scheme for devel-oping countries.

IntroductionCleaner production (CP), as a concept, has expandedrapidly in recent years. Internally, the adoption of CPmeasures is driven by pressure to reduce the costs ofwaste, to reduce the costs of compliance with changingregulations, and to position the enterprise as a ‘‘green’’enterprise in the local, national, or global marketplace.Externally, investors, financial analysts, regulatory bodies,and the public at large increasingly question corporateenvironmental performance. Generally, CP is a recognizedand proven strategy for improving the efficient use ofnatural resources and minimizing wastes and pollutionrisks to human health at the source rather than the end ofthe production process. CP also brings tangible economicsavings by improving the overall production efficiency andfacilitating new markets. Therefore, CP serves as a toolthat brings tangible economic savings and environmentalbenefits by improving the overall production efficiencyand facilitates competitiveness (Hammer 2001). Despitethe above-mentioned advantages of the strategy, the

financing problem is an important constraint in makingCP widely adopted. Companies that have identified cost-effective and technically feasible CP options may still notbe able to make the necessary CP investment to realize thefinancial benefits and environmental advantages. The ob-stacles to financing CP investments could be describedunder two major groups:

– On the demand side, enterprises have insufficient ex-perience in preparing a real CP project which is sys-tematically evaluated from an environmental,economical, and technical point of view and to prepareproper applications for the project financing. Lack ofknowledge in CP assessment, evaluating the financialaspects of the project efficiency and investments oftenblock implementation of CP projects. Even when cap-ital exists, CP is one option among a range of invest-ment options.

– On the supply side, there are obstacles in capital mar-kets such as a lack of environmental expertise andunattractive loan rates to enterprises. Also, costly ad-ministrative requirements result in international fi-nancial institutions establishing loan thresholds, whichare sometimes significantly higher than costs of CPinvestments; it is difficult to receive financing for smallprojects. Generally, there is little experience with theimplementation of economically viable CP projects.

In this regard two processes are crucial, i.e. the selec-tion and priority setting among alternate investment op-tions (the ‘‘capital budgeting’’ process), and the collectionand allocation of capital to finance the prioritized invest-ment options (the ‘‘financing’’ process).

Lithuanian experience on CP financingThe Institute of Environmental Engineering (APINI) is themain provider of CP services for companies, governmentaland financial institutions in Lithuania. In terms of CPinvestment financing, APINI plays a crucial role in CPproject identification, evaluation, implementation andreporting. It can:

– Prepare a loan application on behalf of the applicant,including assistance in calculation of costs savings andenvironmental benefits

– Assist a financing institution in communication withthe applicant and preparation of loan documentation,project description, and reporting requirements

– Prepare project progress and completion reports to bepresented as a part of borrower’s disbursement request

Clean Techn Environ Policy 5 (2003) 142–147

DOI 10.1007/s10098-003-0182-2

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Received: 10 June 2002 / Accepted: 6 January 2003Published online: 27 February 2003� Springer-Verlag 2003

J. K. Staniskis (&), Z. StasiskieneThe Institute of Environmental Engineering,Kaunas University of Technology,K. Donelaicio 20, 3000 Kaunas, LithuaniaE-mail: [email protected].: +370-37-300760Fax: +370-37-209372

Original paper

– Assist in project monitoring and supervision of pro-curement and project implementation progress ascompared to budget and implementation plans, as wellas project objectives

In 1998, Nordic Environment Finance Corporation(NEFCO) established the Revolving Facility for CP Invest-ments. The objective of the Facility is to finance, onfavourable terms, implementation of high-priority CPinvestments with rapid pay-back that yield environmentaland economical benefits (‘‘win–win projects’’). The invest-ments should be commercially viable with an identifiableand secure stream of earnings that is to be used to repay theloan. According to APINI–NEFCO methodology, environ-mental issues in the CP investment project development ofprojects focus on the following:

– Location of the project with respect to populationcentres, sensitive local land uses, and the existing levelsand sources of pollution

– Pollution category (air, surface water, ground water,hazardous waste, etc.)

– Scale of the pollution impact– Effects associated with the pollution, including possible

toxicity to human health, impact on climate change, anddamage to the natural ecosystems and habitat

Most of the Lithuanian companies provided withNEFCO soft loans for CP project implementation gradu-ated from the Lithuanian–Norwegian CP training pro-gramme. Therefore, full CP assessments were performed inthe companies. CP assessment is one of the basic groundsfor CP investment project development according toAPINI–NEFCO methodology, which covers:

– CP planning and organization in a company (obtainingmanagement commitment, identification of barriersand solutions, setting plant-wide goals, and organizinga project team)

– CP pre-assessment (CP audit preparation, division ofprocesses into unit operations, and construction ofprocesses flow diagrams linking unit operations)

– Material balance (determination of process inputs andoutputs, derivation of a material balance – assemblinginput and output information, deriving preliminarymaterial balance, evaluating and refining materialbalance)

– Synthesis (identification of CP options; environmental,technical and economic evaluation of CP options; anddesign of CP action plan)

– Company’s ‘‘economic health’’ analysis– Development of CP investment project

APINI’s practical experience in CP investment projectdevelopment and implementation shows that environmen-tal protection can be efficient if a company’s material flowsare transparent and well known. Finally, it can be concludedthat a CP investment project developed and implementedaccording to the methodology developed by APINI:

– Increases profitability and lowers production costs– Provides a rapid return on any capital or operating

investments required

– Leads to the more efficient use of energy, natural re-sources, and raw materials

– Increases staff motivation through reduced workerrisks

– Reduces the risk of environmental accidents– Reduces/avoids regulatory compliance costs signifi-

cantly (Hammer 2001; Staniskis and Stasiskiene 2000a)

During the UNEP project ‘‘Strategies and Mechanismsfor Promoting Cleaner Production Investments’’ Lithua-nian experience was transferred to several countries inSouth East Africa, Central America, and South East Asia.

Analysis of CP investment promotion possibilitiesin developing countries

Industry levelIn every country where the CP concept has been intro-duced, the progress depends on many different factors andon shifts in their configuration that take place over time.After detailed CP project analysis in developing countriesis carried out, most environmental issues are not explicitlytaken into account because people do not have basic un-derstanding or practice in CP project development andimplementation. Therefore the environmental impacts andtheir economic consequences are often underestimated.The fact that some environmental issues are and others arenot taken into account leads to confusion and misinfor-mation.

The experts from The Institute of EnvironmentalEngineering (Lithuania) were responsible for all issuesrelated to the development of CP investment projects inthe Zimbabwean and Vietnamese companies. CP assess-ment was performed in 18 industrial companies. Toprovide the companies with the ability to evaluate thefinancial viability of a CP project and the whole company’sactivities, the course ‘‘Financial Engineering’’ was includedin the training. That training aided companies insuccessful analysis of the decision-making process andprocedures in the selection of alternative investmentoptions. It was mapped out how investment selectionregularly takes place and how this process can be affectedin favour of CP investments (Staniskis 2000b).

At the end of the project, Local Capacity for CPfinancing was built. A very important conclusion wasthat the CP Investment Projects’ development method-ology proposed by APINI in a country where the CPprogram does not exist appeared to be very effective.From the CP demand side, companies from developingcountries are keen to ensure sustainable development,but the lack of professionally developed projects, casestudies, and training in CP significantly deceleratesthe process. This leads to difficulties in raising thenecessary funds for making the investments in recom-mended economically and technically feasible CPopportunities.

Financial institution levelCommercial banks are the main formal providers offinancial services to the business community. They act asfinancial intermediaries by mobilizing deposits and sav-

J.K. Staniskis, Z. Stasiskiene: Cleaner production financing: possibilities and barriers

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ings and then lending these resources for personal andbusiness loans.

Commercial banks by and large do not distinguishfinancing opportunities by project type, e.g. CP versuspollution control or regular equipment loan. Instead, thestrength of the loan application is reviewed on the basis ofconventional considerations such as creditworthiness ofthe firm and generation of sufficient cash flow to makerequired loan payments. The average interest rate is about20%; therefore, it is not surprising that most commercialbanks in developing countries prefer dealing with largertrading companies rather than with small strugglingmanufacturing enterprises. Governments and communi-ties have to do more to influence the commercial banks,the main sources of financial flows to the business com-munity, to recognize the importance and value of the CPbusiness sector as an expanding clientele for their services(Staniskis 2002a, 2002b).

In developing countries, there is little experience ofventure capital, although there has been a start in somecountries. Venture capital investors expect their main re-turn through the sale of the equity share after a number ofyears’ growth. However, in the region, many entrepreneursexpect that they will be able to buy out outside investorsfor close to the sum of money that was originally invested.This, of course, is totally unacceptable to venture capital-ists as it would mean that they would share in the risk offailure and would not benefit from the capital gains fromsuccess and growth (Stasiskiene 2001; Staniskis and Sta-siskiene 2001).

Therefore, further investigation to reach the mainoutcome – development of The Regional CP RevolvingFund which will integrate financial and non-financialservices in order to make the credit line cost-efficient –was performed in Tanzania, Zimbabwe, Nicaragua andGuatemala.

As was indicated many times at the different meetings,financial services alone will not be able to ensure sustainedCP development. In such cases, non-financial supportservices are expected to be offered by other service pro-viders. Synergy between financial services and businessdevelopment services (BDS) can make credit schemesmore effective and can produce a more successful outcomein lending programmes.

Institutions in developing countries complain of ashortage of good investment proposals. There is somevalidity in this comment; but maybe there is not really ashortage of projects, but a lack of well presented pro-posals in bankable form. Some banks try to solve thisproblem by organizing their own advisory and consul-tancy services. Inevitably, this is costly. Apart from thecost, there is a potential conflict of interest between thosewho help draw up the business plan and those who dothe loan approval process, which has to remain objectiveand independent (Stasiskiene 2001; Staniskis and Sta-siskiene 2001).

Generally, the borrower has to go elsewhere to find aBDS provider – private consultants, a business association,or some private or public business centre. It is rare thatNGOs can provide such services effectively. Working withBDS providers can reduce the transaction costs of a bank

in handling loan requests. This makes such lendingfinancially more attractive.

There is a technological element which is important inall CP investment proposals. Technological capacity is theability of producers to identify product opportunities; tosource, install and operate the right equipment; and tohave knowledge and technical experience to implementchanges in the production processes. These complex fac-tors can be vital in determining the success or failure of aproject and it is this field of capacity building that gen-erates clear synergies between financial and non-financialservices. At the same time, credit schemes may benefitfrom working together with BDS providers in recom-mending enterprises to obtain outside advice when en-countering problems resulting in poor loan repayment.However, BDS providers must not become debt collectors.

Loan officers can benefit from networking with BDSproviders as partners when needing to become more fa-miliar with data on the sector involved and identifying therisk involved in new product development or expansionprojects. Cooperation with BDS providers can also helploan officers become more familiar with the personalityand background (and creditworthiness) of the entrepre-neur seeking the loan.

Finally, access to financial services is only one ingre-dient for sustained enterprise development, albeit animportant one. The minimalist credit approach has clearlimitations, and for credit schemes to be effective and haveimpact, complementary services are needed. Access tosuitable business development services is also importantfor enterprises to support the upgrading of their produc-tion techniques, products and services – with a view tobeing able to adapt to changing market conditions and tomoving into the production of goods and services thatmeet the demands of domestic and foreign markets interms of price, quality, design, etc., in other words, makingthe enterprises more competitive (for instance, quality andenvironment management systems, extension of businessvalue of life-cycle methods in order to assure both envi-ronmental improvements and strategic/market relatedbenefits, environmental impact assessment, eco-design,etc.) (Staniskis 2002a, 2002b).

Proposal for developing countriesAfter basic capacity level (BCL) is created, the countryshould designate its own national development strategybased on needs and experience both national and inter-national. Therefore it should be stressed that two kinds ofactivities—political (efforts on reform tax policies, use ofmarket based instruments, regulatory policy, educationand other tools that motivate decision makers to select CPfrom available choices) and – industry based (specificenvironmental projects, technical assistance and direct fi-nancing environmentally sound projects in industry andorganizations) should be integrated in order to:

– Strengthen support for CP among policy makers– Promote the use of a wider range of policy instruments– Emphasize regional and local ‘‘ownership’’ of CP pro-

grams

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– Implement environmental management systems andstandards

– Establish and strengthen financing mechanisms toprovide investment capital at affordable rates, andstrengthen capacity to prepare financially viable envi-ronmental projects

– Develop methodologies to assess the impact of CPprograms, particularly in economic terms

CP is intrinsically linked to managerial and techno-logical development of organizations. Although CP is aconcept originating in environmentally oriented organi-zations, its implementation is clearly within the capacity ofindustrial development organizations. As noted earlier,environmental policies and regulations can motivate or-ganizations to consider CP; but once they decide to act, theresources should not be provided by environmentalagencies. They should be provided by groups that assistwith firm-level development and with a national level ofsupport capacities.

Implementing CP requires a number of differentmanagerial capacities. In many cases, enterprises needhelp to develop them. Core capabilities include cost ac-counting, process analysis, market research, employeeempowerment, and others. Once these are in place, orga-nizations can be given help to develop basic capacity forCP. Only then will capital investment for CP be appro-priate.

The financial services sector has the power to directfinancial resources towards projects or companies thathave demonstrated good environmental performance. Agrowing number of managers in the sector have becomeaware of the need to systematically evaluate the envi-ronmental risk associated with their decisions. So thefinance sector has one of the key roles in CP promotion.Environmental risks vary from one financial activity toanother. Most such risks are linked to negative impactson a company’s financial results, such as financialliability, the need to comply with stricter regulations, theimpact of accidental releases, or loss of market sharedue to a bad environmental image. Finally, the respon-sibility for financing projects with significant environ-mental impacts can affect the image of financialinstitutions.

From the above it can be concluded that environmentalperformance, measured through the adoption of sophis-ticated cleaner production processes, is increasingly

regarded as an indicator of business health. Good envi-ronmental management reflects good management ingeneral. To the extent that a financial institution sharesthis perception, pressure on firms to adopt cleaner pro-duction processes will be much greater. There is also agood indicator for financial institution to avoid businessthat may phase costs associated with environmental lia-bility.

From the investment demand side, the companies thatparticipate in systematically performed CP training (in-cluding capital budgeting, analysis of past economic per-formance, risk and sensitivity analysis of a CP project) willalways develop economically feasible projects with com-paratively short pay-back periods, and very small oreliminated environmental risk.

As was indicated many times at the different meetings,financial services alone will not be able to ensure sustainedCP development. In such cases non-financial supportservices are expected to be offered by other service pro-viders. Synergy between financial services and BDS canmake credit schemes more effective and can produce amore successful outcome in lending programmes (seeFig. 1).

The main tasks for each element of the schema were set,as follows.

Industrial sectors

– Take part in a CP training programme in order tocreate a CP management system and develop CPinvestment projects.

– Provide data and documents to the BDS provider. Theproject should include a company description, CP as-sessment (list of CP options – ‘‘good housekeeping’’measures, measures with medium investments; andproposals with high investments; and a list of imple-mented CP measures including their environmental andeconomical assessment); CP investment proposals fea-sibility study; procurement of the project equipment;investment analysis (including pay-back period, netpresent value; internal rate of return; risk and sensitivityanalysis; considerations and motivation); company’s‘‘economic health’’ analysis (profit–loss statement, andbalance sheets for the last 3 years), economical ratioanalysis, considerations and motivation; project imple-mentation data (project implementation schedule andsupervision, and progress monitoring).

Fig. 1. Regional revolving (guarantee)facility for CP investments


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– Provide to the BDS provider and legal company thecollateral for the loan security or sign the contract withthe ‘‘guarantee provider’’.

– Sign the contract with ABC Holdings Ltd IncorporatingAfrican Banking Corporation Limited.

– Provide (according to an agreed schedule) informationon the project implementation monitoring and envi-ronmental and economical data of the project duringthe pay-back period (once a year) to BDS.

– Ensure project implementation according to the loanconditions.

Law firm

– Draft a contract between the company and BDS pro-viders.

– Draft all legal documentation related to the contract.– Send the above mentioned documents to the company

for evaluation;.– Produce a contract and all the documents related thereto.– Provide the legal information related to the contract.– Be responsible for the recovery procedure if the com-

pany is in default.– Inform the mortgage office of a fulfilment of the con-

tractual obligations after the company made all itsobligations under the contract.

Business development services providers

– Play one of the crucial roles in CP promotion activities.They should concentrate on their core functions ofdissemination of information, education, training, andcommunication between companies and governmentaland financial institutions. A consultative process couldbe launched within the country at the national andregional levels. Involving the private sector, govern-mental institutions, and international organizations,the process would provide a basis to define the nationalCP investment promotion strategy.

– Assist a company in CP project development and CPinvestment project preparation.

– Assist a company in the development of a loan appli-cation [including the preparation of a loan applicationon behalf of the applicant according to a settled format;and assistance in the calculation of cost saving consti-tuting the basis for the estimated pay-back time of theplanned investment and requested maturity of the loan;information on applicant’s financial status supportedby audited financial status (analysis)].

– Assist CP financing facility in communication with theapplicant and preparation of the loan documentation(including assistance in project monitoring andsupervision; and procurement and project implemen-tation progress as compared to budgets andimplementation plan as well as project objectives).

– Prepare project progress and completion reports to bepresented as part of the borrower’s disbursementrequests.

– Provide to law firm annexes of the contract (projectdescription including environmental and economiccalculations).

Guarantee providers

– Share risks with lending institution so that the lenderwill be compensated for a maximum of 50% of the loanon a loan default.

CP financing facility

– Finance on ‘‘favourable terms’’ the implementation ofhigh-priority cleaner production investments withrapid pay-back that yield environmental and economicbenefits (‘‘win–win projects’’). The basis for providing aloan is the cash flow of the cleaner production invest-ment and the ability of the enterprise to repay the loanover the agreed period.

– Have considerable catalytic effects by demonstrating toother financiers and enterprises that financing of pri-ority cleaner production investments yields environ-mental and economic benefits.

– Address the needs to enhance financing of cleanerproduction projects that otherwise would not have beenimplemented.

– Involve and collaborate with BDS providers, who playan important role in project identification, preparation,appraisal, and monitoring.

– Perform environmental, technical, and economic eval-uation of a CP project.

– Establish, at project completion, an environmentalappraisal of projects focusing on the following con-siderations: (i) the location of the project with respectto population centres, sensitive local land uses, and theexisting levels and sources of pollution, (ii) the pollu-tion category (air, surface water, ground water, haz-ardous waste, etc.); (iii) the scale of the pollutionimpact; and (iv) the effect associated with the pollutionincluding possible toxicity to human health, possibleimpact on climate change, and damage to the naturalecosystems and habitat.

– Focus technical appraisal of projects on, inter alia,(i) ensuring that the project is technically feasible, thetechnical solution is cost effective, and that no experi-mental technologies are being applied; (ii) confirmingthat the environmental and economic benefits areachievable; (iii) establishing that the timescales arereasonable; and (iv) confirming that the procurementapproach is acceptable and that the price estimates arerealistic.

– Verify whether the project has achieved its overall en-vironmental and economical goals with an economicpost-evaluation.

The key aspects of the long, knowledge-intensive processof integrating environment with rapid economical devel-opment are the following:

– Understanding the environment and the processthat affect it by identifying the sources of environmentaldegradation, its consequences, and the costs of reducingit, as the foundation for effective policy

– Developing indicators of environmental performancethat policy makers at the local, regional and nationallevel can use

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– Using environmental information to improve bothpublic regulation and private decision making

– Managing environmental knowledge by building thecapacity to gather the disseminate knowledge, im-proving private sector environmental management andbroadening public policy models to include environ-mental variables

Effective development requires partnership amongdifferent levels of government, the private sector, donorgroups, and civil society. The major challenge in imple-menting the proposed approach of CP investment promo-tion is the country’s ability and willingness to develop andimplement its own national strategy – this will increase ef-fectiveness of possible external assistance and efficiency ofthe support it provides, i.e. the support to BCL should beincreased. A comprehensive strategy is simply toodemanding for any one level or area of government or fora single donor. National governments need to provide theguidance that agencies and organizations require to coor-dinate their efforts to remove bottlenecks to development.

ReferencesHammer B (2001) Financing cleaner production. In: Report for pro-

motion of cleaner production policies and practices in selecteddeveloping member countries, Seattle, Wash.

Staniskis J (2002a) Zimbabwe innovative financing schemes. In:Report for UNEP Project ‘‘Strategies and mechanisms for pro-moting CP investments in Developing Countries’’. UNEP, Paris

Staniskis J (2002b) Tanzania innovative financing schemes. In: Reportfor UNEP Project ‘‘Strategies and mechanisms for promoting CPinvestments in developing countries’’. UNEP, Paris

Staniskis J, Stasiskiene Z (2000a) Analysis of NEFCO funding effec-tiveness for CP project implementation in Lithuania. Proceedingsof International Conference on Cleaner Production: systemsapproach. Technologija, Kaunas, pp 48–60

Staniskis J, Stasiskiene Z (2000b) Report on Zimbabwe mission. In:UNEP Project ‘‘Strategies and mechanisms for promoting CPinvestments in developing countries’’. UNEP, Paris

Staniskis J, Stasiskiene Z (2001) Promotion of cleaner productioninvestments: international experience. Proceedings of EuropeanRoundtable on Cleaner Production ERCP’2001, Lund, Sweden

Stasiskiene Z (2001) Efficiency of cleaner production financing:Lithuanian experience. Proceedings of International Conference.Technologija, Kaunas, pp 38–47


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Cleaner production financing: possibilities and barriers