Environmental Funding Must Be Re-Focused

Partnerships with Private Sector and Local Communities are Key

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James D. Wolfensohn, President of the World Bank, will give a major environmental address on Monday, October 2, at a dinner hosted by the World Resources Institute.

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More than a quarter of the world’s population lives in dangerous environments where unsafe air and contaminated water are responsible for 80 percent of the disease in developing countries and significantly reduced life spans, says the World Bank, the world’s largest financier of pro-environmental projects.

In addition to health risks, poor management of land resources leads to loss of productivity and reduced availability of food and other crops. For example, soil degradation over the next 20 years will make up to 345 million acres (140 million hectares) of fertile land unusable for agriculture — an area nearly equal in size to Alaska. Every year, forests the size of Washington state are destroyed without being replaced.

“Never has there been a greater need to invest in environmental activities, and never have public funds been more scarce,” says Ismail Serageldin, World Bank Vice President for Environmentally Sustainable Development (ESD). “More public money is not the answer. The World Bank is calling for a re-thinking of how governments allocate resources, and is asking for new partnerships with the private sector, local communities and non-government organizations (NGOs) to meet this challenge.”

In order to assist the global environmental effort and highlight the importance of effective financing, the World Bank is hosting the Effective Financing of Environmentally Sustainable Development Conference in Washington, D.C. from October 4-6. National and local government officials, private-sector leaders, scientists, scholars, students and representatives of NGOs, international organizations and environmentalists from both industrialized and developing countries will meet at the conference to discuss how to use the available funds better.

“This conference represents the first effort in trying to see how the individual actions of different stakeholders in the development community can be brought together so that the sum of the parts is greater than the whole,” says Mr. Serageldin. “We must find ways to engage the private sector — the engine of growth — as a major partner in fostering development and conserving the environment.”

At the conference, the World Bank will argue that the terms of the environmental debate must be changed, from a confrontational dialogue to a cooperative one, among NGOs, the private sector, national and local governments and international institutions.

“Private enterprise must be encouraged to bring new technologies to developing countries,” Mr. Serageldin says. “With the right kinds of incentives, price signals and regulations, private-public partnerships can be built that can have dramatic, positive impacts on the environment.”

Besides developing new strategies for tackling environmental problems, conference participants will discuss: privatization and improved market organization, the creation of technology, its transfer and adoption; the expansion of capital markets; developing effective partnerships; and defining new roles for governments, community-based organizations and the private sector. In addition, the conference will focus on developing new strategies for tackling environmental problems.

The World Bank has lent $10 billion overall for environmental projects, $5.6 billion of that total since the Earth Summit.

Overall, the Bank has worked on 137 environmental projects in some 60 countries in the developing world. Pollution management and urban environment projects account for about 60 percent of the World Bank’s total lending for the environment, and 40 percent of the number of environmental projects in the active portfolio.

Rethinking Subsidies

The World Bank says that one major way of assisting the global environment without new capital would be by cutting an array of “unnecessary” subsidies. By requiring that people pay for the actual economic value of products or services they use, natural resources can be protected, and revenues “saved” from subsidies can be reallocated for other development activities.

Costs currently not recovered from users in just three sectors — power, water and railways — are estimated at $125 billion annually, nearly 10 percent of total government revenues in developing countries. Other widespread subsidies that hurt the environment and deplete national budgets include:

  • Agro-chemicals — A total of $30 billion a year is spent globally on agro-chemical subsidies in agriculture.
  • Wood products — In many countries, people pay almost nothing for trees they cut, compared to the potential market value of wood, not even considering the environmental value of forests that are lost.

Governments can also change their macro-economic policies, especially by developing new taxation policies that encourage private sector investments and by imposing punitive taxes on polluters. “For example, polluters can be taxed to pay for the costs of the clean-up of their operations,” said Mr. Serageldin.

On October 4, a panel discussion that includes Nobel laureates will assess the implications of such policies. The discussion will emphasize the importance of ensuring that finances and investments reflect development objectives, cut waste and conserve the environment.

Other notable speakers at the conference include famed environmentalist and underwater explorer Jacques-Yves Cousteau. Vice President Al Gore, a host of finance and environment ministers from developing countries, Presidents of the Asian and Inter-American Development Banks, and prominent development practitioners and NGOs will also attend.

Role of Private Sector in Development

There is increasing recognition globally of the critical role of the private sector in development, particularly in developing countries. For example, total spending in developing countries currently on infrastructure comes to some $200 billion per year– a figure beyond the means of governments and international lending agencies. Such investments require large-scale, long-term funding involving private developers, operators and financiers.

The conference will draw attention to the need for an “enabling environment” in which businesses prosper, productivity is enhanced and local communities are empowered to participate in decision-making.

“This conference will generate a clear call for the effective use of finances,” says Alfredo Sfeir-Younis, a World Bank economist and coordinator of the conference. “By providing a forum for development stakeholders to come together, the conference will chart a way forward that utilizes the energies of governments, the private sector and civil society in promoting environmentally sustainable development.”

In the past, the private sector has tended to perceive environment requirements as costs that reduce profits. During the 1990s, environmental management has become a huge and growing business.

The global market for environmental technologies, estimated at $300 billion in 1992, will grow to some $425 billion by 1997. The United States has the largest segment of the industry, with $134 billion in total estimated domestic and international revenues. Revenues for the remainder of the global environment industry are estimated at $160 billion, concentrated mainly in Japan and Germany. The United States, Germany and Japan account for approximately two-thirds of total world output of environmental technologies.

Developing countries have increasingly recognized the critical role the private sector must play in financing environmentally sustainable development. The World Bank Group, including the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) support about $25 billion of private-sector finance a year, or 10 percent of all investment by private enterprise in developing countries:

  • World Bank — Financial intermediation loans of about $2 billion a year to support $4 billion in private investments.
  • IFC — Loans, equity investments and credit lines of $2.9 billion a year which leverage, on a 6-to-1 ratio, roughly $19.5 billion worth of investments.
  • MIGA — Guarantees of about $600 million a year which support $2.5 billion in private sector investments.

Examples of the New Partnership

Argentina — Aguas Argentinas, a private sector consortium that is operating, improving and expanding water and wastewater services in Buenos Aires, Argentina, was originally approved in fiscal 1994, with a second investment in fiscal 1995. In its two years of implementation, an additional 500,000 residents of Buenos Aires received water service and 300,000 received sewage collection service. An average of 8,000 water leaks and 13,000 sewer blockages were corrected monthly, and 38,000 water meters were installed or changed. Water production capacity increased from 3.5 million cubic meters per day to 4.4 million, resulting in the first summer in 15 years without a water shortage in Buenos Aires. Improved efficiency has resulted in staff reductions from 7,450 to 3,600. Non-payment by the rich dropped from 15 to 7 percent, net revenues increased by 70 percent, and profitability has moved from a loss to a net income of $25 million. In addition, a 120,000 cubic meters per day wastewater treatment plant has been rebuilt, and three new regional plants are under construction. By 1998, these plants will treat wastes from two-thirds of the city’s population, 2 million cubic meters per day.

China — Liaoning Province is an important industrial region of 36 million people confronting acute water supply problems and air and water pollution. A $338 million Bank-financed project will invest in improving water quality, urban air quality, municipal solid waste management, industrial pollution control, and environmental management and training. The plan is innovative in that it concentrates on the province’s five major cities at the same time.

India — Bombay has some 12 million people and is one of India’s most important urban centers. Currently, less than 2 percent of the city waste waters undergo any treatment before disposal to adjoining coastal and creek areas. A $295 million Bank-financed project will build on a previously constructed sewage collection system with Bank support to address the treatment and disposal of waste waters. The project includes the construction of two sea outlet tunnels and one pumping station. Each tunnel will be 1.8 miles long (3 km) and will discharge 800 million liters per day; construction of two aerated lagoons; a slum sanitation program to serve 1 million people, carried out by NGOs, along with other improvements.

Once completed, some 80-90 percent of the buildings and 45 percent of the population of greater Bombay will be connected to a sewage collection system, bringing significant improvements in health and quality of life. Beaches and coastal water quality in and around Bombay will also be improved.

Ghana — The Volta River Authority (VRA) of Ghana is constructing a 300-megawatt combined cycle thermal generating plant to be located on the Atlantic coast near the city of Takoradi. Environmental assessment identified three potential problem areas of emissions, water supply and a seawater once-through cooling system. This assessment also showed that the light crude oil plant that will be converted to gas in the future would not meet World Bank air emission standards. Also, the intake and outfall were to be located in a rich fin and shell fish area, which would have damaged the fishery region and created the need for compensation to the local communities. Subsequently, the VRA accepted the alternative cooling plan as less damaging, which also turned out to be less costly to construct.

How Poverty Hurts the Environment

The World Bank has aggressively increased its lending for environmental projects because without better environmental stewardship, development in the poorest countries will be undermined. Even if environmental degradation does not reach life threatening levels, it can result in a significant decline in the quality of the world.

The world faces a tremendous backlog in providing for the poor and disadvantaged, which can cripple environmental protection policies:

  • One billion people live on less than a dollar a day;
  • One billion people do not have clean water;
  • Two billion people do not have electricity;
  • About 1.7 billion people do not have sanitation;
  • Between 2-3 million children die every year from diseases caused by lack of water and sanitation.

Added to these problems, some 90 million people are being added to the overall global population each year — again, mostly in developing countries. This means that the world’s population will expand to an estimated 9 billion over the next 40 years, and food production will have to double in one generation.

Some 90 percent of the world’s increased population will be located in urban areas, posing formidable problems of social and institutional change, infrastructure investment and pollution control. Already, many municipal authorities are overwhelmed by their current responsibilities.

As human numbers and the scale of their activities increase, so does the pressure on fragile ecosystems. In the past decade, 7-10 percent of tropical forests and wetlands have been destroyed; important aquifers have been depleted; and coasts have been polluted at an unprecedented rate.

The very poor, struggling at the edge of subsistence levels of consumption and preoccupied with day-to-day survival, have limited scope to plan ahead and make natural resource investments. The poor’s use of natural resources is affected by their facing greater risks, with fewer means to cope. These risks range from misguided policy interventions to evolving land tenure systems that favor those with greater political clout — policy themes that will be addressed by the conference.

The World Bank says that the conference is one more way of “putting people first” in policies and investment programs for development. The conference recognizes the centrality of people and their institutions in sustainable development. “It is all about providing governments and their citizens opportunities to interact and for policies to emerge that are pro-women, pro-poor and pro-environment,” says Mr. Serageldin.

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