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Writings 
Environment PREVair - 2
An innovative environmental credit scheme for small companies: SMEs: condition for a stable civil society and cause of environmental
problems SMEs in most countries form the majority of companies, create the largest number of new jobs, and in general the diversification of SMEs form the basis of a sound and healthy economy. A large and
healthy "middle segment" in the economy will increase not only economic but also political stability, as it generates a growing middle-class with a vested interest in a vigorous democracy and an open society. This happens
through the creation of large numbers of "meso" institutions, i.e., non-profit organizations representing the interests of specific segments of the community. It is this level of representation which in a democracy
provides the means for expression and the fulfilment of many "social interaction" needs of large segments of the population. Such structures can only flourish in an environment where a large enough number of people belong
to what is commonly defined as the middle-class, and have enough time and other resources to volunteer. One of the major problems facing governments today in the implementation of National Environmental Action Plans (NEAPs), or
various Multilateral Environmental Agreements (MEAs), such as the Montreal Protocol on the Protection of the Ozone Layer, the UN Framework Convention on Climate Change etc. are the lack of instruments to reach the vast majority of
companies, i.e. SMEs. According to the country, these can number between 90 and 98 % of all companies, as well as one of the most important source of diffuse pollution, together with agriculture, transport and households. But among
those, SMEs are surely the first in terms of hazardous emissions and waste (VOCs, heavy metals, endocrine disrupters etc.). This is because SMEs, like their larger corporate brethren, use industrial strength inputs, unlike most of
agriculture, transport and households (with the notable exception of insecticides and pesticides). Also, the reality in the field is that, like probably everywhere, the immense majority of SMEs are not in compliance with the law.
If authorities were to enforce environmental regulations to the letter, most of the economy would be paralysed from one day to the next. On the other hand, SME owners are not against environmental measures. They would probably love
to protect nature if they believed they knew
a way to do so while preserving their bottom line as well. (Note that pure knowledge is not enough, they have also to be intimately convinced that this knowledge is valid for their own company and their own circumstances.) Any
strategy to reduce environmental impact must therefore find a way to deal with this problem. SMEs cannot be wished away, regulation is mostly inoperative on them and they mostly do not have the resources, informational, financial
and managerial to implement complicated management systems, spend a lot of time researching best technological options, or to buy state-of-the-art equipment from retained earnings. In the very long run, the solution of course is
to integrate full-cost pricing of natural resources so that all environmental externalities become internalized. In that way, regulatory under-reach and under-enforcement of SMEs is automatically corrected. Even so, egregious
market failures in the use of many public goods (such as air or natural stocks e.g. fish) will continue to call for complicated corrective mechanisms (such as carbon emission rights coupled with a trading system). The full
internalization of environmental externalities will therefore probably take decades. What can we do in the meantime? How can SMEs be assisted in modernizing their technology so that, step-by-step, they can absorb the impact of
inevitably higher natural resources prices? This is the subject of this case study. The theoretical option of doing nothing to assist SMEs is an inefficient option when once considers the slow level of compliance of SMEs today.
So what kind of assistance is most efficient? There are two major types: financial (loans, grants, guarantees etc.) and technical (information, counselling, training etc.). Experience shows that combining the two works the
best, and that either one alone most often leads to sub-optimal investment decisions, or no investment at all (and frustration which discredits the donor agency!). When assistance is simultaneously financial and technical, it has
several advantages:
- it breaks down the barriers of distrust of SME owners and managers vis-ŕ-vis other concepts, such as integrated Environmental Management (which includes waste minimization or cleaner production), which are needed to
sustain environmental performance improvements, and - one type of assistance leverages the other one, i.e., if only technical guidance is given, the small company will probably not take a financial risk to buy
state-of-the-art technology. A loan takes away that excuse. - finally, it minimizes the risk of sub-optimal investment decisions by SME (e.g. if the company gets purely financial assistance without receiving technical
guidance, it is quite possible that it will choose obsolete technology or over-dimensioned solutions recommended by vendors eager to sell their own wares without proper knowledge of the universe of options, nor any interest in
getting the SME to save money since their commission depends on the final cost).
Many existing SME assistance programmes suffer from the lack of co-ordination between technical and financial measures. This has been observed by the European Commission, e.g. concerning the implementation of the voluntary
(European) Environmental Management and Audit Scheme (EMAS). This is because financial institutions are not usually experts in technical assistance, and vice-versa. In the case of EMAS, this has been recognized
and many countries now offer financial incentives for SMEs to get subsidized technical assistance from consultants to obtain EMAS validation (e.g. France, UK, Ireland, Germany and Austria). Some countries outside the EU are doing
the same for ISO 14001 certification. The same lack of co-ordination or turf wars can be observed between the bilateral technical and financial assistance programmes of various OECD members countries. The experience of US AID in
the Pollution Prevention Centres (PPC) programme implemented by the World Environmental Centre (WEC) in Central and Eastern Europe leads us to the same conclusion: while the programme was extremely successful as long as AID
paid for US experts and equipment, it slowed down dramatically when the funds allotted to equipment purchase dried up, in spite of the fact that WEC had trained a large number of local people capable of offering the needed
technical assistance, and had kept the PPCs open for months or years while requiring them to come up with additional demonstration projects, this time self-financed. WEC field reports indicate the frustration at the lack of
self-perpetuation, which was expected from the dissemination of excellent local language case study booklets (describing projects with rates of return on investment in the hundreds or thousands of percent!). This is all the more
disheartening when one considers the size of the targeted companies which were mostly large. In fact, WEC has learned from this and designed a financial-cum-technical assistance programme for which it has obtained over a million $
from the Swiss government to test in Latin America. The PREVair financing scheme has been designed from the start to combine financial and technical assistance, and create a large base of "ownership". The latter
was a crucial weak point of the PPC programme, which laudably went for maximal operational efficiency but failed to create widespread local ownership or to consider local sensitivities and rivalries. The process of economic
restructuring in CEEC will inevitably lead to the number of SMEs increasing sharply, as has already happened since 1989. Unfortunately, such SMEs collectively pollute a lot, and create a diffuse pollution which is very expensive to
fight. It in particular leads to much higher than otherwise needed expenditures on wastewater treatment plants. Since the capital stock of SMEs is being constituted very fast at the present time, it is important that new investment
incorporate as much as possible sound environmental considerations, to avoid future costly end-of-the-pipe adjustments. That is the main rationale for our earlier attempts to transfer the PREVair SME environmental financing scheme
in Hungary, for potential expansion to other CEE countries. Such a programme could make the difference between an SME investing the absolute minimum it needs now, and a slightly better equipment which it otherwise would not
consider. 2. Description of the PREVair scheme The PREVair scheme started in 1990. The Upper Rhine department, located at the confluence of 3 countries (France, Switzerland and
Germany), has always been more sensitive to environmental issues than most other French regions. The Upper Rhine is one of two Départements (together with the Lower Rhine) in Alsace: France's smallest and second most
industrialized and densely populated "Region" after Paris. The Banque Populaire du Haut-Rhin, a local privately-owned co-operative bank part of the larger Banque Populaire Group, is a medium sized bank focussed on
servicing small and medium sized companies, as well as individual consumers. It is well established in the community, is trusted by local businesses, and has a yearly loan portfolio of about 5 Billion FRF. In 1990, the then
President of ECO-Conseil, a French NGO focusing on environmental capacity-building, obtained the agreement of the Banque Populaire du Haut-Rhin (BP or BPHR) to start a new financing scheme to allow SMEs to make environmental
investments. PREVair was designed from the start as an experiment to try to reach what presumably was the most difficult target: run-of-the-mill private sector companies between 1 and 100 employees. Average means
companies which have nothing to do directly with the environment, though over the years we have also supported small recycling companies, as they were needed to provide the services which the other customer companies needed.
We figured that if we could reach average small companies, then the approach had to be valid. PREVair is an innovative approach because of
PREVair
with relevance to Central and Eastern European Countries
The principles of PREVair are:
- to apply a holistic approach to the company; All types of pollution are taken into consideration: e.g. air, water, waste, noise, impact on sites and landscapes. PREVair is a loan
- demand-driven Note 1
about crafts: crafts here are not meant to be the small economic sector which in North America is called arts and crafts. In continental Europe, crafts are still often organized following the pattern started in the Middle Ages, i.e., in Guilds. These guilds include such businesses such as jewellers, bakers, carpenters, chimney sweeps, garages etc., i.e. millions of small businesses which employ tens of millions of people forming the first rung on the "economic food chain".
Note 2
about the importance of farmers and winemakers: Alsace is renowned for the quality of its food, and is a major agricultural producing region, in addition to being one of the most industrialized regions in France. Alsace is also world-renowned for the quality of its white wines, and is often described as the world's foremost producer of premium white wines.
Each loan request is accompanied by an environmental review called "éco-diagnostic" is made by the loan officer of the local bank agency together with the requesting company. This review evaluates the
environmental situation and needs of the company. The project is then submitted to the "Comité PREVair" for evaluation of the expected environmental benefits of the proposed solution(s), and if needed, is
reviewed by an eco-counsellor of ECO-Conseil contracted by the bank. This committee of experts, one of PREVair's strong points, involves a wide spectrum of
stakeholders, from all levels of government (city, "Départment", "Région", national), to business associations and private enterprises to ECO-Conseil as the only environmental NGO. This independent committee of
experts evaluates every loan request and each member has a right of veto. Organizations represented in the "Comité PREVair" nominate a person competent in environmental affairs . See Annex 3 for the list of
members of the Committee and a description of the type of organization. Several of the organizations in the Committee are also potential sources of subsidies for environmental investments, and one function of the Committee is to
see whether the proposed investments might qualify for such a subsidy. 2.2 Selection criteria for projects
- Extent of integrated / holistic / global approach and policy 2.3 Funding of the PREVair scheme Startup Loan and technical assistance "Comité PREVair" Cost of funds
- to acquire the necessary knowledge about the environmental condition of the company via the eco-counsellor;
- to submit loans requests to the "Comité PREVair",
an independent committee of experts, for environmental validation;
- the experts who represent different stakeholders all have a power of veto.
- for SMEs, small and medium-sized industries, crafts, farmers, winemakers
- at a fixed annual rate of 4 % (in 1997).
- it can cover up to 80% of the total investment, up to maximum 500,000.-
FRF.
- with usual maturity of 5 years and maximum maturity of 7 years.
- maximum allocated of 20 M FRF per year.
- Extent to which environmental factors are taken into account
- Relevance and quality of technical options and choices
- Impact on employment (only in positive sense)
The initial start-up cost (conceptualization, lobbying etc.) were borne by ECO-Conseil. The start-up costs for the bank were
covered by the bank internally.
The bank also allocated internal funding to start PREVair, and very importantly, paid an eco-counsellor to assist the SME in its "
éco-diagnostic".
Each member organization covers its own costs for travel and time.
The rate is below market, which means that the bank does not have as
great a profit margin on PREVair than on other loans. Its main incentives are the build-up of customer loyalty and the positive image achieved through public, official and peer recognition. The market rate for loans in
1996-1997 was about 10-11 %.
In 1996, the BP signed an agreement with the European Investment Fund, administered by the European Investment Bank, to cover credit risks associated with PREVair for 30 Million FRF maximum over 3 years. The European Investment Fund was launched by the European Commission as part of its programme "Environment and Growth for SMEs" following a decision of the European Parliament (see below).
Following this agreement, the BP decided to improve the terms of PREVair as follows:
old terms |
new terms |
|
interest rate |
5% |
4% |
maximum loan amount (without VAT) |
300,000 |
300,000 |
maximal percentage of loan vs. total project |
50% |
80% |
maximum maturity in years |
5 |
7 |
maximal annual loan volume in M FRF |
10 |
20 |
Note 3: PREVair loans represent about 2 % of the total loan volume
to SMEs of the bank. At the very beginning (1990), the interest rate was 6%, and the rate slowly declined as the general rate environment declined. Note 4: exceptionally, higher amounts of the order of 1 M FRF are
possible if the proposed project will benefit a large number of companies. This was the case e.g. for setting up a regional scheme called "Transform" to collect/recycle and /or otherwise dispose of automobile waste.
2.4 How does PREVair work in practice? 2.4.1. initial project identification Information about PREVair is available in all local agencies, as well
as in bank literature. In addition, extensive press coverage over the years and publicity by ECO-Conseil Enterprise (one of the divisions of ECO-Conseil) through other projects for SMEs adds to local
knowledge of the scheme. Companies wishing to obtain a PREVair loan apply to their usual loan officer. role of the local agency:
- initial screening with regard to formal/financial criteria (due diligence) Note 5: the Request for Environmental Analysis (or "éco-diagnostic") is designed as a simplified self-help environmental review. It was conceived by ECO-Conseil, and a second version
specifically for farms (with buildings used for animal husbandry) was designed in 1995. The questionnaire was tested on site and validated by the Committee of Experts. Note 6:
since local agencies can only play their role if they possess some basic environmental knowledge, ECO-Conseil trains local agency staff, e.g. "Seveso regulation" etc. 2.4.2 loan request evaluation
After the financial due diligence by the local agencies, ECO-Conseil Enterprise completes the first link in the chain of environmental due diligence, which takes place in a 2 or 3 step process. Step 1:
ECO-Conseil Enterprise
- analyse and evaluate loan applications upon requests of loan officers or the Committee of Experts Step 2: the Comité PREVair
- meets approximately every 2 months (6 times a year) to consider all applications which have passed the initial screening (on average 10 new applications per session) Steps 3 & 4: (optional)
- new or second on-site visit by ECO-Conseil Entreprise. In that case, the loan application is sent back to the Comité PREVair with the result of the site visit and the recommendation of the eco-counsellor.
Note 7: ECO-Conseil Entreprise represents ECO-Conseil in all meetings of the PREVair Committee of Experts (a representative of the Strasbourg Headquarters is often present). 2.4.3 evaluation of results
Several months after the loan has been approved, the eco-counsellor visits the company to verify the degree of implementation of the investment, to speak to the owner/manager, and to ascertain his
level of satisfaction. Nevertheless, due to lack of time and funding, we have not proceeded with a systematic quantitative evaluation of the benefits. This would also require exact measures to establish a
baseline, which is not always possible or desired, probably for psychological reasons. Due to the follow-up by the eco-counsellor and the successive visits to the company, one can often observe that the consciousness of the
company owner of the necessity and benefits of dealing with environmental problems increases. As a result, such companies often decide to apply to the bank for further PREVair loans, in order
to continue the environmental modernization process. The undeniable positive impact on the working conditions (e.g. less solvent fumes, noise, dust etc.), and on the environment, is an
important factor in the repeat business of PREVair. 2.4.4 confidentiality It is extremely important that the on-site visit occur in a climate of
mutual trust. The personality of the eco-counselor is therefore of paramount importance in eliciting a positive reaction from small company owners who are often afraid that the results may be used
against them, since indeed, data gathered is transmitted to the Comité PREVair, some of whose members are regulatory agencies with the power to levy fines.
- setting up financial part of loan with the credit departments- fill
in the environmental "Request Analysis" ("éco-diagnostic") together with the loan applicant
- request technical advice or on-site visit from ECO-Conseil Enterprise
- visits companies on site and conducts environmental performance reviews together with the company owner/top manager
- informs the company about environmental regulations and advises on best options: cleaner technologies, cleaner processes, environmentally-sound products etc.
- transmits results to Credit Department for presentation to
Comité PREVair
- examines each loan requests on environmental grounds
- may request new or second on-site visit by the eco-counsellor for clarification
- makes recommendations to improve policy and management procedures with regard to the environment (including
recommendations about Environmental Management Systems);
- explores of complementary financing possibilities
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