Methodological and Technological issues in Technology Transfer

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5.2.1. Government Finance in Climate-Change-Related Projects

Governments raise finance from tax revenues and through borrowing from domestic and international financial markets or from multilateral organisations, and use the funds for government spending, including on projects that are perceived, or assumed, to be justified in terms of the public interest. Traditionally, governments have been the principal suppliers of finance for infrastructure projects, which are seen as being in the public interest. This encompasses many sectors of relevance to climate change such as energy, transport, agriculture, water and waste, and coastal defences.

Such finance can be provided as part of the capital expenditure programmes of state or local governments, through the investment activities of state owned industries, or through the lending of government-owned financial institutions, such as national development banks. While there has been a trend in recent years to increase the involvement of the private sector in such activities, public sector finance remains a very important source of finance in many areas, both in the developed and developing world.

While the allocation of government finance is subject to a number of influences, such as political pressure and central spending limits, the principal method used for many public sector projects by governments and government-controlled companies is through the internal rates of return. Because such businesses are backed by government and/or by a monopoly customer base (as with many electricity systems), the risk is perceived to be very low, and low rates of return are required. Financial rates of return in the range 3-8%/yr, set by governments according to macroeconomic and other factors, have been typical.

To expand the scope of this approach, sometime governments have sought to expand the definition of benefits beyond financial returns, to include other factors such as environmental benefits based on estimates of quantified 'external costs.' This results in sophisticated and extensive cost/benefit evaluation of approaches against a range of criteria (Anderson, 1979). Such an approach has provided the dominant criteria for public sector financing decisions in many countries over the past few decades, both nationally and - to some extent - in the area of foreign aid. It is also possible to incorporate non-financial factors into the decision process by means of multi-criteria analysis, which takes different non-monetary considerations into account and makes them comparable using a system of non-monetary weights. The external costs may also be "internalised" by measures to make Coasian bargaining possible2 or by targeted policy measures in line with the Polluter Pays Principle. It should be noted that such cost-benefit analysis is largely the preserve of the public sector - the commercial private sector cannot include non-financial considerations into its analysis, unless measures are taken to monetise them.

Such approaches to quantitative evaluation are also applied in developing countries, and often indicate that government funding of programmes with positive climate change impacts are worthwhile in their own right. This has been seen particularly in the area of energy efficiency, and developing countries are increasingly turning to energy efficiency investment as a means to provide energy services rapidly with limited capital resources. They are doing this by enabling more work to be done and more services to be provided with less energy input, reduced capital expenditure, and minimal environmental impact. Economic planners in some developing countries seek to employ demand side management (DSM) as a cornerstone of sustainable economic expansion. The government of Thailand, for example, has committed US$60 million per year to an Energy Conservation Fund. In addition, the Electricity Generating Authority of Thailand has adopted a five-year, US$189 million DSM programme focused on commercial and industrial energy savings. In Mexico, the national electric utility has begun a move toward DSM with a programme to procure and sell two million compact fluorescent lamps (CFLs) for residential applications in two cities. The Mexican government is also committed to promoting energy efficiency in its federal buildings, and in municipal services such as street lighting and water pumping. Similar initiatives are emerging in the Philippines, Indonesia, Poland, the Caribbean, and China, among others.

With continuing pressures to reduce taxation and government expenditure, governments are increasingly seeking to justify expenditure on public infrastructure and to consider alternatives. Thus, in many cases there has been increasing interest in opening public infrastructure development to the private sector, for example, by privatising state owned companies, opening markets to competition, and opening projects to private finance. This increasing role of the private sector in areas such as electricity supply has tended to increase the required rate of return. While this might at first glance appear to increase the cost of the services to be provided by the project, in many cases this is expected to be more than offset by the gains in efficiency. However, this can create problems for environmentally sound technologies if, as is often the case, they involve increased capital costs (in return for reduced operating costs). Such problems can be exacerbated by the fact that the private sector will not be able to take account of external costs/benefits in the same way as public entities. These factors are not insurmountable, and there are structural options to help direct private finance both at the macro level (e.g., environmental charges) and micro level (e.g., the public-private partnerships in section 5.6) to help overcome them. However, governments should be aware of the potential climate change drawbacks in shifting from public to private sector finance.

One clear example of the consequences of this shift is the impact it has on DSM programmes above. As the energy market is deregulated and privatised it becomes increasingly difficult to support formal DSM programmes. As such attention has shifted to alternative mechanisms for encouraging energy efficiency, both through macroeconomic measures and through specific activities such as energy service companies or ESCOs (see section 5.7.3)

Since the beginning of the 1990s, several countries in Central and Eastern Europe (CEE) and the Newly Independent States (NIS) have explored the creation of public environmental funds with the specific purpose of investing in environmental infrastructure, technology and conservation. These funds are financed by earmarked revenues from charges and fines for pollution and use of natural resources or environmentally harmful products. The significant advantages of these funds are that the resources are dedicated for environmental purposes and not such to competition with other demand, and that they are off-budgetary. Although in NIS (countries) these funds remain insignificant and somehow a flawed source of financing environmental investments, they have been able to mobilise significant resources and play an essential role in maintaining high levels of environmental investments in the economy of some CEE countries (in particular Poland and the Czech Republic). Such funds could potentially be developed in other economies. (See OECD 1995a, OECD 1995b, OECD 1999a, Peszko 1995; Peszko and Zylicz 1998; Mullins et al., 1997).

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