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REPORTS - SPECIAL REPORTS |
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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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