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Detailed Review of Selected Non-Incineration and Incineration POPs Elimination Technologies for the CEE Region

5 Economic review criteria

5.1 Introduction
5.2 Categorisation of criteria
5.3 Category 1: Technology specific criteria
5.4 Category 2: Context specific criteria
5.5 Category 3: Generic criteria
5.6 Criteria evaluation measures
5.7 Summary and discussion

5.1 Introduction

5.1.1 Background

The economic field of expertise not only deals with the identification and qualification of individual evaluation criteria. It also deals with summarisation of the individual criteria against one another. The present chapter primarily focuses on the former of the two through a systematic analysis of the gross list of criteria outlined below introducing a few of the most commonly used measures for evaluation of generic criteria as well as some of the problems related to this. Finally, Section discusses the issue of environmental financing and argues that the financing available for a specific project in practice is likely to be a decisive factor in the selection of a technology.

The economic review criteria and approach has been focussing on the essence of the technical evaluation of the four selected POP elimination technologies. These are reviewed in detail in Chapter 6.

5.1.2 Gross list of economic criteria

An economic assessment of potentially viable POPs elimination technologies addresses a variety of more or less related areas. These areas include:

• financial criteria, i.e. capital costs, operational costs, unit costs and similar traditional financial evaluation criteria;
• organisational constraints;
• know-how transfer;
• capacity;
• robustness;
• logistics;
• process residues;
• demand; and
• socio-economic costs and benefits.

The aim of the following chapter on economic review criteria is to argue the potential for each of the identified criteria in terms of their appropriateness and applicability on the four selected POP elimination technologies covered by the present review report. Hence, the main objective of this chapter is not to conclude which of the four selected technologies is the favoured option, but rather to establish a set of generic issues to be considered systematically when evaluating the options for a POP elimination solution in a specific context.

5.2 Categorisation of criteria

The term "economic" in this context is very broadly defined so as to concern topics, which one way or the other may have cost implications to the implementation of a specific technology option. Several of these topics are described in the technical, environmental and risk parts of the review, but will be reconsidered in this section with the economic angle.

The nine-item list presented above basically represents a very disparate and complex view on what issues could potentially be relevant in relation to POP elimination technology evaluation. Not all of these issues may prove to be relevant or applicable as technology evaluation criteria, and the approach is to systematically argue why a specific criterion is relevant or not.

The main working hypothesis is that the economic review criteria as outlined above falls into one of three different categories:

• Category 1: Criteria which are technology specific, i.e. evaluation criteria that relate solely to the technology option in focus, regardless of the context. A typical example is capital costs;
   
• Category 2: Criteria which are context specific, i.e. evaluation criteria that yield different prioritisation of technology options depending on the actual context, for example region. One such criterion could be treatment capacity of the technology option in focus. If a specific region faces severe problems with certain types of stockpiled pesticides in powder form, the preferred technology may not be the same in another region, where PCB contained in large industrial transformers tends to be the biggest problem. Socio-economic criteria typically fall into this category; and
   
• Criteria 3: Criteria which are generic in terms of technology and context, i.e. evaluation criteria that can be met (or not met) regardless of technology option or context on focus. Typical for this category could be sound implementation and management practices, as for example how to organise the financing of operational activities, how to ensure public acceptability and similar.

5.3 Category 1: Technology specific criteria

5.3.1 General

The category of technology specific criteria covers a number of the technical and performance related attributes that uniquely characterise the technology option in focus. Most of the criteria within this category are being described in the technical, environmental and risk parts of this review. Common to many of these criteria is, however, that they have cost implications either directly for the organisation responsible for running the operations, or for the initial owners of the POPs to be eliminated (or for the society as such, as the ownership issue if for example obsolete pesticides very often is blurred).

A distinction is made between the costs related to the mere elimination process (direct costs) and costs related to some of the supporting activities that inevitably follow from the elimination process, such as transport and temporary storage of POPs and similar. The latter is referred to as indirect costs.

5.3.2 Direct costs

The two main direct cost components involved include treatment costs and capital costs.

• Treatment costs - typically formulated in relation to the treatment capacity of the technology - include costs for raw materials, energy consumption, labour input and similar. As prices, however, vary from one region of the world to another, vendors should optimally submit information on required input of raw materials, electricity, labour and similar in natural units, as it will be necessary to assess each of these cost items in the specific context. The cost of labour input will for example often vary substantially from one country to another, whereas many of the raw materials typically must be purchased at prevailing international market prices. Finally, it should be noted that the issue of technology robustness, i.e. the risk of technological breakdown causing temporary cease of operations, has been incorporated indirectly in the treatment costs. The figure is calculated by dividing the annual use of operational costs with the amounts of POPs treated within the same period, adjusted for technological down-time (expected time used for maintenance, service etc.). Treatment costs normally amount to approx. 50% of the total costs pr. unit POP treated.
   
• Capital costs - in principle an objective technology specific evaluation criterion as it is typically to be paid in "hard" exchangeable currency and therefore is comparable in between technologies regardless of the specific context. Nevertheless, the capital cost criterion is not so straight forward. The main reason is that in the CEE Region, collecting and eliminating hazardous chemicals are not likely to become outright profitable in the foreseeable future. This is due to a number of factors, one of which concerns the initial ownership of the POPs as previously mentioned. Another issue concerns the effective (or non-effective) enforcement of environmental regulation put forward by national authorities. In practice, these circumstances in practice often constrain an operator in terms of the revenues that can be gained from the operation. This will change in the new EU member States and new applicant countries. In most of the former Soviet republics, however, activities related to combating the POP problem must be based on substantial subsidising, either from national authorities (state guarantee, for example), or from international donors and other international financing intermediaries (IFI's).

These considerations influence the loan conditions that can be obtained for a particular country or region, which to a certain extent makes capital cost a context specific evaluation criterion.

One should expect a general relation between the capital costs and marginal treatment costs, so that less expensive the plant, the higher the average costs for treating one unit of POP. This is evidenced by the key cost components of the four technologies included in this review (see table 5.1). In practice, the funding options available for the specific project (operational revenues, government subsidies, commercial and development bank loans, grants) will often play a decisive role when prioritising purchase of either an expensive technology with low operational costs or a less expensive technology with relatively higher operational costs.

• Marginal cost of capital - in the price comparison table, the costs for capital investment have practically been expressed as the marginal costs of capital. In principle, the marginal costs of capital measure the share of the costs for eliminating one additional kg of POPs, which is incurred by the initial capital investment. In practice, the marginal costs of capital are obtained by expressing the capital investment as an annuity (fixed annual cash flow over the expected lifetime of the elimination plant) divided by the annual elimination capacity of the technology or plant.
   
• Direct costs evaluation criteria - cost estimates have been provided by the individual POPs elimination technology vendors and are based on pricing schemes that prevail in the respective home countries, including the demand for analytical testing and similar. Hence, these estimates cannot be transferred directly to the CEE context, although the figures do give an indication as to the potential for CEE applicability.

Table 5.1 Criteria in support of main direct cost components

*1: Assuming full loan financing (annuity at 7% p.a. and 15 years maturity). The loan conditions likely to be obtained from a bank among other things very much depend on the loan amount in question. For the present purpose, however, all four technologies have been tested on the same set of simple loan conditions in order to make the technologies comparable and the comparison thereby transparent.
*2: The cement kiln is a special case in respect of the capital investment, as the facility in its design and purpose is not dedicated to eliminating POPs. Cement production can in principle be maintained parallel with the POPs incineration, and the marginal capital costs should therefore not be included as part of the total costs for POPs elimination, thereby reducing the total costs per eliminated kg POP.
*3: Includes analyses and treatment costs. The estimate is based on cost figures provided for treatment of pesticides.
*4: Assuming average annual treatment capacities of: Ecologic 3,000t/year; BCD 45t/year; CIS 3,000t/year and cement kiln 30,700t/year.

5.3.3 Indirect costs

The term "technology" is typically defined narrowly by vendors as to include the mere destruction process. Costs will in practice, however, accrue to all processes associated with the POPs destruction. Hence, the basic assumption for the technology specific economic criteria is that one should apply a comprehensive and universal view to project costing. A comprehensive list of cost items can be established by applying a kind of cradle-to-grave approach, by which the POPs are followed from the first initial identification all the way to the final elimination and documentation. This will typically include:

• Initial identification and registration of POPs;
• Special repackaging of POPs in order to meet specific requirements posed by the elimination technology;
• Pre-treatment of POPs in order to meet specific requirements posed by the elimination technology;
• Transportation to plant;
• Special requirements for management and storage at plant;
• Destruction of POPs, including analyses etc;
• Destruction/cleaning/safe long-term disposal of temporary storage means (drums etc);
• Safe disposal of residues and rest products (secondary wastes);
• Post-restoration/cleaning up of plant site; and
• Management and administration.

It is likely that all of these items will accrue directly to the organisation operating the elimination process. In terms of what is the most appropriate technology, all costs should, however, be included in the prioritisation process, no matter to which they accrue (government institutions, the operator, private enterprises etc.). Furthermore, some of these items will be common to all technologies and could therefore effectively be excluded as prioritisation criterion.

Those cost items, for which each technology may perform differently (or individually), must be explored, and the vendors should accordingly be urged to submit information on these particular items in addition to information on the mere destruction process.

• Repackaging costs - the POPs elimination technologies in focus obviously differ in terms of how the POPs must be handled before and during the mere elimination process. One technology may for example require that the POP is stored in drums with very specific characteristics in order to be practically handled at the elimination facility, whereas another technology may be more rugged in terms of requirements for repackaging of the POPs prior to the treatment. The technologies may thus in this respect have different indirect cost implications, which need to be explored.
   
• Pre-treatment costs - a technology may for instance be able to treat POPs only when these are available in liquid form, thereby implying that POPs appearing in powder form require some kind of pre-treatment. Vendors must specify in details the requirements for the costs related to pre-treatment.
   
• Transportation costs for POPs - transportation costs for POPs to the destruction plant should obviously be weighed against the costs of relocating the plant (if possible at all). Transportation costs are in general in the CEE Region not very high although they are expectedly rising as the full EU membership status approaches. The transportation costs should also include the risk premium that is related to carrying hazardous chemicals over great distances either by road or rail.
   
• Safe management of storage means - safe management of storage means may be an important evaluation criterion, as some technologies offer direct incineration of the entire package, including means of storage and contents, whereas others can work with waste in liquid form only, thus necessitating some kind of post-process handling (cleaning and safe disposal) of the storage means additional costs for the operator.
   
• Residues handling - in most cases will there be residues left from the destruction process, which necessitates post-process handling of some kind, either be in form of land filling or restricted dump site disposal or similar. The main attributes (or cost drivers) to this criterion will be the amount of residues to be disposed of per unit of eliminated POP and hazard potential of the residues.
   
• Restoration of the plant site - cleaning up of contaminated sites can be extremely costly. Although the operators will of course strive to avoid spills and leakages from the operation, there will always be a risk of unforeseen events that require restoration of the plant site after operations have ceased. If the operations are planned to last for many years, the financial impact of this criterion (at the moment of the investment decision) may not be overwhelming simply because of the discounting of future cash flows. But it should be considered, nevertheless, for example, how many cubic metres of contaminated soil that eventually will have to be cleaned in a worst case scenario (i.e. what is the extent of the area needed to erect the plant).
   
• Indirect costs evaluation criteria - actual costs have not been provided by the vendors, as the indirect cost items described above are not normally considered to be an integrated part of the technologies. It is - as described - nevertheless the specific attributes of each technology options that actually make an indirect cost item occur (or not occur). I.e. these attributes can be considered as cost drivers, and are therefore also relevant as economic technology evaluation criteria.

Table 5.2 below outlines six criteria, which could support each of the six indirect cost items described above. Each criterion in the table is associated with additional costs, which can be derived relatively easy.

Table 5.2 Examples of criteria in support of indirect cost indicators

The table may not be exhaustive, but it does give an indication of arguments needed to achieve a comprehensive approach to the costing exercise of the technology evaluation.

5.4 Category 2: Context specific criteria

5.4.1 General

A context specific evaluation criterion is basically a prioritisation scheme that does not yield a direct answer as to what technology option will be preferred universally, as they depend on the context in which they are applied. These criteria may end up ranking the same technology options differently in different contexts, e.g. different countries and regions.

The elements to this category of criteria basically relate to either demand (in terms of amounts and fractions of POPs available for destruction) or the institutional and regulatory framework.

5.4.2 Amounts and fractions of POPs

Meeting the contextual (e.g. local or regional) demand in terms of amounts and fractions available is obviously critical to combating the POP problem of a particular local or regional community. No use in supplying a piece of equipment that cannot actually solve the problems it is supposed to, either because of a mismatching capacity of the acquired treatment facility or because the technology is not technically suited for treating the specific POP fractions that exist in a given region or country.

Whereas this in itself is a fairly simple observation, the argument could in fact be taken a step further. A steady and continuous supply of POPs to be eliminated is needed in order to ensure the full benefit from the acquired treatment facility. Costs will accrue (costs of servicing of loans, maintaining a skilled labour force and similar) even when operations have ceased for lack of POPs to be treated, thus in reality increasing the overall marginal costs. Practical evidence from previous studies (e.g. NEFCO: PCB Fast Track Project, COWI 2002) indicates that reasons for this can be several despite the fact that inventories and other statistics may indicate that plenty of POPs should be available in the region. Some POPs may be tied up in operational equipment, e.g. PCB in industrial capacitors and transformers. This PCB will become available for elimination only to the extent that the electrical equipment can be renewed thus keeping up production lines etc. In some regions and countries it may also be difficult to identify owners of e.g. obsolete pesticides, who are willing to take responsibility (i.e. pay for a safe disposal), as previously mentioned in this section. Some POP owners may also be reluctant to report correctly to environmental authorities, simply because they know that it will impose additional costs to the enterprise or farm collective. Thus, the demand problem also very much involves the question about the regulatory framework, including what options exist for actually enforcing the regulation put forward by public authorities in the regional or local context.

These considerations may not necessarily have a direct and decisive impact on the choice of technology in a specific context. But it is the kind of evidence that will show in pre-investment feasibility studies and businesses plans and therefore potentially constrain the size of loans that can be obtained for the purpose.

5.4.3 Institutional and regulatory framework

Environmental control and monitoring
National environmental legislation and regulation obviously has an impact on the costs of obtaining licenses and permits required for establishing the treatment facility. Furthermore, the market prices for laboratory testing may vary substantially in between regions and countries. Certain particular features in national regulation and enforcement practice may thus render one specific technology more financially attractive than the other. One such example is costs for performing analytical testing to comply with environmental regulation.

Even though a technology may be well tested, environmental authorities require a continuous, rigorous testing of the environmental performance of the treatment technology. Costs for analytical testing and control can amount to as much as 15-40% of the total costs pr unit POP treated. The four technologies included in this review indicate, however, that the relative share of analytical costs to total (direct) costs varies quite a lot. In principle, one would have expected that the need for analytical testing would not depend on the technology option, but rather on the amounts of POP treated. Part of the differences in analytical costs between the technologies of this review may be due to different environmental requirements put forward by the environmental authorities in the countries, from which the individual technologies are sold. Analytical testing will, however, have to comply with the minimum requirements put forward in international conventions, regardless of national regulation.

Furthermore, costs for laboratory testing certified in accordance with international standards may vary substantially from one country to another, and so analytical costs only apply as an evaluation criterion for technology prioritisation in a specific context.

Socio-economic indicators
Furthermore, a number of the socio-economic characteristics of the region or country in question also fall into the category of context specific evaluation criteria. One typical example is the local unemployment rate. If a local community is experiencing high unemployment in the local labour force, a labour intensive technology option may be ranked relatively higher than a technology option that does not yield many new jobs for local people. Such prioritisation can be economically justified by the potential savings on public budgets in form of fewer transferrals of unemployment benefits. More people employed also increases the local tax base, which again can have second order effects in terms of increased private and public spending.

Again, these considerations may not necessarily have a direct impact on the choice of technology in a specific context. But it is the kind of evidence that will show in pre-investment socio-economic cost-benefit analyses. The full socio-economic analysis of project costs and benefits is appropriate when evaluating the individual project in a specific context, as such analysis includes not only financial project costs, but also costs incurred by the relevant local municipality or the entire society as such as a direct or indirect result of the project. These are important tools, not least because public authorities are likely to be involved one way or the other in this kind of activities, either on the financing side or as de-facto operator of the treatment facility.

Political framework and public acceptability
Finally, there may be political or public barriers to overcome locally. Most people do not like the idea of having a hazardous waste treatment plant located nearby - this is well-known from anywhere in the world. Lobbying conducted by NGOs or vendors may make some technology options politically unattractive, as has for example been the case for incineration based technologies some places. A successful POPs elimination project should entail public accept in the local community of the elimination facility as well as the elimination activity itself. Proper communication between authorities and local communities is in this respect critical, provided of course that the POPs elimination technologies are in fact as environmentally safe as e.g. vendors would argue. One very important aspect of achieving actual local accept, is that the communication between these parties is actively supported by unbiased expert evaluation amended by as early as possible involvement of key interest groups.

5.5 Category 3: Generic criteria

5.5.1 General

A few items in the initial screening list are neither technology nor context specific. In terms of actually reducing stocks of existing POPs, these items play an equally critical role as does the choice of the most appropriate technology. The issues concerned are related to sound implementation and management practices of the specific projects.

5.5.2 Transfer of know-how

Each of the four vendors included in the present review have submitted information on how they envisage conducting the transfer of know-how necessary to run the facility. Typically it involves some kind of initial phase following installation of the technical equipment, in which technicians are operating the facility jointly with the future local operators.

A POPs elimination facility is not a typical off-the-shelf commodity, and it thus seems likely that specific terms for e.g. the extent and type of know-how transfer can be agreed with the vendor during the sales negotiations.

So in practice, transfer of know-how for a specific project is typically an issue that can be arranged at will of the project implementing authorities. Basically, it is about making sure that the people or organisations responsible for the activities also have the necessary means including skills, incentives and authority to conduct the activities efficiently. The vendor of the POPs elimination technology can play an important role in providing local operators with adequate skills.

Commissioning of the chosen technology option may thus be conducted in a way so as to ensure that necessary skills are transferred to the local operators, either through a prolonged commissioning period, in which vendors and future operators work closely together, or by ensuring future involvement from the vendor through leasing contracts, management contracts and similar. These are options that need to be explored in depth regardless of technology type and context.

5.5.3 Organisation

Organisational issues broadly concern financing, ownership responsibilities and instalment of appropriate checks and control procedures. Evidence from other similar sectors of the CEE Region (wastewater treatment, municipal waste facilities etc.) clearly indicates that generic guidelines for sound implementation can be established. The aim of such guidelines is basically to ensure viable and sustainable real-life solutions.

Again, these are topics that the implementing authorities will have to deal with directly when practically designing POP elimination projects, but they are typically not relevant as mere technology evaluation criteria.

5.6 Criteria evaluation measures

5.6.1 The ranking of alternatives

Identifying appropriate technical, risk, environmental and economic review criteria does not in itself enable a unique ranking of the technological alternatives in question. Different people will put emphasis on different criteria, basically because people have different preferences. Furthermore, the ranking process inevitably involves comparison of different criteria that by nature are incomparable. How for example to objectively compare an environmental criteria on emission thresholds with an economic criteria on financial project viability?

Yet, a number of more or less commonly applied methods for formalising the ranking of alternatives do exist. Most of these methods work with measurable indicators rather than evaluation criteria, though, inasmuch as these methods typically are quantitative by nature.

One area, within which a quantitative approach to ranking alternatives is broadly acknowledged, is the evaluation of financial pros and cons (i.e. revenues and costs). There is a range of traditional financial evaluation measures that can summarise and weigh different costs and financial benefits (e.g. revenues for a partly or fully commercial operator) disbursed over time, including for example net present value as well as internal rate of return.

• Net Present Value: The basic idea with the net present value (NPV) evaluation measure is that it incorporates the time aspect of investment planning. The principle is that the longer a certain payment can be deferred in time the better in strict financial terms. The rationale for this is that in the meantime until the payment is actually due, the committed but still unspent money will generate interest. If an amount of 105 USD is due in one year from now, the value of this amount today is only 100 USD, because the 100 USD will draw 5 USD interest during the period until the final payment is due (provided a discount rate of 5% p.a.). So, in other words, the investor will need to have only 100 USD in his wallet today in order to be able to commit himself to an investment, which implies a cost of 105 USD in one year from now. This difference is reflected in the NPV measure.
   
• Internal Rate of Return: The internal rate of return (IRR) measure is closely related to the NPV measure, inasmuch as it is the discount rate that satisfies the equation NPV=0. A given investment project represented by an array of net in- and outflows disbursed over time will thus be deemed favourable only if the IRR for the project is at least as high as the IRR that can be obtained from an alternative investment. In practice the alternative investment is typically represented by common market interest rate.

5.6.2 Application of monetarised evaluation measures

The NPV and IRR measures are used for screening of investment opportunities by for example commercial operators. A commercial operator will be searching for profitable business, and the traditional NPV and IRR analysis exactly reveals the expected profitability (or the opposite) of a given investment. As such, this type of analysis is a rather limited tool for ranking of alternatives, as it does not take into consideration any item or criteria that does not have a direct cost or revenue implication.

The NPV approach is, however, often applied on a broader set of criteria or indicators than just the financial (i.e. actual cash flows only), so as to include also for example social, health and environmental costs. The latter is obviously very relevant in the context of a POPs elimination project, as the main objective of such project is to improve the environment in order to impact for example human health. These considerations are not relevant to a potential commercial operator of the POPs elimination technology, but will obviously be in focus for public decision makers, including potential donors (development banks, bilateral donors etc.). Economic cost-benefit analyses take into account not only actual cash flows, but also indirect cost implications related to health, environment and similar so as to prove project viability for a potential commercial operator as well as for the society.

The main drawback of the economic cost benefit analysis is that it requires quantification and monetarisation of a number of criteria or indicators that by nature are very hard to quantify and monetarise. The NPV measure requires all criteria to be expressed in terms of money, and this can be a very problematic or even questionable process for example for environmental benefits. No one in principle doubts the benefits of reducing stocks of hazardous chemicals in a safe manner, but how exactly to measure these benefits in terms of what value this may have for human health and the environment in general? And more, how exactly can one express this value in terms of money, which is a prerequisite for being able to apply the NPV measure? The ultimate question in this respect would be how to measure the value of a human life. These questions are in any case not easily answered.

There exist other approaches to criteria based evaluation of alternatives, which do not necessarily involve direct monetarisation, as for example the various multi criteria planning methods. Common to most of these methods is that they require a more explicit expression of the decision makers' preferences than does the more traditional NPV method. The basic point is that it is necessary to establish some common denominator for all the criteria involved, in order to make them comparable across categories (so that for example technical criteria can be weighed against environmental or financial criteria). Multi criteria planning methods are typically fairly advanced tools, and they are in any case not nearly as commonly acknowledged and accepted as are the NPV and IRR methods.

Despite the methodological hardship related to a full economic cost benefit analysis, this kind of analysis is strongly recommended (and even required) in many western public administrations, including in the US and the EU.

5.7 Summary and discussion

5.7.1 Summary

The aim of this section on economic evaluation criteria has been to identify and argue issues that are likely to have some kind of cost implication in relation to the choice of technology option. The definition of what is an economic criterion has been broad, so as to include in practice most (non-technical) issues that could eventually become a stumbling stone for a successful project.

The list of potential criteria emerging from the dialogue with vendors, NGOs and technical experts have been divided in three categories in order to systematically identify which criteria are in fact relevant at the present stage.

The first category of economic criteria includes two major direct cost components - treatment costs and costs of capital. Treatment costs should preferably be identified in terms of natural units (amounts of raw materials, man-days required etc) as prices may vary. Finally, one should apply a comprehensive and universal view to project costing, so as to include all costs related to associate processes (transport, residual products disposal etc.).

The second category criteria have basically one thing in common, i.e. that they all require additional analyses into the substantial issues on the ground, be that in the form of feasibility studies, business plans, cost-benefit analyses or similar. These criteria do not apply well at the present stage of mere technology assessment.

Third category criteria mainly deal with sound implementation practices of specific projects. These criteria should rather be used for designing of the specific implementation projects, than for technology evaluation purposes.

So, in essence, most of the initially identified potential economic criteria are in fact not technology-dependent, and must thus be addressed at later stages through further analyses and appropriate designing of the specific projects. Furthermore, it must be recognised that establishing a set of evaluation criteria not in itself automatically yields a unique ranking of the potential candidate technologies. The evaluation process - weighing some criteria before others - is critical in as much as it ultimately involves that the decision makers explicitly reveal their preferences. This can be a complex as well as a troublesome matter.

Finally, the importance of the financing issues involved must be stressed. This is because the available funding sources bear an impact on the choice of technology. This impact runs parallel to the impact any objective criterion set up by an independent expert may have in the same respect. Elaborated financing plans or strategies may enable a project designer to gain control over some of these aspects as well.

5.7.2 Discussion

A note on financing
The present review report represents a bottom-up approach to identifying the most attractive POPs elimination technology from a short-listed selection of likely alternatives. The potential areas of interest (environment, risk, technology, economy) are identified, and within each of the categories a number of relevant measurable criteria are established on the basis of which, the technological alternatives in principle can be ranked.

One might argue, however, that decisions in practice depend also on a number of other factors that are not necessarily entirely grounded in independent and objective expertise. Or at least, that the list of alternative technologies subject to an evaluation in a specific context may be limited by factors that are hard to describe objectively.

The country in which the facility is being installed may for example prefer a facility manufactured in the country or even a technology invented in the country before any internationally recognised 'best available technique', regardless of what an expert's assessment recommends. A potential bilateral donor may have a parallel interest to promote the industry of its own country. This, as well as other more or less politically grounded interests, may distort the choice of a technically, environmentally and economically more justified alternative.

So why even bother making such experts' review of alternatives in the first place, if the choice in the end anyway depends on a number of factors that are political rather than factual?

Firstly, it may not be a major problem at all, provided that appropriate alternatives do exist nationally. Technologies for POPs elimination do exist for example in some of the countries of the CEE Region. These national technologies may not represent international state-of-the-art in terms of for example environmental performance, but as long as they comply with basically agreed standards, it is better that nothing.

Secondly, these considerations very much put the financing aspects in focus. As described, it must be expected that the funding options available for a specific project will impact the choice of a POPs elimination technology alternative, as the political thrust generally tends to follow the money. So, provided that the issue on funding options is important, then the question is what funding sources are available, what is the deciding factors in this respect and can these factors be influenced at all?

For the CEE Region in the long-term perspective it must be expected that economic wealth will increase, so that the countries eventually will be able to finance POPs management by themselves. In a period of time from now, however, the countries of the CEE Region will most likely still are dependent on external assistance of some kind. Environmentally sound elimination of POPs in these countries is not likely to become a business in a foreseeable future, from which one would expect a high financial return on the initial investment, and private capital therefore would be accordingly difficult to attract. So there will most likely still be a role to play for international funding, for example in form of development bank soft loans, EU Structural and Cohesion funds frontrunner mechanisms (e.g. ISPA) or bilateral donors.

Almost all of these external funding sources require up-front documentation on a potential project's financial viability (or bankability), and an investment project that does not generate income can by nature never become financially viable. Without prospects of project viability even under very relaxed conditions, funding options are typically very limited, and so this is important to consider when designing the project including the supporting organisation and regulatory framework.

One way for the project designer to cope with these difficulties will be to approach the financing issue actively prior to designing each specific project. A comprehensive financing plan or strategy for future POPs management in the country - maybe as part of an overall national environmental action plan - could thus be an appropriate measure. An overall financing plan could consider total costs for compliance to the Stockholm Convention and compare these with available sources of funding. To the extent that funding proves to be inadequate to meet the objectives of the compliance strategy, the financing plan could then analyse other potential sources of funding as well as what the constraints, in terms of technology choice, may imply to the country. Such a process may very well lead to a reformulation of the requirements to the technologies in question (i.e. a reformulation of evaluation criteria), for example that the technologies should be capable of treating not only POPs but also other specified types of hazardous waste, so as to enlarge the market base for a potential operator.

This could maybe in turn ensure the project's financial viability thus keeping a number of potential sources for funding open.

Environmental financing - brief overview
This section provides a brief overview of possible sources of finance available for a specific POP elimination project as well as of the principal steps that are involved in obtaining external financing e.g. loans and grants from development banks and donor organisations.

Funding sources
Basic funding sources that may in principle be available for financing of POP elimination activities have been listed in Table 5.3 below.

Table 5.3 Sources of environmental financing (1)

The extent, to which the activities can be organised in order to generate operational revenues, is the key to what kind of financing will be available to support the implementation of a POP elimination technology. Thus the funding options are broader in cases where it can be substantiated that there exists a potential for commercialisation of the operations, i.e. that one can identify customers willing to pay the operator to dispose safely of e.g. obsolete pesticides. The revenue generated under such conditions may be used to cover operational costs, but also to attract lenders willing to finance the initial capital investments. These additional funding sources have been outlined in Table 5.4 below.

Table 5.4 Sources of environmental financing (2)

Project cycle
Obtaining project financing from the various donor organisations and IFI's requires a basic understanding of how these institutions work. The procedures involved may - as mentioned previously - be quite complex. Typically, however, the procedures tend to involve more or less the same steps from the point, where the project is initially conceived until the final agreements are approved and signed. These steps are often referred to as the project cycle.

Identification phase
The identification phase is normally conducted at higher political levels. The major development banks for example prepare dedicated country strategies in close consultation with country officials and thus provide the basis for establishing a policy dialogue and formulating an appropriate development strategy and lending programme for each country. Most of the major bilateral donors do the same. Individual projects typically originate from these studies. Knowledge about these strategies and programmes is essential for the project designer. Documentation required in the identification phase typically involves core elements of a business plan as well as a legal opinion on the feasibility of the proposed organisation. This phase can take up to two years.

Preparation phase
Preparation of the project proposal begins when there is mutual agreement on project objectives. The process of preparing a project is often time consuming and complex and may require hiring of consultants for preparation of the needed documentation. This documentation can include technical and financial feasibility studies, elaborated business plans, socio-economic cost-benefit analyses, environmental impact assessments and similar. In some cases the donor organisation or IFI is capable of conducting/financing the preparation of the required documentation, but it is of course pivotal to all involved parties that the beneficiaries take full ownership to the analyses made and to the project in general. Active participation by the beneficiary throughout this phase is therefore very important. This phase typically lasts somewhere between 1 and 3 years, depending of the extent of the proposed project.

Appraisal phase
After project preparation has been completed, the financial organisation typically needs some time to review the proposal and undertakes a full-scale project appraisal. This is a comprehensive review of the technical, economic, financial, and institutional aspects of the project. This phase may take up till 6 months or so to complete.

Negotiation phase
After the appraisal has been completed, formal loan or grant negotiation begins. The purpose of this phase is to agree on implementation framework and conditions. These agreements, including procurement agreements, are then formalised in loan documents or grant agreements. This phase typically lasts 2-3 months. After the loan is approved, funds are available to implement the project. Implementation is typically the responsibility of the borrower. Following the full disbursement of the allocated funds and subsequent implementation, the project is typically subject for evaluation.

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Version 1.0 March 2005, © Danish Environmental Protection Agency