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The Cleaner Production Investment Process Day 1

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Title: The Cleaner Production Investment Process Day 1


1
The Cleaner ProductionInvestment ProcessDay 1
Prepared by
Gloucestershire Business School, University of
Gloucester, UK
ROSCAM Strategic Development Consultancy, Zimbabwe
For UNEP, Division of Technology, Industry, and
Economics
FINANZAS AMBIENTALES, Lima, Perú
ARMSA, Guatemala
2
Introduction
3
Course Background
  • 15 min

4
Development of the training materials
  • Content has been developed by
  • Gloucestershire Business School, UK
  • Finanzas Ambientales, Lima, Peru
  • The Illinois EPA
  • The Philippine Institute of CPAs
  • The Asian Institute of Management
  • UNEP Cleaner Production Financing National
    Project Coordinators in Guatemala and Zimbabwe

5
UNEP Financing Cleaner Production Support
  • United Nations Environment Programme (UNEP)
    Division of Technology, Industry, and Economics
  • Course support is from the project
  • Strategies and Mechanisms for Promoting Cleaner
    Production Investments in Developing Countries
  • Funding provided by the Government of Norway

6
Words of Welcome
Introduction of Instructors
  • 15 min

7
Participant Introductions
  • 30 min

8
Who is here today?
  • What type of organization do you work for?
  • e.g., industry, government, other
  • If from industry, which sector and what size
  • What are your job responsibilities and areas of
    expertise?
  • e.g., management, accounting, finance,
    engineering, production, environmental
  • What is your investment perspective?
  • e.g., developer of investment proposals, one who
    funds investment proposals

9
Why are you here?
  • What work issues or concerns motivated you to
    come?
  • What are your learning goals for this course?
  • What are your expectations of this course?

10
Course Overview
  • 15 min

11
Focus of the course
  • Sustainable banking???
  • Project financing
  • Also to incorporate your experiences, questions,
    and goals into the presentations, exercises,
    discussions

In the context of Cleaner Production
12
Cleaner Production is ...
  • The continuous application of an integrated
    preventive environmental strategy applied to
    processes, products, and services to increase
    overall efficiency and reduce risks to humans and
    the environment.
  • UNEP

13
Cleaner Production is different
  • Much of current environmental protection focuses
    on what to do with wastes and emissions after
    they have been created, otherwise known as
    end-of-pipe disposal treatment
  • The goal of Cleaner Production is to avoid
    generating pollution in the first place

14
Environmental management hierarchy
  • CLEANER PRODUCTION
  • Pollution Prevention
  • On-site recycling/reuse

BEST LEAST Desirable
Off-site recycling/reuse
Control/Treatment
Disposal
15
Cleaner Production benefits
  • Reduces costs (of raw materials, energy, waste,
    emissions)
  • Reduces risk (to employees, human health, and
    environment)
  • Identifies new opportunities for more efficient
    operations

16
CP4 Course aims (1)
  • Entrepreneurs perspective
  • Prepare a bankable proposal to justify economic
    feasibility
  • Manage the relationship with banks and other
    potential sources of finance

17
CP4 Course aims (2)
  • Bankers perspective
  • Raise awareness on Cleaner Production investment
    proposals
  • Raise awareness on sustainable banking trends

18
CP4 Course content (1)
  • CP a successful strategy towards sustainable
    banking
  • Introduction to project funding
  • Participants experiences with raising funds -
    problems and issues
  • The bankers perspective - what banks look for
    from firms seeking finance
  • 1- Economic viability of the project
  • 2- Financial and economic position of the firm
  • 3- General economic background

19
CP4 Course content (2)
  • Group exercise
  • Developing a bankable proposal
  • The bankers response
  • Other potential sources of finance
  • Group exercise
  • Alternative sources of finance

20
CP4 Course content (3)
  • Eco-criteria for investment decision-making
  • Post-funding implementation and control after
    the application has been accepted
  • Group Exercise
  • Implementation and management

21
Conclusion
  • Where to go for more information
  • Brief review of what we learned
  • Final questions and comments
  • Any other issues?
  • Course evaluation

22
Time for a break! 20 min
23
CP a successful strategy towards sustainable
banking
24
Economy is a sub-system of ecology
25
Towards a Sustainable Economy
  • Growth Eco-efficiency
    Sustainability
  • Yesterday Today Tomorrow

Flora fauna
Mining OilGas Industry Trade-Serv Agriculture

clean
polluting
26
The tools for the sustainable banker of the 21st
century
Economic IRR, NPV, Ratio-Analysis, balance
sheets, cash flows, guarantees, etc.
Environmental Cleaner Production, Environmental
Management Systems, Environmental Management
Accounting, Eco-labelling, environmental risks
analysis and classification, Life-Cycle Analysis,
eco-balance, environmental reporting,etc.
Commercial information, public image, etc
27
A two-way bridge between two worlds
Financial world
Environmental world
CP
Common language
Eco-risks
Eco-dividends
businesses
28
Current trends in commercial banking
  • Financial institutions are becoming
  • increasingly similar
  • Commercial banks activities are
  • expanding in developing countries
  • and countries with economies in
  • transition
  • Increasing interest in sustainable
  • banking

29
Types of financial institutions (FIs)
  • commercial banks
  • savings and loan associations
  • life insurance firms
  • state and local government pension
  • funds
  • sales and consumer finance companies
  • mutual funds
  • insurance companies credit unions

30
Financial institutions - increasing similarity
  • Traditionally, different types of FI
  • specialized narrowly in their own
  • areas
  • Still true to some extent, but less so
  • Many FIs are expanding their
  • product-ranges into others areas

31
Sustainable banking - (1)
  • banks and other FIs are becoming
  • more aware of their environmental
  • responsibilities - both in banks own
  • operations, and in lending
  • 1992 Earth Summit UNEP
  • Financial Initiative on the
  • Environment and Sustainable
  • Development

32
UNEP Finance Initiatives (UNEP FI)
  • Conceived at the 1992 Rio Earth Summit, UNEP FI
    has grown from from 6 banks to some 270 financial
    institutions by 2001.
  • The UNEP FI is a voluntary pact between UNEP and
    some 270 financial institutions globally
  • UNEP FI promotes sustainability excellence
    across the finance sector
  • UNEP FI builds the business case for Financial
    Institutions and Insurers to become
    sustainability leaders

33
Sustainable banking - (2)
Some banks are moving from a traditional
defensive position - non-active - deny
banks responsibilities for environmental
impacts - resist environmental
legislation towards ..
34
Sustainable Banking - (3)
  • . Sustainable banking
  • - Proactively seek environmental cost savings
  • - Recognize possible environmental effects
  • on projects and firms risks
  • - Set up special environmental funds

35
Opportunities for the clients and FI
Business derived
environmental
liabilities and risks
IMPACT ON FI

é
Capital costs
efficiency
é
Operating
é
é
Financial
costs
costs
ê
ê
Market share
é
ê

Repayment
u

Asset value
New market
Reduced

New business
u
opportunities
assets value
Legal Liability
Inherent preventive approach
Potential legal
u
Fines
u
Clean up
liability
Long term pollution liabilities
ê
Damaged
Better
é
ê
REPUTATION
reputation
reputation
36
Introduction to Project Funding
37
The firms business environment - Relevant factors
  • Government policy
  • Fiscal policy and legislation
  • Financial sector
  • Macro-economic developments
  • Past and current practices in project financing

38
Options for project financing
  • Internal funds
  • Private sector
  • 1. Commercial banks
  • 2. Development corporations
  • 3. Equipment vendors subsidiary finance
  • Companies
  • 4. Trade finance (suppliers and customers)
  • 5. Equity
  • Government sector

39
Internal funds
  • Internal funds can be generated from
  • Capital introduced by the owner
  • Profits cash flows generated by the business
    and retained within it

40
Capital from the private sector
  • Long-term loans to purchase fixed assets secured
    or unsecured
  • Short-term loans (including lines of credits
    without conditions on use)
  • Leasing
  • Equity (issue of shares/stock)
  • ...

41
Capital from the government sector
  • Grants
  • Subsidies
  • Government-managed development funds

42
Firms criteria in raising finance
  • Profitability
  • Risk of excessive debt
  • (Leverage, or gearing)
  • Matching duration of finance to duration of
    project
  • Procedures for application

43
Participants Experiencesof Financing Projects
44
Project finance - Issues and questions (1)
  • What was the project?
  • Which sources were considered?
  • Which sources were then approached?
  • What information did they require?
  • Could you provide this information?
  • What were their criteria? (Were these clear to
    the firm?)

45
Project finance - Issues and questions (2)
  • Was the application successful? If not - why
    not?
  • Did any problems arise during the process of
    applying?
  • What requirements did the financier set
    concerning post-funding project management?

46
Project finance - Issues and questions (3)
  • What do you consider the firm did well? and
    not-so-well?
  • Would you do anything differently another time?
  • What advice can you offer to others from this
    experience?
  • Does this experience prompt any questions?

47
Some typical project finance issues and problems
...
  • The project is not considered to be economically
    feasible (i.e. profitable)
  • The firm is unable or unwilling to issue more
    shares or to raise debt
  • The firm does not yet have contacts with
    commercial banks
  • The firm is in public ownership and private
    sources of finance are not accessible

48
and some possible solutions (1)
  • Problem the project is not considered to be
    economically feasible
  • Solution Total Cost Assessment of project
  • Problem the firm is unable or unwilling to issue
    more shares or to raise debt
  • Solution Leasing

49
and some possible solutions (2)
  • Problem the firm does not yet have contacts with
    commercial banks
  • Solution contact chamber of commerce, local
    accountants, NGOs funds managers, for assistance
  • Problem the firm is in public ownership and
    private sources of finance are not accessible
  • Solution contact local national CP centre for
    institutional assistance

50
A few general points of advice...
  • consider the effect of the current business
    environment
  • search widely for possible alternative sources of
    finance
  • seek advice from experts and from contacts in
    other firms

51
Time for lunch! 60 min
52
The Banks Perspective
53
Commercial banks Purposes and profile (1)
  • Transfer funds from ultimate lenders to
    ultimate borrowers
  • Acquire funds by receiving money from savers
    savings accounts, deposit accounts, etc.
  • Provide funds to borrowers through term loans,
    lines of credit, bonds, etc.

54
Commercial banks Purposes and profile (2)
  • Commercial banks aim to
  • Maximize their returns
  • Minimize the risks they accept
  • Expertise in evaluating borrower
  • credit-worthiness
  • Competition between commercial
  • banks helps to keep down lending
  • rates

55
Project finance from banks the main options
  • Term loans
  • Related to specific projects
  • Specific amount and term
  • Rate will reflect risk
  • Rate may be fixed over time or variable
  • Lines of credit
  • Limited amounts
  • Flexible in use
  • Higher interest rates
  • Interest charged only on finance actually used

56
Loan application and approval procedure (1)
1. Research and review potential sources 2.
Initial informal discussions with bank loan
officer 3. Fill out banks loan application
form obtain all necessary data 4. Submit
to bank the loan application and supporting
documents
57
Loan application and approval procedure (2)
5. Review of application by bank 6. Negotiate
specific terms of loan 7. Bank sends commitment
letter 8. Bank sends a term sheet which
defines the specific lending terms 9. Sign the
loan agreement 10. Receive the funds 11.
Proceed to implement project
58
Bank will usually require...
  • Procedural
  • completed loan application forms
  • additional documentation as required,
  • e.g. the firms accounts
  • Financial
  • acceptable repayment plan
  • proven economic viability (of both
  • project and firm)
  • collateral (i.e. security such as mortgage)

59
Banks information needs
  • To assess loan applications, banks need
    information on
  • 1- Economic viability of the specific project
  • 2- The firms overall financial and economic
  • situation
  • 3- The general economic and political
  • background of the country and sector

60
Banks information needs
1- Economic viability of the specific
project 2- The firms overall financial and
economic situation 3- The general economic
and political background of the country and
sector
61
Information on the project
  • Purpose of the loan
  • Expected cash flows from project
  • Expected profitability of project
  • (NPV, IRR...)
  • Assessment of risks of project
  • How project relates to the
  • firms business generally

62
Purpose of the loan to demonstrate
How will the CP Investment produce the
perceived...
  • Reduce energy use
  • Reduce material input costs
  • Reduce penalty fees
  • Increase in sales and production
  • and establish increase in demand
  • Improve product quality
  • Environmental compliance and
  • regulation costs

cost reductions and increase in revenue? sales
and production levels increase? reduced risks?
63
Cash flow forecast/projection
  • Look at the likely future cash position of the
    company.
  • Examine the possible effects of changes in the
    cash flow components.

64
Profitability analysisProfitability indicators
  • A profitability indicator, or financial
    indicator, is a single number that is
    calculated for characterisation of project
    profitability in a concise, understandable form.
  • Common examples are
  • Simple payback period
  • Return on investment (ROI)
  • Net present value (NPV)
  • Internal rate of return (IRR)

65
Assessment of risks Sensitivity analysis
  • What could go wrong with the plans for
  • the project?
  • What will be the effect on NPV if
  • different assumptions are made re
  • sales demand, costs, length of
  • project life, etc.?

66
Banks information needs
1- Economic viability of the specific
project 2- The firms overall financial and
economic situation 3- The general economic
and political background of the country and
sector
67
Concern about the financial facts of a business
includes
  • Organization's ability to meet current
  • obligations
  • The nature of liabilities
  • The companys ability to stand pressure from
  • both internal and external sources
  • The true worth of the various assets of the
  • business (accurate picture)

68
The banks information needs
  • To demonstrate a companys credit-worthiness,
    bank will require
  • past financial statements (balance
  • sheets, income statements, etc.)
  • forecast future financial statements
  • past credit history and references
  • information on the firms
  • management

69
Business plan Objectives
  • To show to outsiders to help to raise money
  • To use within the business
  • As a guide to future action
  • To control the firm by using the business plan as
    a benchmark against which to compare performance

70
Business plan content
  • past and forecast future financial
  • statements
  • brief overview of business
  • markets, customers and competitors
  • products and services
  • distribution
  • management
  • sales forecasts
  • how the firm is to be financed

71
Information what makes it useful
  • relevance
  • reliability
  • consistency
  • completeness
  • comparability
  • timeliness
  • understandability
  • materiality
  • feasibility and cost-effectiveness

72
Interpretation of financial statements
  • RATIO ANALYSIS
  • Is useful to virtually all readers of financial
    accounting
  • statements.
  • Ratios are like a thermometer which takes the
    actual
  • temperature of a business in relation to some
    standard
  • measure.
  • Ratio analysis can help to identify problem areas
    but in itself cannot offer solutions these must
    be provided by the businessman.

73
Ratio analysis
For financial analysis purposes, it is useful to
classify ratios under five headings Profitabilit
y ratios which measure the overall effectiveness
of managers as shown by the returns generated on
sales and investments. Liquidity ratios which
judge whether a business is likely to run out of
cash in the short term.
74
  • Solvency ratios which measure the extent to
    which a business is financed by borrowed money
    and the risk involved.
  • Activity ratios which measure how effectively the
    business is using its resources.
  • Growth ratios which measures the businesss past
    rate of growth and assess the potential for
    future growth.

75
Profitability ratios
  • key question at what rate does the business
    generate profit from its activities?
  • Test 1 What is the proportion of direct
    trading profit contributed by every dollar worth
    of sales?
  • Test 2 What is the amount of profit generated
    out of every dollar invested in the company?

76
Profitability ratiosExamples
  • Test 1 Gross profit percentage on sales
  • Test 2 Return on capital employed

Gross profit
Gross sales
Profit before interest tax
Capital employed
77
Liquidity ratios
  • definition ability to meet short-
  • term operating liabilities
  • key question how much is the total
  • of the firms short-term liabilities?
  • Test 1 are the liquid (short-term)
  • assets sufficient to cover adequately
  • these short-term liabilities?
  • Test 2 are the regular operating cash
  • inflows adequate to cover short-term
  • liabilities, as they fall due for payment?

78
Liquidity ratiosExamples
  • Test 1 Current ratio
  • Test 2 Acid test quick ratio

Current assets
Current liabilities
Current assets - stock
Current liabilities
The acceptable ratios depend upon the type of
industry in which a company operates.
79
Solvency ratios
  • definition ability to meet long-term
  • liabilities such as debt
  • key question how much is the total
  • of the firms indebtedness?
  • Test 1 what are the relative proportions
  • of (1) equity, and (2) debt?
  • gearing, or leverage
  • Test 2 are operating profits adequate
  • to cover the interest that has to be paid
  • regularly on the debt?

80
Solvency ratiosExamples
  • Test 1 Debt ratio
  • Test 2 Times interest earned

Total debt
Total assets
Earnings before interest taxes
Interest charges
81
Activity ratios
  • Key question How effectively does the firm use
    its resources?
  • Test 1 What is the turnover of stocks?
  • Test 2 What is the quality of debtors and
    credit policies of the business? How many days
    sales represented by debtors?

82
Activity ratiosExamples
  • Test 1 Stock turnover ratio
  • Test 2 Debtors turnover ratio

Sales revenue
Stocks (at period end)
Debtors (Balance sheet)
Average daily sales
Sales as per income statement
Average daily sales
Days (365)
83
Limitation of ratios
  • (A) differences found among the accounting
    methods used by various companies, which make
    comparisons difficult even when talking about the
    same industry
  • (B) financial statements are based upon past
    performance and past events, we must project our
    evaluation from this basis

84
Conclusion
  • Though with limitations, ratios still provide
    guides and clues in spotting trends towards
    better or poor performance and in finding
    significant deviations from average or an
    acceptable standard, if any is available.
  • It is in the interpretation of such trends and
    deviations that the analyst will use his skills
    and experience to determine what is likely to
    happen in the organization.

85
Banks information needs
1- Economic viability of the specific
project 2- The firms overall financial and
economic situation 3- The general economic
and political background of the country and
sector
86
General economic background
National and world economy - forecasts of
economic growth - forecasts of inflation -
political or economic instability Sector-specifi
c background - developing new technologies
- changes in product markets - new
legislation and regulation - level of
competition in the sector
87
Conclusions (1)
  • Banks have specific demands for
  • information due to their loan
  • application/approval procedures
  • Most information should be provided
  • by applicants
  • Banks will maintain some data
  • themselves (e.g. general economic
  • data)

88
Conclusions (2)
  • banks obtain information on firms through
  • the application forms and supporting documents
    submitted by the firms
  • face-to-face contacts and visits to the firm
  • the history of the banks relationship with the
    customer
  • post-funding control enhances the
  • relationship and facilitates future
  • borrowing

89
Conclusions (3)
  • Firms should set up and maintain adequate
    information systems
  • Before
  • They are needed !

90
Group exercise - Acme Part 1Preparing a
Bankable Proposal
  • Read the Acme case, it is detailed in your
    handout
  • You will be working in a small group with others
  • The task is to develop a proposal to a bank for
    finance for acmes project
  • Your group will present this to the banker
  • Plan ahead - what points to include?

91
Time for a break! 15 min
92
Developing a Bankable ProposalAcme
Electroplaters Part 1
93
Group exercise - Acme Part 1The task
  • 1. Prepare presentation to a bank
  • making the case for finance for
  • Acmes project
  • 2. Complete the standard application
  • bank loan application form, located
  • in your handout
  • 3. Anticipate possible questions from
  • the banker

94
Group exercise - Acme Part 1 Criteria for
success
  • firms current financial position
  • history of firm
  • the projects expected returns and
  • risks
  • availability of relevant information
  • firms ability to implement the
  • project

95
ChecklistFunding Application Format Checklist
Refers to the checklist document
96
Review of what we have covered today
97
Final questions or comments?
98
The Cleaner ProductionInvestment ProcessDay 2
Prepared by
Gloucestershire Business School, University of
Gloucester, UK
ROSCAM Strategic Development Consultancy, Zimbabwe
For UNEP, Division of Technology, Industry, and
Economics
FINANZAS AMBIENTALES, Lima, Perú
ARMSA, Guatemala
99
Any questions?
  • Arising from day 1 ?
  • Looking ahead to day 2 ?

100
Developing a bankable proposalGroup
presentations
101
Time for a break! 15 min
102
Developing a bankable proposalthe bankers
response
103
Time for lunch! 60 min
104
Other Potential Sources for Project Financing
105
ChecklistFunding Options
106
Further potential sources
  • Internal funds
  • Equity (owners capital)
  • Leasing / equipment vendors and subsidiary
    finance companies
  • Trade credit (suppliers, customers)
  • Micro-credits
  • Development bank loans
  • Government finance

107
Internal funds (1)
  • Internal funds retained profits (reserves)
  • Size of reserves depends on-
  • Past profitability of business
  • Minimizing tax liabilities
  • Proportion of profits retained
  • vs.
  • Paid out to owners in dividends

108
Internal funds (2)
  • avoids having to approach external sources (and
    transaction costs)
  • preserve borrowing power for future projects
  • have an indirect opportunity cost
  • not available to new firms
  • must be built up over time

109
Equity capital
  • Equity ordinary shares, i.e. owners capital
  • Potential sources of new equity-
  • more capital from the current owners
    (shareholders)
  • new shareholders, by private approaches
  • venture capital
  • a public share offering

110
Equipment vendors and subsidiary finance companies
  • Leasing has become a major source of financing
    that is provided by some equipment vendors and
    subsidiary finance companies (lease-providers).
  • With financial leases (or capital leases)
  • Title to the equipment is held by the firm which
    operates it (the lease-holder)
  • The lease-provider retains a first security
    interest in the equipment
  • The lease-holder faces the risks and receives
    the rewards of ownership

111
Trade finance
  • potential sources
  • suppliers of raw materials
  • suppliers of other goods and services
  • key customers
  • their motive to secure a key customer or source
    of supply
  • risk being tied to a particular supplier or
    customer and unable to develop business freely

112
Micro-Credits (MC)
  • aim to match appropriate technologies
  • and financing, through the development
  • of packages that build on community
  • values
  • local initiatives, depending on MC
  • managers knowledge of their own
  • localities and markets
  • an expanding source for socially
  • desirable projects - but little-known

113
Grameen Bank (1)
Micro Credit example
  • Grameen Bank,Bangladesh the pioneer (founder
    Mohammed Yunus)
  • core belief the credit-worthiness of the poorest
    members of a community
  • aim to break out of the poverty cycle, using
    innovative technologies
  • a model for many similar banks operating across
    the world

114
Micro Credit example
Grameen Bank (2)
  • finance derived from international
  • sources (e.g. development banks)
  • Grameen uses this to make soft
  • loans to local borrowers
  • several projects in renewable
  • energy and other environmental
  • investments
  • website www.Grameen-info.org

115
Micro Credit example
Grameens lending policy
  • no requirement for security
  • repayable in weekly instalments
  • eligibility for subsequent loans
  • depends on full repayment of any
  • earlier loans
  • transparency in bank transactions
  • helps to encourage repayments by
  • borrowers, through social pressure

116
Grameen - the results
Micro Credit example
  • 2.34 million borrowers in Bangladesh
  • 94 are women
  • loans for projects in 39,000 of 86,000 villages
    in Bangladesh
  • 1977-1997, total lending - US2 billion
  • now, 223 Grameen-type programmes in 58 countries

117
Development banks (1)
  • examples
  • World Bank
  • International Finance Corporation
  • Inter-American Development Bank
  • Asian Development Bank
  • wide and diverse range of
  • programmes and projects

118
Development banks (2)
  • development banks aim
  • to lend large amounts
  • but at lower transaction costs
  • therefore, traditionally, mainly
  • large projects in the public sector
  • stringent guidelines on project
  • characteristics and lending criteria
  • (e.g. to be environmental, social,
  • developmental, technically innovative)

119
Development banks (3)
  • Benefits of development bank finance
  • can help with technological and
  • managerial advice on the project
  • project packaging
  • liaison with other potential sources
  • of finance

120
Raising finance from government schemes
  • identify the available schemes
  • find out
  • the criteria and conditions of the
  • scheme
  • the procedures for application
  • develop the firms application
  • to match the schemes criteria
  • to identify how the project supports
  • public policy objectives

121
Grants
  • low or zero cost of capital
  • may be available for only part of a project, or
    on restrictive terms
  • preserves borrowing power for other purposes
  • accessible via local brokers and/or international
    development agencies
  • BUT
  • can conceal true long-term costs
  • misses opportunity to build long-term
    relationship with financiers

122
Past funding experience
  • successful past experiences with financing
    projects?
  • how might CP projects be
  • different? Why might they be ...
  • more difficult to finance?
  • easier to finance?
  • could these further sources be
  • relevant? If so - when and how?

123
Summary
  • a wide range of potential sources
  • means
  • more likely to be able to raise finance...
  • and on better terms
  • the range varies between countries
  • and over time
  • an early search for a wide range
  • of sources can be very worthwhile
  • each source will have its own criteria
  • and procedures

124
Acme ElectroplatersPart 2
125
Time for a break! 15 min
126
Eco-criteria for investment decision-making
127
Criteria () activities to encourage
Bio-pesticides Bio-control Bio-fertilisers Renew
able energies Efficient energy Clean
fuel Aquaculture Organic agriculture Health
safety Environmental management Pollution
control Pollution prevention Recycling Waste
management Reforestation Eco-tourism Eco-data
access Corporate eco-donations Eco-education Nom
ad forest products
128
Sectors of major concern
Where CP can highly contribute to reduce risk and
increase efficiency and profitability
  • Energy and Mines
  • Petroleum and Chemicals
  • Agribusiness
  • Transportation
  • Recycling
  • Eco-Tourism

129
Energy
  • Risks
  • Atmospheric emissions
  • Water contamination
  • Acoustic pollution
  • Safety
  • Opportunities
  • Alternative energies
  • Cost reduction

130
Mining
  • Risks
  • Environmental air and water pollution
  • Occupational health and safety
  • Opportunities
  • Genuine wealth creation
  • Production of quality durable goods

131
Agribusiness
  • Risks
  • Solid waste
  • Water and ground contamination
  • Public health
  • Opportunities
  • Organic Brands and distribution channels
  • Exportation opportunities through international
    standards

132
Banks requirements to obtain services in
  • Environmental risk assessment of business
    activities
  • Environmental footprint of investments,
    guaranties, leasing
  • Training for local bank staff
  • Development of new eco-products (capital risk
    investment fund, forest funds)
  • Identification of new business opportunities
    within client database

133
Competitive banking
In today's hyper-competitive financial services
environment, incremental improvement is no longer
enough. To be successful, firms need to
undertake massive change - a fundamental
reinvention of their strategies and operations
that will allow them to delight customers, exceed
investor expectations, and attract and retain the
best and the brightest professionals. Reinventing
FINANCIAL SERVICES Succeeding With Corporate
Transformation Deloitte Consulting and Deloitte
Touche 2001
134
Sustainable banking trends
  • Use of eco-criteria in decision-making
  • New financial eco-products (eco-funds,
    eco-mortgage, renewable energy credits)
  • CP prevention is better than end-of-pipe
    solutions
  • Efficient use of resources (water, energy)
  • Fewer, bigger banks.
  • Avoid eco-risks, identify eco-business
    opportunities
  • Internalise environmental costs debts in
    companys decision-making
  • Total environmental accounting
  • Capital markets increasingly value green
    capital

135
Dow Jones Sustainability World Index
330.00
280.00
230.00
180.00
130.00
80.00
12/93
6/94
12/94
6/95
12/95
6/96
12/96
6/97
12/97
6/98
12/98
6/99
12/99
6/00
12/00
6/01
Dow Jones Sustainability World Index
Dow Jones Global Index (USD, Price Index)
136
Financial eco-innovations
Personal banking Corporate banking Eco-mortgage E
co-shares Eco-autos Eco-financial
derivatives Home-office 2x1 ESCO, Energy Service
Co Eco-savings Build, Operate,
Transfer Eco-leasing Eco-loans Swap for
debt Eco-credit cards Eco-investment funds
137
Post-funding management and control
138
Aims
  • ensure repayments are made in full and on time
  • avoid foreclosure / calling in security
  • comply with all loan contract conditions
  • build strong credit history and relationship for
    the future

139
Post-funding management and control issues
  • 1-implementation phase
  • 2-security for loans (collateral)
  • 3-other loan contract conditions
  • 4-regular financial information
  • 5-evidence of strong internal management
  • 6-keeping the lender informed

140
1-Implementation
  • need to synchronize
  • receiving the finance
  • acquiring the new asset(s)
  • starting the new business activities
  • project management techniques and skills, e.g.
    critical path analysis
  • clear organizational responsibilities

141
2-Security for loans
  • usually requested by banks, though less crucial
    than the firms ability to repay
  • can include owners personal assets as well as
    the firms assets
  • need to protect assets used as security
  • Third-party guarantee

142
3-Loan contract conditions (covenants)
  • Examples
  • - adequate liquidity
  • - adequate solvency
  • (gearing / leverage)
  • - no significant changes in
  • - nature of business
  • - ownership
  • - no sales of major assets without the
  • prior agreement of the lender

143
4-Regular financial information Financial Reports
(FRs) rules
  • based on legal rules and accounting standards
  • (Generally Accepted Accounting Practice)
  • required annually by law
  • lenders may require more frequently
  • and promptly
  • with supporting analyses

144
Analyzing FRs
  • FRs can be analysed by readers to evaluate the
    firms likely return and risk position, as
    reflected in
  • liquidity
  • solvency
  • profitability
  • operating efficiency

145
Analyzing FRs comparators
  • over time
  • vertical, or trend, analysis
  • against other (comparable) firms
  • horizontal analysis, or benchmarking
  • against other standards

146
Preparing FRs guidelines for management
  • disclose accounting policies, especially if
    different from normal
  • be open where estimates and approximations have
    been necessary
  • indicate if any amounts in the FRs are no longer
    realistic
  • ensure reliability of the accounting systems
    which collect the data
  • thoroughly review FRs before sending outside the
    firm

147
5-Evidence of good internal management
  • performance indicators
  • budgeting
  • costing and cost control
  • ex-post audit of projects

148
6-Keeping the lender informed
  • Keep lenders informed about any significant
    changes in
  • trading
  • the firms risk factors
  • key personnel
  • nature of the business
  • any other factors relevant to risk and return

149
Post-funding experiences
  • any experience during this phase?
  • what terms did lenders impose?
  • were any difficulties met, in complying with
    these terms?
  • how did the firm deal with them?

150
Acme ElectroplatersPart 3
151
Conclusion
152
Review ofwhat we have coveredin this course
153
The CP investment process (1)
  • introduction to the course
  • CP a successful strategy towards sustainable
    banking
  • introduction to project funding and participants
    experiences
  • bankers perspective and information needs

154
The CP investment process (2)
  • developing a bankable proposal
  • other potential sources of finance
  • eco-criteria for investment decision making
  • post-funding management and control
  • conclusion

155
Final questions and comments?
156
Course evaluation
157
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