History will be made today if Legco's Finance Committee approves funding for an environmental proposal that would see taxpayers' money spent on pollution control measures outside Hong Kong for the first time. The government's proposed HK$93 million industrial cleanup scheme would also see cash incentives going directly to individual Hong Kong factory owners in the Pearl River Delta - another departure from normal practice. A more far-reaching implication, according to environment secretary Edward Yau Tang-wah, is that the Hong Kong-funded initiative would sow the seeds for greater collaboration with Guangdong province officials and businesses in tackling cross-border air pollution. The latest available data released this week - 2003 for Guangdong and 2006 for Hong Kong - show emissions rising in the delta but falling in Hong Kong, with the exception here of sulfur dioxide emissions, mainly from local power generation. 'If it can secure money from Legco, this project will be a milestone because it represents a change of mindset,' Mr Yau said. 'It goes beyond the boundary of Hong Kong and is being used as a catalyst to involve third parties on the basis of dollar-for-dollar matching, with a very clear parameter that the money is spent on measures that bring an immediate improvement through cleaner production. 'It also underlines the importance of looking at air pollution and other environmental matters from a regional perspective because we all live in the same air shed,' he said, noting that Hong Kong both contributed to and suffered from the problems. Hong Kong and Guangdong jointly agreed in 2002 to reduce emissions of four major air pollutants by up to 55 per cent by 2010, taking 1997 as the base year. With faster economic growth in the delta than initially assumed, Guangdong is at risk of missing its targets. It also significantly underestimated baseline emissions for three out of the four pollutants, making it even more of a stretch to hit the 2010 targets. There are more than 56,000 Hong Kong-owned factories operating in the delta, many with equipment and production processes that fall below today's environmental standards. Pressure to clean up is mounting from mainland authorities, environmentally sensitive trading partners (especially the European Union) and, increasingly, major overseas buyers and eco-aware consumers. Under the proposed five-year scheme, the Hong Kong Productivity Council would provide professional advice and technical support with other environmental service providers. It would also conduct campaigns to raise awareness. Independent verification of clean production improvements would be provided free of charge, up to HK$15,000 per project, for up to 1,000 projects. There would be matching funds to a cap of HK$15,000 per project for on-site environmental assessments in up to 1,000 factories. There would also be matching contributions up to HK$160,000 per project for about 90 demonstration projects on condition that experiences would be shared. 'Our experience says there is a technology gap, an information gap and an awareness gap among all factories, regardless of their size,' Mr Yau said. 'And even though big companies have the resources and commitment, they may not necessarily know the best means of clean production.' He added that far from being an expense, greener production could yield substantial cost savings in terms of energy consumption and reduction of wastage. Federation of Hong Kong Industries chairman Clement Chen Cheng-jen said HK$93 million was 'a drop in the ocean' when divided among so many factories, but that it was a start. 'Instead of paying lip service, the government is starting to put some seed money into the cleanup,' he said. 'I believe that if we have a good start, even more funding will become available because, fortunately, the government has a surplus right now.' Mr Chen said Hong Kong factory owners were acutely aware of how serious the mainland was about tackling pollution and were ready to act. 'Polluting units from Guangdong will not be welcomed anywhere in China. So what's the end result? Either you upgrade and clean up or you just fold,' he said. But he cautioned that hiring consultants for environmental health checks or making cleanup proposals were only first steps for factory owners, and that there would be ongoing costs with implementation. 'If a factory says it needs HK$5-$10 million to procure the necessary equipment and technology, we hope the government can help out - not fully funding all the necessary procurement but at least in some sort of partnership, some sort of jointly paid scheme,' Mr Chen said. The federation is also turning to mainland authorities to assist its 4,000 members, some 90 per cent of whom are small- and medium-sized enterprises (SMEs). 'To help all these factories to upgrade their manufacturing and clean up their emissions you need to build in some incentives,' he said 'They shouldn't charge the normal duty or tariff because if more factories upgrade their equipment more frequently with the newest technology, that will help out in terms of the environment, in terms of pollution.' Paying for cleaner processes is an issue for many Hong Kong factory owners hit by steeply rising production costs and relentless price pressure from overseas buyers. 'In order to amplify the effect of the HK$93 million programme we must do financing,' said Productivity Council executive director Wilson Fung Wai-yip. The council is working with five Hong Kong banks to develop an environmental loans package that will be announced soon. 'It will help banks open a new market in financing equipment and environmental installations,' he said, noting that the potential for financing better environmental practices by Hong Kong SMEs on the mainland was huge but poorly developed. In July last year, HSBC became the first bank in Hong Kong to offer a green equipment financing product. Some 50 loans have since been advanced, with technical backup from the Business Environment Council. The financing scheme under development will rely on technical expertise provided by the Productivity Council to certify whether specified environmental equipment, technologies or services are actually needed and able to deliver savings. Mr Fung said the focus would be on relatively small loan amounts of about HK$100,000 to HK$1 million to finance installations of environmental equipment and cleaner production processes. The prospect of more money flowing into the delta cleanup could provide a boost for Hong Kong's 170 or so environmental and energy service companies. Although they are among the most able to provide environmental solutions, they have the least access to the capital needed to implement them. The catch is that without a track record they have difficulty securing commercial loans, and without commercial loans they have difficulty establishing a track record. Stewart Ballard, chief commercial consul at the US Consulate in Hong Kong, has been trying for two years to launch an innovative scheme that can achieve pollution prevention ('P2') and energy efficiency ('E2') without any upfront cost to a factory owner. The 'P2E2' service provider installs the necessary equipment and processes and pays itself out of future savings and new revenues under performance contracts written in Hong Kong. The consulate has lined up proven US technology firms with local environmental service companies as potential partners. It has identified customers in the delta and elsewhere. It has even obtained equipment and technology loan guarantees of up to 95 per cent from international financial institutions affiliated to the World Bank. Yet to date only one small P2E2 project has been able to secure bank funding in Hong Kong, 'Although there have been over 30 successful self-funded projects, there has not been a single Hong Kong bank loan for a P2E2 project big enough to allow a Hong Kong service company to de-pollute and render more energy efficient an entire industrial facility,' Mr Ballard said. 'This is no matter how great the technology solution, no matter how experienced the service company in that sector and no matter how willing the end-user is to allow the project to proceed.' Mr Ballard said Hong Kong banks usually required hard collateral such as buildings, land and equipment to back loan applications. They were less comfortable lending against intangibles such as future earnings under a service contract. 'Even if we have a guarantee from an international financial institution, such as the World Bank, the loan is considered unsecured.' The Business Environment Council's chief executive officer, Andrew Thomson, acknowledged that, historically, there had been reluctance by banks to lend money for environmental projects - mainly because of the inability of companies to present compelling cases for their loans. 'But there's more interest now. Banks realise that green lending is part of their corporate social responsibility and have found that it can make their client's businesses more profitable too.' Mr Yau emphasised the importance of having an impartial professional body such as the Productivity Council go in, make sure that factory owners are putting money in the right places and provide independent, third-party verification of any savings achieved. 'If there are more professionals working in this area and success stories are demonstrated and shared, that can make clean production more viable, building up the case for commercial lending.' For Mr Yau, the funding request before Legco is about Hong Kong being willing to do its part in tandem with Guangdong's policy. If successful, he said, 'the fruits will be shared by both sides - not just among enterprises but also between the two governments'. Christine Loh Kung-wai, chief executive officer of think-tank Civic Exchange, said the governments must go all out to reduce emissions from large sources such as power plants and road transportation, as well as from factories using low-quality fuel in their generators and from highly toxic marine sources. She sees the HK$93 million scheme as a carrot without a stick. 'It is useful to provide funds to help SMEs operating in Guangdong to understand how they can do better, but that won't be enough,' Ms Loh said. 'You need a carrot and a stick. It is challenging to impose a stick without jurisdiction, however. So, we need to look more broadly at what to do.' She said it was necessary to co-operate with Guangdong, which had political jurisdiction, and ask what it was willing to do. 'One of the easiest ways to reduce emissions is to switch fuels. This change is immediate. The question is how to do it. Maybe Hong Kong needs Guangdong's help to clean up the air for the East Asian Games in 2009, and in return, Guangzhou needs the whole of the delta's help for the Asian Games in 2010. Can Hong Kong co-operate with Shenzhen for a trial in, say, the export sector?' Ms Loh said another way for Hong Kong and Guangdong to collaborate was through extraterritorial legislation so that Hong Kong could prosecute factory owners in Guangdong who violated environmental regulations. 'This is controversial but why not explore it? This could be a big stick,' she said.
