ENVIRONMENTAL FINANCIAL ADVISORY BOARD
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
Honorable Carol M. Browner
Administrator
U.S. Environmental Protection Agency
Washington, D.C. 20460
Dear Administrator Browner:
On behalf of the Environmental Financial Advisory Board (EFAB), we are pleased to
transmit to you the EFAB white paper, "Removing Barriers to Investment in Environmental
Infrastructure in Western Europe." This paper examines significant barriers to environmental
investments by the U.S. financial services industry in this important part of the world. It also
recommends policies to remove these barriers that would benefit U.S. national interests.
Specifically, the paper proposes U.S. support for fair and open competition in financing
public purpose environmental infrastructure by eliminating banking practices that close Western
European markets to U.S. industry. It also advocates U.S. support for increased financial
disclosure by banks and governments so that international agencies can assign more accurate
credit ratings to environmental projects in Western Europe.
We believe that the recommendations presented in the paper are particularly timely for
the Agency and the Administration because they provide an opportunity to link^environmental
and financial services in a positive way and to incorporate them in U.S. proposals in the ongoing
round of international trade negotiations. We further believe that the proposals properly framed
would benefit both the U.S. financial services industry and the world environment.
The Board is available at your convenience to further discuss this paper and to undertake
further analyses if needed. Given the time constraints that exist with the trade negotiations, we
ask that you forward the white paper for consideration by the U.S. Trade Representative.
Sincerely,
Robert O. Lenna >-*ohn C. Wise
EFAB Chairman , EFAB Executive Director
Enclosure
cc: W. Michael McCabe
Acting Deputy Administrator
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Environmental
Financial Advisory Board
EFAB
Robert Lenna
Chair
John Wise
Executive Director
Members
Hon. Pete Domenici
Terry Agriss
George Brewster
George Butcher
Pete Butkus
Michael Curley
Michael Deane
Linda Descano
Michael Finnegan
Evan Henry
Anne Pendergrass Hill
Martin Kamarck
Stephen Mahfood
Langdon Marsh
John McCarthy
Vernice Miller-Travis
George Raftelis
Arthur Ray
Andrew Sawyers
James Smith
Sonia Toledo
Jim Tozzi
Billy Turner
Mary Ellen Whitworth
Joseph Young
Removing Barriers to Investment in
Environmental Infrastructure
in Western Europe
WHITE PAPER
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the report do not
necessarily represent those of the Agency or any other agencies in the Federal
Government.
December 2000
Printed on Recycled Paper
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Removing Barriers to Investment in Environmental
Infrastructure in Western Europe
I. Introduction
A. Purpose
Investment in environmental and other infrastructure in Western Europe represents a
significant opportunity for the U.S. financial services industry. Legal, financial, and cultural
barriers in Western Europe thwart efforts by the industry to pursue these opportunities. These
barriers not only limit the growth of the U.S. financial services sector, but also deprive project
sponsors of efficient and cost-effective financing. This paper builds the case for removing these
barriers and recommends policies that would benefit both the U.S. financial services industry and
U.S. national interests.
B. Background
Over the past 25 years, the United States and the nations of Western Europe have
demonstrated strong and growing commitments to environmental protection. Moreover, they
have increasingly understood that the substantial environmental challenges facing all parties
concerned are linked and must be addressed in comprehensive and sustainable ways.
Only through long-term economic growth and development can nations expect to
generate the capital and public support necessary to pay the costs of environmental protection.
Comprehensive solutions to environmental challenges require considerable resources and
expertise. For example, public and private investment in environmental activities in the United
States alone is $150 billion per year and growing.
The sheer size of this need illustrates that access to capital markets is critical to continued
investment in this area and that financing solutions must be as cost-effective as possible.
Therefore, a strong financial services industry is not only necessary to sustain a nation's
economic health and growth, but also plays a critical role in improving the quality of the
environment through financing infrastructure projects.
The U.S. financial services industry is among the strongest and most efficient in the
world. It is no coincidence that the industry and the country are both enjoying an unprecedented
era of growth and prosperity. Our national interests are well served by the strength of this
industry, and they are closely tied to its continued well-being.
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Both the U.S. financial services industry and our national interests would benefit from the
removal of barriers to investments in Western European infrastructure. The industry would gain
greater access to the world's largest economic bloc. The United States would enjoy the fruits of
an even healthier financial sector, new opportunities for U.S. firms to provide goods and services
supported by this financing, and improvements in global environmental quality.
II. Parameters for Discussion
A. Environmental Infrastructure
We take a broad view of what falls under the rubric of environmental infrastructure.
Project areas include, but are not necessarily limited to, drinking water, wastewater treatment,
municipal solid waste, hazardous waste, air pollution abatement, clean energy, energy efficiency,
co-generation, and natural resource use. Activities include supporting state and local
environmental finance institutions and mechanisms, improving project preparation, improving
borrower creditworthiness, and providing and leveraging sources of capital.
B. Financial Services Industry
The private financial services industry includes: commercial banks; investment banks;
savings institutions; leasing firms; insurance companies (property, casualty, life and health);
venture capital entities; and foundations. Companies in these industry sectors provide one or
more of a number of financial services including credit extension, equity investment, under-
writing activities, credit enhancements, leasing and rental services, and financial risk assessment.
The industry as a whole is experiencing a significant consolidation in the number of service
providers and a growing concentration of industry assets in fewer companies. This consolidation
is occurring through the merger and acquisition of firms in the same and different sectors.
C. U.S. Trade Objectives
For more than 50 years, the United States has strongly supported the overarching goal of
tradeJiberalization. Trade liberalization in this context means open markets, freer trade, and the
rule of law in commerce. In pursuing this goal, the United States has expressed a number of
objectives for its bilateral and multilateral trade negotiations. Some of the trade objectives that
are relevant to this discussion are:
the right of firms to establish and operate freely;
equal treatment of foreign and domestic firms;
equal treatment of World Trade Organization (WTO) members; and
greater transparency in each nation's regulation of services.
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D. Western Europe
For our purposes, Western Europe includes the nations of the European Union (EU):
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Outside the EU it includes
Iceland, Norway, and Switzerland. It does not include the independent states formed out of the
Soviet Union (Russia, Ukraine, etc.); the Baltic states of Lithuania, Latvia, and Estonia; or the
former communist nations of Eastern Europe (Poland, Hungary, etc.).
Next, we will examine a number of barriers that the U.S. financial services industry faces
in its efforts to finance environmental and other infrastructure activities in Western Europe.
III. Barriers
Many firms in the U.S. financial services industry — including commercial and
investment banks, insurance companies, and accounting and management consulting firms — are
actively engaged in Western European markets. They successfully compete with European and
other firms across a wide range of service areas. However, U.S. financial services firms
encounter significant barriers as they seek involvement in financing environmental and other
infrastructure activities in Western Europe.
The barriers result from laws and regulations, economic and financial practices (some of
which are rooted in political and cultural differences with the U.S.), and traditionally closed
relationships between Western European financial institutions and their clients. Our examination
of these barriers is based on discussions with individuals in the U.S. financial services industry
and additional staff research.
A. Governmental Rules
An established legal and regulatory system is an important prerequisite for the legitimate
participation of businesses in markets and for the protection of consumers. Major uncertainties
exist for businesses operating in the EU, however, because of the overlapping or parallel-
application of EU community regulations and the individual regulations of the 15 member states.
While this system of parallel application was a political necessity for the successful creation of
the Union, its continued use hurts European investment and growth opportunities. This lack of
regulatory harmony among EU nations is mirrored by a greater lack of harmonization in laws
and regulations between the EU and the United States.
Taxes are another area that presents challenges to U.S. businesses operating in Western
Europe. Overall, taxes are quite high and vary from country to country. In addition, significant
tax barriers still exist with regard to cross-border investment and trade between EU nations.
These conditions increase operating costs for companies and retard investment and growth.
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Important administrative disharmonies between EU countries also occur with regard to
accounting standards and practices, creating the burdens of dealing with many different systems.
The fact that many local governments in Western Europe lack the authority to borrow or
issue debt represents yet another barrier (and one that is particularly critical for environmental
projects). Local governments must obtain permission from the national government even when
they have the desire and resources to proceed on their own. This type of approval process can
raise uncertainties and delay infrastructure projects to the point where they are not competitive
with other investment opportunities. Devolution of financial control to lower levels of
government is needed. While this process has begun in Western Europe, such change is slow.
B. Financial Practices
One troublesome and specific financing problem in much of the world is a history of, or
preference for, short-term borrowing. For example, many European sub-sovereign (regional and
local) governments consider debt maturities of 7-10 years as long-term, even where the
infrastructure funded may have a much longer life (20-50 years). A debt repayment term that is
much shorter than the useful life of the funded infrastructure results in dramatically higher annual
costs that can make investment in public environmental infrastructure projects unaffordable.
Shorter debt repayment terms are also generally considered inequitable since, over the life of the
infrastructure asset, many individuals who enjoy the benefits of the service do not pay equally for
it. On the plus side, EU municipal debt is eligible for longer maturities/lower rates.
The absence of user fees mechanisms for recovering capital and operating costs is another
barrier to financing environmental and other infrastructure projects in Western Europe. Project
finance in the classical sense often does not occur. That is to say, project revenues do not finance
the project. In Europe, taxes, not user fees, traditionally pay for local services. Moreover, such
taxes have been high and competition for the resources generated intense. Governments at all
levels do not want to give up these traditional sources of revenue or the ability to use the
resources for whatever priorities they wish.
Coupled with these practices, many local governments in Western Europe are unwilling
to pay even a small portion of the costs of drinking waters-waste water, and other environmental
utilities (all require significant investment in infrastructure). These local governments believe
that their national governments have an absolute responsibility to handle the full costs of these
vital social services.
C. Banking Relationships
Western European banks have traditionally allocated much of their energy and capital to
serving the needs of their corporate and governmental clients through relationship-based lending.
These special financial relationships are exceptionally strong, tightly closed, and long-term in
nature. They are further strengthened by the fact that banks and other financial institutions in
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States. We should also note the danger in strictly characterizing financial services firms as U.S.-
based or European-based. With consolidations occurring constantly, more and more of these
firms are becoming multi-national.
In any event, legal, financial, and institutional barriers do restrict the activities of the U.S.
financial services industry in Western Europe and relief would benefit firms in this industry and
the United States as a whole.
B. Opportunities for Environmentally-Related Benefits
Focusing on environmental projects, the removal of these barriers would provide benefits
for the U.S. in two areas: opening up access to involvement in environmental infrastructure
projects, in the EU, and providing access to the new wave of projects in countries projected to
soon join the EU.
The commitment to environmental infrastructure in the current EU countries is apparent
when we consider some important similarities between the United States and these nations. Both
groups recognize the importance of environmental protection in modern economic societies; both
have strong, well-developed regulatory apparatuses in place to monitor and enforce
environmental compliance; both understand the need to make economic development
environmentally sustainable and have incorporated this goal in their governmental policies; and
both have made major and growing investments in pollution prevention and environmental
abatement controls.
Annual public and private environmental investment in the United States was about $100
billion in 1990. This figure had grown by the year 2000 to about $150 billion. Meanwhile,
cumulative environmental investment by European nations was roughly $75 billion and growing
in the early-mid 1990s. Environmental project commitments by the European Union through the
European Investment Bank alone exceeded $24 billion ECU in the period from 1995 to 1999.
Since some of the barriers identified directly affect environmental infrastructure
investments (e.g., limitations on debt issuance by local governments), one of the areas opened up
by greater liberalization would be environmental projects.
A second and potentially greater benefit may result from new investments in countries
soon to join the EU. The upcoming EU enlargement anticipates the accession of Cyprus, the
Czech Republic, Estonia, Hungary, Poland and Slovenia by 2002. Further enlargement
involving up to ten other states is planned for subsequent years. This ambitious enlargement
process represents tremendous opportunities for the EU as well as significant challenges.
One of the largest challenges will be in the environmental area. As required by the terms
of admission to the European Union, the new member states will need to devote considerable
resources (as will the Union itself) to bringing their environmental programs and conditions up to
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Europe frequently have controlling interests in nonfmancial firms. Many financial observers
believe that these institutions have maintained their close public and private relationships even at
the expense of profit.
Fortunately for the financial institutions, they have developed creative ways of mitigating
the profitability impacts of these relationships. For example, banks in close cooperation with
governments and state-owned or controlled banks have developed mechanisms to reduce or
offload the banks' exposure to these relationships. One such mechanism involves the pooling of
many low-profit bank loans into financial packages/products that are guarantied by the banks and
then sold by their investment bank affiliates to the public.
Foreign financial services firms, of course, cannot take advantage of the special financing
mechanisms. Thus, they cannot hope to profitably compete with the Western European firms for
the original business. It has also proven very difficult in this closed system to determine the
nature and extent of local government liabilities that are absorbed by the banking system.
IV. Benefits of Overcoming These Barriers
The barriers described retard the role that the U.S. financial service industry could play in
Western European infrastructure investment. Much of the benefit that could be achieved from
removal of these barriers would accrue to the U.S. financial services industry itself, through an
expanded base of business. We have also identified additional benefits for other U.S. industries,
for project sponsors, and for the global environment. Furthermore, our national interest- lies not
only in advancing the cause for U.S. businesses, but also in facilitating efficient financing for
projects that improve environmental quality anywhere in the world.
A. Opportunities for the U.S. Financial Services Industry
Western Europe is a significant economic power. Economically, it is the world's largest
monetary bloc with a population exceeding 370 million and a combined gross domestic product
of $84 trillion. By comparison, the U.S. market covers 270 million people and has a gross
national product of $71 trillion.
The United States and Western Europe enjoy the world's largest commercial relationship.
They are each other's largest trade and investment partners. Total trade between them reached
$484 billion in 1997, of which $436.3 billion involved the nations of the EU. Two-way direct
investment between the U.S. and the EU alone exceeded $750 billion that year. Improving
access to financial service markets in Western European countries would benefit U.S. firms.
The U.S. financial services industry has hundreds of billions of dollars invested in
Western Europe and the rest of the world. However, these investments are small in comparison
to the size of the European market or the size of the industry's investment activities in the United
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period runs through 2002). Government and corporate bonds, listed futures, and options are all
being quoted, priced, and settled in Euros.
The introduction of the single currency is triggering important changes in the policies and
behavior of both European governments and European financial service industries. To meet
single currency harmonization requirements (i.e., lock in exchange rates), participating EU states
cut public budgets to reduce deficits and tightened fiscal policies to reduce central bank interest
rates. These actions have led to more stable prices and lower private interest rates.
In order to achieve these reductions, the governments have had to restrain the growth in
subsidies to regional and local governments. This has encouraged the emergence of sub-
sovereign debt capabilities in the European market as these governments had to look for
resources to carry out their infrastructure and other responsibilities. This trend is still in its early
stages and should be closely monitored.
The integration of markets in the 11 participating countries has been accompanied by
increased consolidation across all business sectors, including financial services. In fact, Europe
has been the most active region in the world for cross-border mergers and acquisitions. The need
to finance the costs of this growing wave of consolidation has energized West European bond
markets. These markets are at a point where long-term bond and loan deals can be done easily.
The combination of consolidation in both other business sectors and financial services
has begun to affect historically close business-bank ties. Long established relationships are
changing as corporations adjust to new, larger partners. Corporations are also finding that to
finance large-scale consolidations they must increasingly issue their own debt. For banks in the
EU, the introduction of the single currency has put increasing pressure on profits by eliminating
trading in European currencies. This has led them to look to maximize profits in other areas,
including corporate banking, causing additional relational stresses.
B. WTO Services Negotiations
.Historically, the importance of service industries has not been adequately examined nor
have service industries received the political attention that their contribution to national
economies would seen to merit.1 These facts, however, are changing.
In December 1997, the WTO completed its first financial services negotiation. The
agreement reached included market-opening commitments from 102 nations. In it, the
signatories agreed to a legal framework for international trade, market access in financial
services, and a dispute settlement mechanism. The agreement took effect in 1999.
1 In ten countries, including the United States and seven in Western Europe, services now account for more
than 70% of total economic activity.
8
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the levels of current EU members. However, this situation also represents a considerable market
opportunity for both the U.S. financial services and the U.S. environmental goods and services
industries. Evaluating and quantifying the potential market is a topic worthy of further study.
Whether as a result of access to projects in the existing EU countries or from expansion,
U.S. businesses that provide environmental goods and services also stand to benefit from
removal of these barriers. The United States and Europe represent two of the largest markets in
the world for environmental goods and services. In the United States, the environmental goods
and services industry (EGSI) consists of more than 100,000 companies that employ more than
1.3 million workers and generate more than $180 billion dollars in revenues worldwide. While
the U.S. EGSI market is mature and its growth slow, it has export revenues of $16 billion a year
and growing. This strong export figure reflects the fact that world EGSI markets exceed $500
billion per year and, unlike the U.S. market, are experiencing strong growth.
Finally, the removal of barriers offers two broader benefits that, while difficult to
quantify, are important to U.S. interests. First, enhancing access to and efficiency of
environmental financing should accelerate the pace of environmental improvements, especially
in countries that have not yet joined the EU. Second, initiatives to remove these barriers offer an
opportunity to link trade and environmental issues in a positive light, rather than the negative
experiences associated with the WTO ministerial meeting in Seattle, Washington in late 1999.
On other fronts, the U.S. government and the governments of other industrialized nations are
looking to build positive new relationships between trade and the environment. For example, on
July 24, 2000, the G8 nations meeting in Okinawa, Japan .issued a Communique that reaffirmed
their commitment to WTO trade negotiations that are compatible and mutually supportive with
social and environmental polices.
V. Trends and Existing Initiatives to Overcome Barriers
Current" political and economic trends are already at work to address the barriers
identified earlier. While they are probably not sufficient by themselves to solve the problems,
these existing trends represent real opportunities to alleviate and/or overcome the barriers.
Existing initiatives may also provide the U.S. government with mechanisms to address these and
other trade and investment barriers. Some of the most significant opportunities result from
ongoing European integration (especially monetary) and timely, ongoing WTO negotiations
involving the services industries.
A. European Integration
Many observers consider the adoption and introduction of a single currency (the Euro) by
the EU in January 1999 the biggest political event in Europe during the past 25 years. For the 11
EU countries participating in the single monetary market, the Euro has become the currency used
in capital markets, by government agencies, and for wholesale corporate payments (the transition
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However, much remains to be done to liberalize trade in financial services. The 1997
financial services agreement was just a limited first step. The agreement largely formalized
existing bilateral agreements of WTO members within the WTO's large multilateral context. But
importantly, it did reaffirm the timetable and framework for future negotiations.
The work to map out the next round of negotiations began earlier this year. On July 14,
2000, the United States submitted a framework proposal for services negotiation (the first nation
to do so). In its submission, the United States noted the importance of services in modern
economies and recognized the strength of its service industries. The United States stated that it
took this action to influence the scope and pace of WTO negotiations, which it wants to cover
more sectors and be more open to outside observers.
The next step for the United States is the submission of additional papers-later this year
containing proposals for the liberalization of specific service sectors (such as financial). This
first phase of the negotiations will run through March 2001 with members submitting their
negotiating proposals and finishing technical work. All proposals submitted must be at least as
liberal as current practice. The negotiations are scheduled for conclusion by 2002.
VI. Findings and Recommendations
The examination conducted in this paper indicates that relation-based banking and
attending financing practices represent a considerable barrier to U.S. financial services industry
involvement in financing environmental infrastructure in Western Europe. It also reveals
benefits for U.S. industry groups and environmental interests from overcoming these barriers.
The combination of the growing importance of environmental investment, the changing
nature of financial markets in Western Europe, and the new WTO. services liberalization
negotiations provides an opportunity for the United States to develop approaches that will
strengthen its economy, share the benefits with its best trading partners, and promote sustainable
environmental finance. Over the next few months, a significant opportunity exists to address
these barriers through the U.S. government plans to submit negotiation proposals to the WTO for
liberalizing trade in financial services. Accordingly, the Board recommends that the U.S.
government incorporate in its proposals:
• Support for fair and open competition in financing public-purpose environmental
infrastructure activities in Western Europe by eliminating the use of restricted-access
financing mechanisms that support closed relationship-based banking
Support for increased disclosure of the environmental financing practices that take place
between Western European banks and communities by requiring that all bank and
government liabilities and guarantees be clearly delineated in financial reporting and
easily available to international credit rating agencies
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These recommendations, if adopted, would need to be transmitted to the Office of the
U.S. Trade Representative as soon as possible in order to be included in any U.S. proposal on
financial and/or environmental services. The Board is available to assist in this process as
needed and to answer any questions about the paper.
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RAR-13-2001 TUE 11:32 AM
FAX NO,
P. 02
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
FEB 2 8 200!
v WK 13 200t
OFFICE OF
INTERNATIONAL ACTIVITIES
Robert O. Lenna, Chair
U.S. EPA Environmental Finance Advisory Board
Maine Municipal Bond Bank
3 University Drive, Box 2268
Augusta, Maine 04338-2268
Dear Mr. Lenna:
The Office of International Activities has received and is reviewing the Environmental
Financial Advisory Board (EFAB) report, "Removing Barriers to Investment in Environmental
Infrastructure in Western Europe." While this review goes forward, we would like to offer an
interim response to this report (EPA-EFAB-IW-01-01).
We believe the report deals with an important and timely topic, touching as it does on
issues currently being developed and negotiated by the United States Trade Representative
(USTR) under the World Trade Organiration (WTO) framework. In particular, this Office is
closely following the WTO negotiations with regard to both financial and environmental services.
We strongly believe that finance is an essential consideration for effective and sustainable
environmental protection anywhere in the world.
Given these factors, we have referred a copy of the report to the Office of the USTR for
their review and comment. Upon completion of our own review and receipt of comments from
the USTR and other interested parties, this Office will provide a more comprehensive response to
the Board.
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tfAR-13-2001 TUE 11:33 AM FAX NO, P. 03
.2-
In the meantime, let me express our appreciation to EFAB for its consideration of this and
other international environmental issues. We look forward to continuing cooperation with the
Board on financing issues of concern to the Agency and this Office.
Sincerely yours,
Daniel Magraw
Acting Principal Deputy Assistant Administrator
cc: John Wise
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