Business Needs Healthy Oceans, too. So, why Isn’t the Private Sector Biting?

By  Henry Teitelbaum, Editor, P3Planet.com

If anyone knows how to get stakeholders involved in schemes that protect the environment by paying people to act as guardians of the ecosystem, it’s Al Appleton. The former head of New York City’s water, sewage, and environmental protection operations, he helped initiate parts of the city’s landmark watershed agreement that pays farmers in the surrounding Catskill Mountains to protect the watershed – a scheme that has saved the city billions in filtration costs over the years.

Despite its success – and despite the efficacy of demonstration projects across the United States – that scheme remains one of the few payments for watershed services projects delivering results on a large-scale. That, says Appleton, is because a successful project requires more than intelligent market models if businessmen are going to get involved.

For one, he says, successful projects need scale if they are to become interesting for businesses. For another, he adds, the public and non-profit sectors need to understand the entrepreneurial mentality by which business people operate.

“You people who are on the cutting edge of environmental economics… need to really get much more involved in creating a climate of opinion that makes ecosystem services proposals more attractive,” he told delegates to the recent Forest Trends Marine Ecosystem Services (MARES) Katoomba Meeting in Palo Alto, California.

He added that a similar awareness of the needs of elected officials must also be taken into account when designing solutions to specific ecosystem challenges.

“Politicians hate incrementalism,” he says, because of the risk that the projects either won’t solve the problem or will do so in a timeframe that won’t justify their investment of political capital. With these stakeholder considerations in mind, Appleton says that as efforts to take on the challenge of creating deep ocean ecosystem markets gather momentum in addressing issues related to acidity, temperature, nitrogen runoff, plastic waste, pirate fishing or fish farming, it’s strategically very important to think big and to “hit the first targets with care” so as to build credibility for further attempts at creating ecosystem markets.

Where to Begin

Beyond structure, schemes designed to save the oceans by enticing payments for specific marine ecosystem services face the same challenges faced years ago by schemes designed to slow global warming by paying to save the rainforests and reduce greenhouse gas emissions from deforestation and forest degradation (REDD). Chief of these is that much scientific research needs to be done to gain the understanding of how marine ecosystems work, how they interact with each other and terrestrial ecosystems, and how market-based mechanisms can be applied in support of them.

MARES Program Director Tundi Agardy says the challenge is compounded by the fact that humans, as terrestrial beings “have difficulty understanding the ways in which we influence marine environments.”

She says we also are just beginning to understand the true value of marine ecosystem services for communities, economies and to businesses. There remains much uncertainty as well over what critical thresholds exist in marine ecosystems, a consideration that should influence how and where resources are allocated.

Speaking at the same event, Forest Trends MARES Program Manager Winnie Lau said it is critical to develop a range of voluntary market-based mechanisms, notably through the Payment for Ecosystem Services model, but also through water quality services, ocean zoning, marine spatial planning, and leasing activities to attract private financing for sustainable coastline and ocean resource management. To do this effectively, she says the private sector needs to forge closer partnerships with communities, with governments, and with regulators as well as with existing terrestrial ecosystem service providers.

The Evolving Tool Chest

Agardy says that while much work has been done to apply the models that have been used successfully to preserve terrestrial ecosystems in marine protected areas, marine parks, coastal parks and in wetlands preservation, “what we haven’t done is really apply these new tools to the marine environment on a full scale.”

There’s also a lag in the legal and regulatory framework that underlies marine conservation efforts, though this too is evolving quickly, according to Agardy.

“Many countries are shifting to a much more strategic view of marine conservation ecosystems”, she says, with a “real emphasis on marine spatial planning and zoning in almost every coastal country in the world.”

This is a very important development from a commercial perspective, Agardy notes, because clear and codified property and use rights are a pre-condition to setting up markets tied to fisheries, water quality, carbon sequestration and other services.

The Externality Quandary and the Need for Legal Drivers

Ricardo Bayon, of EKO Asset Management Partners (and co-founder of Ecosystem Marketplace), reminded MARES participants that ecosystem markets, far from being a product of free enterprise and private sector innovation, are fundamentally reliant upon governments and government-sponsored regulation for their creation. This is particularly true of wetlands, which do not produce readily identifiable products of interest to consumers or industry, but are nevertheless essential habitats for fish and the preservation of coastline.

“Nobody wakes up in the morning wanting a bowl of wetlands,” he says, citing a friend from the wetlands mitigation banking sector, so “most of these markets are in fact created by governments and by rules set up by governments” to achieve policy goals.

Albert Cho of Cisco Systems says laws don’t just provide a whip to markets’ carrot – they provide clear rules upon which all participants can rely. This regulatory certainty reduces market risk and creates consensus around how to incentivize private-sector risk-taking, and in aligning the design of the market with long-term political goals.

Linda Sheehan of the California Coastkeeper Alliance, says that a “strong regulatory system supported regularly with strong science can create and uncover the hidden costs that don’t appear on balance sheets.” This, in turn, allows the emergence of markets that are much more closely tailored to achieving the environmental goals that societies seek. But she warned against regulation for regulation’s sake. “The goal is not a suite of regulatory tools, but a market that reflects the cost of healthy ecosystems.”

Science and Technology: the Sharpening Saw

Science, technology and our understanding of marine ecosystems and their connectivity to terrestrial and wetlands ecosystems have made enormous advances in recent years. This has opened up opportunities to measure with an improving degree of accuracy the inter-relationships that exist between them. Peter Mumby of the University of Exeter says this has significant implications for the creation of new ecosystem services because the increasing reliability of sonar and satellite mapping makes it easier to determine the impact of a service and to choose where it is most likely to be effective.

“Mapping can help determine the value of a particular mangrove or reef for maintaining ecosystems,” he says, making it possible to more precisely estimate the survivorship of fish that rely on the former to reach a level of maturity that is optimal for survival on the latter.

Besides the implications for fisheries, the ability to predict differences in biomass that result from the protection or restoration of particular ecosystems and coastal habitat has implications for a host of private sector stakeholders. These include those who have interests in making carbon sequestration mappable, in improving coastal defenses against storms and erosion, in selecting building materials or in promoting tourism.

Mumby noted, as an example, how the potential for coastal marine ecosystem services to shore up terrestrial coastlines should enable coordination with the insurance industry in making solutions more effective as well as in scaling them up.

Learning from Success: Iceland and New Zealand

Besides outlining the enormous profit potential in developing market-based ecosystem services, such as the $2.4 trillion estimated value of business services to be derived from maintaining a frozen Arctic alone, the MARES Katoomba meeting also brought attention to some of the ongoing market-based marine projects that have been successfully delivering profits since the 1970s.

Jim Sanchirico of the University of California at Davis, says there are very successful fishery management programs in Iceland and New Zealand, with the latter now having demonstrated that fish species entered into a program that reduces the Total Allowable Catch can actually produce higher profitability than those that don’t.

Operating on the hypothesis that as fish stocks rebuild, the cost of fishing will fall and the consolidation of the fishing fleets will produce greater efficiency, he found that the annual growth rate in sales of the fish entered into the quota system was 9%, versus only 1% for fish for which quotas were not restricted.

In a final presentation, Bettina von Hagen of the EcoTrust advised attendees at the meeting to be mindful of opportunities to “leverage funding and sympathetic players.” She cited one example in Oregon where by taking ownership of a relatively small plot of watershed property adjacent to a much larger area of publicly owned property, EcoTrust has been more effective at meeting biodiversity challenges and critical needs than if it had been working with just the isolated plot. Similarly, she said it is important to be mindful of regulatory changes, tax incentives and industry restructuring for opportunities to develop new markets.

She also called on ecosystem market designers to look for ways to assist distressed communities by showing them how to create jobs from new services to the natural resources that they have available.

“If your only currency is timber, you’re going to make certain choices that are not optimal, when you have a forest that produces this whole range of goods and services,” including carbon storage, habitat creation, salmon spawning, recreation and scenic attractions.

“You have to look for value in the most unexpected places,” von Hagen said.

This article has previously run on Ecosystem Marketplace and in Business Green

Jarvis Collapse Offers Cautionary Lesson For All PFI Contractors

By Henry Teitelbaum

 

The recent collapse of rail and public infrastructure developer Jarvis PLC marked the end of the line for yet another company that relied too much on  ambition and good timing for its success.

 

The story-line is more suited to that of a dot-com casualty than a stodgy ‘old economy’ business built largely around the long-term services that come from 25-plus-year Private Finance Initiative contracts. But Jarvis, which grew from a shell of a company worth around £2 million in 1994 to Britain’s largest engineering and construction company in less than 10 years before its luck ran out, should be a case study for how not to manage a business that operates in the PFI space.

 

It should also help to reinforce the need for companies to share and uphold the public service values that should be at the core of their commitment to the communities they serve. 

 

Jarvis began its spectacular rise with the privatization of British Rail, when its then-CEO, Paris Moayedi, realized that key maintenance assets, including some of the most advanced track laying and upgrade vehicles in the world, were being put up for sale for a song. He bought the company that operated them, NIMCO, and instantly turned Jarvis into a leading rail maintenance force, responsible for upgrading key lines across the country.

 

Jarvis didn’t just become an overnight sensation and leading player in a lucrative market for maintenance services to the newly privatized Railtrack. It’s acquired  technology allowed it to earn margins of 8%, or about twice that of its peers at Amec, Balfour Beatty and other established competitors. Moayedi, who famously scoffed at the margins others were earning for their work, reportedly responded to questions about Jarvis’ margins by commenting “I don’t get out of bed for 3%”, a remark that would later come to haunt the business.

 

Moayedi’s ambitions led him to next focus Jarvis’ attentions on the developing PFI market in the UK, which began under Tory chancellor Norman Lamont in 1992, but was embraced with fervor by Tony Blair’s New Labour government as it strove to deliver improvements to roads, schools, and healthcare services. 

 

Jarvis quickly pushed to the front of the pack, winning preferred bidder status in tenders on everything from major motorway projects to new schools and hospital accommodation projects. Driven by Moayedi’s desire to build a huge forward order book, Jarvis drastically underbid competitors to get public authorities to award them PFI contracts, even when the company’s capacity to deliver was strained. When timetables began to slip, things got ugly. Jarvis would blame its legions of subcontractors for the problems and at times failed to pay them, leading to more costly delays and legal disputes. 

 

But it was the tragic accident at Potter’s Bar that really brought matters to a head. Although the company had admitted responsibility for several other derailments, the May 2002 crash in which seven people were killed raised questions about the  company’s commitment to passenger safety. While there was, and still is no evidence to show that Jarvis deliberately cut corners on safety in delivering maintenance on the tracks for which it was contractually responsible, the attention that the incident brought to the company’s industry high profit margins, along with its poor response to questions about its practices left lingering doubts.

 

It wasn’t long before the doubts reached Moayedi’s office. They combined with howls of anger at the overstretched state of Jarvis’ PFI business and its habit of recognizing profits not yet earned from long-term contracts, to force the CEO out in 2003. 

 

Several debt restructurings later,  Jarvis was up against the wall, forced out of the accommodation business, and beating a hasty retreat to a much reduced rail maintenance operation. It was even forced by the cash crunch into selling the  lucrative £150 million equity stake in the TubeLines consortium that would go on to deliver upgrades to the London Undergound. 

 

Then, when Network Rail took over from the failed Railtrack as operator for the UK’s rail infrastructure in 2004, it was Jarvis that suffered the most from the greater discipline that was applied by the new operator to how money was spent. Much work was taken in-house and spending on other projects was postponed. Other major rail contractors were also winning a larger slice of the remaining work that was up for grabs. All this was happening to Jarvis at a time when its reliance on rail maintenance and upgrade work was nearly complete.

 

The final blow came when the recession led Network Rail to further cut new contracting work, leaving Jarvis no choice but to enter administration.

 

One has to feel for the 2,000 rail workers at Jarvis who now face an uncertain future. But Jarvis and the style of leadership that marked its heyday will not be missed.

 

There are many in the UK who now believe that PFI is nothing more than an invitation for private companies to raid the public purse, deliver enough of a school, healthcare facility or other public facility to meet the letter of the contract, and move on to the next one. Where this has been the case, it is often the likes of Jarvis that has been responsible for that perception. 

 

In the end, though, Jarvis’ shoddy, short-term profit driven approach to business availed the company and its shareholders very little. The lesson for anyone building a business around PFI contracting is that you either plan for the long-term and build your business around delivering quality long-term services to your customers, or expect to fail. 

 

In the end, good businesses get rewarded. And bad businesses go to the wall. 

Bridging The Public/Private Divide May Be COP15’s Main Achievement

LONDON. March 12th 2010 — The hand-wringing over the failure to reach consensus on targets and timetables for reducing greenhouse gas emissions at December’s United Nations Climate Change Summit in Copenhagen may persist for some time to come.

But looking beyond the effort to reach a strong international agreement, the excitement that COP15 has generated among businesses for developing market-based initiatives and public-private collaborations on infrastructure that will mitigate climate change is only just beginning to be felt. Whether it’s green cities, clean vehicle partnerships or trading schemes that monetize the cost of carbon, COP15 has made it clear that the private sector is not waiting for a government consensus to develop.

“If practical solutions to the problem of climate change are going to be found, financed, and implemented, it is global firms that will get it done,” says Anant K. Sundaram, visiting Professor of Buiness Administration at Dartmouth’s Tuck School of Business. He says that while the international public policy apparatus – including the UN – is needed to enable and oversee this, “it needs to get out of the way” so that companies can deliver technology solutions in energy efficiency, energy alternatives and capturing and storing carbon on a scale that is meaningful.

Nowhere was positive momentum for engaging private sector expertise and financial support more on display than in efforts to promote REDD, or Reducing Emissions from Deforestation and Forest Degradation in Developing Countries. REDD helps support forest conservation by creating a mechanism whereby carbon emitting businesses in one country can buy offsets in the form of pollution allowances that essentially pay for the upkeep and preservation of rainforests in poorer countries.

Stewart Maginnis, director of Environment and development at IUCN, a Switzerland-based environmental conservation group, says that COP15 produced significant progress in spreading understanding of REDD. “A clear idea of what is required to make REDD-plus work has now emerged, with real potential to contribute up to 30% of the global effort to stabilize atmospheric greenhouse gas concentrations over the next decade.”

While no legally binding REDD-plus mechanism was adopted at the conference due to the larger failure to reach binding agreements on how much money rich nations would contribute, enough progress was made to allow the private sector to begin implementing sub national demonstration activities and even scaling them up to the national level. The talks even produced $3.5 billion of short-term financial commitments to fund the effort from Norway, Japan, the United States, Britain, France and Australia.

Progress on REDD was due in large part to a very effective alliance of private sector, NGOs, scientists and governments, and this did not go unnoticed by other constituencies at the conference. Professor Diana Liverman, Visiting Professor of Environmental Policy and Development at Oxford University and former Director of the Environmental Change Institute, says that after seeing the success of the forest lobby, “the really powerful agricultural interests and countries came together I think for the first time to think very seriously about the role of agriculture and food systems both in adaptation and mitigation.”

There was no shortage of business leaders agitating for business to do its part, whether a political agreement was reached or not. Sir Richard Branson, chief executive of Virgin Group, set the bar high, stating: “If governments do not come to a resolution then I think it’s up to businesses to actually force through resolutions to this issue.” He called on industries such as shipping and aviation to set targets for themselves in reducing the amount of carbon they release into the atmosphere, and then find imaginative ways to achieve those targets, much as cities need to find imaginative ways to engage the private sector to achieve their targets.

The same panel also highlighted the need for private funding for municipal-level climate change mitigation projects, and found strong support from a group of leading mayors from around the world, who called for the greater use of public private partnerships at the municipal level to fund sustainability projects.

Los Angeles Mayor Antonio Villaraigosa outlined several groundbreaking partnership initiatives, including the world’s largest LED street-lighting program to improve energy efficiency as well as a Clean Truck Program at the LA seaport, where efforts to replace around 5100 old diesel trucks have already reduced truck emissions by 70%. California governor Arnold Schwarzenegger, who has become one of America’s leading advocates of public private partnerships in infrastructure after close encounters with a spiraling state budget, was similarly keen at the conference to promote municipally based private sector projects, as well as grassroots level efforts to combat climate change.

He has good reason. Private financing and delivery of public assets and infrastructure improvements at the municipal, state and national levels through PPP has become a global phenomenon over the past five years as national governments in developed and developing countries both look for new ways to get the modern economic and social infrastructure without breaking the budget. The model makes use of private investments for construction and maintenance of the assets, typically in return for a steady long-term flow of interest payments linked to tolls or to future government tax revenue.

Moreover, while the PPP model has been used until recently primarily for highway transportation projects, and to procure public schools, healthcare, prison and government facilities, there are an increasing number of projects in the pipeline to deliver clean water, clean energy, zero emissions transportation, sewage and waste recycling services.

Numerous governments have also been introducing sustainable development into their criteria for selecting PPP projects that they put out for competitive tender. The Netherlands, which has one of the most active PPP programs on the European continent, actively biases the award of projects towards those consortia that give attention to environmental considerations in their bid proposals. In France, PPP projects that are aligned with the goals of the “grenelle de l’environnement”, or ecological forum, such as heavy rail infrastructure projects, are currently given priority consideration for a special state signature guarantee that could cover 80% of the financing of the borrower’s loans during construction and operation.

In the U.S., President Barack Obama last month followed up his endorsement of COP15’s goals with the announcement of $8 billion of Federal Railroad Administration grants from the America Recovery and Reinvestment Act (ARRA) to act as seed money to create a nationwide high-speed rail network. In California, which alone will receive $2.25 billion of the grant, Governor Schwarzenegger has pledged to match the federal grant dollar for dollar, with $10 billion of bonds already approved for the rail line and a PPP envisioned as part of the project delivery mechanism.

Not everyone at COP15, or indeed in environment ministries around the world, is convinced that a prominent role for private sector participation in delivering climate change solutions is desirable. This is especially true with regard to sensitive assets such as water, which some consider too essential a resource for life to be entrusted to private suppliers. Many environmentalists also continue to oppose nuclear energy, notwithstanding its zero-carbon footprint, on grounds that it’s expensive to produce, generates toxic waste and carries other environmental risks. Still others are opposed to entrusting such facilities to large corporations on grounds that many of these companies have dubious environmental records.

Such views found ample expression not only in the violent clashes that took place outside the conference, but in the views of eco-avengers such as author Naomi Klein, who decried the lack of attention at the conference to “the role that corporations are playing in creating this crisis”, as well as the continuing influence of the fossil fuel lobby on shaping climate policy.

Geoffrey Hamilton, Chief, Cooperation and Partnerships Section for the United Nations Economic Commission for Europe, says it would be wrong to underestimate the strength of opposition to private involvement in designing and delivering climate change solutions. “Many environmental people reflect views within governments, where they are suspicious of the private sector and view it not so much as part of the solution, but as part of the problem.”

From his perspective, “One of the benchmarks in terms of determining the success of COP15 is the extent to which bridges are being built between the environmental ministries and the public infrastructure development ministries, because that’s been a difficulty in the past.”

It’s hard to predict whether COP15 will lead to the binding agreements that the private sector and the public-at-large see as needed to enable
the scale of investment that the private sector is capable of delivering this year. But if it does, it is likely that the deal comes as much out of an awareness of the green jobs bonanza that will result as by the need to invest in saving the planet.

When a group of 191 institutional investors managing more than $13 trillion met at the UN in January, the statement that came out of the meeting was as unambiguous on this point as it was about their commitment to taking action. But noting how Germany’s “comprehensive policies “ on developing a low-carbon economy have already helped to create eight times more renewable energy jobs per capita than the U.S., the statement concluded:

“For us to deploy capital at the scale needed to truly catalyze a low-carbon economy, however, policymakers must act swiftly.”

This article has previously been published in in Ecosystem Marketplace and BusinessGreen.

Henry Teitelbaum, Editor, P3 Planet.com