Building Supply Capacity for Environmental Services in Asia: The Role of Domestic and Trade Policies

Research
Date period
2 April 2007

This paper assesses the role of domestic and trade policies of emerging Asian countries in building the capacity of their environmental service sector. Although the environmental sector in emerging Asia constitutes barely 6 percent of the global environmental market by value, the sector has witnessed double-digit growth in Asia during the last decade. This has been driven largely by growing demand for environmental products and services due to demographic factors, a degraded state of the environment, as well as increasing stringency of environmental regulations. Water and wastewater management services constitute the most significant segment by value in Asia, followed by solid waste management services. These form part of the infrastructure services of an economy, and capacity building in these segments is a critical challenge for developing countries in order to provide basic services to their population. 

A set of nine countries is considered in the analysis: China, Chinese Taipei, Indonesia, India, Malaysia, the Philippines, Thailand, Republic of Korea (hereafter ‘Korea’) and Vietnam. These countries reflect the widely diverse nature of Asian economies in terms of levels of economic structure anddevelopment, regulatory frameworks, demography, and natural resource endowments. Three countries, China, India and Indonesia, account for more than 40 percent of the current total world population, but there exists gross under-provision of basic environmental services in these nations, particularly in water and sanitation services. Thus, Asia has the highest number of people unserved by water supply and sanitation services in the world. 

Among the nine countries studied, Korea and Chinese Taipei have the most developed domestic environmental sector, strongly driven by government commitment to nurturing the growth of the sector through enhanced environmental expenditure, developmental funds for environmental firms and facilitating technology upgradation. Malaysia and, more recently, China have also promoted the growth of the environmental sector as an integral part of their economic planning process. Moreover, China and Korea have undertaken regional environmental initiatives to help develop the sector, including trilateral cooperation with Japan to encourage the transfer of state-of-the-art environmental technology. During the last five years, the Chinese environmental sector has experienced remarkable growth, and today is valued more than the combined markets of Korea and Chinese Taipei. 

The domestic environmental service industry in emerging Asia consists of small and medium firms compared to the large multinational corporations (e.g. from France, Germany, US, UK) dominating this sector. Micro-sized environmental service firms, belonging to the informal sector, are also significant in providing essential infrastructure services in these Asian countries. It is important to recognize and maintain the co-existence of the small and micro environmental firms in a sector otherwise dominated by giants as they serve an important social and economic function in the developing countries.

The small size of the Asian environmental firms restricts their ability to invest in Research and Development (R&D) and develop a large marketing network. Being relatively new firms, they are at a disadvantage in competing with mature multinationals or in winning contracts for large environmental projects. For example, Indian environmental firms have observed that projects funded by multilateral donor agencies have built-in conditionality for employing internationally established firms, and this inhibits the growth of the domestic emerging firms in the developing countries. 

It is important to note that the supply capacity of the environmental services in any country is dependent on the state of development of other economic sectors. Since environmental services cut across several economic sectors, including engineering, construction, consulting, etc., the countries which have well-developed capacities in these related industries are able to enhance the supply capacity of the environmental services industry more easily.

Six of the countries under study, including Chinese Taipei, Indonesia, Malaysia, the Philippines, Republic of Korea and Thailand are more integrated with the global economy since they followed liberalisation policies earlier than China, India and Vietnam. Although among the late reformers, China has pursued a more aggressive liberalisation path than the gradualist path chosen by India. The 1990s saw a surge in foreign investment for water treatment and sanitation projects, especially in Southeast Asia, but fell off sharply with the 1997 financial crisis and failures in water service projects. The essential problem arose in cases of “take or pay” type of build-own-operate contracts in water services, where the government took the commercial risk of the investment in order to attract foreign investment. Since state departments in these countries are financially constrained to begin with, it resulted in the early termination of contracts and exodus of large multinational companies from Southeast Asian developing countries. It is also evident that leading multinational corporations do not look beyond their contract clauses, and can well engage in environmentally unfriendly practices if the contract granted by the local regulatory body is negligent of the sustainability issue, as experienced in India. 

Thus, liberalisation by itself, or the presence of leading global environmental service providers in developing countries, will not result in building domestic capacity of environmental services. The growth of domestic environmental service providers in Korea, Chinese Taipei, and lately China, has taken place along with strategic government policies and increased environmental expenditure. Import-substitution, and preference built-in for domestic engineering firms, helped to nurture domestic sector while allowing foreign participation. The nature of private contracts is critical in determining whether or not and what kind of actual technology transfer takes place. The accompanying environmental policies and regulations integrated in the economic planning process, rather than piece-meal measures, will pave the way for building capacity and establishing a strong domestic environmental sector.