REMARKS OF AMBASSADOR PETER TUFO IN BUDAPEST JAN. 20

[USIA]

USIS Washington File

23 January 1998

TEXT: REMARKS OF AMBASSADOR PETER TUFO IN BUDAPEST JAN. 20

(At USAID-sponsored conf. on environmental investment) (2050)

Budapest -- U.S. Ambassador to Hungary Peter Tufo gave a keynote
address January 20 at a Regional Environmental Investment Conference
in Budapest that brought together more than 100 government officials
from throughout Central and Eastern Europe to learn about private
sector sources of funding and financing techniques for environmental
projects.

Ambassador Tufo said that a central focus in U.S. foreign policy
activities during the past few years has been "the goals of
sustainable economic development and the effort to address the global
challenge of climate change." He added that the U.S. Embassy in
Hungary has moved "environmental projects to the top of our bilateral
agenda."

Remarking that commitments of capital are needed now to deal with the
region's environmental problems, which "are serious and seem
overwhelming," he said, "Our experience has suggested that countries
which rely fully on central government funds for these projects miss
the boat.... There are many ways to involve the private sector in
financing environmental projects."

Tufo disagreed with the belief that "countries which need to stimulate
economic growth cannot afford to invest in environmental projects....
I believe that environmental investment is not only compatible with
economic growth and democratic institutions. They go hand-in-hand."

In addition to the ambassador, former Environmental Protection Agency
Director William Reilly addressed the conference, as did the Mayor of
Budapest and high level bankers and investment fund managers. The
conference was sponsored by the U.S. Agency for International
Development (USAID).

Following is the text of Ambassador Tufo's remarks:

(Begin text)

Remarks by Ambassador Peter Tufo
At the Regional Environmental Investment Conference
Sponsored by USAID
January 20, 1998
Budapest, Hungary

Ladies, gentlemen, honored guests. It gives me great pleasure to join
the dialogue in this USAID-sponsored Regional Environmental Investment
Conference. I applaud the conference organizers, USAID, and the
Harvard Institute for International Development for providing the
opportunity for us to compare experiences and develop our
understanding of this vital issue. In case anyone had their doubts, I
am a committed environmentalist. I also have long experience in the
business of finding innovative financing for environmental
infrastructure.

During the past few years, the State Department -- and the U.S.
government in general -- has made the goals of sustainable economic
development and the effort to address the global challenge of climate
change a central focus in our foreign policy activities. Here in
Hungary, the U.S. Embassy has given notice by word and by deed that we
are moving environmental projects to the top of our bilateral agenda.

Those of you already engaged in the region know that the environmental
problems are serious and seem overwhelming. The applicants to the
European Union will have tremendous investments to make, given
requirements to harmonize regulations and performance with EU
environmental standards and legislation. None are expected to fully
meet these standards even early in the next century, and presumably
derogations may be necessary for early entry. The European Bank for
Reconstruction and Development estimates that the "Visegrad Four"
countries will need to invest more than 80 billion dollars in
industrial and municipal infrastructure to meet the environmental
requirements of EU accession. The numbers are daunting, but there is
increasing interest and concern within governments and financial
decision-makers in facilitating these kinds of investments as the
countries of the region move from survival to surviving well.

What can be done? Recognizing the problem is the first step.
Commitments of capital are needed now for the rehabilitation and new
construction of potable water systems and waste water treatment
plants, energy efficient buildings, technologies to reduce pollution
in plants and mines, and the conversion of transportation and heating
systems to cleaner fuels, to name just a few areas.

The lack of investment resources is not the only impediment to
environmental improvement. Sometimes we lack only imagination, or new
technology, or the ability to recognize opportunities that stare us in
the face.

U.S. technology is a world leader and has achieved significant results
both domestically and overseas in pollution-reduction projects. Here
in the region, there are many challenges presented by the need for
environmental cleanup and adaptive reuse of the wastelands created by
former Soviet bases. The Szekesfehervar model in western Hungary
points the way to the creation of high-tech industrial parks which can
stimulate employment, create showcases for environmental technology
and perhaps eventually expand the protection of nature reserves to
provide valuable "sinks" for CO2 emissions.

In every country, the domestic banking sector, international financial
institutions and private foreign investors will be the sources of much
of the capital needed for such investments. There are also new "green"
equity funds in the region, one in the Baltic states and another
sponsored by the European bank for reconstruction and development,
which provide venture capital and loans for private investment in
environmental projects.

It is indisputable that private capital has been the engine for
economic growth and the primary source of capital for the vast
majority of the environmental technology and infrastructure currently
in place in the United States, Western Europe, and Japan. Our
experience has suggested that countries which rely fully on central
government funds for these projects miss the boat. Without the profit
motive driving the search for economically plausible projects, and
without the accountability that flags this process, they cannot expect
to develop sufficiently robust levels of investment.

There are many ways to involve the private sector in financing
environmental projects. The United States, for example, uses municipal
bonds widely to finance its urban infrastructure, while other
countries rely more on loans from banks or municipal funds. Industry
has a number of options, from infusion of equity capital to borrowing
to public private partnerships. There are examples of water systems,
municipal solid waste services and hazardous waste plants which are
completely privatized, although these are much less common than
private funding for railroads, telephones or toll roads.

While every country must develop a system that fits its needs and
institutions, many of the models and systems now functioning in other
countries can be adapted to new circumstances. Also, some aspects of
sound privately financed projects are found in almost every model,
such as annual revenue streams, appropriate rate structures, good
collections and cost recovery through recycling. There must of course
be a reasonable relationship between return on investment and risk. A
key in my experience is capturing assured revenue streams that are
sufficient and that, once identified, can be put in a "locked box" so
that they are inviolable for any other use.

But access to private resources will not happen without government
incentives and rewards. Private investment must be boosted through
incentives provided to encourage it to flow toward environmental
projects. Some of you are in a position to see that this happens over
the next few years. For example, cities and communities need to have
viable budgets, continue to structure refinancing, and be accountable.
They need to be able to pay market interest rates, be willing to
provide collateral and evidence of cost recovery, and in general
demonstrate that they represent a reasonable risk to private sector
partners and lenders. Financial institutions need to develop their
ability to assess the credit risk of non-traditional borrowers, and to
use revenue streams creatively to meet the needs of this very large
market.

We should be looking for every opportunity to forge these
"risk-reward" relationships between the public and private sector.
These partnerships can bring efficient management and effective
oversight to bear. For example, in New York we developed a kind of
layered financing for toll roads which became known as "burger bonds."
This system used underutilized assets, in this case land alongside the
highways which was leased to a company. The government obtained a
fixed revenue stream, reduced its debt burden and could piggyback on
the company's higher bond rating. On it's part, the franchised company
got a long-term contract. When it began five years ago, the
arrangement of stacked bonds was controversial. But it satisfied all
regulatory requirements and met the test of time. It illustrates one
way to utilize municipal or state assets for imaginative financing.

As you know, representatives from 150 countries were in Kyoto last
month and managed against great odds to forge the basic terms of an
international climate protocol to establish benchmarks for green house
gas emissions. Costa Rica, Hungary, Poland, and other countries
represented at this conference played an important role alongside the
U.S. in achieving this historic compromise, which is but a first step
in a long process. The growing concern with and awareness of global
warming is creating many new opportunities for joint-implementation
activities which bring together entities in different countries to
cooperate on projects which reduce or mitigate emissions.

Until now, joint-implementation activities have been carried out on a
voluntary basis with the expectation that a system for trading
emissions permits might emerge. More than 20 countries have been
experimenting with these projects, including countries in Central and
Eastern Europe and the new independent states. Pilot projects have
been carried out to make buildings more energy efficient, to convert
buses and heating utilities to more efficient fuels, and to reduce
methane emission by using this gas from landfill sites rather than
releasing it into the atmosphere.

These projects provide both global and national environmental benefits
and attract foreign private funds and state-of-the-art technology.
(It's worth recalling that technology has to keep proving itself, and
that technology providers need to find opportunities to show how well
their product can perform. I would advise you to seek them out,
because they are inherently risk-takers.)

Joint-implementation projects also provide training for industrial
partners which help these companies meet the environmental standards
emerging for companies exporting products to Western Europe.

The important step of developing a system for emissions trading and
credit for joint implementation or "clean development" projects was
hotly debated in Kyoto. Although progress was made, it is likely that
discussions on this topic will continue until the follow-up meeting in
Buenos Aires next November. There are still many issues to be
operationally defined, such as how to monitor projects and to measure
their impacts. This is important, because we must be tough in holding
those who commit to targets accountable, whether they be governments
or private investors, and we must show that there are consequences for
not meeting them.

I am confident, however, that solutions will be found, and that
transferable credits for projects which reduce or sequester global
greenhouse gases will open up a great many more opportunities for
private investment in energy efficiency and nature conservation. The
solutions will be found, and whether this happens sooner or later
will, to some extent, depend upon our combined efforts.

I have often said that economic growth and strengthening democratic
institutions are the first priorities for this region. I have also
heard it said that countries which need to stimulate economic growth
cannot afford to invest in environmental projects. I disagree. I
believe that environmental investment is not only compatible with
economic growth and democratic institutions. They go hand-in-hand.
Industries which meet environmental standards, are able to compete in
export markets. Those which are more energy efficient are more
profitable, governments which are responsive to environmental
challenges and that develop creative uses of existing assets for this
purpose can build strong foundations of popular support. Cities which
have well managed environmental investment programs provide their
citizens with better services and meet the health needs of children.
They are carrying out their larger purpose.

I encourage you to develop networks on environmental finance that
branch out beyond the end of this conference. Tomorrow, you will visit
the regional environment center for Central and Eastern Europe,
located in Szentendre. It has local offices in many countries in the
regions, has developed strong networks with environmental groups and
policy makers, and has valuable information and analytical products
for use by government decision makers and the private sector. I
encourage you to make full use of its excellent resources and wish you
good learning and good luck.

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