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  1. Financing Cleaner Production and Energy Efficiency Projects Presentation of the Energy Efficiency Guide for Industry in Asia

  2. Hello!

  3. Participant introductions • What type of organization do you work for? • e.g., industry, government, other • if from industry, which sector and what size • What are your job responsibilities and areas of expertise? • e.g., management, accounting, finance, engineering, production, environmental • What is your investment perspective? • e.g., developer of investment proposals, one who funds investment proposals

  4. Lecture Waste and Cleaner Production Cost identification and estimation LUNCH BREAK Capital budgeting and project profitability Project funding Workshop exercise Risks of waste Cost identification for waste Cost estimation for waste Calculating cash flow and simple payback Calculating NPV What the bank will consider Workshop overview 9.00 10.30 12.30 14.00 16.30

  5. WASTE AND CLEANER PRODUCTION

  6. Waste and Cleaner Production What is waste? • “Anything that leaves the company not as product!” • It costs money… • and… • it can be prevented!

  7. Waste and Cleaner Production Waste takes many forms Air Emissions Materials, Energy, Water, Labour, Capital Products, By-Products Solid Waste Waste Energy, Wastewater

  8. Waste and Cleaner ProductionExercise 1 (10 min) Write down the risks associated with waste from the perspective of: • Management of a company • Government • Investors

  9. Treatment & Disposal Regulatory Compliance THE HIDDEN COST OF WASTE Lost Raw Materials, Energy, Labor Liability Company Image Waste and Cleaner ProductionThe “Cost of Waste Iceberg” Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky. 1998. “Chapter 13: Shared Savings and Environmental Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.

  10. Waste and Cleaner ProductionThe costs of waste ink at Southwire Company • The average disposal cost of a drum of hazardous waste ink was estimated as $50 • Upon closer inspection, the true cost was discovered to be $1300 per drum: • $819 lost raw materials (ink, thinner) • $369 corporate waste management activities • $50 disposal • $47 internal waste handling activities • $16 hazardous waste tax

  11. Waste and Cleaner Production Dilute & disperse Cleaner Production Sustainable Development Pollution Prevention Recycling Pollution Control Complexity of Environmental Issue Dispersion 1960 1980 1990

  12. Waste and Cleaner Production “End of Pipe” treatment Cleaner Production Sustainable Development Pollution Prevention Recycling Treatment Complexity of Environmental Issue Dispersion 1960 1980 1990

  13. Waste and Cleaner Production Off site recycling Cleaner Production Sustainable Development Pollution Prevention Recycling Pollution Control Complexity of Environmental Issue Dispersion 1960 1980 1990

  14. Waste and Cleaner Production Prevention Cleaner Production Sustainable Development Pollution Prevention Recycling Pollution Control Complexity of Environmental Issue Dispersion 1960 1980 1990

  15. Waste and Cleaner ProductionCP definition • Integrated, preventative, continuous strategy • Products, production processes or services • Reduce risks to humans and environment • and increase profits! or waste minimization, pollution prevention, eco-efficiency…

  16. Waste and Cleaner ProductionCP benefits: reduced risk! Reduced material use and waste Reduced liability risks Reduced costs & increased profits Enhanced reputation Increased productivity

  17. Waste and Cleaner ProductionCP strategies • Prevention of waste generation: • Good housekeeping • Input substitution • Better process control • Equipment modification • Technology change • On-site recovery/reuse • Production of useful by-product • Product modification

  18. Waste and Cleaner ProductionCP versus End of pipe COST ENVIRONMENTAL PERFORMANCE COST ENVIRONMENTAL PERFORMANCE End of pipe Treatment Cleaner Production

  19. REPORT ACT CHECK PLAN CP DO Waste and Cleaner ProductionCleaner Production and EMS

  20. Waste and Cleaner ProductionCP Methodology Step 3 Step 5 Step 1 Implement and measure results Identify CP options Get organized Step 2 Step 4 Carry out feasibility analysis Step 6 Analyze processes Integrate in business processes At what steps do you need cost data?

  21. COST IDENTIFICAITON AND ESTIMATION

  22. Cost identification and estimationStep 2: Analyse processes • Prepare process flow charts • Collect baseline data and observations • Material balance: determine true waste! • Assign costs to materials, energy and waste

  23. Cost identification and estimationCase study: the PLC Company • A mid-sized manufacturer of food packaging materials • Major manufacturing steps are Printing, Laminating, and Slitting • Waste management includes incineration and wastewater treatment • Cleaner Production has reduced volume of solid scrap and the annual cost of waste

  24. plastic film, aluminium film, adhesive solvent air emissions solvent air emissions INVENTORY printed laminated film printed film SLITTING plastic film, ink PRINTING LAMINATION Solid scrap Solid scrap Solid scrap Liquid waste ink to waste management to waste management Cost identification and estimation Materials flow chart at PLS Company product

  25. Cost identification and estimation Materials flow chart at PLS Company air emissions Waste water treatment chemicals air emissions Cleaner water to a nearby stream fresh water dirty scrubber water fuel and fuel additive WASTEWATER TREATMENT INCINERATOR liquid ink waste from printing step solid scrap from printing, laminating, slitting steps sludge ash OFF-SITE LANDFILL

  26. Cost identification and estimationMaterials Balance • Physical analogy to financial balance sheet • Compares all material inputs and outputs • Identifies sources of waste and data gaps • Provides basis for cost evaluation MANUFACTURING PROCESS PRODUCT INPUTS NON-PRODUCT OUTPUT (WASTE)

  27. Cost identification and estimationOther tools • Walk-through & interviews • Cost checklists (generic & sector/process specific) – see handout C2 • Activity Based Costing (ABC), costs are allocated from overhead accounts • To processes, products, or projects that actually generate costs • Based on activities with a direct relationship to cost generation • Check accounting records • External expertise for less tangible costs, e.g. • Insurance sector— liability estimation • Marketing firms— value of company image • Environmental agencies — estimates of current and future regulatory compliance costs

  28. Cost identification and estimationTo quantify or not to quantify? • How do you know if a relevant cost or savings is quantitatively significant before you go ahead and quantify it? You don’t. • Try to do at least a rough, first-cut estimate of all quantifiable costs — then decide whether or not refining the estimate is worth the effort. Do a balancing act!

  29. Cost identification and estimationExercise 2 (10 min) List costs of waste management at PLS Company (There are three categories of costs: • The cost of manufacturing inputs • The cost of waste management • Less tangible costs)

  30. Cost identification and estimationCosts of waste at the PLS Company The total cost of waste due to the generation of solid scrap during print runs was estimated to be US$213,000 per year, including: • Cost of lost direct manufacturing inputs (e.g, plastic film, ink, energy, labour) • Cost of waste management (e.g., incinerator operation, wastewater treatment plant operation, final waste disposal)

  31. Cost identification and estimationProblematic accounting practices? Various costs at a facility might be... • “Hidden” in the accounting records • Misallocated from overhead accounts • Classified as fixed when they are really variable, or semi-variable • Not found in the accounting records at all • (Can you think of others?)

  32. “Hidden” costs of lost raw materials Manufacture of plastic rear panels for automobiles (as % of input materials) Material loss per the accounting records Actual material loss Adapted from: Rooney, Charles. “Economics of Pollution Prevention: How Waste Reduction Pays.”Pollution Prevention Review.Summer 1993.

  33. “Hidden” costs of lost raw materialsat the PLS company • The PLS accounting records show: • The amount of raw materials used • The amount of final product shipped • But the records do not show: • The amount of solid scrap waste generated • The amount of any other lost raw materials

  34. Cost identification and estimationDirect costs vs. indirect costs Direct costs • can be easily traced to a unit of product (e.g., direct materials, direct labour) • assigned directly to the process, product, or project responsible for generating the cost Indirect costs • cannot be traced as easily to a unit of product (e.g., facility energy use, insurance, maintenance, waste treatment) • assigned to facility, division, or company overhead accounts (varies per company) • Often ‘hidden’ • Often include environmental costs!!!

  35. Indirect Environmental Management Costs “hidden” in an overhead account Product Manufacturing Cost Statement Variable Costs Raw Materials Intermediates Additives Utilities Direct Labour Packaging Wastewater Treatment $2.27/lb. $0.87/lb. $0.41/lb. $0.96/lb. $11.32/lb. $10.31/lb. $9.14/lb. $0.04/kW-h $0.07/kW-h $27.40/hr $31.43/hr. $0.60/pkg. $0.57/pkg $0.01/gal. • legal expenses • environmentally driven R&D • permitting time and fees • environmental training Fixed Costs Supervisor Fixed Labour Depreciation Divisional Overhead General Services & Administration Fixed Costs Supervisor Fixed Labour Depreciation Divisional Overhead General Services & Administration $4,600 $57,800 $1,227 $13,662 $1,294 Total Variable Cost Total Fixed Cost Total Manufacturing Cost Total Cost Source: Green Ledgers: Case Studies in Corporate Environmental Accounting. World Resources Institute. May 1995.

  36. Survey of industry accountantsin the US Findings: • Environmental management costs (such as waste handling, treatment, and disposal) predominantly assigned to overhead accounts • Even energy and water costs (manufacturing inputs) are usually assigned to overhead accounts Source: Environmental Capital Budgeting Survey . Tellus Institute, for U.S. EPA, June 1995

  37. Cost identification and estimationExercise 3 (10 min) Calculate the aluminium and plastic film loss during the slitting step of the process: • Amount in km / year • Costs in $ / year (Hint: virgin material input = finished product + waste scrap)

  38. Cost identification and estimationProblematic accounting practices? Various costs at a facility might be... • “Hidden” in the accounting records • Misallocated from overhead accounts • Classified as fixed when they are really variable, or semi-variable • Not found in the accounting records at all • (Can you think of others?)

  39. Cost identification and estimationCost allocation Costs initially assigned to overhead accounts are usually allocated back to processes, products, or projects using an allocation basis such as • Quantity of raw materials used • Production volume • Machine hours • Labour hours • Floor space

  40. Solid scrap waste Treatment and disposal costs Cost identification and estimationCost allocation • How would you • allocate? • On the basis of: • # of set-up runs? • raw materials use? • machine hours? • amount of scrap? • some other basis? Allocated from overhead Printing Laminating Slitting

  41. Cost identification and estimationProblematic accounting practices? Various costs at a facility might be... • “Hidden” in the accounting records • Misallocated from overhead accounts • Classified as fixed when they are really variable, or semi-variable • Not found in the accounting records at all • (Can you think of others?)

  42. Cost identification and estimationFixed vs. variable costs • Fixed Costs - do not vary with production level or other factors • e.g., equipment depreciation, labour • Variable Costs - do (or can) vary with production level or other factors • e.g., raw materials use, energy use • A cost considered “fixed” at one firm may be considered “variable” at another firm Cleaner Production aims to reduce variable costs

  43. Cost identification and estimationFixed vs. variable costs (cont.) • Incinerator operating costs at PLS include: • Fuel, fuel additive • Operating labour • Trucking ash to landfill • Equipment depreciation costs • PLS views these waste treatment costs as essentially fixed costs — do you agree?

  44. Cost identification and estimationProblematic accounting practices? Various costs at a facility might be... • “Hidden” in the accounting records • Misallocated from overhead accounts • Classified as fixed when they are really variable, or semi-variable • Not found in the accounting records at all • (Can you think of others?)

  45. Cost identification and estimationCosts missing from accounting records • Future costs • Future variable costs, e.g., landfill fees • Future fixed costs, e.g., future depreciation costs of new waste treatment equipment • Less tangible costs • Lost profit from reduced production throughput • Managing impact of waste on reputation Remember:future fixed costs are not fixed yet!Cleaner Production now can reduce the size & cost of treatment equipment that you may have to purchase in the future

  46. CEO Board Production Sales & Marketing Accounting & Finance Research & Development Environment, Health, & Safety Purchasing Materials Control Inventory Operations Quality Control Shipping Maintenance Engineering Legal Cost identification and estimationSo where do we get out data from? Checklist: Cleaner Production investment data sources

  47. Cleaner Production at PLS Company PLS implemented two CP projects to reduce the cost of waste in the printing step • an on-site scrap recycling project to reduce waste from start-up runs • a quality control camera project to reduce waste from errors during full-job runs

  48. Scrap recycling project • PLS decided to start using solid scrap material for print job start-up runs, rather than using virgin plastic film • This would reduce the use of raw materials and the rate of solid scrap generation • Since this project did not require any cash outlay, PLS was able to implement it right away

  49. Quality control (QC) camera project • PLS decided to purchase and install a 3 - camera system to monitor quality control of the print jobs as they actually occur • Allows the operators to detect print errors earlier and halt the operations before too much solid scrap is generated • The quality control camera system costs US$105,000 to acquire and install

  50. CAPITAL BUDGETING AND PROJECT PROFITABILITY