Speeches and Articles by Former Consul General James B. Cunningham

"Taking Action on Pollution"
Remarks by U.S. Consul General James B. Cunningham
Hong Kong General Chamber of Commerce
and American Chamber of Commerce
Joint Luncheon
Ritz Carlton Ballroom
June 6, 2006

(As prepared for delivery)

U.S. Consul General James B. Cunningham addresses the joint luncheon.

I'd like to thank the Hong Kong General Chamber and the American Chamber for hosting me in connection with yesterday's "World Environment Day." I want to mark the occasion by talking to you about an issue that is increasingly on the minds of all of us: How can we best tackle air pollution? Moreover, how can we do so without compromising essential business interests?

One of you approached me the other day and asked if I am an expert on the environment. No, I'm not. But I and my family, along with 55,000 resident Americans, are part of this community. And I think I speak for them when I say we want to be good citizens of Hong Kong and to contribute to its quality of life.

Hong Kong is playing a vital role in the development of mainland China, whose rapid industrialization is lifting millions out of poverty. But in the short space of only a decade, the increased prosperity of the Pearl River Delta has produced the unintended consequence of an air pollution challenge of alarming proportions. Hong Kong's air pollution is increasingly the topic of international, as well as local, comment. The air pollution problem is complex. Solutions will not come quickly or easily. But Hong Kong and neighboring industrial centers can achieve progress if individuals, businesses and governments resist finger-pointing and instead take responsibility for action. I sense there is a rising tide of determination to do so, and I hope to contribute to that attitude today.

The environment is not "someone else's problem." Just as the economy is globalizing, so are quality of life issues like pollution, affecting ever-greater portions of the globe. Indeed, CNN recently reported that pollution from coal burning plants in China is now reaching the West Coast of the U.S.

There can be little debate about the sources of most of the pollution in our air. Although Hong Kong's own traffic and power generation contribute to the smog we breathe, studies estimate that 80% of the air pollution is created by power generation, factories and motor vehicles in the Pearl River Delta. For example, with an estimated 20% annual growth in registered private vehicles in Guangdong Province, there are as many as 50,000 additional cars entering the roads there each month.

But it is the factories that are at the core of the problem. They have brought prosperity to the region, and must continue to do so. Well over 70,000 factories in the PRD are owned or financed by Hong Kong businesses. I read the other day that 60 percent of inbound investment in Guangdong province comes from Hong Kong. The factories produce their own pollutants, they demand ever more power, and they all rely on dirty diesel back-up generators, which are major contributors. While Hong Kong interests play a special role, there are many factors involved. Many of the factories in the PRD support the global business strategies of U.S. firms, and the goods they produce are largely destined for major global markets. So action is called for on several fronts.

But we in Hong Kong are particularly affected, and many of us can be part of the solution. My message is simple. First, while we can't clean up pollution overnight, it can be dealt with. Secondly, while there are many government-based initiatives underway on both sides of the border, business should -- and must -- take the lead. This, I'm glad to say, is starting to happen. Thirdly, and very importantly for this audience, promoting pollution prevention and energy efficiency will not necessarily reduce your cash flow. Dealing with pollution can be a win-win proposition, encouraging corporate responsibility while strengthening your businesses.

Both the Hong Kong General Chamber of Commerce and the American Chamber of Commerce, as well as other business groups in Hong Kong, are starting to play an important role in addressing pollution. I know the Chambers want that role to grow. Many of your businesses have operations across the border. As Chambers, you have signed the "Clean Air Charter" along with other international business chambers. The American Chamber of Commerce will be initiating an environmental study in the near future to assess the impact of pollution on Hong Kong's outlook for investment and human resources. The Hong Kong Business Coalition on the Environment, which you helped to establish, is already promoting environmental awareness and responsibility in the business community. The Business Coalition is also doing the vital work of engaging Chinese organizations and business across the border in Guangdong. You have an irreplaceable role to play in education and coordination, and in setting strong standards for business behavior. These standards must be adopted by a large enough group to make a difference. And they must be acted upon. I encourage you to explore new ways to promote environmentally responsible corporate policies. Experience shows that recognition of success and of good environmental behavior can become a strong "plus" for those who pursue it.

For example, some corporations are beginning to take into account environmental behavior when making sourcing decisions. This principle will become increasingly important and is already a topic of considerable discussion in the United States. Some banks are also looking at the environmental impact when considering credit applications. As Secretary for the Environment, Transport and Works, Dr. Sarah Liao pointed out the other day, internationally recognized principles already exist in the World Bank framework to promote lending to projects that are environmentally responsible.

For all the justified and growing concern in Hong Kong, today's pollution is not a life sentence. Around the world, many polluted regions have been cleaned through long-term, sustained environmental policies. In the U.S., we are introducing green building materials, including those made from industrial waste, as well as water conservation systems and highly efficient cooling and energy conservation systems. Los Angeles has bettered its air quality through strict emissions standards. By one measure, the number of days on which the greater Los Angeles area exceeded federal health standards for air pollution fell by 47% from 1993 to 2004. Cleveland and Pittsburgh are examples of former industrial cities that have cleaned up, so much so that the Economist Intelligence Unit recently ranked both of them as the most livable cities in the U.S. In their cases, however, the loss of their industries was an important factor. That is not something anyone wishes for the PRD's immediate future.

Governments on both sides of the border will be part of the solution. In last year's policy address, Chief Executive Donald Tsang took a strong stand, saying, "Eliminating environmental pollution has a significant bearing not only on public health and the quality of life, but also on the long-term development of Hong Kong. As Asia's world city, Hong Kong cannot tolerate foul air and a poor environment." The government has set new vehicle emission standards, as well as the longer-term requirement that all taxis and many public buses run on LPG. The Pearl River Delta Regional Air Quality Management Plan is a major component of the government's plan. Recognizing the need for financial incentives, the government is exploring support for environmental upgrades, including for Hong Kong-owned factories in the Pearl River Delta.

Cross border cooperation between governments is essential. Beijing has included an environmental component in the PRC's most recent five-year program. Moreover, the Guangdong Government is implementing its own programs, and announced last month that Hong Kong manufacturers of chemicals and other dangerous goods could face closure or relocation if they don't clean up.

Ultimately, though, it is not government, but business that can contribute most effectively and rapidly. Victor Fung, Chairman of the Greater Pearl River Delta Business Council, stated recently that Hong Kong "has a duty and opportunity" to reduce the environmental impact of its factories in the PRD. The Council is also promoting cooperation with Guangdong on concrete measures to do so. The Federation of Hong Kong Industries has launched a "1-1-1" program in which Hong Kong factory owners voluntarily undertake one environmental program per factory per year. The Federation is also a founding member of the Hong Kong Green Manufacturing Alliance. NGOs like Civic Exchange and governments working together will be part of the solution, but business participation and leadership will be critical.

I have heard repeatedly that businesses can't afford to upgrade if doing so undercuts their competitiveness. If necessary, government regulation and enforcement can and will eventually compel industry and region-wide behavior. But businesses can take the initiative. They can also adopt environmentally-friendly technologies now without affecting their bottom line. Experience indicates that one of the most effective ways to tackle the pollution problem is to motivate people to act in their own self-interest.

With this in mind, I'd like to describe an innovative, market-based financing model that encourages investment in pollution-reducing improvements to manufacturing and energy production. Some of you have already heard of our model, "P2E2," which stands for "pollution prevention" and "energy efficiency." We think it holds great promise. It requires no upfront capital, paying back investment by others in green technology for your benefit through cost savings from increased energy efficiency and pollution reduction.

Our P2E2 model is homegrown for the Hong Kong business environment. The seeds for this model emerged from the U.S.-China Joint Commission on Commerce and Trade. We adapted the model to take advantage of the Closer Economic Partnership Arrangement between Hong Kong and the mainland. We introduced the concept in Hong Kong in a May 2005 conference organized by my Commercial staff, and have worked hard since then to make it operational.

How does it work? Our P2E2 initiative uses loan guarantees from the Asian Development Bank (ADB) or International Finance Corporation, as well as credits from the U.S. Export-Import Bank, to facilitate loans by Hong Kong commercial banks for green equipment. The ADB is preparing a wide range of supports to energy efficiency projects and looks forward to realizing successful P2E2 pilot projects in cooperation with my staff. There are four main players in any P2E2 arrangement: a Hong Kong-based environment and energy service company; a factory or business in mainland China; the all-important Hong Kong bank; and a body to verify savings from pollution reduction.

At the risk of oversimplification, here's how it works. There are four main steps:

Step one, the Hong Kong service company (player #1) advises the mainland factory, power plant or real estate development (player #2) on how to streamline processes to reduce environmental impact and energy needs. The Hong Kong service company performs a no-cost study and recommends upgrades.

Step two, the Hong Kong service company secures a loan in Hong Kong with player #3, the bank, to lease or purchase equipment necessary for the upgrade. The bank would make this loan based on a performance contract and on mainland commercial credit risk, which would be partially alleviated by loan guarantees from ADB or the Exim Bank.

Step three, the loan is repaid with cost savings at the Chinese plant through reduced energy usage and raw material needs.

Step four, to keep everyone honest about the actual cost savings achieved, an independent technical auditor (player #4) measures and verifies these cost savings.

The introduction of cost-saving P2E2 technologies under a performance contract between the Hong Kong service company and the mainland business would not reduce that business's cash flow. Payment would be made only out of new cost savings generated under the performance contract -- that is, with the upgraded equipment. While each project varies in terms of size and scope, initial estimates are that the payback period would range from one to three years. After that, on-going savings accrue to the mainland business.

This is a creative model where everyone wins. Although the U.S. Government helped pioneer this financing model for Hong Kong, our P2E2 initiative does not depend on American technology or financing -- although we certainly expect American environmental technology and service firms to be involved. We think the P2E2 model has tremendous potential to improve performance in such sectors as power generation, aluminum, brick-making, cement, ceramics, chemicals, electronics, iron and steel, food processing, paper and pulp, plastics and metalworking.

We are still on the ground floor. Nine Hong Kong commercial banks and two investment funds are interested in participating so far. Approximately 20 Hong Kong environment and energy service companies are pursuing opportunities on the mainland. At least eight firms are interested in measuring and verifying the cost savings achieved. Major Hong Kong real estate developers are working with us to adopt the P2E2 model for their projects on the mainland. Hong Kong service companies are already working on the introduction of P2E2 technologies into hospitals, supermarkets, factories, cement plants and mainland coal-fired power plants.

Some more specific examples: Honeywell is committed to supporting the P2E2 initiative in the Pearl River Delta. The company is actively pursuing performance contracts at customer sites as well as at Honeywell's own factories and facilities in the region. Honeywell's President has tasked his team to turn its facilities in Guangdong Province into showcases for P2E2 technologies.

CITIC Ka Wah Bank is the first mainland Chinese bank in Hong Kong to apply for a Master Guarantee Agreement with the U.S. Export-Import Bank in order to increase its capability to lend to the environmental sector. CITIC Ka Wah Bank intends to offer P2E2-related financial solutions to its end-user customers in textiles, electronics, paper and pulp, and other manufacturing services in the greater China region.

Indications are that this model will achieve really significant cost savings. For example, in one projected case, a medium sized steel plant in Guangdong province annually budgets around US$73 million for power. A conservative estimate of annual cost savings from P2E2 applications would be 45%, thus producing US$33 million in cost savings annually. With the help of Hong Kong lease financing, these annual cost savings can pay for the installation and use by the Hong Kong service company in that Guangdong steel plant of P2E2 equipment worth many times that amount, perhaps as much as $380 million. As results from these projects are documented, we expect there will be increased interest from Hong Kong owners of manufacturing operations in the Pearl River Delta. For more information, I ask that you contact my Senior Commercial Officer, Stewart Ballard, who is our resident P2E2 expert and champion.

The need for progress is urgent. The pollution crisis in my country developed over many years, not one decade. And it took several generations to deal with it. Hong Kong doesn't have that time. You can make a difference. The business communities in Hong Kong and the PRD must work with government and with each other. Don't wait for governments to solve the problem. We can help give you the tools. But business action is essential.

Thank you for sharing your time with me today.

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