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Market Plans

Water and Wastewater Treatment Export Market Plan
Chapter 3. Increasing Competitiveness of the U.S. Water Industry
Chapter 3 - Increasing Competitiveness of the U.S. Water Industry

In order to succeed in the international market for water and wastewater technologies and services, U.S. firms should be aware of the realities of doing business overseas, know and be able to take advantage of particular market characteristics, and use available information support services.

A recent survey of the San Francisco Bay area’s environmental technology exporting firms38 sought to identify critical success factors in overseas markets. In the survey, the following four themes were mentioned most frequently by the exporting companies:

This chapter presents market strategies for three of these success factors (staff dedication is a matter of internal company policies and is not considered here). It also describes other competitiveness strategies such as building joint ventures and consortia with U.S. and thirdcountry firms. It provides important hints on how to enter and compete in promising overseas markets and how to pursue international water and wastewater projects. It also refers exporters to the information resources available through a multitude of U.S. public sector service organizations.

Understanding Local Markets

The first step in a successful export market strategy is knowing where the markets are and how to access them. To a “new-to-market” company, export markets can seem daunting and inaccessible, particularly from an office in the United States. The most successful companies, be they large or small, are those that do their homework. Knowing the stage and pace of market development as well as the local business culture is critical in prioritizing business development efforts. Many companies find that to gain substantial market share, they must be the first one on the ground in the targeted country, which often involves years of education and product orientation prior to any direct sales. Because of the large amount of time and resources required for this approach, many early market opportunities are available only to the larger U.S. water and wastewater equipment manufacturers.

Host Government Regulations

Successful exporting requires an in-depth understanding of host government regulations and an understanding of how these regulations are implemented.

Case Study 3.1 Developing Water Projects in Emerging Markets: What Does It Take to Succeed?

Thierry Baudon, Managing Director of ONDEO’s International Finance Division, identified five success factors in emerging water and wastewater markets:
  1. Develop superior technical and customer management skills, through continuous research.
  2. Develop a thorough understanding of the local environment, including the local institutions, politics, and civilian society.
  3. Develop strong industrial and financial partnerships (with local business partners, international investors, and multilateral financial institutions).
  4. Develop innovative financial engineering capabilities and risk management techniques.
  5. Construct a corporate culture that rewards pioneering attitudes, strong ethics, and decentralized decision-making.
    Source: T. Baudon, “Developing Water Projects in Emerging Markets: What Are the Challenges and What Does It Take to Succeed?” Global Infrastructure Development: World Markets in 1999 (Standard and Poors, 1998).

Developing an understanding of local institutional, regulatory, and decision-making processes and frameworks, as well as establishing local political connections and partnerships, are critical steps to achieving success in export markets.

Most countries have business registration requirements, and tax and business issues that can be very unfamiliar to American companies. Many countries also require local incorporation. These requirements are not real barriers in most instances, but sometimes appear to be as approvals move slowly. Restrictive business practices, such as requiring local ownership of the majority of the business, are fading away in most countries, in part due to the trend of globalization.

Since water and sewerage services are usually the responsibility of municipalities, there are relatively few bureaucratic hurdles for exporters to overcome. The industrial sector, on the other hand, is typically regulated at the national level through central or regional offices. Factories that have been targeted by the authorities and are subject to enforcement actions often represent attractive opportunities to market industrial wastewater treatment equipment. Therefore, it is important to monitor the target country’s regulatory developments in the water sector.

Local Business Culture

U.S. businesses often find that local business customs and norms, as well as cultural practices, present more of a challenge to exporting than many of the bureaucratic hurdles. Establishing, maintaining, and expanding business overseas can be particularly frustrating because of the volume of communication required. Many companies identify a lack of understanding of the local culture as being a key factor in the difference between a successful and a failed business negotiation.

Some of the most challenging areas for U.S. businesses are different notions of property and acceptable levels of risk, and different tax and contract laws. Local partners often do not understand the need to address these risks, or simply want the U.S. firm to bear all the risks. Again, good communication is necessary to work out these issues with the local affiliate.

U.S. companies have also long complained about the bribes and gratuities that officials in some countries expect for anything from copies of bid documents and key data, to final award of a contract. In some European countries, such payments are considered legitimate business expenses. U.S. firms typically must market on quality and price only, and cannot offer such gratuities due to the Foreign Corrupt Practices Act.

To avoid some of the problems discussed above, U.S. businesses should take advantage of the available resources to learn about the local business culture and to recruit the help of a local business advocate.

Market Intelligence Information

A successful export market strategy relies on good information about the target overseas market conditions, competitors, business culture, and specific needs and opportunities. The importance of developing an export strategy cannot be overstressed. Many small and medium-sized businesses, however, lack the resources or expertise to export on their own. In addition, many smaller companies find it difficult to develop an export strategy. The case study below illustrates the difficulties in exporting without a comprehensive, well-designed overseas marketing strategy.

Case Study 3.2 Pipe Repair Manufacturer Export Activities Limited by a Lack of Strategy

An American-owned and Texas-based company manufactures fittings and fabrications for the repair, connection, and branching/tapping of all types and sizes of pipes. Their products are used for water, wastewater, industrial, and manufacturing piping, as well as for irrigation and natural gas pipelines. Currently, the company has 160 employees and 2 to 3 percent of its business is international. The company’s limited successes exporting repair products have been in the border regions of Mexico, Panama, and the Caribbean.

The company began exporting approximately five years ago when Mexican clients heard about it from colleagues in the Caribbean. Since then, however, it has not developed an export strategy to solidify and expand its international presence.

The company relies on contacts made at national and international expositions to find leads and often waits for those who have expressed interest to call. In addition, it does not have a formalized process for finding local affiliates. The company has tried using a sales representative, but the mixed results have made it disinclined to rely as heavily on this approach. All of this suggests a poorly formed export strategy.

The company wants to use its existing base to strengthen its presence in Central America, but is likely to continue to face substantial obstacles until it develops a strong marketing strategy.

Source: Primary interview with company staff.

Gathering information on the market can be done with limited travel and expense by using e-mail, the Internet, a telephone, and a fax machine. U.S. government assistance programs provide several types of information that can be useful for U.S. companies seeking market intelligence, including:

Other sources that can provide market intelligence information include the World Trade Centers Association, an association consisting of over three hundred trade centers worldwide, international accounting firms, as well as many consulting firms. For some companies, having access to proprietary information that gives them the edge over competitors is a worthwhile marketing investment, despite the steep costs. A company can utilize these resources to begin to identify and prioritize country markets for particular products or services. At the same time, firms can learn which U.S. and foreign companies are active in the country and evaluate their competitiveness.

Companies can also take advantage of trade promotion opportunities, including catalogue shows, trade missions, agent distributor searches, and the U.S. Department of Commerce’s Gold Key Program, which help U.S. firms access overseas markets.

Positioning to Enter the Market

When positioning themselves to enter foreign markets, companies must consider the differences in legal, political, and social environments between home and host countries. Developing an understanding of a foreign country’s business climate and customs is often greatly assisted by developing local relationships.

Exporting firms can use two principal strategies in order to increase their competitiveness or establish a local presence:
The case study of Komline-Sanderson (see Case Study 3.3) is an example of a medium-sized company that has effectively positioned itself overseas by remaining flexible, seizing opportunities when they arise, and developing strong relationships with its foreign colleagues.

Case Study 3.3 Komline-Sanderson: Small Company Effectively Develops New Export Opportunities

Komline-Sanderson of Peapack, New Jersey, is a medium- sized business that makes water quality instruments, primarily for liquid/solid separation. It has been working to develop overseas opportunities for its products. Currently, 10 to 15 percent of the company’s business is with foreign industrial and municipal clients.

Komline-Sanderson has found its small size to be both a detriment and a benefit when exporting overseas. As Jabez Van Cleef, director of communications, stated in the Environmental Business Journal, “our size constrains us from building an extensive service and information infrastructure overseas, but it permits us to respond quickly if a market opportunity presents itself.”

Komline’s flexibility has made it possible for it to get a foothold in new markets. The company has been content to sell different products to different markets and to use these footholds as a “springboard” into neighboring and other product markets. For example, it is currently selling industrial process and filter technology in Mexico, machinery for sludge concentration in municipal wastewater treatment in the United Kingdom, and filters for corn-syrup processing in China. Now the company’s associates in China and Mexico are actively working to develop the municipal wastewater side of the business.

Driven by the idea that building a relationship of trust is key to successful exporting, the company’s marketing strategy has benefited from the company’s small size. Also, unlike the competition, Komline is unwilling to “oversell” its products and prefers instead to be forthright about such things as product lifetime. This honesty and the relationship of trust KS develops with its clients will further assist the company’s export efforts.

For further information, visit the Komline-Sanderson Web site at www.komline.com.

Building Local Relationships and Establishing a Local Presence

Local partnerships and representation not only provide U.S. firms with the advantage of learning about opportunities before their competitors, but also provide a source of inside information on local business culture. Establishing a presence in a country requires both time and investment of human and financial resources. Some type of “foreign presence” accounts for approximately 95 percent of foreign sales of water treatment and infrastructure equipment and systems.

Methods for establishing local presence range from hiring a local consultant or agent to represent the firm, to setting up a local office. Perhaps the most common arrangement is to establish a relationship with a local business that has both a good reputation and solid industry contacts. This company can then effectively market and distribute the American company’s product for a percentage of the profit.

In exploring the options for local representation, the firm must determine which option is the most viable given its financial and human resource limitations. U.S. companies should also be familiar with the host country’s rules and regulations concerning the establishment of local offices and partnerships with local organizations. Valuable information can be found in the U.S. Department of State’s Country Commercial Guides.

There are several ways U.S. companies may establish a local presence in a developing country market:
The Hach Company has successfully built an export business that relies on close relationships with distributors aboard. Their case is presented below.

Case Study 3.4 Building a Network of Top-Notch Local Distributors: The Hach Company

“The advantages of entering into distributor and dealer relationships far outweigh the costs,” says Paul Goltz, director of international sales and marketing, The Hach Company.

The Hach Company of Loveland, Colorado, is an internationally recognized manufacturer and distributor of analytical instruments and reagents used to test the quality of water and other aqueous solutions. The company employs almost 1,000 people in the United States and has been selling its products overseas since the 1950s. Hach has built a professional distributor network in over 100 countries; most dealers and sales representatives have well over 10 years of service working with the Hach Company and building markets for its products.

The Hach Company believes that strong local relationships are key to export success. Local affiliates fulfill such critical functions as negotiating new and sometimes frustrating business climates, arranging payment, and addressing tariffs and other barriers.

The Hach Company has established a formal process for selecting and training local distributors, but it also believes that the enthusiasm and capability of the selected local affiliate is critical. Hach representatives look for key characteristics such as honesty, motivation, and a strong commitment to growth.

Hach identifies dealer prospects through the Agency/Distributor Service and the “Gold Key Service” of the Rocky Mountain U.S. Export Assistance Center and by making solid contacts at the U.S. Department of Commerce’s trade and catalogue shows. Other prospective dealers have been located through responses generated from their ongoing, multilingual promotional efforts and through overseas Technical Sales Seminars.

Overseas dealers are required to become experts on all facets of the Hach product line. As a result, the company has established an exhaustive process for training its distributors. Distributors are encouraged to visit the headquarters and the Hach Technical Training Center for hands-on training. In addition, they are required to attend factory-sponsored instrument repair courses presented in the United States and abroad. Since 1996, Hach has held technical sessions for its distributors in Australia, South Asia, Southern Africa, the Pacific Rim countries, the Caribbean, and Latin America.

Recently, the Hach Company expanded its Central Asian presence into Kazakhstan. The business climate and language in this former Soviet economy pose a challenge to American companies. Finding a good local distributor is critical to its success in this market. Hach’s approach was to send staff to the country to identify and build a relationship with a new distributor or sales representative. After a number of years of work, Hach identified a promising distributor candidate. Hach staff sent used equipment
to Kazakhstan so that the distributor and its customers could see and feel the products. Now, Hach has applied for U.S. Commerce Department funds to bring its Central Asian distributors to the United States for training. Growth has been slow in the new market, but the company is already beating internal projections. This is in large part due to the fact that its distributor demonstrates the real enthusiasm and excitement that Hach requires of its affiliates.

For more information, contact Paul Goltz, director of international sales and marketing at (800) 227-4224 or the Web site at www.hach.com.

Source: Primary interview with Paul Goltz.

Joint Exporting Partnerships

Before entering an overseas market, U.S. firms must decide whether they are able to enter that market and whether it is worthwhile to do so—in terms of ability to compete and resource availability. By exporting in partnership with each other, U.S. firms can increase their competitiveness and each firm can benefit from lower individual export costs and increase its efficiency in every phase of exporting. Multinational companies can be important partners for small and medium-sized environmental firms seeking to supply goods and services to large donor-financed projects but unable to bid on such projects directly. Small and medium-sized enterprises can often provide niche services that will serve as an asset to a larger firm and increase the likelihood of overall success. Firms of all sizes and levels of international business experience can use joint exporting to reduce per unit export costs and develop proactive export strategies which may not be feasible for individual exporters.

The ability to reduce export costs and risks is especially important when considering entry into a new or complex export market. While specific benefits will vary with the nature of the product and the targeted foreign markets, joint venture partners may enjoy the following advantages as a result of their alliance:
Joint export ventures undertaken by domestic competitors might raise questions under U.S. antitrust laws. Fortunately, any company may apply to the Department of Commerce for an Export Trade Certificate of Review. The certificate provides exporters with antitrust protection with regard to all export activities specified in the certificate.

Funding and Financing Options

This section identifies funding and financing sources for exports of U.S. water and wastewater technologies and services. Development assistance is a primary driver in the water and wastewater sectors of emerging market countries. Multilateral development agencies strongly support, through technical and financial assistance, water supply infrastructure, wastewater treatment systems, and watershed clean-up projects, representing significant market opportunities. This section also considers U.S. investment and export credit programs that are particularly relevant to U.S. technology and services companies, as well as other funding and financing sources.

Multilateral and Bilateral Projects

Bilateral and multilateral development agencies provide the bulk of funding and financing for environmental and infrastructure projects in developing countries. Among the various types of market opportunities that arise from bilateral and multilateral funding sources, the two primary opportunities are equipment sales and technical assistance. To reduce the risk for U.S. companies providing goods and services, payments are typically made in foreign exchange (often U.S. dollars), which makes donor-supported
projects particularly attractive to U.S. firms. Project funds are used to procure the goods, equipment, contract works, and consultant services needed to design and impleme nt these projects, either directly from the funding agency or through loans to the host country government.

Multilateral Development Banks

The multilateral development banks that are central to many U.S. companies’ export market strategies include the World Bank, the Asian Development Bank (ADB), the Inter-American Development Bank (IDB), and, to a lesser extent, the North American Development Bank (NADBank), the European Bank for Reconstruction and Development (EBRD), and the African Development
Bank (AfDB). The World Bank also manages the Global Environment Facility (GEF), which has emerged as a key funding source for international waters protection programs.

An overview of the key multilateral and bilateral development banks is provided below. Information can be gathered by contacting each individual agency.

The World Bank Group. The World Bank Group is the largest source of international development financing and includes the International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Finance Corporation (IFC). The borrower, not the bank, is always responsible for procurement. The Bank provides financing from its loans for the contracts, but the contract itself is between the borrower and the supplier or contractor. The Bank’s role is to make sure that the borrower’s work is done properly, that the agreed procurement procedures (for example, international competitive bidding) are observed, and that the entire process is conducted with efficiency, fairness, transparency, and impartiality.

Suppliers, contractors, and consultants can learn more about this process by attending a Monthly Business Briefing at World Bank headquarters in Washington, D.C., or reading the Guide to International Business Opportunities. The briefings explore strategies for keeping informed about projects and methods for pursuing foreign investment opportunities. The bank issues numerous publications, including Environment Matters, which summarizes its environmental operations. The World Bank’s environmental projects are summarized in its published portfolio, Facing the Global Challenge: A Progress Report on the World Bank Global Environment Operations.

To assess the qualifications of firms and to assist borrowers in establishing a short list, the bank maintains a computerized roster of consulting firms interested in doing business on bank-financed projects, called the Data on Consulting Firms (DACON) system. (There is no similar registration system for manufacturers and other suppliers of goods or contractors for works.)

The United Nations publishes a biweekly digest called Development Business which is available by subscription. Development Business carries information on business opportunities generated through the World Bank, regional development banks, and other development agencies. Development Business is also available by online subscription. More information may be obtained by contacting the World Bank’s Development Business Liaison Office (http//www.devbusiness.com).

Global Environment Facility (GEF). Projects funded by the GEF are implemented by the World Bank, the United Nations Development Program (UNDP), and the United Nations Environment Program (UNEP). GEF projects to reverse the degradation of international waters help realize the objectives of various regional and international water agreements. The three categories of water projects are: water bodies; integrated land and water projects; and contaminants. From 1991 to 1999, GEF allocated nearly $360 million to international waters initiatives.

Inter-American Development Bank (IDB). The IDB provides capital for different types of infrastructure projects in 26 Latin American and Caribbean nations. The Bank uses funds to sponsor the development of its member countries by supplementing private investment when private capital is inaccessible. Technical assistance for the preparation, financing, and implementation of development plans and projects is also provided by the IDB. Individuals, firms, and organizations that want to learn how to bid on contracts to provide goods and services for projects financed by the IDB should attend its business seminars. The topics covered in the seminars will help participants develop or expand their participation as suppliers of goods and services in the wide variety of sectors financed by the Bank. These seminars are highly recommended for equipment manufacturers, goods suppliers, work and construction contractors, independent consultants, and consultants from universities, think tanks, and non-governmental organizations (NGOs). The IDB publishes the IDB Project Magazine.

Asian Development Bank (ADB). The ADB provides assistance to 33 developing countries in the Asia-Pacific region, including China, India, and the Philippines. The Bank makes loans and equity investments, and provides technical assistance for the preparation and execution of development projects and programs. The ADB holds Business Opportunities Seminars in different member countries throughout the year (the ADB’s North American office is located in Washington, D.C.). The ADB also publishes the ADB Business Opportunities on a monthly basis. The online edition of the ADB Business Opportunities can be found on the ADB website and is updated weekly.

African Development Bank (AfDB). The AfDB primarily assists the governments or government-owned corporations in member African countries. To better direct financial assistance to environmental sectors, the bank has prepared country environmental profiles. The AfDB’s operational program has four main priorities: elimination of poverty, reconstruction and rehabilitation, development of the private sector, and increasing trade and economic integration. The AfDB is also involved in various other sectors, ranging from infrastructure to the economy, including the environment, health care, and demography.

European Bank for Reconstruction and Development (EBRD). The EBRD, based in London, assists countries of Central and Eastern Europe and the former Soviet Union. The financial assistance provided by the EBRD is directed at restructuring and privatizing industries or financing infrastructure in support of these two aims. By mandate, at least 60 percent of EBRD financing must be
for private sector operations.

North American Development Bank (NADBank). This bilateral institution, agreed to by the United States and Mexico in connection with the North American Free Trade Agreement (NAFTA), assists U.S. and Mexican border states in addressing environmental problems. NADBank is providing financial assistance for water and wastewater treatment projects along the U.S.-Mexican border.

To participate successfully in multilateral donor-assisted projects, companies must understand the donor’s project cycles and bidding procedures. Companies can identify and track project opportunities by subscribing to a donor agency’s project notices publication. The typical stages of a project cycle are identification, preparation, appraisal, and implementation. The cycle can last as long as several years. During this long lead time, companies should familiarize themselves with relevant host country institutions and market conditions.

Although companies may contact donor agencies and/or relevant recipient country agencies at any stage of the project preparation, early involvement is often critical. For example, feasibility studies sometimes conducted in the early phases of the project usually contain valuable technical and contact information. It is also advisable to start forming alliances with local counterparts at the early stages of project development.

United States Agency for International Development (USAID). USAID is the main U.S. bilateral donor agency. It offers economic development and humanitarian assistance (in the form of grants) to advance U.S. economic and political interests overseas. U.S. foreign aid also creates markets abroad for U.S. goods and services by offering a competitive advantage to U.S. suppliers (procuring from U.S. suppliers is mandated by USAID).

USAID promotes environmental improvements in host countries by providing technical demonstrations designed to help industries recognize the need for and benefits of cleaner production and cleaner technology. The agency also provides policy and institutional support to aid host country governments in developing environmental management and pollution prevention policies and regulations.

USAID projects are usually bid out of in-country USAID missions and are announced in the Commerce Business Daily. Contracts are typically one to five years in duration, with value between $1 million and $100 million. Consortia of several companies, usually consulting and engineering firms, have greater chances for success in bidding for USAID projects than individual companies. Companies with local offices that are known to USAID missions find themselves in an advantageous position compared to firms unfamiliar to USAID.

Tied Aid Issues

“Tied aid” is government-to-government assistance - including loans, grants, or concessional (subsidized) financing - that is tied to, or conditioned on, the purchase of goods or services from the donor country and/or a restricted number of countries. Many industrialized countries (Japan, France, Germany, etc.) use tied aid as a subsidy program to facilitate market entry and expansion for their private companies, making such funding unavailable to U.S. companies.

Executives of U.S. environmental exporting companies complain that many foreign governments are spending far more on the promotion of exports of their national companies to developing countries, placing U.S. firms at a distinct disadvantage in the global market.

The U.S. policy with respect to tied aid has been to avoid an expensive export subsidy race and to negotiate with other OECD countries to minimize the use of tradedistorting tied aid. Successive rounds of multilateral negotiations led by the Treasury Department and the U.S. Export-Import Bank (Ex-Im Bank) produced the Helsinki Package, an agreement that went into effect in 1992 and established rules prohibiting tied aid for projects that are commercially viable—that is, capable of generating cash flows sufficient to repay standard commercial loans.

While the Helsinki Package agreement has largely eliminated tied aid for commercially viable projects, the U.S. Ex-Im Bank has also created the Tied Aid Capital Projects Fund to match other countries’ tied aid offers for certain key projects in order to counter and preempt foreign donor governments’ efforts to use aid to gain longterm commercial advantages for their exporters.

Case Study 3.5 Tied Aid Restricts the Export Activities of Aqua-Aerobic Systems, Inc.

Aqua-Aerobic Systems, Inc., of Rockford, Illinois, is a leading manufacturer of wastewater treatment products and systems for industrial and municipal applications. The company has over 100 sales representatives globally, and approximately 130 employees in Rockford.

Aqua-Aerobic Systems has had notable successes in the developing world where municipal wastewater projects received USAID and multilateral development bank funds. Still, it estimates that its market opportunities in this area have been limited by as much as 50 percent due to the phenomenon of tied aid, according to Sharon DeDoncker, the company’s vice president of international sales.

Shortly before the Asian financial crisis erupted in 1997, the German government provided bilateral aid for a large municipal wastewater project in Indonesia. Aqua- Aerobic had the necessary vendor qualifications and worked hard to meet the source requirements of the German aid. Its efforts at developing vendor relationships in Germany were not successful, and it ended up losing the project to a German company.

Aqua-Aerobic is writing letters to members of Congress regarding its tied aid concerns. In addition, the company continues to work to develop foreign partnerships that will open up bilaterally-funded projects to it.

For further information, contact Peter Bugg, International Sales Department, at (815) 654-2501 or visit the company’s Internet site at www.aqua-aerobic.com.

Source: Primary interview with Sharon DeDoncker

Relevant U.S. Government Investment and Export Credit Programs

USAID Development Credit Authority. The Development Credit Authority (DCA) is a general authority that permits USAID to offer credit assistance for any development purpose of the U.S. Foreign Assistance Act. The DCA is intended to serve as an alternative funding vehicle to assist USAID missions in meeting their specific strategic objectives. DCA is intended for countries and regions where USAID has an active presence. Global climate change activities are the key sector for which USAID intends to use DCA.

The credit assistance is in the form of direct loans and loan guarantees. Loan terms are related to the needs of each project but will not exceed 20 years. Loan guarantees are used only where lenders engage in true risk sharing with USAID and will cover no more than 50 percent of the lender’s risk of loss. For projects to be eligible, they must have positive financial rates of return so that the loans can be repaid. Loan amounts are in the range of $2 million to $20 million, depending on the project. The maximum loan amount is $100 million. These loans and loan guarantees can have a substantial effect on water and wastewater investment projects, as evidenced by the Aqua-Chem case study presented below.

Export-Import Bank of the United States (Ex-Im Bank). The U.S. Export-Import Bank is an agency of the U.S. government that provides export credit support either to U.S. exporters on a short-term basis or to foreign purchasers on a longer term basis (2-10 years). Through loan guarantees and insurance, the agency fosters exports by making working capital available to U.S. exporters.
Alternatively, through similar mechanisms plus the extension of direct loans (and, on occasion, grants), the Ex-Im Bank provides credit at attractive interest rates to foreign buyers to encourage their purchase of U.S. goods and services. The Ex-Im Bank insures a wide variety of U.S. environmental exports, giving priority to smallbusiness transactions and the expansion of the overseas
presence of the U.S. environmental goods and services industry. The Ex-Im Bank does not compete with commercial lenders, but assumes the risks they cannot accept.

Case Study 3.6 Export-Import Bank Loan Guarantee Supports Aqua-Chem’s Sale of Desalination Equipment to the Caribbean

Aqua-Chem, Inc.’s Water Technologies Division manufactures boilers and seawater desalination equipment. Headquartered in Milwaukee, Wisc., the division has developed a worldwide reputation as a supplier of industrial water equipment. It currently employs 1,300 people in the United States.

Aqua-Chem sold a complete desalination system to the Dutch colony of Aruba in 1998. This $8 million system provides 11.2 million gallons per day of desalted water to the Caribbean island. Used for both industrial applications and for potable water, the water generated by the desalination plant has helped the island keep up with the tourism-driven demand.

Aqua-Chem had provided desalination units to Aruba in the past and the Water and Electricity Board was pleased with its products. However, the utility had recently gone through a partial privatization and was particularly sensitive about capital costs. In order for the utility to purchase the more expensive but higher quality Aqua-Chem units, the company had to structure a particularly attractive financial package.

Aqua-Chem turned to the Export-Import Bank for assistance. The Ex-Im Bank facilitated the sale by providing a loan guarantee to the Water and Electricity Board for this project. Ron Thimm, treasurer, stated that “without the Ex-Im Bank money, Aqua-Chem would very likely have lost the job to a foreign competitor.”

Aqua-Chem used a banker to structure the financing and to complete the Ex-Im Bank application. Mr. Thimm highly recommends the use of a banker who understands both Ex-Im Bank’s financial assistance tools and other financing sources. He also stressed the importance of educating sales staff about the financing solutions and countries where Ex-Im funds are available.

For more information, contact Ron Thimm, treasurer, (414) 577-2845 or visit the company’s Web site at www.aqua-chem.com

The Bank has designed a special Environmental Exports Program that will provide enhanced levels of support for a broad range of environmental exports. The program demonstrates the Bank’s resolve to reach out to small and large exporters of environmental products and services. In 1997, the Environmental Exports Program approved 47 transactions for a total export value of $1.9 billion. The major features of the program are:
Overseas Private Investment Corporation (OPIC). OPIC, a U.S. government agency, helps U.S. businesses of all sizes invest and compete in 140 emerging markets and developing nations worldwide. OPIC finances medium- to long-term investment projects through loan guarantees and direct loans. Direct loans are geared for small businesses or cooperatives and usually range between $2 million and $10 million. Loan guarantees range between $10 million and $200 million. OPIC protects U.S. business activities in e merging markets through its Investment Insurance Programs against currency inconvertibility, expropriation (loss of investment due to expropriation, nationalization, or confiscation by a foreign government), and political instability. The insurance programs also can be used to cover expanding investments. OPIC also offers the Small Contractor’s Guarantee Program, which assists small business construction and service contractors. However, OPIC does not provide export financing.

There are also several funds operating under the aegis of OPIC that support U.S. environmental exports and investment overseas (see the section on commercial financing sources, below).

U.S. Small Business Administration (SBA). The SBA has an Export Working Capital Program that guarantees up to $750,000 of either short- or long-term loans to help small businesses increase their export sales of products or services. This program is designed to assist small businesses requiring capital to expand sales or manufacturing for international markets, as well as meet their working capital needs. Loan proceeds may not be used to establish operations overseas.

Commercial Financing Sources

Private Export Funding Corporation (PEFCO). PEFCO is a consortium of private lenders which acts as a supplemental lender to traditional export financing sources. It works with the Ex-Im Bank by using private capital to finance U.S. exports. PEFCO makes loans of up to $225 million to public and private borrowers located outside of the United States who require medium and/or long-term financing on purchases of U.S. goods and services through traditional lenders or suppliers. In all cases, the loans made by PEFCO must be covered by the comprehensive guarantee of repayment of principal and interest by the Ex-Im Bank. The loan requests must come through a commercial bank.

Global Environment Fund Family of Funds. This group of funds specializes in high-growth markets for environmental technologies, products, and services. The Global Environment Fund is a partnership that invests up to $4 million per venture in public and private environmental companies around the world. Global Environment Finance Partners invests in advanced-stage private firms for investments ranging from $500,000 to $2 million. The Global Environment Emerging Markets Funds (GEEMF I and II) are capitalized by OPIC and focus on environmental infrastructure in developing countries where OPIC operates.

Allied Capital International Small Business Fund. This is a $20 million equity fund that invests in OPICdesignated countries and is managed by the Allied Capital Corporation. Eligible companies are small U.S. businesses seeking risk capital to expand overseas. The preferred investment size is $2 million to $5 million. One of the sectors targeted by the Fund is environmental services.

Aqua International Partners Environmental Fund. Aqua International Partners, a $232 million investment fund, makes private equity investments in companies providing water and water-related products or services to emerging market economies. Aqua invests in operating and special purpose companies that are devoted to water and wastewater treatment operations (either being privatized
or newly formed); manufacturing equipment or products (pipes, pumps, meters, filters, etc.) for commercial, industrial, and residential water users; and other related activities or services.

U.S. Commercial Banks. U.S. commercial banks provide the bulk of trade and investment finance. In addition, various types of private and public infrastructure funds can be used to support technology exports. The U.S. Department of Commerce maintains a national clearinghouse of private and public financial institutions that offer trade finance. Also, the Office of Finance within the
Department of Commerce’s International Trade Administration has developed a Web-based export finance matching service. This service is designed to match U.S. exporters with sources of export financing or risk mitigation. The site also provides links to U.S. commercial financing sources by state.

Local Commercial Banks. Local financial institutions have an important role to play in financing small (under $1 million) environmental investments, particularly in the industrial sector. Credit is generally tight in developing countries, making current conditions in local capital markets a significant factor in financing energy efficiency investments. Chile is a positive example of a fairly welldeveloped local capital market, including a long-term bond market. However, in most other developing countries,
capital markets are immature, and U.S. firms often find it too difficult and expensive to borrow money locally, unless local financial institutions act as intermediaries for external financing sources such as multilateral development banks.

Self-Financing Mechanisms. Very few U.S. water and wastewater companies have set up their own financing arms to complement their technology exports. However, the larger, total solution-oriented companies can often successfully create their own entities for identifying funding sources and structuring debt and equity financing. The case study below highlights the success of Lemna
International in setting up a financing arm.

Case Study 3.7 Lemna: Finding Funds for International Clients

Lemna International, Inc., of Minneapolis, Minn., is recognized worldwide as a supplier of innovative wastewater treatment systems. Lemna offers complete treatment plant designs and equipment for municipal and industrial applications globally, and has completed more than 100 facilities. About 60 of these are in the United States, with the remainder located in developing countries, including Turkey, Poland, and Slovakia. Lemna International’s sister company, Lemna Technologies, works with municipalities of fewer than 100,000 people. Lemna also provides its technologies to industries, including food processing plants, dairies, wineries, packaging production facilities, rendering plants, pig farms, and many others. In Poland, Lemna has worked with more than 30 municipalities, from small rural communities to medium-sized cities of 100,000 to 200,000 inhabitants.

When Lemna found that obtaining funds to build water and wastewater infrastructure was a major problem for many of its clients, the company designed an innovative strategy to help its clients secure needed project funds. The Lemna Infrastructure Financing Enterprise (LIFE) was set up to identify possible funding sources and help clients arrange appropriate financing terms. LIFE staff help Lemna International’s clients determine which financing structure will best meet their needs, and then assist them in securing all or part of the funds. LIFE works with debt, equity, and lease-back arrangements, and is experienced in working with private and institutional investors, private lenders, and export credit agencies, including the U.S. Export-Import Bank.

LIFE structured a $25 million loan package for the design and construction of a sewage system and wastewater treatment plant for a Turkish municipality of 400,000 people. The loan package included funds from Ex-Im and two international banks. The first phase of this project has been constructed, and LIFE is beginning work on financing for Phase II, also for $25 million. LIFE is nearing completion of a debt and equity package for a wastewater treatment plant in China, to be built through a joint venture that includes Lemna International. The total financing for this project will be about $120 million. Other current LIFE projects range in size from wastewater treatment projects in Poland valued at less than $6 million to a $36 million water supply project in Romania and a $50 million water supply expansion project in sub-Saharan Africa.

For more information, contact Poldi Gerard, vice president of marketing, at pgerard@lemna.com or (612) 253- 2000, or visit Lemna’s Web site at www.lemna.com. Source: Primary interview with Poldi Gerald.

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