Project Proposal:
Establishment of a Self- Sustaining Environmental
Investment Service in the East Asian Seas Region

by the
GEF/UNDP/IMO Regional Programme on Partnerships in
Environmental management for the Seas of East Asia
(PEMSEA)

Background

The East Asian Seas face serious national and transboundary environmental
challenges. Globalization of the economy and changes in production and consumption
patterns have not only had an impact on the growth of the region but also have
emphasized the interdependency of countries of the region on the health of their shared
seas and economic sustainability. Any environmental problem within any part of the
East Asian Seas, because of its semi-enclosed nature, can no longer be considered an
isolated or localized concern, but a matter with potentially far-reaching implications.

East Asia is a major contributor to the world's urbanization and globalization trends. The
expected annual growth rate of the urban population in East Asia from the mid-1990's to
2025 is estimated to be roughly four times that of the highest income countries of the
world. For East Asia as a whole, this translates into an expected doubling of the urban
population over 1994 figures. Coastal urban centers with current populations of the
order of 300 million inhabitants are expected to account for more than half the total
population of the region over the next 25 years. The implications with regard to use and
degradation of coastal resources are clear.

Countries of the region are becoming increasingly aware of the urgency to stem
overexploitation and degradation of the marine and coastal resources, and the roles and
responsibilities of stakeholders from all sectors of society to change attitudes,
awareness and behaviour when interacting with the natural environment. Countries are
also aware that there needs to be greater focus on inclusion of the private sector in
sustainable environmental investment policies. This will enable local and national
governments to reduce the burden associated with financing resource conservation and
environmental protection activities, and to focus more on setting and implementing the
frameworks for private sector investment, including environmental considerations.

Another notable reaction is the increasing recognition of the vital role played by local
governments in the planning, development and management of coastal areas. This is
particularly evident in countries such as China, the Philippines, Indonesia and, more
recently, Thailand, where national policies and/or legislation have been enacted to shift
greater responsibility for environmental management to the local government level. In
concert with their increasing responsibilities, local governments are being challenged to
aggressively pursue new coastal management initiatives. For example, China is
targeting a 40% reduction in pollution load to all marine and coastal areas, while
Indonesia has determined that 50% of its coastal provinces will have ICM programmes
in place within 4 years. In the Philippines, which already has a national coastal
management programme in place, there are more than 1000 coastal municipalities.

In parallel to shifting responsibility to the local government level, national governments of
the region are cooperating in a number of ongoing or new initiatives under the GEF

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International Waters Portfolio1. The initiatives are concentrating on transboundary
environmental concerns. Strengthening sub-regional institutional arrangements has
been integrated into each of these projects to enhance the capacity of national
governments, individually and collectively, to address transboundary environmental
issues in the respective sub-regional sea areas.

PEMSEA's Role and Approach to Sustainable Environmental Management in the
East Asian Seas Region

PEMSEA's geographical scope covers the five large marine ecosystems of the East
Asian Seas2. PEMSEA is working at local, national and regional levels, with the ultimate
objective of creating a self-sustaining regional mechanism that will serve as an umbrella
framework and unifying instrument for the governments of the region and the various
sub-regional mechanisms. Not surprisingly, a common issue in each country is the lack
of experience, skilled human resources and financing to meet these new challenges.

PEMSEA is addressing these shortfalls by:

a) establishing 8 national ICM demonstration sites and 10 parallel ICM sites
throughout the region. In addition to providing local governments with the
experience and skilled human resources for coastal management, the ICM
demonstration sites also serve as training grounds for future ICM site managers
and staff, as well as national planners, policy makers and decision-makers; and

b) promoting multi-country, multi-jurisdictional environmental management of 4 sub-
regional sea areas and pollution hotspots through a risk assessment/risk
management (RA/RM) framework. By applying the RA/RM process,
governments (and different levels of government) bordering semi-enclosed sea
areas jointly formulate a vision for their shared waterbody, and develop and
implement a collective strategy and environmental management programme to
achieve that vision.

The combined effect of these two approaches is a working model for environmental
management involving:

· coastal and near-shore areas;
· sea-based and off-shore activities;
· transboundary issues; and
· sub-regional sea areas and large marine ecosystems.

The working model serves as a common tie among countries, levels of government, sub-
regional initiatives, users and beneficiaries of marine and coastal resources, and related
international conventions and agreements concerning the marine environment, within
the planned regional mechanism.

Sustainability of environmental management programmes, and the regional mechanism
itself, is a second area of focus. At each of its sites, PEMSEA assists national and local

1 Mekong River, Tumen River, Yellow Sea, South China Sea, East Asian Seas
2 Yellow Sea, East China Sea, South China Sea, Sulu-Celebes Seas, and Indonesian Seas

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governments with the development and application of institutional arrangements that are
the foundation of sustainability. These include:

· a Council or Authority comprised of national and local stakeholders, tasked
with overseeing the development and management of the marine and coastal
areas;
· an operational body responsible for executing and/or co-coordinating the
implementation of the Council's decisions;
· appropriate policies, regulations and economic instruments;
· enforcement capacity;
· strategic environmental management plans and issue-specific and area-
specific action programmes;
· mobilization of the private sector, the scientific community and civil society as
partners of government;
· land-sea use zonation plans;
· valuation of market and non-market uses of marine and coastal resources;
and
· building human resource capacities.

The institutional arrangements that are A New Approach to Environmental
being applied at each project site provide a
Investments: Partnerships
measure of sustainability, by creating an
environment of understanding, know-how Public Sector Role:
and commitment. But in most cases this is

not enough. At the end of the day,
· identify threats to marine and coastal
areas
investment in facilities, services, products
· create an environment suitable for
and technologies is required in order to
investment
move management programmes from a
· develop environmental investment
planning, coordination and assessment
opportunities
stage, into a response and intervention
· connect to the virtual center for
stage.
environmental investments

· participate in the formulation/operation
This requires a new approach. Reliance
of an environmental investment fund
on government as the sole provider of
expanding and new environmental facilities
Private Sector Role:

and services is neither realistic nor
· develop a global network of
sustainable. Thus, the purpose of
environmental investors, operating
strengthening institutional arrangements is
companies and venture capital groups
also to bring about private sector
· delineate `partnership' expectations of
investment into environmental facilities and
network members
services. This will modify the nature of
· agree on the process by which
investment flows in the region, (which have
network members become involved as
been minimally related to environmental
partners
facilities and services), thereby contributing
· connect to the virtual center for
towards the long-term goal of sustainable
environmental investments
development at the local, national and
· participate in the formulation/operatio
n
regional levels.
of an environmental investment fund

PEMSEA has developed a process for identifying, promoting and developing capital
investments in environmental facilities and services, through partnerships between the

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public and private sectors. The process (i.e., Public-Private Partnership or PPP) was
tested in Batangas Bay, Philippines, and is now being demonstrated and verified at other
sites in the region. PPP is realized through:

· joint ownership of the project;
· economic and political commitment by both parties; and
· operational/administrative co-management of the project.

A number of lessons have been learned in formulating the PPP mechanism in the
region. For example, timeliness, cost-effectiveness and a visible and quantifiable
commitment from both the public and private sectors are essential components of the
PPP process. Several roles must be played by facilitators in the PPP process,
particularly with regard to moving investments from one stage to the next and forging the
partnership bond between the public sector and the private sector. From this
experience, it is PEMSEA's view that PPP is an appropriate financing mechanism, but
one that needs the test of time and experience in order to become an acceptable
alternative to traditional contractual relationships between the public and private
sectors. It is this aspect, and the direct implication on the creation of a sustainable
regional mechanism, that is the focus of the proposed project.

Project Objectives

The objectives of the proposed project are:

1. To establish a regional "environmental investment fund", as a source of
contingent loans, grants or loan guarantees for PPP financed environmental
projects in the region; and

2. To set up and operationalize a self-sustaining environmental investment center.

The environmental investment fund will serve to leverage ownership and commitment to
investments in environmental facilities and services from both the public and private
sectors. The fund will be developed with a view to:

· increasing the priority given to investments in environmental facilities and
services by local governments and central authorities;
· changing the attitude of the private sector and foreign investors regarding profit
margins and project risks in environmental investments;
· fast-tracking environmental projects, facilities and services that are of regional
significance;
· establishing functional public-private sector partnerships within a limited
timeframe; and
· demonstrating the potential for achieving reasonable profitability under the PPP
mechanism, thereby attracting further investment by the public and private
sectors.

An environmental investment center will be developed to impart a variety of technical,
financial and investment services to governments, thereby creating an appropriate
environment for joint ventures between the public sector and private sector, as well as
inputs from other sources of financing. The investment center will also serve as the
legal, technical and financial advisory service to the environmental investment fund.

4

The fund and investment center are elements of a self-sustaining regional mechanism.
The regional mechanism consists of two components: an intergovernmental
arrangement for addressing individual and collective efforts of countries to implement
international instruments related to marine and coastal management, and an
environmental foundation (i.e., the Marine Environmental Resource Foundation or
MERF).

MERF has three distinct roles within the framework of the regional mechanism:

1. Administration and management of the environmental investment fund;

2. Operation of an Environmental Investment Center, providing legal, financial and
technical services and products to governments, and housing a virtual center for
environmental investments; and

3. Facilitation and channel of grants and donations for strengthening capacities in
marine and coastal management, and improving the investment environment at
the national and local levels.




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Project Development

The project will be developed as a collaborative activity of PEMSEA. To assist
participating countries of PEMSEA to establish a sustainable regional mechanism for
environmental management in the Seas of East Asia, extra-budgetary resources are
required for:

· detailing the basic vision of the environmental investment fund and its strategic
focus;
· promoting and building consensus on the new mechanism with concerned
governmental and non-governmental organizations in the region;
· engaging key extra-regional players, including international agencies,
intergovernmental institutions, the private sector, donors, investors and
commercial banks, to support the new mechanism and to participate in its
development and implementation;
· assessing the type of fund, or combination of funds, and how they will be
managed;
· identifying the time horizon required to attain a self-sustaining operation;
· defining legal, governance, financial, technical, monitoring and evaluation
procedures concerning the environmental investment fund and the investment
center;
· securing sufficient capital to meet initial co-financing targets; and
· building capital over time to achieve a self-sustaining co-financing programme
within the defined time horizon.

Project Strategy/Approaches

The project will be undertaken in the following stages:

1. Defining and building support for an environmental investment fund

The creation of a new environmental investment fund requires an assessment of the
advantages of creating such a fund versus the costs and commitments required to order
to get a return on such investment. It is understood that such returns are likely to occur
over a long time period, say 10 years, and that returns need to be measured in terms
that are not solely financial.

Defining the scope and nature of an appropriate environmental investment fund entails
designing its structure and operating modality, including:

a) the basic vision and scope of environmental investments to be covered by the
fund;
b) the type and time horizon of activities needed to achieve the vision;
c) the policies, legal and financial practices and supporting institutional
arrangements in participating countries which inspire confidence in establishing
such a mechanism;
d) attributes that promote continuity, flexibility and co-financing collaborations
between the public and private sectors;
e) the ability to strategically direct and leverage financial resources to projects and
practices that are of environmental significance to the region;

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f) capacity building, networking and information exchange, to create suitable
investment environments; and
g) governance of the environmental investment fund.

The first output of this stage will be a resource document covering the above issues.
The resource document is employed during follow-on consultations with the participating
countries, international agencies, intergovernmental institutions, the private sector,
investors, donors, NGOs and commercial banks. The idea is to establish consensus
and support for the environmental investment fund among these key stakeholders, with
a view to garnering their support for and future participation in the fund.

2. Operationalizing the Environmental Investment Fund

Once the basic vision and strategy for the environmental investment fund have been
agreed to, development of the operating modalities of the mechanism may be
undertaken. There are two approaches to be considered in the operationalization phase
of the environmental investment fund, namely:

· a focused programme approach, covering objectives and activities selected for
strategic impact, feasibility and ability to be carried out quickly in order to build a
track record; or
· a pilot-phase approach, in which the fund concentrates on (a) geographical
area(s), or specific issue(s) before beginning to accept proposals from other
areas or broader issues.

This stage will review both approaches within the context of ongoing initiatives in the
region, including initiatives under the International Waters Portfolio of GEF, and develop
a preferred approach in consultation with key players within and outside the region.
Some aspects to be considered involve:

· applying the frameworks and methodologies being employed by PEMSEA to
identify areas and issues of strategic interest and priority in the region;
· using existing networks among governments, levels of government, international
and regional programmes, the private sector and scientific and technical advisory
groups in reaching agreement on operating modalities; and
· linking to national and regional environmental priorities.

Some specific issues to be addressed include:

· mode and transparency of process in selecting investment projects;
· roles and responsibilities of the public and private sectors in selected projects,
including project co-financing requirements;
· the financial structure of the fund, whether to provide contingent loans, grants
and/or loan guarantees on environmental investments involving the PPP
mechanism;
· the management structure of the fund, serving to meet the fund's objectives as
well as a self-sustaining regional mechanism, within a budget based on a
percentage of the fund's assets or returns;
· an investment center, providing legal, financial and technical expertise to
develop the capacities of national and local governments, developing
investment opportunities/investment environments, raising funds, linking the

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local stakeholders/project proponents and a global network of investors,
operating companies, etc., operating a virtual center of environmental
investments, and selecting and supervising PPP implementation; and
· monitoring the performance of the investment portfolio and programme portfolio,
and incorporating lessons to improve future management.

The principal output of this stage will be operating strategies and procedures for the
environmental investment fund, with clear target areas for environmental investments,
criteria for selecting projects and project proponents, financial and management
structures for a self-sustaining operation, formation of technical/financial advisory and
support group, delineation of performance indicators and establishment of monitoring
and evaluation procedures.


3. Raising Capital for the Environmental Investment Fund

The final stage of the project will be raising the necessary resources to meet the co-
financing targets and performance indicators of the fund. In fact, the development of a
fundraising strategy, and the raising of sinking, endowment or revolving funds, or a
combination of funds, is a priority consideration at the very early stages of this project.

The Global Environment Facility will be a primary source of funds, with other stakeholder
groups identified as secondary targets using the GEF resources as leverage. The
following outline suggests the essential steps in preparation of a submission to GEF:

a) An estimation of needs statement, including the programme plans for 5 to 10
years, with an in-depth financial plan and programme plan, listing of resources
requirements for the programme and specification of endowment, sinking and/or
revolving fund needs over a 5-to-10 year horizon;

b) A prospectus on the management and financial structure of the environmental
investment fund, including the operation of an investment center;

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c) Confirmation of the potential for a self-sustaining regional mechanism, showing
governmental and non-governmental support and commitment to the
programme, the full participation of global investors and private sector groups,
the environmental threats and issues to be tackled through the investments, and
the value-added benefit of the environmental investment fund both as a
mechanism to increase financial commitments to facilities and services, and as a
leverage to fast track interventions on regional environmental priorities; and

d) Formulation of a fundraising strategy and campaign, identifying financial vehicles
suited for potential `partners', including donors, multi-lateral sources,
international agencies, environmental foundations, etc.

Roles and Responsibilities in Project Implementation

Governments of participating countries

National and local governments shall provide technical and administrative support in
conducting in-country assessments of policies, laws, programmes and initiatives that are
supportive of, or a constraint to, the environmental investment fund and PPP process.
Countries will also organize meetings and workshops with stakeholders, ensuring
access to relevant information, developing consensus on the proposed investment fund
among local stakeholders, and delineating the priority service needs from an investment
center.

Local stakeholders

Local stakeholders, including local government agencies, the private sector, NGOs,
scientific and technical institutions and/or pertinent local community groups, as
appropriate, shall participate in the formulation, implementation and evaluation of the
environmental investment fund, coming to a consensus on appropriate options for
environmental priorities and related financing mechanisms.

The Private Sector

International investors, operating companies, venture capital groups, green investment
funds, etc. with interest in environmental projects in the East Asian Seas region and the
public-private partnership approach to financing environmental facilities and services in
the region, shall participate in the formulation of the environmental investment fund
strategy and operating modality.

The Global Environment Facility

The GEF shall provide a grant to assist PEMSEA, the participating governments of the
region, local stakeholders and the private sector to establish the environmental
investment fund for the East Asian Seas Region and a supporting investment center.


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PEMSEA

PEMSEA will develop and coordinate the project, overseeing the preparation of the
completion of each stage and the preparation of the final submission to GEF.

Project Duration

The project will be implemented over an 18-month period.

Expected Outputs

The project will result in:

1.
A bankable document for the development and mobilization of an
environmental investment fund for the Seas of East Asia region;

2.
An investment center, serving as a link between project proponents
from the region and a network of global investors and private sector groups;

3.
Project endorsements from the governments of the region, local
stakeholders, the international private sector and investment groups, donors and
intergovernmental institutions.


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Project Budget

Activity Technical,
Legal
Meetings/Workshops Travel
Misc.
and Financial
Consultants and
Experts
1. Defining and
Fund
2 regional/int'l @
$15,000
$5,000
building support for an structure/operating
$35,000
environmental
modality $50,000

investment fund


Country reviews
8 national @ $4,000
$10,000
$4,000
8 @ $20,000
ea.


Fund governance

$10,000
$5,000
$50,000
.
2. Operationalizing the Standard operating
1 regional workshop
$10,000
$2,500
Environmental
procedures and
@ $35,000
Investment Fund
criteria, legal

arrangements, roles
and responsibilities

$71,500



Financial/managem
8 national@ $4,000
$10,000
$4,000
ent structure of the


fund $75,000



Investment center

development and

operation $50,000

Monitoring and
evaluation of
performance
indicators $50,000
3. Raising Capital for
Preparation of

$7,500
$1,500
the Environmental
submission $50,000
Investment Fund



Endorsement by

$10,000
$5,000
stakeholders

$25,000



Fundraising strategy
$10,000
$10,000
$5,000
for potential partners
$50,000
SUBTOTALS
$631,500
$179,000 82,500
32,000
Project Overhead
$75,000


Total Estimated Budget: US $1,000,000

GEF contribution: US $1,000,000

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Document Outline