EMERGING TECHNOLOGIES FOR EMERGING MARKETS BY PAUL NEUTZ Innova Group The countries of Central Eastern Europe and former Soviet Union are among the target markets of environmental companies in the U.S. Damages to the environment are extensive. The cleanup had an estimated value of $2.4 billion in 1995 and is growing each year. Opportunities will be there for years to come for companies with innovative technology and know how. Respect for the environment and investment in environmental cleanup by Eastern Bloc governments was minimal at best before the political changes in 1989. Damage to air, water and soil is widespread. Occasionally, East European countries were able to install the most up-to-date technology and leapfrog environmental protection in the developed countries. But for the most part, progress in environmental cleanup and protection has been slow in coming. Central and East European, Russia and other ex-Soviet Union countries are all very different in their approach to environmental protection as well as economic and political development. Poland, Hungary and the Czech Republic are the most advanced countries in the region and potentially the best prospects for American environmental firms. Although funds for environmental cleanup there are scarce, they are available. Environmental laws exist and are generally modeled after those of the European Union. The government in the Czech Republic, for instance, took responsibility for all of the environmental liabilities of privatized companies up to the date of privatization and keeps releasing funds for cleanup. In stark contrast, Russia or Ukraine are in turmoil, and regardless of how much potential there may be, environmental projects are not on top of the agenda of the government or industry. The rest of Eastern Europe and ex-Soviet Union countries have been slow to tackle environmental issues, having to deal with other even more pressing problems. Soon after the Iron Curtain was lifted, a number of environmental analysis projects were initiated partially with support of European and U.S. governments. As part of privatization programs international lending institutions prepared environmental audits/impact statements and assessed damages. The respective governments enacted laws protecting environment and assigned priorities to the major sources of pollution. The extent of environmental damage is overwhelming. Unfortunately, until now by most accounts, very little tangible cleanup has been accomplished. Air pollution has been a major target. The region is dotted with power and central heating plants, steel mills, aluminum smelters, chemical factories and refineries. A number of projects are underway to install scrubbers and pollution control equipment, local lignite coal is being replaced by gas, and fines are being levied on companies that do not comply with the regulations. In the Czech Republic and Slovakia, coal-fired power plants are to be replaced by nuclear energy from new or upgraded Soviet-design nuclear plants or large scale hydro power plant projects. Since prices for energy are still regulated, investments in power plants and their upgrading was slow and financed primarily from national budgets, although when the plants were sold to private investors, pollution control was always one of the conditions of the sale. One of the main concerns of regional and municipal governments in Eastern Europe has been waste water and construction or upgrade of waste water treatment plants. Industry has responded to tougher laws on discharge with industrial waste water treatment and pollution in rivers and streams has decreased, although in many cases still far exceeds permitted levels. Many polluters in the region simply cannot afford to invest in treatment technology, but spread the investment over a long period or use alternative methods in production. The quality of groundwater is a major problem in certain regions due to extensive damage to soils, leachate from landfills and thousands of illegal dumps. A number of regional projects are under way to clean up groundwater contaminated with hydrocarbons, PCBs, acid waters from uranium mining, heavy metals and any other imaginable contaminant or combination of contaminants. Local municipalities have tackled with varying success the issue of municipal solid waste and recycling programs are being implemented throughout Central Eastern Europe. Public opinion in Europe turned decidedly against incinerators, regardless of the pollution limits and promises of manufacturers. As a result, waste minimization programs are very popular with industry since the rates for disposal and incineration are steadily increasing. Soil remediation has been a lesser priority. It is only recently that projects in soil washing/sparging bio/phyto and other types of remediation were initiated, mainly in urban areas in preparation for new construction or to protect water sources. Among the major problems in the region are heavy metals and radionuclides as a result of mining activities. The U.S. environmental industry has been quite successful in capturing a significant share of the work in Central and Eastern Europe. U.S. companies participated in many of the public tenders for environmental work, although with various levels of success. Local firms have gotten involved too. Resource Conservation Corp. of Bellevue is working on a large project in the Czech Republic, a $42 million acid uranium mining water evaporator. It is the first of many that will attempt to stop acid water from intruding into groundwater which provides drinking water for several hundred thousand people. Most of other large scale projects are still in the planning stage or bogged down in the slow decision making process in Eastern Europe but smaller, usually privately funded projects are numerous throughout the region. Our firm has been active in assisting U.S. companies in entering the environmental market in Central and Eastern Europe, representing waste disposal and waste-to-energy companies, environmental service providers, environmental technology and product manufacturers and equipment licensers. Innova Group formed a joint venture with a local construction company and an engineering firm to finance and build a tire and plastics pyrolysis system in the Czech Republic. Currently, our firm is preparing an environmental technology demonstration project in the Czech Republic which will serve as a marketing opportunity for Pacific Northwest companies who want to sell their technology to the East European and ex-Soviet markets. The new markets of Eastern Europe are very demanding, partially because competition for scarce resources is fierce and clients expect both upfront work and a lot of value for their money. Government-sponsored projects in most East Europe countries have to be competed for in public tenders and corruption and irregularities are widespread. The bureaucrats involved are amazingly slow, while constantly requiring more details and continuous education about basic principles. Licensing and permitting is a prerequisite for both product and equipment import. On the other hand, there is a little danger of product liability lawsuits since the permitting agency takes responsibility for quality and safety once the product is approved. A number of possibilities for government-granted "seals of approval" exist and tend to be an important marketing tool in both the consumer and industrial market. In the case of equipment, the laws on safety and pollution are very stringent and compliance is sought after in the form of operating permits and independently verified test results on existing sites. East European environmental firms are independent, mostly young and entrepreneurial private firms with highly qualified scientists and engineers. Teaming or joint venture agreements with the right partner company are potentially the most beneficial for companies interested in expanding their business in Eastern Europe. Environmental service firms need a reliable partner with whom to bid for projects. Competing with local labor rates of between $1 and $3 an hour and lower costs of transportation are nearly impossible. U.S. environmental firms with proprietary technology need to provide credible background information, such as patents, references and test results. Sales of smaller equipment such as specialized tools and controls are common. For larger equipment, licensing and local component manufacturing or assembly provide substantial savings on engineering, labor and transportation costs, plus allow for conversion to metric measurements and compliance with local codes. The most successful projects with visible impact in Central Eastern Europe and former USSR are still to come. Emerging U.S. technology and know-how can be tested in the region with a prospect of multiple sales. Despite tremendous potential and the successful inroads some U.S. environmental companies have made, it will still take a lot of long term commitment. But for environmental companies with a right product at the right price, the new East European market is too profitable to pass up. Paul Neutz, principal of Innova Group, a local international business development firm, has traveled extensively in the region, while providing consulting services on doing business in Eastern Europe.