14/07/2017
Affordability Criteria for Industrial Sectors
A case study illustration
Erika Meynaerts and Stella Vanassche
Who we are?
Where we come from?
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Outline
»
»
»
»
»
Background and scope
Method: stepwise approach
Case study: beverages industry (BAT)
Case study: textiles industry (disproportionate costs)
Conclusions
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Background and scope
» IPPC: aims at minimizing pollution from various industrial sources
» Operators of industrial installations are required to obtain an
environmental permit to operate from authorities
» Permit conditions, including emission limit values, are based on
‘Best Available Techniques’ (BAT)
» economically viable
» technically viable
» reasonably accessible
» BUT lack of criteria or methodologies in directive to assess
economic viability of candidate BAT
» Affordability of technical abatement measures for an industrial sector
e.g. selective catalytic reduction (SCR), waste water treatment plant (WWTP)
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Method: stepwise approach
1
REFERENCE VALUES
Does a comparison of the annual
costs of the
environmental measure(s) to key financial figures
give a conclusive result on affordability?
1
YES
Draw conclusion on
affordability of
environmental measure (s)
YES
If costs can be passed on
to suppliers or customers
the environmental measure
can be considered
affordable
YES
Environmental measures
entailing substantial costs
cannot be considered
affordable
YES
The environmental
measure(s) cannot be
considered affordable
NO
PORTER’S FIVE COMPETITIVE FORCES
Does an analysis of the competitive position provide
enough evidence to conclude that the sector can pass
the extra costs on to their suppliers or customers?
NO
FINANCIAL RATIO ANALYSIS
Does a financial ratio analysis suggest that the sector
experiences acute or structural financial problems in
the short or medium term?
NO
IMPACT ON FINANCIAL RATIOS
Can the implementation of the environmental
measure lead to an unacceptable worsening of the
financial performance of the sector?
NO
The environmental measure can be considered
affordable
2
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First step: reference values
» Additional (annual) costs compared to key financial figures
» Quick scan
» lower/upper boundary= definitely affordable/not affordable
» between boundaries= further analysis needed cf. next steps
Annual costs relative to…
Acceptable
To be discussed
Unacceptable
Turnover
< 0,5 %
0,5 – 5 %
>5%
Gross profit
< 10 %
10 - 100 %
> 100 %
Added value
<2%
2 - 50 %
> 50 %
< 10 %
10 - 100 %
> 100 %
Investment costs relative to…
Average total investments of the past 5 years
1
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Case: beverages industry (BAT)
» Step 1: costs clearly affordable for the three sub-sectors
Breweries
Malting plants
Mineral waters and soft
drinks
%
Affordable?
%
Affordable?
%
Affordable?
Turnover
0,16
yes (<0,5%)
0,13
yes (<0,5%)
0,07
yes (<0,5%)
Value added
0,41
yes (<2%)
1,39
yes (<2%)
0,42
yes (<2%)
Gross profits
2,92
yes (<10%)
4,91
yes (<10%)
2,50
yes (<10%)
Investments
1,22
yes (<10%)
0,10
yes (<10%)
2,02
yes (<10%)
1
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1
REFERENCE VALUES
Does a comparison of the annual
costs of the
environmental measure(s) to key financial figures
give a conclusive result on affordability?
1
YES
Draw conclusion on
affordability of
environmental measure (s)
YES
If costs can be passed on
to suppliers or customers
the environmental measure
can be considered
affordable
YES
Environmental measures
entailing substantial costs
cannot be considered
affordable
YES
The environmental
measure(s) cannot be
considered affordable
NO
PORTER’S FIVE COMPETITIVE FORCES
Does an analysis of the competitive position provide
enough evidence to conclude that the sector can pass
the extra costs on to their suppliers or customers?
2
NO
FINANCIAL RATIO ANALYSIS
Does a financial ratio analysis suggest that the sector
experiences acute or structural financial problems in
the short or medium term?
NO
IMPACT ON FINANCIAL RATIOS
Can the implementation of the environmental
measure lead to an unacceptable worsening of the
financial performance of the sector?
NO
The environmental measure can be considered
affordable
2
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Second step: Porter’s 5 forces
» Extended affordability analysis with focus on competitive position
» Appraisal of Porter’s 5 forces:
» entry of new competitors
» threat of substitutes
» bargaining power of buyers
» bargaining power of suppliers
» rivalry among existing competitors
» Qualitative assessment, based on literature or expert interviews
» Measures can be considered affordable if additional costs can be
shifted to suppliers or customers
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Case: beverages industry (BAT)
» Although larger firms that take up prominent place in world market
» They have little or no ability to transfer additional costs to supplier or
customer
» Suppliers: price setting raw materials (cereals) on international
markets
» Customers: product mainly sold to large supermarket chains within
retail business
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1
REFERENCE VALUES
Does a comparison of the annual
costs of the
environmental measure(s) to key financial figures
give a conclusive result on affordability?
1
YES
Draw conclusion on
affordability of
environmental measure (s)
YES
If costs can be passed on
to suppliers or customers
the environmental measure
can be considered
affordable
YES
Environmental measures
entailing substantial costs
cannot be considered
affordable
YES
The environmental
measure(s) cannot be
considered affordable
NO
PORTER’S FIVE COMPETITIVE FORCES
Does an analysis of the competitive position provide
enough evidence to conclude that the sector can pass
the extra costs on to their suppliers or customers?
2
NO
FINANCIAL RATIO ANALYSIS
Does a financial ratio analysis suggest that the sector
experiences acute or structural financial problems in
the short or medium term?
3
NO
IMPACT ON FINANCIAL RATIOS
Can the implementation of the environmental
measure lead to an unacceptable worsening of the
financial performance of the sector?
NO
The environmental measure can be considered
affordable
2
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Third step: financial ratio analysis
» Financial health of sector, before measures
» Ratios required for each of the four areas of financial health, namely:
» profitability
» value added
» solvability
» liquidity
» By comparing ratios of sector in question to those of entire industry
we get indication of relative financial health of sector
» If the sector has acute or structural financial problems in short or
medium term, measures entailing substantial costs are considered
not affordable
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Case: beverages industry (BAT)
» Financial ratio analysis by means of FiTo®-meter
» FiTo®-meter consists of
» eight financial ratios that describe liquidity, solvability, added
value and profitability
» FiTo®-score= average of logarithm of eight financial ratios
» Abatement measures with substantial costs are considered not
affordable for sectors with financial distress in short and medium
term or FiTo®-score below 0.5313
FiTo®-score >0.5506: sector financially healthy in short and medium term
FiTo®-score < 0.5506 and > 0.5313: sector structural financial problems in medium term
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Ratios and FiTo®-score (2005)
Ratio #
Malting plants (9)
Median
Position
Median
Position
Median
Position
224,0
78
158,0
59
142,0
38
237,5
100
228,0
99
56,0
96
6,0
49
10,0
49
7,0
46
4. Self financing quote
28,0
68
62,0
90
14,0
47
5. Financial independence ratio
48,5
74
67,0
84
30,0
46
6. Short term debt ratio
0,0
100
0,0
100
0,0
100
24,0
64
31,0
74
11,0
39
1.Gross value added/personnel
value added/profitability
costs
2. Net return on operating
assets before taxes
profitability
Mineral waters and
Breweries (22)
3. Net return on share. funds
soft drinks (29)
after taxes
profitability/solvability
solvability
7. Coverage of external
profitability/solvability
liabilities by cash flow
liquidity
8. Net treasury ratio
10,5
68
45,0
82
27,0
66
FiTo®-score
0,6280
91
0,6379
93
0,5709
55
1
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1
REFERENCE VALUES
Does a comparison of the annual
costs of the
environmental measure(s) to key financial figures
give a conclusive result on affordability?
1
YES
Draw conclusion on
affordability of
environmental measure (s)
YES
If costs can be passed on
to suppliers or customers
the environmental measure
can be considered
affordable
YES
Environmental measures
entailing substantial costs
cannot be considered
affordable
YES
The environmental
measure(s) cannot be
considered affordable
NO
PORTER’S FIVE COMPETITIVE FORCES
Does an analysis of the competitive position provide
enough evidence to conclude that the sector can pass
the extra costs on to their suppliers or customers?
2
NO
FINANCIAL RATIO ANALYSIS
Does a financial ratio analysis suggest that the sector
experiences acute or structural financial problems in
the short or medium term?
3
NO
IMPACT ON FINANCIAL RATIOS
Can the implementation of the environmental
measure lead to an unacceptable worsening of the
financial performance of the sector?
4
NO
The environmental measure can be considered
affordable
2
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Fourth step: impact on financial ratio
» Financial data extracted from annual accounts of an average firm
» Four latest years available averaged to flatten out yearly fluctuations
» Accounts adapted for: related investment, operational, maintenance
and avoided costs as well as additional income, depreciation
» Impact of an additional loan on balance sheet and profit-and-loss
account taken into account
» Financial ratios recalculated, based on simulated account
» If additional investment leads to unacceptable worsening of financial
health, measures cannot be considered affordable
» Up until now: conclusive results after step 1 - 3
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WFD and disproportionate costs
» Stepwise approach applied beyond BAT and ‘economic viability’
» European Water Framework Directive (WFD)
» all water (bodie)s have to meet ‘good status’ by 2015
» exemptions (deadline extension, less stringent objective) granted
if reaching good status entails disproportionate costs
» Dashboard
» do benefits outweigh costs of selected measures?
» are selected measures affordable for economic agents involved?
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Case: textiles industry
» Affordability of package of measures related to sustainable water
use and improvement of surface and ground water quality
» After step 1: clearly affordable for textiles industry (‘average firm’)
» BUT if we look at scale of individual firm:
» only financial information of firms that have to bear costs taken
into account
» 54% abatement measures not affordable based on ratio of
annual cost and gross profit
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Case: textiles industry
Ratio
Affordable at
Affordable at firm level (% of firms)
sector level?
Yes
To be discussed
No
Annual cost relative to
Turnover
0,09%
Yes (<0,5%)
65%
24%
12%
Gross profit
2,53%
Yes (<10%)
33%
13%
54%
Gross Value Added
0,33%
Yes (<2%)
71%
17%
13%
4,17%
Yes (<10%)
50%
22%
28%
Investment costs relative
to
Total investments
1
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Conclusions
» An important tool for objectifying discussion between industry
representatives and policy makers about affordability of measures
» By combining various criteria policy makers and industry
representatives obtain clearer understanding of financial situation
and possible impact of environmental policy
» Expert judgement and negotiation remain essential
» Applicability of approach is limited in time and space and depends
strongly on availability of cost and financial data
» Approach concentrates on affordability of technical abatement
measures for an average firm or an industrial sector in Flanders
» different accounting rules for primary and secondary sector
» large variations may exist between firms within a sector
» EU-wide or non-EU application requires ‘new’ threshold values
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Thank you
[email protected]
[email protected]
http://www.vito.be/
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