Mexico - The Guadalajara Environmental Management Pilot : An Update

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 19458 ME MEXICO THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT: AN UPDATE June 21, 1999 Mexico Department and the Environmentally and Socially Sustainable Development Sector Management Unit, Latin America and the Caribbean Regional Office This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FILE COPY CURRENCY EQUIVALENTS Currency Unit = Mexican New Peso (N$) US$1.0 = N$8.79 (May 28, 1998) GOVERNMENT FISCAL YEAR January 1 to December 31 WEIGHTS MEASURES Metric System MAIN ABBREVIATIONS AND ACRONYMS EMS Environmental Management System CEO Chief Executive Officer CIESAS Centro de Investigaci6nes y Estudios Superiores en Antropologia Social Occidente GEMP The Guadalajara Environmental Management Pilot INE Instituto Nacional de Ecologia ISO International Standard Organization ITESM Instituto Tecnol6gico y de Estudios Superiores de Monterrey PVG Programa Voluntario de Gesti6n Ambiental SEMARNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca SME Small and Medium-size Enterprise SSyMA Salud, Seguridady Medio Ambiente UdG Universidad de Guadalajara VOC Volatile Organic Compound Vice President Shahid Javed Burki, LCR Country Director Olivier Lafourcade, LCC I C Sector Director (Acting) John Redwood, LCSES Task Manager Kulsum Ahmed, LCSES MEXICO THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT: AN UPDATE TABLE OF CONTENTS Executive Summary iii A. The Guadalajara Environmental Management Pilot 1 (1) Background and Context 1 (2) Policy Questions 2 (3) The Players 2 (4) The Organization of GEMP 3 B. Policy Questions: Results Update 5 (1) Is the ISO 14001 EMS model appropriate for implementation by SMEs? 5 (2) Are networks among SMEs, large companies, universities, and government agencies effective mechanisms to promote implementation of EMSs by SMEs? 8 (3) Does an EMS improve the environmental performance of SMEs? 11 (4) Can the EMSs implemented through the pilot be sustained? 14 C. Replicating the Pilot 16 (1) Additional Lessons Learned 16 (2) Conclusion 17 This report was prepared by Kulsum Ahmed (Task Manager, LCSES), in close collaboration with Richard Wells and David Galbraith of The Lexington Group and Gerardo Bernache of CIESAS. In addition, GEMP team members, Paul Martin (SASEN) and Shelton Davis (LCSES) provided valuable input. Particular thanks are due to the Committee and members of the Project Guadalajara Association for helping us to follow and learn from the Pilot during its second phase. In addition, we are grateful to the Norwegian Government for partially financing the Pilot, through trust funds administered by the Bank's Environment and Social Development Departments. The team also gratefully acknowledges the helpful contributions of Francisco Giner de los Rios of Mexico's Instituto Nacional de Ecologia, Pablo Huesca Perez of Lucent Technologies, and Alfredo Figarola Figarola, Vanessa Moreno, and Juan Carlos Arredondo, all of ITESM. Secretarial assistance was provided by Grissel Prieto. Peer reviewers are Sergio Margulis (EDIEN) and Konrad von Ritter (ECSRE). The Sector Director (Acting) is John Redwood, the Mexico Sector Leader is Adolfo Brizzi and the Mexico Country Director is Olivier Lafourcade. i ii EXECUTIVE SUMMARY Introduction 1. In November, 1996, an agreement was signed between Mexico's Secretaria de Medio Ambiente, Recursos Naturales y Pesca (Ministry of Environment, Natural Resources and Fisheries, SEMARNAP) and eleven large companies with facilities in the city of Guadalajara, to work together to improve the environmental management of selected smaller-scale enterprises. The World Bank also signed the agreement as a witness, and made a commitment to support the pilot project, principally to learn from this innovative approach how to better promote environmental performance improvements in small and medium-size enterprises (SMEs). The preliminary findings of this pilot from February 1997 to February 1998 are described in the World Bank Sector Report: Mexico: The Guadalajara Environmental Management Pilot, Report No. 18071-ME; September 8, 1998. 2. In the second phase of the Pilot from March 1998 to April 1999, the participating SMEs continued to implement environmental management systems (EMSs) under the leadership of a Coordinating Committee consisting of representatives of the large and small companies, as well as the participating universities. The World Bank and its consultants were more distant observers, monitoring progress through visits to Guadalajara in August 1998 and April 1999. This report presents the information gathered in Phase Two, and updates the lessons that can be drawn from the Pilot. Results Update 3. The updated results to the four policy questions that GEMP addresses are summarized below. * Is the ISO 14001 EMS model appropriate for implementation by SMEs? It appears that given sufficient assistance with implementation support, such as simplified formats, discrete milestones, management systems thinking and staff assistance, the ISO 14001 model is appropriate for adoption by SMEs. Indeed, management support, market demands and human resource constraints appear to be more important determinates, than size, as to whether a firm was able to implement an EMS. * Are networks among SMEs, large companies, universities, and government agencies effective mechanisms to promote implementation of EMSs by SMEs? The above-mentioned networks are crucial in promoting SMEs to implement EMSs. GEMP provided valuable information on how to use these networks even more effectively (see para. 5 below). iii * Does an EMS improve the environmental performance of SMEs? The answer to this question is unequivocally "yes." Every one of the fifteeen SMEs that attended the review visit in August 1998 reported at least one significant improvement in its environmental performance. * Can the EMSs initiated through the Pilot be sustained? The more closely and explicitly environmental management can be linked with business objectives, the more likely an SME will be to persist with EMS development. Conclusion 4. On the whole, Phase One of GEMP provided valuable information on local design factors which were critical to successful replication of the pilot. These included the importance of initial encouragement from large client or supplier companies, availability of expert and local technical assistance, and the use of simple analytical tools to achieve scheduled milestones. Improvements were also identified, such as providing greater EMS support to the large companies; providing advance training to the large companies and university consultants, so that they could better support their SMEs; and defining in advance the relationship between regulatory programs and the participating companies. 5. In Phase Two, the lessons learned were generally at an institutional level - how to better design the institutional and incentive structure of the Pilot in order to promote project sustainability. These lessons included (i) the setting-up of a representative coordinating committee at project initiation, similar to that established in GEMP's Phase Two, to establish a clear structure for project leadership and a channel for open communication amongst all parties; (ii) ensuring that university consultants are organized under a single management structure (such as a local EMS extension center), meet predetermined qualifications, and have defined responsibilities; and (iii) ensuring that the large companies continue to play the role of mentor and EMS promoter at a sustained level for several years, through involvement of an industry association with particular interest in the environment, or through the provision of government incentives, e.g. official recognition programs. 6. Can GEMP be called a successful Pilot? The results of GEMP in encouraging SMEs to improve their environmental management practices are mixed. For a handful of companies, GEMP has been a tremendous success. These SMEs are likely to be some of the first SMEs in Mexico to have certified EMSs. For all the others, GEMP will have helped to raise awareness of environmental issues, if not planted the seeds of culture change in a set of people working in the industrial sector in Guadalajara. Equally, the companies which are either temporarily or permanently inactive in GEMP provide us with a better understanding of SMEs and their approach to environmental matters. These valuable lessons need to be applied to other environmental projects reaching out to SMEs. As similar projects are implemented in other countries, we hope that the experience of GEMP can contribute positively to their design. iv THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT: AN UPDATE 1. In November, 1996, an agreement was signed between Mexico's Secretaria de Medlo Ambiente, Recursos Naturales y Pesca (Ministry of Environment, Natural Resources and Fisheries, SEMARNAP) and eleven large companies with facilities in the city of Guadalajara, to work together to improve the environmental management of selected smaller-scale enterprises. The World Bank also signed the agreement as a witness, and made a commitment to support the pilot project, principally to learn from this innovative approach how to better promote environmental performance improvements in small and medium-size enterprises (SMEs). The preliminary findings of this pilot from February 1997 to February 1998 are described in the World Bank Sector Report: Mexico: The Guadalajara Environmental Management Pilot, Report No. 18071-ME; September 8, 1998. 2. In the second phase of the Pilot from March 1998 to April 1999, the participating SMEs continued to implement environmental management systems (EMSs) under the leadership of a Coordinating Committee consisting of representatives of the large and small companies, as well as the participating universities. The World Bank and its consultants were more distant observers, monitoring progress through visits to Guadalajara in August 1998 and April 1999. This report presents the information gathered in Phase Two, and updates the lessons that can be drawn from the Pilot. 3. The report is divided into three sections. To aid the reader, the first section briefly describes the Pilot. The second section updates the findings related to the key policy questions addressed by the Pilot, based upon Phase Two. Finally, the third section describes the lessons learned from the Pilot which could be applied in future initiatives that target environmental improvements in SMEs. A. THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT 4. This section describes the background and context of the Pilot, the key policy questions that it is designed to address, its participants, and its organization. More details of the Pilot's design may be obtained from the World Bank Sector Report: Mexico: The Guadalajara Environmental Management Pilot, Report No. 18071-ME; September 8, 1998. (1) Background and Context 5. On November 19, 1996, eleven large companies in Guadalajara, Mexico signed a voluntary agreement with SEMARNAP to mentor small suppliers in implementing EMSs. Each large company invited one to three of its small suppliers to participate in the Guadalajara Environmental Management Pilot (GEMP), a two-year project to learn about and implement 1 EMSs. The large companies and the World Bank provided these SMEs funding for EMS training and implementation support, which a team of international and local consultants delivered. The World Bank's involvement was under its Non-Lending Services program, not only as response to the Mexican authorities' request, but also to learn, from this innovative approach, how to better promote environmental performance improvements in SMEs. 6. The context of GEMP is one of enormous disparity between the environmental management capabilities of large and small companies. A 1996 survey of industrial environmental management in Mexico revealed that 70 to 80 percent of large Mexican and multinational companies in Mexico had key EMS elements in place as opposed to fewer than 20 percent of the country's small companies. Many of the small companies with these elements, moreover, belonged to larger corporate entities.' Econometric analysis of the survey data indicated that the factor that most strongly differentiated companies with positive environmental performance was the existence of EMS elements.2 (2) Policy Questions 7. The World Bank supported GEMP as a means of addressing four key policy questions: * Is the ISO 14001 EMS model appropriate for implementation by SMEs? * Are networks among SMEs, large companies, universities, and government agencies effective mechanisms to promote implementation of EMSs by SMEs? * Does an EMS improve the environmental performance of SMEs? * Can the EMSs initiated through the Pilot be sustained? (3) The Players 8. The participants in GEMP included: (i) the large companies, who recruited SMEs, provided them with mentoring assistance and partially financed the pilot; (ii) the SMEs, who committed to implementing EMSs; (iii) the Instituto Tecnol6gico y de Estudios Superiores de Monterrey (ITESM) and the Universidad de Guadalajara (UdG), two local universities that provided 17 staff members to assist the SMEs; (iv) The Lexington Group, a management consulting firm specializing in environmental issues, which provided EMS training and guidance to project participants; (v) the Centro de Investigaciones y Estudios Superiores en Antropologia Social (CIESAS), one of Mexico's most prestigious anthropological research institutes, conducted a separate study on the role that culture change plays in the introduction of EMSs; (vi) 'Industrial Environmental Management in Mexico Results ofa Survey. The Lexington Group, 1997. Report to the World Bank on a survey financed by a grant from the Japanese Government. Dasgupta, S., H. Hettige, and D. Wheeler. What Improves Environmental Performance? Evidence from Mexican Industry. World Bank Development Research Group Working Paper #1877, 1998. 2 Mexican federal, state, and local government officials who participated as observers in the pilot; and (vii) The World Bank who financed (in part) the pilot and participated as observers in the planning, training, and review sessions. (4) The Organization of GEMP Phase One 9. From February to May 1997, these groups held several sessions to make critical decisions about GEMP's development, the most significant of which was choosing to use the ISO 14001 EMS as a model without simplification. The core of the project was a series of plenary training and smaller review sessions from May 1997 to February 1998. EMS training was provided on a "just-in-time" basis with participants receiving training in the EMS elements that they could feasibly implement (with the assistance of their mentors and university consultants) in an 8-to- 10-week period. At the end of each implementation period, the group reconvened, first in small workgroups (with companies chosen at random) to review progress, then as one large group to receive training on subsequent EMS elements. A detailed description of the chronological events of Phase One can be found in Mexico- The Guadalajara Environmental Management Pilot, World Bank Sector Report No. 18071-ME; September 8, 1998. Phase Two 10. In the second phase of the project, which began in March 1998, the participants of GEMP initially formalized further their involvement in the Pilot, and reorganized their administrative structure. As the year progressed, these structures evolved further. The main events of Phase Two are described below. February 1998 - August 1998 * Creation of the Project Guadalajara Association3 - under the leadership of the original industry "champion" of GEMP, this was created in February 1998 with the purpose of supporting the participating companies in the continued development of their EMSs, as well as to meet the formal requirements of the agreement with the government (convenio) which had a two-year time frame. However, the intention of the participating companies was to continue the Association beyond the time frame of the convenio, into the medium term. Each participating company, large and small, was required to send in a formal letter from its legal representative confirming its continued participation in GEMP. At this point, ten large companies and sixteen SMEs confirmed their participation; and one large company and five SMEs left the project. Both ITESM and UdG were invited to continue their participation by the Association. ITESM accepted formally and UdG verbally accepted at the start of this phase, but then the latter's participation gradually diminished until they were no longer participating in GEMP by August 1998. The Association does not have a legal basis. It is an informal entity. 3 * Formation of the Coordinating Committee - on March 24, 1998, the Association nominated a Coordinating Committee composed of three large company representatives, two SME representatives, and one consultant each on the part of ITESM and the UdG. The industry champion was asked to be advisor to this Committee, as the large company, he was working for was no longer involved in the Pilot.4 Subsequently, in August 1998, the original industry champion's association with GEMP was formally completely withdrawn. This Committee then assumed all the duties for leading GEMP. * Nomination of ITESM as the information base for GEMP - the Committee formally decided in March 1998 that ITESM would be the keeper of all documentation related to GEMP, such as SME self assessments, surveys, and minutes of Association meetings. * Reorganization of Workgroups - Four SME sub-groups were established in March 1998 based on level of EMS implementation and desired level of support. One group worked directly with its mentor, two groups with university consultants, and the third without consultants. September 1998 - April 1999 * Reduced Activity of Committee - During this period, both the large companies and SMEs whose representatives were on the Committee, faced massive changes. Despite this, the Committee continued to exist, albeit with substantially reduced activity. During these eight months, the Committee only convened three times. The two SME representatives on the Committee reduced their level of support as one of the companies decided to pull out of the Pilot and the second company, due to other pressures temporarily suspended its involvement. They were not replaced by other SMEs. In addition, one of the key large company representatives on the Committee began to face a number of major internal changes in his company. This included two changes in the company's ownership and subsequent reorganization and reduction in personnel. A third change is expected in the next few months. This resulted in the representative being able to only put in a minimal amount of time on GEMP activities. * Reorganization of Workgroups - The workgroups established earlier broke down during this period, as six SMEs suspended EMS development and three SMEs dropped out of the project. Of the remaining seven SMEs that continue EMS development, two are doing so with the help of their mentor, and five with the help of individual consultancy from ITESM (see below). 4This large company merged with another company, and subsequently the Guadalajara plant was taken over by the new company. So technically, the "champion's" company was no longer involved in GEMP. 4 * Increase in Individual Consulting - During this period, the SMEs moved again towards individual consulting help from individual university consultants on the ITESM team. Some SMEs paid for this assistance.' B. POLICY QUESTIONS: RESULTS UPDATE 11. In this section, a recap of the preliminary findings is presented for each of the policy questions, followed by the additional results obtained during Phase Two. The information in this and the following section related to Phase Two is based upon data gathered during missions to Guadalajara in August 1998 and April 1999. (1) Is the ISO 14001 EMS model appropriate for implementation by SMEs? 12. Despite concerns that the ISO 14001 model was inappropriate for adoption by SMEs, the industry participants in the planning sessions decided to use this model for the EMS without modification.' Figure 1 shows the dramatic progress in EMS implementation during the course of the Pilot up to August 1998. In order to prevent misrepresentation of the data (due to the small number of active companies in the pilot in April 1999), Figure 2 shows the same progress for four companies through the course of the Pilot up till April 1999. In May 1997, the SMEs lacked most elements of an ISO 14001-based EMS. By February 1998, however, most SMEs had substantially developed the key EMS policy and planning elements and were well underway on the implementation components. The checking/performance measurement, corrective action, and management review elements were still in the early stages of development, which is understandable given that these elements were the last to be presented during the training. In the period from February to July 1998, the SMEs continued to develop EMS elements such as emergency procedures, compliance evaluation, and performance measurement, although none had a full system in place. 13. As of April 1999, five of the seven active SMEs are planning to participate in a preliminary ISO 14001 audit in June 1999, and it is likely that these will then attempt to obtain ISO 14001 certification.' As this group of seven includes the smallest (3 employees) and the largest (250 employees) of the SMEs, it seems clear that the ISO 14001 model is suitable for implementation by all sizes of SMEs. Payments by SMEs for services carried out by university consultants were made only after the consultancy contract to provide training, financed by the World Bank and the large companies, had been completed (i e after December 1998). 6 Formal EMSs are generally considered too complex and expensive for implementation by SMEs (as SMEs usually have largely informal management systems and both human and financial resource constraints). Further, it is assumed that SMEs in developing countries have less incentive to apply the ISO 14001 model than large companies, because they are predominantly selling to domestic markets less concerned about environmental issues than the international markets of large companies. 'This is subject to being able to afford ISO 14001 certification. 5 Figure 1. SMEs' Assessment of EMS Implementation POL-1 REV-18 - 20 . PO- ,18, VER-17 16 POL-3 VER-t6 10 < PLAN- i8 IMPL.12). 'XMP- IMPL-11 -MPL-9 IMPL-10 -May 1997 Average - - * - February 1998 Average --*--July 1998 Average A_ Maximum The "radar chart" above shows the average scores attained by the 10 SMEs that completed an EMS self-assessment at each of the dates indicated. Each of the self-assessment's 18 questions refers to a specific EMS element (noted below), with potential scores ranging from 0 (no evidence of the element) to 20 (full implementation of the element). Pol-I Environmental policy exists Impl-10 EMS documented Pol-2 Policy appropriate to business Impl-I I Operational control procedures established Pol-3 Policy includes key commitments Impl-12 Emergency procedures exist Plan-4 Significant environmental aspects identified Ver-13 Environmental monitoring, measurement Plan-5 Process to identify legal requirements Ver-14 Compliance evaluation Plan-6 Environmental objectives and targets Ver-15 Non-conformity procedures Impl-7 Roles and responsibilities established Ver-16 Records Impl-8 Training needs identified Ver-17 EMS audits Impl-9 Internal communication process established Rev-18 Management Review 6 Figure 2. Four SMEs' Assessment of EMS Implementation POL-1 20 REV-18 2 POL-2 18 VER-17 16 POL-3 14 VER-16 0 PLAN-4 ),K _ I I VER-15 PLAN-5 VER-14 PLAN-6 VER-13 IMPL-7 IMPL-12 IMPL-8 IMPL-11 IMPL-9 IMPL-10 - R1Av --A--R2Av --- R3 Av x R4 Av This radar chart shows the average scores attained by the 4 SMEs that completed an EMS self-assessment at four intervals: May 1997, February 1998, July 1998, and the last (Round 4) being in April 1999. 7 14. The findings in Phase Two therefore support the same conclusion drawn at the end of Phase One. It appears that given sufficient assistance with implementation support, such as simplified formats, discrete milestones, management systems thinking and staff assistance, the ISO 14001 model is appropriate for adoption by SMEs. Indeed, management support, market demands and human resource constraints appear to be more important determinates, than size, as to whether a firm was able to implement an EMS (see discussion under Policy Question #4 with respect to sustainability). 15. Finally, before we end the discussion for this section, it is worth noting that the objective of GEMP was solely encouraging implementation of EMSs. GEMP did not either encourage or discourage certification of EMSs. Despite this, some of the companies in the Pilot are interested in obtaining certification, in part because of the encouragement they have received from three large companies in GEMP who have certified EMSs, and in part, because of the subsequent market opportunities they feel this could open up to them in the longer term. The companies have received offers from two sources to audit their EMSs for free in order to prepare them for certification. Currently, five of the seven active companies have decided to accept this offer from the Mexican Institute of Standards and Certification. Also of interest, in August 1998, the Association set up a peer review system for its members, whereby Association members with experience of EMS verification, could audit and verify the EMSs established by other GEMP companies. Teams of ITESM consultants and mentor company representatives have performed audits on a few of the SMEs. Peer review arrangements, for SMEs in particular, have a great deal of merit as they are a means of providing third party verification of EMSs at a typically much lower cost than formal certification. (2) Are networks among SMEs, large companies, universities, and government agencies effective mechanisms to promote implementation of EMSs by SMEs? 16. The above-mentioned networks are crucial in promoting SMEs to implement EMSs. In Phase One, we learned that the invitation from the large mentor companies was crucial in getting many of the SMEs to participate in GEMP. This point was re- emphasized in Phase Two, as several SMEs quit active participation in the Pilot as their mentor companies' level of commitment dropped (see discussion under Policy Question #4 with respect to sustainability). Both phases also showed that generally the large companies' role as mentor was limited, especially among those without supplier development programs and EMSs of their own. Conversely, three of the large companies with EMS experience were particularly impressive mentors and leaders throughout the phases of GEMP. 17. This suggests two improvements with respect to the large companies in future initiatives: (i) require large companies to develop EMSs alongside their SME prot6g6s and provide them with the necessary support; and (ii) use an institutional mechanism (preferably one that is already in existence) and/or put in place incentives for sustained 8 involvement in the Pilot by the large companies. An example could be the involvement of an industry association, together with formal recognition of large company involvement by the government. Interestingly, in GEMP, formal recognition on the part of the Mexican National Institute of Ecology (Instituto Nacional de Ecologia, INE) has been contemplated under its Voluntary Program for Environmental Management (PVG, Programa Voluntario de Gesti6n Ambiental, but has not yet come to fruition. Second, the Coordinating Committee itself in April 1999 is contemplating seeking the external support of the environmental committee of the SSyMA (Salud, Seguridady Medio Ambiente) Group for continuing the project. 18. The first phase also found that the university consultant team played an essential role in providing the SMEs with continuous access to assistance, most importantly in management system design and legal analysis, and less so in the technical aspects of their processes. The importance of the university consultant team continued during the second phase. As the Committee's activity wavered during the last few months, it was the slow and steady support of this group to the SMEs that has resulted in a steady improvement in EMS development in the active companies. However during the course of GEMP, while many consultants performed their work diligently and effectively, some of the consultants did not provide the necessary support to their SMEs. There were several reasons for this. First, the consultants were not organized effectively under a single management structure - instead, they were loosely divided into two groups by university affiliation, with one group managed more closely than the other. The two universities also selected their local consultants differently, in some cases emphasizing academic specialization at the expense of general industry experience. 19. The fact that the university consultants turned out to be more important in GEMP than originally envisaged suggests that future improvements that could be made to enhance their participation are: * Train local consultants as a group in EMSs and in general consulting techniques prior to training industry participants. This training will both account for the different learning style of academically trained consultants and make them more effective at supporting their clients. * Establish a structure for management and support of the university consultants. As noted above, the role of local consultants in GEMP proved more important than anticipated. Their contributions might have been more consistent, however, if a single structure for managing and supporting their work had been established. For example, a local EMS extension center could be set up in future projects. This center would be in charge of selecting the consultants based on established qualifications, making sure that they fulfilled their responsibilities, and providing administrative (and possibly financial) support for their work. Such a center could also serve as the local administrative home for the project as a whole. Further, if such a center in based at a learning institution, such as a university, then in the course of providing 9 extension-type services to SMEs, it would also continue to increase the environmental management capabilities in the country through its graduates over the longer term. 20. Finally, the first phase indicated that the contribution of government could have been enhanced through a clearer initial agreement on the exposure of the participating companies to regulatory sanctions. The second phase not only confirmed this, but suggests that active participation in and promotion of such schemes by the government is important for sustainability, rather than a more passive approach. One of the main incentives for the large companies to get involved in GEMP was the opportunity to demonstrate their "environmental responsibility" to the authorities. Appropriate official recognition of the companies in the Pilot has so far not been forthcoming (even though it is contemplated under the PVG)' and is a source of disappointment. To some of the large companies, in particular, this could have been an incentive to continue participation in the Pilot (see discussion above). This Pilot also has not enjoyed unilateral support from within SEMARNAP. Parts of the Environment Ministry are particularly antagonistic to ISO 14001 due to concerns that EMSs are being presented by certain groups as an alternative to compliance. Hence, they have not been willing to understand the implications stemming from the Pilot with an open mind. This is despite the fact that the Pilot only uses ISO 14001 as a model for EMSs (as decided by the industry participants themselves) and takes the attitude that EMS implementation is an industry level choice, whereas compliance with environmental regulation is a legal requirement. Indeed, as GEMP demonstrates, EMS implementation and compliance fulfillment are complementary, rather than substitutes (for further discussion on compliance, see Policy Question #3 below). 21. In the larger picture, perhaps the most significant effect of the EMS training and support provided by GEMP is the expansion of the network of EMS involvement to include individuals and companies outside of GEMP. Twelve of 13 companies (both large and small) responding to a survey question in August 1998 indicated that the industrial community outside of GEMP had shown some or a great deal of interest in using EMSs to improve environmental performance within a supply chain. Companies outside of the project have hired GEMP-trained consultants for EMS assistance, and at least two of the SMEs in the project are working to improve the environmental management of their suppliers. Finally, because of the dynamism of the economy in Guadalajara, many company representatives who received EMS training and began EMS implementation have moved to other companies, taking their EMS experience with them. Whilst this aspect has not been formally documented, based on informal correspondence, some of these representatives are helping their new companies to implement EMS. 8See paragraph 17. 10 (3) Does an EMS improve the environmental performance of SMEs? 22. The answer to this question is unequivocally "yes." Every SME that attended the review visit in August 1998 reported at least one significant improvement in its environmental performance (see Figure 3). In some cases, these improvements, which included "good housekeeping" measures as well as process changes, brought substantial reductions in materials and energy use and in environmental impact, achieved at very low cost and yielding a net monetary savings. 23. Unlike traditional environmental improvement techniques, such as pollution prevention or clean technologies, EMSs do not target the environmental impacts of the organization. Rather, they are targeted at its procedures and attitudes (which collectively constitute its organizational culture) in the belief that changing the underlying culture will result in more fundamental and more consistent environmental improvements. Changes from implementing an EMS might first appear in the attitudes of senior management, middle management, and workers, then in the organization's commitment to environmental improvement, and finally in iis environmental performance. 24. This progression is occurring in many of the SMEs participating in GEMP. As shown in Figure 4, implementing an EMS has influenced attitudes at all levels of the SMEs. Because the project initially targeted senior managers, changes in their attitudes are most evident: two thirds of the SMEs reflected important or very important changes at this level. SMEs embraced formal commitments to environmental improvement by adopting environmental policies (signed by the company's CEO) and environmental objectives and targets. By August 1998, all but one SME had taken both of these steps. The actual environmental improvements made to date by the SMEs are identified in Figure 3 and categorized in Figure 5. Over three fourths of the facilities had reduced releases to the environment, 70 percent had improved the workplace environment, and about two thirds had reduced energy and/or materials use, improved waste handling, and improved regulatory compliance. 25. The environmental performance improvements noted above also led to improvements in economic performance at 80 percent of the SMEs. Many of these improvements were simple, low-cost housekeeping measures that resulted in reduced raw material, energy, or water input. Also noteworthy is that the SMEs most successful at realizing environmental and economic performance improvements generally had a high level of worker participation in their EMSs. 26. Unfortunately, it has proved difficult to quantify environmental performance improvements. Even the larger SMEs rarely have the staff time to measure in detail environmental indicators such as emissions or wastewater quality, although they sometimes make mass balance calculations. For the owner of the 3-person chemical mixer, it is enough to know that there are fewer spills; there is no justification for 11 Figure 3. SME Environmental Performance Improvements9 # 2: 20-employee custom manufacturer of machine # 10: cont'd parts * Reduced hazardous rag waste (from 5.5 to 1.7 kilograms * Oil use halved through better machine maintenance of rags per ton of product) (replacement of old seals) Significantly reduced machine noise * Reclassified as non-hazardous waste generator Reduced electricity consumption * Work area cleaner and safer Offer used-battery collection program to employees * Small garden built within facility # 11: 10-employee environmental services company, # 4:12-employee environmental services group incl. wastewater analysis and production of chemical specializing in effluent analysis and manufacture of products for water treatment water treatment products Separation and proper disposal of hazardous waste * Improved work environment * Reduced evapn and additional waste of hexane and * Extraction hood reduced waste of raw material and dust reduced generation of other gases through changed analytical * Water treatment system improved quality of effluent procedures * Cut water consumption by 50% # 5: 100-employee plastic manufacturer * Reduced energy consumption # 12: 20-employee environmental services company * Reduced number of health and safety incidents offering laboratory analysis and chemical products for water treatment # 6: 100-employee manufacturer of packaging Less effluent generated materials Separation and appropriate disposal of hazardous effluent * Reduced VOC emissions by gradual shift from and waste, including chloroform and hexane polyurethane using volatile adhesive to molded polyethylene Precipitation and/or neutralization of heavy metals * Reduced scrap from 1% to 0 5% # 13: 21-employee print shop # 7: 210-employee print shop - Four 55 gallon containers of paper recycled each week * Paper waste cut 30% by buying paper in custom sizes * Reduced paper consumption by reducing trial runs and * Greater use of recycled paper using both sides of test paper * Designed waste collection system into new layout * Contaminated effluent reduced by 90% (from 700 to 60 # 14: 8-employee company performing analysis of liters/month) by separation of aqueous hazardous wastes hazardous industrial waste * Changed location to improve ability to separate and treat # 8: 45-employee construction company, specializing effluent in construction of gas stations * Installed carbon filter to improve quality of air discharge * Increased tarpaulin use and sprinkler application (now required of subcontractors) reduced dust emissions # 17: 120-employee manufacturer of seat belts and air * Modified construction plan saved several native trees bags * Cut wood consumption by 30% * All used maintenance oil now treated as hazardous waste Reduced consumption of maintenance oil # 9: 30-employee manufacturer of hot sauce and sangrita # 19: 3-employee mixer and distributor of chemical * Vehicles better maintained to reduce emissions products such as chlorine * Change in cleaning process reduced use of iodine-based * Use of personal protective equipment stainless-steel sanitizer by 11,000 liters per year (overall Reduced transportation risk by purchasing new truck (to effluent discharge also reduced) take place of family car) to separate chemical drums * Requiring suppliers to use stronger containers reduced from each other and from driver raw material waste * Reduced number of chemical spills by labeling storage * 3,000 lbs of orange juice concentrate (6% of annual use) drums and using alternative drums that make it easier to recovered annually by spraying scooped-out containers transfer product with water and using resulting juice # 21: 45-employee mixer & distributor of concrete # 10: 70-employee company that shapes, cuts, and * Cut water consumption 1,800,000 liters/month (40%) by prints customer logos on PVC to make safety seals recycling water used to wash out mixers * Changed the incentive structure in the printing area (to * Reduced dust emissions reflect quality as well as quantity) to reduce waste ' Only data from the 15 SMEs that attended the August 1998 review session are included. 12 Figure 4. Improvements in Environmental and Compliance Awarenesso Compliance Awareness Environmental Awarae aes n imor Managementi v Environmental Awareness Middle_____ Management 11 Important or Very important So0. Inproemnt Environmentsal Awareness Workforce 0 10 20 30 40 50 60 70 80 90 100 Percent of SMEs Reporting Improvements (sample size - 13) Figure 5. Environmental and Economic Improvements, by Category" Reduced Releases to Environment Improved Workt Environment Improved Economic Performance Improved Waste Handling Improved Materials and Energy Use Efficiency Improved Compliance 0 10 20 30 40 50 60 70 80 90 100 Percent of SMEs Reportng Improvements (sample aze 15) The improved compliance awareness refers to GEMP participants as individuals and the SME as a whole. This figure is based on data from 13 of the 15 SMEs attending the August 1998 review sessions (not all data points are available for the other 2 SMEs). This exhibit is based on data from the 15 SMEs that attended the August 1998 review sessions 13 quantifying the difference. This reflects the general weakness of the SMEs in implementing the documentation requirements of an EMS.12 27. However, during the course of Phase Two, despite the environmental and economic improvements noted above, some of the SMEs with the most advanced EMSs quit the Pilot. The reasons for this provide a better understanding to the next policy question, namely, the sustainability of such schemes. 28. Finally, it is worth noting that GEMP's emphasis has always been EMS implementation in SMEs. It never presented EMSs as an alternative to regulation, nor was there a thorough study of the impact of EMS implementation on compliance. However, the ISO 14001 model, as taught to the SMEs, required a commitment to full compliance in their environmental policy (this was indeed included by the SMEs that developed policies) and the development of a compliance management system. The companies themselves chose to use a "compliance checklist" developed by the SSyMA Group to monitor their compliance with environmental regulation. At the start of GEMP, many SME representatives were not aware of all their legal regulatory requirements. The process of implementing an EMS heightened this awareness. In fact, as this awareness increased, often the "marks" on the compliance checklist went down initially! Further, many SME representatives commented in the February 1998 review session that the process of implementing an EMS considerably increased their capability to comply with the law as it helped to set up a framework within which they could identify and tackle areas where they were out of compliance. Indeed, SME representatives themselves noted that a practical training module on applicable environmental regulations in future pilots would be useful feature. (4) Can the EMSs implemented through the pilot be sustained? 29. The Pilot was originally designed in two phases, the first with extensive consultant involvement, and the second with very limited observation by Bank-funded consultants. At the end of Phase One, the SMEs indicated that they would continue the implementation of their EMSs, principally for one or more of the following reasons: (i) the adoption of an EMS was a requirement of a major customer, usually the mentor company; (ii) the SME would like to achieve certification of their EMS for marketing purposes; and (iii) implementation of an EMS was now company policy. However, all the SMEs noted, that the most important motivating force would be to schedule future review workshops to provide discrete targets for continued improvement. 30. As mentioned above, from the period March 1998 to August 1998, the SMEs continued to work together with the Committee's help and oversight. At the end of Phase 12This weakness is discussed in greater detail in the report which describes the findings of Phase One: Mexico: The Guadalajara Environmental Management Pilot, Report No. 18071-ME; September 8, 1998. 14 One, 15 SMEs were active participants in GEMP;13 in August 1998, 16 SMEs continued their participation, following formal letters of commitment from their CEOs to the Pilot.4 Reasons for their continued commitment included meeting customer requirements for EMS development, improving relations with current (and poteitial) customers, improving internal operational efficiency and management, improving compliance, complying with the original government agreement (which has a two year span), and a genuine commitment to improving environmental performance. 31. In April 1999, at the end of Phase Two, the reasons for continuing implementation of EMSs and the need for motivation to sustain EMSs still hold true. The seven companies5 that actively continue with EMS development are doing so for the following reasons: a desire to increase the value of the company (SME # 14 recently merged with another company, and SME # 10 may as well); expanding market opportunities with multinational clients (SMEs # 6 and 7) and local clients (SME # 19); and improving business systems (this applies especially to the laboratories that have to comply with a systems-oriented laboratory analysis standard). 32. The SMEs that have pulled out of the Pilot or suspended their EMS development provide us with a much better understanding of SME operation and their approach to environment. First, it is interesting to note that many of these SMEs still continue with the process changes that were implemented as a result of their EMS.16 This suggests that GEMP has already had some impact on the environmental management capabilities of these SMEs despite the short period of their involvement, and that these process changes are sustainable. 33. The primary reasons that six SMEs" have currently suspended EMS development are other business priorities (such as implementing a quality management system in the case of SMEs # 17 and 18) and staff turnover. We expect that at least several of these will pick up again with EMS development, especially if there is a concerted effort by the Committee to support their work. The principal reasons for the departure of three SMEs, including two of the most successful, are as follows: two experienced a change in senior management, with the new management deciding to terminate involvement (SMEs # 2 and 9); and one (SME # 13) experienced the withdrawal of senior management support. 34. For these SMEs, and for others that dropped out previously, loss of senior management support has been the single most important driving factor. It appears that ' Active participants were SMEs who attended the training sessions, and attempted to implement EMSs. 14 Due to active follow-up on the part of one of the mentors, one previously-laggard SME started to develop once again its EMS in Phase Two. Hence the number of active SMEs increased. 15 Active SMEs are defined as those developing EMSs. Five of these SMEs would like to seek certification. Two of these do not want certification , but are still receiving help from ITESM consultants to develop their EMSs. 6 This information is based on interviews with personnel from these companies. " These SMEs have halted further EMS development. They are not receiving assistance from their mentors or from ITESM consultants However, they have not formally quit the Association 15 the economic and environmental benefits achieved through EMS in the short term, though in many cases easily obtained, are not sufficient or obvious enough to ensure management attention and project sustainability. In fact, the two SMEs that experienced a change in senior management (noted above) were among the most advanced of the SMEs in EMS development and had realized impressive environmental and economic performance improvements. Unfortunately, the mechanism in place to promote continued EMS development, namely the mentor company link, was not functioning properly. The reduced activity of the Committee during this period was probably also a factor and contributed to the fact that the new management was not informed about GEMP and its purposes. 35. It appears that constant external pressure on SMEs is important to sustain such programs over several years at least. Since this Pilot has demonstrated that large companies can do this much more effectively than governmental authorities, this suggests that an institutional structure at the level of these companies, such as an industry association, is necessary. In this case, as mentioned above, the Pilot representatives themselves are looking into the possibility of linking the Pilot more closely with the SSyMA Group. 36. The CIESAS culture change study provided some insights into how to sustain the cultural change process initiated through the introduction of the EMSs. Perhaps the major finding of the study in terms of sustainability was that, in order to be effective, EMSs need to be incorporated into the overall business strategies of companies as part of a general cultural change process linked to continuous learning, improvement and innovation. Size of firm is not the major factor for successful EMS implementation. This finding was reconfirmed once again in Phase Two -- the companies where the EMS was strongly linked with their overall business strategy continued to implement EMSs. 37. Finally, despite the mixed results with respect to EMS sustainability, there is already some evidence that GEMP may be extending through the requirement by some of the SMEs that their own suppliers meet some environmental standards. C. REPLICATING THE PILOT (1) Additional Lessons Learned 38. Phase One of GEMP has already indicated a number of keys to successfully replicating the pilot, among which initial encouragement from large client or supplier companies, the availability of expert and local technical assistance, and the use of simple analytical tools to achieve scheduled milestones, are particularly important. Improvements were also identified, such as providing greater EMS support to the large 16 companies; providing advance training to the large companies and university consultants, so that they could better support their SMEs; and defining in advance the relationship between regulatory programs and the participating companies. 39. The August 1998 review sessions indicated that additional improvements that could be made in future pilots include (i) the setting-up of a coordinating committee at project initiation, similar to that established in GEMP's Phase Two, to establish a clear structure for project leadership and a channel for open communication amongst all parties; (ii) ensuring that local university consultants meet predetermined qualifications, are organized under a single management structure, and have defined responsibilities; and (iii) changes in course structure, such as providing greater practical legal expertise on the Mexican environmental regulatory framework, stressing EMS documentation throughout the course, and changing the order of certain EMS elements presented in the training course, such as emphasizing earlier EMS structure and responsibilities, as well as documentation. 40. The April 1999 review of GEMP indicates that one other factor is critical. There needs to be some incentive in place to ensure that the large company continues to play the role of mentor and EMS promoter at a sustained level for several years. This incentive could be at the level of an industry association with particular interest in the environment, or could be in terms of government positively taking into account such activities of large companies which improve environmental performance of their smaller suppliers, e.g. through official recognition programs. (2) Conclusion 41. Can GEMP be called a successful Pilot? The results of GEMP in encouraging SMEs to improve their environmental management practices are mixed. For a handful of companies, GEMP has been a tremendous success. These SMEs are likely to be some of the first SMEs in Mexico to have certified EMSs. For all the others, GEMP will have helped to raise awareness of environmental issues, if not planted the seeds of culture change in a set of people working in the industrial sector in Guadalajara. Equally, the companies which are either temporarily or permanently inactive in GEMP provide us with a better understanding of SMEs and their approach to environmental matters. These valuable lessons need to be applied to other environmental projects reaching out to SMEs. As similar projects are implemented in other countries, we hope that the experience of GEMP can contribute positively to their design. 17 CATALOG UERSIFELE ( CONFIDENTIAL Repowt No.: 19458 ME Type: SR