Mexico - The Guadalajara Environmental Management Pilot

Report No. 18071-ME Mexico The Guadalajara Environmental Management Pilot September 8, 1998 Mexico Department and the Environmentally and Socially Sustainable Development Sector Management Unit, Latin America and the Caribbean Regional Office 0: nt < the W',vIP-0 k  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 EA Environmental Aspect EMS Environmental Management System CCI Command and Control Instrument CEO Chief Executive Officer CIESAS Centro de Investigaci6nes y Estudios Superiores en Antropologia Social Occidente COA Ce'dula de Operaci6n Anual GEMP The Guadalajara Environmental Management Pilot IDG Inter-Disciplinary Group INE Instituto Nacional de Ecologia ISO International Standard Organization ITESM Instituto Tecnol6gico de Estudios Superiores de Monterrey LAU Licencia Ambiental Unica MBI Market Based Instrument NGO Non-Governmental Organization PEMEX Petr6leos Mexicanos PFPA Procuradoria Federal de Protecci6n al Ambiente PVG Programa Voluntario de Gestion Ambiental RETC Registro de Emisiones y Transferencia de Contaminantes SAGE Strategic Advisory Group on the Environment SEA Significant Environmental Aspect SEMARNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca SIRG Sistema Integrado de Regulaci6n Directa y Gesti6n Ambiental de la Industria SME Small and Medium-size Enterprise TQM Total Quality Management UdG Universidad de Guadalajara VOC Volatile Organic Compound Vice President Shahid Javed Burki, LCR Country Director Olivier Lafourcade, LCC1C Sector Director Maritta Koch-Weser, LCSES Task Manager Kulsum Ahmed, LCSES  MEXICO THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT TABLE OF CONTENTS EXECUTIVE SUMMARY (iii) 1. ENVIRONMENTAL MODERNIZATION 1 A. The New Environmentalism and Management of Industrial Pollution 2 B. Partnerships for Environmental Management 3 C. Environmental Management Systems 4 (1) The ISO Standard for Environmental Management Systems 4 (2) Environmental Management Systems and Environmental Cultural Change 5 D. Flexible Mechanisms for Environmental Regulation 6 E. The Special Case of Small and Medium-sized Enterprises 6 2. ENVIRONMENTAL MODERNIZATION IN MEXICO: BUILDING MOMENTUM 8 A. EMS Promotion: Voluntary Environmental Audits 8 B. A Framework for New Environmentalism: Reform of the Ecology Law 9 C. Regulatory Modernization: Integrated Environmental Regulation 9 D. The Status of Environmental Management in Mexican Industry 10 3. THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT 11 A. The Guadalajara Context 12 B. The Guadalajara Environmental Management Pilot Model 13 (1) The Voluntary Agreement of November 1996 13 (2) The Players 13 (3) The Phases of GEMP 14 C. Policy Questions and Test Methodologies 17 (1) Is the ISO 14001 EMS model appropriate for implementation by SMEs? 17 (2) Are networks between SMEs, large companies, universities and government effective mechanisms to promote implementation of EMSs by SMEs? 18 (3) Does an EMS improve the environmental performance of SMEs? 18 (4) Can the EMSs initiated through the Pilot be sustained? 18 i  4. PRELIMINARY RESULTS OF GEMP 19 A. Question 1. Is the ISO 14001 EMS model appropriate for implementation by SMEs? 20 B. Question 2. Are networks between SMEs, large companies, universities and government effective mechanisms to promote implementation of EMSs by SMEs? 26 C. Question 3. Does an EMS improve the environmental performance of SMEs? 30 D. Question 4. Can the EMSs implemented through the pilot be sustained? 33 5. REPLICATING THE PILOT 38 A. Drawing upon the Successful Experiences of GEMP 38 B. Scaling up to a National Program 40 (1) Improvements to the Model 40 (2) Linkages with Broader Initiatives 41 C. Conclusions 42 (1) Environmental Management Systems 42 (2) Partnerships for Environmental Management 43 (3) Flexible Regulatory Mechanisms for Promoting EMSs 43 ANNEX 1: SME PROFILES Al This report was prepared by Kulsum Ahmed (Task Manager, LCSES), Paul Martin (Environmental Specialist, LCSES), and Shelton Davis (Principal Sociologist, SDVDR), in close collaboration with Richard Wells and David Galbraith of The Lexington Group and Gerardo Bernache, Cecilia Lezama, and Esperanza Avalos of CIESAS. Particular thanks are due to the participants of GEMP, in particular the large and small company staff and the university consultants from ITESM and the UdG, without whom this Pilot could not have taken place. 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, Carlos Ramirez of Lucent Technologies, Pablo Huesca Perez of Philips Consumer Communications of Mexico (formerly Lucent Technologies), and David Hanrahan of the World Bank's Environment Department. Secretarial assistance was provided by Grissel Prieto. Peer reviewers are Sergio Margulis (EDIEN) and Konrad von Ritter (ECSRE). The Sector Director is Maritta Koch-Weser, the Mexico Sector Leader is Adolfo Brizzi and the Mexico Country Director is Olivier Lafourcade. ii  EXECUTIVE SUMMARY Introduction 1. On November 19, 1996, eleven large companies in Guadalajara, Mexico signed a voluntary agreement with Mexico's Secretaria de Medio Ambiente, Recursos Naturalesy Pesca (Ministry of Environment, Natural Resources and Fisheries, SEMARNAP) to mentor small suppliers in implementing environmental management systems (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 EMSs. The large companies and the World Bank provided these small and medium enterprises (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. 2. 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 3. 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? 4. The remainder of this Executive Summary gives a brief description of the players and the organization of GEMP, reports on the major findings related to each of these four questions, and Industrial Environmental Management in Mexico: Results of a Survey. The Lexington Group, 1997. Report to the World Bank on a survey funded by a grant from the Japanese government administered by the Bank. 2 Dasgupta, S., H. Hettige, and D. Wheeler. What Improves Environmental Performance? Evidence from Mexican Industry. World Bank Development Research Group Working Paper #1877, 1998. iii  concludes by considering how the experiences and lessons of GEMP can be applied to replicate the approach in other settings. The Players and Organization of GEMP 5. 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 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) 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. 6. 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- 1 0-week period. At the end of each implementation period, the group reconvened, first in small workgroups to review progress, then as one large group to receive training on subsequent EMS elements. Preliminary Results 1. Is the ISO 14001 EMS model appropriate for implementation by SMEs? 7. A widely expressed concern regarding the ISO 14001 model is that it is inappropriate for adoption by SMEs, because smaller companies find it both costly and difficult to implement formal EMSs due to their largely informal management systems and resource constraints (particularly with respect to personnel time and financing). 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. However, the industry participants in the planning sessions decided to use this model for the EMS without modification. 8. The experience to-date indicates that, compared to larger companies, SMEs both enjoy relative advantages and suffer particular drawbacks in the adoption of an EMS. A strong comparative advantage is the relative ease of generating a consensus and disseminating iv  information within an SME, activities that can absorb much energy in a larger company, as well as the significant benefits for SMEs from easily-achieved good-housekeeping practices. On the downside, while it is noteworthy that none of the SMEs indicated a lack of technical expertise on the details of their processes, many reported difficulties in the implementing the EMS resulting from the rapid rate of change that is a fact of life for many smaller companies. 9. It appears that given sufficient assistance with analytical tools and breaking the implementation of an EMS into manageable stages, the ISO 14001 model is appropriate for adoption by SMEs. According to the results presented by the SMEs during the review meetings held in October, 1997, and February, 1998, they have so far on average completed 85% of the policy and planning components of the ISO 14001 model, and 46% of the implementation and review components. The preliminary project findings indicate that: * The ISO 14001 model can be applied by SMEs with no modifications (with possibly the exception of documentation). A survey administered in February, 1998 justified the decision to use the unaltered ISO 14001 model: only 8 percent of the SMEs suggested simplifying the EMS model. ISO 14001 provides a flexible, generic management systems model that can be applied by a wide variety of organizations. Most ISO 14001 requirements flow from the "significant environmental aspects" (SEAs) identified by the organization itself. These SEAs (and hence ISO 14001 requirements) will vary with the size and type of organization. Generally, the SMEs participating in the project identified fewer than 10 and often fewer than five SEAs, as compared to a large, complex chemical or refining operation which may identify several hundred SEAs. This means that for an SME the application of ISO 14001 is correspondingly simpler. However, one potential exception may be the requirements for documentation and docurnent control. Many SMEs chose not to focus their energy on these elements because the required procedures would have added an unwanted layer of bureaucracy to their operations. * Although the ISO 14001 EMS model is appropriate for SMEs, most SMEs require substantial implementation support. The project assigned one consultant to each SME to provide implementation assistance as well as a mentor company to monitor progress. In addition, the project involved tri-weekly meetings for the university consultant group with an expert on ISO 14001 implementation, and periodic training on ISO 14001 provided by The Lexington Group. Although in future projects this support could be streamlined, the fact remains that SMEs require substantial assistance to implement ISO 14001. * Particular areas where SMEs need implementation support include simplifiedformats, discrete milestones, management systems thinking and staff assistance. Simplified formats and methods, developed by the project team, were critical to the success of the project in the opinion,of 77 percent of the SMEs responding to the February 1998 survey. The assignment of discrete milestones for the accomplishment of specific implementation tasks proved quite important in maintaining discipline in schedules and a sense of accountability as well as in giving the participants a logical order of activities. For many of the SMEs, the ISO 14001 training was their first exposure to management systems concepts such as the plan-do-check- v  act cycle or to systematic description of procedures. Thus, it was necessary to introduce generic management systems concepts as well as environmental management systems concepts (presumably, if successful, this process should result in improvements in both environmental and management performance). The local consultants, who were more experienced in systems thinking, also provided critical support in this area. Finally, the key scarce resource among the SMEs was time. Fifty-four percent of the SMEs considLered lack of time a "critical" or "very important" barrier to EMS implementation. Usually, the SME representative also had very significant non-environmental responsibilities (operations or production manager, quality manager, maintenance manager, purchasing or sales manager). Significant help was provided by the assigned project consultant who often acted as a staff extension for the SMEs, providing not only expertise but "an extra set of hands" to assist the SMEs in completing the necessary tasks for EMS implementation. The business culture of the firm, rather than its size, is probably a more important factor, in determining whether afirm can implement an EMS. One of the major findings of the CIESAS study is that size alone was not a determinate factor in the implementation and effectiveness of EMSs. In fact, it may be that small and medium-sized firms can introduce EMSs more rapidly and easily than large companies exactly because of their smaller size and less formal social organization. However, there are several other factors within the "business cultures" of these firms which seem to be determinate elements in both their response to the training course, as well as their capacity to introduce functioning EMSs. In addition to size of firm, these business culture factors are the type of firm, the styles of administration, the education of the workforce, the firn's management/production efficiency, its profitability/security, and finally its level of environmental consciousness. Another important factor in whether a firm did or did not institutionalize an EMS, according to CIESAS, was economic incentives, in particular, the perception that an EMS was needed to penetrate or increase both local and export markets, particularly in an area such as Guadalajara with a high concentration of multinational firms. 10. Finally, it is interesting to note that the International Standards Organization's (ISO) Technical Committee (TC) 207, which developed the 14000 series of standards, itself had set up a special Task Group in 1996 to review whether a new EMS standard needed to be developed for SMEs. The recommendations of this Task Group to Sub-Committee 1 of TC 207 (as reported in a workshop during the ISO TC 207 Annual Meeting in June 1998) are that (i) no new standard for SMEs should be developed at this time; (ii) Sub-Committee 1 of TC 207 should take special account of the needs of SMEs at its next revision of ISO 14001 and ISO 14004 and should address the issues raised by members of the Task Group during their review process starting in July 1998, noting especially the concerns with the wording of ISO 14001 and its annexes and the usability of ISO 14004; (iii) ISO TC 207 should encourage its member organizations to continue to establish national groups to research and develop SME responses to its review process and to develop assistance/guidance to SMEs in their own countries, as well as to share this guidance via the Secretariat of Sub-Committee 1 with other member organizations; (iv) TC 207 should use its liaison with the ISO Committee on Conformity Assessment (CASCO) to promote understanding in certification bodies of the special needs of SMEs in implementing ISO 14001; and finally (v) vi  Sub-Committee 1 should continue to hold a special SME workshop at its plenary meeting and to promote interchange of information (through, for example, an electronic website) between all member countries. These recommendations, which are based on information from over 15 countries, and which required consensus-building from many more countries, are entirely consistent with the findings of this pilot. 2. Are networks among SMEs, large companies, universities, and government agencies effective mechanisms to promote implementation of EMSs by SMEs? 11. Mentor Company Networks: The most important role of the mentor large companies has been to invite the SMEs to participate in the pilot. Of the SMEs that completed an informal survey during the Progress Review Sessions in October 1997, about half stated that they would not have participated if they had been invited by either the government or a university. During the early stages, the motivation for participation in GEMP appeared to be largely based on the commercial interest of the SMEs in strengthening ties with their major clients, as demonstrated by the sudden loss of interest by SME management when a mentor ceased to be a customer during the course of the Pilot.3 The motivation provided by the mentor companies was particularly strong in those cases where, separate from any GEMP activities, they conducted combined quality assurance and environmental management audits of their suppliers. 12. Aside from such motivation and cooperation, the quality of the technical assistance for EMS development provided by the mentors to their SMEs has been mixed. Some multinational mentors, that have strong in-house EMS capacity and conduct supplier audits, have proven to be important sources of guidance for their SMEs. In other cases, lower levels of commitment to supplier development, and EMSs that are less developed than those of their SMEs, have limited the assistance the mentors can provide. Reflecting this variance in EMS expertise among the large companies, only 31% of the SMEs described mentor company support as "very important" or "critical" to the success of the project. Similar future initiatives could reduce such difficulties by placing greater emphasis on the EMS training provided to the mentor companies, and by building into the initial commitment of the mentors agreements to audit the EMSs of their SMEs at the end of the program, and in the longer term to provide second-party certification of any EMSs that fully meet the ISO 14001 requirements. 13. University Consultant Networks: The assistance provided to the SMEs by the consultants has been essential in ensuring progress in EMS implementation. Four aspects stand out: * each SME was assigned an individual consultant from the UdG or ITESM as their main point of contact for assistance, providing the companies with an easily accessible, local source of support; * each of the university consultants was able to draw on advice from other members of the team, whose backgrounds are diverse, and as a result, the SMEs had access to a wide range of skills. Nevertheless, none of the consultants were experts in the particular technologies of the As was the case of SME #16. vii  SMEs, and it is noteworthy that this did not prove to be a source of complaint. Instead, the SMEs placed more value in the ability of the consultants to guide them in the development of a management system, and in the legal analysis of their compliance status, relying on in- house expertise for the more technical analysis of their processes; * although the consultants from UdG and ITESM were entirely new to the ISO 14001 model at the start of the pilot, they have been effective in providing EMS advice to the SMEs. This was largely because The Lexington Group (which has extensive ISO 14001 experience) has provided standard formats and methodologies, and supplemented the two main training sessions with monthly review meetings. A number of SMEs have commented, however, that the consultants could have been more effective if they had learnt about EMS implementation before the SMEs, rather than at the same courses; and, * some consultants (as in the case of the consultant for SME #9) were able to adapt specific cultural knowledge to the training process that resulted in improving and speeding up the implementation of EMSs in the SMEs. Further, the expertise of the university consultants in teaching and effectively working with groups was of considerable use as they worked with management and employees within the SME to help them better understand how to implement EMSs. 14. Finally, it is worth noting that this aspect of the project probably has the greatest developmental impact, in that by training and giving hands-on experience to 15-20 university consultants in EMS, the Pilot has helped to build long-term capacity in EMSs in Guadalajara. It is significant that even in February 1998, a number of university consultants participating in GEMP had been approached by companies outside of the Pilot (and SMEs, in particular) to help them develop and implement their EMSs in order to respond to large company client demands. 15. Government Networks: During the course of the Pilot, representatives of local and national environmental authorities attended many sessions of the project as invited observers, and in several sessions made presentations about how the pilot fitted into new initiatives they were planning. Generally, though, the impact of this involvement was limited. The pilot was undertaken at a time when SEMARNAP was defining the extent to which the federal government will promote EMS adoption, so the principle role of SEMARNAP representatives was to observe progress and update the participating companies on policy decisions. Although this involvement may have helped raise the profile of the initiative, perhaps stimulating management interest, there was also concern among the participating companies that such federal attention would attract additional enforcement actions, combined with a skepticism over the immediate relevance of the policy deliberations. 16. The most practical form of assistance received from the federal government was a review of the compliance checklist prepared by some of the mentor companies and used as an analytical tool by the SMEs in their initial self-evaluation. Written comments were received from the national headquarters of the Procuradoria General de Protecci6n al Ambiente (PFPA), supplemented by discussions with PFPA's regional representative on the interpretation and application of the law. viii  17. Although state and municipal agencies have pledged their support for the initiative, such assistance was largely limited to the participation of current and recent office-holders in the consultant team. This in itself proved an ambiguous benefit: on the one hand, they provided valuable assistance in interpreting local regulations, but on the other, their uncertain status made participating companies fearful of attracting more stringent enforcement. 3. Does an EMS improve the environmental performance of SMEs? 18. Although it has only been three months since the SMEs completed the formal EMS training, and their systems are not yet fully complete, 14 of them have reported improvements in their environmental performance (see Table 4.1, Figures 4.2 - 4.3 in main report and Annex 1). Over 80 percent of the participating SMEs4 reduced their environmental releases, nearly 70 percent improved their work environment, and over 50 percent improved their economic performance while achieving environmental improvements. Slightly less than 50 percent of SMEs also reported improvements in waste handling, materials and energy efficiency, and compliance. It should be noted that these improvements have taken place before the full implementation of an EMS. The SMEs have yet to gain the full benefits of having established a systematic process to address the significant environmental aspects of their operations. However, this serves to illustrate the point that the gains from good housekeeping are potentially very large in the case of SMEs, and that an EMS provides a means to capture these gains very quickly. 19. Although these examples serve to illustrate improvements in environmental performance, the true impact of adopting an EMS is more profound. The ISO 14001 requirement for a commitment to continuous environmental improvement seems a realistic policy for the participating SMEs, largely because of two factors: * the process of evaluating in a systematic manner their pre-existing environmental management, regulatory compliance, and environmental aspects has for many SMEs been instrumental in raising the environmental awareness of all staff, from directors down to production workers; and, * the establishment of measurable environmental goals and the assignment of responsibilities for environmental aspects have led to organizational changes that ought to help ensure that environmental improvement is a sustained commitment. 4. Can the EMSs implemented through the pilot be sustained? 20. With the review workshop held in February, 1998, the first phase of the GEMP has been completed. The objective of the second phase (through February 1999) will be to observe progress, but no further training, assistance or direct motivation will be funded from World Bank Only the 15 SMEs that attended the February 1998 review session are represented in these percentages quoted in this paragraph. ix  or grant resources, raising the question of whether the participating enterprises will continue to implement their SMEs. 21. Most of the SMEs have indicated in review sessions that they would continue the implementation of their EMSs, principally for one or more of the following reasons: * the adoption of an EMS is a requirement of a major customer, usually the mentor company; * the SME would like to achieve certification of their EMS for marketing purposes; and/or, * implementation of an EMS is now company policy. 22. All the SMEs noted, however, that the most important motivating force will be to schedule future review workshops to provide discrete targets for continued improvement. The majority also indicated that the preference was that these sessions be organized either by the participating universities or the mentor companies. Since February, the companies have held a number of joint meetings to review administration arrangements of the Pilot, and in fact have set up a steering committee consisting of both large company, SME, and university representatives to guide the Pilot forward in this Second Phase. Visits during the coming year to review progress ought to provide a clearer answer to this question. Further, even though it remains to be seen whether GEMP can be sustained, there is already some evidence that it may be extending through the requirement by some of the SMEs that their own suppliers meet some environmental standards. 23. The culture change study also provides some indications of the sustainability of the EMSs. Per our hypothesis, a culture change in the participating firms ought to result in a potentially more rooted, permanent system. CIESAS postulate that participation in the training course and the introduction of the EMSs began a process of cultural change in these firms, and that a measurable culture change was observable in the firms that fully implemented an EMS. To understand the nature of this change process, the CIESAS researchers used the anthropological notion of "culture change agents" distirnguishing among the training course itself (organized and executed by the Lexington Group), external change agents such as the mentor companies and the university consultants, and internal change agents such as the inter- disciplinary groups within each company, the company management and the company workforce. 24. According to the CIESAS study, one of the outcomes of the training course was that it provided a new language and cognitive framework by which the participating company representatives could think about and discuss issues relating to industrial production and the environment. For many of the participating small and medium-sized companies, the EMS training was their first exposure to "management systems thinking" which, along with the other training course materials, provided a new way of thinking and talking about their own management and production processes. Learning a new language and logic became, in a profound cognitive sense, the first stage in the cultural change process. x  25. At the level of the external change agents, CIESAS's findings were completely consistent with the earlier conclusions of the value of the mentor company supplier-chain networks and the crucial role played by the university consultants as key agents of culture change. At the level of the enterprise or factory, the CIESAS team found three factors to be important: (i) the nature of the so-called "inter-disciplinary group", who usually held multiple roles within their companies and had to balance their environmental responsibilities with other management and work responsibilities, and whose main role was to communicate the messages from the training course to the factory's personnel; (ii) upper management's "ownership" of the process, that is, how much it internalized the EMS philosophy and framework and was willing to incorporate it into the company's overall business strategy; and (iii) the participation of the plant-level workforce in the implementation of the EMS. In particular, successful EMS implementation also seemed to depend upon a "downward" dissemination process which "empowered" workers to participate in environmental management through adaptation of the system to their work habits and stations. 26. Finally, the CIESAS study provides 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 is 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. Replicating the Pilot 27. The pilot evolved during the course of the first phase, resulting in a practical model for delivering EMS support to SMEs. These successful experiences of GEMP include: - The importance of the large company-SME network as a vehicle for recruiting and motivating SMEs. As mentioned earlier, about half of the SMEs, that fully participated in GEMP's first year of activity, stated that they would not have participated in the Pilot if they had been invited by either the government or a university. * The critical role of the university consultants in helping the SMEs with hands-on implementation support. From providing training to workers in general environmental concepts to advising on management systems and legal requirements to just being an "extra pair of helping hands", this support was rated by 62% of the SMEs as "very important" or ''critical". * Provision of "just-in-time" training and simplified formats made the training sessions more manageable. Further clear definition of milestones gave the SMEs achievable targets at the end of each training session. * Regular review session helped to share and compare different approaches, as well as gave the SMEs networking opportunities. It is also worth noting the importance of maintaining the same workgroups over time to build cohesiveness within the group. These review sessions xi  gave "teeth" to the milestones - the importance of talking about their own successful achievements in front of their peers was additional incentive for the SMEs to implement their training in time for the next review session. * There was considerable industry "ownership" of the Pilot. One individual from a large company took on the role of "champion" of the Pilot, encouraging other large companies to participate, leading the process of setting project objectives and milestones, and advocating the project before regulatory authorities. Decision making and initiative were also in the hands of the industry participants from the start - with the large companies matching the World Bank's funding for the international consultant; the SMEs and large companies jointly making key decisions, such as whether to use the ISO 14001 EMS model without adaptation; and the companies jointly participating in the identification of internal barriers to better environmental management, the development of formats, and the establishment of project milestones. * The initial focus on senior management was important in giving the Pilot priority within the participating firms. The companies themselves identified senior management commitment as a key hurdle to achieving better environmental management, and as a result at the start of the Pilot, a two-hour session on EMS was scheduled purely for senior management of the large and small companies. * The Pilot's convenio and other contracts between the various parties provided the legal terms of reference. Given the large number of players involved in the Pilot, these documents were a way of clarifying the roles and responsibilities of the participants. * Confidentiality of discussions and data was maintained, and this was essential in allowing the companies to talk freely about their environmental issues (particularly those related to compliance). 28. Clearly large scale replication of this Pilot needs to draw upon and utilize the successful experiences from this Pilot, as noted above. However, future such projects will benefit from a number of lessons learned through GEMP. The major areas that were identified for further improvements include the following: With hindsight, the large companies required greater support in EMS implementation than provided by GEMP. As noted earlier, many of the SMEs left their mentors behind with respect to EMS capabilities, and future projects will help to strengthen the mentor-SME link and utilize this even more effectively by providing assistance to the large companies as well, in return for the large companies' financial contributions. The mentor-SME link would also be further strengthened if the large companies were required to implement an EMS in part or all of their installations, as well as commit to auditing their SMEs' EMSs at periodic intervals. xii  * During GEMP, the university consultants, mentors and SMEs all attended training sessions together. Future pilots need to provide training to the large companies and university consultants in advance, so that they can better support their SME clients. * GEMP involved at any one time as many as 60 to 70 participants. Despite convenios and contracts between the various parties, misunderstandings arose due to different expectations on the part of these parties, partly due to each contract being negotiated separately from the others, with only the priorities of those concerned individuals. Future pilots need to allocate a significant amount of time in building joint consensus of expectations of all the players and establishing an open communication process to avoid misunderstandings * In GEMP, the role of the university consultants turned out to be more critical than originally anticipated. As a result, not much thought was given to the incidental expenses for university consultants (such as for travel to SMEs). This needs to be taken into account in future Pilots. * The relationship of the Pilot to national, state and local regulatory programs needs to be well- defined. GEMP took place during a time of important changes in Mexico's industrial regulatory programs. Therefore, the relationship of the project to the emerging systems could not be defined. For future projects, it will be important to define at the outset the rights, responsibilities, and recognition the participating companies will receive within the regulatory system. In other words, the companies need to know what is expected of them and what they will receive in return. 29. In line with the lessons learned from the Pilot and the clear direction of the culture change study, scaling up to a national level program needs to further mainstream this initiative with other more broad initiatives, such as (i) linkage with industry associations and centers of general assistance to industry; and (ii) linkage of this Pilot with other supplier development programs in large companies, such as for quality management. In doing so, these linkages will result in mainstreaming the environment within the general business needs of the firms. In this way, the small-and-medium sized business sector can contribute to broader societal goals of environmental sustainability while increasing its chances of economic survival in a world of global markets and competitiveness. 30. Another potentially interesting linkage that could be tested in future pilots would be to use geographical proximity (for example, an industrial park, a small industrial town, or firms located around a water basin) as a basis for choosing firms. Whilst this might lose some of the advantages to be gained (as was the case in this pilot) from commercial linkages, it would have the advantage of being able to better measure changes in the location's environmental quality, as well as allow more collaboration between the local neighborhood, the authorities and the firms themselves. Further, the proximity of firms might bring significant economies of scale to their control processes for managing effluents and hazardous waste. 31. Linkages of a national program with other industrial and environmental initiatives within the country, such as clean production programs, credit lines for industry, general programs for xiii  assistance to industry (e.g. enhanced competitiveness /export development programs) is also essential. EMSs and promotion of EMSs ought to fit within the country's broad strategy for industrial and environmental management. 32. Finally, a critical aspect of GEMP was the involvement of the universities and through their involvement, the building of local capacity in EMSs. University courses related to environmental management (whether through engineering, law, industry, environment degrees) could provide a flow of people who could potentially assist SMEs. Indeed, GEMP could equally be viewed as a model to deliver hands-on training experience in EMSs to such people. Sustainable replication at the national level needs to consciously build this in-country capacity in a systematic manner within several organizations (to prevent monopolies) and to encourage information exchange and sharing between these bodies in order to build a strong national foundation, by assembling simple tools such as tried and tested formats, case studies, compliance check lists, EMS training modules, and a basic database of sectoral level information on raw material usage per unit of output in environmental leader firms. Conclusion 33. In conclusion, the GEMP model appears to be a practical tool to help SMEs to improve their environmental performance. The preliminary results of GEMP are consistent with the "new environmentalism" and illustrate the key role EMSs can play in improving environmental performance. The GEMP model itself demonstrates the value-added of using partnerships to target and support SMEs. One question, however, remains unanswered: what policy tools can be employed to best promote such initiatives? As these potential tools are considered, it is useful to keep two principles in mind: government can promote, but not require, the adoption of particular management methods within firms, and industrial environmental initiatives do not relieve industry of the responsibility to comply with basic regulatory requirements. 34. As described earlier, there is a general belief that SMEs, which usually supply domestic markets, lack the incentives to implement a formal EMS, such as ISO 14001 due to the fewer potential market benefits. It is interesting to note, however, that the CIESAS study indicates that an important factor in whether a firm did or did not institutionalize an EMS was, in particular, the perception that an EMS was needed to penetrate or increase both local and export markets, particularly in an area such as Guadalajara with a high concentration of multinational firms. Whilst, the pilot shows that large companies have a kind of leverage over their small suppliers which regulatory authorities lack, it is also important for wider-scale replication of the pilot to take a closer look at the potential government role. 35. A government's decision on how actively it should promote such a model should be subject to (i) an evaluation of the significance of pollution from SMEs, and (ii) the potential benefits from bearing the costs of such an activity. Examples of the latter are the reduction of costs as a result of reduced inspection frequency in the SME sector, enhanced economic performance by SMEs addressing enviromnental concerns more cost-effectively, and better environmental performance from this sector. It is interesting to bear in mind that at the start of GEMP, many of the SME representatives were not aware of all their legal regulatory xiv  requirements. The process of implementing an EMS heightened this awareness. Further, many SME representatives commented in the February 1998 progress 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. 36. If a government were to decide to support EMS adoption by SMEs, a range of policy tools is available for use. Low cost options include promotional activities for the creation of private sector EMS networks, public recognition of participating companies, reduced or accelerated administrative requirements (such as faster environmental approvals and permitting procedures or fewer inspections), and efforts to harmonize environmental and other regulations with EMS implementation. More active promotion could include partial financing for EMS training, or even fiscal incentives for companies with certified EMSs. At the very least, governments could learn much from further similar pilots, particularly regarding the difficulties faced by small and large firms in complying with regulations, how to build partnerships for improved environmental management, and finally, how to develop more effective regulatory frameworks. 37. Finally, depending on a government's decision to promote such a model, a number of World Bank instruments could be used to support such initiatives in developing countries. In this particular case, due to the pilot nature of this activity, the costs of the pilot' were borne by the Bank from its own budget as part of its non-lending services program, as well as through grant financing from the Norwegian Government, and by the participating large companies. In future initiatives, potential Bank instruments that could be used to finance such pilots, include stand-alone Learning and Innovation Loans (LILs) as well as regular Bank loans for environmental management or improved industrial competitiveness, where a national program based on this pilot could be one component of that loan. Additionally, the Bank could play an important role in acting as catalyst and facilitator to help build partnerships between private and public entities (for example, through its Business Partners for Development Initiative) or assist in the interchange of lessons learned as a result of such initiatives (through, for example, programs implemented by its Economic Development Institute). The cost of this pilot was approximately US$ 135,000, excluding Bank staff time and travel costs. xv  THE GUADALAJARA ENVIRONMENTAL MANAGEMENT PILOT 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). 2. This report presents the lessons that can be drawn from the pilot, based on experience up to February, 1998. The approach adopted by the project is first placed in the context of both the "Qnew environmentalism" identified by the World Bank in 1996, and also the process of environmental modernization currently underway in Mexico. Subsequently, the local context, design and objectives of the pilot are discussed in detail, before an examination of the preliminary results. The report ends by considering how the experiences and lessons of the pilot can be applied to replicate the approach in other settings. 1. ENVIRONMENTAL MODERNIZATION 3. The Fall, 1996, edition of the World Bank publication "Environment Matters" presented the results of an extensive review of the Bank's environmental activities.' Based on this review of investments covering a wide variety of environmental problems, from industrial and municipal pollution, through rural environmental management, biodiversity conservation and institutional strengthening, the article identified the emergence of a "new environmentalism", that marks a significant departure from the traditional approach to environmental policy-making adopted by OECD nations over the last 30 years. 4. Environmental modernization can be defined as the process of institutional transformation and policy reform that allow the principles of the new environmentalism to be implemented. In this chapter, we first look at the implications of these principles for the management of industrial pollution, and in particular, how these principles highlight (i) the need to form partnerships for environmental management, (ii) the value of establishing environmental management systems (EMSs) within industrial facilities, and (iii) the importance of flexible regulatory regimes to allow such partnerships and EMSs to be fully effective in reducing the cost of environmental improvement. Subsequently, we briefly examine why SMEs present a special case for assistance in applying these principles. 6 Environment Matters, World Bank Environment Department, Fall 1996. See also Andrew Steer, "Ten Principles of the New Environmentalism", Finance & Development, December 1996. 1  A. THE NEW ENVIRONMENTALISM AND MANAGEMENT OF INDUSTRIAL POLLUTION 5. The review of the Bank's environmental activities conducted in 1996 identified ten principles that form the basis of the new environmentalism. To briefly summarize, these principles are: * set priorities carefully, to ensure the highest economic return from scarce financial resources; * adopt the most cost-effective solutions through a multi-disciplinary approach to problem solving; * harness "win-win" opportunities first, through policies that achieve environmental goals as a by-product of more efficient resource use; * use market instruments where feasible, to take advantage of the economic gains their flexibility offers compared to traditional command and control regulation; * economize on scarce administrative and regulatory capacity, by adopting less "enforcement- intensive" policies, and leveraging the interest of non-governmental and community groups in environmental protection; * work with the private sector, not against it, to achieve innovative least cost solutions; 3 involve citizens thoroughly, to better establish priorities, identify cost-effective solutions, ensure commitment in implementation, and build constituencies for change; 3 invest in partnerships that work, combining the resources and interests of civil society, the private sector and government; - remember that management is more important than technology; and, - incorporate the environment from the start, since the biggest gains can be made at the design stage. 6. These principles were distilled from experience in dealing with a wide range of environmental issues, encompassing both "green" challenges of natural resource management, and "brown" questions of industrial and municipal pollution control. When focused more directly on the problem of industrial pollution, we believe that these principles can be further condensed into three recommendations, each relevant at a different level of social interaction. 7. First, at the broad level of interactions between multiple users of the environment, the principles stress the value of building partnerships between and within the private sector, community groups, NGOs, and government. These partnerships allow environmental concerns to be identified more clearly, facilitate the negotiation of solutions, permit a more effective exchange of knowledge and expertise, and build multiple sources of social pressure to ensure that environmental commitments are honored. 8. Second, at the level of the industrial facility, the principles indicate the need to set cost- effective priorities through a multi-disciplinary approach within the enterprise that takes advantage of win-win opportunities. Further, the principles emphasize that management is more important than technology, and that environmental considerations should be included at the design stage. Together, these guidelines sketch out both the need for, and the fundamental 2  characteristics of, a system that allows the environmental impact of an industrial facility to be managed strategically as part of the business - an environmental management system. 9. Finally, at the level of regulatory interactions between government and industry, it is recommended that flexible mechanisms are applied to ensure that environmental goals are achieved at the lowest economic cost. Without such flexibility, it would not be possible to fully benefit from the EMSs established within industrial enterprises, nor the partnerships between the users and regulators of the environment. 10. We briefly discuss some of the international experience that forms the basis for each of these recommendations below, before turning to the particular circumstances of small and medium-sized enterprises. B. PARTNERSHIPS FOR ENVIRONMENTAL MANAGEMENT 11. As countries have strengthened their environmental ministries and adopted environmental regulations, the realization has grown that the government is only one player in the complex set of interactions which define environmental management, and that effective partnerships are needed at all levels in order to tackle environmental issues successfully. The limited budgetary and administrative resources available to environmental ministries relative to their more powerful, longer-established sectoral counterparts, have compounded this awareness. 12. Three principle forms of partnership that can help lead to more effective environmental management, and specifically management of the environmental impacts of industrial activity, can be identified on a functional basis. First, in resolving local disputes over a particular impact, the chances of success are greatly enhanced if local citizens are actively involved. Such participation allows better advantage to be taken of local knowledge of priorities and potential solutions, and builds stronger commitment to the resolution eventually achieved. Second, partnerships that link sources of expertise and experience in dealing with industrial pollution issues can significantly enhance the ability of individual facilities to deal with these challenges. Finally, forums that allow regulators to consult with industry representatives in establishing environmental policy can help identify more cost-effective approaches to reaching policy goals, and can strengthen compliance with the mechanisms developed. 13. The Bank's portfolio has reflected the growing realization of the importance of partnerships, with project designs which increasingly include greater roles for civil society, from environmental education campaigns to build awareness, through the establishment of processes to allow the public to participate more directly in environmental impact assessments, to the example of the PROPER scheme in Indonesia, whereby industrial environmental indicators are published, permitting the public to play a critical role in encouraging industrial environmental compliance. The Bank's treatment of the interaction between industry and the environment also reflects this pattern. In a review of Bank industry and environment projects,' Ahmed suggests ' Kulsum Ahmed, Industry and Environment: Patterns in World Bank Lending, IEN Staff Report, February 1995. 3  that a trend can be observed whereby project design has evolved during a period of 20 years, from the inclusion of an environmental component in an industrial project (Type I) to environment related industrial projects (Type II) to inclusion of industrial components in general environment projects (Type III). C. ENVIRONMENTAL MANAGEMENT SYSTEMS 14. An Environmental Management System (EMS) is a systematic approach to controlling the environmental effects of an organization's activities. Unlike a pollution control standard, an EMS standard does not set specific pollution targets, but establishes the required elements of an effective system. Consistent with the new environmentalism, an EMS provides the tools for a holistic approach to identify and tackle an organization's significant environmental aspects. In doing so, it prevents technological predeterminism, in that neither clean technologies or end-of- pipe treatment or good housekeeping are encouraged per se. It also places the responsibilities for operating the system squarely in the hands of the organization itself, its management and its employees. 15. Evidence for the value of an EMS in ensuring superior environmental performance is provided by a survey of environmental management in Mexican industry, conducted in 1995. An analysis of the results of this survey by the World Bank showed that the more EMS elements a plant has in place, the better the facility's environmental performance.8 The analysis also underlined the importance of fully incorporating the EMS into mainstream business procedures, since the provision of environmental training and the assignment of environmental tasks to specialized environmental personnel was found to be less effective than involving personnel with general production duties. 16. It is important to note that promotion of EMSs does not obviate the need for a strong framework of environmental regulation, nor does the adoption of an EMS substitute for compliance with environmental regulations. Rather, an EMS should be viewed as a tool to help ensure cost-effective compliance, and to encourage the continuous improvement of environmental performance beyond the regulatory minimum. (1) The ISO Standard for Environmental Management Systems 17. In the recent past a number of voluntary EMS standards have been developed, including the British Standard Institute's BS7750, published in 1992, and the European Union's Eco- Management and Audit Scheme (1994). In the same year that BS7750 was published, the International Standard Organization (ISO), an international non-governmental organization, made a commitment to identify ways it might help promote "sustainable business development" in support of the U.N. Conference on Environment and Development, held in Brazil in June 1992. To this end, ISO formed the Strategic Advisory Group on the Environment (SAGE). 8 See footnote 2. 4  Recognizing the desire to improve environmental performance in the business community, and conscious of the potential trade barriers that might be raised by competing standards, SAGE recommended the formation of a Technical Committee to develop voluntary international standards for environmental management systems and tools. Through an iterative process of consultation, building partnerships between governmental and private sector representatives from its 112 member countries, ISO published the ISO 14001 standard on Environmental Management Systems in 1996. While each EMS model presents its own strengths and weaknesses, the ISO standard has attracted particular attention, largely because of the importance of ISO in the global market place. 18. The ISO 14001 standard identifies a series of elements as requirements of an effective EMS, including: * an environmental policy, defined by top management and communicated throughout the organization, specifying commitment to compliance with environmental legislation, pollution prevention, and continual improvement in environmental performance; * planning, starting with the identification of environmental aspects and legal requirements, from which objectives and targets are set and incorporated into an environmental management program that defines responsibilities, means and time-frame; - mechanisms for implementation and operation of the environrmental program, covering the structure of responsibilities, training, communication, documentation, and emergency preparedness; - procedures for checking and corrective action, especially for monitoring and measurement, correcting nonconformance, maintaining records, and conducting periodic audits; and, - management review of the EMS, to ensure its continuing effectiveness. 19. This model was developed through a protracted process of international negotiation, and as a result reflects a number of compromises for which it has subsequently been criticized. Among these, two weaknesses have attracted particular attention. First, the ISO 14001 standard does not require that a certified organization be in compliance with environmental legislation, only that the environmental policy include a commitment to compliance, and that the EMS include a mechanism for identifying regulatory requirements and establish a plan for achieving them. Second, an ISO 14001 certified organization is only required to publicly communicate its environmental policy, not its environmental aspects and program. (2) Environmental Management Systems and Environmental Cultural Change 20. A growing body of evidence indicates that without fundamental changes in corporate outlooks, values, and behavior it will be difficult to resolve the serious problems of pollution in industrial societies. This holds true whether industrial enterprises are large multinational companies, or medium or smaller-sized, national firms. Environmental change is part of a broader process of culture change which must take place within industrial enterprises as well as in other segments of society if economic development is to be envirorimentally sustainable. 5  21. EMSs appear to be an excellent instrument for both understanding and promoting cultural change within industrial enterprises. This is because EMSs focus attention upon a number of critical aspects of business organization, including productive processes and technologies, management styles and systems, worker education and participation, internal communications, and relations of industrial enterprises to regulatory agencies, local governments, and neighboring communities. In doing so, they mainstream environmental aspects into the organization's business management system. Further, the process of establishing an EMS requires "buy-in" from different levels of management and from the employees of the company in order to successfully operate such a system. This suggests that as a result of the successful implementation of an EMS, a change in environmental culture occurs within the organization, where culture change can be defined as a change in environmental behavior as a result of increased environmental awareness and empowerment. D. FLEXIBLE MECHANISMS FOR ENVIRONMENTAL REGULATION 22. The economic gains that can be achieved through the greater flexibility of Market-Based Instruments ((MBIs) rather than Command and Control Instruments (CCIs) are well understood in theory, and are increasingly being realized in practice, for example through the application of wastewater charges in the Netherlands, China, the Philippines and Colombia. In addition, programs that support and recognize voluntary initiatives, including eco-labelling schemes, enviromnent audits, and EMSs, such as ISO 14000 and Responsible Care, provide a flexible mechanism through which industry can respond to wider environmental concerns. By broadening the possible scope of responses, voluntary programs also help empower non- regulatory stakeholders with an interest in industry's management of the environment. 23. Such flexibility is essential if the potential benefits of the partnerships and EMSs discussed above are to be fully realized. Illustrating this point, the corporate headquarters of Du Pont analyzed about four thousand proposals for environmental investments submitted by the corporation'sindividual businesses between 1994-1997. The amount of waste that could be reduced through "efficient" voluntary initiatives was more than five times the reduction achievable through projects required for regulatory purposes, and the cost of the regulated projects, per pound of waste avoided, was more than 10 times higher than that of the non- regulated initiatives.9 E. THE SPECIAL CASE OF SMALL AND MEDIUM-SIZED ENTERPRISES 24. The SME sector in many countries is a significant portion of the total industrial sector. In the case of Mexico, 89% of manufacturing industrial establishments are so-called "micro" facilities, with less than 15 employees, and a further 10% are SMEs (less than 250 employees). Together, micro and SME facilities account for about 50% of employees in the manufacturing 9Personal communication with Darwin Wika, Director Safety, Health and Environment, Du Pont, April 1998. 6  sector.'