Addressing the environmental challenges of micro, small, and medium enterprises
Although Bangladesh has achieved rapid economic growth in recent times, the same has been achieved by the depletion of natural resources and the deterioration of environmental quality.
Unless acted upon immediately, there are little chances of saving the resources for the generation.
The MSME sector (micro, small, and medium enterprises sector) can be an engine of economic growth and equitable development which touches upon the lives of the most vulnerable, most marginalized. It can address the national priorities of employment generation, poverty reduction, and regional imbalance.
Although MSMEs have high social and economic significance, they face several challenges associated with resource consumption and environmental degradation. Some studies have revealed that the pollution per unit of production is generally higher in MSMEs than that of the corresponding larger units.
One of the fundamental challenges towards achieving better environmental performance is the lack of knowledge and information concerning environmental issues. There is a general perception among the MSMEs that the only driving force to achieve environmental performance is legislative compliance.
At the same time, it is believed that their small-scale production operations have very little or no impact on the environment and that the relative resource saving potential is much less.
Furthermore, our entrepreneurs are myopic and are highly concerned with short-term cash flows and profits. With regards to any investment, they tend to discount the future more, and hence the net income in the short run falls.
Because of this reason, they are disinterested in undertaking investments in clean technology deployment. To improve the environmental performance of MSMEs, it is of utmost importance to disseminate the concept of economic benefits created by environmental performance and closed loop approaches.
Making technical and management expertise accessible to the MSMEs can improve their environmental performance considerably.
A key obstacle facing the MSMEs sector is limited access to financial resources, since most of the MSMEs pursue a survival business strategy. As a consequence, MSMEs find it difficult to adopt full-scaled EMS (Environmental management system) such as the ISO 1400 model or the installation of pollution abatement technologies.
Moreover, investment on capital for major process improvement is another issue of concern due to lack of accessibility to financial resources as they fail to attract funding from local, regional, national financial institutions -- and also from international institutions and organizations.
Limited R&D activities and lack of technical expertise are the drawbacks of MSMEs. The government can introduce some fiscal instruments like credit linked capital subsidy schemes for technology upgrades, credit guarantee fund schemes, integrated infrastructure development schemes, etc.
The challenges faced by the MSME sector in Bangladesh in regards to resource inefficiency and the use of obsolete technologies are enormous.
The sector also generates significant environmental pollution. In Bangladesh, where there are thousands of MSMEs generating varying levels of pollution, and where they are plagued with inefficiencies in resource consumption, applying fiscal and other economic instruments can be more efficient compared to the use of conventional command and control measures which include the bureaucratic enforcement of a mandatory emission standard.
The term “environmental fiscal reform” (EFR) was first used in the end of the 1990s in industrialized countries and became an important issue in global politics in 2005 followed by a report published by the OECD Development Assistance and the World Bank.
According to the OECD report: “EFR refers to a range of taxation and pricing measures which can raise fiscal revenues while furthering environmental goals. This includes taxes on natural resource exploitation or on pollution.
“EFR can directly address environmental problems that threaten the livelihood and health of the poor. EFR can also free up economic resources or generate revenues that can help finance access to water, sanitation and electricity services for the poor.”
The World Bank report is referring to the concepts of EFR in the same way as the OECD is stating that “this is achieved by providing economic incentives to correct market failure in the management of natural resources and the control of pollution.”
Four major benefits of EFR are:
(i) EFR can address key concerns for environment degradation
(ii) EFR instruments can reduce abatement expenditures of negative environmental impacts and at the same time generate revenues
(iii) Fiscal instruments can help reduce environmental impact -- especially on poor and vulnerable groups -- by helping the poor get access to financial resources for various basic services like water, sanitation, health, and electricity
(iv) EFR can help increase transparency and accountability if it is designed and applied in a cost-efficient way with full participation from relevant stakeholders.
One of the significant co-benefits of EFR is the environmental steering effects. This essentially makes the polluter pay for the external costs they impose on society, thereby encouraging internalization of externalities.
They realign the rights and responsibilities of firms, groups, or individuals to incentivize them to act in an environmentally responsible manner. Thus, it will help to inculcate behaviour among citizens that will prevent inefficient exploitation of resources and control further degradation of environmental quality.
These instruments will drive up the price of environmentally damaging inputs and increase the returns to more sustainable approaches.
The exploitation of publicly owned/controlled natural resources may also be prevented by appropriate pricing through the use of taxes, royalties or other pricing instruments as part of EFR.
Economic instruments also have the potential of generating large amounts of revenue that can be used for the purpose of environmental conservation. However, it is important to understand that the success of such economic instruments and possible ease of implementation largely depends on the regulatory and relevant policy frameworks.
Further, given the growth imperatives in the country, it must be clearly understood that any reform will require the acceptability of key stakeholders like policy-makers and industry representatives, amongst others.
A major challenge associated with tax imposition is in estimating the true cost of pollution. Agencies that are responsible for monitoring and enforcing taxes should also have reliable information on environmental emissions that are updated on a regular basis.
So EFR requires a good policy design by identifying winners and losers to build a well-targeted compensatory measure. Such as, pollution-based charges may have significant benefits, but it may increase the costs for resource intensive MSMEs.
To compensate those MSMEs, government can put back the revenue in the system collected from these charges for creating awareness among the potential losers, giving grants during capital investment for resource-saving technologies, or providing low-interest loans for pollution control projects.
Despite limited data, MSMEs are undoubtedly the backbone of non-farm job creation in Bangladesh. Some 99% of all non-farm enterprises fall within the MSME categories, providing employment to 20.3 million Bangladeshi workers in 2013.
In line with Vision 2041, the government of Bangladesh has increasingly focused on MSMEs. It’s high time that the government took necessary initiatives to address the environmental problems that are being created by the MSMEs.
Proper policy can provide a platform for improving the environmental performance of MSMEs and make them more competitive in the global value chain.
Rahnuma Sultana is a freelance contributor.