The Governments worldover are desperately seeking investment dollars for investments in the infrastructure sectors. Most tend to concentrate on the visible and the so called sexy stuff - large/sprawling urban jungles, highways, energy plants, transport hubs etc. But, a majority of the Governments find it difficult to attract significant private investments in the environment sector. The sector has grown either due to Government sponsored projects where private industry plays a "Design, Build & Operate" role or on the back of a penalty based regulatory regime where polluting industries have to comply with the regulation which then attracts private investments.

However, with growing environmental consciousness the private sector is realising that investing in green business also makes economic sense. A hotel chain in India recently convereted its flagship properties to fully sustainable developments. They chose to use energy efficient energy systems, promoted greater use of recycled water, brought in new building materials that captured heat in the winters and reflected it in the summer. The developers recovered their investment in under 3 years by saving huge sums just on their energy and water bills.

There are numerous such examples out there. So how can the Government create a climate that brings in more investments into the environment sector? The answer is simple - focus on the regulatory support to investing companies and then let them get on with it.

We use the following example to support our case:

An industry cluster discharges over 30 million litres per day of effluents into a river stream every day. The industry for years has been under regulatory pressure to sort out its effluents or face penalties and/or closure orders. The Governments and environment regulators are finding it very difficult to get the industry to comply with environmental standards. It isn't easy to shut the industry down as many livelihoods depend on it for their daily survival. Thus the regulators are only left with one measure which is to keep on issuing penal notices to the polluting companies which really doesn't deal with the problem as the polluting companies have just incorporated the penalties into the business operational costs.

The cluster has many companies - large and small. Since the effluents are discharged into the ground and through the sewerage system, the proposed solution is what's called a Common Effluent Treatment Plant. There are private sector investors that are keen to invest the entire capital expenditure for the set up of the CETP. The revenue model that they propose is to provide the industrial effluent discharge as an input and supply treated water back to the industry at a pre-determined rate. The industry cluster is very happy with this solution as they get guaranteed supply of clean water which is essential for its operations. The private operator will not only recover its investment over a few years but also generate profits. The Government and other stakeholders will be happy that the industry cluster will stop polluting. So a market based framework will provide the necessary solution.

However the solution does have certain challenges for it to be implemented.

1. What if the some companies within the cluster refuse to pay?
The answer is to set up a statutory body which on behalf of the industry cluster will enter into contractual obligation with the private operator. The industry cluster companies will be statutory members of this body. There must also be a mechanism - if the company doesn't pay its dues, then the supply of water should be stopped instantaneously.

2. Who will be responsible for oversight of this statutory body?
The cluster representatives, members of the Government and members of the public.

3. What if the company carries on drawing water from the ground?
The answer is to ban all ground water drilling.

These three simple regulatory frameworks can provide a robust and feasible solution to a very old and critical problem.

There are numerous such instances where the solutions in the environment sector can be made to work using market based principles. However only those will see the light of the day which have the support of the Government in providing strong regulatory framework.