Small Business and Environmental Technologies:  The Challenges and Opportunities
Testimony Before the Senate Committee on Small Business
Boston, Massachusetts
June 1999

Thank you for the opportunity to participate in this hearing. The topic is vitally important, and you have assembled an excellent group of small business representatives to help address it. I hope I can provide some useful context for your inquiry. The future of this industry should be of great concern to all, considering the role it plays in meeting some of this Nation’s key economic and social goals.

An Industry with A Record of Success
As you may know, the Technology Administration of the Department of Commerce recently published a profile of the U.S. environmental industry, looking at the structure of the industry, the forces shaping it, and the challenges it faces. This was the first comprehensive look at this complex and important industry, and we have been gratified by the positive response we have received to our work. Let me share with you a few of the important findings of the report that are especially relevant here.

	“The U. S. environmental industry has been an American success story.”

The U. S. environmental industry has been an American success story. And it has played a vital role in our economy. In the past 25 years, the environmental industry has grown into a $186 billion industry that employs 1.3 million Americans. It is comprised of more than 33,000 private sector companies and generated $18.4 billion of revenues from exports in 1997, with a positive trade balance of $9.3 billion. Especially important for today’s discussion, small businesses account for 42% of private sector revenues in the environmental industry. Firms with less than $10 million in revenue appear to generate a very significant share of that portion. In addition, a recent survey by Environmental Business International showed that 99 percent of the businesses in the industry were small businesses, and that 28 percent of the revenues comes from small business.

The environmental industry’s products and services have been used by ever major U.S. industry. It has provided its customers the means to comply with environmental regulations enacted during the past 25 years. And, as a result, we have a cleaner, better environment.

	“The industry is at a critical crossroads—a time of great challenge and opportunity—for both the industry and those in government who care about it.”

An Industry in Transition

While successful in the past, today the environmental industry finds itself in a period of transition. The industry is at a critical crossroads—a time of great challenge and opportunity—for both the industry and those in government who care about it.

Where does the industry stand today? It is showing signs of maturing:

• Annual growth in the environmental industry has plummeted from 10 to 15 percent in the 1985 to1990 period, to 1 to3 percent between 1996 and 1998.

• Median profit margins that routinely exceeded 10 percent in the late 1980s are now in the 2 to 3 percent range.

• Venture capital investments in environmental technology companies have fallen steadily from more than $200 million in 1990 to less than $30 million in 1996.

• There is over-capacity in many segments of the industry (including hazardous waste management, analytical services, consulting and engineering, and air pollution control equipment).

• With supply now exceeding demand, it is a buyer’s market, and prices are declining in real terms.

• The industry is in a period of consolidation. Many of the relatively few large environmental companies have accelerated their growth in the past few years through acquisition. Most segments are consolidating at the top, as large and mid-sized firms are merging.

Declining demand, declining prices and increased competition have all added up to declining financial performance. Viewed through the lens of Wall Street, during the period from 1991 to 1998, the NASDAQ appreciated 24 percent annually, and the Dow 17 percent annually. In contrast, the Environmental Business Journal Index of 240 environmental companies gained only 5.5 percent annually.

Our study identified a number of forces that are changing the environmental marketplace. Customers in both the private and public sectors are becoming increasingly sophisticated—moving away from traditional approaches to compliance and toward the integration of environmental concerns into broader business decisions. Overall customers are shifting from simple compliance to solutions that turn environmental costs into productive investments.

	“the global market is expected to total $600 billion by 2010. Yet, only 10 percent of the U.S. environmental industry’s revenues are generated outside the United States.”

Equally important, the market for environmental products and services is increasingly a global one. In 1996, the global market was worth $452 billion, with $280 billion of that represented by overseas markets. And the global market is expected to total $600 billion by 2010. Yet, only 10 percent of the U.S. environmental industry’s revenues are generated outside the United States. By comparison, Japan and Germany each exported more than 20 percent of industry revenues.

Much of the U.S. environmental industry is at a competitive disadvantage in overseas markets. Most of the industry’s 30,000 private sector companies are small, and these small firms have little capability or inclination to export, especially compared to their Western European and Japanese counterparts, many of which are subsidiaries of large parent corporations with deep pockets.

In the face of all these challenges in domestic and foreign markets, it is not clear how well the industry will respond. The industry cut its teeth on the “command and control” system of environmental regulation in our country. However, dependence on this system of regulation to create customer demand has narrowed the competitive strategies of the industry and channeled its products and services toward compliance objectives.

	“The industry leaders we spoke to believe that the pace of environmental improvement was being slowed by the “command and control” system.”

The industry leaders we spoke to believe that the pace of environmental improvement was being slowed by the “command and control” system. First, that system offers little incentive for technology innovations or investments that exceed acceptable performance under the environmental regulations. And it offers no reward for above average performance. Second, the system offers little encouragement to the linking of environmental and economic decisions—a key characteristic of emerging international demands. Instead, environmental compliance is regarded as a cost imposed by government.

The “command and control” system is also believed to discourage investment in the development of new technologies. The development of new technologies is a time consuming process commonly expected to take at least 5 to 10 years to bring a new invention to market. It is a challenge to find capital for such a process since investors usually expect a return within 3 to 5 years. The environmental regulatory process stretches the time to market for environmental technologies even beyond the 5-10 year line, making it more difficult to find financial support for new technology development.

Moreover, single media, source-specific regulations force environmental decisionmakers to focus on the trees rather than the forest. Each requirement covering each category of environmental release must be met in an independent process and on its own schedule. And each requirement is based on the performance of a technology that was commercially available when the rule was developed and promulgated. This type of regulatory approach crates disincentives for integrating environmental and economic decision-making and discourages innovation. It pushes managers to select end-of-pipe solutions to each separate problem.

	“If the industry is to remain an essential and growing part of the U.S. economy, it must adapt to new market realities, and develop products and services that go beyond clean-up and compliance.”

The Future of the Industry

Industry leaders and many of their customers suggest that the industry is at a critical cross-roads in light of these changing domestic market needs, growing competition and rapid international market growth, which is generated by a qualitatively different regulatory approach than “command and control.”

If the industry is to remain an essential and growing part of the U.S. economy, it must adapt to new market realities, and develop products and services that go beyond clean-up and compliance. Industry leaders believe they must emphasize both economic progress and environmental excellence in customers’ operations, while continuing to help their customers make up for past negligence. In short, industry members must become resource managers as well as environmental managers for their customers, more fully integrating their products and services with the core business interests of their clients.

The industry must also assume a more global posture. The industrializing world— the big emerging markets—have the potential to become the big emerging polluters or, hopefully, the big emerging customers for environmental products and services. Changing the export picture in the industry will require strong and effective cooperation between government and industry. Our own International Trade Administration is working with industry, directly and through the Environmental Trade Advisory Committee, to improve industry participation in foreign markets. ITA provides counseling to environmental companies, information concerning foreign market opportunities and support in carrying out domestic and foreign conferences and trade events. It has also created a new federal-state partnership, the States Environmental Exports Initiative, to strengthen the support available to exporters, especially small exporters.

Let me tell you a story about a small environmental business that put these government resources and its own initiative to good use to increase its exports. Schloss Engineered Equipment of Aurora, Colorado is small, woman-owned business providing services to consulting engineers in the planning of major environmental facilities. While exports were always part of the company’s operations, Kristy Schloss, President of the company, was able to increase exports by 900 percent since 1992. She attributes this success to her involvement in the activities of the Small Business Administration, including its Export Assistance Center and her participation in the Department of Commerce’s environmental export programs. Of course, she has also worked hard at learning the needs of her customers. This kind of story needs to be replicated across the country if the industry is to take advantage of the opportunities presented by a global market.

	“changes are needed in the role of government.”

Other changes are needed in the role of government. The government has played a significant role in shaping the domestic markets for environmental products and services. Can it shift its role to support the twin goals of growth and a clean environment? Can it bring environmental regulation into greater harmony with economic goals?

Industry executives and many customers have identified three steps government must take: (1) reform of the regulatory mission of the EPA; (2) reform of government’s own environmental management; and (3) revamped government support for technology development and diffusion.

With respect to regulatory reform, industry leaders suggest two guiding principles to ensure that polluting behavior will be penalized and excellence will be rewarded. First, maintain a regulatory baseline to define the “floor” for environmental progress. Second, rely on performance based policies (including market mechanisms) and information-based policies to reward environmental excellence and encourage integration of environmental and business decisions.

When government agencies are customers of the industry, industry leaders suggest they should procure performance, not hours and effort. Among their suggestions are the adoption of performance-based procurement and establishment of a procurement cycle that are in sync with private sector investment cycles.

Third, industry leaders suggest that the government should reexamine its role in development and commercialization of environmentally beneficial technologies. They suggest that government restructure its R&D investments to facilitate private sector technology innovation, increase government-industry collaboration, and seek technologies of sustainability.

This is a critical time for the environmental industry. As a country, we have made large gains in improving our environment, but much remains to be done. The “command and control” model is weakening as a driver in environmental markets and customers are demanding new, innovative solutions that focus on the environment and economics. Government and industry must work together to forge the win-win situation—merging economic and environmental consideration into policies that create real incentives for environmental excellence. This, in turn, will spur demand for innovative technology and services that will make our companies more competitive and help preserve our global environment for generations to come.

Thank you for giving me the opportunity to testify today. I hope this information helps the Committee in its analysis, and I would, of course, be pleased to respond to any questions you may have.