Good morning ladies and gentlemen.  My presentation today will address a topic of growing interest to the hotel industry here in Egypt and elsewhere:

 - Investing in Environmental Improvements

The information presented is based on Hagler Bailly's work under the Environmental Management System or EMS component of the Red Sea Sustainable Tourism Initiative.  

It also incorporates Hagler Bailly's extensive experience assisting hotels, hotel industry associations and governments realize the benefits of "going green".

The motivation and degree of commitment to environmental management varies considerably among across the hotel sector.

The increasing demand environmentally-responsible lodging, particularly among Western European and North American tourists, has given rise to a host of ecolables and terminology.  Organizations such as The Ecotourism Society in the U.S. and the International Hotel Environment Initiative in the U.K. have published guidance materials to assist hotel owners and managers.

At one end of the spectrum you have the traditional hotels and resorts that are positioning themselves in the tourism market to respond to these demand, but whose level of commitment may be limited to public relations, such as towel reuse signs in the guest rooms.  If this is the extent of the commitment, then we use the term "GREEN WASHING". 

As you move along the continuum you will find those hotels, particularly in developing countries like Egypt, that are have made a commitment to full compliance with all environmental laws, regulations and standards.  In the absence of government enforcement, the motivation is termed - "VOLUNTARY COMPLIANCE". 

Next you find the hotels that have made a commitment to implement applicable environmental technologies and practices  to their facilities and operations.  Often the motivation is to reduce operating costs through improvements in energy and water use efficiency, for example.  Actions are often prioritized based on payback period or returns on investment.   We call this best environmental management practices or "BEST PRACTICES"

Environmental management certification programs, such as ISO 14001 and Green Globe, add the elements of independent verification and continuous improvement.  Both programs require the property to adopt a functioning EMS.

Until now, the actions I have described are largely "inside the fence" or within the operational control of hotel owners and managers.  However in areas such as the Red Sea Coast where nature is the attraction, tourists are looking for a demonstration of the hotels commitment to nature conservation or preservation.

At the far end of the spectrum, you have the "ecolodges".  These facilities are often sited near rare ecological features or traditional cultures.  In this case, tourists or "ecotourists" are interested in learning and expect the accommodation to provide interpretation.  

Of course this is an oversimplification of the "different shades of green", but it is helpful to developers and managers of hotels and resorts when they consider how to position themselves in the international marketplace.

This slide shows the result of a survey Hagler Bailly conducted of hotels in the Caribbean as to their motivation for taking environmental actions.  It is interesting to note that the two primary reasons were to reduce the environmental impact of their operations and to lower their operating costs.

Equally interesting to note is that compliance with environmental requirements ranked the lowest of the reasons given by the survey respondents.

With this as background, we will now begin to characterize environmental investments.  They can be characterized in terms of:
 - Stage of development from design to operations
 - What single or multiple environmental aspect the action is designed to address
 - Size and type of accommodation in which the investment will be made
 - Ownership and management structure of the accommodation and other facilities
 - Implementation cost and payback period
 - And finally, the type and source of financing required.
I review these points in more detail. 

Here are some examples of options available at each stage in the process.

Beginning with site selection, the desire to be near a unique, often remote, ecological feature will affect infrastructure costs such as transportation.  Purchasing undeveloped land for the intent of conservation creates buffer areas that can increase the value of lodging. 

As the project moves into the design stage, environmental consideration is given to architecture and landscaping; types of systems like energy supply and wastewater treatment.  Consideration is also given to amenities such as air conditioning, pools and spas, etc.

During the construction phase, the considerations include the techniques used in site preparation, as well as the possible inclusion of "environmentally-friendly" construction materials materials.

Finally, there are a number of actions that can be taken after the property begins operation.  These, for the most part, represent facility improvements or refurbishment.  I should note here that the actions also include changes in staff practices. 

The actions can also be characterized in terms of the target environmental aspect or aspects.  These include:
 - water conservation and reuse
 - energy efficiency and conservation
 - wastewater treatment
 - clean power technologies such as renewable energy systems
 - solid waste management, and 
 - habitat preservation and/or creation.
Again their are other aspects such as health, safety, and security, but these are outside the scope as well.

We can also characterize the actions in terms of the attractiveness of investment.  The payback period is defined as the length of time required to fully recoup (through savings or increase revenue) the capital investment.  It is important to note that for savings calculations the same action will have a different payback period depending upon the cost of energy and water and the degree of use.

Quick or rapid payback are investments that are recouped in less than one year.  These include changes in staff practices which are also terms "no cost" actions.  They also include a number of the water conservation technologies such as faucet aerators, flow restrictors and low-flow showerheads. Investments in timers, sensors such as photosensors that automatically turn on and off outdoor lighting, and metering devices that shut equipment off when not in use such as pedal valves for pot wash sinks in kitchens all typically fall in this category.

Next you have those investments that payback in 1 to 5 years.  They include energy efficient lighting, occupancy sensors that regulate energy use in unoccupied rooms, and solar hot water heating systems.

As we move into extended payback period actions, those that recoup the investment in more than 5 years, we begin to see more capital intensive items such as solar photovoltaic power systems, wind power, and advanced wastewater treatment and reuse for irrigation.

And then there are a set of actions for which determination of the payback period is uncertain.  In some cases, there is no return on the investment and the investment is considered a "sunk cost".  These include construction materials, solid waste composting to reduce the organic waste being landfilled or incinerated, landscaping and habitat preservation, visitor interpretation, and (for the consultants in the crowd) studies and analyses.  Applying a simple payback analysis to these actions is difficult.

Now let's look at the types and sources of financing for environmental improvements.  

The different types of financing can be broken down into:
 - working capital
 - credit
 - debt or loans
 - equity, and
 - grants

The corresponding sources of financing, not all of which are available here in Egypt, are:
 - cashflow, the typical source for working capital
 - equipment suppliers and
 - export import banks, the typical sources for credit.  It is important to note that USAID has a Commodities Import Program here in Egypt that provides credit to Egyptian hotels and other private sector businesses.
 - national and international development banks that often have a social orientation and may require government guarantees for repayment.  These may or may not be available to the private sector.  
 - commercial banks offer debt financing of differing terms  of repayment.
 - a number of special purpose funds have been created such as the Global Environment Facility of the World Bank and UN Environment Program.  These funds are applicable only to investments that meet specific issues such as biodiversity and climate change. I suppose the the Social Fund here in Egypt would fit in this category.
 - conservation organizations such as World Wildlife Fund and Conservation International have begun offering micro-financing especially to ecotourism projects.
 - Finally you have the international donors such as USAID, CIDA and DANIDA that provide grants that require no repayment.  It is important to that grants from donors are usually limited to studies and assessments or demonstration projects like RSSTI.  Some of these donor funded projects also extend micro-enterprise - small business - loans at concessionairy terms.

It is also important to look at the facility in which the investment is being made.  Here I provide a quick reference to the type and typical size of different accommodations.

 - Bed and breakfasts which are usually less than 20 guest rooms
 - Small hotels, typically less than 100 rooms
 - Ecolodges, typically less than 30 rooms
 - Resorts, such as those found on the Red Sea coast that are  typically between 100 and 500 rooms, and
 - City hotels that typically range from 50 to 750 or more rooms

Again, this is an over simplification here in the Egyptian context.  The important point is that the type of accommodation and its target clientele affect the degree to which environmental action moves from the "back of the house" to the "front of the house". 

The size of accommodation (in terms of number of guest rooms) affects the total cost of implementing environmental improvements, the cost per room to implement, and the length of time to payback the total investment.

For large properties, the total cost will be greater, the cost per room may be less, and the overall payback will be shorter. For smaller properties, the total cost will be less, the cost per room will typically be more (fewer rooms to spread the cost over), and the overall payback is likely to be longer.

Hotels, regardless of size, can be divided into two basic categories: 
 - properties where the same individual or group owns and manages the operation, and 
 - properties where the owner has a contract with a management company, either Egyptian or international.
This distinction is important because they have different responsibilities.

Owners have primary responsibility for maintaining the physical asset.  This requires periodic capital investment for refurbishment, renovation and expansion.

Management companies have primary responsibility for product quality and day-to-day operations.  It should be noted that management companies and owners jointly review capital investment decisions.

The main differences can be found in investment horizon.  Owners have the ability to take a longer term perspective, will consider larger, more capital intensive projects, and are concerned with profitability and the value of their asset.

Management company horizons are limited by the term of their contract, size of investments relative to operating budget, and are concerned with quality of service and brand reputation.

The following three slides are an illustration of the results from a recent RSSTI audit of an operating resort on the Red Sea Coast.  The property is located in an Integrated Development Center where the property is owned by a Egyptian company and operated by an international management company.

The pie chart shows that of the 40 quantified recommendations, over three-quarters have an average implementation cost, when divided by the total number of guestrooms, of less than 50 Egyptian Pounds per room.

Nearly 90 percent of the quantified recommendations have an implementation cost, including both capital and labor, of less that 200 Egyptian Pounds per room.

Now lets look at these same 40 quantified recommendations from a payback period perspective.
Nearly two-thirds have a payback period of less than 2 months.  Some of these effectively have an immediate payback, especially those that involve a change in staff practices.
Nearly three-quarters have a payback period of less than one year.

For purposes of illustration, let's look at the cashflow for the audited property under three scenarios.

1) Implement all quantified recommendations
2) Implement all quantified recommendations with payback of less than one year
3) Implement all quantified recommendations that require no investment (only changes in staff practices)

For all quantified recommendations, the total implementation:
 - cost over 5 years is 1.1 million Egyptian Pounds
 - total savings are 5.8 million Egyptian Pounds, and 
 - net savings are 4.7 million Egyptian Pounds.  

If only those recommendations that have a payback of less than one year are implemented:

 - total cost over 5 years is 100,000 Egyptian Pounds
 - total savings are 3.4 million Egyptian Pounds
 - net savings are 3.3 million Egyptian Pounds

If only the "no-cost" recommendations are implemented:

 - total cost over 5 years is 30,000 Egyptian Pounds
 - total savings are 1.45 million Egyptian Pounds
 - net savings are 1.42 million Egyptian Pounds

The cost of an audit is calculated into all three scenarios.  It should be noted that, based on our experience, the savings are likely to erode over time if there is no Environmental Management System (EMS) in place to reinforce the changes in staff practices.  

So, while Scenario 3 appears to be the most attractive, the likelihood that all no-cost measures will be implemented and maintained is highly unlikely.

So what can we conclude from this presentation.

First, hotel owners and managers have a wide range of environmental investment opportunities available to them, from changes in staff practices to large, capital intensive projects.  The applicable opportunities change as you move through the project development cycle. 

Second, the investment opportunities vary in attractiveness from those that payback in a matter of days or weeks, to those such as nature conservation which may have no quantifiable economic  (from a banker's perspective).

Third, a variety of financing sources are available to capital the investment opportunities depending upon the type of investment ranging from cashflow to long term loans.  Ecolodges are likely to qualify for new sources of financing such as conservation organizations and special purpose funds. 

Finally, we recommend that investors view environmental improvements in a comprehensive manner.  This way the property can achieve the broadest benefits both in terms of savings and in terms of market positioning, thus improving overall viability.

Thank You.