Timing The Installation Of Pollution-Control Equipment

Environmental Concerns!

In 1989, a US company decided to start a new unit in order to paint plastic parts for its auto industry customers. The corporate management also agreed being impressed by the plant managers’ explanation about the potential for additional business.

The company observed that the production levels for the new unit were well below the regulatory norms, which would otherwise necessitate construction of pollution-control equipment, roughly $2 million worth. It postponed installation of the equipment until the unit operated at a higher capacity, since, it did not expect production levels to change in the near future. The cost of the pollution-control equipment was 25 percent of the total unit cost. Hence, the postponement helped the plant manager to seek approval for the new unit from the corporate management. .

The company planned emission levels for the new unit, slightly below the regulatory norms to ensure immediate approval. For two years things were fine but with significant increase in the number of customers, the emission limits exceeded. Though the company immediately started the process of designing, ordering, and installing emission control equipment, it took more than a year to set up the equipment. In the interim period, the company incurred legal liabilities of $25,000 per day under both federal and state environmental laws owing to the increased emission levels.

The government filed an enforcement action. Moreover, the violations gave private citizens an opportunity to file lawsuits. Besides increasing penalties, the company wasted managerial and staff time and lost the goodwill of clients and regulatory agencies.

What went wrong?

Like every other company, the management of this company also wanted to set up a new unit and operate it quickly at a minimal cost. Top management generally tries to postpone any environmental compliance not immediately necessary. Most plant managers ignore long-term needs because they believe the costs they avoid will more than pay for any extra cost of future retrofitting. Others emphasise on short-term needs only, ignoring the possibility of increase in product demand, as they do not consider the need to install pollution controls.

By postponing the installation of $2 million pollution-control equipment for four years the company saved $625,000.However, in the long run the postponement decision proved expensive. Retrofitting the plant in 1992 cost $500,000 more than it would have in 1989, when it would have been part of a new building. To retrofit, the company had to cut the roof open to install ducts, change three-year-old wiring, alter relatively new computer controls, and modify the process-control equipment. Therefore, the net savings, without considering deductions from penalties and legal costs was only $125,000. The government penalty of $ 225,000that swallowed a considerable part of savings. The private citizen's lawsuit lasted for five years and cost over $2 million.

What should companies do?

Corporate management should calculate the costs and benefits of delaying installation of pollution controls. An appropriate economic and financial analysis is necessary not withstanding the possibility of fluctuations in product demand. Example, an auto manufacturer's orders for supplying specific parts will vary based on the status of specific car models and on the company's decision to offer the parts as standard or optional. Production could have increased quickly from the painting plant's point of view.

Companies can develop appropriate models to help managers:
• Calculate the financial gain from postponing capital expenditures under different operating situations
• Estimate potential liabilities accurately
• Communicate decisions taken to concerned departments.

Environmental engineers or operational personnel may not have the necessary qualifications in economics and finance to develop such models. Companies can take the help of external experts or specially trained personnel to carry out the analysis. The cost thereof will be much below the cost of future retrofits and lawsuits.

Related reading :

1. Making business sense of environmental compliance, Singh, J., Sloan Management Review.

2. Eco-efficiency, Canadian Business, Andrew NikiforuK.

3. Pollution Prevention, Reuse and Recycling, ASTM.

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