Chemical Leasing

Last year's OECD report on Economic Features of Chemical Leasing states

Chemical Leasing (ChL) is a service-oriented business model that aligns the interests of the chemical supplier with those of the chemical user by compensating the service of the chemical rather than the chemical volume sold and used. This creates a strategic partnership between the two parties, in which the common goal is the reduction of chemical consumption, thus achieving enhanced performances, chemical handling and waste management and, therefore, economic and environmental benefits.

Due to the economic and environmental benefits that ChL can achieve, since the early 2000s UNIDO and some European countries, notably, Austria, Germany and Switzerland, have been promoting the business model as a means to achieve sustainability in the chemical industry. This study presents a review of the literature on the economic features of the ChL and of similar business models, focusing on the drivers and barriers and comparing their functioning to traditional contracts.

Advanced chemical legislative frameworks have been and are being established in developed and developing countries with the common objective of providing more information to the public and to further involve the chemical industry in reducing the use of hazardous chemicals. Compliance with chemical policy requires constant innovation at the chemical substance level (search for safer alternatives), at the technical process level (search for more efficient processes and technologies) and at organisational level (search for new business solutions) and an enhanced communication of information through the chemical supply chain. It is therefore a strong driver for the uptake of ChL.

Beside policy, the current characteristics of the chemical market, i.e. increased international competition and declining margins, also constitute a driver for the adoption of business models that help in achieving greater efficiency, in maintaining solid relationships between chemical suppliers and customers and in avoiding price underbidding. Moreover, the increase in the demand for greener consumer products may push large retailers to require higher environmental standards of their suppliers, driving the uptake of innovative business models which demonstrate substantial environmental benefits, such as ChL.

Despite these policies and market drivers and the positive results achieved through the implementation of ChL in different countries, the business model still has a limited penetration. Possible reasons are: strict waste legislation, lack of customer demand, liability risks, fear of losing know-how to the supplier and reluctance of the supplier to take on all the investments. A major external barrier is that prospective ChL users are not completely aware of the life-cycle cost of chemicals.

Another hurdle that could affect the uptake of all business models in which chemical management activities are being outsourced, including ChL, is that, when the chemical management activities are performed by individual staff aside other responsibilities (as it is often the case in small and medium-sized enterprises), the transferability is more problematic and the chemical service provider may not be able to reduce the company direct costs, as the salaries of that staff will have to be paid anyway. On the opposite side of the problem, prospective users may have already invested in in-house capacity for chemical management to ensure compliance to strict environmental and health and safety legislation. Therefore, potential ChL suppliers may find it difficult to improve the chemical management of the users and hence there may be less incentive for such a company to switch to a ChL model. Servicising contracts, such as ChL, can mitigate information asymmetries and transaction costs through the realignment of incentives in the supplier-user relationship. However, these contracts can also lead to new types of transactional hazards, such as bilateral dependence and monopoly. These have been dealt with in ChL with different mitigation strategies, crafted to the peculiarities of the companies involved. On the basis of the identified barriers and of the recommendations provided by different authors, some initiatives are suggested to promote the efficient application of the model, focusing on increasing awareness of ChL and its advantages among stakeholders, offering support in the form of legal advice in drafting contracts and facilitating t