Equator PrinciplesManaging Environmental & Social

risk in Project Finance

David Glenister

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Content

Introduction to Project Finance

Social & Environmental Risks

How to manage? Equator Principles as a Tool

Independent third party can help?

Case Studies

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Introduction To Project Finance

Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects

Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project.

In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

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Introduction to Project Finance

Project Finance Risks typically include:

Hard-to-manage risks: Legal Risks Market & Political Risks Force Majeur

Manageable Risks Technical & Operational Risk Environmental & Social Risk Economical Risk

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CORPORATE FINANCE (M&A) & PROJECT FINANCESOCIAL AND ENVIRONMENTAL RISKS

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Labor and Working conditions Pollution (soil, water, air) Health, Safety, Security (community &

employee) Land acquisition and involuntary

Resettlement Biodiversity conservation & sustainable

natural resource management

Example of E&S Risk Matrix

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How to manage? Equator Principles as a Tool

The Equator Principles is a set of environmental and social benchmarks for managing environmental and social issues in development project finance globally.

The Equator Principles were developed by private sector banks – led by Citigroup, ABN AMRO, Barclays and WestLB and were launched in June 2003.

The banks chose to model the Equator Principles on the environmental standards of the World Bank and the social policies of the International Finance Corporation (IFC).

In July 2006, the Equator Principles were revised, increasing their scope and strengthening their processes.

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Equator Principles as a tool

Around 60 Financial Institutions has already adopted Equator Principles

EPFI together represent more than 85 percent of global project financing

Equator Principles becoming the benchmark for Environmental & Social performance

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Equator Principles

The Equator Principles themselves are as follows:-

Principle 1 : Review and Categorization (of projects)

Principle 2 : Social and Environmental Assessment

Principle 3 : Applicable Social and Environmental Standards

Principle 4 : Action Plan and Management System

Principle 5 : Consultation and Disclosure

Principle 6 : Grievance Mechanism

Principle 7 : Independent Review

Principle 8 : Covenants

Principle 9 : Independent Monitoring and Reporting

Principle 10 : EPFI Reporting.

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Equator Principles Work-flow

CovenantsCompliance to Regulations, Action Plan, Reporting Requirements and Decommissioning requirements

Project CategorizationEPFI to classify projects based onIFC Criteria

Social & EnvironmentalAssessmentConduct SEA for Category A and B Projects

Applicable Social andEnvironmental StandardsProjects in Non OECD and lowincome OECD – to refer to andcomply with IFC PerformanceStandards and EHS Guidelines

Action Plan and Management SystemsAction Plan and Management System to develop and implement mitigation measures, corrective actions, monitoring for the impacts and risks

Consultation and DisclosureConsultation and engagement ofProject Affected Communities

Grievance MechanismGrievance mechanisms in theManagement System for affectedcommunities during constructionand operationIndependent ReviewSEA, Action Plan & ConsultationReview by Independent TechnicalExperts

Independent Monitoring andReportingPeriodic Monitoring by IndependentExpert

EPFI ReportingEPFI to report publicly of implementation of principles

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Background

The Equator Principles can bee seen closely mirror the International

Finance Corporation (IFC) Performance Standards on Social and

Environmental Sustainability,:

Performance Standard 1: Social and Environmental Assessment and Management System

Performance Standard 2: Labor and Working Conditions

Performance Standard 3: Pollution Prevention and Abatement

Performance Standard 4: Community Health, Safety and Security

Performance Standard 5: Land Acquisition and Involuntary Resettlement

Performance Standard 6:Bio-diversity Conservation and Sustainable Natural Resource Management

Performance Standard 7: Indigenous Peles

Performance Standard 8: Cultural Heritage

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How to manage

The way each EPFI implement the Principles vary from each other

Basically there are two common approach

To create a separate Social & Environmental unit

To integrate Social & environmental issues on current credit risk unit

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How to manage

Categorization of projects, based on International Finance Cooperation (IFC’s) environmental and social screening criteria, to reflect the magnitude of prospective impacts and risks Category to:

Category A – Projects with potential significant adverse social or environmental impacts that diverse, irreversible or unprecedented;

Category B – Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and

Category C – Projects with minimal or no social or environmental impacts.

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Independent Third Party can Help?

Many EPFI has set procedures to involve independent third parties on these activities

It clearly improve the way they partner with:

Clients Governments Civil society and NGOs

On-site assessments and monitoring also improve transparency and accountability of EPFI efforts on implementing EP and IFC performance standards

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On Site Assessment

On site assessment is used predominantly on the basis of confirming:-

that the Project Operator and/or EPC contractor(s) are aware of the need for certain socio-economic and/or EH&S related issues to be addressed within the project,

that these requirements are factored into the project development and execution process,

that the project design, planning, approval processes, project management and implementation parameters are in accord with EP / IFC criteria, and,

that the desired outcome is likely to be achieved in respect of the project’s environmental and socio-economic probity, if implemented effectively.

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Equator PrinciplesAssessment Objectives;

To assess and report on - in the context of statutory obligations, and any other applicable discretionary corporate social and environmental obligations - whether the Project is in accord with the Equator Principles requirements and associated IFC Performance Standards identified.

To identify any areas where inconsistencies exist between the Equator Principles requirements and current performance or where some re-examination or strengthening of current management performance might be warranted.

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Equator PrinciplesTypical Assessment Process;

3. Audit Preparation

5. PublicAnnouncement

6. Stakeholder consultation

7. On site Audit

8.Draft Report

9.FeedbackReport by

Client

10.Issue Final Report

2. Documentsent to SGS

by client

4. Document Review1. Agree on

scope andproject stage

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How to manage

Once the risk are identified, On-site action is needed to manage risk

The Equator Principles itself rely on external technical expert to help EPFI and borrowers manage E&S issues relate to the project

Principle 7 : Independent Review

Principle 9 : Independent Monitoring and Reporting

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Equator PrinciplesBenefits;

Equator Principles bring a level of social and environmental evaluation, transparency and discipline to projects which might otherwise be absent.

Compliance with the Equator Principles leads to improved environmental and social outcomes.

The banks are secure in the knowledge that their investments are being used to support ethical and sustainable work and that the project conforms to the required standards.

Provide effective project finance risk management, through the incorporation of screening process for projects which are based on IFC’s environmental and social screening process.

Protect Financial Institutions from the environmental and social liabilities of the project.

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Case Study

Bioethanol Plant- Peru Company plans to construct a sugarcane processing mill with a production capacity of approximately 30

million gallons of ethanol per year. The Project consists of:> Agricultural Development:> Industrial Development and Port Facility: Construction and agricultural development will run parallel and the project mill will include the latest

ethanol processing technologies to allow an efficient output. The assignment to third party acting as a Technical Advisor, consists of the following services:> Equator principles verification> Project review/Due diligence > Technical Assessment Report> Construction and Performance Test Monitoring (periodic visits)> Performance test and Project acceptance report

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Case Study

The pipeline route passes through a wide range of land-use types impacting over 17,700 parcels of land utilized by local households in 515 villages. Social and environmental issues encountered included:

severely limited regional routing options due to complex environmental, social, geohazard and geo-political constraints;

potential impacts on sensitive flora and fauna habitats as well as on groundwater resources; temporary land acquisition under complex land tenure systems; disturbance to local livelihoods and activities affecting large numbers of people; community safety; local employment; potential impacts to marginalised and vulnerable groups (including ethnic minorities, women and the elderly); and, the implementation of a major public consultation and disclosure program.

Among the highlights of the BTC project was a ground breaking Regional Review which addressed macro-issues of concern such as:

human rights, revenue management, and security; an extensive public consultation and disclosure program; a 25 million dollar Community Investment Program undertaken on a scale unprecedented in BP's history; a program of NGO capacity building; an 8.8 million dollar Environmental Investment Program; and the enhancement of development impacts through linkages with small and medium enterprises (SMEs).

(Source: IFC Lessons of Experience September 2006, Number 2)

The Baku-Tbilisi-Ceyhan (BTC) pipeline

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Any Questions?

David Glenister,

SGS United Kingdom LtdSGS House217-221 London RoadCamberleySurreyGU15 3EY

Tel: +44 (0) 7889 939814 david.glenister@sgs.com