All clear on the horizon
17 September 1996
Transfer of public risks to the private sector has become a major component of domestic development policy and is increasingly being used for major projects in developing countries such as the former Eastern Bloc and some Asian nations.
But host governments, lenders, investors and developers do not always give proper consideration to environmental matters, and that has led to refusal of funding, withdrawal of political risk insurance cover and substantial compensation costs. To avoid this, there are 10 main points that should be considered when evaluating major projects, whether privately financed or otherwise.
International projects: legislation
Faced with a proposed project in a foreign country with little or no environmental legislation and few regulatory structures to monitor compliance, it is tempting to ignore the environmental impact. While initially saving both time and money, that is a foolish risk which may result in difficulties in financing the deal or, as in the case of BHP's operation of the OK Teddi mine in Papua New Guinea, in successful claims by villagers allegedly affected by pollution. BHP had to agree to a settlement of £290 million to cover resettlement costs, compensation, legal costs and the cost of the clean-up.
Concession companies should identify at the pre-tender stage all consents and permissions needed to provide the services. A full due diligence should be carried out and onerous conditions attached to consents should be highlighted. Familiarity with the workings of local regulatory bodies will allow an assessment to be made of the likelihood of conditions being imposed on new applications.
Further, the contract should provide for the apportionment of the costs of application and/or appeal. Appeals can be costly and time consuming. The outcome can be heavily influenced by variables such as local opposition, the history of the site and government policy. Full investigation and assessment is difficult when little or no environ- mental legislation exists in the host country, but knowing what standards apply and who to speak to are vital.
Especially in relation to international projects, although not exclusively, lenders may have their own environmental standards to be applied to proposed projects. Often these will be higher than those of the host country. Both the World Bank and the Asian development banks have detailed guidelines which must be satisfied before funds will be allocated. In addition, the conditions attached to funding will not necessarily terminate on com- pletion of the project.
Funding for a project to build the world's largest hydro-electric power plant on the Yangtze river, China, at a cost of $25 billion and involving the resettlement of 1.3 million people, was refused by the US Export Import Bank purely on environmental grounds, in particular because of the need to resettle so many people.
In a bid to introduce total transparency for all borrowers, the World Bank is undertaking a pilot project in Uganda in which borrowers must supply all the environmental information on the project and strictly comply with the bank's conditions.
Insurance for environmental liabilities has always been problematic. Bidders should check exactly what insurance cover is required and whether it is available at a realistic price. The majority of existing policies exclude gradual damage caused by pollution while environmental impairment liability (EIL) policies are notoriously expensive and are rarely used.
At the Irian Jaya mining project in Indonesia, the Overseas Private Investment Corporation withdrew its political risks insurance cover in relation to alleged environmental failures in the operation of the mine.
Security and publicity
Because of the large scale nature of privately financed projects they are likely to attract either widespread public support or widespread condemnation (as evident in the UK's road building projects, where such public protests can lead to detrimental publicity). It can result in the need to secure project areas and equipment against protesters' sabotage and/or attempts to delay work or completion.
Security and public relations must be costed and balanced when assessing the tender offer and liability must be fully apportioned in the contract.
Anyone familiar with the US Superfund will know of the astronomical costs associated with cleaning up and the litigation which always seems to follow.
The Environment Act 1995 has introduced liability for causing or knowingly permitting contaminating substances to be in, on or under land, and the person liable for the clean-up will, in the first instance, be the polluter.
Where he cannot be found, liability will fall on the owner or occupier of the site. Consequently it is imperative that an environmental audit is carried out when acquiring land.
The latest draft of the guidance to implement the new regime states that in certain circumstances liability may be transferred between responsible parties.
The presence of protected spec-ies or habitats in, on or adjoining the property can lead to considerable delay and costs in removal and may even prevent development. Searches should be undertaken with English Nature (or the appropriate government body or qualified expert overseas) to assess if protected species or habitats will be affected. One example of the delay that can occur is the hold-up caused by the discovery of the Desmoulin Whorl snail on the Newbury bypass site.
Gathering environmental information
Various legislation requires the registration of substantial amounts of environmental information on public registers. Such information can be useful when carrying out a due diligence on target sites or companies, but it is a double-edged sword in that third parties can easily access the information and check whether or not conditions have been attached to consents and are being complied with.
Most environmental legislation now contains standard clauses imposing personal liability on directors, senior managers or persons holding themselves out in such capacity for offences committed by the company with their consent, connivance or neglect. It is therefore essential that the directors of concession companies are aware of the results of the due diligence exercise and can ensure that they comply with all relevant environmental legislation. Such liability cannot commonly be insured against. Liability can be avoided by incorporating an environmental management system to assess and monitor environmental impacts.
Risk management #
Clearly there is a need to address and cost the environmental risks at all stages of contract negotiations and operation. This will impose a large burden on bidders which are under pressure to submit the cheapest bids in the shortest period, but it can facilitate a quicker and more satisfactory conclusion to contract negotiations and operation if risks have been assessed and apportioned in advance.
Related CPD/EventsSign up for CPD/Events alerts
Smith & Smith PR