The new IFC PERFORMANCE STANDARDS (PS) and the revised EQUATOR PRINCIPLES (EP) have emerged as the de facto social and environmental benchmarks for mining operations in emerging markets. Some project sponsors and their advisors may now find themselves caught between a rock and a hard place: they are in the middle of old school required environmental impact assessments (EIAs) which will no longer satisfy some 80% of the project finance and political risk insurance markets.
The new IFC PSs, which became effective in April 2006, and the EPs, which were revised in July 2006, are essentially the second generation outcomes of the institutional reviews and changes taking place between 2000 and 2003. The significance of these benchmarks is the convergence of key multilateral, bilateral, and commercial financial institutions around them. The larger the project finance and syndication needs, the less chance there is to get around the IFC PS and EP. The financial institutions which adopted the Equator Principles include BMO Financial Group, CIBC, HSBC Group, Manulife, Royal Bank of Canada, Scotiabank, and about three dozen other international banking players.
In general terms, the key changes include the application of a systems approach; linking impact assessment, project design and implementation; and more stringent social requirements. However, other areas, including those pertaining to environmental and biodiversity issues, for example, have also been strengthened.
The terminology now refers to Social and Environmental Assessments (SEAs), instead of Environmental Assessment (EA). Consultation requirements have been strengthened and sponsors are expected, for example, to provide a grievance mechanism to address emerging complaints throughout the projects life cycles. Labour requirements refer to the core labor standards of the International Labor Organization and extend to the supply chain.
The traditional health and safety issues have been expanded and now also include a community and security dimension. The latter is viewed as a potential flash point in terms of human rights concerns.
The biodiversity related requirements have been strengthened, but also allow consideration of offset solutions, which is a relatively new concept in emerging markets.
Requirements relating to indigenous people and resettlement remain complex areas requiring careful navigation to avoid financing delays.
The institutional capacity among financial institutions (and their independent experts) and project sponsors (and their advisors and engineers) to appropriately interpret and apply the new IFC PSs and the EP varies widely. A number of organizations have emerged as pack leaders providing training and support along the value chain of minerals and mining operations. These organizations include the London-based ODI (Overseas Development Institute: www.ODI.org.uk), which is one of Britains leading think tanks on international development and humanitarian issues. Similarly, Sustainable Finance (www.SustainableFinance.co.uk), also headquartered in the UK, provides training initiatives targeted mainly at the financial market. And last not least, Prizma (www.PrizmaSolutions.com), a Wisconsin-based consultancy focused on extractive industries (directed by the author), provides training initiatives tailored to the mining industry and its advisors.
CONSIDER THE UPSIDE
One of the implications of these new standards is the increase in costs, and worse still, these costs come at an earlier stage of a project to produce bankable feasibility studies and SEAs. But there are some upsides which are worth considering. These include better environmental and social data collection and improved confidence levels. Better data can improve project design by avoiding the use of too many (often too conservative) engineering assumptions. This may help avoid or delay the significant capital costs associated with the construction of unnecessary ARD treatment plants or other mitigation solutions adopted sometimes only due to lack of field data (and desire to progress permitting and financing needs).
Also, improved consultation and community engagement can materially improve the level of trust and credibility with local communities, all needed to demonstrate broad community support which will be tested during due diligence trips by project financiers.
Finally, meeting the new benchmarks provides an opportunity to improve the positioning as an acquisition target and/or facilitate tapping the financial markets in a crowded global market place.
For more detailed information, visit www.Equator-Principles.com and www.IFC.org.
(The author is the director of PRIZMA LLC. Contact him at Mehrdad@PrizmaSolutions.com.)