fidic conference – beijing – september 2005 richard burrett, managing director sustainable...
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FIDIC Conference – Beijing – September 2005
Richard Burrett, Managing Director
Sustainable Development
ABN AMRO
Sustainability and Finance
2FIDIC Conference – Beijing – September 2005
Content
ABN AMRO and Global Infrastructure Development
Sustainability and the Finance Sector
The Project Life Cycle and Involvement of Financiers
Observations on Sustainable Infrastructure Development
Summary and Conclusion
FIDIC Conference – Beijing – September 2005
ABN AMRO and Global Infrastructure Development
Making More Possible…
4FIDIC Conference – Beijing – September 2005
ABN AMRO - Facts and Figures
Prominent international bank, origins going back to 1824
Ranks 11th in Europe and 20th in the World (based on tier 1 capital)
Over 3,000 branches in more than 60 countries
Staff of over 98,000
Total assets of EUR 856 billion (as of 30th June 2005)
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ABN AMRO and Global Infrastructure Development
Major player in the Global Infrastructure Markets
Leading financier in the Emerging Markets
We work alongside various multilateral and national development banks
By facilitating economic development we make an important potential
contribution to Sustainable Development
In doing this we have to recognise and manage the social and environmental
impact of infrastructure development to ensure sustainability
Greater awareness of the need to develop responsible lending and
investment policies
We have taken a lead role in the development of industry initiatives such as
the Equator Principles
FIDIC Conference – Beijing – September 2005
Sustainability and the Finance Sector
Who cares wins?
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Sustainable Development in The Finance Sector
Banks have role to play in the creation of a more sustainable future
Many institutions have commenced the journey to develop and integrate
sustainable development into their regular business
Strive to integrate sustainability criteria into lending, investment and risk
assessment
Social and environmental criteria improve our decision-making
Support creation of innovative financial products and services
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An industry initiative designed to achieve a level playing field amongst project
financing banks in the field of environmental and social risk management.
Project finance plays an important role in financing development particularly in
emerging markets
What are the Equator Principles?
Environmental and social policy issues are often
encountered
Opportunity to promote socially and economically
responsible stewardship and development
EPs allow us to work with our customers in their
management of these issues in a more structured way
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How do they work?
Create a common baseline and framework based
on IFC and World Bank safeguard policies and
guidelines
Banks will categorise a project in terms of High,
Medium or Low Risk (A,B or C)
An Environmental Assessment (EA) will be prepared based on the
categorisation
An Environmental Management Plan (EMP) will have to be produced
for higher risk projects
The Borrower will covenant compliance with the EMP
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Why do we track Environmental and Social Risks?
Direct impact on counterparty’s credit risk
clean-up costs
environmental liability
environmental litigation
lose license to operate
Indirect impact on the Bank’s reputation
The aim for responsible engagement with stakeholders is in line with our
business principles.
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What are the key drivers for Banks to adopt these Principles?
More consistent risk management leading to safer loans
Using a common framework and terminology to create transparency
Increased productivity through reduced transaction time
Creating more certainty in closing project financings
Core to a commitment to Sustainable Development
Gaining commercial advantage?
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What are the implications for Project Finance business’?
Project financing plays a key role in financing
development particularly in the Emerging Markets
Over 30 Banks have now adopted EP representing
a major share of that market.
EP are applied to all projects over USD 50 million
EP has created an industry market standard
Will foster more transparent and consistent risk management and engagement
with stakeholders
Some projects may not be financed by the Project Finance market if they do not
or will not comply with the principles
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What are the implications for Project Finance business in Infrastructure Development?
The industry has been grappling with these issues for some years
A number of industry initiatives exist to address Social and Environmental
risk issues
The leading Infrastructure companies have developed sophisticated
management approaches in this sector but concerns still remain
Equator is based on the IFC/World Bank code which is well known to the
majority of companies in this sector in developing countries
The current review of the safeguard policies
is a critical exercise in determining how EP
banks will go forward
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What are the implications for Project Finance business in the Infrastructure Industry?
A transparent approach to the management of Environmental and Social
risks may lead to better dialogue with critical stakeholders
Challenging, complex transactions have closed since the introduction of
Equator which have attracted certain NGO criticism
A number of issues exist around early stage consultation, transparency and
disclosure
Certain EP banks have broader policies on business engagement in this sector above and beyond project financing
The development of these broader E&S policies is likely to be the major legacy of the Equator Principles
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What are the implementation issues at an organisational level within Financial Institutions?
Adopting banks will use the framework to develop individual, internal
practices and procedures
Need to embed this approach into both business line and internal risk
management processes and policies
Creating consistent standards in risk assessment, management,
documentation and reporting
The Equator Banks are already sharing implementation experience to
promote consistency of approach
Clear distrust apparent in certain quarters of the NGO world
FIDIC Conference – Beijing – September 2005
The Project Life Cycle and the Involvement of Financiers
A financier’s view…
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The Project Life Cycle
Time Line
Site
Allocation
Site
Acquisition
Concept
Master-
Planning
Planning Tender Construction
Process Inputs:
Deliverables:
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The Project Life Cycle
The Time Line is not evenly spread between these different stages
of a Project’s development
Site
Allocation
Site
Acquisition
Concept
Master-
Planning
Planning Tender Construction
Early stage project development and planning can take years for a complex project
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The Project Life Cycle
Concept
Master-
Planning
Planning Tender Construction
Concept Design
Policy & Strategic Issues
Design Policy & Objectives
Sustainability Appraisal
Strategic Environmental Assessment
Early Stage Consultation
Site
Allocation
Site
Acquisition
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The Project Life Cycle
Tender Construction
Masterplanning
Resource Management
Concept Designs
Waste Management/Energy/ Resource Appraisal
EIA Scoping Study
EIA/ES/Social Impact
Site
Allocation
Site
Acquisition
Concept
Master-
Planning
Planning
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The Project Life Cycle
Concept
Master-
Planning
Tender Construction
Planning
Planning Application
Planning Inquiry/ Support
Construction Phase:
Environmental Management
Site
Allocation
Site
AcquisitionPlanning
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The Project Life Cycle
Concept
Master-
Planning
Planning
Construction Commissioning
Construction Phase:
Monitoring, Reporting, Environmental
Management, Public consultation
Operation Phase:
Environmental Management, ongoing community engagement, through to de-commissioning
Site
Allocation
Site
AcquisitionTender Construction
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Involvement of Financiers
Site
Allocation
Site
Acquisition
Concept
Master-
Planning
Planning Tender Construction
Financial Advisory?
Funding Package?Credit
Management
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Issues Raised
Financial sector leverage can clearly influence how a project is brought to the
market but …..
The Timeline for a complex project could span over a decade …..
Many of the critical aspects of project scope, design and early stage
stakeholder consultation occur well before finance is considered and can take
years to complete
Financial advisory may be the first opportunity for the Banking sector to
comment on feasibility and bankability issues
How can we promote better project design and development at an early stage
to avoid later difficulties?
By the time bank funding is sought significant investment may have already
taken place in project development
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Way Forward ?
Recognition of where the financial sector’s leverage can be used most
effectively
Need to encourage better practice in early stage project development and
consultation
Engagement with leading project sponsors to promote a community of
“Best Practice”
Avoid arbitrage to “Less Rigorous” funders
FIDIC Conference – Beijing – September 2005
Observations on Sustainable Infrastructure Development
Frameworks, Models and Participants…
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Appropriate Government Frameworks
Infrastructure investment in the context of long term national planning
Frameworks to facilitate planning, project development with appropriate
incentive mechanisms
Governmental underpinning of state owned organisations involved in PPP
style transactions
Regulatory stability
Clear linkage to domestic socio-economic development
Domestic capacity development to support the above
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The role of Multilateral Agencies
Key role in underpinning sustainable economic development at a domestic
level
Capacity building of both local and international institutions
Catalyst for the involvement of Private Sector cross border funding
Well developed risk mitigation products to
encourage international credit
Important stewardship role to ensure
sustainability of transactions undertaken
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The Role of the International Private Sector
At a macro level international project and export finance are important
models to enable the funding of large scale Infrastructure projects.
The PPP model has been successfully used in developing these Markets
In financial terms international institutions are more focused on large scale
initiatives
Re-orientation and balancing activities towards sustainable development
Limitations in the ability and capacity of international financial institutions to
support smaller scale ventures
Different models needed for small and
medium enterprise development
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Domestic Capacity Issues
Local financial institutions are key in the
longer term development of a broad
Infrastructure sector at a domestic level
The need to create access to long term
sources of domestic currency funding evident
in past problems in the power sector inter alia
Local financial institutions should be better positioned to evaluate local counter-party and regulatory risk
Critical role in the financing of medium and small scale enterprises and supplier chains
Local capacity building is critical to ensure longer term benefits of larger scale energy developments accrue to affected local communities
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Financing and Risk Management Models
A multi-track approach may be required to finance sustainable Infrastructure
development along the value chain
Existing political risk products provide adequate support for larger scale
schemes
Domestic institutions and micro-credit providers key for SME sector funding
Emerging carbon markets may offer additional incentive for sustainable
energy initiatives and projects (CDM and JI)
Stable regulatory frameworks are key for the above
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Summary and Conclusion
The development of sustainable Infrastructure activities is complex and challenging
The strongest business case is built around initiatives which consider the whole value chain
This is a multi-track process where the roles of the respective parties need to be properly understood
The management of social and environmental impacts will determine long term sustainability
Private sector financial institutions have a major role to play in this area
FI’s are increasingly recognising this and are beginning to embed E&S criteria into their decision making
The Equator Principles are a manifestation of this trend and we should expect the bar to rise further over time and spread to other areas of business