Sustainability and Finance Richard Burrett Managing Director Sustainable

Sustainability and Finance Richard Burrett, Managing Director Sustainable Development ABN AMRO FIDIC Conference – Beijing – September 2005

Content n ABN AMRO and Global Infrastructure Development n Sustainability and the Finance Sector n The Project Life Cycle and Involvement of Financiers n Observations on Sustainable Infrastructure Development n Summary and Conclusion FIDIC Conference – Beijing – September 2005 2

ABN AMRO and Global Infrastructure Development Making More Possible… FIDIC Conference – Beijing – September 2005

ABN AMRO - Facts and Figures n Prominent international bank, origins going back to 1824 n Ranks 11 th in Europe and 20 th in the World (based on tier 1 capital) n Over 3, 000 branches in more than 60 countries n Staff of over 98, 000 n Total assets of EUR 856 billion (as of 30 th June 2005) FIDIC Conference – Beijing – September 2005 4

ABN AMRO and Global Infrastructure Development n Major player in the Global Infrastructure Markets n Leading financier in the Emerging Markets n We work alongside various multilateral and national development banks n n 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 5

Sustainability and the Finance Sector Who cares wins? FIDIC Conference – Beijing – September 2005

Sustainable Development in The Finance Sector n n n 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 assessment n Social and environmental criteria improve our decision-making n Support creation of innovative financial products and services FIDIC Conference – Beijing – September 2005 risk 7

What are the Equator Principles? n n n 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 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 FIDIC Conference – Beijing – September 2005 8

How do they work? n n n 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 FIDIC Conference – Beijing – September 2005 9

Why do we track Environmental and Social Risks? Direct impact on counterparty’s credit risk n clean-up costs n environmental liability n environmental litigation n lose license to operate Indirect impact on the Bank’s reputation n The aim for responsible engagement with stakeholders is in line with our business principles. FIDIC Conference – Beijing – September 2005 10

What are the key drivers for Banks to adopt these Principles? n More consistent risk management leading to safer loans n Using a common framework and terminology to create transparency n Increased productivity through reduced transaction time n Creating more certainty in closing project financings n Core to a commitment to Sustainable Development n Gaining commercial advantage? FIDIC Conference – Beijing – September 2005 11

What are the implications for Project Finance business’? n n 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. n EP are applied to all projects over USD 50 million n EP has created an industry market standard n n 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 FIDIC Conference – Beijing – September 2005 12

What are the implications for Project Finance business in Infrastructure Development? n n n 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 FIDIC Conference – Beijing – September 2005 13

What are the implications for Project Finance business in the Infrastructure Industry? n n n 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 FIDIC Conference – Beijing – September 2005 14

What are the implementation issues at an organisational level within Financial Institutions? n n n 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 15

The Project Life Cycle and the Involvement of Financiers A financier’s view… FIDIC Conference – Beijing – September 2005

The Project Life Cycle Time Line Process Inputs: Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Deliverables: FIDIC Conference – Beijing – September 2005 17

The Project Life Cycle The Time Line is not evenly spread between these different stages of a Project’s development Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Early stage project development and planning can take years for a complex project FIDIC Conference – Beijing – September 2005 18

The Project Life Cycle Concept Design Policy & Strategic Issues Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Design Policy & Objectives Sustainability Appraisal Strategic Environmental Assessment Early Stage Consultation FIDIC Conference – Beijing – September 2005 19

The Project Life Cycle Masterplanning Resource Management Concept Site Allocation Acquisition Master- Planning Tender Construction Planning Concept Designs Waste Management/Energy/ Resource Appraisal EIA Scoping Study EIA/ES/Social Impact FIDIC Conference – Beijing – September 2005 20

The Project Life Cycle Planning Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Application Planning Inquiry/ Support Construction Phase: Environmental Management FIDIC Conference – Beijing – September 2005 21

The Project Life Cycle Construction Commissioning Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Construction Phase: Monitoring, Reporting, Environmental Management, Public consultation Operation Phase: Environmental Management, ongoing community engagement, through to de-commissioning FIDIC Conference – Beijing – September 2005 22

Involvement of Financiers Financial Advisory? Site Allocation Acquisition Concept Master- Planning Tender Construction Planning Funding Package? Credit Management FIDIC Conference – Beijing – September 2005 23

Issues Raised n n n 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 FIDIC Conference – Beijing – September 2005 24

Way Forward ? n n 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 25

Observations on Sustainable Infrastructure Development Frameworks, Models and Participants… FIDIC Conference – Beijing – September 2005

Appropriate Government Frameworks n n n 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 n Regulatory stability n Clear linkage to domestic socio-economic development n Domestic capacity development to support the above FIDIC Conference – Beijing – September 2005 27

The role of Multilateral Agencies n Key role in underpinning sustainable economic development at a domestic level n Capacity building of both local and international institutions n Catalyst for the involvement of Private Sector cross border funding n n Well developed risk mitigation products to encourage international credit Important stewardship role to ensure sustainability of transactions undertaken FIDIC Conference – Beijing – September 2005 28

The Role of the International Private Sector n n n 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 FIDIC Conference – Beijing – September 2005 29

Domestic Capacity Issues n 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 n Local financial institutions should be better positioned to evaluate local counter-party and regulatory risk n n n 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 FIDIC Conference – Beijing – September 2005 30

Financing and Risk Management Models n n n 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 FIDIC Conference – Beijing – September 2005 31

Summary and Conclusion n n n 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 FIDIC Conference – Beijing – September 2005 32