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

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



Making More Possible…


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)



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


Sustainability and the Finance Sector

Who cares wins?


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


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


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


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.


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?


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


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


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


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


The Project Life Cycle and the Involvement of Financiers

A financier’s view…


The Project Life Cycle

Time Line

Site

Allocation

Site

Acquisition

Concept

Master-

Planning

Planning Tender Construction

Process Inputs:

Deliverables:



The Time Line is not evenly spread between these different stages

of a Project’s development

Site

Allocation

Site

Acquisition

Concept

Master-

Planning


Early stage project development and planning can take years for a complex project



Concept

Master-

Planning


Concept Design

Policy & Strategic Issues

Design Policy & Objectives

Sustainability Appraisal

Strategic Environmental Assessment

Early Stage Consultation

Site

Allocation

Site

Acquisition



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



Concept

Master-

Planning

Tender Construction

Planning

Planning Application

Planning Inquiry/ Support

Construction Phase:

Environmental Management

Site

Allocation

Site

AcquisitionPlanning



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


Involvement of Financiers

Site

Allocation

Site

Acquisition

Concept

Master-

Planning


Financial Advisory?

Funding Package?Credit

Management


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


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


Observations on Sustainable Infrastructure Development

Frameworks, Models and Participants…


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


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


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


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


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


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

Documents

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