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Precedent setting application of Equator Principles in High-Income OECD Countries?

Image from Ichtys Project Website

While the application of Equator Principles and IFC Performance Standards for large capital developments in emerging markets is increasingly common, it is interesting to read that the same environmental and social benchmarks have also been applied in a US$ 20 billion limited recourse financing deal for the Ichthys LNG project in Australia, a High Income OECD Country.  (Shortlink: http://wp.me/p27qSt-B0)

The Project Finance International’s March 2013 issue contains an interesting article authored by Bill Voge, Matthew Brown and Alex Cosgrove, all of Latham and Watkins. L&W acted as legal councel to eight Export Credit Agencies and 33 commercial banks participating in the deal. One of the unique and potentially precedence setting features of this ‘super-sized’ Ichthys deal involves the application of the IFC Performance Standards and Equator Principles to a project located in Australia.

This is unusual – and suggests a bonanza for consultants who will have endless opportunities to assist with gap analysis, concordance assessment, monitoring, certifications, waivers and generate the shear endless reporting requirements which come with the scale and complexities of $20+ billion project involving a large group of banks and ECAs! ;-)

But let’s get back to the topic...

While the Equator Principles “apply globally and to all industry sectors”, the associated requirements typically mean different things based on variables such as the location of the project to be financed under the EPs. Australia is an OECD High-Income country. Using the more recent Equator Principals III jargon, this means that Australia is a so called “Designated Country”. As I blogged in How do you apply the Equator Principles and IFC Performance Standards in Canada?, this term is reserved for a list of currently 31 countries like Australia, Canada and Germany.

The Equator Principles website highlights that “Designated Countries are those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment”. The EPIII also notes that for “Projects located in Designated Countries, the Assessment process evaluates compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues”. In the preceding paragraph, the EPIII highlights that for “Projects located in Non-Designated Countries, the Assessment process evaluates compliance with the then applicable IFC Performance Standards on Environmental and Social Sustainability (Performance Standards) and the World Bank Group Environmental, Health and Safety Guidelines (EHS Guidelines) (Exhibit III).”

Trying to get a feel for what this means in terms of the ESIA process of the Ichthys, I visited the INPEX’s website. INPAX, the Project Sponsor, self-reports ranking among the top 50 global energy companies and is listed on the Tokyo Stock Exchange. The Ichthys Project is operated by INPEX in joint venture with major participants such as Total and Tokyo Gas, Osaka Gas, Chubu Electric and Toho Gas. The Project has entered the construction phase.

I started downloading a couple of the large documents on INPAX’s website. A word search of the Ichtys Gas Field Development Project’s Supplement to the Draft EIA did not find the terms “Equator Principles”, “IFC Performance Standards” or “World Bank”. The same search conducted for the “Ichthys Project Nearshore Environmental Monitoring Plan” was also not fruitful. And as it is now Friday afternoon here, I stopped playing this search game. Perhaps others can point me to specific environmental and social requirements/changes which were applied to the deal because of the application of the Equator Principles and IFC Performance Standards and inform me how/why they exceed Australian requirements.

Do you think that the application of the Equator Principles and IFC Performance Standards in projects located in High Income OECD Countries is a good/bad/precedence setting event? Will this change the purpose of the Equator Principles and IFC Performance Standards? And will it attract some of the advocacy NGOs which often follow and campaign against such 'mega deals' and lodge complains at OECD National Contact Points?

 

About the author: Mehrdad Nazari (MSc, MBA, LEAD Fellow) is a Senior ESIA & Sustainability Advisor, and Director of Prizma. He has over 20 years of professional experience, including 10 as a Principal Environmental Specialist at the European Bank for Reconstruction and Development (see LinkedIn profile here). Prizma also delivers short courses on the Equator Principles and the IFC Performance Standards. The next courses will be hosted by TD Bank on October 29, 2013 in Toronto. The previous course was hosted by Parsons Brinkerhoff on September 23, 2013 in London and the evaluation results of that course are detailed here: EP3 and IFC PS Course: the Good, Bad and Ugly. Additional information and registration details are provided in the course brochure which can be accessed here.

 

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4 Responses to “Precedent setting application of Equator Principles in High-Income OECD Countries?”

  1. September 9th, 2013 at 4:13 am

    Mehrdad Nazari says:

    Chris Scott, Special Counsel at K&L Gates, left this note on LinkedIn • “Hi Mehrdad, based on my experience, banks will often require an Australian project to comply with the higher standard: IFC/World Bank or local law. This is particularly the case where major projects require participation by international banks. The bank has the comfort of knowing it is covered either way. Although Australia is a developed country, projects like this are usually situated in remote areas which have many of the same characteristics as developing nations: delicate & untouched environment, indigenous traditional landowners, etc. Local laws regulate these issues but, by hedging its bets, the bank does not have to due diligence local law to the same extent – and the syndicate’s lawyers don’t have to convince 41 credit committees.”

  2. September 11th, 2013 at 6:20 pm

    The application of Equator Principles in high-income OECD countries | Harris-Roxas Health says:

    […] a very interesting post by Mehrdad Nazari about the use of the Equator Principles and related performance standards in an Australian […]

  3. September 12th, 2013 at 2:21 am

    Johan Frijns says:

    I do not see why this is a precedent setting application of the EPs; without being familiar with this particular project I would say that in this case applying the EPs simply means ensuring that the project meets all legal requirements in Australia. Period.

    The bulk of EP projects financed by EP banks -and reported as such- are simply assessments of whether a project meets requirement of the designated country. This IS applying the Principles to projects in designated (OECD) countries. See for example: http://www.ingforsomethingbetter.com/our-approach/business/equator-principles)

    In addition, the participating banks and project sponsor may include further requirements in the loan agreement, which may or may not be referencing the IFC performance standards. This is then a additional layer of risk management. It seems that this is the case with this project.

  4. September 12th, 2013 at 4:04 pm

    How do you apply the Equator Principles and IFC Performance Standards in Canada? | PRIZMA says:

    […] Check out also a subsequent blog entry: Precedent setting application of Equator Principles in High-Income OECD Countries? It seems that that the Equator Principles and IFC Performance Standards have also been applied in a […]

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