The long term and integrated nature of PPP service contracts incentivizes the contractors to consider the synergies between the design of an asset and its ultimate operating costs. This can result in the delivery of public services in a more environmentally sensitive way and without an additional price tag. The emphasis on whole life costs means that public sector contracting authorities are required to take account of all aspects of cost, including running and disposal costs, as well as the initial purchase price of an asset. Environmental considerations, set out in documents such as environmental policies, are intended to help achieve the Government's objective of a more sustainable environment. There is a problem of perception that environmental technologies and materials are an expensive luxury that government can not afford. This is clearly wrong. PPP projects have demonstrated that investing to deliver environmental improvements can secure not only best value for money through lower running costs but also health and social benefits such as better working conditions (GPPP, 2002).
Good design is crucial to the success of a project and should achieve savings in whole life costs and improvements in environmental performance and productivity. In addition well designed public buildings can help deliver wider benefits to the communities where they are located. To enable good design there should be a clear and concise statement of output requirements that includes the values and evaluation criteria to be employed. Sufficient time must be allowed to enable full and proper consideration of these requirements. There also needs to be a commitment from both the service provider and contracting authority to achieve quality objectives such as reducing the use of energy, water and other resources, minimizing waste and controlling pollution.
Even from the bidders perspective contracts can ensure to cover the following issues so that private partners fulfill environmental requirements:
• Minimizing waste.
• Reducing whole life costs - by optimizing the balance between initial costs and maintenance and operating costs without compromising user comfort.
• Enhancing service delivery - a building which is well lit and airy, relying on natural light, can positive effects on users with obvious benefits to productivity.
• Promoting wider social and environmental benefits - by addressing health, safety and environmental concerns of those living and working in the area a project can have a significant impact on improving the morale and well being of the community.
• Encouraging in-built flexibility - by enabling the facility to save time and cost in the delivery of new services and to respond efficiently to changing requirements and new technologies particularly those which can conserve resources and reduce waste.
The contract specification for a PPP project should correspond with the National Environmental Safeguards and Frameworks as well as with all rules from programs operating under central and local governments where project will take place. Also objectives and targets must be aligned with these strategies and other contained in any relevant departmental strategies. The PPP contract should ideally be sufficiently flexible to take account of any new targets and future monitoring and reporting requirements which may develop over the lifetime of the project.
Environmental Issues and Prospects In a report of Fitch Ratings on Global Infrastructure and Project Finance 2008 there is a special emphasis on environmental issues and its prospects. The report informs that environmental policy continues to evolve around the world, following paths unique to each region and country. This is important in the context of various infrastructure projects. In the current U.S. regulations for SO2 and NOx are becoming more stringent, while new regulations for mercury and carbon control have been introduced. In Europe, a number of directives imposing strict requirements to operators to minimize harmful emissions (SO2, NOX, VOCs) are either in place or are being phased in. In Australia, there is a CO2 reduction plan and an emissions trading scheme by 2010. In general, merchant projects may be offset by corresponding increase in energy prices. Contract oriented projects, however, are more valuable since the incremental costs of environmental compliance are rarely passed through to the counterparties. As future environmental policies are finalized, and timing of implementation known, rating companies like Fitch will more fully incorporate environmental issues into the outlook of individual projects. Source: Global Infrastructure and Project Finance Outlook 2008: Balancing Government and Capital Market Needs. FITCH-Ratings, March 3 2008. |
The significance of the contract in the wider political sphere will need to be acknowledged and arrangements should be made for monitoring environmental performance and reporting on progress to stakeholders such as Environment Ministries, NGOs, and the public. Benchmarking performance is an important way of driving up performance within the life of a long contract. It is realistic to expect environmental standards agreed by government to become more rigorous over time.
The contract must specify the liabilities caused by environmental damage arising from construction or operating activities during project life cycles, but also arising from pre-project term activities whether undertaken by the PPP, a third party or attributable to subcontractors. This requires thorough diligence of pre-existing environmental conditions, limited by cap and subject to project financial valuation. Remediation works due to environmental damage must be determined by independent monitoring agencies. Many contracts consider special insurances on this regard to prevent from sudden changes in cost and revenue streams.
When Environmental and Social issues transcend the PPP contract: The case of the Maggi soybean expansion plant in Brazil In many LAC countries, the public sector faces fiscal constrains and lacks expertise and technical capacity to manage the statutory/planning risk it should bear according to the efficient risk allocation. Hence, the public sector may fail to perform the tasks corresponding to it under such an allocation. The case of Environmental and Social risks is an example to illustrate this point. Brazil has been a country with problems in designing the adequate mechanisms to conceal externalities from environmental and social damages. One example is the case of Maggi Soybean Plat PPP. The rise of large-scale soybean farming in the central western part of Brazil is causing severe social and environmental problems as part of a private and public partnership to develop the sector infrastructure and output. Deforestation of the cerrado (savannah) is increasing rapidly, while the soybean expansion is also threatening the Amazon rainforest more to the north. In the inter-ministerial Plan on Deforestation of the Brazilian government, released in March 2004, soybean cultivation is mentioned as "one important factor in recent Amazon deforestation". Monoculture is disrupting the hydrological balance in this area and is threatening its high biodiversity. Land conflicts with small peasants and indigenous groups have intensified as an unintended consequence of the contract risk allocation between public and private sectors, with several soybean farmers illegally occupying indigenous lands. Various social and environmental NGOs in Brazil and in soybean importing countries such as the Netherlands, Belgium, Switzerland, Germany and the United States, are stepping up efforts to control the social and environmental consequences of the soybean boom in the Brazilian Midwest. In March 2006 the Brazilian Forum of NGOs and Social Movements adopted a set of minimum criteria for soybean cultivation in forest areas and infrastructure expansion. Source: Agriculture in Brazil and Argentina / WRS-01-3, USDA, 2005 |
A good example of emphasis in environmental and social issues in designing PPP contracts is related to the implementation of novel multilateral rules. Many contracts have recently implemented the Equator Principles (EPs) particularly to address complex environmental and social impacts induced by large infrastructure projects on local communities. They apply especially to projects in emerging countries that lack (or fail to enforce) strong environmental and social regulatory structures to minimize impacts. Experience has shown that when these impacts are not properly managed, the host community suffers, projects eventually fail, and financing institutions and banks face many reputational risks. The Equator Principles are a framework for financial institutions to manage environmental and social issues in project finance, particularly through on PPP contracts and concessions (Orr and Kennedy, 2008).
Over the past two decades, commercial banks that financed private parties of PPP contracts have incurred in financial loss, reputational damages, and shareholder concerns due to increasingly poor environmental and social impacts management. The EPs is a breakthrough mechanism to guarantee that all industries and infrastructure projects meet sound standards. The EPs apply to projects with a capital cost of $10 million or more through environmental risk categorization and performance standards that apply to low and middle income countries. It allows concise steps to be taken to ensure appropriate application of social and environmental assessments, the development of action plan, community mitigation engagement, project monitoring, etc.