Environmental & social risk

Hydro power Hydro power

Description (What is the Risk)

The risk of damage to the environment or adverse impact on local communities.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will have primary responsibility to manage the environmental and social strategy across the project.

The Private Partner will retain responsibility for social impacts which are unavoidable as a result of the development of the project (e.g. compensation relocation of urban communities / businesses).

Mitigation Measures (What can be done to minimize the risk)

The Private Partner must ensure that the construction and/or operating contractor complies with any applicable permits and consents by way of the inclusion of corresponding obligations in the construction contracts.

Government Support Arrangements (What other government measures may be needed to be taken)

Developed markets usually have fully functioning regulators and other Government or quasi-Government bodies to act as watch dogs for the Private Partner's compliance with environmental and social regulation.

Comparison with Emerging Market

Environmental and social regulation as well as public scrutiny is advanced in developed markets, as Private Partners and Contracting Authorities come under increasing burdens to develop sound environmental and social risk management plans before construction begins.

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Description (What is the Risk)

The risk of damage to the environment or adverse impact on local communities.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Where the Contracting Authority dictates the location of the power plant, the Private Partner will (subject to full disclosure by the Contracting Authority of all facts known to it) usually have responsibility to accept the project site on an 'as is' condition and manage the environmental and social strategy across the project, as well as obtaining all required licences, permits and authorisations as necessary. Where the procurement process gives the Private Partner latitude to select the optimal location for the power plant this risk will be fully allocated to the private sector.

Social impacts on local communities will be managed by the Private Partner under the oversight of the Contracting Authority.

Mitigation Measures (What can be done to minimize the risk)

The Contracting Authority should conduct prior due diligence in order to ascertain the environmental fitness of the site and disclose all data to the Private Partner. In practice the Contracting Authority in an emerging market will often not have the capability to undertake this task and therefore some of the work may need to be carried out by the Private Partner even if certain risks remain allocated to the Contracting Authority.

The Contracting Authority will expect to approve all environmental plans of the Private Partner.

Government Support Arrangements (What other government measures may be needed to be taken)

In view of the sensitivity of the environmental and social issues associated with large hydro projects (especially where the project may include the construction of a dam/reservoir) even if management of these issues rests with the Private Partner the host Government will have a significant role to play in facilitating initiatives at local level to explain the benefits of the project it is promoting.

Comparison with Developed Market

Environmental and social regulations are often less developed in emerging markets than those in developed markets. However, the participation in the project by International lenders and development finance institutions will oblige the Private Partner to comply with more onerous international standards. International lenders are sensitive about environmental and social risks, as evidenced by their commitment to the Equator Principles. They will look closely at how these risks are managed and this scrutiny is helpful to mitigate the risks posed by these issues.

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