Environmental & social risk

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Description (What is the Risk)

The risk of the existing latent environmental conditions affecting the project and the subsequent risk of damage to the environment or local communities.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will have primary responsibility to accept the project site in an 'as is' condition, subject to Contracting Authority's disclosure of relevant matters, and manage the environmental and social strategy across the project, as well as obtaining all required licenses, permits and authorizations as necessary. This also comprises to a certain extent the risk of unknown environmental conditions to the extent an experienced contractor would have considered their existence as being possible.

Existing environmental risks of the site prior to the Private Partner's acceptance of the site that have not been disclosed or within the knowledge of the Private Partner prior to commercial close will be deemed to be the responsibility of the Contracting Authority.

In some projects the Private Partner is obliged to perform surveys of the ground conditions. Social risks, insofar as they may involve indigenous groups, will be the responsibility of the Contracting Authority.

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

The Contracting Authority should conduct the necessary due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner. The Private Partner will have to duly examine the documents provided by the Contracting Authority in order to be aware of potential risks.

Depending on the specific risk allocation in the individual project the Private Partner might be further obliged to undertake additional surveys.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

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

The Contracting Authority will need to take meaningful steps both before and during the project to manage social impacts of construction and operation.

Investors and lenders may expect to see a plan addressing these aspects, including the execution of any necessary contractual arrangements.

Comparison with Emerging Market

Environmental scrutiny is increasing even in developed markets, as both Private Partners and Contracting Authorities have 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 the existing latent environmental conditions affecting the project and the subsequent risk of damage to the environment or 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, however existing environmental conditions which cannot be adequately addressed or priced may need to be retained by the Contracting Authority.

The Contracting Authority may also need to retain responsibility for social impacts which are unavoidable from the development of the project (e.g. compensation for expropriation of indigenous land rights and/or relocation of urban communities / businesses).

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

The Contracting Authority should conduct the necessary due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner.

The Contracting Authority will be required to review all environmental plans put forth by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

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

Government will need to take meaningful steps both before and during the project to manage social impacts of construction and operation.

Investors and lenders may expect to see a plan addressing these aspects, including the execution of any necessary contractual arrangements.

Active stakeholder management by the Contracting Authority will be critical to achieving key milestones.

Comparison with Developed Market

International lenders and development finance institutions are particularly sensitive about environmental and social risks, as a result of their commitment to the Equator Principles. They will look very closely at how these risks are managed at both private and public sector level and this scrutiny is helpful to mitigate the risks posed by these issues.

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