This article appeared in iCON, October 2006 and was written by Sarah Thomas, Partner at Pinsent Masons.
No one can have escaped the stark warnings on climate change and the need for those responsible for funding, procuring and building new infrastructure to have one eye on "sustainable development". A search of this phrase on Google alone produces more than 70 million hits. But what do we mean by the term "sustainable development" and how, in practice, can this idealistic concept be applied to infrastructure projects?
Sarah Thomas of international law firm Pinsent Masons explores some of the practices, codes and contractual mechanisms that can be used to achieve sustainable development in infrastructure projects.
International Funding Benchmarks
To date, two main sets of social and environmental standards have been launched by international banks and financial institutions funding international projects. The first of these, the "Equator Principles" were first launched in June 2003. They have now been adopted by over forty financial institutions, which represent almost 80% of project financing around the world. Earlier this year the Equator Banks revised these principles, including lowering the capital cost threshold (from USD 50 million to USD 10 million), extending the principles to cover upgrades and extensions of existing projects, requiring each Equator Bank to publicly report annually on progress and strengthening the social and environmental standards and public consultation elements.
In June 2006 the "European Principles for the Environment" (EPE) were launched by the European Investment Bank (EIB). With the endorsement of the European Commission, the EPE were adopted by 4 other major European investment banks.
Both sets of principles require borrowers to meet certain environmental criteria before a project is considered for investment. However, unlike the Equator Principles, the EPE do not recite specific principles but instead refer back to the guiding environmental principles enshrined in the EC Treaty (in particular, the polluter pays, precautionary and prevention principles and the principle that environmental damage should as a priority be rectified at source) together with the project specific practices and standards incorporated in EU secondary environmental legislation.
Particular emphasis is given in the EPE to EU legislation on environmental impact assessment, industrial installations, water and waste management, air and soil pollution, nature protection and occupational health and safety.
The EPE cover the respective regions of operations of each EPE Bank, in particular the Member States of the EU and the European Economic Area countries together with the EU Acceding, Accession, Candidate and potential Candidate Countries (Bulgaria, Romania, Croatia, Turkey). Whilst the EU approach and the relevant secondary legislation is the main point of reference, projects in these regions should also comply with any obligations and standards upheld in relevant Multilateral Environmental Agreements. The signatories will assess compliance with the EPE before agreeing financing.
For co-financed projects, the signatories will seek to agree a common approach to the project with the other financing institutions involved and, where possible, based on or consistent with, the EPE.
Of course, the Equator Principles and EPE address whether a particular project should be funded in the first place. But once a project has been authorised for investment, neither the World Bank nor the European Bank for Reconstruction and Development (EBRD) nor EIB have detailed standard guidelines in their contractual bidding documents spelling out how the themes of environmental protection and sustainable development should be carried forward during the design and construction phase. This is perhaps not surprising, as the whole point of "sustainable development" is that each project takes account of its own environment. One cannot be too prescriptive.
Know your local law
When considering any infrastructure project in the international context, you must consider the local law, in particular local planning regulations, requirements for environmental impact assessments, any environmental and health and safety legislation, as well as any construction costs or standards that have mandatory effect. A government can influence the infrastructure industry and promote sustainable development in a number of ways – in its role as procuring authority as well as 'regulator' and 'legislator'.
International Standards
As regulators and legislators, governments can force the industry to accept certain sustainable development principles by legislating accordingly. In the European context, the Energy Performance of Buildings Directive 2003 is particularly relevant here. There are also numerous examples in the United Kingdom of government introduced legislation which promotes the principles of sustainable development.
There may also be non binding initiatives to promote sustainable development. As procurers of some of the biggest infrastructure projects governments have the opportunity to require contractors/consultants to provide records of compliance with sustainable development initiatives as a tender precondition. This is in addition to use of specific contractual mechanisms.
It is worth mentioning here "Agenda 21", released by the United Nations' Division for Sustainable Development in 1992. This sets certain environmental and developmental objectives for countries to follow in pursuing sustainable development ideals. In particular, it includes a section promoting sustainable construction industry activities. While these measures are not specifically focussed on infrastructure projects, they are, like many of the policies and principles found in this area, sufficiently broad to apply to those involved in infrastructure related projects.
The Federation Internationale des Ingenieurs-Counseils (FIDIC) has also published guidelines on Project Sustainability Management. Finally, ISO 14000 defines an environmental management system. While the ISO standards are voluntary, they are seen as one of the more significant international initiatives for sustainable development and are intended to focus companies' attention on environmental issues.
The UK government's own initiatives are also prime examples. A strategy document 'Building a better quality of life - a strategy for more sustainable construction was first issued in April 2000 and was recently updated in March 2005 entitled "Securing the Future". When first introduced, this document represented somewhat of a watershed in the UK industry as it described steps which the industry could take in order to go someway to achieving the, generally accepted, admirable aim of sustainable development in construction. The document sets out the following ten general principles for the construction industry to follow:
- Re-use existing built assets
- Design for minimum waste
- Aim for lean construction
- Minimise energy in construction
- Minimise energy in building use
- Avoid polluting the environment
- Preserve and enhance bio-diversity
- Conserve water resources
- Respect people and their local environment
- Set targets (benchmarks & performance indicator)
Contractual Mechanisms
On an individual project basis, there are a number of mechanisms to ensure sustainable best practice for clients to choose from. The most obvious is to ensure that specification and design criteria take account of the long term sustainability of the project – not just in terms of the design life of materials but also in terms of the costs of operation and maintenance. Is the building appropriate for its setting? Is it correctly located? Has the ability of users to pay for long term operation and maintenance been considered?
In addition there are a number of contractual provisions that directly or indirectly address sustainability. These range from use of value engineering clauses to encourage innovation and efficiency of design, use of 'Recycling' or 'Wastage' clauses to encourage minimal waste, appointing an Environmental Compliance Officer on site, establishing systems such as waste management plans, to ensuring procurement of sustainable materials by setting up framework arrangements with particular suppliers.
Take for example, clause 13.2 of FIDIC Conditions of Contract for EPC/Turnkey Projects (Silver Book), a value engineering clause. This gives the Contractor the option (not the requirement):
"at any time" to submit a written proposal which "( in the Contractor's opinion ) will if adopted, (i) accelerate completion, (ii) reduce the cost to the employer of executing, maintaining or operating the Works, (iii) improve the efficiency or value to the employer of the completed Works, or (iv) otherwise be of benefit to the Employer". [emphasis added]
The only problem with this provision is that the Contractor cannot recover the cost of preparing any proposal. This means that unless the Contractor is confident that his proposal will be adopted, there is little incentive to suggest efficiencies. Moreover, there are difficulties with evaluation in value engineering provisions. FIDIC resorts to the standard valuation procedure but a number of such clauses attempt to evaluate the "benefit" to the Employer and allow the Contractor a percentage share. This is because changes to design that improve value or efficiency may in fact reduce the capital cost of the project and therefore may result in a decrease in the overall construction cost – again, little incentive to the Contractor to unilaterally suggest such changes.
Provisions requiring contractors to "use all reasonable endeavours" to maximise cost recovery by re-using, recycling, selling or otherwise commercially exploiting any arisings, waste or re-usable process parts are also becoming more common. Points to watch out for here are the various qualifications to which such provisions are subject (typically they are qualified with the words: "without derogating from any other obligation of the Contractor under this Contract" and "to the extent permissible by Law and practicable").
The obligation also tends to be limited to reasonable endeavours rather than absolute. Such provisions also need to be clear as to who owns the wastage and therefore any financial benefit from recycling. Another factor to consider is cost treatment: in target cost contracts any financial benefit could be treated as a credit, so reducing the overall project cost. Arguably a better incentive to encourage recycling and non wastage would be to share any proceeds 50 - 50 with the contractor.
For long term framework agreements - where the client is procuring a number of projects over a term - an employer may also consider using specific environmental Key Performance Indicators or KPI's to measure overall environmental performance. The main advantage of using KPI's as a measure of performance is that they can be moulded to suit the client's specific requirements, can be adjustable during the term and therefore sensitive to market trends and also can be framed to reward good performance rather than simply punish bad performance.
Future Trends
Simply applying the concept "sustainable development" to infrastructure projects is meaningless unless it is given a specific meaning or purpose and one which is tailored to the specific project and to the particular environment in which that project is located. Whilst in the past, lip service was paid to the ideal of "sustainable development" increasingly this ideal is being given shape and form – both in terms of the procurement policies of the major multilateral funding agencies and in the increasing use of environmental management and value engineering contractual provisions by clients generally, particularly in sectors for which the environmental impact is significant – e.g. waste water treatment projects, hydropower, etc. In the wake of climate change and increasing concern for the environment this trend seems certain to continue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
