WRI Publications Feed: Emerging Actors in Development Finance with Potential Social and Environmental Risks: China & Brazil

Environmental and Social Policies in Overseas Investments: Progress and Challenges in China

Sarah Parsons — Wed, 08 May 2013 16:57:41 -0400

Summary

Like other countries that invest overseas, China—through the projects it finances and executes—can bring great benefit to the countries and communities in which it invests (“host countries”). However, investments can pose challenges and risks to host and investor countries. Effectively tailored environmental and social policies can identify and mitigate not only unanticipated environmental and social harm, but also some of the investment risks that can undermine the long-term financial success of a project.

Even in the midst of the 2008–09 global financial crisis, China’s outward foreign direct investment (OFDI) continued to grow.1 Between 2008 and 2009, China’s OFDI flows grew nearly 8 percent, while total world OFDI flows during the same period decreased nearly 40 percent (Unctad Stat 2012). In both 2009 and 2010, the Export-Import Bank of China and the China Development Bank together lent more than the World Bank did to developing countries (Dyer, Anderlini and Sender 2011).

Environmental and Social Policies in Overseas Investments: Progress and Challenges for China examines trends in China’s overseas investments and considers how social and environmental policies can reduce investment risks and enhance the positive impacts of China’s OFDI. We focus on three major forces in China’s OFDI: the central government, financial institutions, and centrally owned state-owned enterprises (SOEs). Although a variety of institutions are involved in overseas investments, the majority of Chinese OFDI originates from centrally owned SOEs, and its OFDI growth is fueled largely by the strong lending capacity of its financial institutions, especially the China Development Bank and the Export Import Bank of China. Aid, trade, and other types of financial interest that may be associated with overseas economic interests are not addressed here, nor are overseas investments by collectively or privately owned companies.

As China continues to expand overseas investments, understanding and managing the environmental and social impact of these investments in host countries can help it build mutually beneficial relation-ships with host countries. Already, methods to address environmental and social issues in overseas investments are emerging in China. Chinese regulatory authorities are creating guidelines in their areas of jurisdiction, and individual financial institutions are developing and refining their own policies. International experience with environmental and social risk mitigation offers a useful context for Chinese investors and policymakers to consider as they continue to develop these overseas investment policies.

Moving forward, China faces several challenges, not the least of which is a lack of understanding of the regulatory and legal environment in host countries. Attention to host countries’ regulatory and legal environments must be ratcheted up if investment risks are to be reduced. Supervisory challenges and coordination among ministries should also be prioritized. Finally, even though governments, financial institutions, and corporations have produced multiple guidelines and policies to guide more sustainable overseas investments, implementation remains a major challenge. Sufficient resources should be directed toward implementation to overcome barriers such as cost, coordination of resources, and time.

While these challenges are real, China’s rapid economic growth and global presence also create opportunities that offer insight for a global audience. China can shape the direction and return of its OFDI to maximize positive impact and achieve “win-win” relationships with host countries. As an experienced recipient of OFDI, China can now apply those lessons as it invests abroad. In addition, China can step into facilitator and leadership roles in the international agenda of promoting sustainable cross-border investment, especially in developing countries.

This issue brief is the first in a series of WRI publications by the International Financial Flows and the Environment (IFFE) project that examine the role of environmental and social policies in overseas investments. Future publications will look at the “business case” for adopting stronger environmental and social policies, and will include case studies of overseas investments from China and other countries.

China's Overseas Investments in the Wind and Solar Industries: Trends and Drivers

Sarah Parsons — Mon, 15 Apr 2013 17:00:58 -0400

Executive Summary

Shifting to a low-carbon economy will require current emitting countries and projected future emitters to rapidly scale up their investments in renewable energy. In recent years, major emerging economies like China, India, and Brazil have been catching up with leading developed country investors in Europe and the United States. By some estimates, China is already the leading global investor in renewable energy infrastructure, and is increasing its overseas investments in renewable energy, particularly solar and wind. If China achieves its goal of sourcing 15 percent of its energy mix from renewables by 2020 and 30–45 percent by 2050, renewable energy will become closer to a mainstream energy resource within the country. Cost reduction incurred in this process would benefit not only China, but also the rest of the world.

This working paper aims to help policymakers, investors, and researchers better understand the trends in China’s overseas investments in the wind and solar industries, and the factors behind those trends. It examines the scale, nature, and types of China’s overseas investments in the wind and solar industries, and identifies the policy and market factors that drive these investments. China has made at least 124 investments in solar and wind industries in 33 countries over the past decade. Of the investments for which data were available, the cumulative value amounted to nearly US$40 billion in 54 investments, and the cumulative installed capacity added was nearly 6,000 MW in 53 investments. Of the 124 investments, 41 were in the wind industry, 81 in the solar industry, and 2 in both the wind and solar industries.

The majority of investments were in electricity generation. Twenty-seven of the wind investments were in wind farms predominantly carried out through joint ventures, as were most of the 41 solar investments. Several investments were made in manufacturing facilities and to establish sales and marketing offices. Most of the investments were concentrated in a few developed countries: the United States, Germany, Italy, and Australia. A handful of developing countries, including South Africa, Pakistan, and Ethiopia, also attracted investments.

China’s investments in the wind and solar industries are driven by a multitude of factors including macroeconomic conditions; industry conditions; policies (both general and specific to the wind and solar industries) that “push” Chinese companies to invest overseas; policy incentives in host countries that “pull” Chinese investors; and financial support from Chinese banks that “enables” these investments.

China is driven to seek solar and wind markets overseas largely because its manufacturing capacity exceeds domestic demand. The Chinese government’s policy support and financial support—mainly from state-owned banks that respond to government policy—encourage this overseas investment trend. Host countries’ policies have also attracted investments from China’s solar and wind industries, either advertently through tax breaks, feed-in tariffs, or bilateral cooperation agreements, or inadvertently as a “side-effect” of policies discouraging imports.

Although the analysis in this working paper points to interesting trends and provides useful insights that enhance our understanding of China’s role as an overseas investor in the wind and solar industries, it is limited by a paucity of information. Beyond the data collected for the 124 investments, the authors also reviewed literature and carried out interviews to deepen the analysis. The analysis is confined to a subset of the renewable energy sector rather than the full range of possible low-carbon investments. The inadequacy of the data does not allow an analysis of the emissions impact of these investments. These limitations suggest areas for further research that could help improve an understanding of China’s potential to reduce emissions beyond its borders, and would allow policy analysis on how China could increase this positive impact, particularly in developing countries.

Breaking Ground: Engaging Communities in Extractive and Infrastructure Projects

Payson Schwin — Wed, 04 Feb 2009 10:18:01 -0500

Growing demand for energy and natural resources has led many low-income, resource-rich countries to open remote areas to industrial development. Even as a financial crisis engulfed the global economy in 2008 and 2009, projects such as oil pipelines, roads, and mines continued to remain key development priorities.

Engage Communities, Avoid Conflict

Kirk Herbertson explains the story of the Mae Moh coal plant in Thailand and how it demonstrates why early community engagement is critical.

In many of these countries, however, strong institutions and governance systems are not yet in place to ensure that extractive and infrastructure projects do not adversely affect local communities. As a result, these sectors have generated a history of harmful environmental and social impacts on local communities. These impacts create risks for companies, governments, and financiers.

For several years, companies, governments, and financial institutions have responded to these challenges by signing up to various initiatives that provide standards and guidance to foster better industry practices. Financial institutions, in particular, often require clients in these sectors to meet environmental and social standards, in order to avoid or mitigate risk.

Many project proponents, host governments, and financial institutions recognize that a strong relationship with those affected by a project can improve the identification and management of risks, as well as long-term project viability. But community engagement efforts often fall short because of a failure to understand local political and community dynamics, or a failure to fully engage all local stakeholders affected by a project.

Establishing Effective Community Engagement Principles

WRI analyzed existing community engagement standards and guidance, as well as experiences in several high profile projects. Our analysis revealed that key gaps remain in the knowledge base and on-the-ground application of community engagement standards. Despite the abundance of existing reports and manuals that provide guidance on community engagement, much of the publicly available information on how project proponents engage communities reveals great difficulty in applying existing guidance effectively.

Based on this analysis, we developed seven Principles for Effective Community Engagement for extractive and infrastructure projects. These principles are intended to serve two key purposes:

For companies and governments developing projects: to provide a framework for identifying solutions to core community engagement challenges.
For citizen organizations supporting communities: to serve as a resource, in order to empower local communities to provide more meaningful input into project design and implementation.

Principles For Effective Community Engagement

Prepare communities before engaging.
Determine what level of engagement is needed.
Integrate community engagement into each phase of the project cycle.
Include traditionally excluded stakeholders.
Gain free, prior and informed consent.
Resolve community grievances through dialogue.
Promote participatory monitoring by local communities.

Next Steps for Key Players

Extractive and infrastructure projects do not exist in a vacuum—they will both affect and be affected by the surrounding communities and environment. Effective community engagement strategies must create win-win situations for the proponent and communities over the life of a project. To address the gaps remaining in the knowledge base and application of community engagement standards, we recommend the following next steps:

For project proponents: identify and promote best practices. Proponents of extractive and infrastructure projects should prioritize the collection and public dissemination of community engagement best practices, including examples of how community engagement creates value for companies. The seven principles proposed in this report can serve as a framework around which best practices can be collected.
For financial institutions: increase disclosure, promote improved community engagement. Financial institutions can play a critical role in guiding their clients to link community engagement with project risk management, and should send strong signals to their clients that community engagement is a priority. By improving their own public reporting on community engagement, financial institutions can promote more open sharing and improvement of engagement strategies. For example, the International Finance Corporation (IFC)—the private sector financing arm of the World Bank Group—should begin to routinely disclose how it determines that each of its projects has “broad community support.” Similarly, the Equator Principles financial institutions should disclose the projects where they are applying the IFC Performance Standards.
For citizen organizations: advocate for inclusive, accountable, and transparent processes. The ultimate goals of community engagement are tangible outcomes, such as providing benefits and mitigating risks to improve the lives of communities and strengthen a project’s viability. However, these outcomes often depend on the integrity of the process for achieving them. Community engagement that is inclusive, accountable, and transparent is more likely to result in optimal outcomes for both communities and project proponents. Informed by this report, citizen organizations supporting affected communities can more clearly articulate the type of processes in which they would like to engage.

When communities have the opportunity to collaborate with project proponents during the design and implementation of a project, proponents can more effectively identify and mitigate potential impacts, prevent harm, and shape the project to fit local conditions. Communities, in turn, can have a voice in determining how they will benefit from a project and whether a project fits their development priorities. This creates local ownership and support for the project, which is also good for the bottom line.

This report is the first of two reports to be produced by WRI’s Institutions and Governance Program, the second of which will identify examples of best practices for each of the principles identified.

Development Without Conflict: The Business Case for Community Consent

admin — Tue, 01 May 2007 00:00:00 -0400

While much has been written on the legal, normative, and development arguments for ensuring that host communities have the opportunity to consent to a project, there has been relatively little attention paid to how obtaining the free, prior informed consent (FPIC) of host communities is in the pecuniary interest of project sponsors and their financial backers. This report seeks to build the “business case” for sponsors of large-scale, high-impact projects to treat the consent of the host community as a requirement of project development.

The argument is set out in four sections. Section I provides context by briefly reviewing the origins and evolution of the FPIC requirement in international law and development discourse. It argues that while community FPIC first emerged as an international norm applicable to indigenous peoples, it has come to be widely seen as critical to the fair treatment of all communities. Section II then directly addresses the business case for FPIC. It identifies and describes the various types of risks associated with developing projects that lack the support of their host community. Section III focuses on case studies. Through a series of real-world examples, it illustrates some of the ways in which the risks of community opposition can manifest themselves. It also provides a positive case study that demonstrates how early attention to FPIC issues can avoid significant costs during implementation. To the extent possible based on publicly available information, each case study quantifies the financial impacts that community opposition (or its avoidance) has had on the project and its sponsor.

We appreciate the input provided by Clive Armstrong, Jennifer Coulson, Anne Perrault, Anita Roper, Bruce Schlein, Jake Siewart, Julie Tanner, and Elizabeth Wild, in the development of this report.

Diverging Paths: What future for export credit agencies in development finance?

admin — Wed, 05 Oct 2005 00:00:00 -0400

Export credit agencies (ECAs) are bilateral public institutions that facilitate financing for home country exporters and investors doing business overseas, particularly in developing countries and emerging market economies. Over the last decade, critics have scrutinized ECA financing decisions from political-economic and sustainable development perspectives, with some questioning the need for ECAs’ continued existence.

Calls for the reform or even elimination of ECAs come in the broader policy context of government commitments to meet Millennium Development Goals (MDGs) that set targets for poverty alleviation, health, education, and environmental protection. A key concern in development circles is how to secure the resources, including financing, needed to achieve these internationally recognized development priorities. To date, public resources directed via ECAs to support export promotion have contributed very little to sustainable development or the MDGs more broadly. Questions thus arise as to whether ECA reform can increase those agencies’ contribution to sustainable development,and whether reform is preferable to the elimination of official export credit supports. This report proposes that reform continues to be referable to the abolition of ECAs, suggests structural and governance reforms that can enable ECAs to make modest but significant contributions to sustainable development outcomes, and identifies national and international opportunities for stakeholders to work toward these changes.

Two key international disciplines governing export credits are analyzed in the report, and will require renegotiation to enable the adoption of some of the reforms proposed here. The first is the Arrangement on officially Supported Export Credits (“the Arrangement”), which is a voluntary agreement negotiated within the Organisation for Economic ooperation and Development (OECD). The second is the Agreement on Subsidies and Countervailing Measures (ASCM), managed by the World Trade Organization (WTO). These two disciplines and their corresponding governance processes establish a legal framework for export credit provision and limit the reforms that ECAs can undertake autonomously.

A proposed reform agenda for ECAs that would support sustainable development includes two sets of recommendations. Reforms in the first set of recommendations would minimize the negative development impacts of current ECA activities. These “do no harm” measures include:

Upward harmonization of environmental and social standards for all ECAs;

Increased transparency in ECA lending practices;

Creation of grievance/recourse mechanisms at ECAs that have not yet established such procedures or structures;

Adoption by ECAs of a comprehensive agreement on sustainable debt management to better support “Highly Indebted Poor Countries”;

Adoption by national governments of legislation to implement measures to combat bribery and corruption in projects that receive ECA support;

Increased monitoring of the development impact of ECA portfolios.

The second set of recommendations consists of reforms that would maximize the positive development benefits to be gained from ECA support. This set of “do good” reforms include:

Invitations to developing countries with significant exports to join negotiations on export credit disciplines;

Amendments to the OECD Arrangement in the form of special sector arrangements, longer terms, increased coverage of local costs, more flexible repayment profiles, and greater flexibility on use of development aid;

Local currency financing;

Bundling of small-scale projects to reduce costs and risk profiles;

Sharing of risks with private financial institutions;

Portfolio balancing of developing-country risks with less risky emerging-market investments;

Monitoring and management of sector exposures.

Short-, medium-, and long-term opportunities for the pursuit of broad reform efforts are identified with specific targets and timetables that must be met to achieve the proposed recommendations. A potential future for ECAs begins with the adoption of reforms that allow ECAs to remain relevant in the global marketplace and lead ECAs to shift a share of their support to projects and exports that contribute significantly to sustainable development. If reform is to remain preferable to elimination of ECAs, however, it will be necessary for national governments to take meaningful and timely steps in that direction.