Development Planning Division Technical Document Series No. 1. Guidelines for environmental appraisal at the DBSA. Final Draft 1 March 2010

Transcription

1 Guidelines for environmental appraisal at the DBSA Final Draft 1 March 2010 Version

2 Suggested citation Development Planning Division Guidelines for environmental appraisal at the DBSA. Technical Document Series No.1, DBSA: Midrand. Published by Development Planning Division Development Bank of Southern Africa PO Box 1234 Halfway House 1685 South Africa Telephone: Telefax: Intellectual Property and Copyright Development Bank of Southern Africa Limited This document is part of the knowledge products and services of the Development Bank of Southern Africa Limited and is therefore the intellectual property of the Development Bank of Southern Africa. All rights are reserved. This document may be reproduced for non-profit and teaching purposes. Whether this document is used or cited in part or in its entirety, users are requested to acknowledge this source. Please use the suggested citation given above. Legal Disclaimer In the preparation of this document, every effort was made to offer the most current, correct and clearly expressed information possible. Nonetheless, inadvertent errors can occur, and applicable laws, rules and regulations may change. The Development Bank of Southern Africa makes its documentation available without warranty of any kind and accepts no responsibility for its accuracy or for any consequences of its use. Series Editor: Andrew Paterson Series Publication Coordinator: Lyn Sumners ISBN: Page 2

3 Contents 1. Introduction Overview Purpose of the guidelines Scope of the guidelines 6 2. Environmental appraisal The role of environmental appraisal Principles of environmental assessment Environmental appraisal and sustainable development 8 3. Overarching environmental issues DBSA policies for the environmental appraisal module The DBSA investment process Integration with other appraisal modules Information required for environmental appraisals Responsibility for environmental appraisals Risk categorisation of projects Environmental appraisal in SADC Public disclosure and participation Environmental appraisal guidelines Overview Initial screening Site visits Environmental risk appraisal of projects Environmental risk appraisal of programmes Financial intermediaries Agency agreements Other DBSA investment products Loan conditions Loan negotiations Project implementation Review process Review procedures Responsibilities 26 Page 3

4 6. References 26 Appendix 1: Extract from the National Environmental Management Act No. 107 of Appendix 2: Criteria for assessing institutional capacity for environmental management 30 Appendix 3: Format for environmental assessment of existing infrastructure projects 31 Appendix 4: Categories of project risk 33 Category 1: High risk 33 Category 2: Medium risk 34 Category 3: Low risk 34 Category 4: Financial intermediary 35 Appendix 5: Project, programme and consolidated reports Project reports Programme reports Consolidated project and programme reports 38 Appendix 6: Contents of EIA reports 39 Appendix 7: Guidance note for EIA reviews 41 Appendix 8: Terms of reference for consultants 52 Appendix 9: Sensitive geographic areas and environmental sites 53 Appendix 10: Environmental requirements for financial intermediaries 54 Tables 55 Abbreviations 55 Terms and definitions 55 Page 4

5 1. Introduction 1.1 Overview The Development Bank of Southern Africa (DBSA) is a development finance institution that finances the creation of infrastructure in South Africa and the southern African region. Although wholly owned by the government of South Africa, the DBSA serves all of the member countries of the Southern African Development Community (SADC). The Development Bank of Southern Africa Act, No. 13 of 1997, defines the primary purpose of the Bank as promoting economic development and growth, human resource development and institutional capacity building by mobilising financial and other resources from the national and international private and public sectors for sustainable developmental programmes and projects. This requires it, among other objectives, to do the following: z Appraise, plan and monitor the implementation of development programmes and projects. z Fund or mobilise funding, in line with the regulations to the Act, for initiatives aimed at minimising or mitigating the environmental impact of development programmes or projects. In terms of these provisions, the DBSA is committed to promoting sustainable development and building the institutional capacity of its borrowers. It recognises that the integrated and sustainable management of the environment, now and in the future, is the basis for sustainable development in all areas of human activity. In terms of this commitment, the DBSA developed a policy framework for environmental appraisal, which comprises the environmental policy of the DBSA Group and the procedural framework outlined in this document. All programmes and projects proposed for DBSA support must undergo environmental appraisals based on the guidelines outlined in this document. These guidelines are intended to guide and assist environmental analysts and specialists in producing consistent and high-quality environmental appraisals to enhance the DBSA s decision-making and, hence, sustainable development. For ease of use, in the rest of this document, references to projects should be understood to include programmes, unless otherwise indicated. Also, the terms environmental analyst and environmental specialist are used interchangeably, unless otherwise specified. 1.2 Purpose of the guidelines The purpose of these environmental appraisal guidelines is to facilitate the application of the DBSA s internal environmental appraisal process; they are designed to ensure the easy and consistent application of the environmental appraisal module. The guidelines allow the early, systematic and Page 5

6 structured consideration of environmental issues in proposed projects, thereby ensuring that they are environmentally sound and in line with the Bank s mandate and policies. In addition, the guidelines will contribute to building the capacity of environmental specialists in the Bank and in financial intermediaries supported by the DBSA. 1.3 Scope of the guidelines The environmental appraisal guidelines in this document cover all projects supported by the Bank, whether directly, through financial intermediaries or in terms of agency agreements. This document also includes specific appraisal requirements for operations outside South Africa. Technical assistance grants for studies or projects that do not involve the provision of infrastructure are excluded, particularly as these have no impact on the environment. However, the responsible environmental analyst must still carefully review the scope or terms of reference of all projects to ensure alignment with the Bank s mandate and compliance with its principles and environmental policy. 2. Environmental appraisal 2.1 The role of environmental appraisal The overarching purpose of the environmental appraisal module is to: z Ensure that projects supported by the DBSA are environmentally sound and sustainable. z Identify and evaluate the environmental risks associated with them. z Ensure that the borrowers implement appropriate mitigation measures to address such risks. The DBSA follows a lifecycle approach to projects by assisting borrowers in designing an appropriate system for environmental management and helping to build their capacity to fulfil their environmental obligations. The DBSA does not, however, manage the environmental concerns associated with any project on behalf of the borrower. The borrower remains completely responsible for managing these and, in its ongoing interaction with borrowers, the DBSA avoids creating any dependency by the borrower in this regard. In the appraisal process, the DBSA aims to achieve the following: z Identify opportunities to maximise the developmental and environmental benefits of projects and promote sustainable development. z Assist management in deciding whether to support a project, based on its environmental risks. z Minimise the environmental risks and liabilities of both the project and the DBSA. Page 6

7 z Assist the borrower in obtaining any legislated environmental authorisations that may be necessary. z Assist borrowers in building their environmental capacity. z Identify ways to prevent, minimise, mitigate or compensate for the environmental risks and/or impact associated with projects. z Assist in the development of conditions to be included in the loan agreement with borrowers. The environmental appraisal module at the Bank is, therefore, a decision-making tool that supports the DBSA in managing its business risks and increasing its developmental impact. 2.2 Principles of environmental assessment The principles underpinning an environmental assessment, whether a strategic or environmental impact assessment (EIA), are set out in section 2 of the National Environmental Management Act (NEMA), No. 107 of 1998, and reproduced in Appendix 1. Section 2(3) of the Act specifically requires development to be socially, environmentally and economically sustainable. The DBSA, as an organ of the state, is bound by the principles established in this statute. It uses the definition of the environment provided in section 1 of the Act, which reads as follows: Environment means the surroundings within which humans exist and that are made up of: (i) (ii) (iii) (iv) the land, water and atmosphere of the earth micro-organisms, plant and animal life any part or combination of the (i) and (ii) and the interrelationships among and between them the physical, chemical, aesthetic and cultural properties and conditions of the foregoing that influence human health and well-being. This definition is also in line with the national standard on the environmental assessment of sites and organisations, SANS 14015:2003/ISO 14015:2001, which defines the environment as surroundings in which an organisation operates, including air, water, land, natural resources, flora, fauna, humans, and their interrelation. Although the NEMA and SANS definitions include people as part of the environment, the DBSA appraises the socio-economic impact of its projects in the social appraisal module. This inevitably results in overlaps between the social and environmental appraisal modules, and the results of these modules must be integrated before the findings of all six of the appraisal modules (the other four being technical, economic, financial and institutional) are consolidated. Page 7

8 2.3 Environmental appraisal and sustainable development The guiding principle of the appraisal process is to ensure that Bank-supported interventions are economically, socially and environmentally sustainable, in accordance with the principles of sustainable development outlined in the NEMA. Integral to these principles, particularly the precautionary principle, is the requirement that the environmental risk of a proposed project must be properly assessed and managed. Four sources of environmental risk must be considered in environmental appraisals. These are: z Environmental impact: Risks emerging from the nature and impact of the project could include, for example, the potential of a waste disposal site to pollute groundwater, or of road fill contaminated with heavy metals to lead to toxic runoff. z Legal requirements: Non-compliance with the legislative regime is a significant source of risk. Legal risks can include siting requirements such as planning authorisation and EIA approvals, operating requirements such as water permits, and environmental liability regimes that link the proponents of a project to any existing or future contamination. z Institutional capacity: Any limitations of the capacity of an institution to fulfil environmental requirements during the implementation, operation and maintenance of a project can present a significant risk. z Public and political concerns: Environmental issues have a high potential for reputational risk and even conflict owing to public and political concerns. Environmental assessments are not limited to risks the Bank also appraises the environmental benefits of projects. In line with the Bank s policy and the sustainability principles, the appraisal process actively considers ways to improve environmental benefits, for instance by exploring alternatives that may have a larger positive impact on the environment. Appraisals of projects within South Africa are based on the NEMA principles. Appraisals of private sector projects outside of South Africa, especially those with a high environmental risk, must use international good practice on social and environmental assessment, particularly the Performance standards on social and environmental sustainability of the International Finance Corporation (2006). 3. Overarching environmental issues 3.1 DBSA policies for the environmental appraisal module The DBSA Board approved the current environmental policy in 2005 (see the DBSA website). This policy requires all Bank operations to be carried out in an environmentally and socially responsible manner, deriving the maximum environmental and social benefits. The policy is in line with the DBSA s commitments in terms of the UNEP Finance Initiative (in 2004, the DBSA became Page 8

9 a signatory to this initiative between the UNEP and the financial sector). The Initiative recognises that sustainable development depends on a positive interaction between socio-economic development and environmental protection, which balances the interests of the current and future generations. It views sustainable development as a collective responsibility of government, business and individuals, and requires financial institutions to adopt best practice in environmental management. In line with this commitment, projects can only qualify for DBSA support if they fully comply with the Bank s environmental policy and adhere to the procedural framework outlined in this document. The environmental policy outlines three fundamental principles of the appraisal process, namely: z Compliance with national and regional policies, legislative and regulatory requirements related to the environment, as well as any relevant international obligations z Stewardship of environmental products and services both within and outside the Bank z An environmental management system (EMS) that assists in improving the environmental performance of the Bank s investment portfolio In implementing these appraisal guidelines in line with the environmental policy, the following internal policies apply: z All projects being considered for support are subject to an environmental appraisal; this must be submitted to the project manager, in writing, according to the format outlined in this document. z The appraisal must be conducted by an environmental analyst, and such an analyst must therefore be on every project team that does appraisals. z All documentation and communication used and decisions taken in the appraisal must be clearly referenced and justified in the appraisal report. z The environmental specialist in the Advisory Unit must review all appraisal reports for high-risk and SADC programmes and projects, to provide input and share knowledge with other members of the Environmental CoP. z All projects in the high-risk category must have environmental management plans (EMPs) in line with the EIA process. z No environmental appraisal report can be changed without consultation with the relevant environmental analyst. z No funds can be disbursed without the appropriate authorisations from the regulatory authority; consequently, any requirement for an environmental authorisation or permit will be a suspensive condition in the loan agreement. z The DBSA will not fund a project if the environmental risk assessment remains high after mitigation. z Any conditionality pertaining to credit lines on projects must be identified and addressed in the appraisal. Page 9

10 3.2 The DBSA investment process The process flow for investment applications can broadly be divided into the following seven steps: 1. Process the application 2. Mobilise project resources and information 3. Recommend an investment proposition 4. Process the investment decision 5. Conclude the contract 6. Deliver implementation assistance 7. Project implementation completion The process is sequential and follows the phases of the lifecycle of the project. The length of this process depends on the nature and type of project and the institutional capacity of the client for environmental management. The primary elements of the investment process flow are described below: 1. Process the application: In this step, development needs are identified, a development intervention is conceptualised and an application is made to the DBSA for funding. After registering the application, the project manager screens it against the mandate of the Bank and requests a project team, including an environmental analyst, to be assigned. Using the available information, the environmental analyst determines the environmental risk category of the project and issues a request for any additional information required. 2. Mobilise project resources and information: Once established, the project team assists the borrower in the design and preparation of the project, if necessary. The environmental analyst assesses the adequacy of the information provided by the client and, where appropriate, assists the client in fulfilling the requirements outlined in this document. 3. Recommend an investment proposition: When all of the required information has been obtained, the project team undertakes a detailed appraisal of the sustainability of the proposed project, according to the appraisal guidelines for the six modules. At this stage, additional environmental information is analysed, particularly for medium- to high-risk projects (as per Appendix 4). The team s findings and recommendations provide the basis for a decision about providing investment assistance, as well as the terms and conditions for any investment loan. 4. Process the investment decision: After the completion of the appraisal, DBSA management reviews the investment appraisal report and its recommendations. Depending on the type and value of the project, the proposal serves at the Development Intervention Committee, Corporate Credit Committee or Board Investment Committee, where a decision is taken about support for the project. Page 10

11 5. Conclude the contract: Following the approval of the proposal by the relevant investment review committee, the contract is concluded with the client. This involves the negotiation and agreement on the primary terms and conditions of the loan agreement. Any environmental requirements suggested in the appraisal report will be part of the negotiations and, once agreed upon, included in the loan agreement as either suspensive or further terms and conditions. 6. Deliver implementation assistance: This process entails disbursing funding and monitoring the implementation of the project, according to the terms and conditions in the loan agreement. The DBSA monitors all projects under implementation to ensure full compliance with these terms and conditions, including environmental conditions. 7. Project implementation completion: Project completion reports review the results of the implementation, generate lessons learnt, and recommend surveillance or monitoring arrangements. The Bank continues to monitor the project for the duration of the loan term. The completion report includes a section on environmental performance, which reflects environmental compliance. Section 4 of this document details the procedural requirements for each of these steps. In view of the importance of the evaluation function, a separate and independent unit has been established to conduct evaluations. These studies compare the actual impact of the project, including on the environment, with the impact anticipated in the appraisal process, and assess the effectiveness of any mitigation measures. 3.3 Integration with other appraisal modules Unit managers, in conjunction with project managers, appoint members of the project team, generally from the same region. (In the Equity and Investment Banking and the Project Finance Units, however, the project manager selects the analysts.) Every project team must include an environmental analyst, as noted above, to conduct the environmental appraisal. To be effective, the environmental appraisal must be integrated with the full appraisal report and its findings aligned with those of the other appraisal modules. The environmental analyst should interact closely with the technical, institutional and social analysts. 3.4 Information required for environmental appraisals To expedite the environmental appraisal, the borrower should be informed as soon as possible about the information that the DBSA requires. The nature of the required information depends on the type of project and its initial risk categorisation. In some cases, the borrower may need advice about legal procedures for obtaining permits and other environmental authorisations. When assisting clients in this regard, the environmental analyst must Page 11

12 bear in mind the issue of environmental liability. The analyst may not recommend specific consultants to the borrower, intervene, or take steps to obtain permits on its behalf. Guidance may be given only on procedural requirements. The DBSA reserves the right to request additional information about the project at any time. Technical assistance may be offered to assist clients in obtaining all the information needed for the environmental appraisal. 3.5 Responsibility for environmental appraisals z The borrower: The borrower is responsible for environmental management of the project and, accordingly, for all the costs associated with the environmental assessment. The borrower must also provide adequate information in good time to allow the environmental analyst (and the team) to conduct a proper appraisal to facilitate decision-making. This information includes relevant environmental study reports, environmental permits or authorisations, and any other records deemed necessary for the appraisal. In addition, the borrower must allow reasonable access to the project site. It is imperative for the borrower to take the responsibility and ensure that the environmental appraisal leads to environmentally sound projects. z The DBSA: The Bank establishes a project appraisal team for every registered project application; in line with these guidelines, this team will include an environmental analyst. The specific tasks of this analyst include the following: Assess the early review report in conjunction with the project manager, screen the project and provide an initial risk categorisation. Inform the borrower about the environmental information required for the appraisal, based on the risk categorisation of the project. Conduct the environmental appraisal of the project in accordance with these procedural requirements. The environmental analyst may, at the request of the borrower, offer advice on the preparation of terms of reference for EIAs, legal procedures for obtaining permits, and the environmental management of the project. Further, the analyst may be requested to draw up terms of reference for external consultants to review, for example, an EIA or other technical reports. A proposed framework for such terms of reference is presented in Appendix 8. As noted, the analyst may not recommend specific consultants to the borrower, intervene, or obtain the relevant permits on its behalf. 3.6 Risk categorisation of projects Proposed projects are classified into four categories based on the type, location, sensitivity and size of the project, as well as the nature and intensity (or magnitude) of the environmental impact associated with the project. The purpose of this classification is to assist in decision-making during the appraisal process, and indicate what information or permits and authorisations may be required. Page 12

13 The categories are: Category 1: High risk A project in Category 1 is likely to have a significant and irreversible adverse impact on the environment, and could lead to significant changes in land use and in the social and biophysical environment. The DBSA requires an EIA for any project in this category, regardless of legislative or regulatory requirements. Note that South African law requires an EIA for all activities identified under section 21 of the Environment Conservation Act, No. 73 of 1989, and section 24(5) of the NEMA. In addition, the Bank requires all projects in this category to have an EMP in line with the EIA to ensure that environmental risks are properly mitigated. An EMP is a recognised tool that can provide assurance that the project proponent has made adequate provision for the mitigation of its environmental impacts. The Integrated Environmental Management (IEM) Information Series, No. 12 (DEAT, 2004a) reflects on methods and procedures for mitigating and monitoring environmental impact. It may assist DBSA staff in reviewing EIAs and related documents (including EMPs), as well as clients developing and implementing the EMP. Category 2: Medium risk A project in Category 2 has a potentially adverse impact on the environment, but less so than Category 1 projects. In this category, the country s legislative and regulatory requirements for EIAs apply. If the project is not a regulated activity, the requirements of the environmental assessment apply. However, the responsible analyst must still indicate the level of environmental assessment required. This may be an assessment of the site (facility) or organisation, a basic EIA or a full EIA, depending on the type of project or a combination of other factors, such as the sensitivity of the geographic area or natural environment. Category 3: Low risk A project in Category 3 is unlikely to have a significant adverse impact on the environment. Since these projects have no adverse impact on the natural environment, they are readily appraised with limited environmental information. However, they remain subject to a screening process similar to projects in the previous categories, in order to identify potential issues for further investigation. Page 13

14 Category 4: Financial intermediaries This category entails Bank investments through financial intermediaries. The funding is lent in turn to subprojects, some of which may have a significant adverse impact on the environment (see Appendix 10). The environmental analyst remains responsible for categorising all projects, regardless of category, and must also determine what environmental information is required for the appraisal. This must be appropriately motivated in the appraisal report. As a minimum requirement, the project must adhere to the legislative and regulatory requirements of the country where it will be implemented. To facilitate categorisation, an illustrative list of projects under each category is provided in Appendix 4; note that the list is not exhaustive. Finally, where a project involves the refinancing of existing infrastructure projects, the Bank requires a comprehensive assessment of the environmental performance of the organisation and the facility concerned for all Category 1 and 2 projects, even where these are not affected by the legislative and regulatory requirements for EIAs. The proposed approach to and format for assessment of existing infrastructure projects is presented in Appendix 3. An international standard for the environmental assessment of an organisation, SANS 14050:2003, provides additional guidance on the planning, implementation and reporting of such an assessment. 3.7 Environmental appraisal in SADC As noted, these environmental appraisal guidelines apply to all DBSA-supported projects, including in the rest of the SADC region. In the region, different countries have different approaches depending on their legislative regimes, and a project should be assessed against the legislative and regulatory requirements of the country concerned (Walmsely & Tshipala, 2007). If there is no enabling legislation for environmental assessment or effective regulations for implementing the provisions of the enabling legislation, the borrower will be required to implement a process based on the framework outlined in this document. The review process should be aligned to internationally recognised standards for environmental assessment. As indicated earlier, it is strongly recommended that all high-risk private sector projects outside South Africa be reviewed against the standards of the International Finance Corporation (2006). The standards cover the following issues: social and environmental assessment and management systems; labour and working conditions; pollution prevention and abatement; community health, safety and security; land acquisition and involuntary resettlement; biodiversity conservation and sustainable natural resource management; indigenous people; and cultural heritage. Page 14

15 The Bank will likewise apply international standards for environmental quality to projects in countries that lack legislative requirements to this effect. The main standard used is the Environmental, health, and safety (EHS) guidelines of the World Bank (2007), which provides technical guidance on good industry practice. Should borrowers argue for a different standard, a recommendation to this effect must to be based on specialist investigations, comprehensively documented in the EIA or environmental due diligence (EDD). To assist the analyst with a review of the EIA, particularly for projects in the SADC region, the main components of an EIA report and guidance notes are provided in Appendices 6 and 7 respectively. The DBSA reserves the right to apply standards, in terms of both procedural requirements and environmental quality standards, that go beyond legislative and regulatory requirements. 3.8 Public disclosure and participation In compliance with Principle 10 of the Rio Declaration on Environment and Development (UNEP, 1992), South African legislation and regulations on activities that must have EIAs also set out requirements for public participation. These requirements enable interested and affected parties to engage with the authorities and project sponsors on any proposed development project. The DBSA, as a development finance institution, views public participation as a critical component of the EIA process, as it enhances collective decision-making and project ownership and helps to broaden development impact. Therefore, the DBSA requires public consultation on all Category 1 projects and any Category 2 projects that must have an EIA, in line with the DBSA Act and the Bank s policy on environmental sustainability. In addition, as part of the appraisal and ongoing monitoring, the environmental analyst must, where feasible and appropriate, engage with all relevant stakeholders, including local communities and environmental or other interest groups. Such engagement will fulfil the public consultation requirements for projects under Category 3, for which a formal EIA process is not required. The IEM Information Series No. 3 (DEAT, 2004c) reflects on approaches to stakeholder engagement (broadly defined to include public participation and consultation) and techniques to facilitate environmental appraisal. It may be useful to both DBSA staff and clients. 4. Environmental appraisal guidelines 4.1 Overview This section provides further details on the risk assessment methodologies used in environmental appraisal in the Bank. It outlines the main steps in conducting an appraisal and then reflects procedural requirements for the assessment and management of environmental risk. The environmental appraisal, being primarily qualitative, involves planning the process, gathering and validating information, Page 15

16 evaluating the information, and reporting on the appraisal. As outlined below, the process comprises three main steps, namely project screening, a site visit and the environmental appraisal. 4.2 Initial screening The major task in implementing the environmental appraisal guidelines is the initial screening of the project to determine, among others, the appropriate risk category. The screening commences after a project has been accepted into the pipeline based on its fit with the DBSA s mandate, policies and priorities. The DBSA requires an environmental screening of all projects, regardless of their potential environmental risks. This screening or project categorisation is based on the early review report prepared by the project manager, the borrower s project proposal, and any other baseline information available to the environmental analyst. The environmental analyst assigns the proposed development project or credit line to one of the following four categories (see section 3.6): z Category 1: High risk z Category 2: Medium risk z Category 3: Low risk z Category 4: Financial intermediary The analyst has the discretion to impose requirements that differ from those of the above categories. Any such deviation must be motivated in the project appraisal report for discussion with the project manager and team. The analyst may also call on other professionals, whether internal or external, to assist in the initial screening decisions. Once a risk category has been assigned, the analyst outlines the information needed, including legislative and regulatory requirements, and communicates this to the borrower in conjunction with the project manager. At this stage, all existing environmental investigations, audits and EIAs are verified. Any alternative opportunities that may yield additional environmental benefits are also identified for consideration in the proposed project. However, since project planning is often at an advanced stage when borrowers approach the Bank for funding, opportunities for influencing the project in this way may be limited. 4.3 Site visits The environmental specialist undertakes at least one site visit before the appraisal, to inform the risk categorisation and to assess the types of risks that are likely to be encountered before and after mitigation. During the field visit, the analyst does the following: Page 16

17 z Assess the sensitivity of the site, the potential environmental risks from project activities, and the potential for intervention to promote alternative designs. z Assess the institutional capacity of the borrower for environmental management. z Establish relationships with, among other important contacts, project designers, engineers and interested and affected parties. A site visit is particularly important when no EIA or scoping report has been submitted or when they are incomplete, as it enables the analyst to identify the potential environmental impact of the project and develop a risk table for the appraisal report. Also, when the DBSA has previously financed projects as part of an ongoing programme with a borrower, the site visit allows the analyst to assess the environmental performance of both the borrower and the projects. 4.4 Environmental risk appraisal of projects The environmental analyst uses all the relevant documentation, including EIA or environmental due diligence reports, information from site visits, discussions with regulatory authorities and interested and affected parties, and the relevant guidelines to identify the environmental risks of the project and the phases in which they are likely to occur. In some cases, the documentation supplied by the borrower may be inadequate. The environmental analyst will then consult with the project manager to, for example, redo all or part of the EIA, obtain other documents, or request expert reporting on sectoral issues and a review of the EIA, for which additional funding may be needed. An appraisal cannot be comprehensive and sound without an adequate information base. The Bank therefore requires the analyst to report on the adequacy and source of the information. Appendix 5 outlines further requirements for documenting the quality and adequacy of the information reviewed for the appraisal report. The methodology for the review of an EIA is given in Appendix 7; see also DEAT (2004b). The Bank also requires an environmental risk table for all projects. The broad methodology for constructing the table is outlined in the rest of this section. For each risk identified, the magnitude of its consequences (or impact) is assessed and given a rating of low, medium or high. The criteria for the rating could include the following: z Nature of the impact z Sensitivity of the environment z Extent of the impact z Intensity or severity of the impact z Duration of the impact z Potential for cumulative effects Page 17

18 z Potential for non-compliance with regulatory requirements z Impact on endangered species z Potential for lender liability z Potential for reputational risk This list is not definitive, and analysts are encouraged to identify criteria that may be more appropriate for a particular project. Any criteria used in the rating should be documented in the appraisal report. When projects form part of a programme that has already been assessed, the norms and criteria identified in the programme appraisal report should be used. The table below identifies possible ways of deciding on the rating. Table 1: Qualitative measures of magnitude Criteria Rating Low Medium High Scale of impact Localised On site Fairly extensive Regional National International Sensitivity of the environment Not in a sensitive environment In a sensitive environment, but impact localised and reversible Mitigation measures easily prescribed Project situated in sensitive areas specified in Appendix 9 Potential for cumulative impact Non-compliance with regulatory requirements None Limited Extensive Full compliance Applications in place Non-compliance Impact on endangered species Little or none Unlikely to be adverse Some, but mostly reversible Significant loss of species Irreversible Diverse and comprehensive negative effects Potential for lender liability Potential for reputational risk Little or none Some Significant Little or none Some Significant Page 18

19 The probability of the risk event occurring is then assessed, as per Table 2. Table 2: Qualitative measures of probability Descriptor High Medium Low Description The event is likely to occur in most circumstances The event may sometimes occur The event may only occur in exceptional circumstances Table 3 combines the magnitude of the impact of each risk and the probability of the risk event occurring, to yield an overall rating for each risk. Table 3: Qualitative risk assessment matrix Probability Magnitude of consequence (impact) Low Medium High A (High) High/low High/medium High B (Medium) Medium/low Medium Medium/high C (Low) Low Low/medium Low/high The ratings in Table 3 are interpreted as follows: High/low: High/medium: High: Medium/low: Medium: Medium/high: Low: Low/medium: Low/high: The chance of the event occurring is very high but the potential impact is low. The chance of the event occurring is high but the potential impact is moderate. The chance of the event occurring and the potential impact are both high. The chance of the event occurring is moderate and the potential impact limited. The chance of the event occurring and the potential impact are both moderate. The chance of the event occurring is moderate and the potential impact high. The chance of the event occurring and the potential impact are both low. The chance of the event occurring is low and the potential impact moderate. The chance of the event occurring is low and the potential impact high. The initial risk assessment is done before mitigation measures are in place. Once these measures have been identified, the magnitude, probability and overall risk are reassessed, based on the expected effects of the mitigation measures. Note that the proposed mitigation measures must be practical and involve concrete actions in the EMP, as well as adequate financial provision. General statements of intent, with a limited capacity to implement the required actions, must not be used to reduce the impact ratings, as the risk will remain high. Page 19

20 The analyst should also explicitly consider the effect of the borrower s institutional capacity on the magnitude and probability of each of the identified environmental risks. The results of the risk assessment are detailed in the environmental appraisal report and summarised as per Table 4 below. Table 4: Summary risk assessment of a project Environmental risk Specify environmental risk Magnitude Probability Risk rating (without mitigation) Proposed mitigation measures H, M, L H, M, L H/M, etc. Detail mitigation measures Magnitude Probability Risk rating (with mitigation) H, M, L H, M, L H/L, etc. An overall risk rating for the project should also be given before and after the mitigation. This is done as follows: as part of the initial screening, a project is classified into one of the categories identified earlier, based on its nature, the magnitude of potential adverse effects and the sensitivity of the project site, among other criteria. Individual risks are then assigned risk ratings in terms of their probability and magnitude profile. Once mitigation measures are in place, the ratings of individual risks are reassessed, as per Table 4, and the whole project is then reassessed according to where it lies in the broad category. For example, if the broad category is medium, the project may be medium/ high, medium or medium/low. This gives the allocation of the overall risk category. In the loan risk spread provided by the Risk Management Unit, environmental risk is allocated 20 points. Table 5 proposes a method for allocating these 20 points, after the borrower has agreed to the mitigation measures. Table 5: Application of the loan risk spread Overall environmental risk rating Risk-rating points allocated (from loan risk spread summary) Risk spread Risk-rating class High 0 Unacceptable High/medium 3 Doubtful High High/low 5 Weak Medium/high 9 Vulnerable Medium 11 Acceptable Medium Medium/low 13 Satisfactory Low/high 15 Good Low/medium 17 Very good Low Low 20 Excellent Page 20

21 4.5 Environmental risk appraisal of programmes As noted, the DBSA also funds investment programmes that involve several different projects. The Bank requires all of the projects in a programme to be appraised individually. In some programmes, the individual projects are listed or even described upfront. In this case, the analyst must try to obtain enough information to identify the nature and type of the projects, and determine the project category. The analyst can use the information obtained by the borrower when the projects were identified and also request additional baseline information, especially for projects with significant environmental risks. The institutional rating and the risk categorisation of individual projects are then used to assign an overall risk rating to the programme. In other cases, information on the projects may not be available at the time of the appraisal. Under these circumstances, the emphasis is on the risk profile of the programme and the institutional capacity of the borrower for environmental management. Appendix 2 lists criteria for assessing institutional capacity; other criteria can be motivated where required. On the basis of these criteria, the borrower risk will be evaluated as high, medium or low. The institutional rating and the risk profile of the programme are then used to assign an overall risk rating to the programme. The rest of the process to apply the loan risk spread is the same as for projects, and the results are presented as per Table 6 below. Table 6: Summary risk assessment of a programme Projects, project types and/or sectors (Infrastructure programme) Risk classification Institutional capacity risk rating Overall risk rating Electricity reticulation High, medium, low High, medium, low Based on the risk of the project and the risk rating from the institutional capacity assessment Sanitation reticulation As above As above As above 4.6 Financial intermediaries The DBSA s support to financial intermediaries presents special considerations in the appraisal process. As is the case with some programmes, the environmental analyst may have very little information on the projects that will be supported through the on-lending of funds, other than perhaps the sectors under consideration. Page 21

22 In general, the analyst follows the same approach as for the appraisal of programmes. The emphasis is on the overall risk category of the projects being considered for funding and the financial intermediary s institutional capacity for environmental management. However, the DBSA s environmental requirements for on-lending projects may differ from those for directly financed programmes, as outlined in Appendix 10. The DBSA requires projects funded by financial intermediaries to be environmentally sound and sustainable. Therefore, if they do not already have the appropriate policies, financial intermediaries must establish an environmental appraisal policy and procedural framework as part of their overall credit review policy. The existence and/or adequacy of the borrower s environmental appraisal policy framework is assessed as part of the appraisal of the credit line. The analyst, in conjunction with the project manager, should inform the financial intermediary of the requirements outlined in Appendix 10 as early as possible in the appraisal process. 4.7 Agency agreements The DBSA s investment portfolio also includes projects supported through credit lines that the Bank has with other development finance institutions. Most of these institutions have attached environmental conditionalities to their lines of credit. When appraising projects, the environmental analyst should ensure that any environmental conditionalities are included in the environmental appraisal and, more importantly, that the ultimate borrower (or financial intermediary) adheres to them. Where the agencies have not such procedural requirements or conditionalities to their support, the environmental guidelines set out in this document apply, with due regard for international good practice. 4.8 Other DBSA investment products In addition to traditional loans, the DBSA provides a range of innovative products, such as equity investments, bids and bonds. The environmental appraisal of these products faces special challenges stemming from the diversity of the implementing institutions and their varied capacity for environmental management. In most cases, Bank lending through these products is not targeted at specific projects. Therefore, the focus of the environmental appraisal is on the institutional capacity for environmental management and the profile of the projects to be funded by such products. In addition, to ensure that these financial products result in projects or operations that are environmentally sound and sustainable, adherence to the DBSA s internal policies and environmental requirements as outlined in these guidelines is strictly monitored. Page 22

23 Therefore, the environmental analyst must ensure that the loan agreement includes clauses for compliance with all of the relevant environmental legislative and regulatory requirements, as well as the requirements for monitoring and reporting environmental risks. Where feasible, the analyst and the project team must monitor these conditions for each individual project financed by such products. In line with the DBSA s focus on ensuring that the projects supported by these financial products are environmentally sound and sustainable, it is committed to strengthening the environmental management capacity of the borrowers. In the assessment, the environmental analyst must identify any limitations or inadequacies in this capacity for possible support through technical assistance. The assessment should use the criteria in Appendix 2 and preferably also the national standard for the environmental appraisal of sites and organisations (SANS 14015). 4.9 Loan conditions The DBSA ensures compliance with its mandate, policy and guidelines on environmental management by incorporating appropriate conditionalities in the legal agreements with its borrowers. The two main types of conditionalities are suspensive conditions and further terms and conditions. z Suspensive conditions: The acquisition of an environmental authorisation or permit, where required, is always a suspensive condition the DBSA requires proof that the authorisation or permit has been obtained before any funds can be disbursed to the project. Where non-compliance with certain requirements would affect the environmental risks of a project to such an extent that the DBSA could suffer significant liability, such requirements must also be made suspensive conditions. z Further terms and conditions: These aim to ensure that the borrower complies with the environmental conditions identified in the loan agreement. They may include, for example, requirements for preparing and reporting on an environmental mitigation and management plan. The environmental analyst, in conjunction with the project manager, must clearly indicate the issues to be included in the legal agreement with the borrower. The legal advisor will assist in drafting such environmental conditions; they should be precise and indicate exactly what is required. Before the borrower signs loan agreement, the analyst must verify that these environmental conditions have been included in the agreement. The main mitigation measures to lower the environmental risks of the project should form part of the loan agreement and be drawn through to the contract documents, tender documents and the bill of quantities. As part of the monitoring during the implementation phase, the environmental analyst should verify that the borrower adheres to the relevant clauses in the loan agreement. Page 23