Comments to the Auditor General on the review of EDC's ERD (January 2004)

Comments to the Auditor General on the review of EDC's Environmental Review Directive (January 2004)

 

EDC’s Commitments to the Environment

“I have asked the Auditor General to undertake an audit two years after a revised framework has been adopted, to ensure that EDC has implemented the recommended changes in its design and operation.”

Pierre Pettigrew, Press Release, June 26, 2001

 

Following a two year review by Parliament of the Export Development Act (EDA) and Export Development Canada (EDC), Pierre Pettigrew, Minister of International Trade, held a press conference in June 2001 to highlight what changes EDC would make to its policies.

 

The press release noted the government commitment to, among other things:

  • Take account of benefits to Canada and Canada’s international obligations in the area of human rights, core labour standards, and the environment
  • Make the environmental review a legal requirement and have the Auditor General review its implementation of this directive.

 

To achieve these goals, Minister Pettigrew made a number of government recommendations with regards to what the framework should do. These included:

  1. Help ensure that the projects supported by the Corporation are environmentally sound and sustainable;
  2. Clearly identify the environmental standards that EDC will apply in conducting reviews;
  3. Clearly identify those EDC products and services that require environmental review;
  4. EDC should screen projects for environmental risk and impacts, and screening should be based on simple, clear and objective standards. The framework should be clear about the environmental information required for screening and review, and stipulate that the decision to provide or decline financial support will not be taken in the absence of sufficient environmental information;
  5. EDC should categorize projects according to their level of potential environmental impact, and the due diligence should be proportionate to the category – this categorization system should be similar to that of other International Financial Institutions, such as the International Finance Corporation;
  6. EDC should provide reasonable public transparency for those projects that pose the greatest potential for environmental impact, without unduly compromising Canada’s international business competitiveness through the release of commercially sensitive financial information. EDC’s draft disclosure policy has been designed to serve that objective;
  7. EDC will seek to mitigate the environmental impacts of projects as much as possible, and should stipulate the environmental grounds on which EDC will decline support;
  8. The framework’s design should permit clear accountabilities of its operation;
  9. The framework should identify those projects that require ongoing monitoring to ensure environmentally related covenants or commitments made by project proponents are met, and should specify appropriate monitoring procedures;
  10. Balance interests and competitiveness of exporters with government’s policy objectives. Striking this balance can be greatly assisted by public consultations, and EDC should employ such consultations in its policy revision practices;
  11. Serve as a model to our counterparts in the OECD, and designed to allow EDC to play a leadership role in the evolution of a multilateral consensus.

 

These expectations of what EDC’s environmental review directive should contain, provide the framework around which we have based these comments to the Auditor General’s office. The comments are based on our own observations, on the May 2001 Auditor General report, the September US General Accounting Office report, the new OECD Common Approaches on export credits and the environment, and best practices among public international financial institutions (PIFIs).

 



1) SUSTAINABILITY OF PROJECTS

Since EDC adopted its new Environmental Review Directive (ERD) and disclosure policy, it has supported a number of projects that are of questionable sustainability.

 

In January 2003, EDC gave support to complete the Cernavoda 2 nuclear reactor. EDC had previously financed Cernavoda 1. The Cernavoda 2 nuclear reactor in Romania is employing CANDU nuclear reactors which have a long historical legacy of poor performance. Assessments of all three summaries of the environmental impact assessments conducted for the Cernavoda2 reactor, found serious omissions in key information necessary for conducting a rigorous review. And over the summer of 2003, Cernavoda 1 reactors had to be shut down due to lack of water coolant.

 

In November 2002, EDC supported the Collahuasi copper smelter in Chile. Prior to lending support for the facility, in January 1998, 8,000 miners from the region went on strike to protest their appalling work conditions. In 2001, two toxic spills occurred near the mine, costing the company US$12,000 in fines. More recently, in February 2003, EDC signed a $375 million support facility with Nortel for its expansion in Colombia. Although telecommunications may seem to be innocuous in terms of its impacts, doing business in Colombia requires much greater precaution. The Urra dam in Colombia brought with it forced disappearances and murders. This time, the Nortel expansion has led to the loss of 10,000 trade union jobs from Colombia’s telecommunications industry.

 

In other cases, details remain vague about the projects, listing various goods and services, as with Nexen, Inc. Nemak of Canada, Celulosa Araucco y Constitution SA, Inversiones CMPC, SA, Petrobras SA., Calpine Corporation. Yet all of these companies are involved in projects that could potentially have serious negative environmental impacts.

 

Many environmental, health, social and labour considerations still seem to be missing from EDC’s environmental review process. The ERD seems to have missed out on at least three of these elements, and remains weak in the area of the environment.

 



2) CLEARLY IDENTIFY STANDARDS APPLIED IN THE REVIEW

EDC currently uses a benchmarking approach to its project review. This means that it benchmarks or measures projects against a broad array of standards, ranging in scope from ISO 14000 to the World Bank (WB) Pollution Prevention and Abatement Handbook, and the International Finance Corporation (IFC) safeguards and policies. A broad set of standards does provide a certain degree of flexibility to those reviewing the projects, but it also exposes the process to a lack of predictability and consistency in how EDC evaluates projects. This situation is aggravated further by the fact that rather than using a minimum set of high international standards appropriate to different processes (e.g. consultation) and sectors (e.g. for dams), it uses a broad illustrative list, and it does not disclose which specific standards a particular project has met (or exceeded).

 

RECOMMENDATION: To lend greater clarity to the process, EDC should include within its ERD a defined, rather than illustrative list, of standards which it applies to projects. At best, it would refer to a defined minimum set of standards, including IFC safeguard policies and guidelines, World Bank guidelines and the Pollution Prevention and Abatement Handbook, World Bank Safeguard Policy OP/BP 4.12 on resettlement, IFC World Health Organization standards, and International Labour Organization core labour standards (in particular, the ‘Declaration on fundamental principles and rights at work’), ILO 169 (Indigenous rights), and the outcomes of the World Bank extractive industries review. Like the IFC, EDC should adopt procedural requirements related to Environmental Assessments for large dams and reservoirs (Appendix 4, IFC Environmental and Social Review procedure). Together these standards cover a large number of the controversial projects that EDC has supported in the past.

 

Furthermore, EDC must disclose to stakeholders on its web site which standards have been applied to what projects. For controversial projects, this might further assure affected groups and other concerned citizens that the company has met with the highest standard/s. It would also enable these groups to monitor when a project falls below these standards, thereby developing a level of corporate accountability.CLEARLY IDENTIFY PRODUCTS AND SERVICES FOR REVIEW

 



3)

To determine which products and services are eligible for an environmental review, EDC is obliged to screen all projects with a repayment term or coverage period of more than two years and with a value above SDR 10 million. These it classifies into three categories, A, B and C – A having the most significant adverse impacts and C having minimal or no adverse effects. This is a screening mechanism employed by other public international financial institutions such as the IFC.

 

RECOMMENDATIONS: Although how EDC identifies products and services for review is clearly articulated, the threshold of two years and SDR $10 million represents a significant omission. EDC has said in the past that the two year threshold is in place because 80% of its business is for manufactured goods with repayment periods of less than two years. This may be true, but monetary or time thresholds themselves should not be the trigger for determining whether a project should be reviewed or not. Rather the project impacts should trigger the review. The UK’s Export Credit Guarantee Department screens all applications for environmental impact, as does the Japan Bank for International Cooperation (JBIC). For Both JBIC and US Ex-Im, the sensitivity of the location also acts as an additional trigger regardless of the amount.

 

Project splitting

Equally, setting a figure of SDR$10 million can provide a loophole that permits projects to avoid being subject to the review. For example, GE Norway won a $27 million contract to provide turbines and generators for the Yamula dam in Turkey, and divided the work load between GE Norway, Brazil and Canada. Each national company could then approach their national export credit agency each for $9 million, thereby avoiding the review. Alternatively the same company may seek two separate financing deals. Under its individual transactions, for example, EDC lists a number of transactions where this may have occurred: on 10/07/02, two separate loans for 5 million to Hampson Russell Software Services for the sale of software to Petroleos Mexicanos; on 16/08/02 and 22/08/02, and again on 14/01/03, two separate loans for 5 million to Dux Machinery Corporation for the sale of dump trucks to a mining project in Bolivia.

 

RECOMMENDATION: EDC have said that they screen all projects regardless of the monetary or repayment threshold, where there are potential significant negative environmental impacts. If this is so, they should codify this practice in their policies to close this loophole. CLARITY IN THE SCREENING PROCESS AND INFORMATION REQUIRED FOR REVIEW

 



4)

Clarity (or lack thereof) in the Screening Process has to some extent been addressed above.

 

In terms of information required for review, EDC’s ERD remains vague. For projects in the United States, EDC requires no additional information if the project meets US country requirements. For all other projects, the information will “vary” according to the project but must be “sufficient”. Currently for Category A projects, EDC accepts an EIA report (brief details of which it provides in Annex 3) or elements of other EA instruments (listed in its Annex 4). Nothing is specified for Category B projects, although EDC does state that it may require more information if it deems that what the company has provided is not “sufficient” to conduct a review. Since no definition of “sufficient” is provided, and the EIA and EA instruments it requires companies to provide are only illustrative rather than required, the information that EDC uses for its review remains unknown.

 

RECOMMENDATION: Just as EDC needs to be more specific in terms of which standards it applies to projects (Point 2 above), EDC also needs to articulate more clearly and specifically the type of information it requires for its review of the projects. For example, the IFC Procedure for Environmental and Social Review of Projects, p. 22, states that “the detail and sophistication of Environmental Assessment should be commensurate with the expected impacts.” Consequently, IFC and other agencies, such as OPIC, require a full Environmental Impact Assessment (and Environmental management plan in the case of OPIC) for Category A projects. Both IFC and OPIC lay out fairly specific guidelines for what this EIA should include[1]. Both also provide specific details for what should be included in alternatives to an EIA, such as for an environmental management and monitoring plan, and environmental audits[2]. Currently, there is not a clear enough distinction at EDC between the environmental due diligence, and commensurate information requirements, for Category A projects and B projects.CATEGORIZATION COMMENSURATE WITH IMPACT

 



5)

The ERD categorizes projects into three levels, A, B and C. These correspond, respectively, to whether a project has “significant adverse environmental effects that are sensitive, diverse or unprecedented”, “potential [and less adverse] environmental effects” that are “site specific” and not “irreversible”, or “minimal or no adverse environmental effects”. This is in keeping with the categorization system used by the IFC, but falls short in its lack of specificity of what constitutes each Category. For example, EDC fails to define sensitive, whereas the IFC defines sensitive impacts as “irreversible (e.g., lead to loss of a major natural habitat), affect[ing] vulnerable groups or ethnic minorities, involv[ing] involuntary displacement and resettlement, or affect[ing] significant cultural heritage sites, diverse, or unprecedented”. 

 

In addition, to be in keeping with IFC standards, EDC should have a fourth category for financial intermediaries (“FI”). This is for investment of EDC funds through a financial intermediary that is involved in subprojects that may result in adverse environmental impacts. The IFC has specific environmental and social review requirements for FI projects.

 

 

EDC also makes us of lines of credit EDC must ensure that this type of financing per transaction is subject to an improved ERD. On June 6, 2001, EDC and Power Finance Corporation Limited (PFC) of India signed a US$75 million a line of credit to finance the supply of goods and services by Canadian exporters. The new financing benefits Canadian companies selling goods and services to the power industry in India – potentially oil, gas, dam and nuclear projects, which might otherwise be subject to greater environmental due diligence. More recently, there were four other projects that might also fall into this categorization or whose categorization seems questionable: 18/07/03, $50-100 million dollars for Financing Support of Existing and Future Canadian Procurement, Chile, Corporacion Nacional del Cobre, various Canadian exporters; 23/09/03; Canada Potash Corporation of Saskatchewan Inc. Financing Renewal of corporate credit facility in support of FDI out 50-100 million, Potash Corporation of Saskatchewan Inc; 25/07/03, Canada Nexen Inc. (oil and gas company) Financing Renewal of Credit Facilities in support of FDI 100+ million Nexen Inc; and 29/04/03 a $5 million guarantee on a loan from Bank Boston to Tamrock Loaders Inc, for the sale of mining equipment to a Peruvian mining company. It is uncertain whether such investments or those using Fis are currently subject to the ERD.

 

RECOMMENDATION:

If EDC’s categorization system is to be on par with the IFC’s it should revise its policies (and practice) to reflect this. This would include more clearly articulating what constitutes a Category A project, as the IFC does, periodically updating its illustrative list of Category A projects to reflects best practices, as the European Bank for Reconstruction and Development has done, and adopting a fourth category for lines of credit or other financial services to financial intermediaries. REASONABLE PUBLIC TRANSPARENCY AND DISCLOSURE

 



6)

EDC’s disclosure policy requires quarterly, individual transaction, and environmental and social reporting. The aggregate reporting occurs 60 days after the last quarter and reports on business by country or region, sector and type of finance. The individual transaction reporting occurs within 90 days of signing the transaction, again providing information on the country, counterparty and exporter, type of finance, and range of amount. EDC also provides environmental and social information for Category A projects, but it needs the company’s consent to disclose anything on the web site. If it receives this consent, EDC discloses the name of the country, the project, a description of the project, the sponsor, and a contact. If it does not receive the company’s consent, then it will not post any details even though it may still provide support. This may have been the case for the Rosebel mining project in Surinam and the Vatra Cintec Solid waste disposal facility in Venezuela, which to the best of our knowledge, did not appear on the D3 section of the web site, only the D2 section.

 

The basis on which decisions go before the board is not clearly articulated anywhere, nor do all Category A projects necessarily go before the board. Board decisions are not made public, nor does the public know when projects go before the board for approval. EDC does not disclose the EIA, instead encouraging the company to do so, and it does not require any public consultations on the EIA, again only encouraging companies to do so. There are still important gaps in public consultation and disclosure, as articulated in the May 2001 Auditor General’s report.

 

RECOMMENDATION: Category A projects, by virtue of requiring a higher level of environmental due diligence, should be subject to not only greater information requirements, but also higher levels of disclosure and public consultation, not less, as is currently the case. Unlike the D2 reporting, neither the amount nor the type of financing, for example, are highlighted on D3.

 

All Cat A projects, regardless of threshold, should automatically be subject to Board review, and EDC should indicate the date of decision-making and the result of the decision. US Ex-Im does this.

 

EDC should also disclose details about the process for the project cycle and the decision-making process. The IFC clearly articulates this in its policies.[3]

 

Disclosure on EDC’s web site of details about a project under consideration should be a prerequisite of support for all category A projects, and should be provided at least 60 days prior to board approval. 

 

Disclosure of the EIA should also be a prerequisite of support. US Ex-Im makes public disclosure of project information and the EIA prior to making a decision, a prerequisite of project financing. It publishes information on high and medium impact projects on its Web site prior to board decisions, and provides details on how to obtain the EIA. Public comments are encouraged.

 

Since the model EIA in Annex 3 makes reference to information collected on public consultations, and consultations are a standard practice of all EIAs, EDC should explicitly state in its policies that public consultations are a requirement for all Category A projects.

 

For individual transactions, EDC should:

  • more clearly identify category A, B and C projects in its D2 reporting. In its 2002 Environmental Advisor’s Report, EDC identifies six Category A projects. Three of these are identified with “*”, while the Eastchester Gas Expansion project in the US, the Vatra Cintec waste disposal facility in Venezuela and the Don Mario mine in Bolivia have no marks to distinguish them as Cat. A.  The Stanwell Magnesium plant in Australia, which was posted for board approval on 26/11/02 (a month after the Collahuasi project), can not even be found – perhaps it wasn’t approved. Similarly none of the seven Category B projects are distinguished as such in the D2 listing.
  • either use a more specific range of values for the amount of financing it provides or give the exact amount. References to ‘less than 5 million’, ‘5-15 million’, ‘25-50 million’ and ‘100 million +’ are vague and insufficient for a public international financial institution. 
  • provide a more detailed description of the transaction and the Canadian company. “Various goods and services’ and “Various Canadian exporters” is far too vague, in particular for a $100+ million transaction for oil and gas exploration. For example:

 

04/07/03

Mexico

Pemex Project Funding Master Trust; Petroleos Mexicanos; PEMEX-Refinacion; PEMEX - Exploracion y Produccion; Pemex-Gas y Petroquimica Basica

Financing

Support for purchase by Pemex of Canadian goods and services

100+ million

Various Canadian Exporters

 

EDC does not currently inform interested parties when it has posted a new project to the D3 section of its web site. In contrast, other IFIs, such as the IFC, maintain a list of interested parties who can sign up to receive notice of when new projects are posted to the Category A section of its web site. MITIGATING ENVIRONMENTAL IMPACTS AND GROUNDS FOR DECLINING SUPPORT

 



7)

Mitigating environmental impacts

Where there are significant adverse environmental impacts, EDC draws up covenants in which they articulate the measures a company has to take to mitigate the negative impacts of the project as a condition of continuing to receive financial support. EDC claims that it sends staff periodically to the field where a project has a huge impacts on the community to monitor implementation of these covenants, or that an independent company monitors the implementation of these conditionalities. EDC does not disclose these covenants to the public, and the details of the companies that are monitoring covenant implementation.

 

RECOMMENDATIONS: EDC should ensure that it meets with a diversity of civil society groups when it makes its periodic visits to affected areas. It should also release the covenants, or require the company to do so, to interested parties. This will enable interested parties to monitor implementation of the covenants, and bring any breaches of these to the attention of EDC’s Compliance Officer or the independent monitor.

 

Grounds for declining support

EDC does not currently delineate any environmental grounds for declining a project. Although its ERD states in paragraph 26, that where “entering into a transaction […] is likely to have adverse environmental effects, despite the implementation of mitigation measures […EDC] will decline to enter into a transaction”, it still allows itself to “justify” its involvement on various, completely subjective, grounds. EDC therefore does not provide grounds for declining a project so much as grounds for justifying its support. This seems to contradict the first tenet of what this mechanism should do: ensure that the projects supported by the Corporation are environmentally sound and sustainable.

 

In contrast, the US Overseas Private Investment Corporation maintains not only the grounds for declining assistance on environmental grounds but also has a list of instances where it is categorically prohibited from getting involved.

 

RECOMMENDATION: The grounds for declining a project, rather than the grounds for justifying involvement, should be more clearly articulated in EDC’s ERD. In a best case scenario, EDC would provide an exclusion list of instances that would categorically prohibit its involvement. This might be in cases where projects involve significant degradation of critical natural habitats, National Parks or protected areas, or primary forests, and that involved forced relocations or where affected communities do not have the right to raise their concerns, many of which are simply listed as ‘sensitive areas’ in Annex II of EDC’s existing ERD. US OPIC[4] maintains a list of categorical prohibitions in-keeping with this idea, although the IFC[5], the European Bank for Reconstruction and Development[6], and Australian[7] and American[8] ECAs do maintain exclusion lists of materials to be traded. CLEAR ACCOUNTABILITIES OF ITS OPERATION

 



8)

All concerns in this text contribute to the continued absence of accountability of its operations – the lack of disclosure, lack of clarity of process and policy , etcetera. MONITORING AND COMPLIANCE

 



9)

EDC monitors projects, although unclear whether all Category A or B or only those with covenants, with reference to implementation of the covenants they attach to a project. This entail periodic visits to a project site, or requiring the company to employ an independent third party to monitor compliance. Covenants are not publicly available. There is no written requirement for EDC or the third party to conduct interviews with civil society to ascertain their opinions with regards to a company’s compliance. Affected communities or interested parties can however now bring grievances or complaints before a Compliance Officer. The Compliance Officer’s mandate is to ensure the EDC is complicit with its policies.

 

To date, the NGO Working Group has filed one complaint, in June 2003, to EDC’s Compliance Officer on Cernavoda2. Since neither the covenants nor the three EIAs conducted for the project were made publicly available, the task of registering a comprehensive and accurate complaint proved to be a difficult process. Nevertheless, based on assessments by various experts of the EIA summaries, we argued that the EIA conducted by AECL, as well as the other two EIAs, failed to include data essential to EDC conducting an informed and appropriate review of the project. In essence, we argued that the review and approval have been conducted without sufficient information, in particular pertaining to the emergency water supply, liquid and gaseous effluents, site specific information, and the historical problems associated with CANDU reactors.[9] However, since the EIA model to be employed by companies is so flexible, and the term “sufficient information” remains so vague, our complaint rested on the interpretation of the spirit, rather than the letter, of EDC’s policies. This also means that the ability of the Compliance Officer to ensure the complicity of EDC to its policies is only as good as the policies themselves.

 

Our complaint was reviewed and EDC was found to have complied with its policies. Although the Compliance Officer is now conducting an additional compliance audit, standard practice is for there to be a report documenting the findings of complaint once an opinion on a complaint has been given. More than six months after filing the complaint, we have seen no substantive documentation that corroborates conclusion of the Compliance Officer.

 

The Compliance Officer’s level of reporting out is poor, in comparison with peers. The NGO WG made recommendation on reporting out, based on comparison of other practices of the IFC/MIGA CAO, Canada’s Financial Services Sector Ombudsman and others. To date, these have been ignored.   BUSINESS INTERESTS VS. ENVIRONMENTAL POLICY OBJECTIVES OF GOVERNMENT

 



10.)

Business interests and government policy objectives

In this year’s Environmental Advisor’s report[10], EDC indicated that of 25 projects that were classified as Category A, only six reached the signing stage. For Category B, the statistics were 21 and 7.

 

This is the first admission by EDC that it has actually rejected Category A projects, although it remains unclear on what grounds these projects were rejected and at what stage of the process. Since not all Category A projects up for Board approval are necessarily listed on the D3 section of the web site, and since EDC does not provide on-going details or statistics about rejected Category A projects or about the covenants attached to approved projects, it is difficult to definitively ascertain whether the environmental screening and review has had any impact on the final outcome of the project, or whether it is just ‘business’ as usual.  This is all the more true when EDC approves projects such as Cernavoda2 with know environmental and health risks.[11]

 

RECOMMENDATION: Interested parties should receive notification that a Category A project is under consideration 120-60 days in advance of decision-making. Environmental and social information should be published at this stage. If not approved, EDC should release a press statement as do other PIFIs in regards to its decline. This would ensure that as a public financial institution, EDC works to improve Canadian corporate practices. 

 

Consultation

EDC has demonstrated a strong commitment to dialogue, rather than consultation. For example, in December 2001, EDC released a final ERD policy, but requested comments with no corporate commitment to incorporate. Despite the lack of purpose, the NGO Working Group, among others, submitted comments on the policy. No substantive changes were ever made. It appears that EDC, despite SCFAIT and Government recommendations are still using consultations, dialogues for PR rather than policy purposes.