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Dams and Development E-Paper Contents

p. -1 of 74 BACK | NEXT Home Page of Dams and Development Foreword I. Why an e-paper on dams and development? II. Assessing options III. Participatory processes IV. Social impacts V. Environmental impacts VI. Benefit distribution VII. Dam safety and sustainability VIII. Existing projects IX. Improving governance X. What other organizations say XI. ADB, Dams, and Development XII. References Contact Us

Environmental performance bonds

Performance bonds are routinely used in construction contracts to ensure projects are built according to specification. WCD has proposed that they can also be used to promote compliance with environmental commitments on dam projects, particularly for private sector developers.

The following definition of performance bonds for environmental management is provided in the UNEP/UNDP/Dutch Report on the Development and Harmonization of Environmental Standards in East Africa:

'By definition, an environmental performance bond is a deposit that likely polluters and violators of environmental standards must pay to a certain environmental fund. These bonds are aimed at providing financial incentive to industry to adhere to environmental requirements.

In order for environmental institutions to efficiently administer the bonds the following must be done:

• registration of facilities and activities that have or are most likely to cause significant impacts on the environment when operated or carried out in a manner that is not consistent with good environmental practice; the government (environmental institutions) should have the power to require facilities included in the register to post a bond as security for good environmental practice;
• further powers should be given to environmental institutions to confiscate a bond if it is satisfied that the operator of a registered facility has breached the provisions of an environmental statute; and,
• alternatively, environmental institutions may require a bond subject to EIA or licence requirements, and if the facility fails to comply with the EIA or licence requirements, then the bond may be confiscated.

See also:

• Examples of environmental performance bonds from the mining industry
• Example from Lao PDR

Examples of environmental performance bonds from the mining industry:

Performance Bonds have been used for environmental restoration of mining operations for some time, for example, the 2003 Annual Report of a major mining company outlines the extent of financial commitment:

'Ghanaian mining companies are required by law to rehabilitate land disturbed as a result of mining operations. In Ghana, Gold Fields funds environmental rehabilitation costs by posting a reclamation bond, and to date an amount of US$3 million has been secured. In Australia, Gold Fields guarantees its environmental obligations by providing the Western Australian government with unconditional bank-guaranteed performance bonds to the amount of AUS$12.3 million'.

A review of the financing mechanisms for mine restoration, including performance bond provisions, in USA, Canada, Australia and Chile is provided in a report to the South African Government.

Example from Lao PDR - Environment and Social Program Loan

A 2001 ADB program loan for capacity building in environment and social sectors in Lao PDR includes provision for operationalizing the use of environmental performance bonds on infrastructure projects

'As part of the Program, the Government will test arrangements to strengthen performance bond systems to provide a means of enforcing developer and contractor commitments and obligations on environmental and social mitigation, and to improve the incentive structure for compliance. Such performance bonds financially guarantee meeting the costs of such mitigation, or will be called upon in the event of noncompliance. Potential activities for which a bond could apply include resettlement and compensation, environmental mitigation works, monitoring, and decommissioning. The bonds will be targeted to specific activities identified in the project EMP and RAP, and will apply to developers of major sensitive projects.

A number of issues will be addressed on a case-by-case basis such as (i) the form of security, its irrevocable nature, and the appropriate level of financial assurance; (ii) the triggers for release of the bond; and (iii) arrangements for holding the bond. The Government will apply the recommendations of its study of these options to configure and implement the performance bond system'. (para 82)

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