The US$3.8 billion Dakota Access Pipeline in the US, Melbourne’s proposed US$8.8 billion east-west road link, and Mexico City’s twice-failed new international airport are among the many projects involving huge capital investments. These are just three of the many high-profile infrastructure projects. It faces strong resistance from civil society, politicians and regulators.
Such resistance can result in significant financial or reputational losses for investors, whether directly as infrastructure investors or operators, or through equity or fixed income positions.
A study of the Dakota Access Pipeline found that Energy Transfer Partners (ETP), the main company involved in its construction, and its partners suffered losses of US$7.5 billion as a result of construction delays and cost overruns. It has been suggested. These have resulted in protests and legal challenges to the project, in part due to concerns about water pollution, damage to Native American ancestral lands, and lack of consultation in the pipeline approval process. ETP’s stock price fell 20% between 2014 and 2017, when the protests were at their peak. Additionally, banks involved in financing the pipeline faced widespread protests and calls for boycotts by civil society groups.
These examples highlight the potential harm that can occur when project sponsors, investors, developers, and operators fail to understand, address, and manage the social impact of a project. In Latin America, research by the Inter-American Development Bank (IDB) shows how social issues have led to the cancellation, delay or cost overrun of many infrastructure projects in the past few decades. The study cites poor planning, reduced access to natural resources (such as land and water), lack of community benefits, and lack of proper consultation as the most prominent contributing factors to conflict.
However, for many infrastructure investors, the social component of ESG is often the least considered of the three. With the exception of high-profile issues such as health and safety and labor relations, social issues are difficult to quantify and the prevailing perception is that they are less relevant or less important.
With the exception of high-profile issues such as health and safety and labor relations, social issues are difficult to quantify and the prevailing perception is that they are less relevant or less important.
This is particularly true in developed markets, even though social (and environmental) impact assessments have long been routine in the preparation and implementation of major infrastructure projects. However, this is often approached as a compliance step to ensure the project meets regulatory requirements, rather than a complete process where all potential impacts can be carefully understood and managed.
changing pendulum
Based on recent conversations with infrastructure investors, it is becoming increasingly clear that a more concerted focus on social factors is on the agenda. Some of them are based on single issues. For example, there is growing recognition of the need for greater diversity in the infrastructure industry. However, there is a deeper underlying problem.
- Evolving social expectations: The way infrastructure project operators and owners need to engage and respond to their communities and customers depends, in part, on social media and the coordination and dissemination of public opinion, whether positive or negative. It is brought about and changed by the way we promote it. Regulators and customers increasingly expect private public service providers to add value to communities and the surrounding environment as an essential element of service delivery, rather than as an add-on to corporate social responsibility programs. It seems like it is. In the UK, water regulator Ofwat has made a holistic approach to customer service one of four key themes as part of its 2019 tariff review.
- Changing political background: The rise of populism in many markets has raised questions about the future role of private companies providing public services such as electricity and water. In the UK, France, and even many European states, major political parties are starting to talk more openly about renationalizing public services and related infrastructure. More generally, private financing mechanisms for infrastructure projects are under pressure.
These issues are familiar to infrastructure investors in emerging markets, and beyond compliance with social issues, navigating political bypasses will ensure the long-term success of projects and investments. is the central element. Perhaps it is time to apply some of the lessons learned from these markets to more established infrastructure markets.
And what does this mean? From a process perspective, conducting comprehensive social impact research and engaging stakeholders is a key starting point. This is because issues of concern and value-add opportunities can be difficult to predict or identify. I worked on a project in Argentina and encountered strong opposition from local wine producers. This is not due to environmental impacts or land loss, but rather to concerns about the impact on the local labor market, which a social impact study targeting only minimum legal requirements could not reveal. That’s probably what happened. The good news is that there are many tools available to support such efforts and ensure that the results are properly integrated throughout the project and investment lifecycle. *
However, addressing the underlying problem may require radical measures. reconsider Describes how infrastructure and public services are designed, delivered, and communicated. Here, concepts such as sustainable and socially inclusive infrastructure are gaining traction. To date, much of the research on these areas has focused on how to integrate them into national strategic infrastructure plans.
Retail investors should also be part of this conversation. Improving processes is One However, there needs to be scope for investors to collaborate with policymakers and regulators on strategic planning to fully understand and integrate the complexity and impact of social factors from the outset. Ultimately, it’s about driving better projects and outcomes for investors, civil society, consumers and politicians.
Ultimately, it’s about driving better projects and outcomes for investors, civil society, consumers and politicians.
While infrastructure investors recognize the importance of re-establishing their social license to operate and focusing more collaboratively on social issues, there is still much work to do. A 2017 poll found that 83 per cent of the UK population supported renationalising water and 77 per cent supported renationalising the UK electricity and gas network.Deeper and deeper consideration of social issues systematic Some parts of the investment process may begin to stem this trend and, in turn, begin to reduce the magnitude of potential financial, reputational, and operating losses.
*See here and here for examples.
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