Harmon Hall

Environmental & Social Review Summary

This Environmental and Social Review Summary is prepared and distributed in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board of Director’s decision. Board dates are estimates only.
Any documentation which is attached to this Environmental and Social Review Summary has been prepared by the project sponsor and authorization has been given for public release. IFC has reviewed this documentation and considers that it is of adequate quality to be released to the public but does not endorse the content.

Project number

29753

Country

Mexico

(IDA)

Region

Latin America and the Caribbean

Sector

Other Training

Department

Reg Manufact, Agri & Services, CAF/CLA

Company name

Harmon Hall Holding, S.A. de C.V.

Environmental category

Status

Active

Date ESRS disclosed	June 21, 2010
Last Updated Date	February 8, 2012
Previous Events	Invested: August 19, 2010 Signed: August 11, 2010 Approved: July 23, 2010

View Summary of Proposed Investment (SPI), click here

Overview

Category & Applicable Standards

Key Issues & Mitigation

Community Engagements

Client's Documentation

Overview of IFC's scope of review

IFC’s Environmental specialist visited the project during the second half of May 2010. The appraisal visit consisted of meetings with corporate level Directors of Human Resources, Sales, Marketing, Academics and Administration as well as Franchise Managers and School Directors of several facilities, owned and franchises. The following facilities were visited: Cancun (Kindergarten, Elementary and English Schools (owned), Lindavista School (Mexico City, franchise) La Villa School (Mexico City, owned), Nisa School (Mexico City, owned), Cuernavaca Centro School (owned), Cuernavaca Sur school (owned), and Xochimilco School (franchise). The specialists reviewed various human resource related documents as well as other environmental, life and fire safety related (Civil Protection Plans) documents that were on hand at the corporate office as well as in the various facilities.

Project description

Harmon Hall was founded in 1966. Today, Harmon Hall is the leading English language school chain in Mexico, with a network of 110 English schools in 63 cities and over 40,000 students in the whole system. Harmon Hall also owns and operates K-12 schools in the interior of the country. Harmon Hall’s headquarters are located in Mexico City. The Company has English Schools located in 63 different cities across Mexico and one in Guatemala. The Company has K-12 schools located in Cancun and Hermosillo.

Nexxus Capital Private Equity Fund III, L.P. acquired 60% of HH in April 2008. Since then, the Company has implemented a series of measures to improve the operations and profitability of the Company, which have resulted in a significant growth of revenues and EBITDA generation. The transaction represents an equity investment for IFC which consists of two components: (i) the purchase of the selling shareholders’ shares and (ii) a capital increase in Harmon Hall to finance the expansion plans of the Company for the next 18 months. The Company is 60% owned by Nexxus Capital Private Equity Fund III, a private equity fund that targets investments in middle-market Mexican companies. The remaining 40% is owned by a minority shareholder. After the transaction, the minority shareholder's stake will be sold to IFC, HSBC and DEG. Total project cost is estimated at US$19 million. IFC will provide a US$7.7 million equity investment.

Identified applicable performance standards

While all Performance Standards are applicable to this investment, IFC’s environmental and social due diligence indicates that the investment will have impacts which must be managed in a manner consistent with the following Performance Standards:

PS1: Social and Environmental Assessment and Management Systems: Harmon Hall activities have limited adverse social and environmental impact, Harmon Hall should have a corporate management system to manage and minimize any potential impacts.

PS2: Labor and Working Conditions: Harmon Hall has approximately 1229 employees. The company does not currently have a Human Resources policy.

PS3: Pollution Prevention and Abatement: Harmon Hall activities have limited environmental impact including waste and wastewater generation. Nonetheless, some non-hazardous wastes, including sanitary wastewater, are generated.

PS4: Community Health and Safety: Harmon Hall does not construct (or own) any infrastructure, and does not consume natural resources (other than municipally-supplied water and energy). However emergency preparedness and community engagement apply.

PS8: Cultural Heritage: Harmon Hall currently occupies space in one building that has been declared as a cultural heritage site in Mexico.

The following IFC Performance Standards do not apply to Harmon Hall:

PS5: Land Acquisition and Involuntary Resettlement: Harmon Hall does not acquire land; it leases existing building space to install or relocate the educational facilities.

PS6: Biodiversity Conservation and Sustainable Natural Resource Management: Harmon Hall does not consume natural resources (other than municipally-supplied water and energy).

PS7: Indigenous Peoples: Harmon Hall does not construct any infrastructure. Harmon Hall leases existing constructed space for the operations of all of its schools. No Indigenous People are impacted.

Environmental and social categorization and rationale

This project will be categorized a B based on the appraisal mission of May 2010. This is a project with potential but limited adverse social and environmental impacts that are few in number, generally site specific, largely reversible and readily addressed through mitigation measures, as outlined in the Environmental and Social Action Plan (ESAP) attached to this ESRS. The main issues include environmental and social management systems, including formalizing human resources and community and employee engagement procedures, and Life and Fire Safety.

Key environmental and social issues and mitigation

PS 1- Social and Environmental Assessment and Management Systems

Summary:
Currently, Harmon Hall does not have a formal (i.e., written) process to assess the environmental and social impacts or risks of its operational activities. Prior to leasing a facility, no environmental or social assessments are performed; only cost control and profitability evaluations. The selection of new locations is based on a market study (to select the city) and then a commercial space is selected based on the information regarding the potential market, land use, the leasing cost and the feasibility of creating the brand of the site to the corporate visual identity. Since 2010, Harmon Hall has had a non-written policy of preferring space in shopping malls, as that approach has an advantage of providing available parking for the students and staff. Harmon Hall representatives consider that temporarily blocking garage access of neighborhood residences by students (i.e., due to student drop off and pick up) is the only social impact from its activities.

Actions:
Harmon Hall will appoint someone to lead the development, implementation, and maintenance of an Environmental and Social Management System (ESMS). The system will be implemented in their owned and franchised schools encompassing social, occupational health and safety, human resources, and environmental affairs management. The first step will be to identify and document the environmental and social impacts of Harmon Hall operations. The ESMS will require compliance with country regulations, IFC Performance Standards and EHS Guidelines. The ESMS will include a formal system for monitoring, and reporting social and environmental issues to senior management and back to IFC in the form of an Annual Monitoring Report. Additionally, Harmon Hall will develop and document a corporate policy for the selection of new sites, which will include social and environmental criteria (e.g., buildings with enough parking space to prevent blocking of neighboring garages, and Life and Fire Safety (L&FS)). Site selection criteria will also promote, to the extent possible and feasible, commercial complex having an existing and operational Waste Water Treatment Plant.

The ESMS will also establish an employee training program covering environmental and social issues based on the responsibilities and impacts of the employee’s activities and it will include training for the employees in charge of the community engagement and L&FS, (discussed later) mechanism.

PS 2 – Labor and Working Conditions

Summary:
Harmon Hall has 1229 employees. Harmon Hall’s human resources policy is composed of the Internal Work Regulation and includes the following procedures:
- Recruiting (identification of personnel needs and publication of the position);
- Selection of employees;
- Hiring and induction;
- Payroll and employee payment;
- Termination.

The Internal Work Regulation includes the rights and obligations of the employees, as well as the company’s discipline procedures. The discipline procedures establish written warnings for improvement prior to employee termination. The Internal Worker Regulation also establishes the reasons for preventive warnings and immediate termination (i.e., none are related to sexual preference, racial group, or other non-related to the job conditions). According to Harmon Hall’s Human Resources Director, this document is provided to the employees only for signing and should be available for review by an employee through a request to the facility director. However, this document was not available in several of the schools visited during the appraisal mission.

Other human resources (HR) documents (i.e., the actual HR procedures) have not been communicated to the employees. According to the Human Resources Director, these are in draft version. The termination procedure establishes the employee’s right to payment according to Mexican regulations. According to the Human Resources Director, the benefits are established in the contract and this includes medical services through Mexico’s social security system (i.e., IMSS, Instituto Mexicano del Seguro Social), at least 18 days of vacation per year (i.e., the Mexican worker minimum is 6 days per year), and teachers are paid per hour. The benefits were found to be compliant with Mexican labor regulations. According to the interviewed teachers, they are paid all the hours they work.

Harmon Hall does not have a formal grievance mechanism to receive complaints from the employees; however, all the facility directors mentioned that they are in charge of addressing complaint and solving conflicts between employees. The employees interviewed noted that they were not aware of a formal process in place, and that should they have a concern, they would present their complaint to the facility director or to the academic supervisor. According to the Human Resources Director, there are no permanent subcontractors; housekeeping personnel is hired directly by each facility. Only one facility has a security guard subcontractor. Harmon Hall does not have a policy specific to the management and employment of the security guards, except as specified in the contract with the security firm.

According to the Human Resources Director, teachers are not prevented from forming their own unions, but at present, there has been no interest from the teachers or other employees about organizing a union. The interviewed employees (i.e., mostly teachers) confirmed that there is no formal union, and that they have not been restricted from creating one or forced to join a specific union. They also mentioned that they have not felt the need to create a union. In Mexico there is a national teachers union, which is very political; it is linked to two political parties.

Harmon Hall has a competency model called “Golden Compass.” This model groups the competencies in two categories: performance (i.e., entrepreneur thinking, results orientation, among many others) and leadership (i.e., motivation, leading by example, etc.). This competency model is referred in the selection and job promotion procedures. There is no written non-discrimination policy has not been implemented by the company. According to Human Resources Director, 48 % of Harmon Hall employees are women. One out of the eight Boards of Directors’ members is woman. None of the interviewed employees reported any discrimination issues during the facility visits.

Actions:
Harmon Hall will prepare a summary of its human resources policy and will make it available to the employees. The policy will also include a non-discrimination and equal opportunity statement and will reference the Golden Compass. Harmon Hall will make sure that copies of the internal work regulations are available for review by the employees in the office of each facility director. Harmon Hall will develop and implement an employee grievance mechanism and communicate it to the employees.

Additionally, Harmon Hall will develop a contractor selection policy. This policy will require the contractor to certify that no child or forced labor is used in any of the work they perform for Harmon Hall, and that all of the contractor employees have social security services.

PS-3 Pollution Prevention and Abatement

Summary:
Harmon Hall uses energy saving lamps, toilets and air conditioning units, however, this is an informal policy and is not documented. They have also implemented a practice of turning off the lights and electrical equipment (e.g., audio players and air conditioning units) when the classrooms are not in use. The toilets observed in the facilities were low flow - less than 6 liters per flush. None of the facilities are required by Mexican regulations to have a dedicated wastewater treatment plant. Only a small portion of Mexico’s sanitary waste is treated, and most of the facilities that Harmon Hall rents would not have waste water treatment. Students and teachers are not allowed to bring food to the facility, and this policy minimizes the generation of waste. Additionally, Harmon Hall has established that the only official communication means are e-mail and Skype, and this has minimized the generation of paper waste.

Harmon Hall has performed environmental awareness campaigns for solid waste recycling and re-forestry. However, these are not performed on a regular basis. Harmon Hall monitors and reports its energy and water consumption only in currency terms. There are no requirements or plans to develop and monitor energy or water consumption in terms of performance indicators (e.g., cubic meters or kilowatt per student or group).

Solid waste is collected by the municipal authority in all the schools visited. Some of them (e.g., Cancun elementary and Cancun kindergarten, and Cuernavaca Sur) have separation programs for recyclable waste per the directors’ initiative. As previously noted, Harmon Hall has reduced the consumption of paper and waste paper generation by making mandatory that all internal communications are electronic. There are no laboratories in any of the facilities. Only small amounts of paint and solvents (i.e., less than 1-liter, and stored properly and away from any student access) was noted in the facilities as well as household products for housekeeping.

As previously noted, the use of electricity is recorded only in currency terms, and not in the amount of electricity used. Harmon Hall has not performed an estimate of its greenhouse gas emissions. Gas is used only in the kindergarten and elementary schools located in Cancun; each of these facilities has a small kitchen and gas is used to prepare food. No statistics on the gas consumption were available.

Given the activities performed, the facilities are required by Mexican regulations to have a site-specific Civil Protection Program, which should include responsibilities for the prevention of emergencies, training for first aid and firefighting (e.g., use of fire extinguishers), and the presence of evacuation brigades. The program must also include evacuation drill, i.e., there must be marked meeting points, fire extinguishers, evacuation routes, and emergency exits. Compliance with the program requires annual training of the brigades (i.e., formed by facility employees) in first aid and fire extinguisher operation. Several of the facilities were found to have issues that were non compliant with Mexican regulations. For example, none of the emergency exits in any of the nine school buildings visited had a panic bar for opening the door, and only one emergency exit was clearly labeled. Further, none of the emergency exits opened towards the exterior as is required by Mexican law.

According to the Franchise Manager and the Development Leader, the schools are fumigated every quarter. This activity is contracted and coordinated by the school director and the directors are requested by Harmon Hall to ask the contractors to use low toxicity pesticides. However, there are no written policies for the directors to follow with regards to the exterminating contractors and the chemicals used.

Actions:
Harmon Hall will update the Civil Protection Plans of all its facility and will provide first aid and firefighting (i.e., use of extinguishers and evacuation brigades) training. Harmon Hall will install evacuation route signs to make sure that one is visible from every point in a facility and will comply with local requirements for fire extinguishers inspection and recharge, and for emergency exit signaling and design. Additionally, Harmon Hall will have a third party Audit the fire and life systems to be agreed with by IFC, but focused on their K-12 and other owned facilities and a sample of their franchised facilities. Subsequent to the Audit, Harmon Hall will draft corrective actions to address the identified deficiencies and recommended actions in the respective Audit.

The policy for the selection of new sites for schools will specify a requirement for adequate emergency exits (including those that would facilitate the evacuation of persons in wheel chairs), and the availability of functional fixed firefighting systems. In addition the selection criteria should include criteria that the new premises have waste water treatment, where feasible.

The contractor selection policy mentioned in PS2 will include a statement that pest control contractors must use only low toxicity chemicals for pest management.

PS-4 Community Health, Safety and Security

Summary:
Harmon Hall does not have a policy of engagement with the local community. Only one of the facilities visited reported to actively participate as a member of the neighborhoods’ organization (and that was primarily for security reasons). Harmon Hall does not have a formal mechanism to receive complaints from the community; however, most facilities directors mentioned that they have not received any complaints from the neighboring community and that they would be in charge of addressing any complaints received at their facility if that were the case. The received complaints are related to induced traffic on the local community and neighbours during dropped off and pick up times.

Mexican regulations do not require an ESIA or any formal consultation process as part of the procedure for private operations leasing property like Harmon Hall. Harmon Hall has informally appointed its facilities directors to be in charge of attending to any complaints presented by the local community (mainly the neighbors). However, Harmon Hall has not developed or implemented a grievance mechanism system whereby the local community can raise their concerns and issues to the company.

Actions:
Furthermore, Harmon Hall will prepare a formal community engagement mechanism to be used in all its facilities; this will include the means Harmon Hall will use to let the community know the existence of the mechanism and the policies/procedures to attend to any community complaints.

PS 8 Cultural Heritage

Summary:
Harmon Hall uses only one building that is located within a cultural heritage zone (the school located within Oaxaca City central zone). According to the Franchise Manager and the Development Leader, Harmon Hall has not used other properties considered cultural heritage sites in Mexico, as they are not allowed to modify the structure or even install advertising signs in the front face of the building. With respect to the Oaxaca school, the Franchise Manager indicated that the company has complied with all the legal requirements that apply to the use of an historical building. Documents related to this building were not available for review as they are kept at the site, which was not visited during the appraisal mission. For the use of this building, Harmon Hall requires a permit from the Archeology and History National Institute (INAH, Instituto Nacional de Arqueologia e Historia) and INAH must also approve any modification to the building (including its front face). Currently Harmon Hall does not have any written plans or procedures for the use (i.e., lease) of a building that is an identified cultural heritage site.

Action:
The policy for the selection of new sites for schools (as mentioned in PS1) will include the avoidance of buildings declared cultural heritage.

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