Andrade G. SA II

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	26162
Country	Brazil
Sector	Collective Investment Vehicles
Department	Infrastructure
Company name	Andrade Gutierrez S.A.
Environmental category	B
Status	Pending Disbursement

Date ESRS disclosed	November 19, 2007

Previous Events	Signed: February 20, 2008 Approved: February 11, 2008

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

This is a repeat investment with Andrade Gutierrez S.A. (or the company) for an original project (Andrade Gutierrez S.A., Project 11489) that was appraised in 2002 and committed in 2003. Since then, IFC has conducted periodic and ongoing supervision of the company’s environmental, social, health and safety (ESHS) performance by reviewing Annual Monitoring Reports (AMRs) submitted by the company’s management, and by conducting follow-up visits to the company’s headquarters, two of its existing concession companies, and an active infrastructure construction site in March 2007.

The assessment of this new investment comprised a desk review of the company’s responses to email queries surrounding updated information for the key ESHS issues associated with IFC’s original investment, as well as additional information regarding labor and working conditions – i.e., human resources policy, collective bargaining agreements, and related matters.

Project description

The proposed IFC financing involves a $50 million repeat investment in Andrade Gutierrez S.A., the holding company of the Andrade Gutierrez Group (the Group), a major player in Brazil’s infrastructure sector and an emerging regional player in Latin America and the Caribbean. The AG Group is comprised of direct and indirect sub holding companies that operate in:

- heavy construction and engineering services (Construtora Andrade Gutierrez S.A., or CAG);
- infrastructure service concessions (Andrade Gutierrez Concessões S.A., or AGC); and
- telecommunications (AG Telecom).

AGC is the holding company for the Group's investments in private infrastructure service concessions. AGC’s existing portfolio includes investments in

- Companhia de Concessões Rodoviárias (CCR) which operates six private toll road concessions in southeast Brazil and has been awarded the concession to operate Line 4 of the São Paulo metro system;
- Companhia de Saneamento do Paraná (Sanepar), the partially privatized water and sanitation concessionaire in the State of Parana in Brazil;
- Light S.A., the power distribution utility for the municipal area of Rio de Janeiro;
- Water Port S.A., an entity which provides water and sanitation services to Companhia Docas do Estado de São Paulo (CODESP) in the Port of Santos;
- Corporación Quiport S.A. which holds a 35-year concession to manage the existing Quito airport and to build, operate and transfer the new Quito international airport in Ecuador; and
- Companhia Operadora de Rodovias, a consortium which provides engineering and other technical services to certain toll roads owned and operated by CCR.

IFC’s proposed $50 million will be comprised of a $25 million “A” Loan and a $25 million standby facility to

- provide the company with a corporate public-private partnership (PPP) development facility to enable the Group to evaluate, pursue and invest in more complex, resource-consuming projects under PPP and traditional concession structures, most probably through AGC, and
- help improve the liquidity of CAG and extend the maturity profile of its existing financial debt. IFC’s loan proceeds will not be used to support AG Telecom’s investments.

Identified applicable performance standards

Because the proposed investment is to support future, but as yet, undefined infrastructure investment activities, the principal Performance Standards (PS) to be applied to this investment are:

- PS1 – Social and Environmental Assessment and Management Systems; and
- PS2 – Labor and Working Conditions.
- PS3 through PS 8 as appropriate on a case by case basis.

A condition of IFC’s repeat investment in the company will be that any and all activities undertaken by the Group, whether directly by CAG and its contractors, or by AGC as either a majority or minority concessionaire investor, shall consider all relevant social and environmental risks and impacts and requirements including:

- Host country laws and regulations
- IFC’s Performance Standards
- The World Bank/IFC environmental, health and safety guidelines.

Environmental and social categorization and rationale

Similar to earlier IFC investments in the Group, this corporate investment is a Category B project because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. In its capacity as contractor or concessionaire, the Group may become involved in specific sub-investments which are Category A projects. In such cases, the Group will provide evidence to the IFC that such projects are executed and operated in accordance with IFC’s Performance Standards and World Bank/IFC environmental, health and safety guidelines as applicable to Category A projects.

Issues for this repeat investment are essentially the same as those identified for IFC’s initial investment with the company and IFC’s separate investment in AGC, and include: environmental and social management systems; employee health and safety performance and programs; and community relations and development programs.

IFC’s ongoing review and supervision of the existing investment in the company since 2003 has shown that the company carries out its infrastructure activities in substantial compliance with its environmental, health and safety, and social obligations under Brazilian and other relevant national laws, as well as the applicable IFC policies and guidelines. IFC’s current Environmental and Social Risk Rating (ESRR) for the Company (Project 11489) is B – 2 – Average, and for AGC (Project 10491) the current Environmental and Social Risk Rating (ESRR) is B – 1– Good.

Key environmental and social issues and mitigation

Social and Environmental Assessment and Management Systems:

To ensure compliance with the myriad of laws, norms, contractual and other requirements applicable to its construction and concession activities, the Group has in place both in CAG and AGC, ESHS management systems that integrate environment, social, health and safety, and quality performance.

CAG has a corporate level Integrated Management System (IMS) that is certified to the four related international management system standards: ISO 9001 (Quality Management); ISO 14001 (Environmental Management); OHSAS 18001 (Occupational Health and Safety Management); and SA 8000 (Social Responsibility Management). CAG employs a project specific approach to ESHS management within an overall corporate and project level Integrated Quality Management System methodology. Since developing the IMS in 2003, CAG’s primary goal has been to apply IMS implementation at 100% of its sites. This was achieved in 2004.

A Corporate Director of Quality, Environment, Safety and Occupational Health is responsible for overall environmental and social performance of all CAG construction activities. Dedicated Safety and Environmental Officers are assigned to each project. The project level IMS, which is developed based on the Work Breakdown Structure (WBS), defines in detail the project construction program, and the procedures corresponding to the other components of the Quality Management System. Near seamless integration has been developed between the environmental, health and safety components, corporate social responsibility actions and the construction quality management component of the project level IMS. The latter details all activities to be carried out with associated instructions on best practices and related processes and procedures, including:

- procedures for proper storage and handling of fuels, oils and other hazardous materials;
- construction waste management;
- soil erosion and sediment control;
- fugitive dust control;
- reclamation and restoration of areas disturbed or degraded during construction; and
- safe work practices.

Whereas CAG has a corporate Integrated Quality Management System which is applied case by case to each CAG construction contract, the ESHS management system of each concession company in which AGC invests is structured, certified and managed independently of the other concession companies. Consequently, in connection with IFC’s investment in AGC in 2001, IFC required AGC to develop a support and monitoring function to coordinate with individual concession companies in lieu of a corporate level centralized ESHS management system.

AGC uses a decentralized oversight approach to ensure ESHS objectives for its concession investments. In this regard, AGC has:

- developed and implemented an Environmental and Social Policy Statement, whereby AGC has undertaken to make reasonable efforts as a minority investor to influence other individual concession investors to ensure that the concession companies in which it invests meet IFC’s policies and guidelines; and

- adopted an Environmental and Social Management Plan that includes an Environmental and Social Coordinator who reports to AGC’s senior management with regard to environmental and social due diligence and oversight activities for individual concession investments. This is essentially a monitoring and reporting function, rather than an ESHS management role.

Potential AGC investments are evaluated on a case by case basis by external consultants coordinated by AGC’s Environmental and Social Coordinator who reports to the management of AGC as part of the overall investment due diligence process.

In connection with IFC’s proposed repeat investment with the company, the Group will develop procedures which ensure that :

- The company will formally adopt IFC’s Performance Standards as part of the legal and other requirements contained within CAG’s IMS and AGC’s concession companies ESHS management processes to ensure the PS will be taken into account for all activities;

- For concessions in which AGC is a majority investor, the Group will provide evidence to IFC that such projects are executed and operated in accordance with IFC’s Performance Standards and World Bank/IFC environmental, health and safety guidelines;

- For concessions in which AGC is a minority investor, the Group will use its best efforts and its relationship with other concession investors to encourage a similar outcome;

- If the Group invests in specific sub-investments which are Category A projects, it will inform IFC prior to project entry explaining the justification for the categorization and the nature of the proposed mitigation measures. Involuntary resettlement of project impacted residents, in particular, is an area where there is still significant discrepancy between national legal requirements in Latin America and IFC’s Performance Standards.

CAG and AGC will continue to follow all relevant legal and other requirements related to the protection of cultural resources and property where its activities impact archeological sites, and ensure that such activities are carried out in accordance with approved plans and procedures. CAG and AGC’s concession companies will coordinate with government-approved experts and authorities as necessary to report and collect archeological findings and objects, including some those which may be put on public display at its work sites.

CAG’s recently developed Manual of Environmental Licensing and Identification of Joint, Work-Related Environmental Liability Risks provides employees with basic information regarding environmental licensing requirements. It also helps construction managers and supervisors identify the risks and impacts associated with activities the Company performs. CAG’s Project Officers periodically report on the status of ESHS performance. In addition, the results of internal audits and inspections are provided to senior management. As required as conditions of environmental licenses and permits, the Company provides external status reports to the relevant government authorities, who, in turn, disseminate information to the public, as necessary. The Group will extend the use of this Manual to AGC’s concession companies, as relevant.

- Labor and Working Conditions:

The Group directly employs over 11,000 employees, the vast majority of which are involved in the construction activities. In addition, another 5,000 or more are indirectly employed as third party subcontractors. As evidenced by its certification to SA 8000, the international social accountability standard, the company has demonstrated it’s commitment to implementing best practice in labor relations for its employees, as well as those of suppliers and vendors. SA 8000 is based on the principles of international human rights norms as described in International Labor Organization conventions, the United Nations Convention on the Rights of the Child and the Universal Declaration of Human Rights. Consistent with IFC requirements, it addresses eight key areas: child labor, forced labor, health and safety, free association and collective bargaining, discrimination, disciplinary practices, working hours and compensation.

The effectiveness of CAG’s IMS to control occupational health and safety risks consistent with IFC requirements is evidenced by its certification to OHSAS 18001 -- the international occupational health and safety management system standard. CAG ensures that all employees and subcontractors receive regular training in safety, workplace hazards, first aid, and the proper use of personal protective equipment. In addition, specialized training is provided for selected employees depending on their specific job activities. The company has a good long-term safety record and devotes considerable resources to safety and accident prevention. Similar standards and practices prevail in the AGC concession companies. AGC’s AMRs for the years 2004 to 2006 indicate substantive compliance of all active concessions with IFC’s requirements.

After one fatal accident in 2003, and none in 2004 or 2005, CAG experienced five work-related fatalities in 2006 and three to-date in 2007. Following each fatal accident, the company launched a thorough investigation to review the causes and circumstances in order to improve employee and supervisor training, awareness and oversight at each of its project locations. Notwithstanding, CAG’s overall labor accident statistics and frequency rates have improved during this same period despite the rise in fatal accidents.

AGC’s AMRs for the years 2004 to 2006 also indicate substantive compliance of all active concessions with Brazil’s labor and working condition legal requirements, which themselves substantively comply with IFC’s requirements.

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