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2004 October Report of the Auditor General of Canada

October 2004 Report—Environmental Review at Export Development Canada

Appendix—Environmental Review Directive

Preamble

1. For the purposes of section 10.1 of the Export Development Act, this Environmental Review Directive (the "directive") sets out the process by which Export Development Canada ("EDC") will, before entering into a transaction that is related to a project, determine whether the project is likely to have adverse environmental effects despite the implementation of mitigation measures and, if so, whether EDC is justified in entering into the transaction.

2. The directive requires EDC to categorize relevant projects on the basis of their potential adverse environmental effects; categorization determines the nature and extent of environmental information that will be required by EDC in conducting its environmental review of the project, as well as the extent of that review.

3. Where the directive requires that EDC conduct an environmental review of a project, EDC will use international standards as benchmarks. The directive establishes grounds upon which EDC is justified in entering into a transaction related to a project where that project, despite the implementation of mitigation measures, is likely to have adverse environmental effects.

4. The directive also prescribes those projects in respect of which EDC is not required to conduct an environmental review, and sets out exceptions to the obligation to make the determination referred to above. Finally, the directive provides, in Annex 1, definitions of various terms used herein.

Scope

5. This directive applies in all instances in which EDC is considering exercising its powers under section 10 or 23 of the Export Development Act by entering into a transaction that has, as applicable, a repayment term or coverage period of two years or more and a value of more than SDR 10 million and that is related to a project. A transaction is related to a project if, in EDC's opinion, it is: (i) in respect of goods or services purchased or to be purchased (or with respect to which rights of use are otherwise acquired), by a project sponsor, project company or an entity with prime responsibility for project design, development and construction, for use in a particular identified project; (ii) in respect of an equity transaction or an equity investment made in a particular identified project by or on behalf of a project sponsor; or (iii) entered into by EDC for the purpose of promoting procurement of Canadian goods or services by a project sponsor, project company or other entity with prime responsibility for project design, development and construction, for use in a particular identified project.

Categorization

6. In respect of each transaction to which this directive applies, EDC will categorize the related project on the basis of the extent of the project's potential adverse environmental effects, which categorization will determine the nature and extent of environmental information that will be required by EDC in conducting its environmental review of the project, as well as the extent of that review. EDC's categorization of a project into one of the following three categories will reflect EDC's evaluation of the most appropriate category for the project in question. Where EDC determines that its categorization of any project is inappropriate, EDC will re-categorize the project.

Category A

7. EDC will categorize a project in Category A if EDC considers that the project is likely to have significant adverse environmental effects that are sensitive, diverse, or unprecedented. These effects may affect an area broader than the sites or facilities subject to the physical works, and may be irreversible. For illustrative purposes only, Annex 2 provides a list of sensitive sectors and projects that will generally be considered by EDC, for the purposes of categorization, to be Category A projects.

8. The environmental assessment for a Category A project will normally be in the form of an environmental impact assessment (a report with respect to which is illustrated in Annex 3), but may be comprised of elements of other EA instruments including any of those referred to in Annex 4.

9. EDC expects that for each Category A project public consultations with affected parties, if any, will be held in the host country, and that the results of these consultations will have been taken into account in the environmental assessment of the project. EDC's expectations regarding the nature, scope and extent of public consultation will take into account the political, legal, and cultural context of the host country.

Category B

10. EDC will categorize a project in Category B if EDC considers that the project's potential environmental effects are less adverse than the potential environmental effects of Category A projects. Environmental effects associated with Category B projects are usually site-specific; few if any are irreversible; and in most cases mitigation measures can be designed more readily than for Category A projects.

11. The scope of environmental assessment for a Category B project may vary from project to project, and is more narrow than that of an EA for a Category A project.

Category C

12. EDC will categorize a project in Category C if EDC considers that the project is likely to have minimal or no adverse environmental effects. Generally, no environmental assessment is required for Category C projects.

Environmental Review Information Requirements

13. The information EDC will require in connection with its environmental review of a project will vary depending upon the category into which the project has been classified by EDC.

14. In all cases, the submission to EDC of existing documentation is encouraged to improve the efficiency of the review process and minimize duplication of effort. Where an environmental analysis of a project has been conducted by a recognized international financial institution whose environmental review procedures are acceptable to EDC, EDC may consider such institution's environmental analysis of the project in conducting its own review.

15. Where a project is located in either of Canada or the United States of America and EDC receives confirmation that the project has been designed in compliance with host country environmental requirements, EDC may determine that it requires no additional environmental information in respect of the project beyond that required for categorization.

16. Where EDC determines that it is unable to obtain sufficient environmental assessment information to conduct its environmental review of a project, EDC will decline to enter into a transaction related to such project.

Category A projects

17. For Category A projects, EDC will require a copy of the EIA report (or comparable EA instrument reports) or elements thereof in order to assist EDC in identifying and assessing potential adverse environmental effects associated with the project.

18. If the environmental assessment for a Category A project has been completed by an employee(s) of the project sponsor or project company, or an employee(s) of any affiliate thereof, EDC will require, prior to the time it enters into a transaction related to the project, that independent expertise acceptable to EDC be engaged to review such environmental assessment for potentially significant problems in the analysis.

Category B projects

19. Environmental information provided to EDC for the purposes of an environmental review of a Category B project may be in the form of EA instrument reports or elements thereof, in order to assist EDC in identifying and assessing potential adverse environmental effects associated with the project. In addition, EDC may accept various approaches to meeting its informational requirements for Category B projects: for example, environmentally-sound design criteria, or pollution standards for small-scale industrial plants or rural works; environmentally-sound siting criteria, construction standards, or inspection procedures for housing projects; or environmentally-sound operating procedures for road rehabilitation projects.

Category C projects

20. No environmental assessment information is required by EDC in respect of a Category C project, except as may be required by EDC to categorize the project.

Evaluation and Decision

21. In conducting its environmental review, EDC will use, as benchmarks, the international standards which are in EDC's opinion the most appropriate to the particular project, and require any adverse gaps EDC identifies between the standards to which the project has been designed and the international standards selected by EDC to be explained to EDC's satisfaction.

22. In addition, the environmental assessment information provided will demonstrate to EDC's satisfaction that the project in respect of which EDC is conducting a review has been designed to comply with host country environmental requirements, such as any applicable provisions for local consultation, licenses, permits and other regulatory approvals.

23. On the basis of its environmental review, EDC will come to a conclusion as to whether or not a project is likely to have adverse environmental effects despite the implementation of mitigation measures. In the event that EDC has completed its environmental review and is of the view that a project is likely to have adverse environmental effects despite the implementation of mitigation measures, EDC will determine whether, despite these effects, EDC is justified in entering into a transaction in respect of such project.

24. Grounds which in EDC's view justify providing support to a project that has adverse environmental effects despite mitigation measures include:

• the adverse environmental effects, taking into account mitigation measures, associated with the project are not in EDC's view significant;
• EDC's satisfaction that the project is designed to meet or exceed internationally recognized good practices, guidelines or standards;
• the existence of what are in EDC's view compelling socio-economic considerations as presented by the host country;
• the project represents an opportunity to improve environmental conditions in the host country above base-line conditions; or
• the project provides the opportunity to transfer environmentally sound technologies, services and knowledge to, or for the benefit of, the host country.

25. Where EDC determines that it is justified in entering into a transaction related to a project that is likely to have adverse environmental effects despite the implementation of mitigation measures, EDC may (but need not) enter into the transaction.

26. Where EDC determines that it is not justified in entering into a transaction related to a project that is likely to have adverse environmental effects despite the implementation of mitigation measures, EDC will decline to enter into the transaction.

Covenants and Monitoring

27. Compliance by a project with host country laws and regulations will normally be confirmed through warranties and representations.

28. Where EDC's environmental review identifies a need to monitor a project, EDC will seek to obtain such rights, assurances or covenants as EDC deems necessary to provide to it the ability to conduct such monitoring during the term of EDC's support to the project. Where EDC is unable to secure such rights, assurances or covenants as it deems necessary in the circumstances, EDC may decline to enter into the transaction.

Exceptions

29. Notwithstanding anything else herein, EDC shall not be required to make a determination for the purposes of section 10.1 of the Export Development Act in respect of:

1. any transaction related to a project EDC was, as of December 21, 2001, already reviewing under the Environmental Review Framework;
2. any transaction related to a project in respect of which, as of December 21, 2001, an approval for any purpose has been given by any level of authority within EDC or an endorsement has been made by the Risk Management Office of EDC or the management Risk Management Committee;
3. any transaction related to a project that is in support of a review or study in connection therewith, such as an environmental or feasibility study;
4. any transaction related to a Category C project; and
5. any transaction related to a Category A or B project which is located in Canada or the United States of America, where EDC receives confirmation that the project has been designed in compliance with applicable host country environmental requirements.

30. Transactions related to projects described in 29 a), b) and c) above are entirely exempt from the application of this directive. EDC will categorize projects referred to under 29 d) and e) above in accordance with this directive, but EDC is not required to make a determination in respect of same.

Effective Date

31. This amended directive, which is not retroactive, shall come into effect on May 1, 2002 and shall replace the directive which came into effect on December 21, 2001.

Annex 1—Definitions

Definitions

The following terms shall have the meanings ascribed thereto below when used in this directive:

"adverse environmental effect" means any harmful environmental effect;

"affected parties" means those parties living at or near the site of the project, indigenous groups with an interest in project land, project sponsors and local non-governmental or public sector organizations participating in the local public consultation process;

"considering", in relation to a transaction and for the purposes only of the Scope of this directive, means that EDC is prepared, but for the application of the directive, to enter into the transaction;

"coverage period" means the time period starting from the day that insurance coverage provided under a policy issued by EDC in a political risk insurance transaction commences to apply through to and including the date upon which such coverage would normally be expected to terminate in accordance with the terms of such policy;

"enter", in relation to a transaction related to a project, means the point of time at which EDC first becomes unconditionally legally obligated to provide funds to its transaction counterparty, or at which EDC's political risk insurance coverage commences to apply;

"environment" means land, water, air, living organisms and interacting natural systems;

"environmental assessment" or "EA" means the process of assessing the environmental effects and project-related social impacts of a project in order to evaluate their significance, and may include identifying measures to prevent, minimize, mitigate or compensate for adverse environmental effects. Environmental assessment is the responsibility of the project sponsor;

"environmental assessment instruments" or "EA instruments" are tools used to assess the environmental effects and project-related social impacts of a project in order to evaluate their significance, which may also identify measures to prevent, minimize, mitigate or compensate for adverse environmental effects; EA instruments include EIAs and other instruments described in Appendix 4;

"environmental effect" means any change to the environment, including any project-related social impact, as a result of the normal construction or operation of the project, or in the event of a reasonably foreseeable accident or malfunction in relation to the project;

"environmental impact assessment" or "EIA" means an EA instrument to identify and assess the potential environmental effects of a project, evaluate alternatives, and design mitigation, management and monitoring measures;

"environmental impact assessment report" or "EIA report" means the document or documents which describe the processes, findings and conclusions of the EIA;

"environmental review" means the review by or for EDC of the environmental assessment of a project;

"Environmental Review Framework" means the framework, employed by EDC in conducting environmental reviews of projects related to transactions EDC was considering, which came into effect on April 12, 1999;

"equity transaction" means the acquisition by EDC, other than by way of the taking or realization of security or recovery, of an interest in an entity in the exercise of its powers under subsection 10(1.1) of the Export Development Act;

"Export Development Act" means the Export Development Act ( R.S.C. 1985, c. E-20 ), as amended from time to time;

"financing transaction" means a loan, any facility whereby EDC purchases receivables whether or not such receivables are evidenced by debt instruments, lease or financing guarantee entered into by EDC pursuant to EDC's financing program;

"greenfield" means, in relation to a project, developed on a previously undeveloped site or location;

"host country" means the nation in which a project is located;

"international standards" means the internationally recognized good practices, standards and guidelines with respect to project design and performance that EDC will rely upon as benchmarks in undertaking its environmental review of a project; an illustrative list of such good practices, standards and guidelines is provided in Annex 5;

"major extension" means, in relation to a project, additions or modifications intended to result in a substantial change in output or functionality;

"mitigation measures" means methods to reduce, eliminate or compensate for adverse environmental effects;

"political risk insurance transaction" means insurance coverage provided by EDC under its political risk insurance program to protect against political risks such as foreign exchange transfer difficulties, expropriation by a host government, or war, revolution, and insurrection;

"project" means a physical development that is greenfield, or undergoing major extension or transformation-conversion and is industrial, commercial or infrastructure-related in nature;

"project-related social impact" means any instance of involuntary resettlement or any other adverse change that the project imposes on indigenous or vulnerable groups or on cultural heritage;

"project company" means an entity owned in whole or in part by a project sponsor and established for the purpose of the design, development, construction or operation of a particular identified project;

"project sponsor" means an entity owning, either directly or through an ownership interest in a project company, the assets of a project;

"repayment term" shall have the meaning given that term in section 8 of the Arrangement on Guidelines for Officially Supported Export Credits;

"SDR" means Special Drawing Rights, an artificial currency unit defined as a basket of national currencies established by the International Monetary Fund;

"transformation/conversion" means, in relation to a project, reuse on a previously developed site or a modernization intended to result in a substantial change in output or functionality; and

"transaction" means EDC's support of a project in the form of financing, political risk insurance or equity, or any combination thereof, in cases which that support has, as applicable, a repayment term or coverage period of two years or more and a value of more than SDR 10 million.

Annex 2—Illustrative List of Category A Projects

I. Projects as described below:

1. Crude oil refineries (excluding undertakings manufacturing only lubricants from crude oil) and installations for the gasification and liquefaction of 500 tonnes or more of coal or bituminous shale per day.

2. Thermal power stations and other combustion installations with a heat output of 300 megawatts or more and nuclear power stations and other nuclear reactors (except research installations for the production and conversion of fissionable and fertile materials, whose maximum power does not exceed 1 kilowatt continuous thermal load).

3. Installations solely designed for the production or enrichment of nuclear fuels, the reprocessing of irradiated nuclear fuels, or for the storage, disposal and processing of radioactive waste.

4. Major installations for the initial smelting of cast iron and steel and for the production of nonferrous metals.

5. Installations for the extraction of asbestos and for the processing and transformation of asbestos and products containing asbestos: for asbestos-cement products, with an annual production of more than 20,000 tonnes finished product; for friction material, with an annual production of more than 50 tonnes finished product; and for other asbestos utilisation of more than 200 tonnes per year.

6. Integrated chemical installations including the manufacture and transportation of pesticides and hazardous/toxic materials.

7. Construction of motorways, express roads and lines for long-distance railway traffic and of airports with a basic runway length of 2,100 metres or more.

8. Large-diameter oil and gas pipelines.

9. Sea ports and also inland waterways and ports for inland-waterway traffic which permit the passage of vessels of over 1,350 tonnes.

10. Waste-disposal installations for the incineration, chemical treatment or landfill of toxic and dangerous wastes.

11. Large dams and reservoirs.

12. Groundwater abstraction activities in cases where the annual volume of water to be abstracted amounts to 10 million cubic metres or more.

13. Pulp and paper manufacturing of 200 air-dried metric tonnes or more per day.

14. Major mining, on-site extraction and processing of metal ores or coal.

15. Hydrocarbon production.

16. Major storage facilities for petroleum, petrochemical and chemical products.

17. Large-scale logging.

18. Large-scale waste-water treatment.

19. Domestic solid waste-processing facilities.

20. Large-scale tourism development.

21. Large-scale power transmission.

22. Large-scale reclamation.

23. Large-scale agriculture/silviculture involving the intensification or development of previously undisturbed land.

24. Tanneries.

II. Sensitive Areas

A project may also be classified as Category A if it is planned to be carried out in a sensitive location, even if it does not otherwise appear in the above list. These sensitive areas include National Parks and other conservation areas of national or regional importance, such as wetlands and areas of archaeological significance, areas prone to erosion and/or desertification, and areas of importance to ethnic groups. The preceding list is clearly non-exhaustive and the types of projects it contains are examples only.

Annex 3—Illustrative Environmental Impact Assessment Report

An EIA's scope and level of detail should be commensurate with the project's potential environmental effects. The EIA report will normally include the following items*:

• Executive Summary: Concisely discusses significant findings and recommended actions.
• Policy, legal and administrative directive: Discusses the policy, legal, and administrative directive within which the EIA is carried out.
• Project description: Describes the proposed project and its geographic, ecological, social, and temporal context, including any offsite investments that may be required (e.g., dedicated pipelines, access roads, power plants, water supply, housing, and raw material and product storage facilities). Indicates the need for any resettlement or social development plan. Normally includes a map showing the project site and the project's area of influence.
• Baseline data: Assesses the dimensions of the study area and describes relevant physical, biological, and socio-economic conditions, including any changes anticipated before the project commences. Also takes into account current and proposed development activities within the project area but not directly connected to the project. Data should be relevant to decisions about project location, design, operation, or mitigation measures. The section indicates accuracy, reliability and sources of the data.
• Environmental effects: Predicts and assesses the project's likely positive and negative effects. Identifies mitigation measures and any residual negative effects that cannot be mitigated. Explores opportunities for environmental enhancement. Identifies and estimates the extent and quality of available data, key data gaps, and uncertainties associated with predictions, and specifies topics that do not require further attention.
• Analysis of alternatives: Compares feasible alternatives to the proposed project site, technology, design and operation including the "without project" situation. For each of the alternatives, quantifies the environmental effects to the extent possible, and attaches economic values where feasible. States the basis for selecting the particular project design proposed and justifies recommended emission levels and approaches to pollution prevention and abatement.
• Environmental Management Plan: Describes mitigation, monitoring and institutional measures to be taken during construction and operation to eliminate adverse effects, offset them, or reduce them to acceptable levels.
• Consultation: Record of consultation meetings, including consultations for obtaining the informed views of the affected people, local non-governmental organizations and regulatory agencies.
• Appendices.

*Note that the lack of one or more of these elements in an EIA report does not necessarily mean that the report or the related EIA is incomplete.

Annex 4—Other Environmental Assessment Instruments

"environmental audit" means an instrument to determine the nature and extent of all environmental areas of concern at an existing facility. The audit identifies and justifies appropriate measures to mitigate the areas of concern, estimates the cost of the measures, and recommends a schedule for implementing them. For certain projects, the EA report may consist of an environmental audit alone; in other cases, the audit is part of the EA documentation;

"environmental management plan" (EMP) means an instrument that details (a) the measures to be taken during the implementation and operation of a project to eliminate or offset adverse environmental effects, or to reduce them to acceptable levels; and (b) the actions needed to implement these measures. The EMP is an integral part of Category A EAs (irrespective of other instruments used). EAs for Category B projects may also result in an EMP;

"hazard assessment" means an instrument for identifying, analyzing, and controlling hazards associated with the pres ence of dangerous materials and conditions at a project site. Hazard assessments should be undertaken for projects involving certain inflammable, explosive, reactive, and toxic materials when they are present at a site in quantities above a specified threshold level. For certain projects, the EA report may consist of the hazard assessment alone; in other cases, the hazard assessment is part of the EA documentation;

"environmental risk assessment" means an instrument for estimating the probability of harm occurring from the presence of dangerous conditions or materials at a project site. Environmental risk represents the likelihood and significance of a potential hazard being realized; therefore, a hazard assessment often precedes a risk assessment, or the two are conducted as one exercise. Environmental risk assessment is a flexible method of analysis, a systematic approach to organizing and analyzing scientific information about potentially hazardous activities or about substances that might pose risks under specified conditions. Environmental risk assessments should be undertaken for projects involving handling, storage, or disposal of hazardous materials and waste, the construction of dams, or major construction works in locations vulnerable to seismic activity or other potentially damaging natural events. For certain projects, the EA report may consist of the risk assessment alone; in other cases, the environmental risk assessment is part of the EA documentation.

Annex 5 – Illustrative List of Internationally Recognized Good Practices, Standards and Guidelines

• World Bank's Pollution Prevention and Abatement Handbook.
• The International Finance Corporation's Guidelines and Safeguard Policies.
• The environmental requirements, standards, policies or guidelines of regional development banks (such as the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development and the Inter-American Development Bank).
• Canadian Council of Ministers of the Environment (CCME): Canadian Environmental Quality Guidelines.
• World Health Organization (WHO): Air Quality and Drinking Water Quality Guidelines.
• Good practices guidelines published by United Nations Environment Programme.
• Good practices guidelines published by internationally recognized industry associations such as Responsible Care, International Council on Metals and the Environment or International Atomic Energy Agency.
• International Organization for Standardization: ISO 14000 standards.