The proposed operation is an equity investment wherein IFC, together with ISQ, will acquire all DEI assets in Peru, Ecuador, Argentina and Chile. This is a Category A investment because of (a) the potentially significant and diverse environmental, social, labor and/or occupational health and safety (E&S) impacts and risks associated with DEI’s facilities to be acquired, including certain potential E&S liabilities which IFC and ISQ will not be able to fully assess until after the acquisition process is completed, and (b) because of the inherent risks of an operation of this nature, associated with a diverse Portfolio of assets spanning across several countries, including renewable and fossil fuel-based power generation, power transmission, and the exploitation of a gas field and associated gas processing and transport. Furthermore, in the short-to-mid term, Orazul Energia Partners LLC is expected to expand existing assets and/or develop new projects, some of which are likely to have additional significant adverse E&S risks and impacts.

Assessment of Impacts and Risks:   DEI has been operating energy generation facilities in the Portfolio for over 19 years with some of the assets in operation for more than 50 years. Based on DEI’s reputation and the information available to the IFC and ISQ through the due diligence and bidding processes, the IFC concluded that the Portfolio is generally operated in compliance with local E&S regulations. 

All these existing operational assets have caused permanent and diverse impacts typical of hydropower and thermal generation, transmission lines, and gas exploitation and transport projects. Construction impacts have already occurred and, to the best of IFC’s knowledge after due inquiry, construction impacts were managed in compliance with local legislation, and there are no major legacy or environmental and social liabilities, other than those described in the Red Flags / Existing Legacies section below. 

Operation impacts are also typical of these type of operations and include but are not limited to: (a) hydropower: (a.1) permanent land use modification over the areas flooded by the reservoirs, (a.2) permanent conversion of a free flowing aquatic environment in to a slow moving lake, (a.3) permanent modification of natural water and sediment flow regimes and barrier effect to movement of aquatic biota, (a.4) potential modifications in water quality upstream and downstream of the dams, and (a.5) increased risks to the safety of downstream populations in case of partial or total structural failure or extraordinary water releases; (b) thermal power: (b.1) emission and air quality impacts, (b.2) increased noise level to surrounding communities, (b.3) water use and temperature modification associated with the cooling systems, and (b.4) hazardous waste generation, storage, handling and disposal, including potential risks to surrounding communities from storage of flammable diesel fuel; (c) transmission lines: (c.1) continued easement and access use for maintenance activities, (c.2) occupational health and safety risk of maintenance crews, (c.3) safety risks to neighboring communities (especially children) that could decide to climb the towers and accidentally fall or get electrocuted, and (c.4) potential collisions of birds with the transmission cables; (d) gas well, fractionation plant and pipeline: (d.1) any spill or explosion / accidents related to either pipeline integrity failures due to aging equipment/poor maintenance or sabotage / illegal taping into the pipelines and accidents when transferring the product into trucks, (d.2) community health and safety risks during transportation of the product by truck, and (d.3) potential social conflict /risks related to affected communities if effective communication and community engagement efforts are not undertaken.      

Existing Management of E&S impacts and risks: All these operational impacts and risks are currently managed in compliance with local regulations and DEI corporate E&S policies and practice, and there are no existing claims or liabilities other than those described below.  DEI has a well-developed corporate ESMS, which includes a Policy, organizational structure, procedures, KPI, benchmarking and monitoring and evaluation (https://www.duke-energy.com/_/media/pdfs/our-company/ehspolicyandmgtsystemrev.pdf?la=en and   https://www.duke-energy.com/our-company/investors/corporate-governance). These ensure consistency and effectiveness on DEI E&S management activities, and a culture of continuous improvements in E&S risk management, prevention, detection, and correction of non-compliances, reduction of adverse impacts to the environment, workers and affected communities, and enhancement of the company’s reputation with external stakeholders. 

At individual sites, DEI also has well-established and competent local E&S teams that report to a corporate E&S Manager based at DEI Corporate Head Quarters in the USA. All country-based E&S managers meet once a year to review status compliance, share experiences, learn about good practices, set up the work plan for the following year, and benchmark against each other and the corporate goals. Local E&S teams have site specific procedures for managing environmental and social compliance, community relations, OHS, emergency preparedness and response, and contractor management, among others. 

External audits are conducted annually by independent third party accredited organizations to provide certification or registration of conformity to the requirements of one or more international accepted systems (ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 standards). Site specific pollution prevention and mitigation measures associated with each existing asset were originally identified as part of each project ESIA process. These ESIA’s were performed in compliance with local regulations. Once these assets were acquired by DEI, the company performed a gap analysis between current practices and their expected corporate E&S KPI, and developed site specific measures and targets for improving efficiency in terms of water and energy consumption, pollution prevention and control, occupation health and safety, and emergency preparedness and response, among others. Each site has well developed environmental and OHS monitoring programs. 

Red Flag / Existing Liabilities: Based on the Red Flags Environmental and Social Due Diligence report, the IFC, ISQ and IE teams did not identify any major legacy or liability considerations that would have precluded IFC from investing. However, several important issues were identified that will require further assessment and a well-articulated E&S Action Plan (ESAP) to assure compliance with IFC Performance Standards. The main issues identified are:

-           Social Tensions in Peruvian Assets: In two operations in Peru, the Consortium is faced with social legacy issues that could jeopardize the social license for continued operations as well as future expansion.  In the case of the Cañón del Pato 247 MW hydropower plant, conflict associated with flow regulation at Parón Lake exists and is currently managed by the community subjecting the power plant only to use unregulated natural runoff from the lake, even if the plant’s concession allows for regulation and use of up to 8 m3/s. Similarly in the Aguaytía gas plant and related exploitation of Block 31C, there are historic tensions that have recently escalated due to allegations that DEI did not honor a concession requirement to distribute gas and other benefits among the project-affected people (PAP). Both of these sources of conflict have led to historic and recent protests, some of which have even resulted in the temporary takeover of some of DEI assets by the communities and a series of current law suits. 

In the IE’s and the Consortium’s opinion, both of these issues can be resolved with increased communication and a well-articulated stakeholder engagement process. The situation at Parón Lake is not an active conflict and the plant has been operating without the need to regulate the release at Parón Lake in accordance to DEI’s legal right per the existing concession agreement. However, once the Consortium owns the assets, the new management will reengage, assess the situation, and explore win-win solutions that may allow for a greater release from Parón Lake while avoiding any negative impacts and/or assuring there is appropriate compensation / benefit distribution to the affected communities. The social issue at Aguaytía, on the other hand, is an existing and active volatile situation resulting from lack of clarity –and even contradictions - in the regulatory framework defining who is responsible for the gas distribution among the PAP – namely Pucallpa in the Ucayali Region. This process will continue with the GoP commencing a bidding process for gas distribution in the region. In the meantime, the Consortium, will need to develop a well-articulated communication strategy to assure PAP clearly understand the legal situation and the extent of Aguaytía’s new owners efforts and responsibilities in expediting fairly-priced gas distribution in the region. 

As a requirement to IFC’s investment, the Consortium will (a) hire a new community relations and conflict resolution advisor or advisory team, (b) perform a detailed assessment of these social legacies, and (c) via a comprehensive stakeholder engagement process and in consultation with the PAP, develop a communication strategy and a concrete action plan applying best efforts and referencing Good International Industry Practice (GIIP) to meaningfully address both situations at Parón Lake and at the Aguaytía site. 

-           Hazardous Waste: Several sites in Argentina reportedly store asbestos that was removed from the power plants per DEI’s policy requirement. This asbestos is currently being stored on site, either in enclosed-above-ground decommissioned tanks or buried underground in shipping containers. As part of the ESAP, ISQ will be required to commission a study on (a) current asbestos containment status and dispersion risks, and (b) best practice for either final disposal or continued in-site storage.

-           Security: Presently, DEI subsidiaries outsource security services to private third parties locally reputable security companies that provide armed security guards. To avoid any potential issues related to violation of human rights and use of security forces, the Consortium will perform Security Risk Assessments (SRA) and develop site-specific Security Management Plans (SMP) compliant with PS4 and aligned with the UN Voluntary Principles of Security and Human Rights. The SRA and SMP will include, but not be limited to: (a) assess likelihood and severity of potential security risks at each site, (b) screen past records of security companies and personnel employed, (c) define clear objectives and permissible actions to be undertaken in case of security breaches; (d) design an effective grievance mechanism for aggrieved members of community and/or employees; (e) assure appropriate training of security personnel to avoid  human rights violations; and (f) detailed recording of security incidents with due investigation and implementation of corrective actions including investigation and appropriate disciplinary actions when complaints against security personnel are raised by employees or a third party.

Orazul Energia Partners LLC – Corporate E&S Management System (ESMS) and proposed organization structure going forwards:    ISQ has developed similar platforms in other regions of the world, and has a good track record in the timely implementation of adequate corporate E&S management structures and development of corporate ESMS aligned with the PS, and guided by ISQ’s Environmental, Social and Governance (ESG) policy. The Consortium will constitute a Dedicated Asset Team (DAT) that will oversee the Consortium’s overall performance, including E&S. This DAT will report to the Consortium’s Board (where the IFC/ AMC will be represented). The DAT and the Consortium’s Board will supervise and manage a newly formed asset management company (“Orazul Energia Asset Management LLC” or “Orazul Management”) that will employee a CEO, CFO, General Counsel, Vice-President of Corporate Development & Strategy and Vice-president of Environmental Social Management System & Compliance (or comparable positions and titles) that will supervise the various regional management teams. The Consortium intends to retain all existing DEI’s local E&S personnel, who have on-the-ground knowledge of the assets, operating experience, and a good track record. The local E&S teams will report directly to the Vice-President of Environmental Social Management System & Compliance.

As a requirement to IFC’s investment, the Consortium will (i) appoint a senior officer with overall E&S corporate responsibilities (the Vice-President of Environmental Social Management System & Compliance); (ii) develop a Corporate E&S Policy in form and content satisfactory to the IFC that will be approved by the Consortium’s Board of Directors and distributed to all the Consortium’s assets, (iii) design, develop, and implement a corporate ESMS, requiring compliance with IFC PS in all existing assets and new projects; and (iv) perform a detailed gap analysis at each site between current E&S practices and IFC PS, and design an asset-by-asset Corrective Action Plan, that will include but not be limited to, all the issues identified in the initial Red Flag report noted above, to assure that all assets implement corrective measures in a reasonable time to bridge any identified gaps between current E&S performance and the PS within a reasonable period of time.

At the time of this review, ISQ was already in the process of developing the Consortium’s corporate E&S Policy and a risk management framework to assess and manage E&S aspects associated with these new investments. 

ISQ’s Environmental, Social and Governance (ESG) policy will set the basis for the Consortium’s corporate ESMS that will cover compliance with local laws and with IFC PS; including but not limited to:  

PS1 (i) mechanisms to identify,  assess and manage environmental and social risks and impacts of existing and new assets, assuring the adoption of the mitigation hierarchy to anticipate and avoid, minimize or compensate for risks and impacts to workers, affected communities, and the environment, (ii) stakeholder communication and engagement management plan to assure that permanent lines of communication are open with project affected communities and information on issues that could potentially affect them is timely and openly disclosed and disseminated, including an effective grievance mechanisms; (iii) emergency preparedness and response system, and (iv) supervision and recording of key performance indicators (KPI), and monitoring and review of indicators and comparison with internally accepted benchmarks; 

PS2: (i) promotion and fair treatment, non-discrimination, and equal opportunity of workers, (ii) establishing, maintaining, and improve worker-management relationship, (iii) protection of work force, including vulnerable categories of workers and workers engaged by third parties, (iv) promotion of safe and healthy working conditions, and the health of workers, (v) prohibit the use of forced and child labor; 

PS3: (i) elimination or minimization of adverse impacts on human health and the environment from pollution from project activities, (ii) promotion of the sustainable use of natural resources, including energy and water, and (iii) reduction of  project-related GHG emissions; 

PS4: (i) avoid adverse impacts on the health and safety of the affected community during the project life from both routine and non-routine circumstances, (ii) ensure that the safeguarding of personnel and property is carried out in accordance with relevant human rights principles and in a manner that avoids or minimizes risks to the affected communities, (iii) assist and collaborate with the affected communities, local government agencies, and other relevant parties, in their preparations to respond effectively to emergency situations; 

PS5: (i) avoid or minimize displacement by exploring alternative project designs, (ii) avoid forced eviction, (iii) anticipate and minimize adverse social and economic impacts from land acquisition or restrictions on land use, (iv) improve, or restore, the livelihoods and standards of living of displaced persons, (v) improve living conditions among physically displaced persons through the provision of adequate housing with security of tenure at resettlement sites; 

PS6: (i) protect and conserve biodiversity, (ii) maintain the benefits from ecosystem services, (iii) promote the sustainable management of living natural resources through the adoption of practices that integrate conservation needs and development priorities;

PS7: (i) ensure that the development process fosters full respect for the human rights, dignity, aspirations, culture, and natural resource-based livelihoods of indigenous peoples, (ii) anticipate and avoid adverse impacts of projects on communities of indigenous peoples or, when avoidance is not possible, to minimize and/or compensate for such impacts, (iii) promote sustainable development benefits and opportunities for indigenous peoples in a culturally appropriate manner, (iv) establish and maintain an ongoing relationship based on informed consultation and participation with the indigenous peoples affected by a project throughout the project’s life-cycle, (iv) to ensure the Free, Prior, and Informed Consent (FPIC) of the affected communities of indigenous peoples, (v) respect and preserve the culture, knowledge, and practices of indigenous peoples; and 

PS8: (i) to protect cultural heritage from the adverse impacts of project activities and support its preservation, (ii) promote the equitable sharing of benefits from the use of cultural heritage.

A key component of the corporate ESMS will be comprehensive corrective actions execution monitoring of the ESAP items targeted to remedy the issues identified in the Red Flag report noted above. The corrective actions will have a clear road map for action, with responsibilities, budget, intermediate deliverables, timeline, and expected outcomes. 

Organizational Structure and Capacity: As noted above, to enable effective implementation of the Corporate ESMS, and as a requirement for IFC’s investment, Orazul Management will appoint at corporate level a fulltime VP, who will be appropriately qualified and experienced on environmental and social matters, that will manage the existing E&S local teams and compliment and strengthen the Consortium’s E&S management capabilities as deemed necessary and to meet business needs.

Human Resources Policies and Procedures:   

In total, the acquired assets currently employ 464 people – a total of 15% are female employees with 20% in management positions in DEI. 

DEI has an Employment Policy in place that is applicable to all its full time employees. The policy covers general terms and conditions of services including appointment procedure, probation period, confirmation of service, promotion, retirement, employee’s code of conduct, pay scale, other financial benefits, transfer and change of duty. DEI has also developed documents pertaining to job categorization, leave policy, bonus policy, office timings, policy on non-employment of adolescent and child at work, anti-discrimination policy, anti- harassment and abuse at work policy, performance appraisal policy, anti-bribery and corruption policy. This HR policy is adopted by all subsidiaries in all countries and is adapted to comply with local labor laws and is aligned with PS2 requirements. 

In all the assets assessed, neither IFC, ISQ nor the IE identified any type of restriction for workers to join or form Labor Unions nor any interference with the right of workers to bargain collectively. As a matter of fact, in all of the assets to be acquired, there are existing unions and current collective agreements that get negotiated on a periodic basis and in compliance with local labor laws. No major labor union complaint, claim, or strike has been reported in recent years.  

DEI has an anti-discrimination policy, as part of their HR policy, which clearly states the company’s commitment against discrimination based on sexual orientation, gender, parental status, age, race, religion, or disability. This also includes a policy on anti-harassment and abuse at work which states that any reports of unfair discrimination or harassment will be treated seriously and appropriate actions will be taken. 

DEI also has a formal employee grievance redress mechanism. Employees are required to report their grievances verbally or in writing to their immediate managers, which is the first level where action is required to be taken within five working days of receiving the complaint. In case of unresolved grievances, the employee can escalate the issue to the upper management level. 

As part of the ESAP, the Consortium will review and modify as necessary all current HR policies and procedures in the Consortium’s subsidiary companies, so that they are all compliant with local legislation and PS2. This policy will build upon DEI’s current policies and procedures as found necessary. For instance, the  updated internal grievance mechanism will build upon DEI’s existing one, and be developed in line with PS2 provisions and be accessible to all workers, and ,thus, the existing grievance process for employees will be modified to allow employees to raise anonymous complaints and will have provisions for protection of confidentiality and non- retribution. The local companies and Orazul Management will maintain grievance records and will monitor redress of grievances. This grievance mechanism shall also be extended to contractors performing core activities, and its implementation and effectiveness will be monitored by the Consortium through performing periodic audits at all its sites. The Consortium will also develop a PS2 compliant Retrenchment Policy.

Occupational Health and Safety: DEI has an OHS policy committing to ensure a healthy and safe work environment to employees. At each individual asset, DEI has identified the OHS risks associated with the different tasks, assures employee are trained and uses adequate personal protection equipment (PPE) for each task, and implements strict occupational health and safety protocols which are commensurate to the risks identified for each task. DEI has outlined objectives to achieve zero fatalities and no lost-time accidents, and has developed comprehensive health programs to avoid occupation injuries. Most assets have been able to successfully meet this “zero accident” objective. DEI developed OHS KPI including frequency and severity, as well as recording of near-misses. DEI’s OHS management system includes monthly workplace inspections to evaluate adequacy of training, work processes, safeguarding from heavy machinery, working in heights, confined spaces, and hot-work, LF&S equipment, emergency drills, and general housekeeping among others.

In DEI 2015 Sustainability Reports, the company provides OHS indicator showing sustained improvement in KPI. The two KPI used reported by the company are Total Incident Case Rate (TICR) and Lost-Workday Case Rate (LWCR), and have been consistently improved in the last five years.  

As part of the ESAP, the Consortium will develop OHS policies and procedures to assure compliance with GIIP and PS2. These will build upon DEI existing ones,  and assure to include, at a minimum: (i) policies and principles focused in safety first, no fatalities, and a culture of accident prevention, (ii) occupational risk identification process and management associated with each task/activity, (iii) training/ qualification and PPE requirements and restrictions/limitations related to each task/activity, (iv) first aid guidelines, (v) crisis and emergency response procedures, and (vi) standard performance indicators (KPI), workplace conditions as well as incident/accident statistics, such as Lost Time Injuries (LTI), Lost Time Injuries Frequency Rates (LTIFR), severity rates, and fatalities, will be monitored and assessed at each of the projects and at corporate level. 

Workers Engaged by Third Parties: DEI maintains original equipment manufacturers (OEM) maintenance agreements. The company requires each contractor to get an approved work permit before commencement of any new task on site, and submit periodic reports on work progress. These work permits clearly outline the OHS risks related to the task, the qualification and certifications required, PPE needs, and detail procedures, KPI and emergency contacts and procedures.  As an integral component of the updated Consortium’s OHS policies and procedures to be developed per the ESAP, the Consortium will develop a formal contractor management procedure to qualify and audit its contractors as well as their subcontractors. The procedure will build on the existing work order process currently in use by DEI, and include but not be limited to: (i) a compliance checklist against the applicable legal requirements and PS; (ii) OHS performance criteria as part of contractor qualification and selection; and (iii) OHS monitoring and audit procedures.

Stakeholder Engagement: 

DEI has been conducting regional stakeholder engagement assessments across the entire organization, specially focusing on better understanding the concerns and needs of the communities affected within their areas of impact. During the last 5 years, each business unit of DEI has performed a stakeholder analysis and mapping to identify the most significant stakeholder groups and summarize the different interests, risks, and opportunities present at each asset. As a result of this exercise, each business unit has developed facility-specific stakeholder engagement plans.

Since all the assets are currently operating, most of the activities are related to CSR, and support of community requests such as construction of social infrastructure or community development projects in the regions served by DEI.  For instance, all DEI assets in SA, have community relations and corporate social responsibility departments with the main objectives of providing resources and know-how to support neighboring communities in the areas of education and sports, including community education events, financial support to update/repair local schools, guided school visits to the plants, sponsorship of sport teams, in-kind and monetary donations, to name a few. A procedure has been developed for communication with communities residing adjacent to the plant premises and records of the external communication are regularly updated every month and maintained at each individual facility.

Building upon the existing facility-specific stakeholder engagement plans, as part of the ESAP, the Consortium will develop a Community Engagement Framework (CEF), incorporating corporate policies and guidelines, local requirements, relevant experiences with existing assets, and IFC’ s PSs. 

For any future acquisitions, expansion and greenfield developments with potential impacts on local communities, the Consortium will develop and implement an appropriate Stakeholder Engagement Plan (SEP) based on the CEF, to ensure that project-affected communities are provided with information and consulted on the risks, impacts, and opportunities presented by each project, remain engaged on ongoing basis and provide a grievance redress mechanisms. For projects with potential significant environmental, social, security or safety impact or risks on local communities, the SEP will be designed to ensure their Informed Consultation and Participation (ICP) with regard to the impacts, risks and benefits of each project, and way in which those will be managed. Furthermore, if any expansion or new project could significantly impact Indigenous Peoples or territories, the Consortium will assure to obtain Free Prior and Informed Consent (FPIC) of affected indigenous communities in accordance with PS7 requirements.  

DEI has detailed community grievance mechanisms in place. Grievance mechanisms for local communities also exist at the individual project level for all assets in the form of suggestion boxes or complaints registers. Every operational plant has a grievance redress committee with representation from site management and local community members. The committees meet on a quarterly basis and senior management from corporate level (Managing Director) attend committee meetings. The Consortium will develop an external communication procedure covering both, environmental and OHS aspects.

Contact Person:          Henry Akona

Company Name:          I Squared Capital Advisors (US) LLC 

Address:                      410 Park Avenue, Suite 830 

                                     New York, New York 10022 

Email:                           communications@isquaredcapital.com