Project finance, sustainable development and human rights

The study examined the linkages between project finance-foreign direct investment and sustainable development and human rights issues; and the extent to which project finance accentuates the positive and negative impacts of foreign direct investment on sustainable development and human rights and through which channels.

This is a joint interdisciplinary research project between IIED and the University of Essex Human Rights Centre, supported by the UK Economic and Social Research Council (ESRC). It analysed a particular way in which financial markets and global investment policies influence the major issues of sustainable development, poverty reduction and human rights.

The research questions addressed were:

• What are the linkages between project fiinance-foreign direct investment and sustainable development and human rights issues?
• To what extent does the use of project finance accentuate the positive and negative impacts of foreign direct investment on sustainable development and human rights and through which channels?

Two main sets of issues were analysed to approach the research questions.

The first refers to contractual arrangements that are an essential part of project finance, and their possible effects on foreign investment in the host country and on sustainable development and human rights. Because revenue flows of the projects are the main or only source for loan payments under project finance, the ability to forecast project revenue is key for lenders. This induced project sponsors to enter into contractual arrangements to provide a framework for project viability and to allocate risk between parties. The underlying hypothesis is that these contracts could include stabilisation clauses or financial arrangements that impede the achievement of sustainable development goals in the host country.

The second set of issues refers to the links between the 'due diligence' process of project finance institutions involved in the financial arrangements with sustainable development and human rights issues. The due diligence process is an interdisciplinary process analysing legal, technical, environmental, social and financial risks designed to detect events that might result in total or partial project failure. Financial institutions therefore might affect the sustainable development impacts of a project by conditioning the loan or guarantees on compliance with environmental and social standards.

Three case studies were undertaken.

* The Baku Tbilisi-Ceyhan (BTC) pipeline (conducted by IIED)

* THE ORION AND CMB PULP PLANTS IN URUGUAY (conducted by IIED)

* THE NEWMONT AND ANGLOGOLD MINING PROJECTS in GHANA (conducted by University of Ghana Legon)