The proposed transaction is an equity investment of upto USD 125 million in Hero Future Energies Private Limited ("HFE" or the "company"), a leading developer of solar and wind power projects in India. The company is part of Hero Group (the "group"), a leading industrial conglomerate and a market leader in automotive manufacturing, mainly two wheeler motorbikes and ancillary businesses with Hero MotoCorp Limited being its flagship entity. The group also has other diversified business interests in the country and abroad.Since its incorporation in 2012, the company has identified projects of more than 2 GW and plans have a total installed capacity of around 1000 MW in the next 12 months. Both operational and under construction projects are located in the Indian states of Andhra Pradesh, Madhya Pradesh, Karnataka, Maharashtra, Rajasthan, Tamil Nadu and Telangana. The company has also secured/implemented over 25 MW of rooftop projects and also plans to further expand its rooftop solar business. It is also actively looking to expand its international business in various geographies. The proposed IFC investment is part of fresh equity infusion to support the expansion plans for the company.All the projects are developed by/under wholly owned special purpose vehicles (SPVs) of HFE, HWEPL (Wind Holdco) and HSEPL (Solar Holdco). Most of the under construction capacity is being developed with third party engineering procurement construction (EPC) contracts signed with reputed technology suppliers. The contracts include supply, erection and commissioning ("E&C") of wind turbines and solar panels. The SPVs also sign a comprehensive operation and maintenance (O&M) contract with these technology suppliers for long term operations/maintenance services. While the projects are mostly developed by third party contractors/vendors, HFE maintains very strong oversight over each processes (like land take, licensing, evacuation planning, technical aspects etc.) and is deeply involved in the project development. This is done through a dedicated team of qualified personnel at the site supported by a larger team of technical experts based at the corporate office and in charge of overall project development at the company level.
OVERVIEW OF IFC'S SCOPE OF REVIEW
IFC's review consisted of appraising technical, environmental, health and safety (EHS) and social information submitted by the company including: the environment and social impact assessment (ESIA) report of an operating wind project; draft Environment and Social Management Framework (ESMF) manual dated April 2016; environmental and social (E&S) due diligence (ESDD) reports for eight operational wind and solar projects; company's policies on occupational, health and safety (OHS) environment, corporate social responsibility (CSR) and prevention of sexual and harassment; EHS manual; Human Resource (HR) policy manual; and other EHS records - clauses for contractors, standard operating procedure (SOP) for drilling and blasting operations during excavation, EHS induction, work permit records and emergency response plan.The review included site visits in April and July 2016 to company's (a) operational wind power project in Dhar, in Madhya Pradesh; (b) under construction wind power project in Zaherabad, near Hyderabad, in Telangana; and (c) proposed wind power project site in Anantpur, in Andhra Pradesh as well as discussions with corporate EHS, business development, HR (and CSR) management and project specific personnel on land acquisition, EHS and contractor management. In addition the appraisal process included meetings with the senior management (chief executive officer, project and finance head) to discuss the Action Plan and way forward approach. IFC's appraisal process also included meetings with village representatives, community elders, land/revenue officials and some impacted households for some of the company's sites and operations visited.
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.PS 1 - Assessment and Management of Environmental and Social Risks and ImpactsPS 2 - Labor and working conditionsIf IFC's investment proceeds, IFC will periodically review the the project's ongoing compliance with the Performance Standards
As the proposed investment is for an equity infusion to support the expansion plans for the company, the potential risks or impacts concern undefined assets and use of proceeds, the processes of how the company will address Performance Standards 3 through 8 is described within the detailed PS1 narrative below and represents the framework (hence its presentation under PS1) that will be applied by the company at corporate level as new assets and projects are developed under the expansion plan. Screening and assessment of issues identified in future projects against PSs requirements will be completed though through the company's E&S management system, as discussed under PS1.
ENVIRONMENTAL AND SOCIAL CATEGORIZATION AND RATIONALE
The proposed equity investment is a Category A project due to the diversity of E&S risks and impacts associated with planning, development and operations of large wind and solar projects mainly on account of land, biodiversity, noise and community related issues. While some of the individual projects that the company has or will develop/acquire may have limited risks and impacts, at this stage the residual risks and impacts associated with future pipeline (unknown/identified at this stage) of projects are not clearly known. HFE's portfolio of existing/operating projects has residual issues as identified in the independent third party E&S due diligence that would need to be addressed in line with the agreed Environment and Social Action Plan (ESAP). These and other impacts on account of future planned projects will need to be carefully managed in accordance with Performance Standard's requirements.
**Information on IFC's Policy and Performance Standards on Environmental and Social Sustainability can be found at www.ifc.org/sustainability
ENVIRONMENTAL AND SOCIAL MITIGATION MEASURES
IFC's appraisal considered the environmental and social management planning process and documentation for the project and gaps, if any, between these and IFC's requirements. Where necessary, corrective measures, intended to close these gaps within a reasonable period of time, are summarized in the paragraphs that follow and (if applicable) in an agreed Environmental and Social Action Plan (ESAP). Through the implementation of these measures, the project is expected to be designed and operated in accordance with Performance Standards objectives.
PS 1: ASSESSMENT AND MANAGEMENT OF ENVIRONMENTAL AND SOCIAL RISKS AND IMPACTS
HFE has in place a set of policies for management of Health, Safety and Environment (HSE), Corporate Social Responsibility (CSR), Human Resource (HR) aspects linked to its operations. These policies govern the scope of HSE and HR management at different assets and operations of the company. The company has also in place an organizational structure to manage and implement the environmental and social risks linked to its operations. The EHS organizational structure currently has two qualified environment and safety personnel to assess the risks and implement the mitigation measures. Apart from this the company has a HR Department with qualified and dedicated personnel to look after and manage labor and working relations, engagement and welfare aspects of its employees along with CSR activities. The EHS and HR organizational set up is based at corporate level and supported by site level personnel.As a part of its operational procedure, the company a) undertakes an environment and social impact assessment (ESIA) for all its projects; b) incorporates HSE clauses in its EPC and O&M contracts; c) reviews the Health and Safety (H&S) performance of the different under-construction and operational assets on a periodic basis; d) undertakes internal supervision and audits on a periodic basis to assess risks and compliance to statutory requirements; and e) undertakes engagement activities and community development programs at its different project sites/locations.The third party ESDDs undertaken for all operating wind and solar projects have assessed the legacy risks and current impacts arising on account of operations of these projects. Key gaps in the current E&S management practices of the company/assets include a) a robust identification and assessment of risk and impacts in the ESIA (for wind projects) especially those linked to biodiversity, noise (including cumulative noise), shadow flicker and assessment of community safety risks associated with blade throw and turbine fall (and the lack of consideration for maintenance of minimum set back distance from the Wind Turbine Generator (WTGs); b) deficiencies in labor and contractor management practices (especially at construction sites) linked to management of workers' accommodation camps, working hours/overtime, workplace environment and facilities and grievance management; c) management of safety aspects especially linked to working at height and confined spaces; and d) overall implementation of E&S management plans emerging out of the ESIAs. The operational phase gaps in current E&S approach practices are mainly linked to stakeholder engagement, grievance management and monitoring impacts on account of noise, shadow flicker and avifauna impacts. Asset specific E&S action plans have been developed as an outcome of the ESDDs. HFE has committed to implementing these actions plans within a time bound manner (ESAP Action 1 #).Key environmental impacts associated with HFE's solar and wind projects typically include; a) temporary impacts on ambient noise and air quality especially during construction linked to site preparation activities (foundation and road excavation, leveling, land clearing) and transportation; b) safety risks, noise and shadow flicker impacts on nearby sensitive receptors (for wind projects); c) management of construction waste (packaging and crating material, broken solar panels, construction debris etc.) and ensuring there safe storage and disposal; d) impacts associated with land take; and e) water usage and waste water discharge.IFC reviewed the ESIA for a 100 MW project (located in Dhar, Madhya Pradesh and operational since March 2016). The study has identified risks and impacts of 13 WTGs, associated with noise, shadow flicker, blade throw and turbine fall on approximately 180-200 houses and some public institutions and government owned buildings like school, Anganwadi (kids care center) and panchayat house) located within the setback distance of about 220 meters (1.5 times the turbine height (tower + rotor radius) as specified in the World Bank EHS Guidelines for Wind Energy projects). The project facilities are located on government lands, most of which inhabited by scheduled tribes. These tribal households are mostly native to the region and have been living/using these lands for residential and agricultural (sustenance agriculture) purposes. Consultations with these groups suggest that they don't enjoy customary or traditional rights to these lands and are predominantly informal settlers on government lands. Most of these habitations/houses located within the setback distance have existed prior to the setting up of these turbines.To mitigate the risks and impacts on these houses/people, the company will offer/attempt to relocate households living within a distance of 150 meters from these 13 WTGs. To this effect, the company will develop and implement a relocation/resettlement plan (including budget and timelines) with the objective to relocate as many people/households as possible within the radius of 150 meters. The plan will be consistent with the relevant and applicable requirements of PS 5. It will be implemented by the company and monitored through a third party on a bi-annual basis (ESAP Action #3). A framework underlining the principles governing these relocations will be developed in consultation with the affected households. The company will undertake culturally suitable and appropriate communication programme to ensure disclosure/dissemination of information to all households and tribal groups in line with the processes laid out in the ICP (informed consultation and participation).For turbine locations where relocation of all houses is not feasible, the company will undertake a Quantitative Risk Assessment (QRA) to assess the level of safety risks (ESAP Action #3). For turbines locations where the risk is assessed to be higher than As Low As Reasonably Practicable (ALARP), the company will undertake measures with the objective to mitigate the risks so as to bring the risk levels down to ALARP. These measures will consist of a number of options as suggested by third party appointed to carry out QRA, based on the risk levels quantified, including relocation of the turbines relocation of structures/people, and other measures to minimize the safety risks. These would include (but not be limited to) strengthening of foundations/hub, enhanced monitoring/inspection, and on-going communication among other measures. The decision tree for the selection of the mitigation measures and the outcome of the risk assessment (pre and post-mitigation) will be documented.In terms of noise levels within the setback distance of 220 m, the incremental noise levels in daytime are within the WBG EHS guideline limit of 3 dB (A); however, the total noise levels are slightly more than the ambient noise standards. For the night time, the incremental noise levels are more than 3dB (A) as well as the noise levels are exceeding the ambient noise standards. For people remaining within the setback distance of 220 meters, the company will ensure implementation of mitigation measures for noise (including installation of noise barriers, double glazing of windows and additional roof coverage to achieve the guideline limit or ambient noise standards in the households, whichever is lower) and shadow flicker impacts (including curtains and relocation/covering of windows) . The company will communicate, to all stakeholders, the risks of living under the turbines. This communication will be an ongoing process and will be documented by the company.HFE has, with the help of an external consultant, developed an Environment and Social Management Framework (ESMF) at a corporate level to manage E&S impacts linked to its operations. This ESMF would, going forward, become the basis for undertaking site/asset level impact assessment and developing/implementing necessary E&S measures to manage and mitigate impacts linked to the company/assets operations (ESAP Action #2). The ESMF builds upon the existing E&S procedures and practices of the company, suggests additional measures/actions and defines new procedures for planning, developing and operating solar and wind projects of the company going forward. These include: a) strengthening the E&S screening process with a "Go/No-Go" decision at the planning/decision making stage of the project based on ground assessment of risks/sensitivities; b) committing to establishing and maintaining a set-back area/distance in accordance with WBG EHS guidelines for Wind Energy projects (for all new projects where construction activities are yet to commence); c) defining the terms of reference (ToR) for a robust ESIA; d) proposing a set of standard operating procedures for both construction and operation phase, including labor and stakeholder management, grievance handling, debris management, accident/incident reporting, waste management, emergency response, chance find procedure, ongoing monitoring of noise/shadow flicker and avifauna impacts; e) strengthening existing E&S organization structure with additional/qualified resources (ESAP Action #2); f) strengthening contractor oversight mechanisms, especially during construction phase, g) proposing a set of internal systems/protocols for internal monitoring/reporting and documentation on E&S aspects of company's operations and h) undertaking E&S due diligence and agreeing on a timeline for closure of E&S gaps to meet the PSs (in case of acquisition projects).For all new projects, HFE will develop project specific management and monitoring plans and will: a) monitor noise and ambient air quality on a periodic basis; b) ensure implementation of mitigation measures in line with the ESIA; c) ensure disposal of waste to registered vendors and d) ensure that water is sourced from authorized vendors and ensure extraction/use of water from water bodies with necessary permissions from regulatory authorities. The company will also ensure that domestic wastewater during construction and O&M phases will be disposed of through septic tanks and soak pits and there will be no discharge of waste water to any surface water body. During rainy periods, appropriate mitigation measures to minimize erosion and water pollution will be implemented.HFE projects are not expected to result in significant community safety and security risks (other than those outlined above). The equipment, plants and infrastructure meet good industry practice specifications. The sites are located in a low/moderate seismic hazard zone and natural hazards are taken into account in the design of foundations. The sites are generally not located on any air traffic route and turbines are not proposed within any airport obstacle limitation area. Impacts on account of labor influx and construction phase traffic will be mitigated in line with the ESIA/ESMF requirements. The company ensures that all transformers are fenced and cables insulated to avoid any electrical hazards. HFE allows grazing and agricultural activities in most part of its sites during operations for wind energy projects. Access to agricultural fields, villages, communities and their networks are not disrupted/hindered.HFE employs (through contractors) unarmed private security personnel during project construction and operation. These personnel are mostly engaged through an outsourced and authorized security agency. Consistent with PS 4, HFE/ HFE's contractor will require the security agency to implement procedures to ensure that: past records of security personnel employed are screened; security personnel have clear objectives and permissible actions laid out; security personnel are trained in avoidance of abusive behavior; security incidents are recorded, investigated and corrective action implemented; bona fide complaints against security personnel are investigated and appropriate disciplinary actions are implemented; and there is a grievance mechanism for aggrieved members of community or employees, in the event of a violation of the code for security personnel (ESAP Action #7). Contractor oversight procedures of the company will ensure compliance to the aforesaid requirements.HFE will ensure that its projects are not located in/close or adjacent to any conservation areas/protected areas/World Heritage sites or Eco-sensitive Zones. The E&S screening process defined in the ESMF will be used to screen/decide upon projects located near any such conservation areas. The ESIA for the different projects will be undertaken in line with the ToR laid out in the ESMF including assessment of impacts on biodiversity and monitoring protocols for assessment of avifauna impacts associated with wind farm developments. These would include but not be limited to habitat assessment, collision risk, identification of migratory path/pattern and other ecosystem services that support the presence of birds/bats in the project area of influence. HFE will decide upon the location/siting of turbines and implementation of relevant mitigation measures based on the outcome of the ESIA and upon assessment of impacts associated with any avifauna. The company will, for its operating projects, undertake monitoring activities/program to assess any impacts on avifauna (ESAP Action #5). Should the monitoring activities demonstrate significant activity or/and bird/bat strikes, HFE will consider implementing measures, in consultation with recognized bird/bat species specialists, to address the impacts, including, if required, a targeted shutdown (curtailment) protocol, enhanced collision monitoring program or other good international industry practice measures listed in the WBG EHS Guidelines for Wind Energy projects.HFE will, going forward, comply with the requirements of the IFC Performance Standards 2012 and will align its practices to the relevant WBG EHS Guidelines as applicable to its project and operations by implementing the mitigation, monitoring and management measures outlined in the ESMF and the ESAP. HFE will, as a part of its own oversight procedure, undertake periodic monitoring/review and reporting of E&S performance of the different projects to the management and investors. The company will also upon the written request of investor, conduct a) third party audit of high risks projects especially during construction phase; and b) annual third party audit to assess implementation of the E&S management systems and the agreed ESAP (ESAP Action #6).
PS 2: LABOR AND WORKING CONDITIONS
The company employs about 125 employees at its corporate office and various locations. The company has documented HR policies and procedures on various operational matters e.g. leave, travel, reimbursement, insurance and medical claims, separation etc. The policies are available in a common folder for corporate office staff and communicated to all employees during the induction. Within the HR policies, the company has a code of conduct which includes basic responsibilities of staff on quality and EHS. All employees sign and acknowledge receipt of the code of conduct. Any change in the policies is communicated through circulars/notices.HFE will undertake a review of HR policies (ESAP Action #4) and procedures and strengthen and upgrade them to make them consistent with PS2 requirements. This will include (but not be limited to) policies and procedures on: (a) non-discrimination and equal opportunity; (b) contract labor management; (c) freedom of association and collective bargaining; and (d) retrenchment. The company's new HR Policies and procedures will be made available/accessible to all employees and communicated at the time of employee induction. The company has zero tolerance for child labor and as an operational practice collects age proofs of all employees including contract workers. During the visits to company's project sites, no instances of child or forced labor were noted.Since December 2015 HFE has developed a grievance redressal procedure which formalizes how grievances can be raised with reporting manager and, if not solved, can be escalated to HR. A corporate grievance committee has been established and, in case a grievance is not resolved, the committee would investigate the matter and convey the decision to the aggrieved employee. Finally, if the grievance committee is also not able to decide, the Chief Executive Officer and/or Managing Director will make the final decision. For reporting of grievances, the employees can use email or grievance register available at each company's site. HR ensures confidentiality of employee raising the grievance.The company has also formulated and implemented a prevention of sexual harassment policy in line with regulatory requirements. As per the policy, the company has constituted internal complaints committee (with majority of female members and external representation) in each region to handle sexual harassment related complaints.The employees at the company are currently not part of any union. As discussed above, the company will document and implement a policy on Freedom of Association in line with PS2 requirements.As discussed under PS1, the company has a documented OHS policy and has recently (in April 2016) developed an EHS manual. The EHS manual describes the roles and responsibilities of site engineers and safety officers (which are generally the HFE employees on-site) and covers basic OHS SOPs on formation of EHS committee, incident reporting and investigation, workpermit system, dangerous works (for example: hot work, working at height, excavation and foundation work, erection of tower and overhead lines), and emergency response.Typically, HFE develops the projects on either on turnkey model or on self-development model. Presently most of HFE's existing projects have been developed under turnkey model by reputed contractors. In such cases, contractors have their own OHS policies and procedures, which are reviewed by HFE before signing of the contract to ensure that they adequately cover the expected risks of the project and are aligned with the HFE policies. Contractors are required to deploy their EHS officers on-site to ensure implementation of the OHS policies and procedures both during construction and operation phases of the project. As contractors outsource a number of activities (e.g. civil, erection, electrical) to sub-contractors, they are responsible to ensure implementation of OHS procedures for their sub-contractors. HFE's site and EHS teams conduct regular inspections of all under construction and operational projects to ensure compliance with its policies and procedures.HFE has been including basic EHS clauses in the contracts signed with these contractors which have been further strengthened recently, and which HFE plans to roll out for their new projects. The clauses clearly require the contractor to follow HFE's EHS policies and procedures (even if the contractor has its own policies) and analyze and bridge discrepancies, if any. The contractors are required to ensure compliance by their sub-contractors, comply with all legal requirements, have required EHS organization in place, coordinate with HFE's site and EHS teams, have EHS committee on-site and report on identified leading and lagging indicators at mentioned frequencies. Further, the evaluation of performance of contractors and provision of penalties in case of non-compliance are included in the contract clauses.The ESDD reports for operational projects concluded that there were limited OHS concerns. However, IFC observed that the quality of construction camp's accommodations for workers could be improved further in terms of providing more space for each worker, better sleeping arrangements, housekeeping and through improved water and sanitation arrangements.HFE's monitoring and review processes need improvements to ensure contractors' compliance with the applicable statutory requirements. HFE will ensure that as part of the contractor oversight procedures, the company will review the contractors' HR policies and procedures and communicate to them the applicable provisions of its own HR policy and PS2 requirements. Also, the company will document specific guidelines for worker's accommodation in construction camps which are reasonably consistent with the relevant IFC guidance note and with Building and Other Construction (Regulation of Employment and Conditions of Service) Act, 1996, including available living conditionswith basic amenities and electricity; potable water; mess facilities for food; where workers desire self-cooking, provision of fuel and arrangement for cooking; provision of toilets and bath including separate toilets and baths for women; appropriate sewage disposal facilities; and primary medical care for all workers engaged at site including protection against heat/cold and disease carrying animals (e.g. mosquitos). Further, the company will put in place detailed requirements including audit procedures to verify that: contractors comply with applicable statutory requirements, including those on wages and benefits; worker accommodation is consistent with agreed guidelines; workers have access to an appropriate grievance mechanism; and migrant workers are engaged on substantially equivalent terms as non-migrant workers performing the same work, all in accordance with PS2 provisions (ESAP Action #4). The company will provide training and capacity building support to the contractors to understand and meet the aforesaid requirements. The contract labor management process developed as part of the ESMF will be implemented by the company.