How to manage corruption risk in renewable energy projects

Out-Law Guide | 08 Dec 2022 | 2:02 pm | 8 min. read

Corruption risk can materialise throughout the lifecycle of a renewable energy project. If it is not managed properly, businesses and their directors can face criminal penalties and reputational damage.

The risk of corruption is heightened in the context of renewables due to converging factors – time pressures to deliver new projects in response to the climate crisis and concerns over energy security, together with potential access to lucrative contracts and the presence of ‘rent seeking’ gatekeepers of processes at the heart of the development and operation of renewable energy assets.

In this guide, we look at common corruption risk points in the context of a renewable energy project and what businesses can do to address them.

Before a project starts

It is incumbent on renewables companies to recognise that they face higher levels of corruption risk and respond accordingly – well before a project is signed off. In practice, that means conducting bribery and corruption risk assessments.

Many businesses will undertake generic business-wide risk assessments on projects, but specific bribery and corruption risk assessments for renewables projects are needed to help developers understand the environment they are getting into, the common processes and practices that will shape the respective phases of the project, and who they may be required to deal with through the full lifecycle of the project – including potential local partners who may present political exposure risk based on the prevailing circumstances in a particular country.

James Edward

Edward James

Partner

Corruption risk is not just some ancillary risk – it is commercial risk, because corruption presents a risk to the viability of projects and businesses themselves

Bribery and corruption risk assessments are often overlooked. Renewables companies should not fall into the trap of skipping this vital step as the risk assessment can be critical in informing the controls that need to be put in place to effectively manage risk.

Obtaining a generation licence

The requirements that developers must meet to begin producing renewable energy will vary from country to country. A common requirement is a licence to generate the energy and the developer may also seek a licence to sell electricity.

The licensing processes can be bureaucratic, and often governments only issue a limited number of licenses. There is a risk that a public official or an agent acting on their behalf will solicit bribes to guarantee licensing applications are successful.

Bribes will typically be solicited in a manner designed to disguise what is happening. Understanding what the licensing process involves is therefore a vital step in safeguarding against intentionally or unwittingly enabling officials, or agents acting on their behalf, to do something abnormal, like seeking an additional or enlarged payment – that is a red flag that something is not right.

Sensible precautions should also be taken when dealing with public officials. Your representatives should not meet with them alone. They should meet in formal settings and communicate through formal channels – informal settings such as restaurants should be avoided. Play a fair game as you would in any procurement process. Avoid activities that might be considered as seeking unfair favour, like flying officials to your host country or trying to obtain information about the bids, pricing and other confidential aspects of other companies. Keep things professional.

In many countries, there will either be a legislative or practical requirement to partner with local businesses on projects. There are further corruption risks to manage in the context of business partners – see below.

Clearing regulatory hurdles and customs

Securing a licence is just one important step in a renewable energy project. Further hurdles to overcome before a shovel is put in the ground will typically include obtaining land use permissions and environmental permits, as well as clearing customs when components for a development are being imported into the country where the project is located.

James Edward

Edward James

Partner

It is essential that developers do due diligence on prospective agents before appointing them

Projects are time sensitive. Financial models for projects are built around expected timeframes. If there are delays in securing necessary permissions and permits and clearing customs then that can impact on debt repayment arrangements. Public officials commonly act as gatekeepers of permissions, permits and customs handling and there is a risk that they will deliberately hold up those processes, knowing the effect that this can have on a project. They may do so in order to solicit facilitation payments to speed things along – facilitation payments are a form of bribe that essentially involve making a payment to somebody to do something they should be doing in any event.

Customs and clearing agents can help developers navigate potential pain points at ports or with land registries or other permitting bodies, but it is essential that developers do due diligence on prospective agents before appointing them. Relying on generic anti-bribery clauses in contracts will not be enough to mitigate the risk that the agents themselves engage in corrupt activities on their behalf.

Robust financial controls are also important. Developers should closely monitor cash handling and query payments by cash where other payment options are available – in some countries the use of cash is unavoidable, but developers can ensure there is a clear paper trail of receipts and have checks in place for what the money is being used for.

For payments made through a third party, developers should build understanding of common tariffs and scrutinise unusual line items in invoices where they do not appear to align with what was agreed under contract – anything that does not appear to be the standard payment is a red flag. One example of such a red flag might be where an agent seeks a ‘special bonus’ for a contact to fast-track goods through a port and avoid demurrage costs being incurred.

Risks during the operational phase

Successfully securing a licence, land use permissions, other regulatory permits and navigating the risk of customs hold-ups does not signal the end of corruption risk in renewable energy projects. Corruption risk can commonly arise when projects are operational and stems from the perception that the operator has deep pockets – something that can make them targets for rent seekers.

One way this can manifest itself is when politicians jostle for some type of payment for their political party or similar cause in return for promising that the operator will not face any issues in operating its assets. There may be a veiled threat of nationalisation or of the introduction of localisation requirements for non-payment, for example.

Another example might be where legislation in the country requires compulsory inspection of the operator’s facilities by a representative of the government. The operator will in certain countries be liable for a fee for such an inspection, commonly known as per diem payments, but the risk is that the representative claims the payment to be made is larger than was understood and/or that it has to be paid in cash – this may be a local rent seeker trying to take advantage of an operator.

Another situation that operators may face is where local law enforcement officers may be required to police community protests or workers’ strike action to prevent physical damage being done to people or property. Corrupt police officers may seek payment in cash from the operator just for doing their job.

Building an understanding of the local legislative requirements, and what the standard processes for things like inspection and payment of fees are, will help developers identify when things are unusual and should be queried. Where an operator does not know these things themselves, they should invest in obtaining expert advice and know-how.

Managing local business partner corruption risk

To deliver major renewables projects around the world, multinational developers will commonly seek, or be obliged by so-called localisation laws, to enter into joint ventures with local businesses in the countries where the development is planned.

These partnership arrangements can be beneficial for multinational developers. Local business partners can provide an understanding of local legislative requirements, as well as of the processes involved in securing licences, permissions and permits, and those associated with clearing customs when shipping-in components. Local business partners can also facilitate good relationships with government and other public officials, community groups and other stakeholders.

However, in an environment where the risk of corruption in renewables projects is heightened, particular attention needs to be given to local business partner corruption risk.

James Edward

Edward James

Partner

Compliance checks and other due diligence or corporate intelligence work will help developers understand who prospective local business partners really are, their background, and their potential ties to politically exposed persons

Sometimes localisation requirements are attached to processes integral to the delivery of a renewables project. For example, a government may require that a developer establish a joint venture with a local business as a condition of obtaining a licence to generate electricity. There is so-called ‘rent seeker’ risk associated with such arrangements.

Rent seekers are people who seek to exploit their position as influencers over a process to extract payment. Examples include whether a rent seeker seeks payment to authorise an application, prioritise goods checks, or otherwise smooth a process in favour of a prospective ‘rent payer’.

In the context of renewable project localisation requirements, beyond the risk that a public official brazenly solicits a bribe, the risk is that they strongly encourage developers to partner with specific entities or go as far as to suggest that their success in a competitive tendering process for a generation licence, for example, could depend on their selection of a specific business partner. If a local business partner is recommended by a government official, this is a red flag.

Reputational risk management is essential, so whenever business partners are recommended developers need to do deep level due diligence. Compliance checks and other due diligence or corporate intelligence work will help developers understand who prospective local business partners really are, their background, and their potential ties to politically exposed persons. This will help developers make a more informed decision over who to partner with and who to avoid.

When local business partners are selected, developers should ensure their representatives never engage with government officials alone. This goes back to the need to keep engagement points professional.

Developers should also monitor for deals that local business partners broker that are too good to be true. For example, there is a risk of corruption if local business partners say they can secure licences, permissions or permits on terms that do not make sense commercially. Care should be taken with requests for payments to be made upfront or for requests from a business partner to fund gifts, entertainment and sponsorship.

Once projects are operational, local business partners often take responsibility for overseeing the award of services contracts. This is another corruption risk point, particularly in developing countries where the value of those contracts is particularly high on a relative basis. Developers should ensure that a proper procurement process is followed and conduct due diligence on bidders.

The commercial imperative

Recognising that renewables could become a hotspot for corruption risk is an important first step to managing the risks that follow.

Corruption risk is not just some ancillary risk – it is commercial risk, because corruption presents a risk to the viability of projects and businesses themselves. Risk-led decision making can help developers address corruption risk, so conducting corruption risk assessments on a project-specific basis is vital.

Legal advice that is impractical in the real world will not be helpful. Operators should engage advisers that can find practical solutions to help them continue operations safely while navigating corruption risk. This advice can be obtained from white collar crime and investigations experts who have experience in practically investigating and managing bribery and corruption incidents in challenging jurisdictions.

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