Changes in the Environmental Licensing of Infrastructure Investment in Brazil

Changes in the Environmental Licensing of Infrastructure Investment in BrazilRonaldo Seroa da Motta *1.IntroductionBrazil has a sophisticated body of environmental legislation. This legislation was, systematically established in 1981, with the National Environmental Policy (PNMA - Law 6.938/1981), which adopted licensing and zoning instruments and the polluter pays principle.Zoning has been very effective in relocating industrial activities. Today, throughout Brazil, they are located far from urban residential centers. But only recently zoning has been used to determine the location of agricultural activities, which was necessary in view of the effort to control deforestation. The polluter pays (or the user-pays) principle in environmental legislation places the burden of the costs of environmental damage on the agent responsible, whether in the form of pollution or depletion of assets and natural resources. This principle guides both the amounts associated with the indemnities for environmental damage in cases of litigation and the basis for setting the assessment of charges for use and payments for environmental services.Licensing is the process by which an environmental agency authorizes the operation of activities of significant environmental impact and, therefore, has become the strongest instrument for environmental control. Because of this, the instrument's implementation was very rapid and widespread, despite having been subject of constant debate and often revision, in recent decades.Governance of the PNMA involves the National Environment Council (CONAMA), which has been the country's major environmental policy forum. All levels of government and civil society have representation on the Council, whose aim is to define environmental regulations or study proposed regulations before they become law. For its part, the National Environmental Information System (SNIA), also created by the PNMA, has made little progress, compromising the effectiveness of the monitoring of environmental quality in the country, which in many cases precludes the assigning of liability for environmental damages.The Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) was created in 1989, merging sectorial forestry, biodiversity, water resources, pollution control, zoning and licensing bodies, and thus serves on the federal level through the executive agency of the Ministry of Environment (MMA) for the application of federal environmental regulations.States and municipalities also have secretariats and their respective executive bodies dedicated to environmental issues. As a general rule, federal environmental issues are those that cut across state lines, whereas states’ issues are those that extend beyond municipal lines and local issues are the responsibility of the municipalities.This division of jurisdiction, however, does not always fit in easily with the aforementioned principles. For example, state tributaries feed federal rivers, just like fragments of forests and conservation can be found in a number of different jurisdictions. Local emissions affect air and river basins that cover more than a single municipality. The collection of solid waste may be local, but its disposal could be in another municipality. Many other examples arise. For its part, the Federal Constitution also permits these areas to act in complementary fashion; that is, a joint operation between various levels of government.Thus, the environmental governance institutional arrangement in Brazil is very complex because, in addition to involving a number of government levels, it also liaises with areas that regulate environment-impacting activities, such as sanitation and energy. In short, although conceptually desirable, decentralized implementation, in which states and municipalities share responsibility with the federal government on environmental issues in their territory, often creates conflicts of jurisdiction.As already discussed in Seroa da Motta and Ouverney (2014), problems of overlapping and conflicting governance also permeate the licensing process and result in uncertain licensing timetables that, consequently, generate regulatory uncertainty. Just recently, in fact, various government rules were issued to mitigate these imperfections in environmental licensing procedures for infrastructure projects, creating consolidation and centralizing mechanisms for terms of reference and disciplining participation of public institutions.This chapter will first examine the evolution of the process for licensing infrastructure projects in Brazil, addressing in detail the governance issues mentioned above. Additionally, to illustrate this procedural standard, the estimates available that measure the average length of proceedings relating to hydroelectric plant licensing are presented. Finally, there is an evaluation of possible impacts of recent changes to the environmental licensing process for infrastructure projects and recommendations of planning strategies that reduce the importance of this process on the Brazilian economy's efforts to achieve sustainability.2. Environmental Licensing of Infrastructure Projects in BrazilA recent study of sustainability indicators (see Carraro et al., 2012), which takes into account economic, social and environmental indicators, highlights that, among the BRICS, Brazil is the country with the best sustainability performance, largely due to social and environmental achievements. In the economic and social spheres, maintaining this trajectory requires improving the educational system, business environment and, in particular, logistics infrastructure (Giambiagi and Castelar, 2012).For its part, ensuring environmental sustainability of growth, characterized by the continued expansion of consumption, will require greater environmental control efforts. To this end, design and implementation of public policies increasingly must try to reconcile growth and environmental concerns, so there is neither loss of efficiency nor greater social inequality. This balance, as pointed out by Seroa da Motta and Ouverney (2014), will be even more necessary for expansion of infrastructure services.In the developed countries, investments in infrastructure usually are intended for renewing and improving existing structure. In developing countries, there is still a large gap to be filled, so most investment in this area is aimed at expanding existing infrastructure.One feature of infrastructure projects is that their sunk costs are high, which requires long periods of financial return on invested capital. Although they bring about great social and financial gains, these projects are responsible for generally significant external environmental costs in space and time. Therefore, these externalities almost always place investments in infrastructure in opposition to environmental sustainabilitygoals. This is because, once location, amount of resources and type of technology are defined, there will be impacts on the environment (Corfee-Morlot, et al., 2012), including lock-in effects.Additionally, it has been observed that these effects tend to affect the population’s poorest strata (World Bank, 2007a) more intensely. Thus infrastructure project viability will depend on proper incorporation of these impacts during their planning, design and execution phases.The impacts can be direct or indirect in nature. Direct environmental effects are those related only to the project (within the fence) and are usually short-term and associated with construction. Indirect impacts arise from interaction of infrastructure projects in space and time and, therefore, require an analysis of the impacts of their operations on the development of the environmental resource base. Measurement and control of direct impacts can be made, to a large extent, through establishment of safeguard policies and environmental impact assessments (World Bank, 2007b). Therefore, most countries adopt very complex procedures for prior analysis of these effects and their mitigation through environmental licensing instruments, as was the case in Brazil.2.1. Process Dynamics in BrazilFor infrastructure projects in Brazil, Federal Decree No. 99.274/90, supplemented by CONAMA Resolution No. 237/97, established a three-phase process for issuing licenses, namely:a) Preliminary License - PL - granted at the preliminary planning stage of the project or activity for a maximum of five (5) years, approves its location and concept, attests to environmental feasibility and establishes basic requirements and conditions to be met in the next stages of its implementation.b) Installation License - IL - authorizes installation of the project or activity pursuant to the specifications of the approved plans, programs and projects, including environmental control measures and other conditions.c) Operating License - OL - authorizes the operation of the activity or project after verifying compliance with the requirements of the previous licenses, such asenvironmental control measures and conditions established for the operation. The project's Operating License must be renewed within the statutory period established by the competent environmental agency, ranging from four (4) to ten (10) years.The process begins with the environmental agency presenting the terms of reference (ToR), which define the environmental studies and projects to be presented by the project developer at the start of the licensing process, consolidated in the Environmental Impact Study and the Environmental Impact Report (EIA-RIMA), and that can be adjusted at each step of the process. For these terms, each sector has specific, standardized conditions that will represent differentiated efforts during the process. There are also some procedures that are more integrated with the awarding of environmental licenses for Growth Acceleration Program (PAC) process investments. [1] In this context, the environmental licensing process inevitably will be differentiated depending on the technical characteristics of the project itself and its capacity to affect the environment, as well as the corporate governance capacity of each project developer to manage such a complex procedure and the degree of institutional governance interaction during the process.The participation of economic and social actors in the licensing process comes about through Public Hearings [2]. However, at any stage of the process, civil organizations, the Public Prosecutors Office [3]or a group of at least 50 citizens can interact by submitting questions and requests. Nevertheless, this participatory process has not been effective in resolving conflicts, with results almost always challenged in court.While the licensing process for industrial activities was greatly simplified at the end of the 1990s, the opposite was observed for infrastructure projects. Although licensing process speed also depends on the environmental complexity of the project and the quality of the environmental impact studies, there are indications the governance process is also important for expediting its issuance.2.2 Process PerformanceA study prepared by the National Confederation of Industry (CNI, 2012) points out that in the case of oil and gas sector projects, most problems and delays in environmental licensing stem from lapses in legislation, bureaucratic obstacles and administrativeproblems that have nothing to do with effective protection of the environment. This study also argues that the legislation dealing with the environmental licensing process of the sector was published in 1994 and therefore does not meet current dynamic and technological standards. Furthermore, as the World Bank (2008) notes, there are conflicts of hierarchy between Federal, State and Municipal levels, the role of Public Prosecutors and that of other government agencies arising from gaps in legislation or regulations.For a more profound analysis of this dynamic, the World Bank (2008) made an estimate of the average time for various stages of environmental licensing of hydroelectric power plants (HPPs) in the 1997-2005 period, when licensing data was more systematized.The estimates shown here cover the licensing process phases through to issuance of the installation license (IL) and are therefore not associated with the project construction phase and, thus, would be influenced by the evolution of the diagnosis of environmental and social impacts and their respective mitigating and indemnifying measures. These phases are the following:∙Time between filing a process with IBAMA until the delivery of the terms of reference (ToR) by IBAMA to the project developer: in this phase theinitiative of the licensing agency predominates.∙Time between receipt of the ToR until the delivery of the EIA-RIMA (environmental studies) by the project developer: in this phase the initiativeof the licensing agency predominates.∙Time between the delivery of the latest version of the EIA-RIMA by the project developer and the last Public Hearing (PH) organized by IBAMA:phase dominated by EIA RIMA discussion, in particular with civil society.∙Time between the last PH until issuance of the prior license (PL) by IBAMA: in this phase, there may be requirements stemming from analysisof impacts that are additional to those previously included in the ToR, bothdue to manifestations that emerged in the PHs as well as demands raised byother public entities.∙Time between the PL until the granting of the installation license (IL) by IBAMA: a phase in which the environmental agency requires verification ofcompliance with the mitigation measures, which may also be questionedexternally.Note that except for ToR and EIA-RIMA delivery phases, in the other stages there is a possibility process’time could be influenced by both the project’s environmental complexity, which complicates diagnosis of impacts and their mitigation measures, as well as by continuous insertion of additional issues that require successive extensions to the diagnosis.Estimates are presented in the table below as (i) a continuous timeline as of time zero of the initial filing of the process and (ii) the difference between estimates of these running times between the phases analyzed.Besides average value, we estimated the dispersion of this time with standard deviations of measures to capture the variance of the sample used (Table 1). A greater magnitude of this standard deviation from the average value indicates a higher degree of individual variation in time, i.e., suggesting higher heterogeneity of the sample.Table 1. Average time of HPP federal environmental licensing - 1997-2005As can be seen in Table 1, in the case of HPPs the total average time until IL issuance was 3.4 years, with average time for the issuance of a PL being 2.7 years. Besides being a long amount of time for a process, all average time values of each phasehave relatively high standard deviations, indicating a high variation between the times per project. Consequently, this variability can be an additional source of regulatory uncertainty. [4]The time for delivery of the ToR by IBAMA to the project developer was relatively long, 1.1 years, indicating that IBAMA could increase its efficiency in this phase. Project developers spent an average 0.5 years to prepare the first version of the EIA-RIMA. This estimate of time may indicate that developers have been responsive in preparing studies.On the other hand, the process takes 0.7 years until the last PH has been held, plus 0.3 years to then issue a PL. However, the issue of the IL occurs 0.7 years after issuance of the first IL) These high time gaps in the final stage of the process may indicate that additional interventions outside the IBAMA analysis process may be influencing this process time.2.3 The Proposed RevisionsProposals to increase the efficiency of infrastructure project licensing process in Brazil are going to reduce not only the time, but also and mainly, process time variability. As the World Bank (2008) emphasized, the principal ones could be summarized through better coordination in setting the terms of reference that guide the environmental analysis and mechanisms for resolving conflicts when these result in different interpretations, as we are detailing below.Terms of reference stability: Perhaps the main procedural change is unification and coordination of terms of reference that define the environmental studies and projects the project developer presents at the beginning of the licensing process.IBAMA Instruction 065/2005 at the time already established requirements for different licensing process aspects, including deadlines for action by IBAMA in each stage of licensing. But the biggest challenge to complying with the Regulating Instruction's deadlines would be, especially, interventions in the process that did not depend only on IBAMA's actions. Thus, apart from IBAMA, other federal environmental area agencies (ICMBio [5], for example) along with state and local agencies, have specifically interceded. Additionally, there are systematic intercessions of authorities andregulatory agencies in the project sector (such as, in the case of HPPs, for example, ANEEL, EPE and ANA). [6]The same occurs for agencies that protect traditional communities and peoples, such as FUNAI, INCRA [7]and the Palmares Foundation, primarily because the law guarantees compensation to these populations. There is also need for interventions by IPHAN [8], in the case of archaeological and cultural sites. This participation possibility could include Watershed Committees, Port Authorities, etc., whenever there is regulatory motivation related to project impacts.While these participations may contribute to a process' environmental integrity, they often are neither coordinated nor linked to each other, beyond IBAMA's initial divergent initiatives. Finally, the Public Prosecutors' mandate and constitutional independence often result in intercessions that, because they cannot be subordinated to compliance with deadlines, also reduce licensing process predictability.In short, it is necessary that the terms of reference not be unilaterally imposed by the environmental agency and, rather, should begin to be prepared in conjunction with the project developer. Additionally, all institutions must manifest themselves permanently and their intercessions throughout the process must be regulated based on exceptionality criteria.Conflict Resolution: Government agents responsible for issuing licenses live under a threat of suffering administrative proceedings based on Environmental Crimes (Federal Law no. 9.605/98) and Administrative Misconduct (Federal Law No. 8.429/92) Laws, which attribute criminal responsibility to a public official, even when acting in good faith in complex circumstances. This kind of fear leads to a more time-consuming licensing process since there is considerable hesitation on the part of agents in providing advice and responding to requests for additional information.The licensing process offers few opportunities for conflict resolution, which partly explains the tendency for leaving the courts to deal with such issues, thereby transferring administrative process uncertainties to the Judiciary. Thus, we propose creation of mechanisms for resolving conflicts between the licensing process actors, which could be triggered before a conflict is transferred to the courts. Moreover, we suggest setting up anindependent advisory panel of international reputation to work on projects where there are high social and/or environmental risks.For this, one alternative would be specialization of the Judiciary in environmental licensing conflicts. Such specialization could adopt a circuit court format or even establish a board, as the State of São Paulo Court of Justice did with the creation of a Special Environment Chamber comprised of judges who are experts in the field and collaborate in preparing appropriate decisions in the appeals phases. Another suggestion, outside the judiciary, would be to use panels made up of technical experts.3. The New RulesInitiatives established at the end of 2011 for regulation and simplification of the federal licensing process were oriented towards removing many of the barriers outlined above.Complementary Law 140/2011 sets the rules for cooperation, pursuant to sections III, VI and VII of the caput and sole paragraph of art. 23 of the Federal Constitution governing environmental licensing cooperation between the federal government, states and the Federal District.Seven decree orders were published, directly aimed at process streamlining, in particular (i) disciplining intercessions with submission deadlines and criteria for these exceptional events; (ii) simplifying the process for low impact cases; and (iii) environmental compliance of projects already in operation. The description of the decree orders follows.Ministerial Decree Order 419 of October 26, 2011 regulates the actions of Federal Public Administration agencies and entities involved in environmental licensing, defining deadlines for their expressions of additional requirements.Decree Order 420, of October 26, 2011, regulates procedures to be applied by IBAMA for environmental compliance and licensing of federal highways. The aim is to simplify environmental licensing of paving, duplication and expansion of road capacity within rights of way.For its part, Decree Order 421, of October 26, 2011, regulates licensing and federal environmental regulation of electricity transmission systems, designed to simplify the process for low impact projects.Decree Order 422, of October 26, 2011, regulates procedures for federal environmental licensing of exploration and production of oil and natural gas activities and projects in the marine environment and land-sea transition zone, creating a system with rules and deadlines in various phases of a project.Regulating environmental licensing of federal highways was the subject of Inter-ministerial Decree Order 424, of October 26, 2011. It establishes the Environmentally Sustainable Federal Highways Program [9].Decree Order 424, of October 26, 2011, issued by the Environment Ministry and Inter-ministerial Decree Order MMA/SEP/PR 425, of October 26, 2011, of the Environment Ministry and Ports Secretariat of the Office of the President of the Republic, aimed, respectively, to establish environmental regulation of ports and port terminals and creation of a Federal Environmental Compliance and Management Support Program (PRGAP) for maritime ports and port terminals.Although their application is still too recent to measure results, the objectives are moving in the right direction and, if effectively implemented, could reduce the degree of regulatory uncertainty currently affecting the infrastructure sector.4. Final CommentsIt seems plausible to assume that licensing process time depends on (i) the environmental impacts resulting from their complexity and their technical characteristics; (ii) the capacity of project developers to meet the license requirements; and (iii) the institutional governance of licensing agencies in process management. [10] The sample in this preliminary study, however, does not allow a more complete statistical analysis of this identification. Without a more technical and sophisticated analysis that in particular explores the variances of the estimated averages, it is difficult to accurately identify the factors that influenced licensing time.On the other hand, there are indications the environmental licensing process permits the existence of extensive debate and time for analysis in the process. However,they also indicate that better coordination and unification of these procedures could greatly streamline the process.The recent changes in legislation and standards in the licensing process outlined above, as discussed in the Introduction, point in this direction and it is hoped they will generate the desired results.This expectation has a precedent. Similar rules adopted in the United States for hydropower licensing in 2003 also encouraged greater coordination among federal and state agencies and introduced limitations to requests for additional studies after defining the terms of reference. However, American standards went further, establishing plans, timelines and deadlines for all participants and adoption of conflict resolution mechanisms. The effects of these measures reduced average licensing time to 3.5 years.[11]More recently, in 2013, the Hydropower Regulatory Efficiency Act of 2013 was published, which aims to drastically simplify the process by exempting units with installed capacity below 10,000 kilowatts and limiting to two years the process time for projects without dams or that use a closed pumping system. That is, we are still at the beginning of a trajectory of revised standards that ensure both faster processes and environmental integrity. And more drastic simplifications must be constantly evaluated for smaller projects, such as occurs in the U.S. In the case of projects where there is higher social and/or environmental risk, it is necessary to continue complying with execution schedules containing deadlines for all phases of analysis and application of restrictions to significant changes in the terms of reference and, above all, to develop mechanisms for resolving conflicts between the licensing process actors.For this, it is important to continuously systematize and update information in the licensing processes so that studies that assess progress and bottlenecks can be increasingly detailed and accurate, thereby generating reliable information for their constant revision. This access to information is an urgent requirement to make it possible to immediately track and monitor implementation of recent coordination standards and process simplification, while developing the adjustments necessary to boost their effectiveness.As already suggested in Seroa da Motta and Ouverney (2014), to further enhance the effectiveness of the licensing process, the importance of inclusion of the environmental variable process within infrastructure planning needs to be reduced. That is, this environmental concern should be moved back to the earlier planning stages, reducing the need for adjustments when projects are being implemented.To this end, the authors indicate prescriptions that can be summarized in the following steps, namely:(i) Establishment of uniform procedures for identifying and measuring indirect and direct environmental costs in the formulation and evaluation of projects at all planning levels;(ii) Listing of the main short- and long-term environmental concerns to be translated into policies for environmental protection upon which the licensing procedures would be based;(iii) Setting rate mechanisms that price in the social cost of infrastructure services, including environmental externalities, for demand management, including the possibility of cross-subsidies for compensatory measures;(iv) Establishment of financing mechanisms with a strong environmental performance incentive component along with research and development of more environmentally sustainable technologies and efficient ways to incorporate risk mitigation;(v) Expansion of courts specializing in the licensing process and extrajudicial areas for conflict resolution, including adoption of expert panels; and(vi) Promotion of debates, both for investors and consumers, about links between infrastructure and environmental preservation.In short, the country's economic growth requires broad and rapid expansion of infrastructure, with projects spread across the country interacting with distinct natural systems and, consequently, resulting in more complex environmental impacts of different scopes and magnitudes. Therefore, constant improvement of the environmental licensing regulatory framework will be crucial to stop the blaming of environmental sustainability as an obstacle to infrastructure projects, leading them to be understood as a means of enhancing social welfare. And to ensure the allocative efficiency of infrastructure。