Community Engament Report.ai - Institute of the Americas

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The Inter-American. Human Rights Court has stated that in situations where operations would displace indigenous peoples
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Making the Business Case for Community Engagement in Latin America

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the most attention. But in reality, the direct (and indirect) impact of large-scale projects covers the spectrum of extractive industries and associated infrastructure. Throughout the Americas, issues have arisen in cases of pipelines, wind farms, LNG terminals, as well as upstream oil and gas activities.

ommunities across Latin America have become increasingly engaged and empowered to make decisions that seek a balance between economic development, environmental conservation, and upholding cultural traditions and ways of life.

As a plethora of institutions, regulations, and mechanisms have emerged to deal with these complex relationships, the question remains how much progress has been made in Latin America’s energy sector. Moreover, how far does Latin America still have to go?

At the same time, the public and private sectors are realizing the importance of community engagement. For companies, good community relations have a ect outcomes. For governments, there are a multitude of reasons to shore up community support, from the desire for private investment and

This report examines the evolving rights and responsibilities of governments, corporations, and civil society through the lens of four key markets: Mexico, Colombia, Peru, and Chile.

populations in the vicinity of energy projects and beyond.

Consulta Previa

rise, early and constant community engagement is becoming more urgent. This is particularly evident in the energy sector, where large-scale and longterm investment is at stake.

Of the numerous local and global responses that have emerged to navigate the relationship between governments and communities, the right of indigenous peoples to free, prior, and informed consultation is the most well-known.

National governments will always play a critical and antecedent role. Invariably, the State should be the

The process of prior consultation — or consulta previa — stems from the International Labour Organization’s (ILO) Convention 169 on indigenous and tribal peoples. The Convention requires consultation be prior, free, informed, and in good faith. An in-depth analysis of the advantages and drawbacks of Convention 169, as well as the ample jurisprudence developed in national courts and the Inter-American Court of Human Rights is beyond the scope of this report. Still it bears noting that the tool has become a particularly powerful one in reshaping the relationship between the State and indigenous communities, as well as an important means for recourse when communities

operators become involved. Frequently this relationship is outlined in national and international law, as in the case of prior consultation with indigenous communities. Still, most energy projects outlast the electoral cycle. A strong regulatory framework needs to be in place to ensure certainty and stability over the long term, one that will have a life beyond the administration that implements it. This needs to guide government, company, and community roles and responsibilities. Early studies on community social responsibility have focused on the mining sector. The highly visible and often damaging nature of mineral extraction has meant that these cases have received 1

Making the Business Case for Community Engagement in Latin America Several Latin American countries have ratified the agreement and enshrined the ILO’s principles in domestic legislation. Colombia passed Law 21 in 1991; Peru passed its prior consultation law in 2011. Chile is still working towards an adequate community engagement mechanism. While Mexico is in the enviable position of being able to learn from early adopters’ mistakes as it develops its own approach to social conflict under a national energy reform.

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As for when it should be applied, indigenous groups feel they have the right to be consulted before an exploration block is awarded, or even tendered. This is not regular practice. The same concept would apply to a large infrastructure project, be it a pipeline, solar or wind farm, or transmission line. While many communities (indigenous or not) welcome energy projects on certain conditions, recognizing their associated economic and development benefits, there will always be groups who reject the industry outright. The Inter-American Human Rights Court has stated that in situations where operations would displace indigenous peoples or deny them the use and enjoyment of traditional lands, consent would be required. In all other cases, consultation is sufficient.

However, an enduring problem with the consulta previa process has been its narrow definition, particularly in Latin America where indigenous groups are not the only communities affected by energy projects. Campesino or rural communities and afro-descendants are not always afforded the same protections, adding to the confusion and frustration surrounding prior consultation. Another significant challenge has been the lack of understanding around how the consulta previa process works. The issue has been muddied in many countries by a lack of transparency, information, and communication concerning who is subject to the law, when it should be used, and what remedies are available to aggrieved parties. Countries such as Peru, Colombia, and Chile are attempting to address this issue through participatory workshops and online materials outlining the process.

But experience has shown that barreling through a community without consent is a recipe for conflict, which should be disincentive enough for governments and private parties alike. For governments going forward, simply engaging in a consultation process early, before tendering the block or project would go a long way to mitigating conflict.

In short, consulta previa applies to indigenous groups, must be carried out by the State, and calls for free, prior, and informed consultation, rather than consent.

This final issue has become a flashpoint for the debate in Mexico. Under Mexico’s sweeping energy reforms, regulators have incorporated many of the lessons from community engagement elsewhere. Article 119 of the Hydrocarbons Law requires that prior to any bid process, the National Energy Secretariat and Governance Secretariat carry out a social impact study. Article 120 requires the National Energy Secretariat to carry out a prior consultation process with indigenous groups. Similar articles also appear in the Electric Industry Law.

Mexico

Consulta previa applies equally to the extractive industry and power sector. Indeed, the principle behind Convention 169 and the domestic legislation that enforces it, is that indigenous peoples should be consulted about any issue that affects them, be it a development project or question of governance. Consulta previa in practice has proved far from straightforward. The Peruvian government has made it clear that the State is responsible for prior consultation, while the Colombian government has a habit of placing the burden on the private sector.

The contention arises from a seeming contradiction in Article 96 of the Hydrocarbons Law, which describes exploration and production as in the “social interest and public order,” and grants preference to these activities over any other enjoyment 2

Making the Business Case for Community Engagement in Latin America

of surface land and subsoil; Article 4 of the Electric Industry Law and Article 4 of the Geothermal Law use similar language.

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remain regulatory rather than legislative. Much of Chile’s experience with social conflict stems from the mining and hydropower sectors. In 2014, the Chilean government formally rejected the HidroAysén hydroelectric project. The 2,750 MW project had been beset by fierce opposition from both environmental and community groups. In officially abandoning the project, Energy Minister Máximo Pacheco noted that it had failed to sufficiently take into account the concerns of local populations.

For critics, such as the Latin American Social Sciences Institute (FLACSO), the new laws reflect a logic that subordinates indigenous communities’ status to energy development. Human rights groups in Mexico argue that indigenous communities are already being affected by the reforms. They note that the territories of 13 indigenous groups overlap with areas that were awarded to Pemex during Round Zero for oil and gas exploration and production. These issues will only become more acute as the Mexican government proceeds with onshore oil and gas auctions under Round One this year.

Peru President Ollanta Humala has made economic development with social inclusion a centerpiece of his administration’s legacy. In part, the policy emerged as a response to Peru’s experience with the tragic results of poorly executed community relations.

Chile In Chile, the Energy Ministry is negotiating a series of laws and regulations under a national política de asociatividad that would create a framework for participation by all affected communities, not just indigenous groups.

The country’s prior consultation law was developed in the wake of the Bagua protests in 2009. A dispute over development in the Amazon resulted in clashes between police and indigenous groups that left 24 police officers and 10 civilians dead. More recently, in February 2015, protests in the Amazonian town of Pichanaki left one dead and dozens injured. Ultimately, Argentine oil company Pluspetrol was forced to discontinue operations in that case.

An earlier version of the government’s proposed framework had companies sharing profits directly with communities but this was later abandoned, according to the government, in order to avoid “monetizing the relationship.” Still, the new policy has much to be admired. The Law on Tariff Equity seeks to ensure that communities residing near generation projects benefit from lower electricity costs, for example.

Unfortunately for the dozens of energy-related conflicts in Peru, consulta previa only applies to new contracts and recourse will largely fall to companies and the courts. Still, the government is trying to address concerns around prior consultation. The Intercultural Vice Ministry is in charge of the mechanism and regularly updates information on processes throughout the country. For example, Lot 192, which was recently put up for auction, is undertaking a simultaneous consultation process with the affected indigenous groups. This includes stakeholder identification, access to information, facilitated workshops, and dialogue.

Other policies under negotiation seek to ensure the economic benefits are shared locally, by promoting investment in local development — such as fostering local energy projects — and providing support for indigenous groups. The Guide to Participation in Energy Projects is currently out for public consultation but will likely 3

Making the Business Case for Community Engagement in Latin America

Colombia

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much goes to whom, there are very real concerns around the capacity of local authorities to manage and distribute funds.

The government’s role does not end with prior consultation. Many governments are taking a more proactive stance on requiring companies to do their own due diligence. In Colombia, contract terms require operators to invest one percent of the contractual investment minimum during the exploration phase into a Community Beneficiary Program (PBC). Repsol is coordinating with the UN Development Programme in the Guajira region to better engage with local Wayuu people affected by its offshore project. Colombia's National Hydro carbons Agency has also committed to visiting all project sites to monitor compliance with environmental and social standards.

A complete analysis of these policies is beyond the scope of this paper but the issue has serious implications for the government–community relationship and can engender distrust in affected communities. It should also matter for companies, which are wary of assuming a pseudo government role in cases where local governments lack the administrative capacity to deliver the public services local communities need and desire.

Making the Business Case

Figure 1: PBC Activities During Exploration Phase 2009 - 2012

The relationship between the State and communities is just one piece of the puzzle. A company may be awarded a concession or contract for 10, 20 or even 40 years, far outlasting the electoral cycle. Ensuring sustainable and successful engagement is all the more important as a result. Figure 3: Active Social Conflicts in Peru by Month

Source (Fig. 1 & 2): UN Development Programme

Figure 2: PBC Activities During Production Phase 2009 - 2012

Source: Defensoria del Pueblo - SIMCO

Making the business case for best practices in social responsibility is not a new concept. In the last decade, in particular, the energy industry has changed the way in which it engages with local communities and environmental groups across Latin America. Still, social conflict has continued to rise.

Source (Fig. 1 & 2): UN Development Programme

One of the major stumbling blocks for the government‘s community relationship has been coordination between national and local administrations as well as the capacity of local institutions to execute consultation processes and development projects. The administration and distribution of royalties is another dilemma: Beyond the question of how 4

In July 2015, Peru recorded 143 active social conflicts, of which 20 percent were energy or hydrocarbons-related and 64 percent were related

Making the Business Case for Community Engagement in Latin America

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has also become more informed and active in demanding their rights, at times supported by international advocacy groups.

to mining. In Colombia, the Environmental Justice Atlas is following 16 conflicts around fossil fuels. In Mexico, a Zapoteca community in Oaxaca is engaged in an ongoing dispute with the Energy Ministry and the Eólica del Sur wind company over a proposed 396 MW project.

International norms have also evolved to provide greater protection and many of these charters have been adopted at the national level. Donors and financial institutions, including the International Finance Corporation (IFC), have pushed for a higher standard in energy projects across the globe.

A study published by the Rights and Resources Initiative in 2012 analyzed the financial implications of delays, disruptions, and withdrawal during the construction and operation of large-scale projects. While the study focused on land tenure disputes, it found that operational costs in extreme cases could reach 29 times the costs calculated in their baseline survey.

Maximizing Financial Returns and Risk Mitigation In addition to these early studies, other initiatives have emerged that attempt to quantify, evaluate, and even predict the loss incurred to companies when social responsibility is poorly executed. The IFC’s Financial Valuation Tool for Sustainability Investments helps companies assess and define social investments that will maximize financial returns and risk mitigation.

Another study, co-authored by the Harvard Kennedy School, University of Queensland, and Shrift consulting firm, found that costs from delays and disruptions as a result of social conflict regularly topped hundreds of millions of dollars. In net present value terms, the report explains: “A major, world-class mining project with capital expenditure of between US $3 – 5 billion will suffer costs of roughly US$20 million per week of delayed production”.

Essentially, the tool allows companies to estimate the value of loss — be it through delays, disruptions, or project abandonment — as well as the productivity gains of social investment, for example the added value for a company of having a locally-trained workforce with a lower attrition rate. The tool also ranks community investments against best practices to help companies allocate their social budgets in ways that protect the value of their investment and reduce risks over the life of the project.

In one case highlighted, a Latin American mining project that experienced a nine-month delay in 2010 incurred $750 million in additional costs in that year alone. Ongoing conflict and stoppages continued to cost the company $100 million per year. Arguably, the business case is even more important in a low oil price environment. As fiscal belts are tightened, the corporate social responsibility budget is often slashed.

It is still too early — and too few companies are using the tool — to truly measure its impact. But preliminary feedback has been positive. Indeed, companies have reported that one of the main benefits of using the tool has been the process itself; the communication across the company around the value of social responsibility and the practice of stakeholder identification and engagement, among others.

Meanwhile, businesses are being nudged by a confluence of internal and external factors that have reframed the debate. A series of high-profile cases put the spotlight on environmental and community concerns. Civil society in Latin America 5

Making the Business Case for Community Engagement in Latin America

Another available tool is Equitable Origin’s EO 100 Standard that emphasizes the connection between energy companies and consumers. Once a company’s project or individual production field is certified, they can display the EO 100 label. The certification functions like other well-known sustainability standards, such as Fair Trade or the Forest Stewardship Council. One drawback of these tools is that they are voluntary with the burden residing once again with the State to regulate and enforce social responsibility. Daniel Schydlowsky, Superintendent of Peru’s banking regulator SBS, has called on Latin America’s central banks to regulate socioeconomic credit risk. He argues that banks lending to large development projects with potential for social conflict can require borrowers to provide information about how they will mitigate socio economic risk. It follows that as project developers tend to listen to those clutching the purse strings, they are more likely to carry out due diligence with regards to social responsibility. The Equator Principles are a similar initiative designed to account for social credit risk whenever the 80 members — all major banks and financial institutions —are financing or advising on large-scale projects. However, it must be noted that many of the problems that eventually lead to social conflict arise well before a company enters, as a result of inadequate prior consultation on the part of the State. Another limiting factor has been the role ascribed to community members and leaders. Indigenous peoples and advocacy groups have long raised concerns around their persistent identification as beneficiaries of energy projects, rather than managers and decision makers. This position is arguably enforced by the current mechanisms designed for consultation with both governments 6

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and business.

Environmental Sustainability In many indigenous, afro-descendant, and campesino communities, cultural and environmental factors are inseparable when it comes to measuring the impact of energy projects on traditions, culture, and land. When evaluating energy projects in remote and rural areas, the exploration and production or power generation itself is not the biggest risk. Rather, it is the indirect outcomes that cause the most harm. In the Amazon regions, for example, roads bring illegal logging, migration, deforestation, and other illicit activities. These can have a serious impact on local communities and ways of life, as well as irrevocably damaging native wildlife and water quality.

Lessons from Peru’s Camisea Project The Camisea natural gas project is one of the region's success stories. The Camisea approach has become the gold standard for extractive large-scale projects across Peru. The benefits of the “offshore-inland” model, based on the same principles as an offshore oil platform, have found support across industry, government, and civil society groups. The strict standards imposed by lenders in 2004 included the stipulation that no roads be constructed to the Camisea site. Instead, project equipment and personnel are transported via helicopter and boat. In order to ensure a minimal environmental footprint, Pluspetrol claims just 0.01% of Lot 88 has been affected by natural gas exploration and production. Meanwhile, project revenues have been earmarked for local development, including training local community members as environmental monitors who keep track of the

Making the Business Case for Community Engagement in Latin America

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Figure 4: Camisea Natural Gas Project

per barrel of oil equivalent. Other successful case studies in the region support the offshoreinland approach. The Urucú facility operated by Petrobras in the heart of the Amazon rainforest exports natural gas 500 km to Manaus via underground pipeline beneath the Amazon river and wetlands. The model can also be adapted, as in the case of Block 17 in Ecuador, where an oil pipeline was built on a monorail to protect the forest floor.

Conclusions

Source: ASEA

project’s impact on surrounding forests and indigenous groups in isolation and initial contact. In terms of community engagement, Camisea’s operators point to the consultation process involving 12,000 members of the local community as evidence of due diligence. A medical passport program protects local communities by ensuring all visitors to the site have received the requisite vaccinations. Still, despite overall approval, some human rights groups in Peru have argued that the government and operators have fallen short of their obligations. In particular they cite a lack of community consultation preceding the project’s expansion. Critics have pointed to the additional costs of adhering to an offshore-inland model as a deterrent for other projects in the region. Hunt Oil — a member of the Camisea operating consortium — has argued that the model incurs an additional cost of 30 percent per well. The Blue Moon Fund has countered that the cost is far lower and in fact closer to $1 - 2 per barrel where production is $20 7

Community engagement on extractive and infrastructure projects has become a mantra in Latin America. Colombia and Peru in particular have seen indigenous protests and legal challenges delay and halt projects, costing millions of dollars and, worse, dozens of lives. Still, confusion over the respective roles and responsibilities of the State, companies, and communities helps explain why both private sector participants and indigenous groups have been so dissatisfied with the process. The need to strike the most effective and rational balance for community-energy engagement remains a critical challenge for Latin America, both in terms of economic development and social inclusion. Clearly, there are complex issues at play, but there are some obvious recommendations that would help the region continue to progress and accrue positively to industry and government. As this paper has underscored, there is a wide range of uses and interpretations of the concept

Making the Business Case for Community Engagement in Latin America and tool that is consulta previa. Governments, communities, and industry across the region stand to greatly benefit from increased clarity and more widespread understanding and information as to the precepts of the process and its potency to defuse conflict and discord.

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3) Governance: A region-wide review is carried out to analyze the issue of local governance and capacity — particularly with regards to energy funds and execution of community projects — and the relationship between national and subnational governments in order to identify gaps, and develop best practices.

Beyond policy prescriptions for improving community engagement around energy development, a better understanding of the financial implications, the so-called business case, is imperative. The IFC’s Financial Valuation Tool for Sustainability Investments is just one example of how to make the case for the financial bottom line to ensure more effective community interaction. However, these tools need to be more widely adopted and monitored.

References • Davis, Rachel and Franks, Daniel, 2014. “Costs of Company - Community Conflict in the Extractive Sector.” Corporate Social Responsibility Initiative Report No. 66. Cambridge MA. Harvard Kennedy School. • International Finance Corporation, “Financial Valuation Tool for Sustainability Investments.” • International Labour Organization, Indigenous and Tribal Peoples Convention 169 (1991). Ley 21 de 1991 (Colombia 1991). • Ley de derecho a la consulta previa a los pueblos indígenas u originarios, reconocido en el convenio 169 de la Organización Internacional de Trabajo (OIT) (Peru 2011). • Ministro de Energía de Chile, “Guía de Estándar de Participación para Proyectos de Energía: Versión Preliminar para Consulta Pública.” • Schydlowsky, Daniel M. and Thompson, Robert C., “Reducing the Financial Risk of Social Conflict”, Americas Quarterly Spring 2014. • UN Development Programme, “Línea de Base: Programas en beneficio de las comunidades implementados por el sector de hidrocarburos en Colombia .”

Finally, one of the most prominent gaps in building and sustaining good community relations and long lasting benefits is governance and capacity, in particular at the local level. Miscommunication and tension is rife between national and subnational governments, and community distrust is created when a lack of institutional capability or knowledge translates into poor execution of community projects, particularly where royalties are involved. Politics, corruption, and personnel issues all play into this problem.

Key Considerations 1) Communication: Each country devise a national strategy to communicate best practices and the legal parameters of consulta previa. Moreover, each country should establish a prior consultation framework —and legal protection — for other affected communities, such as campesinos and afro-descendants. 2) Rollout: As part of the unfolding energy reform process in Mexico, the government pursue a more aggressive deployment of financial sustainability tools among the private sector, and collect a detailed analysis of community engagement efficacy, adaptability, and industry satisfaction.

The Institute of the Americas’ Energy Program works to foster a deeper understanding of the most critical energy issues facing the Western Hemisphere. For more information and upcoming events, follow us on Twitter @IOA_Energy or visit: www.iamericas.org/energy 8