Development Without Conflict

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WRI: DEVELOPMENT WITHOUT CONFLICT

iW A S H I N G T O N , D C

May 2007

DEVELOPMENT WITHOUT CONFLICT

THE BUSINESS CASE FOR COMMUNITY CONSENT

Editor

JONATHAN SOHN

Authors

STEVEN HERZ

ANTONIO LA VINA

JONATHAN SOHN


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JOAN OCALLAGHANEDITOR

HYACINTH BILLINGSPUBLICATIONS DIRECTOR

MAGGIE POWELLLAYOUT

Each World Resources Institute report represents a timely, scholarly treatment ofa subject of public concern. WRI takes responsibility for choosing the study topicsand guaranteeing its authors and researchers freedom of inquiry. It also solicits andresponds to the guidance of advisory panels and expert reviewers. Unless otherwisestated, however, all the interpretation and findings set forth in WRI publications arethose of the authors.

Though no oil and gas company provided financial support for this project, WorldResources Institute does receive financial support for other activities from RoyalDutch/Shell Group.

Copyright 2007 World Resources Institute. All rights reserved.

ISBN 978-1-56973-644-9

Library of Congress Control Number: 2007927895

Printed in the United States of America on chlorine-free paper with recycled contentof 30%.

Cover Photo Credits

Heldur Netocny, Panos Pictures

Fernando Moleres, Panos Pictures

Oleg Nikishin, Panos Pictures

iStockphoto


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C O N T E N T S

Acknowledgments ........................................................................................iv

Foreword ........................................................................................................ v

Executive Summary ......................................................................................1

Introduction ..................................................................................................5

The Principle of Free, Prior, and Informed Consent ..................................7

The Business Case for Community Consent ..............................................12

Case Studies

Malampaya Deep Water Gas-to-Power Project, The Philippines ..............19

Esquel Gold Project, Argentina .................................................................27

Samut Prakarn Wastewater Management Project, Thailand ...................33

Minera Yanacocha Gold Mine Project, Peru .............................................40

Conclusions and Recommendations ...........................................................47

Appendix: Selected Resources on Conducting FPIC Processes ................51

Notes ..............................................................................................................52

References .....................................................................................................57

About the Authors .........................................................................................61


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A C K N O W L E D G M E N T S

The authors would like to thank the followingcolleagues for valuable input to various draftsof the paper: Philip Angell, Lalanath De Silva,David Jhirad, Janice Lao, Jen Lesar, Smita Nakhooda,

Sarah Paraghamian, Luiz Ros, Frances Seymour, FredWellington, and Sheri Willoughby.

We also appreciate review comments received fromClive Armstrong, Anne Perrault, Anita Roper, BruceSchlein, Jake Siewart, Julie Tanner, and ElizabethWild. The reviewers comments and suggestions havesignificantly strengthened the report. The authors retainfull responsibility for any remaining errors of fact orinterpretation.

We would like to thank Bob Livernash and JoanOCallaghan for their editing expertise. Sabina Ahmed,Hyacinth Billings, Jennie Hommel, Maggie Powell, andMaira Reimao provided invaluable assistance with the

production and editorial process.

Finally, WRI greatly appreciates the financial supportprovided by the Charles Stewart Mott Foundation, theNetherlands Ministry of Foreign Affairs, and the WallaceGlobal Fund.


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F O R E W O R D

The examples this report presents illustrate the power ofstrongly mobilized public opinion. A community ignoredor scorned can exact a significant financial price in thepresent and impose opportunity costs for a company in

the future.

Many companies and governments still push projectsthrough to completion without community consultationor approval. In many cases, they believe their actions arejustified, perhaps even in the public interest. Yet, amongaffected communities the ripples from such action dontdissipate quickly.

Even as we refine what this principle means inoperation, there is no question that as a principle and asa practice, free, prior, informed consent is a key part oflegitimacy.

And if you wonder if that is true, simply ask this question:Is your company better off having the people in thecommunities where you operate with you or against you?

It is just plain common sense.

JONATHAN LASH

PRESIDENT

WORLD RESOURCES INSTITUTE

The rather daunting title of this report is TheBusiness Case for Community Consent.But its really about common sense. Common

sense in a world in which communications are virtuallyinstantaneous and reputation has enormous globalvalue. Almost 75 percent of the market capitalization ofthe companies in the Dow Jones Industrial Average isintangibleprimarily a companys brand and reputation.

This report examines the premise that the informedconsent of a community affected by development projects,either public or private, makes good business sense. Itargues that the risks created by not obtaining communityconsent are significant and quantifiable, as are thebenefits obtained with meaningful consultation.

The principle of free, prior, informed consent is stillevolving. This paper explores its many facets and thepotential implications for the projects that corporationsand governments undertake, especially in developingcountries.

The process of consultation is not simple, nor is themeaning of consent obvious. In many cases, it is noteven obvious who or what constitutes a community; asa consequence, the definition of consent and who cangrant it requires careful discussion. But those discussionsmust acknowledge the ever-increasing expectations thatcommunities have a say in projects that affect their future.


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E X E C U T I V E S U M M A R Y

projects around the world, it illustrates how a companys

ability to gain the approval of the host community canaffect the projects success. In addition, it describes bestpractices and leading policy developments that providepractical guidance for implementing FPIC principles inglobal business practices.

The report includes four cases:

1. In the Philippines, the Malampaya Deep Water Gas-to-Power Project is the largest industrial development in thenation. The project extracts natural gas from below theseabed off the coast of Palawan Island and transports

it more than 500 kilometers by undersea pipeline to anatural gas refinery plant in Batangas City on LuzonIsland. It is a joint venture of the Royal/Dutch Shellsubsidiary Shell Philippines Exploration (SPEX), ChevronTexaco, and the Philippine National Oil Company (PNOC).

Shell employed four strategies to gain communityconsent: (1) community outreach and interviews with keyopinion leaders and decision makers; (2) informationdissemination, education, and communication activities;(3) perception surveys and participatory workshops tointroduce the project and validate initial survey results;and (4) participatory involvement in the formulation of

environmental management plans.

Based on these activities, the project sponsors madesignificant changes to the project. Shell also recognizedthat the risks of community opposition can arise afterthe project has been implemented, and endeavored tomaintain and cultivate its relationships with the affectedcommunities during project operations. These efforts

While much has been written on the legal,

normative, and development arguments forensuring that host communities have the

opportunity to provide their free, prior, and informedconsent (FPIC) to a project, relatively little attention hasbeen paid to the business case for FPIC. The argumentis rarely made that it is in the financial interest of projectsponsors and their financial backers to ensure that localcommunities have certain rights to provide or withholdtheir consent.

Most project sponsors and financiers tend to perceivethe business case for community interaction in

terms of community engagement or consultation.Operationlizing FPIC is an evolving practice. As a result,when FPIC is considered, it is often regarded as beingtoo difficult or ill defined to implement effectively, or asinconsistent with host country preferences or policies.In some situations, governments may conclude thatthe national interests in a project should overridelocal concerns, or they may simply not be interested inensuring the concerns of all stakeholders are addressed.

As a result, while many sponsors and financiers of high-risk projects require community consultations as part oftheir assessment or development procedures, they rarely

require that consent be achieved as a key element forproject development.

THE CASE STUDIES

This report demonstrates the business case forincorporation of FPIC principles in large-scaledevelopment projects. Drawing on four case studies from

C A R O L I N E P E N N

P A N O S P I C T U R E S


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have succeeded in gaining community support for theproject and significant, documented financial savings tothe company.

2. In Argentina, the Esquel Gold Project is a proposed

open-pit mine project near the town of Esquel. Esquelsresidents are well-educated and socially cohesive; manymoved to the community from more urbanized areas toenjoy its natural amenities and alpine charm.

The Esquel project is owned by Meridian Gold, a mid-tier gold producer based in Reno, Nevada. Meridian hopedto develop an open-pit gold mine 700 meters above and7 kilometers east of the town. From the earliest stages ofproject development, the company did not share criticalinformation about the potential benefits and risks of theproject, or engage with the community to understandand address its concerns before they became points ofcontention. Meridian reacted to gathering oppositionmainly by initiating a public relations campaign thatproved to be counterproductive. The mining project wasoverwhelmingly rejected in a public referendum in March2003.

As a result, a project that the company once billed asthe next chapter in its growth has never been developed.According to financial analysts monitoring the miningsector, the events in Esquel created significant concernwith respect to Meridians share price. In addition, inFebruary 2006 Meridian was forced to write down the

value of the property by US $379 million. It remains to beseen whether Meridian will ever be able to gain access toEsquels estimated US $1.33 billion reserves.

3. In Thailand, the Samut Prakarn Wastewater ManagementProject (Samut Prakarn) was conceived by the PollutionControl Department of the Government of Thailand(PCD) in the early 1990s to address the severe waterpollution problems in Samut Prakarn province.

Due to its strategic location on the Chao Phraya Riverjust southeast of Bangkok, Samut Prakarn province hadbecome one of the most heavily industrialized and rapidly

urbanizing provinces in Thailand. But its rudimentarysanitation and water treatment facilities could not handlethe large volumes of wastewater produced by its 1.2million residents and over 4,000 factories.

Recognizing the severity of the problem, theGovernment of Thailand asked the Asian DevelopmentBank (ADB) to assist in the development of a wastewater

management system for the province. The ADBrecommended building two large central treatment plants,one on each side of the Chao Phraya River. Only onecontractor submitted a final bid to build a single facilitynot at the original east bank site, but rather at Klong Dan,

more than 20 kilometers from the east bank of the river.

The residents of Klong Dan were not informed of thedecision to relocate the wastewater treatment facility totheir community. They objected to the nontransparentand nonparticipatory manner in which the change tothe location was made, and to the fact that appropriateenvironmental or social assessments of the impacts at thenew site were not conducted.

Community leaders also came to suspect that thedecision to move the project was driven more bycorruption and the desire to enrich a handful of politicallywell-connected landholders than by any consideredassessment of the public interest. Thai authoritiesinvestigated and corroborated these allegations, anduncovered additional evidence of corruption.

Despite the fact that the project is 95 percent complete,all work on the project remains suspended as the PCDdetermines how to proceed. To date, the Governmentof Thailand has spent an estimated US $650 millionconstructing the project, and will need to spend anadditional $140$180 million to complete the facilityand bring it online. The value of the economic benefits

attributed to the project has already been reduced by about$1.27 billion, and the project is no longer economicallyviable under its original assumptions.

4. In Peru, the Minera Yanacocha Gold Mine Project(Yanacocha) is the one of the largest and most profitablegold mines in the world. Yanacocha is a joint venture ofNewmont Mining Corporation (51 percent), Compaade Minas Buenaventura of Peru (44 percent), and theInternational Finance Corporation, the private-sectorlending arm of the World Bank Group (5 percent).

Yanacocha is a linchpin asset for each of its principal

owners. Its six open-pit mines, five leach pads, andassociated processing facilities sprawl across 160 squarekilometers, five separate mountains, and four distinctwatersheds. These existing facilities occupy only a smallportion of the 1,725-square-kilometer concession on whichYanacocha owns exploration and development rights.After a relatively modest start in 1992, new discoveries ledto rapid expansion.


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By 1998, the mine was causing significant tensionsbetween the company and the community. The situationworsened after a June 2000 accident involving thetransportation of mercury that affected residents in severalvillages, and worsened further as a result of community

opposition to the companys interest in mining CerroQuilish, a 3.7-million-ounce deposit within the Yanacochaconcession.

After a long legal battle that ultimately was won bythe company, in September 2004 Yanacocha obtaineda government permit to begin exploring Quilish andmoved its drilling equipment onto the site. The publicreaction was swift and intense. The protests culminatedin a region-wide strike that included a mass mobilizationof approximately 10,000 people in the public square inCajamarca. The blockade was disbanded and protests wereended after local leaders and representatives of the Ministryof Mines negotiated an agreement with the company.

In early November, the company publicly apologized forits actions, formally requested that the Ministry revokeits permit to explore Quilish, and removed the Quilishproject from its operations plans. Quilishs reserves areworth an estimated US $2.23 billion, and could havebrought in about US $1.7 billion after production costs.Furthermore, the conflicts between Yanacocha and thecommunity have placed more than just the Quilishreserves in jeopardyother proposed expansions of themine are now facing heightened scrutiny.

Based on these case studies, the report reaches anumber of important conclusions:

When businesses get it right, achieving consent canbenefit both the community and the project.

The business risks of going forward with a large-scaleproject in a community without its acceptance canthreaten the viability of the project.

Community opposition can arise from impacts that aregenerated at any stage in the project cycle.

Addressing issues of community concern before theproject begins is likely to be more successful and cost-effective than responding to community oppositionlater on.

The risks of failing to achieve community consent arenot borne exclusively by the project sponsor. Otherstakeholders, such as shareholders, financiers, and hostgovernments can also have their interests adversely

affected by conflicts that may result from the failure toachieve community support of a project.

Engagement or consultation may not always besufficient to fully address these risks. Consultations

that do not resolve a communitys reasons foropposition or achieve consent will provide littleassurance against potentially costly and disruptiveconflict.

THE BOTTOM LINE

Taking these findings from the case studies into account,the report recommends that each stakeholder takespecific, affirmative steps to ensure that the free, prior,and informed consent of project-affected parties is securedbefore and during project operations, recognizing theoperational uncertainties surrounding communityconsent.

Most important, it recommends that project sponsorsand financiers incorporate community involvementand consent procedures and requirements into theirproject and investment decision making, planning,and operations at the very beginning, and that hostgovernments incorporate such procedures andrequirements into their permitting processes.

We recognize that achieving FPIC can be challenging.Implementation questionssuch as who should be

empowered to represent the community, through whatprocesses is approval given, how to overcome difficultenabling environments, and how FPIC should beverifiedcan defy easy answers and may vary significantlywith the particulars of the local context.

The four case studies suggest six principles that mayassist project proponents in crafting and implementingconsent procedures that will mitigate the business risksassociated with projects that do not adequately involve thecommunity:

Information. Affected communities should be provided

sufficient information in local languages regarding theproposed project. Project proponents should work withcommunities to understand the types of informationthe communities need to make informed decisions,and must allow sufficient time for communities toreview and discuss information provided to them.


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Inclusiveness. All interested community membersshould be allowed and encouraged to take part inthe FPIC process, including stakeholders affected byindirect or cumulative impacts.

Dialogue. Dialogue within an FPIC process shouldbe formalized, continue throughout the lifetime of aproject, and include government and local stakeholderrepresentatives.

Legal recognition. FPIC should be formally recognizedthrough binding negotiated agreements. There shouldbe a sufficient period of time for community decisionmaking prior to project commencement.

Monitoring and evaluation. Opportunities forappropriate and independent community monitoringshould be put in place. Monitoring and evaluationshould be supported by independent grievance

processes to ensure that community concerns areaddressed throughout a projects lifetime.

Corporate buy-in. Project proponents should viewFPIC as an inherent and necessary cost of project

development. Where appropriate, developersshould find constructive ways to channel funds tocommunities to maintain the integrity of the processand the independence of the communitys role.

Community involvement and consent work best in asetting where the host country government recognizesthese concerns as a matter of law or policy. Projectproponents should work with governments to gain theirendorsement and involvement in the FPIC process. Tofully protect their legal rights and interests, proponentsshould develop with communities further proceduresbased on local conditions.


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I N T R O D U C T I O N

are debated. What is absolutely clear, however, is that the

needs and concerns of a community that may be host to aproject cannot be ignored or given short shrift.

There is a surprising lack of attention to the businesscase for community consent. Although the challenges ofgaining consent can be considerable, the business case fornot imposing a project on an unsupportive communityis compelling. For one thing, the business risks ofcommunity opposition can be much greater, in bothmagnitude and likelihood, than many of the other projectrisks that project sponsors and financiers routinely seekto shift, mitigate, or insure against. The potential risks

related to community opposition include:

increased costs from delays in construction andoperation;

reduced demand for project outputs; reduced access to critical project inputs; and increased costs of mitigating environmental and social

impacts.

Community opposition can also induce the governmentto halt operations, revoke permits, or impose costly fineson projects. In the worst case, the failure to properly

manage these risks can threaten the projects commercialsuccess or financial viability. Moreover, the adverseimpacts of community resistance can also transcend thespecific project and affect corporate operations morebroadly. Potential corporate impacts include brandand reputational harms and greater difficulty in futureprojects.

Developing a large-scale industrial project can be

one of the most complex business transactionsthat a company can undertake. To bring a project

online, a project sponsor must successfully address adaunting array of issues, and must gain the consentand cooperation of many different actors, includingproject shareholders, bankers, insurers, operators, publicpermitting authorities, contractors, suppliers, workers,and, when appropriate, customers. Reconciling thedifferent expectations and interests of these stakeholdersoften requires lengthy, and even intense, negotiationsto clarify the rights, obligations, and expectations of theparties, and confirm their agreement to participate.

Yet ironically, the stakeholders that may have the greatestinterest in the projectthe host communitiesmayoften be least likely to have the opportunity to negotiatetheir interests or consent to the project. For communitiesthat host a large-scale project, unlike for most otherstakeholders, project decisions can literally be life altering.Whether a project goes forwardand how benefits, costs,and risks are allocated over the projects life cyclecanprofoundly affect the lives, livelihoods, and developmentaspirations of communities, both positively andnegatively, for years to come. While the interests of otherstakeholders are subtly choreographed, host communities

are often relegated to observer status.

Free, prior, and informed consent (FPIC, or consent)is the right of communities to exercise control, to theextent possible, over their own economic, social andcultural development.1 Operationlizing FPIC is anevolving challenge. The answers to questions like Whatdefines a community? and What determines consent?

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On the other hand, project sponsors that demonstratethe support of their host communities can find it easierto gain regulatory approval for future projects, efficientlybring their products to market, attract skilled employees,or market their products to the growing pool of customers

who consider production conditions and corporatesustainability practices in their purchasing decisions.

This report seeks to fill the gap in the existing literatureby suggesting the business case for sponsors of large-scale, high-impact projects to treat the consent of the hostcommunity as a requirement of project development.The business case argument is set out in four sections.The first section provides context by briefly reviewingthe origins and evolution of the FPIC requirement ininternational law and development discourse. It arguesthat while community consent first emerged as aninternational norm applicable to indigenous peoples,it has come to be widely seen as integral to the fairtreatment of all communities.

The second section addresses the business case forFPIC. It describes the potential risks associated withdeveloping projects that lack the support of their hostcommunities, and the benefits that may be achieved fromobtaining consent.

The third section focuses on case studies. Through aseries of real-world examples, it illustrates some of theways in which the risks of community opposition canmanifest themselves in both public- and private-sectorprojects and how dealing with community concerns

can lead to a successful project. To the extent possible,based on publicly available information, each casestudy quantifies the financial impacts that communityopposition (or its avoidance) has had on the project andits sponsor. This section also includes boxes that exploreseveral other aspects of the business case for FPIC that arenot fully discussed in the case studies.

The fourth section offers a set of potential conclusionsand recommendations that emerge from the case studies.It describes the substantial business advantages thatcan be realized from securing broad-based communityconsent beforemaking major project decisions, and ateach stage in project development and operations. Ittherefore recommends that each stakeholder take specific,affirmative steps to ensure that the free, prior, andinformed consent of project-affected parties is securedbefore project operations.

Finally, Appendix A provides a list of resources toassist those who seek further practical guidance and bestpractices on how to conduct a FPIC process.


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T H E P R I N C I P L E O F F R E E , P R I O R ,

A N D I N F O R M E D C O N S E N T

T H E P R I N C I P L E O F F R E E , P R I O R ,

A N D I N F O R M E D C O N S E N T

undertaking prefeasibility and feasibility assessments; conclusions reached by studies undertaken regarding

community support;

any negotiated resettlement plan and compensationsettlement;

any development plans associated with the project; means of benefit sharing; allocation of liabilities; means of redress; oversight mechanisms; and project closure and decommissioning issues.6

FPIC differs importantly from mere consultation inthe way decision-making authority is exercised andlegitimated. Consultation requires only an exchange ofinformation among project sponsors, regulators, andaffected communities. It therefore provides only a limitedmechanism for the public to provide information toproject decision makers, or to be apprised of decisionsthat have already been made elsewhere. Consultationsdo not involve sharing or transferring decision-making authority to those who will be directly affected.Furthermore, they do not necessarily facilitate more

inclusive and collaborative decision making, and are rarelyan empowering form of public engagement.7

On the other hand, FPIC processes allow hostcommunities to meaningfully participate in decision-making processes, negotiate fair and enforceableoutcomes, and withhold their consent to a project if

While sometimes controversial, the principle that

host communities should have the opportunityto grant or withhold their free, prior, and

informed consent (FPIC) to projects located on their landsor that impact the resources upon which they depend isnow widely considered to be an internationally guaranteedhuman right of indigenous peoples, and is increasinglybeing recognized in national law, international norms,and voluntary best practice standards and guidelines.2FPIC is also increasingly seen as critical to ensuring thatall communities have the opportunity to control their owndevelopment destinies. This section defines the FPICprinciple, and provides an overview of the ways in which it

has been recognized in various international conventionsand guidelines, and in the national law of a growingnumber of countries.

The International Labour Organization (ILO) definesFPIC as the right of communities to exercise control, tothe extent possible, over their own economic, social andcultural development.3 This right is held collectively bythe community and does not give individuals the power toveto a project. FPIC requires that consent be freely given,obtained prior to final authorization and implementationof activities, and founded upon an understanding of thefull range of issues implicated by the activity or decision

in question.4

It is more than a one-time event: it involvesa continuous, iterative process of communication andnegotiation spanning the entire planning and projectcycles.5 While this does not mean that all decisionsare provisional or nonbinding, it does require thatinformation be provided, and consent be obtained, withrespect to:

J E R E M Y H A R T L E Y P A N O S P I C T U R E S


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their needs, priorities, and concerns are not adequatelyaddressed. By requiring consent, FPIC processes cangive affected communities the leverage to negotiatemutually acceptable agreements under which the projectmay proceed, thereby ensuring that the projects stand a

better chance of producing results that benefit them. Indoing so, FPIC processes empower host communities bychanging the basic terms of engagement, and can therebyhelp ensure that the poorest and most marginalized ordisenfranchised groups are included in the decisionmaking and receive an equitable share of project benefits.8

The legitimacy and practical benefits of the communityright to FPIC have been recognized in a number ofinternational conventions and standard-setting exercises,voluntary sectoral guidelines, and national laws. Forthe most part, these focus on the rights of indigenouscommunitiesdue to those communities uniquecircumstances and special status in international law.For example, ILO Convention 169 (1989) provides thatindigenous and tribal peoples shall have the right todecide their own priorities for the process of developmentas it affects their lives, beliefs, institutions and spiritualwell-being and the lands they occupy or otherwise use,and to exercise control, to the extent possible, overtheir own economic, social and cultural development.9Similarly, the United Nations (UN) draft Declaration onthe Rights of Indigenous Peoples provides:

Indigenous peoples have the right to determine and

develop priorities and strategies for the developmentor use of their lands, territories and other resources,including the right to require that states obtain theirfree and informed consent prior to the approvalof any project affecting their lands, territories andother resources, particularly in connection with thedevelopment, utilization or exploitation of mineral,water or other resources.10

Other human rights conventions, such as theConvention on the Elimination of Racial Discrimination,the International Covenant on Civil and Political Rights,and the Convention on Biological Diversity, have been

interpreted to require that the rights of communities toFPIC be recognized and implemented.11 In addition, theUN Sub-Commission on the Promotion and Protectionof Human Rights Norms on Transnational Corporationsstates that:

transnational corporations and other businessenterprises shall respect the rights of local

communities affected by their activities and the rightsof indigenous peoples and communities consistentwith international human rights standards. They shallalso respect the principle of free, prior, and informedconsent of the indigenous peoples and communities to

be affected by their development projects.12

Regional human rights systems have also supportedthe rights of indigenous communities to FPIC over theuses of their lands and resources. The Inter-AmericanCommission on Human Rights has concluded that inter-American human rights law requires special measuresto ensure recognition of the particular and collectiveinterest that indigenous people have in the occupationand use of their traditional lands and resources and theirright not to be deprived of this interest except with fullyinformed consent, under conditions of equality, andwith fair compensation.13 Similarly, the Organizationof American States draft American Declaration onthe Rights of Indigenous Peoples declares that statesshould obtain consent prior to the approval of anyproject affecting indigenous peoples lands, territories,and resources, particularly in connection with thedevelopment, utilization, or exploration of mineral, water,or other resources.14 And the European Commission hasrecognized the right of indigenous peoples to objectto projects, which includes the principle of free andinformed consent.15

The principle of FPIC for indigenous peoples has

also been recognized in several global standard-settingprocesses that have articulated best practices forspecific high-impact industries. For example, the ForestStewardship Council, a multi-stakeholder collaborationto establish norms for the forestry industry, recognizesthat indigenous peoples have the right to control theforest resources on their lands, unless they delegatecontrol with free and informed consent to other entities.16The World Commission on Dams similarly recognizedthe importance of respecting the rights of indigenouscommunities to consent to activities that impact theirlands and resources.17 And the World Banks ExtractiveIndustries Review, an independent review of the

development impacts of the World Banks oil, mining,and gas lending, also endorsed FPIC for indigenouscommunities, although the Bank ultimately adopted aslightly different standard (see Box 1).18

Some countries have incorporated community consentprovisions in domestic law. In the Philippines, communityconsent is required by the general law applicable to


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indigenous peoples (Indigenous Peoples Rights Act, 1997)and more specific laws, such as those that regulate miningand protected areas (Philippine Mining Act of 1995;National Integrated Protected Areas System Act of 1992).

Similarly, community consent of local communities(other than indigenous peoples) is also required forbioprospecting and forestry, and is implied in all projectsrequiring an environmental impact assessment (EIA).For projects requiring EIAs, the principle of communityconsent is supposed to guide decision makers inapproving or rejecting a project.19 In the United States,federal law allows for a streamlined relicensing process

for operators of hydroelectric plants that can demonstratethey have the consent of affected stakeholders (see Box2). FPIC has also been incorporated in the mining lawin Australias Northern Territory for almost 30 years, and

in the legislation of at least five other Australian states.20Russian law also recognizes FPIC as a right of indigenouspeople.21

Although the right to FPIC is more firmly entrenchedfor indigenous communities, there is a growingrecognition that all communities should have ameaningful role in making decisions about projects

The World Bank has begun to incorporate a community

consent principle into its policy frameworkat least forsome of its highest-risk projects. In 2004, after an extensiveindependent review of its extractive industries portfolio (theExtractive Industries Review, or EIR), the Bank revised itspolicies to require that an extractive industry project mustsecure the broad support of affected communities througha process of free, prior, and informed consultation in orderto be eligible for Bank financing.1 The next year, the Bankrevised its Indigenous Peoples policy to apply the same broadcommunity support standard to projects that affect indigenouspeoples.2 The Bank has argued that this new standard not onlywill help to ensure that communities are better able to asserttheir interests in the planning process, but will also benefit

project sponsors, since projects that are endorsed by their hostcommunities tend to be more productive and less vulnerableto disruption, and often enhance the reputations of theirsponsors.3

In March 2006, after a comprehensive review of its ownenvironmental and social policies, the World Banks private-sector lending arm, the International Finance Corporation(IFC), extended the application of the broad communitysupport standard to all projects that will have significantadverse impacts on affected communities. For projects thataffect the lands of indigenous peoples, the IFC replaced thebroad community support standard with a requirement that

the project sponsor engage in good faith negotiations withthe affected communities, and demonstrate the successfuloutcome of the negotiation.4

Both the World Bank and the IFC received substantial publiccriticism for failing to adopt the standard FPIC formulation.But it remains to be seen whether in practice the broad

community support or good faith negotiation requirements

will prove to be any less protective of community preferencesthan FPIC. Each of these standards incorporates an elementof community acceptance or approval into project decisionmaking that should, if conscientiously applied, functionallyapproximate an FPIC requirement.

The approach recently taken by the Equator Principle banksa coalition of more than 40 of the worlds largest private-sector project financiers that have agreed to harmonize theirenvironmental and social policies with the IFCs performancestandardsdoes not fully incorporate the principles notedin the above paragraph. While the Equator Principle bankshave adopted the good faith negotiation requirement for

projects that affect indigenous peoples, they require only free,prior, and informed consultation with other adversely affectedcommunities. They have not adopted IFCs requirement thatsuch consultations lead to broad community support. Withoutsuch a minimum standard for consultation outcomes, theEquator Principle does not require that public inputs actuallyinfluence project decision making, and does not ensure thatindividual projects and stakeholders of these projects canrealize the benefits of consent-based decision making. Thus,there is opportunity for enhancing these new principlesin practice by encouraging borrowers to seek the supportof nonindigenous communities in high-risk, high-impactprojects.

Notes

1. World Bank 2004, p. 7.

2. World Bank, Operational Policy 4.10: Indigenous Peoples (July2005).

3. World Bank 2004, p. 5.

4. IFC 2006, p. 30.

BO X 1 EMERGING STANDARDS OF CONSENT AND CONSULTATION IN THE PROJECTFINANCE SECTOR


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development. Acceptance emerges from recognizingrights, addressing risks, and safeguarding theentitlements of affected people, particularly indigenousand tribal peoples, women, and other vulnerablegroups. Decision-making processes and mechanisms

[should be] used that enable informed participation byall groups of people, and result in the demonstrableacceptance of key decisions.26

Similarly, the World Banks Extractive Industries Reviewrecommended that the rights of local communities toFPIC be respected as a precondition to World Bankfunding of extractive industry projects.27 And the Mining,

that directly affect them, including the ability to refuseto host projects that do not provide adequate benefitsor help them to realize their development aspirations.22For nonindigenous communities, the case for FPIC isbased on (1) the right to meaningful participation in

environmental decision making;23

(2) the right to controlaccess to their lands and resources;24 (3) contemporarystandards of public participation as a hallmark oflegitimate governance; and (4) basic principles of equityand justice.25 The World Commission on Dams concluded:

Public acceptance of key decisions is essential forequitable and sustainable water and energy resources

In the United States, federal law allows for a streamlinedrelicensing process for operators of hydroelectric plants

that can demonstrate they have the consent of affectedstakeholders. Pursuant to the Federal Power Act, the FederalEnergy Regulatory Commission (FERC) authorizes newlicenses and renewals for hydroelectric dams.1 At least fiveyears before a project license expires, the operator mustnotify FERC of its intent to seek a new license.2 The licenseemust prepare materials on project operations and futurerelicensing plans. This information serves as a basis forconsultations with state and federal agencies, Native Americantribes, nongovernmental organizations, affected propertyowners, and other members of the public to identify theactions needed to minimize adverse environmental and social

impacts.3

Based upon the inputs from these consultations,the licensee conducts further studies and proposes a set oflicensing conditions for FERCs consideration. Approval ofthese license conditions is a prerequisite for relicensing.4

This relicensing process can be quite time-consumingand expensive. However, licensees can significantlyreduce the time and expense of gaining FERC approval bydemonstrating stakeholder consent through a settlementagreement process.5 Under this approach, local agenciesand public stakeholders negotiate directly with the licenseapplicant to develop proposed terms and conditions thatinclude appropriate environmental and social mitigationcommitments.6 Once a settlement has been agreed upon,

it is submitted to FERC with the request that all settlementterms and conditions be included as part of the official license.However, since FERC may delete or change some conditionsof the agreement, many settlement stakeholders include termsin the settlement that make all settlement conditions legally

binding, regardless of whether they are included in the finalgovernment license.

FERC encourages the settlement process because it allowsfor a more efficient and less contentious relicensing process.7And stakeholders on all sides of the process like it becausesettlement agreements often yield outcomes for the riparianenvironment and the impacted communities that are superiorto those that can be achieved in traditional relicensings.8

Trust and inclusion of all perspectives are seen as keyelements of good settlement agreement processes. As aresult, stakeholders often begin by negotiating protocols ofengagement before addressing substantive issues. This allowsthem to establish a framework for long-term cooperation

among all stakeholders and generally reflect the concerns ofall parties in a relatively equitable manner. FERC notes thatwhen the process is successful, a common result is morelocal control and ownership of the licensing decision, andongoing local participation during the term of the license.9

Notes

1. FERC 2004.

2. Id.

3. http://www.hydroreform.org/hydroguide/7-settlements-as-preferred-basis-for-licenses.

4. Id. There are three relicensing processes: Three Step Traditional,Alternative Procedures, and a newer Integrated Licensing Process.

5. 18 CFR 385.601 et seq.

6. For example, American Whitewater, Stewardship RelicensingOverview. Available at: www.americanwhitewater.org.

7. Id.

8. Id.

9. FERC 2004, pp. 27.

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Minerals and Sustainable Development project, anindustry-led initiative to assess the contribution of themining sector to sustainable development, concluded:

Land use decisions should be arrived at through a

process that respects the principle of prior informedconsent arrived at through democratic decision-makingprocesses that account for the rights and interestsof communities and other stakeholders, while stillallowing for the negotiated use of renewable and non-renewable resources.28

While the principle of FPIC is increasingly recognizedin both human rights and development discourse,substantial questions remain about how it should bestbe implemented. Achieving FPIC can undoubtedlybe difficult, as significant implementation challenges

often arise. But these challenges are not so daunting asto negate the rights and development cases for FPICdescribed in this section, or the business rationalediscussed in the following sections.

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T H E B U S I N E S S C A S E

F O R C O M M U N I T Y C O N S E N T

Corporate buy-in. Project proponents should view

FPIC as an inherent and necessary cost of projectdevelopment. Where appropriate, developersshould find constructive ways to channel funds tocommunities to maintain the integrity of the processand the independence of the communitys role.

Community involvement and consent work best in asetting where the host country government recognizesthese concerns as a matter of law or policy. Projectproponents should work with governments to gain theirendorsement and involvement in the FPIC process. Tofully protect their legal rights and interests, proponents

should develop with communities further proceduresbased on local conditions.

Without these components, corporations run adangerous risk that projects will not succeed or will fallbelow expectations. They also miss many significantbenefitsin terms of cost savings; improved community,national, and international reputation; and ability to winacceptance of future projects. This section presents thebusiness case for community consent, in terms of boththe risks entailed in not following these principles and thepotential benefits of gaining community consent.

REDUCING RISK

Sponsors of international projects are usually experts atnegotiating the multiple administrative processes requiredto secure the permits and licenses necessary to develop aproject.29 However, they are often less adept at recognizingthat regulatory approval does not necessarily imply theconsent of host communities. Official approval processes

This report identifies six principles that are critical

components of crafting and implementing consentprocedures:

Information. Affected communities should be providedsufficient information in local languages regarding theproposed project. Project proponents should work withcommunities to understand the types of informationthe communities need to make informed decisions,and must allow sufficient time for communities toreview and discuss information provided to them.

Inclusiveness. All interested community membersshould be allowed and encouraged to take part inthe FPIC process, including stakeholders affected byindirect or cumulative impacts.

Dialogue. Dialogue within an FPIC process shouldbe formalized, continue throughout the lifetime of aproject, and include government and local stakeholderrepresentatives.

Legal recognition. FPIC should be formally recognizedthrough binding negotiated agreements. There shouldbe a sufficient period of time for community decisionmaking prior to project commencement.

Monitoring and evaluation. Opportunities forappropriate and independent community monitoringshould be put in place. Monitoring and evaluationshould be supported by independent grievanceprocesses to ensure that community concerns areaddressed throughout a projects lifetime.

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often marginalizeor bypass entirelyhost communitiesand other locally affected interests. And governmentsoften lack the will or the capacity to help project sponsorsnegotiate agreements with host communities, or toenforce those agreements as the project moves forward.

Host communities commonly complain that theseprocesses do not adequately account for their concernsregarding the adverse environmental, social, andeconomic impacts of projects, or too readily allow themto bear a disproportionate share of the costs and risks ofprojects undertaken in the national interest.30

In response, host communities in many countries havebecome more proactive about asserting their interests andless willing to allow their governments to have exclusivecontrol over the terms of their participation. Communitiesare increasingly demanding a more pluralistic approach toproject development that affords them a decisive voice indecisions about how the lands they occupy and the naturalresources on which they depend will be utilized.31 Moreand more, they frame this demand by insisting on theopportunity to grant or withhold their consent to projectsthat directly affect them.32

The failure to respect a communitys right to FPICmay produce a strong public backlash, in the form ofblockades, mass mobilizations, strikes, consumer boycotts,and litigation. In extreme cases, such conflict can leadto civil strife, violence, and human rights abuses. Forexample, efforts by the Philippine government in the

1980s to develop large infrastructure projects in territoriesindigenous peoples had occupied for centuries led torevolt, public campaigns, and significant project delays.Ultimately, the Indigenous Peoples Rights Act of 1997 waspassed as a result of these and other organized movements.

For project sponsors and their financiers, communityopposition can introduce significant risks. At the projectlevel, these include:

reduced access to capital; increased construction costs and delays;

reduced access to critical project labor and materialinputs; operational delays and increased production costs; reduced demand for products (particularly name brand

consumer items); and

increased costs of post-hoc mitigation of environmentaland social impacts.

Community opposition can also cause the governmentto revoke permits, impose fines, or even halt operations.Moreover, community resistance can have adverse impactson corporate operations beyond the scope of an individualproject, including negative impacts on stock prices,

brands, and reputations, and greater difficulty in securingfinancing, insurance, and community cooperation infuture projects. Each of these risks is discussed below.

Financing Risks

It may be far more difficult for project sponsors toattract cosponsors or to secure financing for projectsthat are opposed by their host communities. Investorsand financiers may delay their involvement, requiremore lucrative terms as compensation for the additionalrisks, or simply decline to participate at all. For example,Manhattan Minerals was forced to abandon its plans fora mine in Tambogrande, Peru, after intense communityopposition prevented the company from bringing a majorpartner into the venture.33 Intense local opposition to aproposed US $1.7 billion paper mill on the ArgentinaUruguay border recently prompted ING Group towithdraw its consideration of financing the project.34

Construction Risks

Community opposition can significantly increase therisk that the project sponsor will not be able to completethe project on time, on budget, or at all. Blockades, work

stoppages, and lawsuits can cause lengthy delays in thedesign, siting, permitting, and construction of the project,and can significantly raise the costs of construction.Construction delays can result in increased financecharges and contractual penalties for failure to deliveroutputs. More important, major increases in up-frontcapital costs and delays in realizing expected revenuestreams can significantly impact the projects expectedfinancial rates of return. For example, indigenous peopleson the island of Mindanao in the Philippines waged acampaign against the Philippine National Oil CompanysMt. Apo geothermal plant, which delayed the project (andits revenues) for many years.35

Operational Risks

Community opposition can also increase the risks thatthe project sponsor will not be able to produce a sufficientquantity of output, or sell it at a sufficient price, to justifythe investment. Through blockades, protests, workstoppages, and litigation, community opposition can


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unsafefor (particularly expatriate) managementpersonnel to reside in the host community. Finally,community complaints can force the sponsor to incuradditional costs to secure its facilities and develop andimplement politically acceptable post-hoc environmental

and social mitigation plans.

A particularly vivid illustration of how communityopposition can disrupt operations occurred at Ro TintosPanguna copper mine in the Papua New Guinea provinceof Bougainville. One of the most productive copper minesin the world at the time, Panguna was forced to close in1989 after accumulated local grievances with the minehelped ignite a secessionist civil war that claimed thelives of thousands of Bougainville residents. It has neverreopened.36

Reputation RisksReputation risk is the current and prospective impacton earnings and capital arising from negative publicopinion.37 Though difficult to quantify, communityopposition to a project can have direct and potentially far-reaching impacts on the reputations of project sponsorsand their financiers. By partnering with media-savvytransnational advocacy networks, aggrieved communitiescan alert the global public to the impacts of a companysprojects, even in the most remote corners of the world.As a result, the sponsor of a project that faces significantcommunity opposition may find that other communities

become much less willing to host its projects. Andcompanies with global operations and high consumervisibility may find that their consumer brand identitycan quickly be tainted by allegations that the company iscoercive, predatory, and indifferent to social concerns. Forexample, in the early 1990s the threat of an internationalconsumer boycott forced Scott Paper to abandon its plansfor a US $635 million Indonesian eucalyptus plantationand pulp mill that may have displaced thousands oflocal residents and decimated huge swaths of tropicalrainforest.38

Corporate RisksSponsors of projects that run into trouble due tocommunity opposition can suffer a variety of collateralimpacts on their balance sheets and their other operations.Reduced profitability and asset values of a project candecrease the companys stock valuation, particularly forless-diversified companies. Manhattan Minerals, forexample, suffered a huge decline in its stock market

raise production costs and impede the projects abilityto bring the product to market. And through boycotts oradverse publicity, it can reduce the demand for a projectsoutputs. Similarly, community opposition can also

increase the risks that the project will not have consistentaccess to sufficient, high-quality inputs for its operations.Community blockades can inhibit access to criticalecosystem service inputs, such as water supplies or timberreserves. And opposition can reduce the project sponsorsability to attract and retain qualified local workers, caninduce strikes and work stoppages, and can raise tensionsto the point where it becomes uncomfortableor even

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Host Country Political Risks

Even if the government does not take action against aprojects sponsors, community opposition can createother political risks in a host country. Most importantly,similar grievances in different communities in a countryor region can accumulate to the point where the businessenvironment for a company or industry is degraded. Forexample, despite continued government support for theindustry, the local political culture of Peru has becomedemonstrably less accommodating to mining projects as aresult of a number of high-profile conflicts between minesand their host communities.

RECOGNIZING THE BENEFITS

Aside from risk reduction, invoking a successfulcommunity consent process can produce significant

benefits for the company, the region, and theenvironment. Community support can save time, whichcan yield significant monetary benefits.

For a large-scale infrastructure project, the total costsof engaging the affected communities and gainingtheir consent are likely to be extremely small relative tothe total project costs. Moreover, a proven track recordof harmonious community relations can make futureinteractions with government regulators much easier, andcan help a project sponsor win public contracts for otherprojects. Thus, SPEX used its success with Malampayato help convince the Philippine government that it was a

suitable sponsor for a related projectthe constructionof an onshore pipeline from its natural gas refinery inBatangas to two nearby gas-fired power plants. SPEX wasable to secure the support of the Philippine governmentfor this project, even before it obtained the US $5 millioninvestment needed it. Shells success also has facilitatedthe companys efforts to develop new projects elsewherearound the world.

valuation after the Peruvian government terminated itsoption to develop the mine when it could not find a majorpartner to cofinance Tambogrande.39 In addition, theperception that a company cannot earn the support ofhost communities can adversely affect its ability to raise

financing for future projects, or to negotiate acceptableterms and premiums for project insurance.40

Host Government Risks

Host governments are typically critical players in thedevelopment and operation of large-scale projects. Intheir permitting and regulatory roles, host governmentsoften have the primary responsibility for addressingadverse impacts on affected parties and ensuring thatmutually beneficial outcomes are reached. They also havethe primary role in creating the enabling conditions foreffective FPIC processes. In many cases, however, hostgovernments lack the capacity or political will to fulfillthese roles effectively. For example, governments in someinstances conclude that the national interest in a projectshould override local concerns, and are not interestedin ensuring that the concerns of all stakeholdersare addressed. In these circumstances, the affectedcommunities often hold the project sponsors responsible.Thus, in Bougainville, at least some of the antipathy ofthe residents toward the Panguna mine was caused bythe insensitivity of the Australian colonial government tothe land claims of the local residents at the time the minewas being developed. The local landowners believed that

the Australian authorities did not seek their permissionto develop the mine. Instead, they imposed Australianproperty law, which granted the rights to subsurfaceminerals to the government, in contradiction to traditionalproperty rules.41

Moreover, communities that are aggrieved by aproject may petition their government for redress, andtheir advocacy efforts may induce the government tosignificantly alter the way in which it discharges itsregulatory functions. In response to local concerns,a government may commence enforcement actionsor impose civil or criminal penalties on sponsors,

tighten regulatory or statutory requirements, orwithhold or withdraw necessary permits and licenses.Host governments may also void their commercialarrangements, withhold payments, or even nationalize, orrenationalize, private assets.


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C A S E S T U D I E S

Projects that generate significant public oppositionare, by definition, highly controversial, and the reasons

for conflict are often in dispute. To ensure objectivityin describing the relevant events, we tried to solicit thehelp of the project sponsors or other key proponents indeveloping the case studies. However, with the exceptionof Shell Philippines in the Malampaya case, cooperationwas not forthcoming, despite our best efforts. Shellsparticipation enabled us to visit project sites, reviewproject documentation, and interview a number ofsenior corporate officials. The other case studies did notbenefit from such accessthey were limited to deskreviews of primary and secondary source materials. Tomaintain balance in those cases, we emphasized publicmaterials produced by the project sponsor or financiers,

independent third-party investigators or dispute resolutionmechanisms, and well-respected news sources.

This section illustrates the business case forobtaining the consent of host communities

by considering several case studies. First, itexamines a more positive case study, the Malampaya gasproject in the Philippines, in which the project sponsoravoided significant costs during project planning andimplementation through early and consistent attention toFPIC issues. Then it considers three cases in which thesponsors suffered significant adverse business impactsdue to the failure to secure or maintain communitysupport: (1) the Esquel gold mine in Argentina, (2)the Samut Prakarn Wastewater Management Projectin Thailand, and (3) the Yanacocha gold mine in Peru.These cases highlight some of the myriad ways in whichcommunity opposition can impede the developmentor

compromise the profitabilityof large-scale, high-impactprojects. Based on publicly available information, eachcase study attempts to quantify the financial impacts thatcommunity opposition (or its avoidance) has had on theproject and its sponsor. In addition, this section includesseveral boxes that highlight other aspects of the businesscase for FPIC that are not captured in the case studies.

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CASE 1

MALAMPAYA DEEP WATER

GAS-TO-POWER PROJECT,THE PHILIPPINES

Figure 1). First, it built a concrete gravity structurethe

foundation of the offshore platformin Sitio Agusuhin,Subic Bay, and Zambales. Second, SPEX installed theconcrete gravity structure and platform at the offshoreextraction site northwest of Palawan province. Third,SPEX laid the 504 kilometers of offshore pipeline underthe waters around Palawan and Mindoro Islands.47 Fourth,SPEX constructed a natural gas refinery plant to processthe extracted gas in Batangas City.

SHELLS INTEREST IN OBTAINING COMMUNITYCONSENT

According to SPEX, Malampaya was the first project in thePhilippines to actively undertake a community consentprocess as part of its Environmental Impact Study (EIS),even though it was not explicitly required to do so. Shellsinterest in engaging affected communities and obtainingtheir consent was influenced by several political, legal,and business-related considerations. First, Shell beganto develop Malampaya in the mid-1990s, at a time whenits record of environmental and social stewardshipwas being sharply criticized and intensely scrutinized.Activists had been criticizing Shell for its environmentaland human rights record in the Delta region of Nigeria,and for its controversial decision to dispose of the Brent

Spar oil terminal in the North Sea. Public reaction toShells conduct led to organized campaigns, internationalprotests, and consumer boycotts that damaged thecompanys reputation and cost it millions of dollars inrevenue.48 Chastened by the public backlash, Shell beganto develop a set of sustainable development policies andto rethink its approach to community engagement.49The company stated: [W]e have learned that for some

The Malampaya Deep Water Gas-to-Power Project

(Malampaya)a US $4.5 billion joint venture ofthe Royal/Dutch Shell subsidiary Shell PhilippinesExploration (SPEX), Chevron Texaco, and the PhilippineNational Oil Company (PNOC)is the largest industrialinvestment in the Philippines.42 The project extractsnatural gas from below the seabed off the coast of PalawanIsland and transports it more than 500 kilometers byundersea pipeline to a natural gas refinery plant inBatangas City on Luzon Island.

Malampaya began commercial operations in January2002. With total reserves of 3 trillion cubic feet, the

project is expected to produce 400450 million cubic feetof gas per day for over 20 years.43 The refined gas fromthe Malampaya project feeds a separate pipeline projectthat supplies three gas turbine power plants in Batangasprovince. These plants are expected to supply Luzon witha total of 2,700 megawatts of electricityover 30 percentof the Philippines total power demand.44

SPEX and ChevronTexaco each owns and financed 45percent of the project, and PNOC owns and financed theremaining 10 percent. The project sponsors expect to earnUS $6.7 billion from MalampayaUS $3 billion eachfor SPEX and ChevronTexaco, and US $0.67 billion for

PNOC.45

In addition, the Philippine government is expectedto earn at least US $10 billion through a service contractthat entitles it to 60 percent of net project revenues.46

SPEX operates and manages the project on behalf ofits partners, and was responsible for bringing the projectonline. Construction commenced in 1998 and entailedlarge-scale operations in four different provinces (see

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decisions, [public] approval is as important as theopinion of experts or the official consent of authorities.50Shell designated Malampaya to be the first project toincorporate this new approach.

In addition, SPEX was well aware of the adverseaffects of community opposition on other projects in thePhilippines. In 1983, Shell Philippines had constructed a

gas terminal facility in Bian, Laguna Province, withoutconsulting the local communities. Even after the projecthad secured environmental approval, local oppositionmounted until the mayor of Bian refused to approveother permits necessary for the continued operation ofthe facility. As a result, the project experienced lengthydelays and closed down entirely after a year in operation.51Similarly, other high-profile clashes between project

sponsors and their host communities in the Philippines,such as the Benguet Antamok Gold Operation (BAGO)pit mine,52 the Calaca II Coal Fired Power Plant,53 and theMount Apo Geothermal Project54 led SPEX to recognizethe advantages of securing public acceptance.

Finally, the regulatory requirements of the Philippinegovernment with respect to community participation wereevolving as Shell was planning the project. When Shellfirst approached the Department of Environment andNatural Resources (DENR) to identify the requirementsfor its EIS in 1995, the Philippine Environmental ImpactAssessment law did not mandate community engagementas part of the EIS process.55 But shortly thereafter,the law was revised to require public participation. In1996, DENR issued guidelines that defined publicparticipation as a transparent, gender sensitive, andcommunity-based process involving the broadest rangeof stakeholders, commencing at the earliest possiblestage of project design and development and continuinguntil post-assessment monitoring, which aims to ensuresocial acceptability of a project or undertaking. Theguidelines defined social acceptability as the resultof a process mutually agreed upon by the DENR, keystakeholders, and the proponent to ensure that the validand relevant concerns of stakeholders, including affectedcommunities, are fully considered and/or resolved in thedecision-making process.56 In 1996, however, socialacceptability did not necessarily require communityconsent; this came later, at least for indigenous peoples,

with the passage of the Indigenous Peoples Rights Actof 1997. Box 3 provides the Administrative Order in thePhilippines that guides obtainment of community consentnecessary for environmental licenses to be issued fromthe Environment Ministry.

SHELLS APPROACH TO COMMUNITYRELATIONS

Shell began engaging community stakeholders in 1996,about two years before project construction began. Itsoutreach efforts were conducted through two Shellentities: (1) SPEX, the chief proponent of the project;

and (2) the Pilipinas Shell Foundation, which includedthe social development arm of Shell Philippines (theShell Foundation or PSFI)57 and the External Affairs(EA) Division of Shell Philippines, the parent companyof SPEX.58 SPEX was assigned to deal with all the issuesrelated to the environment, including permitting, whilethe foundation took charge of all social developmentissues directly and indirectly related to the project. The


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The process of obtaining community consent and continuingto work with communities is complex and difficult. It is not

always easy to measure or assess whether it is working well.

To help ensure that the process is succeeding, in 1996 thePhilippine Government issued an administrative orderrequiring project sponsors to complete a matrix that discussesall community concerns and how they are being addressedby the sponsor. Government approval of this matrix was aprerequisite to obtaining an environmental license from theEnvironment Ministry.

The matrix identifies six different areas: ecological andenvironment soundness of the proposed project, effectiveimplementation of the public participation process, resolutionof conflicts, promotion of social and intergenerational equityand poverty alleviation, and proposed mitigation measuresfor adverse impacts and measures for the enhancement ofpositive impacts on people. For each of these areas, it suggestsindicators or other evidence that can measure whether thearea has been successfully addressed.

Ecological and Environmental Soundness of the Proposed

Project

Examples of proof that this criterion has been met caninclude:

Risk Management Plan, if applicable;

Environmental Management Plan, with the commitment ofthe proponent to implement the proposed measures;

municipal, barangay (township),or provincial resolutionendorsing the project;

endorsement letters from local nongovernmentalorganizations (NGOs) and community leaders;

signed contract between the proponent and projectcontractor(s), incorporating all of the mitigating andenhancement measures in the terms of reference or scopeof work of the contractor(s); and

list of detailed specifications of raw materials andequipment to be used in the project, from the differentsuppliers showing that they are the product ofenvironmentally friendly processes and substances.

Effective Implementation of the Public Participation Process

Examples of proof include:

scoping report that has been signed by all key parties andstakeholders representatives;

matrix showing the manner of inclusion of the commentsand suggestions of stakeholders in the various aspects ofthe EIA; and

stakeholder letters signifying interest to participate in themonitoring of the project and/or implementation of theEnvironmental Management Plan.

BO X 3 PHILIPPINES MATRIX ON COMMUNITY CONSENT

foundation also played an ongoing role in managing socialdevelopment projects in the communities affected by theMalampaya project.59

Shell employed four strategies to gain communityconsent: (1) community outreach and interviews with keyopinion leaders and decision makers; (2) informationdissemination, education, and communication activities;(3) perception surveys and participatory workshops tointroduce the project and validate initial survey results;and (4) participatory involvement in the formulationof environmental management plans.60 As required byPhilippine law, Shell held town hall meetings to providea forum for Shell to hear and respond to communityconcerns, and public hearings were also held to presentand discuss the results of the EIS report.61 Perception

surveys conducted after the public hearings and townhall meetings showed that between 72 and 84 percent ofrespondents approved of the project.62

COMMUNITY CONCERNS AND SHELLSRESPONSE TO GAIN CONSENT

Mindoro. At the beginning of the engagementsbeforetown hall meetings and public hearingsmanycommunity members opposed the project.63 Opponentswere concerned that the installation and operations ofthe offshore pipeline would have adverse environmental,health and safety, and economic impacts. The strongopposition in Mindoro also stemmed from previousnegative experiences with other extractives projects.Protests were held in Mindoro, and commentators on

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Resolution of Conflicts

Examples of proof include: Memorandum of Understanding between the parties to the

dispute;

negotiated agreements on conflicts formalized through amemorandum of agreement between the proponent, thegovernment, and legitimate stakeholders;

Resettlement and Compensation Plan, if applicable; and

Social Development Program, if applicable.

Promotion of Social and Intergenerational Equity and Poverty

Alleviation

The project should promote social equity and answer thefollowing questions:

How could the benefits and burdens of the project bedistributed among the different groups and classes ofpeople affected?

How could the project benefits be distributed moreeffectively among the poorer people in the intendedbeneficiary population?

What might be done to lessen the burdens on projectvictims or benefactors, especially poor people?

Are gainful employment and alternative sources of

livelihood provided, particularly when vast tracts of

agricultural lands and/or fisheries are affected due toproject operation?

Do livelihood programs/projects involve women and othervulnerable groups?

Proposed Mitigation Measures for Adverse Impacts and

Measures for the Enhancement of Positive Impacts on People

The project should formulate or develop a mutually agreed-upon compensation scheme for resettled households.

The project should respect and preserve the aesthetic valueand cultural heritage of affected communities.

Examples of proof include:

endorsement letters from the local NGOs and politicians;

municipal or barangay resolutions endorsing the project;

an Environmental Management and Monitoring Plan thatincludes a Social Development Program, Compensationand Resettlement Plan, and other relevant plans and thatis signed by the proponent agreeing to implement andstrictly abide by all of the proposed measures.

References

DENR Department Administrative Order No. 96-37, PhilippinesDepartment of Environment and Natural Resources (1996).Personal interview with Tony La Via, former member of thePhilippines Department of Environment and Natural Resources.

BO X 3 CONTINUED

the local radio stations voiced their vehement oppositionto the project.64 In response, the PSFI group assigned toMindoro held additional town hall meetings to addresspublic concerns. Shell also conducted an intensiveinformation, education, and communication campaign,including radio advertisements and an informationexhibit with educational videos displayed in the city hall.65These efforts succeeded in allaying the environmentaland safety concerns of the Mindoro stakeholders. Manyof the stakeholders, however, were also concerned thatthe project would produce no direct benefits, since thepipeline would not directly pass through Mindoro. Theytherefore requested that Shell provide start-up funding formicro-finance and livelihood loans. Shell agreed to provideMindoro a grant of about US $1 million (Php 50 million),

which was distributed through seven Mindoro NGOs thatpresented project proposals and met PSFI grantee criteria.

Sitio Agusuhin. SPEX wanted to build a massive drydock in Sitio Agusuhin in which to construct the concretegravity structure for the platform. However, about 142families of fisherfolk lived at the proposed site of the drydock. Although many of these residents had lived there alltheir lives, the Philippine government considered themto be illegal squatters, since the land on which they livedwas part of a U.S. military installation. The governmentexerted political pressure to expedite their eviction,and required them to abandon their homes with only afew weeks notice. Predictably, the community reactednegatively to the governments decision to remove themin such a fashion. In the ensuing conflict, both the World


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Bank and the local Roman Catholic Church intervened onbehalf of the community to ensure that they were treatedappropriately.66

The Shell Foundation was able to persuade the

community to relocate beyond the perimeter of thefacility by offering a package of monetary compensationand social programs. Some residents chose to leave thearea entirely, while others remained near their formerhomes in Agusuhin. All of the families that were resettledwere compensated according to the local governmentassessors valuation of their dwellings. Several membersof the community, however, were dissatisfied with thecompensation package.67 These residents organizedprotests that threatened to delay the project. In response,the Shell Foundations community officers entered intonegotiations with the aggrieved parties. The residentssought greater compensation for their lands, andpreference in Shells hiring of the 3,000 workers requiredto construct the gravity structures. In addition, thecommunity was concerned that Sitio Agusuhin wouldexperience a boom and bust cycle, as it had when theU.S. Navy left its base in nearby Subic Bay. It thereforeviewed the project as an opportunity to build a moredurable base of development for their community thana short-term construction project could provide. Towardthis end, the community requested that Shell providesupport for a high school, medical and dental services,employment and microfinance projects, and assistance inwriting up an agreement with the local government for

protection from future projects to be undertaken in thearea.

While Shell agreed to most of these requests, it refusedto increase the compensation package, insisting thatcompensation be based on the assessors valuations.Problems also arose in Shells implementation of someof its commitments. For example, a microfinance loanprogram was only set up toward the end of the Agusuhinconstruction project. The delay in the programsimplementation concerned some residents, who believedthat Shell did not leave enough time to build sustainablealternative livelihoods after the project. Moreover, SPEXs

agreement to hire local workers was complicated by theshortage of residents with the requisite constructionskills. The foundation worked to address this problemby training local residents in necessary skills, such aswelding and masonry. Most of the women, however, didnot undergo training, and were employed in cleaning andclearing activities. In the end, the majority of the residentswere employed on a full-time basis.

Ultimately, the Agusuhin community was persuadedthat the project could bring economic development to thearea, and signed a memorandum of agreement acceptingthe compensation offer.68 Some dissatisfaction over thecompensation package persists, as some community

members maintain that they did not understand how theassessment valuation was carried out.

Batangas City. In 1999, PSFI facilitated the formation ofthe alliance of affected barangays (townships) in Batangas,which they named TALIM Councilan acronym forthe communities of Tabangao, Ambulong, Libjo, SanIsidro, and Malitam. The council was formed to enablethe different communities to unite in their commonconcerns and problems with regard to the Malampayaproject. The council facilitated meetings of local leaders todiscuss common problems and helped to resolve disputesbetween Shell and affected community members.The council also communicated Shells response to itsconstituents.69

In Batangas City, ongoing concerns about the negativehealth and environmental impacts of an existing Shell oilrefinery caused some local residents to be skeptical of theMalampaya project. SPEX and PSFI asked the communityto focus on issues relating to the Malampaya project, anddid not address the issues associated with the other Shellprojects in its community engagements. Within theseparameters, the communities sought to ensure that therewould be priority hiring from among its residents, and

that appropriate safety measures were in place.70

Almost all of the employment opportunities wereavailable during the construction phase. Once therefinery was brought online, it needed only about eightpeople at a time for operation. To mitigate this boom-and-bust cycle, PSFI provided residents with training foremployment opportunities at other companies located inBatangas City that need to hire staff with certain skills,such as animation and electronics. PSFI also set up a jobplacement program to help the trainees find work at othercompanies in need of their new skills.71

Not all of the affected communities in Batangas Citywere satisfied with the substantive outcomes of theirengagements with Shell. But in general, most of thecommunities believed that Shell had addressed their mostimportant concerns regarding employment, alternativelivelihood, and health and environmental impacts.Recently, however, plant safety has become a concern.Although safety training sessions have been conducted


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for the communities, there is continued apprehensionwith regard to whether this training is adequate. Somecommunities have requested more training, alongwith additional security to watch over the complex andpipelines. According to the communities interviewed

in Batangas City, these requests are still pending Shellsresponse and action. Local community leaders, whilegenerally satisfied with their relationship with SPEX andPSFI on the Malampaya project, still express their viewthat Shell needs to be more transparent and accessible.72

Offshore Pipeline Route. Three options were consideredfor the offshore pipeline route during the initial stagesof the project (see Figure 2). Two options would haverouted the pipeline entirely offshore; the third, least-expensive option, would have crossed Mindoro Island.73At first, the project sponsors preferred the third optionfor cost reasons. But as a result of initial environmentalassessments and informal community interviews,Shell learned that the overland route through Mindorowould traverse and heavily impact some areas of richbiodiversity, and that one of the offshore routes wouldcross the ancestral waters of the indigenous Tagbanuatribe. Initial interviews with community membersraised the environmental and social impacts of the otherroute options. Shell ultimately rejected these routes infavor of a mainly offshore route that avoided the mostsignificant environmental and social impacts of the othertwo options, and therefore averted potential communitypressure in the affected areas.74 This route, however, was

three times more expensive than the other two options.75

When Things Go Wrong. SPEX accounted for communityconcerns as they arose by revising its public engagementplan on an ongoing basis. For instance, SPEX initiallyfailed to engage the Pearl Farmers Association locatedaround the project area in Palawan. Shell was aware ofthe association, but did not consult its members becauseShell believed the farmers to be operating outside theprojects zone of impact.76 The pearl farmers were upsetby Shells failure to engage them, and their relationshipwas initially contentious. They expressed their oppositionby challenging Shells EIS results with respect to the

anticipated impacts on their pearl farm business duringthe public hearing. They pointed to possible impacts fromnoise pollution and the environmental consequencesof leakages. In response, Shell revised its engagementstrategy and met with the association to explain andresolve the issues its members had raised during thepublic hearing.

Similarly, the SPEX team originally failed to informlocal fisherfolk that several fish-aggregating devices,locally known aspayaos, would be destroyed during thelaying of the offshore pipeline around Mindoro. As aresult, the fisherfolk threatened to impede the pipe-layingactivities in the area. Shell then met with the 50 affectedfisherfolk and compensated them for the damages thatthey suffered, which amounted to US $35,700 (Php2 million).77 No delays occurred due to communityopposition.

MAINTAINING COMMUNITY CONSENTDURING IMPLEMENTATION AND OPERATIONS

Shell recognized that the risks of community oppositioncan also arise after the project has been implemented, andendeavored to maintain and cultivate its relationships with


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the affected communities during project operations.78 Asa condition for receiving environmental clearance fromthe government for the project, Shell agreed to formmultiparty monitoring teams (MMTs) composed of localgovernment representatives, NGOs, community leaders,

provincial and community environmental officers, andother stakeholders to monitor the environmental andsocial impacts of the project during its implementation.In 2000, MMTs for the different provinces were set up.79While the memorandums of agreement for the MMTs didnot require Shell to ensure community satisfaction andconsent, the MMTs still potentially provide an importantmeans for the public to participate in overseeingimplementation and operations, and to raise concerns asthey arise.

In addition, the Shell Foundation has played an activerole in ensuring ongoing acceptance of the project duringoperations. PSFI meets with community representativesmonthly to provide updates on project operations andimpacts, and to allow the community to raise concernsand grievances.80 It also operates sustainable developmentprograms in each affected province that provide servicesreq

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