Francisco Acuña
CEO & Founder
InTrust Global Investments
View from the Top

Managing Relations with Indigenous Communities

Wed, 02/19/2014 - 12:41

Q: What work is being done to improve the impact that renewable energy projects have on local communities?

A: Development finance institutions are focusing strongly on how to bring communities on board as stakeholders. They are considering the best ways of involving them as real partners, and the best way of doing that is clearly not through royalty payments.

Q: What does making them partners mean in practice?

A: There are a lot of guidelines to follow. We have seen companies that have shot straight in, negotiated with people that were not the real community leaders but were commissioners that were in office for three years. Negotiations were often poorly managed and did not fully involve investors and developers. Companies have offered the communities a royalty payment, no matter what happens with the company. The problem in practice is that the indigenous community members feel robbed if the company is doing well. This makes them react and stop operations. The company goes down, but they do not care because they are getting their royalty payments.

Q: How could a new model help to overcome these obstacles?

A: The new model dictates that you do not buy the land in question, but instead you negotiate for the indigenous communities to give you the land as an equity contribution. This is a different type of negotiation, because it gets them involved in the management process. Naturally, they will not be managing the wind farms, but this arrangement will give the next generation the option of buying part of the company. This process has worked in Canada, Europe and Australia. It is simply becoming too expensive to create any such infrastructure project in Mexico without the involvement of local communities, and the largest hydropower plant in the western hemisphere is stopped in Brazil for that very reason. Enabling these communities to become partners results in greater government support for your project than for your competition, because of the positive social impact it implies. We are also showing the value for the community of having their kids working in renewables, rather than on a factory line. The difference with our fund is that we get involved as an asset manager.

We have partners that have a long track record of doing small, clean energy projects and working well with the local communities. When we go and negotiate with the communities, we want a mutually trusted third party to come and reassure them that we are telling the truth. This ensures that the communities fully understand what they are getting into. This was not the case for some projects in Oaxaca - the relationship between these communities and the nature that surrounds them is not going to be overridden by a local developer negotiating with them over a couple of beers and giving them a pick-up truck.

The market is shifting away from these types of negotiations. Chevron being sued for billions in Ecuador after being accused of causing a huge environmental crisis created a huge discussion. We are being very pragmatic by saying that we can make a lot of money doing things differently. It might take more time, but more money is there to be made in the long-term. However, few models like this are currently being implemented in Latin America.

Q: What do the communities get in return for cooperation with the development of a wind farm?

A: It depends on what they provide. They can invest with land and capital or they can invest only with land. The problem with the latter option is how the land is valued. For example, Baja California is great for wind but the land itself is worthless. There is the need to create real value for that land in line with a 200MW project. This opens up some very interesting opportunities. You have to value the land according to the value of the project, its capacity and the amount of money needed to operate compared to the size of the land. That value can be calculated to percentages of between 5% and 15%. If forestry is involved that percentage can go up to 30%, as the communities are directly using the forest. However, with this combination of factors, the social return on investment goes up, which then allows you to monetize. You can show investors that the communities are getting clean water, that young people are working on the wind farm and that entrepreneurial value is being created. Some investors, such as pension funds, are particularly amenable to such evidence of community relations.