Benefit Sharing - Barry Trembaths Articles and Stories

Hydropower Benefit Sharing – An Update

Barry P. Trembath Federica Cimato

Independent Consultant Independent Consultant

Introduction

At the Hydropower and Dams conference in Berne in 2000, Barry Trembath presented a paper on benefit sharing which brought together work he had commissioned in the World Bank: Sharing and Apportioning Rents in Hydropower Projects and observations concerning the Shuikou hydroelectric project in China for which he was theWorld Bank task manager. At that time, the concept of benefit sharing was in its infancy with pioneering examples in South American countries such as Colombia and Brazil and Canada, primarily Quebec. Even in these areas there was more emphasis on transferring a portion of hydropower revenues to local jurisdictions rather than to communities or individuals. Over the subsequent years Trembath continued to develop and refine the original theme, bringing in examples from other places in the world, many of them presented at Hydropower and Dams Conferences. An updated presentation was made at the Beijing Conference on Sustainable Hydropower Development sponsored by China National Development and Reform Commission (CNDRC), United Nations Department of Economic and Social Affairs (UNDESA and the World Bank. Michael Cernea, who might be considered the father of World Bank resettlement policies, attended the session at which this paper was presented and suggested that with some elaboration, the material would provide the basis for a book that he was editing together with Hari Mohan Mathur: ‘Can Compensation Prevent Impoverishment’. The chapter was written entitled: ‘Beyond Compensation – Sharing of Rents arising from Hydropower Projects’, completed shortly before Trembaththe retired from the World Bank in 2005. The book was published by Oxford University Press in 2008 (reference 1). In the same volume was a chapter by Dominique Egre and others who had also been studying benefit sharing since 1999, including work that had been commissioned by the World Bank (reference 2)

Since then, benefit sharing in some shape or form has become the ideal to which many project owners and financiers aspire and one can now find many references to benefit sharing in the literature and on the internet. This paper attempts to bring together and summarize the main contributions to this substantial body of literature. However, in reviewing the literature, it became apparent that examples of ‘on the ground’ benefit sharing are few and far between. Therefore the examples discussed in the literature are supplemented by those in which both authors have been involved and updating of previous case studies where information is available. Understandably, given the long gestation period of hydropower projects some of the case studies relate to relatively recent hydropower projects and others relate to projects currently in preparation. It is hoped in presenting this material to give some context to the current focus on benefit sharing in comparison to the absence of emphasis at the beginning of the last decade.

The paper starts with a definition of’ benefit sharing as used in this paper, followed by some historical context mentioning where the hydropower development community has come from since the pre 1980s to where it is now. Section 3.0 presents the rationale for benefit sharing including a recap of the concept of rent in hydropower projects. Section 4.0 provides a brief summary of the 2005 paper and Section 5.0 results of the current literature. Section 6.0 presents international examples, and Section 7.0 discusses various approaches to benefit sharing which includes the authors’ recent experiences in this regard. Section 8.0 concludes the paper with discussion on some commonalities and the authors’ views in respect to these aspects.

1.0 Benefit Sharing – A Definition

Economic benefits can accrue from any development project whether in infrastructure, health and education or institutional development. However, in the context of hydropower development, the term ‘benefit sharing’ refers to a different concept, in some cases meaning different things to different people. In this paper we deal with ‘benefit sharing’ as sharing of the economic rent generated by hydropower projects. This rent accrues when a hydropower project is deemed less expensive, in present value terms, than the least cost alternative. We refer to ‘benefit sharing’ as systematic efforts by project owners (private and/or Governments developers) to redistribute (share) the rent(the net income) in the form of monetary and ‘non-monetary benefits to which a value can be attached’ beyond obligatory mitigation and compensation measures. Thus, we make the distinction between rent sharing between jurisdictions, and benefit sharing where a portion of the hydro rent passes directly to communities or individuals. The concept of ‘rent’ originated in the field of economics where Ricardo introduced it in a book published in 1817. However, since economic analysis is a carried out from the viewpoint of governments and nowadays even government owned utilities thank in financial terms, it is probably best to define it in those terms where an appropriate definition would be ‘unencumbered cash flow’ since this is the amount available for distribution to shareholders.

2.0 Background – The Historical Context

Until the 1970s there was no thought of benefit sharing; in fact the opposite attitude existed even in some developed countries. The existing literature concerning negative aspects of hydropower projects is vast but since this paper focuses on the present and the future, not too much space will be devoted to the past.

In the past, resettlement was not only involuntary, in some cases it was forced, not only in developing and in communist countries but also in developed countries. In developed countries in projects such as the Columbia River Scheme in British Columbia (Canada) and the Snowy Mountains Scheme (Australia), at least some effort was made to provide appropriate compensation. However, in developing countries, the impact of hydro development on local communities was worse, in most cases due to the lack of legislation and social safeguards to protect those affected by the project – typically vulnerable communities living in remote areas. An astonishing case is that of the Kariba dam in the Kariba Gorge of the Zambezi river basin between Zambia and Zimbabwe, built in 1950s and then one of the largest developments in the world. The development required the resettlement of 57,000 people, who – according to the literature – were loaded on trucks and forced to relocate (reference 3). In 1993, the anthropologist Thayer Scudder, who had studied the relocated communities since the late 1950s, reported that most of them were still ‘development refugees, living in less-productive, problem-prone areas, some of which have been so seriously degraded within the last generation that they resemble lands on the edge of the Sahara Desert.’ More recently, Jacques Leslie (2005) (reference 4) reported on the plight of the people resettled, who were still living in miserable conditions. The World Bank included a project component in a 1997 project in Zambia aimed to benefit the Gwembe Tonga people who were the affected people from Kariba, but the component was not fully financed and the Bank was only able to secure about five million dollars of the $15.1 million dollars budget from other international financiers. Kariba therefore remains the worst dam-resettlement case in African history.

Over the years, much progress has been made away from this type of situation, but to some extent the old ways overlapped with the new ways, and positive change has not accrued in the same way across countries. Paradoxically, in some countries agreements with indigenous people were instrumental and led the way to benefit sharing. Through agreements, developers and Governments committed to establishing a long-term relationship with aboriginal and indigenous communities, legally recognising their rights as partners of hydro projects and ensuring an acceptable redistribution of the rent between the various parties of the agreements. The Story of a Treaty by Claudia Orange, first published in 1989 (reference 5) describes the process whereby in New Zealand, William Hobson, representing the British Government came to an agreement with 500 Maori leaders which led to the Treaty of Waitangi in 1840. The process of negotiating this treaty could serve as a model for discussions with indigenous people or even with communities benefiting from benefit sharing today. In China, early development of hydropower was often neglectful of resettlement. But recognizing some responsibility (if only for the sake of diffusing local unrest) the Government in the 1980s started funding ‘remaining problems’ funds, whereby a fraction of revenues was allocated to addressing outstanding issues. This approach has subsequently been institutionalized and widely adopted. However, no comprehensive feedback research appears to be available to a non-Chinese audience.

Another example where agreements with indigenous peoples came early is found in Quebec, where there was an agreement in July 1905[1] (reference 6) between the Government of Canada in the name of King Edward VII and various first nations in northern Ontario. One first nation community in the bordering Abitibi region of north-western Quebec is included in this treaty. It was also known as the ‘James Bay Treaty’ since the eastern end of the affected treaty territory was at the shore of James Bay.

When the James Bay Hydroelectric project was first mooted, Hydro Quebec and the Quebec Government had planned to proceed without consulting the affected tribes. However, these tribes (not all of whom were Cree) formed an ad hoc association and eventually the Governments of Canada and Quebec and representatives from each of the Cree villages and most of the Inuit villages signed the James Bay and Northern Quebec Agreement on November 11, 1975 (reference 7). The Agreement offered, for the first time, a written contract which explicitly presented the rights of indigenous people. This hydroelectric treaty became a model for future agreements for other communities with issues of the same nature. It allowed hydroelectric development on Cree lands in exchange for financial compensation, greater autonomy, and improvements to health care, housing, and educational services.

In most countries, or at least in developing countries, the concept of benefit sharing followed more enlightened policies on resettlement. The 2005 Trembath paper (reference 1) summarizes the process whereby the World Bank developed policies in relation to resettlement. China independently developed similar policies until eventually they – China and the WB – began to learn from each other. It should be noted that other international financial institutions and donors, such as the Asian Development Bank and the OECD, followed the World Bank in developing their own policies

3.0 Rationale for Benefit Sharing

The concept of rent sharing as such is not new; it exits in other resource extraction industries such as petroleum, mining, forestry and fishing. In the petroleum sector, the concept was used in the early 1970s when the OPEC countries wanted a greater share of the profits emanating from their resources; this thinking precipitated the first oil crisis. With regard to hydropower projects, the economic basis was first set out in a paper by Mitch Rothman in 2000 (reference 8). As far as known the first World Bank project to include any form of benefit sharing was the ‘Hubei Hydropower in Poor Areas Project’ which was approved by the World Bank Board of Executive Directors and the Governments of Hubei and China in 2002 (reference 9).

The thinking behind benefit sharing comes from the increased awareness (and documentation) that traditional policies and measures of compensation and mitigation have been inadequate, both in design and implementation. Long-term resettlement practitioner Thayer Scudder is hard-pressed to cite examples of documented successful hydro-related resettlement around the world, although there are some recent resettlement projects that have been deemed adequate. It has been frequently noted that all the good intentions and techniques used by officials and resettlement planners have not been able to make up for the inadequate legal compensation frameworks within with they worked in almost all developing countries.

The fundamental rationale behind sharing benefits resulting from hydropower lies on the existence of economic rent and the asymmetric nature of the project’s impacts on different stakeholders. The costs and benefits of hydro investment are unevenly distributed between the developers, the communities that ‘host’ the project, and the rest of the population. While the latter are likely to benefit from more reliable electricity supply, possibly at cheaper rates, the ‘hosting communities’ experience changes in the surrounding environment, physical displacement, loss of land, forest and fishing grounds, change in livelihood and food security, and in some cases, disruption of traditional practices and activities. The risk of impoverishment of the communities affected by hydro development is high, as cited by the international literature (See Cernea, 2008, reference 24) although it is worth noting that most cases of impoverishment quoted do not relate to hydropower developments but to other projects where there is no obvious rent. Benefit sharing reduces the risk of impoverishment by creating mechanisms for re-distributing the economic rent to all the affected parties in a way that is sustainable. This is not only ethically fair but also economically rational, as explained below. However, as will be discussed later in this report, it may be desirable to extend the benefit sharing project area beyond the directly affected area.

Through effective benefit sharing mechanisms, local communities become partners, supporters rather than opponents of the project – their incentives for a timely realization of the project become aligned with those of the developers. From a developer’s perspective, an effective engagement with local communities is necessary to obtain a ‘social license’ to invest, which in turn speeds up project execution by reducing delays resulting from resistance or protracted negotiations, allowing the project to be completed on time and to open up the stream of project benefits (generation and royalties) sooner rather than later; thus the project becomes socially feasible as well as satisfying the more conventional tests of technical, economic, financial and environmental feasibility. On the contrary, failing to engage with local communities can lead to opposition and conflict, possibly resulting in reputational damage for the developer, the power off-taker and the financiers, exposure to legal action and security problems as well as delays. With this is mind, benefit sharing can be seen as a cost effective way of facilitating project implementation, perfectly compatible with profit maximization.

Benefit sharing is now common and appears in most World Bank projects. To a large extent this has been fuelled by the introduction and acceptance of the Corporate Social Responsibility (CSR) philosophy and emerging methodology which many large utilities are embracing. Examples appear in Asia and the Pacific (India, Nepal, Lao PDR and Vietnam), the South Pacific Islands (Fiji, Vanuatu and Solomon Islands).

Summary of the 2005 paper (Beyond Compensation – Sharing of Rents Arising from Hydropower Projects) (reference 1)

The 2005 paper first included a lead in from successful resettlement in the Shuikou project in China. The paper concluded and recommended that reservoir resettlement should be considered in the broader context of regional development, with surplus returns from hydropower projects being used to finance a regional development strategy covering physical infrastructure, community infrastructure and economic restructuring to capitalize on the project or to help mitigate its negative impacts. After summarising the theoretical basis for rent sharing (as developed by Mitch Rothman (reference 8), the paper made the case for hydro rent to be shared by hydropower plants on border rivers, for monopsomies, or where perceived ownership by local governments or communities is different to legal ownership. The paper then discusses a rationale for benefit sharing. Several examples of both rent and benefit sharing were provided in the paper divided into several categories or benefit sharing models. These were: post resettlement assistance, tax sharing and equity sharing. Finally the paper gave an example of retroactive benefit sharing in the case of the Columbia Basin Trust in Canada. References to all of these case studies are provided in reference 1.

5.0 International Literature since the 2005 Paper

During the preparation of this paper, the authors considered what should be covered. There have been several studies, papers and workshops dealing with benefit sharing, attesting to the increasing awareness of the need to include this as a necessary (rather than desirable) element of a best practice hydropower project. Many of these papers do not add to what is already known by professionals who specialize in this field. However, it was agreed that the major efforts should at least be briefly discussed, but more emphasis would be given to cases where some sort of benefit sharing was already being carried out, where updates were available on earlier projects, where the authors had specific knowledge and finally on current initiatives underway. There are three major contributors to the literature: Dominique Egré, Lawrence (Larry) Haas and the World Bank (via different authors). Rather than discuss individual papers, contributions from these three authorities have been grouped.

Dominique Egré dedicated part of his career to studying benefit sharing. In 2000 he co-authored a paper on the successful case of involuntary resettlement for the Urrá 1 Project in Colombia (reference 10); then in 2002, co-authored a desk study report for the World Bank specifically on benefit sharing, which led to his publication for UNEP in 2007 (reference 11), a compendium of relevant practices on benefit sharing. Egret’s 2007 publication is comprehensive and even today represents a useful tool for benefit sharing practitioners: it clarifies the rationale behind the need for benefit sharing, proposes some categories for benefit sharing mechanisms, and presents some case studies in detail. The author made a useful distinction between activities falling under the ‘compensation policy’ framework (such as livelihood compensation and enhancement, environmental enhancement and community development enhancing activities); and those activities that fall outside this framework and are indeed monetary benefit sharing schemes as defined by the author as ‘mechanisms that channel part or all the revenues and/or profits of a dam project to project-affected populations or to populations living in the vicinity of a dam development’. He provides a framework that distinguishes between different mechanisms, namely revenue sharing, development funds, equity sharing, property taxes, and preferential electricity rates; and spells out the different objectives that -in his view- these mechanisms intend to achieve, including: providing additional long-term compensation to affected populations; establishing long-term regional development funds; and establishing a partnership between developers and local communities based on sharing of the economic rent generated by the dam project.

Égré’s framework for benefit sharing takes into account the role and interest in the project of different stakeholders – developers, project beneficiaries, the State, and local communities. Among the 12 examples presented in the 2007 paper (reference 11) the compendium, five are located in Canada, one in Norway, two in China, one in Nepal and one in Lesotho. In another work, Égré et al (2008) (reference 12) he presents economic, ethical and development arguments for supporting benefit sharing with project affected people. Building on Cernea’s impoverishment risk theory, the authors use the economic rationale, ethical and development considerations as well as administrative considerations to develop criteria to evaluate the benefit sharing mechanisms, as summarised in the table below.

Table XX: Égré et al (2008)’s Criteria to Evaluate Benefit Sharing Mechanisms (reference 12)

Economic rationale	Existence of an economic rent (prerequisite).
Ethical considerations	Benefits shared commensurate with the entitlements and needs of each category of PAPs. Involvement of PAPs in use of benefits.
Development considerations	Involvement of the state in defining benefit sharing mechanism. Contribution of benefit sharing mechanism to development on a sustainable basis on project affected area.
Administration considerations	Efficiency of transfer mechanism. Accountability of implementing agencies.

Lawrence (Larry) Haas is also a prolific author on the subject of benefit sharing and a participant in many conferences including a 2008 World Bank workshop. The origin of his interest goes back to the work he did as staff member of the World Commission on Dams (2000) (reference 3). Haas subsequently carried out benefits work in Vietnam (reference 13) for the Asian Development Bank (ADB technical assistance grant TA4689) , under which a draft decree and circular were prepared which provided for a bottom-up-process to decide how revenue sharing funds would be invested to support initiatives in areas such as poverty reduction, sustainable income generation, access to markets, environmental protection, ecological and local community development, and cultural activities The draft decree also set out benefit sharing principles over all stages of the project cycle for hydropower development and the integration into the GoV’s socio-economic development planning process. The principles included: (a) a formula and standard procedures to remit a share of the revenue generated by a hydropower project into a project-specific revenue sharing fund (the Fund) , and to internalize this cost in the retail electricity tariff; (b) appointment of a benefit sharing council with appropriate local representation to manage the Fund and to make other recommendations on non-monetary forms of benefit sharing to extend to the project’s ‘host’ community; (c) within a framework provided by regulations, collaborative development of a Fund charter to transparently set out the eligibility criteria, grant selection and award procedures and all the local administrative arrangements for the Fund; (d) use of the Fund to offer a menu of local development measures preferred by beneficiaries, administered through a grant application program and (e) ensuring that appropriate mechanisms for transparency, accountability and monitoring are incorporated so as not to undermine public confidence. Benefit sharing would apply to all hydropower projects in Vietnam (existing and new) meeting specified requirements. At that time it included over 30 large hydropower projects. The 210 MW A’Vuong hydropower project located in the highlands of Quang Nam Province was selected for the pilot project. The first unit of the A’Vuong project was synchronized in the power system in October 2008.

The draft decree and guidelines also provided draft legal agreements and institutional arrangements to introduce benefit sharing for the operation phases of existing and new hydropower projects across the country. They incorporated three forms of benefit sharing aimed at local communities living in the project impact zone, who ‘host’ the hydropower project (i) equitable access to electricity services; (ii) enhanced entitlements for natural resource access to offset resource access lost or transformed due to the hydropower project operation; and (iii) direct revenue sharing through a grant application system to support beneficiary defined local development initiatives. This PDA represented an important next step by the Government of Vietnam to establish effective institutional arrangements at provincial level as part of a sector policy framework for benefit sharing to balance economic, social and environmental aspects to foster sustainable development of the power sector and ensure the involvement of affected people in decisions to improve their well-being, livelihoods and income generation.

The most recent treatment of this project is the Completion Report prepared by the province of Quang Nam which was also partially funded by another ADB TA grant 6498. The draft report was published in 2010 is available on line (reference 15). It appears from this report that the benefit sharing activities although making steady progress have not extended beyond the pilot stage. In the opinion of this paper, the rule and procedure dominated approach is not the best way of producing results in a developing country where ‘time is of the essence’ and where procedures should be developed on a project and community specific basis[2] [3]A further contribution by Larry Haas was the report on a meeting in China in October, 2008 (reference 14), evidently after the Experts Meeting in the World Bank reported elsewhere in this paper. One aspect covered by this paper was the evolution of the International Hydropower Association (IHA) Sustainability Guidelines between 2004 and 2006. Where the 2006 protocol was more explicit on the subjects of: additional benefits and capacity building, in two articles, and additional economic benefits in another article. While the IHA Sustainability Protocol has not gained a lot of traction in comparison to the IFC Performance Standards which are now widely used, the fact that the Protocol is moving with the times is worth noting.

The Haas 2008 paper (reference14) discusses the business case for benefit sharing which has been discussed earlier in this paper with more emphasis on risk reduction and mobilizing capital from international financiers. It advocates a long term approach consisting of: equitable sharing of electricity services; non monetary benefits enhancing access to local resources; and revenue sharing. In the opinion of this paper, the first two aspects are not new.[4]. In the third approach Haas advocates a formula to direct monetary benefits to hydropower and in that we have a difference of opinion. Early in this paper, we discussed the principle of rent sharing and that the magnitude of rent depends on the attractiveness of the hydropower resource. For example Nam Theun 2 was an extremely good hydropower resource which was recognized in the 1980s. Therefore it was able to withstand a level of good works including macro reform and extraordinary demands on the Project which few hydropower projects could support. Other projects are marginal, and although a well funded resettlement program is always justified, in these cases the extent of benefit sharing may be limited unless it can be supported by CSR funds which the developer or power off-taker can draw on. Reference 14 sets out alternatives to sources of funds which are often a mix of measures. The sources of funds aspects will be dealt with later in this report

One useful aspect of this paper was its detailed treatment of the Columbia Basin Trust which evidently was used as an OECD example. The Columbia Basin Trust was mentioned in reference 1 but the coverage was based on a presentation made by a speaker to an Energy Week session at the World Bank. The coverage provided in the Haas reporting of the Yichang workshop is a welcome addition to the literature. (Should there be some details here about the operation of the Trust ?) The structure and operations of this Trust are described later in this paper.A further paper by Larry Haas was published in 2009 (reference 16), the subject being introduction of local benefit sharing around large dams in West Africa. The main departure from earlier cited literature is that it is dealing with benefit sharing from existing dams. This is a useful idea. The Columbia Basin Trust was first cited in Referenc 1 as Retroactive Rent Sharing given that the Trust was only established when the power purchases contracts between British Colombia and the downstream American utilities were close to expiry after 30 years. It is at this stage that the rent generated by hydropower projects becomes more visible: the loans have been repaid, the assets have been depreciated on the balance sheets and operating costs remain low. There are many large hydropower projects in Africa which fall into this category. Larry Haas’s paper lists 94 hydropower projects in West Africa mainly in Nigeria and Cote d’Ivoire but there also large projects in East Africa; in Zambia there is Kafue Gorge, on the Zambesi forming the border to Zambia and Zimbabwe there are Kariba and Kariba North and in Mozambique there is Cahora Bassa. Surprisingly, what is not mentioned with respect to West Africa is the Inga project in DRC, although the redevelopment and further development of Grand Inga has gained much interest from the multilaterals in recent years. It is worth noting that as previously mentioned the poor resettlement experience cited earlier was associated with the Kariba Dam. Benefit sharing in conjunction with large existing hydropower project is certainly an avenue that is worth exploring and it is hoped that the World Bank and other IFIs consider this as they move forward with financing activities. Apart from the matter of applying benefit sharing to existing dams the really ‘new’ aspects of the West Africa paper is the new African audience which is certainly worth cultivating.

The World Bank Group (WBG) has been one of the first international finance institutions to advocate ‘benefit sharing’ as instrumental elements for projects realisation and sustainability. After a dramatic scale-down of hydro projects in the 90s until early 2000s, the Bank saw a sharp increase in hydro project preparation between 2005 and 2007. This followed a new Water Resources Sector Strategy developed within the Bank, which in turn was followed by internationalization of this strategy: the role of hydropower in meeting the World’s energy needs in the Johannesburg Plan of Implementation in August – September 2002, the Bonn International Conference for Renewable Energy (June 2004 and finally the United Nations Symposium on Hydropower and Sustainable Development in October, 2004. In fiscal 2008, the Bank’s lending reached almost one billion dollars (plus $150m in technical assistance) . The WBG’s renewed interest in hydro pointed to the need of an up-to-date or ‘fresh’ approach to benefit sharing, proven by a few key publications that came out around those years. Though not explicitly focussed on hydro power, in 2007 IFC published a handbook on stakeholder engagement providing a comprehensive guidance to companies investing in emerging markets on how to best engage with local communities in different phases of the project cycle, from project conception to decommissioning and de-investment (reference 17). One year later, the Bank held a workshop specifically on benefit sharing in the context of hydropower development; and in 2009, it published Enhancing Development Benefits to Local Communities from Hydropower Projects, a literature review produced by Mott Mac Donald (reference 18).

This one day workshop (reference 19) was structured around four thematic sessions[5]; it was preceded by a meeting of experts and followed by a closed session. The workshop aimed to provide a platform for discussion on past and current practices, as well as approaches of development benefits mechanisms within the specific context of hydropower projects. It also was intended to provide a forum for sharing knowledge as to how development benefits mechanisms may be applied to Bank-financed projects. The workshop contributed to bringing the details of individual projects to the attention of the various participants[6]; and helped tease out some of the main challenges of implementing benefit sharing on the ground, including issues related to weak institutions, political interference, and the difference in the legislations across the Governments where the Bank operates.

According to World Bank, the need for benefit sharing stems from ‘a recognition of lessons learned from hydropower legacy, the roles of social and cultural factors in the effectiveness of outcomes, the added value of multi-sectoral integrated approaches, and the ‘rights of local communities to benefit from development projects’. The Bank defines benefit sharing as a framework ‘to maximise and distribute benefits across stakeholders, consistent with the principles of sustainability’ ( beyond the concepts of compensation and mitigation).

In 2009, the World Bank’s published a literature review (reference 18) contained almost 100 references, with a summary of the issues raised and case studies explained. Many of the papers in the review were related to tangential issues, for example carbon financing, environment, multi-purpose benefits and resettlement; and included some of the literature produced prior to 2005, and a comprehensive review of the work of Egré and Haas.

The paper usefully refers to the literature on the constraints to enhancing benefit sharing mechanisms, summarising it in a list of fourteen points. These covered everything from government issues such as lack of legislation, corruption, political will and confusion about aspects of benefit sharing such as the difference from resettlement,, who pays etc. which this paper attempts to clarify.

What is clear from this literature survey, however, is that examples of benefit sharing ‘on the ground’ were few and far between.

Perhaps the most useful contribution of the World Bank to the literature is a paper entitled A Guide for Local Benefit Sharing in World Bank Projects’. This 2012 paper by Chaogang Wang (reference 20) focuses on the design of benefit sharing programs which, in our view, contains all the key elements and deals with them in the appropriate order: It begins with: (a) gaining an understanding of the impacts of a project; (b) gaining an understanding of the legal regulatory context; (c) consultations with stakeholders; (d) defining objectives of the benefit sharing program; (d) determining beneficiaries; (e) designing mechanisms and exploring multiple entry points; and (e) setting up implementation arrangements. There is also as section on financing arrangements and annexes describing benefit sharing arrangements in Bank-financed projects and looking at benefit sharing policies in seven countries.

A diagram drawn from International Institute for Environment and Development (2009) graphically illustrates the point made in initial paragraphs of the 2012 report although starting after the forced resettlement era mentioned earlier. This diagram notes that the progression has been from: notification and compensation in pre 1980 s through livelihood restoration programs in the 1980s and 1990s ultimately to participation approaches and long term benefit sharing with local communities in the post 2000 period. This generally corresponds to the time line covered by this paper commencing with the paper by Mitch Rothman in 2000 (reference 8) which seems to have broadened the discussion internationally, as did the report of the WCD. The remainder of the body of the report provides detailed description of the steps outlined above.

The annex referring to benefit sharing in Bank financed projects is set out in matrix form with the last column providing a summary of benefit sharing arrangements. The projects mentioned are as follows:

Nam Theun 2 Social and Environmental Project: This project is well known to the hydropower community. It should be noted that this project while associated with the Nam Theun2 project is a separate project financed by IDA. Since the funds are provided by IDA and do not arise from the rent arising from the project it does not fit into the rent sharing model postulated earlier.

Bumbuna Hydroelectric Environmental and Social Management Project, Sierra Leone: This project includes non monetary benefits through catchment management and other sustainable livelihood alternatives. Revenue sharing is channelled through the Bumbuna Trust which will have an annual budget of $1.3 million funded from the electricity tariff.

Bujigali Private Power Generation Uganda. This project is often referred to Bujigali II after previous abortive attempts to get it off the ground. The new project includes a community development fund which has a capital of $2.4 million funded by the Bujigali Energy Company. This is a one off payment compared with the more sustainable continuing payment of the previously cited project payable through the tariff. Several other measures are included to involve villages in the operation and maintenance of investments financed from this fund.

Rampur Hydropower Project in Himachal Pradesh India. This is the first World Bank financed hydropower project in India for many years and as such it had limited objectives. However since the same owner SJVNIL is also the owner of the Nathpa Jhakri Power Project, which has now become a cash cow, SJVNIL has substantial Corporate Social Responsibility (CSR) funds available for necessary social works. The approach taken for this project is good one; it integrates funds contributed by the Company into the local development plan which combines many of the features one would expect to see in a well designed benefit sharing program: (a) basic infrastructure; (b) mobile health vans; (c) scholarships for affected people and local people; sponsoring children to industrial training institutions; (d) support services to agricultural and horticultural activities. The amount spent appears to be a one off sum of $6.3 million compared to the RAP of $7.7 million.

Vishnugad Pipalkotti Project in Uttarrakhand Province India (2011): The owner of this project is THDCIL, a sister parastatal company to SJVNIL. The funding source is again CSR funds and the amount budgeted is similar. There is a similar but different menu of community development activities being financed by the CSR funds all of which are equally applicable. However, the Company has internalized the idea of CSR funding and also used it in funding community development in the areas of its exiting power stations, Tehri, Tehri Pumped Storage Project and Koteshwar. The Company has also ‘adopted’ an NGO that it used for community liaison during the preparation stage of the project and is also used for monitoring the utilization of funds and creation of community assets. The start of implementation of the project was delayed because of environmental issues and political activism, but the main contract has now been awarded. Although the project itself was held up recent reports indicate that CSR funding continued. Another significant improvement in comparison to Rampur is a new measure included as part of the new Hydropower Development Policy which recommends devoting one percent of the plant’s revenue generation to local development in a wider area comprising both directly and indirectly affected communities. Also, the Company will also provide 100 kWh of free electricity per month per household, for a period of ten years to affected communities.[7]

Water Resources Development (2011) Mozambique. It is not clear that a hydropower plant was part of this development. The project will support some basic infrastructure and some community development activities. It appears these measures are financed as part of the project and therefore do not fit into the scope of this paper.

Trung Son Hydropower Development Project Vietnam: Similar comments apply as for Mozambique

Upper Cisokan Pumped Storage Project (2011) Indonesia: There are preliminary plans to include a small hydropower project at the foot of the downstream dam which may be financed by the developer or from additional finance from the World Bank. It is known that a wider community development plan was contemplated but shortage of time dictated against it. This is the first involvement of the Bank with storage based hydropower in Indonesia; it is also the state-owned Indonesia’s electricity company (PLN)’s first reservoir project since the late 1980s. Consequently priority was given to developing a first class RAP.

The second annex covers policies on benefit sharing for hydropower projects in seven countries. The seven countries covered are Brazil, China, Colombia, India, Lao PDR, Nepal and Norway. Of these the Brazil case is fairly well known, the China case is also known but the paper gives an update of recent developments; India and Nepal are covered elsewhere in this paper, Norway as a developed country, although largely hydro based, is not really relevant and in Lao PDR there are no specific policies. The main reference is to Nam Theun 2 which is adequately covered elsewhere.

In 2011, the Mekong River Commission (MRC) published ‘Knowledge base on Benefit Sharing’ (reference 21). The MRC emphasised the need for benefit sharing to be ‘over the economic life of the project’, and reflect ‘a systematic approach to balance the development opportunities and risks at different scales, [without] leaving people behind in terms of development – in particular the local communities’. The MRC also stresses the importance of considering benefit sharing mechanisms up-front during the design phase so that technical features can be incorporated also to minimise impacts or generate benefits to local communities (e.g. flushing and environment flow provision, downstream de-regulation structures etc); and to include benefit sharing into the financial analysis that informs project development agreement/PPP between the developer and the government. The MRC provides a very good overview of existing projects, in the Mekong River as well as in other regions of the world, some of which will also be referred to in the following section.

6.0 International Examples of Benefit Sharing Approaches

In describing its approach to building effective relationships with indigenous communities, Hydro-Quebec’s[8] – one of the world leading companies in this area – refer to ‘respect, goodwill, and commitment’ as three fundamental values (see Roux and Seelos). While agreeing with these principles, we (the authors of this paper) further suggest that commitment should be to achieving outcomes rather than spend; and that how good will and respect and commitment are perceived by the local communities is also very important. We describe here some case studies of benefit sharing that were designed with those three values in mind and the intent to give local communities recognition of their role as partners in the projects. These international examples are not confined to those occurring after 2005, but are included to indicate approaches that have been described previously but not in a consistent way.

Formalised partnership and remedial fund: the case of La Forge 1 in Quebec, Canada.

Hydro-Québec is among the largest electric utilities in Canada and one of the major renewable energy producers in the world (98% of their output is renewable energy). The company is a government-owned public utility established in 1944 by the Government of Quebec today it accounts for over 50% of all hydropower generated in Canada. Since the mid-70s, the company has been committed to engaging with aboriginal communities, and gaining social acceptance through their participation in decision-making on energy projects. To date, Hydro-Québec has signed some 30 agreements with Aboriginal nations (now also referred to as First Nations) and communities regarding development projects with a view to enabling them to participate in project construction, and benefiting from the economic spinoffs.

Partnerships with indigenous communities, such as the Cree and Innu communities, have been referred to earlier in this paper. Elaborating on one case, the Laforge-1 (878 MW) development involved the creation of a new reservoir that covers approximately 1,300 km2. The dam caused several ecological and social impacts.

In 1992, the Cree and Hydro-Québec signed the Opimiscow-La Grande Agreement, with which they agreed upon remedial measures to address the impact of the projects or to compensate for the loss of trapping areas used for harvesting animal pelts by increasing the carrying capacity and enhancing habitats around the project sites. Hydro-Québec agreed to provide the Cree with a C$25 million Remedial Measures Fund. The parties also agreed to create a non-profit corporation called Opimiscow-Sotrac Company to carry out the remedial works. The board of directors of the Opimiscow-Sotrac company had six voting members: three were appointed by the Cree and the other three by Hydro-Québec. Ex post assessment carried out in 1999 showed that the company carried out remedial works in an effective and innovative fashion, with positive impact on the communities and the project itself (Roux and Seelos, 2004 ‘Building on partnerships with aboriginal communities’).

Partnerships and equity sharing – Ecuador, China and Nepal.

In Ecuador, with the support of Germany’s development agency (GTZ), an independent power producer named Energia Renovable y Desarollo Sustenable (ERDESU AG) was established as a stock corporation co-owned by the provincial government, the communities, the indigenous peoples’ association, the German industrial enterprise Wasserkraft Volk, and GTZ. ERDESU’s seven-member supervisory board comprises representatives of the indigenous communities, the provincial government. Its goals are to develop hydroelectric capabilities in the region and to oversee the revenue distribution to the stakeholders involved.

In China, the Hubei Hydropower Development in Poor Areas Project supported by the World Bank in 2002, established a partnership agreement based on equity sharing with local governments. According to the agreement, hydroelectric plants were developed by new limited liability companies each of which had a county-owned generation company as sponsor. The partnership also entailed revenue sharing to target poverty alleviation in the county, with each of the project counties devoting 20% of the fiscal revenues accruing from the operation of their respective plants for at least five years after commissioning to funding county poverty alleviation plans. The Implementation Completion Report for the project (reference 25) reported that the funds were disbursed as planned. While it was difficult to separate the impact of the additional funds, several indicators pointed to a dramatic improvement in the poverty situation in the host counties. During 2012 discussions with provincial finance officials, they reported that the project had a catalytic effect and similar measures were being adopted for all county developed hydropower projects.

Shareholding agreements have also been implemented in Nepal. The NEA-owned Chilime Hydropower Project was the first to allocate 10% equity to the people of Rasuwa district, where the project is located. Recognising that not everyone can afford to buy shares, two commercial banks were brought in to provide loans of up to 80% of the share value to locals with the shares serving as collateral. One reason for the success of the scheme was the fact that by the time the shares were distributed, the plant had been generating power for close to a decade, and so there were immediate payouts on the shares.

Another NEA project, Upper Tamakoshi Hydropower Limited, has also decided to provide locals of Dolakha district with a promoters’ share of 10%. The main concern with the issuance of shares of a large project like Upper Tamakoshi is the capacity of the locals to absorb that 10%, which is estimated to be in the range of NPR four billion (approx. $40 million). The main stakeholder group, Upper Tamakoshi Hydropower District Level Coordination Committee, is cognisant of this fact and plans to seek the assistance of financial institutions to help locals purchase shares. It remains to be seen whether these institutions have the capacity or the will to be involved. The project is currently under construction, but will not list until construction is close to completion.

Revenue sharing and Funds – the case of Canada, Brazil, Colombia, China, India, Lesotho, Vietnam.

Revenue sharing

In 1999, the The Pesamit Agreement was signed by Hydro-Québec and the Innu community of Betsiamites. The agreement, submitted for approval through a community-wide referendum, established that the community could invest 17.5% of the total construction costs of the three partial river diversions, and in return could benefit from revenues equivalent to the value of 17.5% of the total energy produced by the river diversions (net off operating and environmental monitoring and follow-up costs). A similar partnership was signed by Hydro-Québec with the Innu community of Essipit in 1999.

In 2003, in connection with the Eastmain-1A and Rupert Diversion project in Canada, the ‘Paix des Braves’ agreement committed the Province of Québec to pay the Cree $70 million a year for 50 years in exchange for the rights to develop a series of hydro projects expected to cost $4 billion. The agreement included negotiated settlements applying to land rights, forestry and mining (see reference 26).

Revenue sharingis often stipulated by national legislation:

In Colombia 3% of revenues from all hydropower projects are transferred annually to the watershed agency to fund watershed management activities working with the basin communities. A further 1.5% of project revenues is transferred to the municipalities bordering the reservoir and 1.5% of project revenues must be devolved to the municipalities located in the watershed upstream of the dam. These allocations must be used for infrastructure projects that have been identified in municipal development plans
Brazil’s royalty regime stipulates royalties to be distributed as follows: 45% to states, 45% to cities and 10% to federal bodies (Ministry of the Environment, Ministry of Mines and Energy, and the National Scientific and Technological Development Fund). Of the 45% aimed at the municipalities, 85% goes to those directly affected by the plant’s reservoir. The remaining 15% are distributed among states and cities affected by reservoirs upstream from the power plant, considering they help increase the energy generated there.
Nepal’s regulation foresees 50% of royalties go to the National exchequer, with the remainder distributed between the District (12%) and the Region (38%) hosting the project.

Funds

Columbia Basin Trust This development is referred to in reference 1. To briefly summarize: In 1961 the United States and Canada signed the Columbia River Treaty, under which Canada would build three dams on the Upper Columbia River. In return Canada would receive US$64.4 million for flood control benefits in the United States, 50 percent of the additional electricity generated in the United States resulting from the upstream storage, and 100% of the electricity generated in Canada. The Province of British Columbia sold its share of the downstream power to a group of American utilities for 30 years, for US$254 million. This income was then used to construct the three treaty dams in Canada, and part of the power generation facilities. The Province of British Columbia as a whole did well out of this agreement since the hydropower plants associated with the dams produce 65% of British Columbia’s electricity at a very low cost to consumers. But adverse environmental and social impacts associated with dam construction were never adequately addressed. These included: forcible relocation of towns and villages involving 2,300 people, without enabling them to share in the rent; reservoirs that were not cleared creating debris problems; loss of wildlife habitat; polluted natural lakes; loss of agricultural and forestry lands; and fluctuation of reservoirs up to 43 m per year. For 30 years these issues impeded further development of the south-east corner of British Columbia. In 1992, knowing that initial contracts for downstream benefits would expire beginning in 1998, local governments banded together to demand that these longstanding issues be addressed as part of new negotiations. The stakes were high since the next 30 years of benefits were considered to be worth five billion dollars. Intense negotiations between British Columbia and the local governments culminated in the Columbia Basin Accord which provided for a Columbia Basin Trust headed by a board of directors, made up of representatives of basin communities, which would have broad powers for generating economic, environmental and social benefits within the Basin. The Columbia Basin Accord also provided for resource transfers and fund matching arrangements such that it was expected that some 600 million dollars would be returned to the region and more than a billion dollars of investment activity would be generated over a ten year period.

The structure of the Trust is rather ‘heavy’ and would only be suitable for projects of national importance or where national legislation was contemplated. It provides for percentage shares of revenue for 11 different sectors[9]. In the authors’ view the pre-determination of these sectors is unduly restrictive as if there was a lack of confidence that the Trust would not allocate the funds in accordance with community needs. The selection of sectors and projects within sectors would also be open to undue influence by pressure groups.

Revenue sharing, local development funds, and skill programmes

India has a huge hydropower potential of about 80 GW. It has 40 GW of installed capacity in 2013, which is approximately 17% of total electricity generation in India. State-owned enterprises dominate the market, with a 97% share. As part of the 11^th Plan (2007-2012), the Government set various targets and introduced new regulations to boost hydro development and some benefit sharing.

India has a revenue sharing mechanism whereby Indian States are allocated 12% of electricity generated, free of cost, for the entire life of the projects operating in the states. The financial return from the sale of free power (defined as a percentage of total generation) is then re-distributed to local people in the form of subsidised rates, e.g. to farmers in the northern states that run irrigation pumps tube wells (MRC, 2011). Interestingly, dropping levels of groundwater in three States have raised questions about the conflicting incentives created by the subsidised rates and negative impact on groundwater extraction.

In 2008, the National Hydropower Policy (reference 22) made provisions for one percent free power from the project to be allocated for ‘Local Area Development’ for welfare schemes, creation of additional infrastructure and common facilities. However, the State Governments are also expected to contribute a matching one percent from their share of 12 percent free power for local area development, earmarking and transferring funds to a dedicated Local Area Development Fund (LAFD) on a yearly basis. The Government has produced guidelines recommending a governance structure which ensures the participation of the local communities in the Fund’s decision making committee, namely the Local Area Development Committee, constituted for each project separately. The revenues from the sale of one percent free electricity are transferred via electronic bank transfer into the bank accounts of the people affected by the project – according a specified formula that allocates relatively higher sums to the most affected people – annually, and for the entire life of the project. The matching funds provided by the State Government fund development works in the affected areas, again according to specific formulas as specified in the guidelines.

Human development has also been considered as part of the Government’s plan to boost hydro development. A scheme called ‘Adopt an Industrial Training Institute (ITI)’ has been initiated with a view to building up of skilled work force in the vicinity of the project. According to the National Electricity Plan, ITIs are to be adopted or new ITI established by power developers in the vicinity of their projects to provide opportunity to local population to develop skill in construction and O & M of the power projects. Unfortunately, it is too early to obtain specific evidence on the developmental impact of the Indian mechanism, and its impact on livelihood enhancement and poverty reduction amongst the local communities. However, anecdotal evidence and reference to project implementation reports points to very useful impacts in both the Rampur and Vishnugad Pipalkoti projects referred to previously.

(e) Royalty sharing and shareholding

Nepal legislation requires hydropower developers to share the rent from projects in the form of royalties with the Government. In 2004, an amendment to the Self-Governance Regulations introduced a 50:38:12 formula whereby the central government receives 50% of the royalty, 38% goes to the region(s) hosting the project, and 12% to the concerned district(s). In the past, forms of non-monetary benefits and equity sharing have been implemented for some projects, oftentimes when international donors where also involved as project financiers; yet in the last 3 years the GoN has made significant effort to incorporate benefit sharing in the legal framework governing hydro development, as explained later in this paper (see ‘Projects under preparation’).

Ethnographic research carried out in 2013 by the Centre for Inclusive Growth (CIG)[10] a DFID-funded technical assistance programme, revealed that in the case of two projects, Kali Gandaki A (KGA) and Middle Marsyangdi (MM), several non-monetary benefit sharing mechanisms have been funded by the developers during construction. Yet, the royalty system has proven not to be able to support the development of affected areas during the life of the project. At the time of the ethnographic study, ten and five years after KGA and MM respectively became operational, the local communities[11] expressed gratitude for the activities funded by the developers during construction[12], which included rural electrification, microfinance programmes, preferential hiring policy (including provisions for wage rates, insurance, labour conditions, working hours, job training) and health and education facilities built during the construction of the project. The construction of access roads and implementation of rural electrification were perceived by the locals as the main sources of their socio-economic improvement, along with the employment opportunities generated during construction.

However, years after the end of construction, lack of funds and/or poor institutional capacity led to some of the facilities – such as schools and health centres, roads and other infrastructure built by the developers – to be unusable due to absence of personnel and poor maintenance. The study also revealed that the benefits from projects were unequally distributed amongst culturally diverse and economically disparate groups: the most vulnerable, including indigenous people, women of all caste/ethnic groups, and individuals from low castes, had not been able to take advantage of the opportunities offered by the project, including employment. This was due to lack of skills, no access to information, and cultural norms. The local communities were also vocal about not being aware of how the royalties to their districts were employed, or if indeed received by the district from the central government.

Benefit sharing in the form of shareholding agreements are not foreseen by current legislation but have been implemented in a few cases such as the NEA-owned Chilime Hydropower Project, and the Upper Tamakoshi Plant, referred to earlier.

Projects under preparation

Indonesia – Forestry benefit sharing and CSR regulatory framework

The Government of Indonesia has set an ambition target of reaching a 92% electrification rate by 2021; to meet this target Indonesia needs 57 GW of new generating capacity.

With the support of the World Bank, PLN (the government-owned electricity utility) has been building the Upper Cisokan Pumped Storage Project, mentioned earlier in this paper, for which a wider community development plan was originally contemplated but shortage of time dictated otherwise.. A second project, Poko Hydroelectric Project, in South Sulawesi is currently under design. The World Bank is considering supporting this project also and using it as a pilot for benefit sharing programs in Indonesia.

Since 2009, Indonesia has been testing revenue sharing mechanisms and community engagement in the context of forestry management and conservation. The Government has developed a full national strategy (reference 27)^[13] for the REDD+ programme^[14]^.With the support of the World Bank, pilots are being tested in different provinces to split revenues accruing from the sale of REDD+ credits between government, communities and the project developer. Also, in early January 2011, the UN-REDD Programme Indonesia supported the National Forestry Council (Dewan Kehutanan Nasional or DKN) in building consensus on the importance of Free Prior and Informed Consent (FPIC). The Policy Guidance on the Rights to FPIC was developed and publicly distributed by the UN-REDD Programme and the DKN, and is now part of the REDD+ national strategy. In the context of hydropower development, Indonesia’s state-owned enterprises, including PLN, are subject to specific regulation on CSR requiring them to support community development programs (named PKBL) and to promote partnership programs with small enterprises while developing energy infrastructure. The regulation established that 2% of ‘net profits’ should be earmarked for CSR activities. In its annual sustainability report 2013, PLN reported that in addition to its CSR activities, it also funded projects that provided financial support and training to the communities affected by projects in order to promote economic prosperity and sustainable development. This would be in addition to compensation and mitigation budgets.

For the Poko HEP in South Sulawesi, PLN has expressed its willingness to find innovative ways to engage more closely with local governments and local communities in developing hydropower potentials. These include, among others, identification of schemes to share benefits with local governments and communities from developing hydropower projects. PLN has specifically requested the World Bank to provide technical assistance in this area.

Nepal – Benefit sharing mechanisms as part of the project development agreement (PDA)

As mentioned earlier in this paper, Nepal does have institutional benefit/revenue sharing mechanisms in place, which in some instances have proven to be unable to adequately benefit the communities affected by the project. In recent years, the Government of Nepal (GoN) has made significant steps to improve the legal provisions applying to hydropower development, some of which will have a direct impact on benefit sharing. With the support of a DFID-funded technical assistance, the Investment Board of Nepal (IBN, Nepal’s PPP agency) has developed and endorsed a list of policy principles for hydro power development, which in turn informed the revision of the project develop agreement (PDA) template used for hydro PPPs negotiations. Another initiative focuses on the process followed by the IBN to build consensus around the PDA.

The revised PDA template ensures that Nepal’s social and environmental safeguards for hydro projects are up to international standards, and introduces revenue sharing in the form of both monetary and non-monetary benefits for the local communities. These include: an industrial benefit plan to ensure: (a) full and fair opportunity of access for Nepal suppliers of goods and services to meet the capital and operating needs of hydro project developments; (b) promotion of safe and healthy working conditions among suppliers; (c) an employment and skill training plan to promote the recruitment, training and employment of local people; (d) rural electrification for the affected areas; and (e) equity shares to the local communities.

The new PDA template provides the legal basis governing the split between the GoN and developers of roles and responsibilities with respect to the sharing of revenues from projects; and it does it in a way that contributes to both regional economic prosperity and local socio-economic development. The template has been currently used for negotiations between the GoN and developers for the Upper Karnali, Arun III and Trisuli 1A projects.

Solomon Islands – Ongoing Consultation and Livelihood Enhancement Activities

With the World Bank’s support, the Solomon Islands Government (SIG) has been developing the Tina River Hydro Development Project (TRHDP)[15] which is intended to be developed by a private developer. The environmental and social impact assessment for TRHDP is currently in progress but it is intended at this stage that the Environmental Management Plan will be implemented by the private developer. The World Bank Group is supporting the project by providing technical and expert advice in the areas of environment and social safeguards, dam safety, project finance, and benefit sharing arrangements, which aim to ensure the social and environmental sustainability of the project. The Bank also intends to provide a Partial Risk Guarantee for the project. International experts in benefit sharing have been working with communities in the Tina River area and the SIG to design arrangements that will bring meaningful development to the project area. The TRHDP project office has already been working on social issues for several years. These are particularly important in the Solomon Islands since the people are Melanesian and the project area for the most part lies in an area where the land has not been alienated and customary land ownership prevails. It is hoped that the arrangements for compensation and benefit sharing will serve as a model going forward removing what has been an impediment to infrastructure development in the Solomon Islands as a whole.[16]

The developer has already carried out a series of consultation with the local communities, and awareness programmes explaining the impacts of the project have been going on since 2011 (details are available online at http://tina-hydro.com/). A draft document was produced in early 2014 laying out several activities to mitigate socio-economic impacts and enhance the livelihood of the local communities. The proposed measures for addressing socio-economic impacts go beyond compensation to include several activities such as: priority recruitment for local workers; training for administrative officers and independent legal advice to the local communities; the establishment of a project community consultative council to liaise with developers and contractors; a cultural orientation course for outside workers; electrification of local villages; training programs ahead of construction, including in road maintenance and security to create long-term employment opportunities; household budgetary advice and training; and a hydro-lake maintenance plan to be developed with the local communities.

Though yet to be finalised, these activities represent a form of benefit sharing identified and designed together with the local communities in order to best respond to their development needs. Once this plan is adopted, budgeted, and implemented, it can be considered a benefit to the communities. If the plan is financed out of hydro revenues, then it is a shared benefit.

7.0 Commonalities and Authors Views

7.1 Benefit Sharing Models

Among practitioners, it is generally agreed that:

There is substantial commonality, but also some critical differences, between well designed resettlement programs and benefit sharing programs.
Benefit-sharing is no substitute for the need to prepare, cost and implement Resettlement Action Plans (RAPs) that deal with asset compensation and socio/economic rehabilitation issues.
Benefit-sharing plans go beyond the RAPs – they deal with those area needs that are not covered in RAPs.
Both programs can consist of a mixture of cash, at least in resettlement programs[17], preferential access to natural resources or other resources associated with the hydropower, and benefits in kind in the form of community development. Community development funds can be disbursed to communities, to small groups of individuals, directly to individuals, or to contractors building community facilities etc.
Preferential access to resources can include: fishing where benefited individuals have preferential access to reservoirs for fishing or other reservoir related activities such as duck raising or fresh water pearl raising, to forest areas within proximity to the reservoir where they can be paid cash for catchment management activities and providing other environmental services.
Preferential access can also be provided to rural electrification although we would argue that this should not be at preferential electricity rates. History has shown that eventually small grids are absorbed into the main grid and tariff differentials complicate matters. Moreover, rural electrification studies have shown that the willingness to pay by rural consumers is much higher than the electricity tariff for the same category of consumer. If subsidies and cross subsidies are required then they are best incorporated into the overall utility tariff schedule. Although it is not a usual case, in the Chilime and Upper Tamakoshi projects in Nepal, affected people are given preference in buying shares in the hydropower project companies. They are also expected to pay prevailing tariffs.

7.2 Monetary Benefits

A useful way of looking at this issue is in accountancy terms, where a Sources and Uses of Funds statement accompanies the Income Statement and Balance Sheet, and details actual cash flows during the year (wheras the Income Statement includes non-cash items and does not include capital expenditure). The concept is also used in Chinese resettlement where compensation for land is compensated by a multiple of annual agricultural production revenue which takes into account the productivity of the land. If the amount thus calculated is inadequate, there is flexibility in the Chinese legislation.

Source of Funds: Private sector programs must be financed by the project companies, or mother companies of the project company or by the utility buying the power. In recent years the use of CSR funds has become prevalent as was the case of the Indian projects mentioned previously and as is likely to be the case in Indonesia. Sources such as carbon financing would be available to the project anyway so they cannot be regarded as a true source of funds. In keeping with the concept of rent sharing, it is our view that all programs should be financed by the project company as a share of income in some form (whether net income or cash flow)

Uses of Funds: In some jurisdictions a share of funds is directed to provincial or local government; ideally these should be used specifically for development in the project areas. This report generally deals with the share of rent devoted to communities or community development funds. A publication by the Inter American Development Bank (reference 28) provides (in Section 4) a comprehensive list of the type of activities that might be financed by community development funds. These might be grouped under: physical infrastructure (water supply and sanitation, roads, rural electrification, telecommunications), community infrastructure (clinics, schools community centres, libraries), and generic services such as education (hiring teachers, buying textbooks, providing scholarships) and services associated with physical and community infrastructure, poverty eradication programs. The list is endless and choices must depend on the community’s selection and opinion of what they most need.

For larger projects a more formal way of providing benefits might be considered such as the Columbia Basin Trust where funds are paid into a professionally managed trust which evaluates proposals by communities for projects which will provide recurring income.

7.3 Mechanisms for Raising Funds

Revenue Sharing: This is conceptually sound and is aligned with practice in the petroleum and mining sectors, where it is common to negotiate the share of revenue that the host Government will ‘take’. Theoretically it is correct that the more attractive the resource, the higher the Government ‘take’ should be; the same would apply for hydropower projects. There have been some objections to this (e.g. Tina River in the Solomon Islands since it can create a feast or famine situation if revenue is related to kWh generated. However this can be overcome by setting up a trust fund where the trustees determine how much can be returned to communities each year after adequate reserves have been set up.

Profit Sharing: The problem with this is that profit includes non cash distortions such as depreciation and could also apply to situations where inefficiently operated projects will have less profit to share. Cash flow sharing is better but there is probably not much difference between this and revenue sharing where operating costs are very low; but it is probably fairer than revenue sharing since it also takes into account any taxes and other charges that the project must pay.

Fixed Royalty per kW or kWh: This is not favoured because the amount to be shared should depend on how attractive the project is, but may be applicable if wholesale tariffs are also fixed.

Subsidized Electricity: For reasons stated above this is not favoured but there may be exceptions. In China in the Shuikou project, China provided free electricity to resettled communities about twice their needs so they could attract energy intensive industries into the area thus creating jobs. This could be considered, although energy intensive industries are usually dirty industries.

Equity Sharing: As described earlier, this is practiced in some places including by Hydro Quebec but is the same as profit sharing.

Share of Tax Revenue: In China, counties were provided a portion of income tax revenue from the project and this was the case in the Hubei Hydropower Development in Poor Areas Project, but tax revenue has the same disadvantages as profits and in that it may be manipulated to avoid tax.

Percentage of Power Production as Free Power: This is the same as revenue sharing.

There is no theoretical way of determining what the percentage of revenue or cash flow that goes to communities; in India the host Province gets 10% free power and another two percent goes to local communities; these benefits go a long way in poorer areas.

7.4 The Benefit Sharing Project Area

Ideally this should be the catchment area, but this is often impractical except for projects of national importance. In Colombia, national legislation provides for fixed percentages of revenue to upstream and downstream users while in Itaipu, municipalities bordering the reservoir are the main beneficiaries. Understandably, this has led to problems because of the magnitude of the revenues involved.

We would argue that both the amount of revenue and the ‘benefit sharing project area’ should be determined based on discussions with the major stakeholders including local government officials, and that the objective should be to avoid that the amount of funds going to the selected area is not disproportionate to funds normally received from existing programs. In fact in many cases reinforcement of local programs may be the best way of proceeding. One of the objectives should also be to avoid divisiveness wherever possible. In the Hubei Project in China (reference 9), the four poverty counties chose that the existing county poverty alleviation programs should receive the funds and they also determined what percentage of project tax revenues would be devoted to the programs and over what period. As discussed earlier this led to a catalytic effect.

7.4 Lessons learned

The literature contains many ‘lessons learned’ Some of the more important ones, which are also drawn from our own experience, of these are as follows.

It should be clear to all stakeholders from the beginning, that although there is a close affinity between resettlement and benefit sharing the two activities are not the same. A well funded Resettlement Action Plan, well implemented, is a mandatory requirement of international financing agencies, whereas benefit sharing, although strongly recommended, is not yet mandatory.
It is important not to unduly raise stakeholder expectations, particularly when international agencies are involved. Therefore, plans should be developed by local consultants in consultation with local government and the beneficiaries of the funds.
Keep it simple. If it is necessary to establish a Trust for legal reasons or to ensure a reasonably constant source of benefits rather than a feast or famine situation, keep it as simple as possible.
Early engagement with culturally sensitive communication plans is important for building a good relationship with the communities, and for designing benefit sharing mechanisms in line with communities’ needs and expectations. The poor and the most vulnerable groups have proven to be often excluded from engagement and access to the benefits generated by the project due to the presence of political elites and cultural norms. Special attention should be given that all groups are included
Power dynamics that favour certain groups in the communities while preventing or retarding the development of other groups should be avoided through the preparation and application of well- designed benefit sharing mechanisms. Part of the issue has to do with defining who is affected and who is eligible to receive benefits; this can be addressed through a well-designed stakeholders’ consultation and engagement plan, as well as through the preparation and analysis of socio-economic village profiles.
The evidence indicates that communities’ participation is recommended in different phases of the project – from design to implementation of benefit plans. Indigenous knowledge can inform the design of a project from an early stage, and contribute to a greater sense of ownerships and partnership.
The institutional capacity of indigenous communities is important in determining the options available for revenue sharing mechanisms. Where possible, existing indigenous/local institutions should be utilized to the fullest.
Government institutions have the greatest responsibility in promoting the use of revenues from hydro for regional economic development. The IFIs could support governments to integrate benefit/revenue sharing into regional development plans.
It is important that the communities see the opportunities generated by the project early on, e.g. through pre-employment training and preferential hiring policies. The flow of benefits should start soon after revenues are generated in order to maintain trust.
The monitoring of the impacts of benefit sharing mechanisms on the welfare of the local communities could be done by an independent party in order to promote transparency, accountability, and lessons sharing.
The existing literature does not sufficiently cover impact evaluations of benefit sharing mechanisms on poverty reduction.
There is no doubt that the development of workable mechanisms for sharing the benefits of hydropower projects with the affected project regions has become a ‘mainstream’ objective and activity.

References

Trembath Barry P. (2008) ‘Beyond Compensation: Sharing of Rents Arising from Hydropower Projects’ Chapter 14 in Michael M. Cernea, Hari Mohan Mathur (eds) ‘Can Compensation Prevent Impoverishment’ Oxford University Press, 2008.
Égré Dominique, Roquet Vincent, Durocher Karine (2008),’Benefit Sharing to Supplement Compensation in Resource Extractive Industries: The Case of Dams, Projects’ Chapter 12 in Michael M. Cernea, Hari Mohan Mathur (eds) ‘Can Compensation Prevent Impoverishment’ Oxford University Press, 2008.
World Commission on Dams (2000), Dams and Development – Report on the World Commission on Dams – Case Study on Kariba Dam.
Leslie Jaques Pipe Dreams: Can the Zambezi River supply the region’s water needs?’. Cultural Survival Quarterly. Retrieved 2007-07-31.
Orange, Claudia, ‘The Story of a Treaty’ Allen & Unwin New Zealand, 1989; the book has been continuously in print since 1989.
Treaty between Government of Canada and Inuit (the James Bay Treaty) http://www.archives.gov.on.ca/en/explore/online/james_bay_treaty/treaty.aspx
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The Authors

Barry P. Trembath has an engineering background having graduated in 1965 and 1971 with des in civil and structural engineering from the University of N.S.W. and while resident in the Philippines, he was also awarded an MBA from the University of the Philippines in 1982. He has more than 50 years of experience of which 40 years was devoted almost exclusively to hydropower all of it in developing countries. He was resident in five countries in Asia and the Pacific and South America before he joined the World Bank in 1988. While with the World Bank he had a substantial role in more than 10,000 MW of hydropower and 5000 MW of pumped storage. His interest in rent sharing goes back to 1986 when in Nepal he saw the difficulties that Nepal and India had in reaching an agreement on the 10,800 MW Karnali Chisapani project and in benefit sharing from 1989 when he was task manager for the Shuikou project in China involving large scale resettlement.

Federica Cimato hasa political sciences and development economics background. She graduated in Political Science from the State University of Milan in 2003, to then work as a researcher in the field of microfinance before moving to the UK where she took a MAs in Development Economics at the University of Sussex. She worked for the Institute for Development Studies (IDS) before joining the UK Government Economic Service in 2007. She was an economic advisor on climate change mitigation and adaptation policies for the UK Government Department for Environment Food and Rural Affairs, DEFRA. In 2009 she joined UK Department for International Development (DFID) for which she worked until recently. With DFID, she spent three years in Nepal on a DFID-funded technical assistance programme, and led on the benefit sharing component of the TA and related field research. She is now an independent consultant.

[1] This was not the first treaty; in fact it is also referred to as Treaty No 9; but it is understood that it is the first treaty related to a hydropower project.

[2] It is also interesting to note that the development fund proposed is the same as that used in the Columbia Basin Trust referred to in Trembath’s 2005 paper (Ref 1).

[3] One cannot help contrasting the limited range of income generating activities in 12 villages covering 209 households with in pilot projects with the multitude of income generating activities which were developed by the communities themselves in the Shuikou hydropower project in China (references provided in Reference 1)

[4] In the Saguling and Cirata projects in Indonesia in the late 1970s, cage fishing was found top produce protein an order of magnitude higher than the ruce fields that originally covered the reservoir area. Cage fishing and several other reservoir based activities also feature as resettlement activities in the Shuikou project as do forestry based activities

[5] The opening session was followed by Session 1Context and Purpose, Session 2 Voices of Local Communities; Session 3 Enhancing Developments to Local Communities a Literature Review, Session 4 dealing with Emerging Practices. Each session began with presentations by Bank staff except for Session 2, where two presentations were made, one by Jose Carino, a former Commissioner of the WCD and the other by Real Courelles which detailed the Hydro Quebec experience with hydropower development.

[6] One of the presentations focused on the Nam Theun 2 project (for which the substantial activities of resettlement and rehabilitation are not neatly distinguishable from those of benefit sharing); the Nam Theun Social and Environmental Project (a project in itself); Hydro-Quebec’s projects; and Larry Haas focused on the Vietnam, already described in this report.

[7] This seems to be remarkably similar to one of the benefits to affected communities provided at Shuikou in China.

[8] QH generating facilities have an installed capacity of some 34,000 MW, with hydropower producing 93% of Quebec’s or Hydro-Quebec’s total energy output.

[9] Water initiatives one percent, Youth initiatives seven percent, Arts, Culture and Heritage five percent, Economic 12 percent; Education five percent; Environment 15 percent, Social percent, Joint Programs one percent; Geographic 33 percent and Basin- wide Programs 10 percent.

[10] In which co-author Federica Cimato was directly involved.

^[11] For the fieldwork, 59 and 41 households were interviewed for the KGA and the MM project respectively.

^[12]MM was jointly funded by Nepal Electricity Authority (NEA) and KfW; the construction of the KGA was supported by loan assistance of ADB and the Japan Bank of International Cooperation, and the project is now owned and operated by NEA.

^[13]REDD+ National Strategy, Indonesia REDD+ Task Force, June 2012.

^[14]Reducing Emissions from Deforestation and Forest Degradation (REDD) is an effort to create a financial value for the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development. ‘REDD+’ includes the roles of conservation, sustainable management of forests, and enhancement of forest carbon stocks.

[15] Co-author Barry Trembath has been involved in this project since 2006.

[16] In the South Pacific, the people are usually Polynesian or Melanesian; Fiji is an exception where the people on Viti Levu are Melanesian with a Polynesian culture. Melanesians (which include PNG, Solomon Islands, Vanuatu and Fiji) have a particular attachment to the land. In Fiji, a dispute between Fiji Electricity Authority and land owners went on for several years and resulted in a court decision about 20 years after the project was commissioned. The recent series of coups in Fiji can be attributed to the issue of land.

[17] For example, in China, personal assets including crops around houses are compensated in cash, and it is up the family being resettled to make their own arrangements to rebuild. Discussions between community leaders in Solomon Islands ahead of the Tina River Project indicated a wide degree of acceptance that compensation in kind was a far better alternative to cash although a little cash was a good idea.