Land Acquisition and Resettlement: Investment Risks

Background• Project Sponsor – an internationally renowned

renewable energy company.• Project Finance – total investment €620mn

financed by a consortium of international and local banks

• Project - construction and operation of large-scale renewable energy project in remote Kenya.

• Associated facility – construction of a 400 km transmission line; the responsibility of the electricity distribution parastatal.

• E&S Standards - consortium and sponsor agreed on IFC Performance Standards as impact benchmarks for the renewable energy project.

Findings of the Consortium’s E&S Due Diligence

• ESIA and steps undertaken by project sponsor for the renewable energy power facility in line with the IFC PS.

• Land acquisition and resettlement of 200 households directly impacted well managed and in line with IFC PS, and almost complete

• All relevant development permits granted to the project

Overlooked Impacts of Associated Facilities

• However, the ESIA had a significant gap.• It failed to assess the E&S impacts of facilities being

developed by third parties.• In particular – impacts of the transmission line, critical to

the success of the project.• At least 1,000 households along the RoW directly affected

• Project sponsor was not engaged with the developer of the transmission line regarding the potential risks associated with the involuntary resettlement and compensation along the RoW

What action did the consortium take? • Consortium was concerned with the financial & reputational

risks associated with transmission line impacts• Compensation budget doubled within a year – led to project

realignments, changes in local legislation, updated census.• Unclear whether the responsible party could absorb the increase,

or if project sponsor would have to share some of the anticipated $15mn unforeseen costs.

• Inadequacies in the management of the process and engagement with directly affected parties increasing the risk of conflict, potential for project delays and reputational damage

• Consortium requested the project sponsor to mobilize a team to oversee the resettlement process for the transmission line, at an additional cost of €100,000.

Lessons learnt

• Poorly managed resettlement processes and unresolved grievances typically trigger conflict and increase potential for project delays, damage to assets, reputation.

• These risks increase when a third party is responsible for infrastructure development critical to the viability of the project and where they are not bound to international standards of good practice.

• Understanding the full scope of potential sources of E&S risk to a project is critical, in particular impacts of associated facilities. They can present a major risk particularly as influence over managing them is limited.

• Where significant risks are identified for associated facilities project sponsor’s should have a strategy to meaningfully engage third parties to adopt good E&S management practices from the outset to mitigate risk and associated spiraling project costs.

Thank you