Companies that invest in land and resources in emerging economies risk financial and public relations disasters if local inhabitants feel they are getting ripped off, consultants warned in a report last week.
The report was released by a group known as the Munden Project and founder Lou Munden said: “When we looked at companies involved in international land acquisitions, we found that they experience an astonishing amount of financial damage.”
This ranged from “massively increased operating costs, as much as 29 times above a normal baseline scenario, to outright abandonment of functional operations when they ignore pre-existing or customary local land rights.”
The report was entitled The Financial Risks of Insecure Land Tenure: An Investment View, and Munden emphasized that the financial risks were many and varied from delays in construction timetables to the expropriation of assets “following the loss of insurance coverage.”
He said that, “even more troubling, the escalation of risk can be extremely rapid,” and that conventional techniques for managing risk were inadequate for coping with insecure local land tenure.
Projects go wrong when local people feel they have not been adequately compensated and are being deprived of their land, jobs, water and forests.
This can lead to disruption of many kinds, from roadblocks to frequent acts of sabotage and other forms of violence.
An investing company which then turns to local authorities to put down the resistance can find that its international image is badly damaged.
The report cited the case of Malaysian industrial group Sime Darby in Liberia, which had to suspend the plantation of oil-bearing palm trees in the north of the country under pressure from local communities, and had to renegotiate the amounts paid for land.
Another example occurred in Chile, where Chilean company SN Power had to abandon a hydroelectric project with the loss of US$23 million already invested because it had not obtained approval from native populations.
An attempt by biofuels company SEKAB to buy land in Tanzania for a huge plantation which would affect the environment ran into controversy and cost the company more than US$20 million.
For Andy White, the coordinator of the Rights and Resources Initiative (RRI) in Washington, “the mining sector is the most exposed because it needs a lot of investments.”
“The mining sector is a ticking time bomb all across Africa and now in Myanmar,” he said.
The RRI said that “the pace of deforestation in the country [Myanmar] ... has raced forward unabated.”
Center for People and Forests project coordinator Maung Maung Than said that a conflict in the north of Myanmar “like so many around the world, has its roots in community forest rights and land tenure.”
White said: “It is hard to believe that national governments still embrace unfettered natural resource extraction, turning over valuable land to international investors and domestic elite. In this equation, long-term economic gain is often sacrificed for short-term cash.”
Referring to the example of Liberia, and to a failed venture in Orissa, India, by the mining firm Vedanta which damaged its credit rating, White said: “We have a turning point ... investors will have to go to London or New York to borrow money.”
“The financial sector will eventually understand that all this is unsound, it’s a house of cards,” he said.