Out of the conflict zone: the case for community consent processes in the extractive sector.

• Author: Spears, Suzanne A.

An examination of contemporary struggles over extractive industry projects shows that they are not adequately captured by current CSR strategies because they are not exclusively disputes about the environment, human rights or health and safety as those subjects are generally understood by companies. Rather, they are better understood as disputes over community control of resources and the right of community members to control the direction of their lives. This Article proposes that extractive industries can tackle the underlying causes of the growing opposition to their projects in the developing world by engaging in consent processes with communities and groups directly affected by projects with a view to obtaining their free prior and informed consent (FPIC). The authors propose that FPIC must be enduring, enforceable, and meaningful in order to take companies and communities out of their current defensive positions. FPIC should instead allow companies and communities to take up proactive positions--with those companies that have the consent of the communities in which they operate obtaining a competitive advantage and those communities that have enforceable agreements with companies obtaining control over the natural-resource-based development process on which their future depends.

1. INTRODUCTION

   These natural resources are ours ... If I enter your house, I knock first. When have they asked our permission to enter a community? ... Never. (1) Miguel Palacin, Peruvian Indigenous Leader, Sept. 3, 2007 Why is it that, with many of the large extractive industry companies having taken up the mantra of corporate social responsibility (CSR) in recent years, (2) conflicts between such companies and their host communities are multiplying as never before? Today extractive industry companies can call upon a range of CSR initiatives, standards and tools to help them manage community relations responsibly, and many major companies have codes of conduct in place. Yet barely a day goes by without news of another multi-billion dollar energy or mining project being protested, delayed, occupied or otherwise blocked by community opposition. The number of disputes between foreign investors and host states is also on the rise and not since the 1980s have we seen as many government interventions in energy and mining investments as we have seen in the last two years--many as a result of or accompanied by vigorous community opposition.

   An examination of contemporary struggles over extractive industry projects illustrates that they are not adequately addressed by current CSR strategies. Such strategies seek to address only a narrowly circumscribed range of headline-grabbing issues, such as extractive industry companies' complicity in human rights abuses by security forces, their involvement in corruption and their role in fueling armed conflict in diamond-rich countries. In addition to these important concerns, CSR must also begin to address the underlying causes of community opposition to extractive industry projects, which are likely to relate to the rights of communities to control the natural resources they have long seen as their own and of community members to control the direction of their lives. In other words, to overcome conflict, the new generation of CSR techniques must contribute to sustainable development.

   Building on the findings of a number of recent studies, (3) this article proposes that extractive industries can tackle the underlying causes of opposition to their activities in the developing world by engaging in consent processes with communities directly affected by their projects with a view to obtaining their free prior and informed consent (FPIC). In addition to being free, prior, informed and consensual, FPIC must be enduring, enforceable and meaningful. Although fraught with contingencies and in need of considerable further analysis, FPIC presents the obvious next step in the evolution of the relationship between extractive industry companies and communities, as it is a model of stakeholder engagement with the potential to address the complex and dynamic root causes of community concern.

   If implemented properly, FPIC processes should take companies and communities out of their current defensive positions, in which companies attempt to manage community-related risks in order to protect their social licenses to operate, and communities disrupt extractive industry projects in attempts to protect their ways of life. FPIC processes should allow companies and communities to take up proactive positions instead; companies that maintain the consent of the communities in which they operate will obtain a competitive advantage, while communities that have enforceable agreements with companies will have more control over the development processes on which their future depends. If properly obtained, FPIC should allow large extractive industry projects to go forward in a less conflicted atmosphere.

   Part II of this Article explores why extractive industry projects are particularly vulnerable to community opposition, and identifies the triggers for and underlying root causes of that opposition. Part III examines the emergence of social engagement as an objective of the extractive industries in the 1990s and the development of second-generation CSR initiatives since then. Part IV examines the emergence of sustainable development as an objective of the extractive industries and introduces the concept of FPIC as a third-generation CSR technique. Part V presents the principal challenges facing FPIC, including concerns about sovereignty, the legal status of the concept, and the difficulty of "operationalizing consent." Part VI illustrates the themes discussed in the preceding Parts by discussing four case studies of extractive industry projects in Peru. Finally, we offer some preliminary conclusions about community consent processes.

2. EXTRACTIVE INDUSTRIES IN CONFLICT WITH COMMUNITIES

   During the 1980s and 1990s, relatively depressed mineral prices and the dominant development theories of the time contributed to a trend of privatization, deregulation and increased openness to foreign direct investment in the extractive industries of developing economies. (4) As a result, foreign direct investment in those countries' extractive industries rose by nine times between 1990 and 2000 and by more than fifty percent between 2000 and 2005. (5) The recent boom in mineral prices, spurred in large part by the rapid growth in the Chinese and Indian economies, means that extractive industries are likely to continue expanding into previously untouched land and coming into contact with new communities in the developing world in the coming years. (6)

   Given their prominent role in the mineral production of many developing countries, transnational corporations inevitably become associated with the social costs of extraction. (7) Few other industry sectors have such a profound social impact-and consequently such a propensity to provoke community opposition-as the extractive industries. At the same time, the sector is particularly vulnerable to disruption by community opposition and in need of earning and maintaining the trust of affected communities over time. The following three Parts will explore why extractive industries find themselves in this conundrum, beginning with an examination of the vulnerability of the extractive industries to community opposition, and then examining the triggers for and underlying root causes of opposition to extractive industry projects.

   1. Vulnerability of the Extractive Industries to Community Opposition

      As a preliminary matter, extractive industry projects are particularly vulnerable to community opposition because they are very long term (generally lasting at least twenty years), complex (usually involving a chain of investments, multiple contracts and numerous parties) and capital intensive (often requiring investments of several billion dollars). Because revenue does not begin to flow until the entire project is complete, breakdowns or delays in any part of the integrated chain of investments as a result of blockades, work stoppages, lawsuits, and other forms of community opposition can negatively affect capital recovery and overall project internal rate of return.

      The financing, construction, and operational risks associated with extractive industry projects all increase as a result of community opposition. Financing risks increase because investors and financial institutions may delay their approval, impose additional conditions or decide not to finance a controversial project or company. (8) Construction risks increase because delays resulting from community opposition may raise costs and trigger contractual penalties or finance charges. (9) Operational risks increase because a disrupted project might not be able to produce a sufficient quantity of output, and may have higher production costs, reduced access to necessary inputs, and reduced access to markets. (10) Community opposition also might make it more difficult to attract qualified local workers, require greater expenditure on security and raise tensions to the point where it becomes unsafe for expatriate management personnel to reside in the host community. (11)

      Conflict with communities also increases reputation and legal risks for extractive industry companies. (12) Reputation is an extractive industry company's lifeblood, as it is the key to attracting quality partners, gaining the opportunity to extract and distinguishing one company from another. (13) Reputations can be tarnished by media reports, NGO investigations, lawsuits and activist campaigns that bring international attention to the negative effects of a company's projects in remote parts of the world. Mounting public relations campaigns, implementing CSR programs to repair the damage, and defending or settling lawsuits are expensive endeavors that take up significant...