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Financing for Development

Adequate rehabilitation and the proper resettlement of those displaced as part of development-induced displacement have always been a difficult issue to resolve. The method usually favoured by governments has been to offer compensation, but this is never sufficient, for such sums accrue to the ultimate project costs and the invariable tendency is to minimise these. This article, by citing diverse examples pursued by different governments, shows how innovative methods of "benefit-sharing", wherein proceeds from the proposed project also assist the displaced in rebuilding their lives, offer a possible solution to the question of satisfactory rehabilitation and resettlement.

Special articles

Financing for Development


Economic and Political WeeklyMarch 24, 20071035practices, delays, etc, leaving the goal of oustees’ reintegrationand reconstruction unachieved.Moreover, research has found that RAPs are too often devoidof allocations for investment in development activities for theresettlers, as distinct from restorative activities. The resettlementpolicies of the World Bank, ADB, and other development agen-cies do provide room for investing in resettlers’ development overand above the payment of individual compensations. But becausethese policy provisions are seldom implemented (a World Bankstudy), the insufficient financing not only chronically ruinsresettlers’ livelihood, but also undermines the total economiccontributionsof projects with resettlement components. Con-versely, better resettlement financing results also in overallbetter performing projects.Fortunately, however, new experiences in several countriesalso reveal the seeds of alternative approaches. Moreover, theseare not piecemeal or accidental acts, but rather significant macro-societal measures. They include adopted legislation for creatingadequate financial capacity for resettlement. Such approachessuggest valid alternatives to current under-financing patterns inother countries as well.II‘Where Would Resources Come From?’When the question of allocating more resources for RAPs israised, the official responses usually are: “We pay compensation.There are no other financial resources for the resettlers”; or“Where would the resources for more funding come from?”In fact, and fortunately, much better responses are possible.Certainly, resource scarcity is a real constraint. But is it a constraintthat cannot be overcome?Resource constraints during resettlement implementation areoften an artefact of inadequate pre-project cost calculations forthis component, not of absolute resource scarcity [Pearce 1999,Pearce and Swanson 2004]. Undervaluation of losses andunderestimatesof resettlers’ real reconstruction costs coalesceinto under-allocations in financing at the very start of the project.This underbudgeting is much harder to correct later, duringimplementation, even if RAP implementers realise that initiallyallocated resources are not up to their complex tasks.Despite constraints and scarcity, there are ways to mobilisethe necessary financial resources to do the resettlement programmeswell and achieve resettlement along with development. Economictheory comes to help, pointing to significant resources generatedby the very projects that impose the displacement.The usual resource for financing RAPs and compensationobligations has been and still is today an upfront budget allocationfor payment of compensation. As long as the mindset of decision-makers and financial planners is entrenched in the belief thatcompensation is all that is due and needed for resettlers to recover,we can expect only (i) a limited upfront budget allocation, and(ii) attempts to push this allocation to the lowest level tolerable.This belief is cultivated and reinforced by the long persisting(but never actually proven) assumption – originating in obsoleteeconomic theory – that compensation alone would be sufficientfor income restoration.We question this mindset. These assumptions have been empiri-cally proven as incorrect. For a policy to succeed, the means forachieving its objectives must be commensurate with these otherobjectives, at the level necessary to render the objectives feasible.Furthermore, a basic economic principle, germane to the circum-stances of expropriation and forced (non-market) acquisition, is thatproject costs should not be externalised. Yet, such externalisationdoes happen [Daly 2004] whenever the financial means are shortof covering all costs imposed on the displaced people, making themend up worse off than they were before the project.Consequently, resource allocation should be keyed to the pursuitof the policy’s objectives in resettlement. If the project’s budgetbalance has its dial set only on the narrow task of delivering somecompensation but not on what compensation can actually achieve,then the incentives will be to minimise payments and to set thecompensation dial low from the outset. If, however, the dial ofthe budgeting balance is shifted to reaching the policy goal oflivelihood restoration and improvement, then the allocation ofrequired means would be much higher from the outset.This dilemma confronts project designers particularly in large-scale projects, which have to pay substantial aggregate amountsas compensation, while being under pressure to minimise totalcosts in order to increase the project’s attractiveness to fundingauthorities. However, these “substantial aggregate amounts” tendto obscure the fact that, because of the high numbers of displaceesin large infrastructure projects, on a per capita basis the com-pensation amounts to pitifully little.Furthermore, large-scale projects are by definition high costand require mega-investments. Compared to these mega-costs,the outlays for resettlement remain a limited fraction of totalbudgets. Resettlers claim that if the public sector has resourcesto finance the physical infrastructure built by the project, thenit is only right to also allocate a sufficient amount for economi-cally restoring those whose livelihoods are put at grave risk bythe project. This is a powerful argument, which can be discountedonly at the peril of growing political discontent and instability.IIIEconomic Rent as Potential ResourceReturning to the question about “where would resources comefrom” to increase the financing of resettlement, we will refer tothe experience of several countries that have faced the samequestion and found novel answers and solutions. We believe thatthese approaches hold lessons that can be replicated.In essence, these solutions revolve around (a) using the windfalleconomic rent generated by the exploitation of natural resources,as well as (b) using a fraction of those projects’ normal benefitsand channelling them to reconstructing resettlers livelihoods athigher than pre-displacement levels. These solutions are notlimited to hydropower projects: the rationale applies to othercategories of projects, especially in the extractive industries.The economic theory of rent is of particular relevance for theargument that certain categories of projects, usually unfeasiblewithout population displacements, also generate surplus (wind-fall) benefits that can be used for overcoming resource scarcityin financing resettlement.To clarify the potential role of economic rent, we draw on arelatively recent World Bank study focused on “measuring andapportioning rents from hydroelectric power developments” andon how economics defines the concept of economic rent [MichaelRothman 2000]. The study’s author examines several rent-capturemechanisms and the reallocation of rent, drawing on alarge body of economic literature. Though it was not written forthe purpose of resettlement financing, the study speaks to the
Economic and Political WeeklyMarch 24, 20071036issues we address here about allocating a percentage of theeconomic rent towards better funding the population dislocated– and to be resettled – by such projects.Economic rent is defined in classic economic theory as a surplusreturn over and above the value of the invested capital, materials,labour costs, and other factors of production employed to exploitnatural resources. The footprints of projects that exploit naturalresources require considerable amount of land (and/or water) andthey trigger forced displacement. These include mining industryprojects, oil and gas projects, hydropower projects, etc. Bysecuring, through expropriation (or purchase) access to lands richin natural resources, such projects buy the opportunity to harvesta substantial economic rent, above the average returns in othersectors. Economic analysis shows that economic rent,…arises when exploiting a resource that Nature has endowed witha value that is independent of any labour, capital or entrepreneurialeffort applied to the resource. Resource developers, therefore, donot “earn” rent as they do normal profits (ie, return to capital andentrepreneurship). Rather, rent is a windfall created by exploitingthebounty of Nature. The owner of the natural resource is the ownerof the rent. Typically, the natural resource is an attribute of a particularpiece of land that has minerals under it, or water falling over it,or some other attribute that produces rent [Rothman 2000:5].The amount of the rent depends on various factors, such asthe quality of the resource and its scarcity. The higher thequalityof a resource compared to the same resource at adifferentlocation, the higher the rent that can be captured byexploitingtheformer. Yet the lower quality resource would stillyield aneconomic rent over normal returns to capital and en-trepreneurship.The scarcity of certain natural resources, and the inherentquality differentials in resources ensure the long continuity ofeconomic rent accrual to the owners (or users) of the resource.Such rent – and this is an important point directly relevant tothe subject of compensation and benefit-sharing – is defined ineconomics as a “windfall”, significantly in excess of the normalrate of return to capital and results from exploiting the “bountyof nature”. Therefore, ownership over the resource becomes mostimportant since ownership gives entitlement over returns anddetermines how these are allocated and used.When such resource exploration and exploitation projects areundertaken by public sector enterprises, the economic rent cap-tured through such projects is usually delivered back to the state,which represents the resource owners, the public at large. Ofcourse, given the great variety in tenure regimes, the rights tothe rents must be regulated by laws:Ownership of the land and of the rights to its rents differ withthe nature of the resource and with local law. In some cases, theowner of the land may also own outright all the rights to it. Inmany cases, governments own the land or the rights to its attributesthat produce the rents. Governments, in the name of the publicthat owns the resources, then typically try to “capture” the rentthrough royalties, stumpage fees, competitive auctions, develop-ment licence fees and other mechanisms. A very large body ofliterature examines the efficiency and effectiveness of rent-capturemechanisms [Rothman 2000:5].Once such rent is captured through various mechanisms, thequestions relevant to our argument here are: how should thesurplus be used? Is it appropriate to redistribute it evenly to thepopulation at large? Or should some particular groups be allowedto benefit with priority from its capture?The only logical answer is: Given the asset-dispossession anddecapitalisation process that occur when such projects are built,it is fair and necessary that populations that lose their livelihoodshould have a priority call on such resources. The state and govern-ments are ultimately those who decide on allocation priorities andon the proportions in which the captured rent is allocated.IVProject Benefits as Financial ResourceIn addition to economic rents, however, another financingsource upon which the novel practices emergent in resettlementhave begun to rely on is the project’s normal and long-termexpected stream of benefits.The investments needed for resettlers’ reconstruction can beincreased not only from the upfront budget allocations to aproject, but also on account of the project’s future benefit streams.Regardless of the sector, each successful project has its expectedstream of benefits, even if it does not capture an economic rentfrom natural resources extraction. The avenue of “benefit-sharing”can serve the goals of the resettlement policy in those situationsof scarcity when sufficient upfront budgetary resources cannotbe fully found and allocated ex ante. In a detailed study of suchapproaches, van Wicklin provides numerous examples of projectsin several economic sectors that already are putting in practicesuch mechanisms of benefit-sharing, and argues that thisapproachis legitimate on four powerful grounds: economic,financial, moral and political [van Wicklin 1999].True enough, the project’s stream of benefits emerges later, whilethe financial resources for good resettlement may be needed earlyin the project’s life. However, as in many other respects, creditarrangements can be made from the project’s start to resolve thistime-conflict, counting on benefits that will emerge after the project’sfull completion (sometimes starting even during its implementa-tion). While the upfront budgetary resources are available in theinitial stages of relocation, a share of project benefits can startflowing into the resettlement areas during the reconstruction period,and continue. This will sustain the post-displacement reconstructioneffort long beyond the completion of the given project.Policy Support to Benefit-SharingAt this point, a policy query may come up: is using a shareof project benefits allowed by existing resettlement policies? Oris this a policy innovation, which was not envisaged and includedwhen existing resettlement policies were conceived and adopted?The latter is not the case: at least in international policies,benefit-sharing is not an unheard of innovation, but a clearlystated principle. Whether the principle of benefit-sharing withresettlers is explicitly included in national policies varies fromone country to another. International resettlement policies suchas the ADB policy on involuntary resettlement and the WorldBank’s resettlement policy include verbatim the principle of“enabling resettlers to share in project benefits” [World Bank1990, 2001; ADB 1995, 2003]. ADB’s involuntary resettlementpolicy requires that ADB development projects entailing resettle-ment “make development not only economically but also sociallyand environmentally beneficial” [ADB 1995: 8] for their targetpopulation. Further, ADB Operations Manual F2 on involuntaryresettlement (2006)requires that projectstreat involuntary resettlement as a development opportunity, allowplanners to manage impoverishment risks and turn the peopledispossessed or displaced into project beneficiaries” [ADB2003:2].
Economic and Political WeeklyMarch 24, 20071037However, in resettlement practice this supportive provision ofinternational policies is far from being consistently implementedeven in projects that these institutions co-finance, thus as suchimplementation depends also on political will in various coun-tries. This is one of the explanations for why numerous resettle-ment project components are not endowed with the sufficientresources that they need to succeed. The non-use of benefit-sharing mechanisms in public sector projects expresses,ultimately,the absence of local political will to do so.During the last 10-15 years, the need – and the advantages –of channelling a fraction of benefits to the people and areasadversely affected have been gradually recognised in variouscountries. This has led to laws and regulations mandating benefit-sharing. For instance, explicit measures for channelling a per-centage of the project’s financial benefits back to resettlers arenow implemented, legally and systematically, in developingcountries such as Brazil, China, Colombia, and sporadically –in some other countries. These are what we call “advancedpractices” or innovative practices. But they are still far from beingadopted as general practice in all developing countries.The room for replication is therefore vast and wide open.Rationale for Benefit-SharingThe theoretical rationale for project benefit-sharing rests onseveral solid grounds. Such approaches:– go far toward reducing or preventing potential risk of impoverish-ment from becoming real impoverishment outcomes;– contribute to achieving the overarching goal of povertyreduction;– are economically rational for the project itself, facilitating andspeeding up the technical construction process by reducing delaysresulting from resistance or protracted negotiations. Projects canbe completed sooner rather than later, and the stream of projectbenefits begins earlier;– are equitable, meeting the ethical demand on developmentinterventions to spread development benefits widely; and– are politically sound and necessary to increase satisfaction andto prevent growing adversity vis-à-vis the project among thesurrounding population.The financing of post-displacement rehabilitation throughbenefit-sharing mechanisms is slowly being embraced as legitimate andincremental to individual compensations paid on a family-by-family basis. Countries tend to use this mechanism for investmentsin the welfare of the displaced groups as large collectivities, througharea-development programmes around reservoirs.In sum, the advantage of using economic rents and projectbenefits is that the financing necessary to avoid displacees’pauperisation becomes part of the economics of thedisplacingproject itself. This type of financial capacity can beincorporatedfrom the outset into the overall project’s economicand financial architecture, easing the demands on ex ante bud-getary resources.VPolitical WillFinancing Is Not Just a Resource MatterCertainly, there are always competing demands on the rent andbenefits that projects generate. How these competing demandsare prioritised depends, once again, on the ownership over thenatural resources, on the direct responsibility for the projectcausing the displacement and on political will.The financing of improved resettlement is – obviously – notjust a financial resource matter. Like all matters pertinent toresource allocation, it depends on political will and politicaldecision-making by project owners. The project owners – eitherthe state, or a private corporation – are those who deliberatelywill a forced displacement, when they decide to begin a projectpredicated on population relocation. The same actors have to willthe resources for rectifying the harm inflicted by displacement.In this respect, distinct consideration should be given to thetwo typical categories of projects in which these issuesemerge.Such projects are either public sector projects, or areprivate for-profit projects in the business sector. Differencesamong them affect decision-making mechanisms.In public sector projects, the major decisions on benefit allocationare made at the political level, where priorities are ranked. Thisis why using a fraction of project benefits for sound resettlementis regarded as an issue of political will at the state and governmentlevels. Compensation resources, in principle, are not in dispute,because these must be secured by existing law as a matter of propertyrestitution, guaranteed in all constitutions. But compensation aloneis not sufficient to achieve the objective of livelihood restoration,and the statistically common outcome is failure and impoverish-ment. Allocating the increment of financing – by using a fractionof economic rent returns and of normal benefits – may make thecritical difference between failed resettlement with impoverishmentand successful resettlement with development.The choice is stark, and the outcomes predictable.Given that the historical record of displacement is well knownand a reliable predictor, the absence of an explicit legislation forbenefit-sharing from public sector projects causing displacementmeans, in unambiguous terms, accepting in advance that resettle-ment will fail to achieve restoration of livelihoods. The displacedgroups will be left to end up worse off than before. Equally starkly,it means not repaying in full society’s debt to those expropriatedand condoning cost-externalisation and impoverishment.In fact, the issue in public sector projects – and the political choices– are not so much about the principle of returning economic rentfrom resource development to the public, as it is about the specificsegments of the public to which resources are returned.The remarkable cases described further in this paper are amongthe cases seen by the World Bank study as still “rare” in thehydroelectric sector [Rothman 2000:1]. But they embody a newtrend. The novel element in these cases is that the respective countrygovernments have enacted in law explicit procedures for regularlyallocating a percentage of benefits to resettlement areas. Theseprocedures distinguish the benefits to resettlement areas from benefitschannelled to the general public of electricity consumers in theformof lower tariffs. The examples will show that such distinctionsare feasible and that these mechanisms chart a novel path.Furthermore, these cases implicitly suggest also the feasibilityof replicating such allocative procedures in public sector projects,and not only in hydropower, but also in mining projects and otherextractive industries (oil, gas, minerals, etc). In fact, deliveringthe captured economic rent back to the general public is in itselfnot a novel practice: it has been used for a long time in manycountries. What is novel is the enactment of the priority of aspecial sub-group of the public (those displaced and their hosts)and of its granted entitlement to an earmarked amount. Theearmarking of a certain percentage for the area populations
Economic and Political WeeklyMarch 24, 20071038affected by displacement is a financial and social innovation.Applying these novel mechanisms to an increasing number ofprojects, and allocating by law such incremental financing, wouldgo far in counteracting the risks of impoverishment.When private sector entities own such resource-related projects,these entities capture the same kind of economic rent as a“windfall” additional to “normal” rates of return to investments.The argument for channelling a share of benefits to reconstructionpost-resettlement is therefore similar. If anything, it is evenstronger: in private sector projects undertaken for profit, the rentand other benefits are not returned to the general public, but goesonly to the parties investing in the project itself.The initial investors and the shareholders of such private com-panies are entitled to benefits and dividends because they investedby upfront financing or invest by purchasing shares of these companieson the stock market. Generally, the people displaced for buildingsuch enterprises cannot afford to be shareowners. But the indis-pensability of their lands for creating the enterprise makes theman indispensable party, a “stakeholder” in the project building thenew enterprise. The lands formerly owned by the displacedpopulation are used and “invested” inthe new companies, butthe people themselves are being bought out andexcludedthroughimposed expropriation before construction. The price they receivein a non-market transaction forced upon them, a price that carriesthe label of “compensation”, may, atthe very best, be equal to thereplacement value of their land itself,6 but does not include theland’sdevelopmental potential. Yet without these lands and house plotsand communal assets, thenew enterprises themselves would beimpossible. This is why the people who are yielding their landto the projects could be reasonably regarded as “shareholders”.Their contribution is their land, holding great developmentopportunity.The social contract embedded in the principle of land acquisi-tion for development purposes involves the obligation of thepurchasers (or expropriators) to not worsen the condition of theland sellers but to enable them to recover and improve theirlivelihood. They surrender not just any non-essential,indifferentgood. They surrender the economic foundation oftheir existence.It is this economic foundation that must be reconstructed. Ifcompensation payments upfront are incapable to ensure recon-struction of this foundation, as empirical evidence has proven,mechanisms for access to benefit-sharing are indispensable tosecure financing for such reconstruction. And this certainly posesa major theoretical question to the principle of compensationitself, in economic theory: why is this principle not extended tothe lost development opportunity intrinsic in the asset, leftuncompensated, and is narrowed only to the current value of theundeveloped asset?VIGood National Practices for Benefit-SharingThe approaches to benefit-sharing can become trendsetters. Itis therefore worth learning about them.Types of MechanismsWe can distinguish several mechanisms for sharing andreinvestingthe benefits in resettlers’ development. These mecha-nisms include not only the people displaced and relocated, butalso the host populations, who also suffer risks and impactsassociated with “hosting”. Resources are channelled on an areabasis to the geographic zone around the hydropower reservoir,inhabited by both resettlers and hosts.The six main mechanisms are:(i) Direct transfers of a share of the revenue streams, to financespecific post-relocation development schemes;(ii) Establishment of revolving development funds through fixedallocations; while the principal of those funds is being saved andpreserved, the interest generated from saving the principal is usedfor post-resettlement development;(iii) Equity sharing in the new, project-created enterprises(andother productive potentials) through various forms ofco-ownership;(iv) Special taxes paid to regional and local governments,additionalto the general tax system, to supplement localdevelopmentprogrammes with added initiatives;(v) Allocations of electrical power, on a regular and legallymandated basis;(vi) Granting of preferential electricity cost rates – or, forexample,lower water fees, or other forms of access to in-kind benefits.Obviously, every such mechanism requires legal enactment toensure implementation over time and financial accountability.Through legal commitments, the state recognises its responsi-bility in re-establishing the resettlers.Over the last 10-15 years, the adopted regulations have gonethrough rounds of testing and repeated refinements, toimproveoninitial rules. Each country has designated a some-what different share of benefits to be invested in developingthe resettlement areas. Since these financial resources areadditional to the resourcesprovided as compensation to indi-vidual families, the flows of shared-benefits have incrementalimpacts. In fact, in some countries compensation standards havebeen increased in parallel with enacting benefit-sharing – seefurther, the case of China. Together, they stimulate post-relo-cation development.In all cases described below, the flows of shared-benefits are notlimited to a short period: they are deemed by law to continue forlong periods, sometimes for the life of the enterprisesconstructedbythe project. The continuity of benefit flows becomesa foundation of long-term development for those uprooted andrelocated.Brief description of such practices in various countries follow,after which we will distil some common characteristics.ColombiaStarting in the early 1990s, Colombia began allocating a per-centage of benefits from hydropower plants to the developmentof the areas into which the displaced reservoir populations wererelocated. In 1993 Colombia enacted a legal framework forbenefit transfers, National Law Nr 99. It was shortly followedin1994 by official regulations (“Decree 1993”) which specified theprovisions of the national law. Two years later, this decree wassupplemented by National Law Nr 344, which created an“Environment Compensation Fund”, financed through revenuefrom development projects. Shortly thereafter, the allocationstothis compensation fund were increased to 20 per cent of projectrevenue.The Colombian laws also define the proportions of revenuesto be returned to the relocation areas. For instance, 3.8 per cent
Economic and Political WeeklyMarch 24, 20071039of the revenue of hydroelectric plants is to be transferred to theregion’s watershed agencies for new productive investments inwater saving and local irrigation; 1.5 per cent of the projectrevenue must be transferred to the municipalities bordering thereservoir; and another 1.5 per cent is allocated to upstreammunicipalities, beyond the reservoir proper.These transfers, being mandated by the country’s legislation,must be reported publicly and are monitorable. Moreover, thelaws require that the revenue be used only for the purposesoutlined in the respective laws: these are either social develop-ment activities or environmental protection activities suchaswatershed maintenance, tree planting, etc. This way thebenefitsare helping to lengthen the lifetime of the hydroelectricplants (eg, controlling siltation), while also enhancing the welfareof the area populations [van Wicklin 1999, Egre Roquet andDurocher 2007].BrazilMassive investments in hydropower are a pillar of Brazil’stransition from an underdeveloped country to a mid-level incomecountry. Enormously rich in natural resources, the country needsvast electrical power for the industries created to process naturalresources, industries that in turn provide employment for Brazil’slarge population. This is why the country has embarked over thelast 30 years in one of the world’s largest hydropower programmes,comparable to China and India.The multiplication of big reservoirs, however, has led to largedisplacements. When the programme started, the country wasin fact not prepared to appropriately handle such massive dis-placements. The early social results were dismal. The affectedpeople were severely impoverished and many moved anarchicallyinto slums around big towns. National policy guidelines forregulating displacement and resettlement did not exist7 andcommensurate financing, apt to address displacement-causedeconomic distress, was not made available either.A politically important step to redress this sombre situationwas the decision to revise the country’s constitution. Brazil’sparliament included in the constitution (1988) the principle ofreinvesting a percentage of royalties from hydropower in theresettlement areas.Subsequent to this constitutional change, Brazil proceeded toadopt, in rapid succession, a series of laws to translate the newprinciple in practice by defining entitlements and specific amountsof transferable royalties, together with procedures for assuringa regular timetable for such allocations. Moreover, since Brazilis a federation of states, the laws were adopted at the federallevel, to be binding for all of Brazil’s states. Another task wasto define an agreed balance between resource transfers to stateauthorities and transfers to federal authorities. Four federal lawsto define this balance were adopted in the space of 12 years,between 1989 and 2000: Law 7990 (in 1989), Law 8001 (in 1990),Law 9433 (in 1997) and Law 9984 (in 2000) [Gomide 2004,Trembath 2007].From the outset, the policy decision was to direct the lion’sshare of resources – roughly 90 per cent of all royalties frompublic hydropower plants – to the states and municipalities andonly 10 per cent to federal agencies. For instance, the laws of1989 and 1990 specified a distribution of 45 per cent to the overallbudgets of affected states, another 45 per cent to the directlyaffected municipalities within those states, 8 per cent to the federalelectrical regulatory agency and 2 per cent to the Brazil ministryof science and technology. Significantly, – in order to ensureproper resource management, consistent with the objectives ofthis special legislation – the laws also mandated how the fundsshould be further divided: for instance, 40 per cent for themaintenance of electrical services, 35 per cent for waterresourcemanagement and data gathering and no less than 25per cent for environmental protection [Gomide 2004]. Royaltiesare to be paid throughout the power plants’ lifetime, to helpprovide for the long-term “economic sustainability ofaffectedcommunities” [Gomide 2004; Egre, Roquet and Durocher2007].Subsequent laws, in 1997 and 2000, took the prior legislationfurther, regulating national water resource use and introducingpayment for the use of reservoir waters. The legislation alsodistinguished between royalties and financial compensation: thelatter is to be paid to the municipalities with areas inundated bythe reservoir. The compensation is calculated as a very smallfraction per MWh of generated power (amounting to US$ 0.93/MWh),8 which becomes significant country-wise, on the aggre-gate. To firmly implement these provisions, a national wateragency was created by Law 9984 (2000).What have been the results? A 2004 assessment of this pro-gramme informs us that 137 hydropower plants with 145 reser-voirs paid the requisite royalties and financial compensationto22of Brazil’s states and 593 municipalities. Of these, 252 munici-palities received financial compensations, 16 municipalitiesreceived only royalties, and 325 municipalities received bothroyalties and compensations. Annually, the amount offinancialcompensation and royalties exceeded US$ 400 million[Gomide 2004].ChinaSome of China’s largest dams were built before 1980, suchas Xinanjiang, Sanmenxia and Danjiangkou, each onedisplacingmore than 3,00,000 people. The inadequate financingof resettlement at that time led to disastrous impoverishment,deep resentment among the affected populations, and politicalinstability.After realising the errors of the 1960s and 1970s and their tragiceffects on the population and the national economy, Chinaembarked on a radically different course. Starting from the 1980s,China began to enact a series of governmental policies to regulateand improve resettlement, gradually increasing the state-financingof Development-caused Forced Displacement andResettlement (DFDR) processes. Regulations were passed,startingin 1981 with the decree of the ministry of finance and of theministry of electric power that required each power plant toallocate 0.1 Fen/kWh to investments in the reservoir area for thelife of the power plant. In 1985 China’s state council decidedto create a Post-Resettlement Development Fund in which con-tributions from power companies would be deposited. A com-prehensive land law was adopted in 1986, the Land Adminis-tration Law (LAL) which contained detailed provisions regardingacquisition and displacement operations. Subsequently, regula-tions were issued in 1991 to specify and enhance the compen-sation normsof the LAL for re-settlers from medium and largereservoirs. Theentire Land Administration Law was re-examinedand improved in August 1998 by the Ninth National People’sCongress (NPC).9The objectives of all these regulations were
Economic and Political WeeklyMarch 24, 20071040defined in terms of helping resettlers to develop new forms oflivelihood and production.As distinct from land acquisition acts in other countries, China’s1998 Land Law contains explicit and detailed provisions andnorms for people’s sustainable resettlement, rather than only foracquiring cultivated lands. More recent legislation adopted bythe state council of China [State Council 2006a, 2006b] hasrestricted further the previous authority of local governments(particularly, the counties) to resort to land acquisition – anauthority that these local governments have often abused, spark-ing peasants’ protests. These added restrictions on expropriationsreflect the central authorities’ efforts to reduce the loss of arablelands,10 counteract abusive land seizures and the resulting peasantprotests, and to keep tighter checks on the aggregate size ofinvoluntary resettlements.The Chinese institutional and administrative system providesfor, and requires, that each province establish its own institutionalcapacity for resettlement, as a “Provincial Resettlement Bureau”equipped with a large multiprofessional staff specialised inresettlement operations and mandated to look at virtually allaspects of DFDR operations in that province.11 These are importantagencies on their own, despite their modest title as “bureaus”,given that the population in each of China’s provinces is in thetens of millions. Significantly, the legislation confers on theseagencies the responsibility of managing the reservoir develop-ment funds and initiating development interventions to benefitthe resettlers. Keeping in mind that China has increased, in severalsuccessive stages, the amount of resources channelled as “com-pensation” to the displaced populations, it is obvious that thecombination of financing through multiplechannels results inmuch more support for sustainable reconstruction post-resettlement.This is one reason why the incidence of impover-ishment of displaced people has been decreasing in China overtime, despite the increase in numbers of people displaced, asreported by evaluation studies by theWorldBank and otheragencies [Piccioto, van Wicklin and Rice 2001].CanadaAmong industrialised countries, Canada stands out by the largesize of its hydropower potential. To exploit this potential, Canadahas embarked on a systematic programme of building major dams.Indigenous tribal populations, who have customary land rightsrecognised under Canadian law, populate some areas in whichmany of these dams are being built.In 1971, HydroQuebec, Canada’s major power utilityannouncedplans for the James Bay project, which would includethe construction of as many as 20 dams [Scudder 2005]. Theproject would have negatively affected the entire homeland ofthe tribal Cree Indian population. The Cree organised themselves,protested intensely and publicly, and resorted to legal action aswell. The Canadian courts decided in their favour and stoppedproject construction. The protests of the Cree, who were laterjoined by the indigenous Inuit populations, along with NGOsadvocating for indigenous and environmental protection, deter-mined significant changes in the position of the Canadian gov-ernment and of its public utilities.To address the needs of this population and to recognise theircontribution in land to the country’s hydroelectric developments,Canada’s government and hydroelectric utilities adopted astrategyof partnering with the local indigenous communities.HydroQuebec announced that it would enter into agreements withthe affected indigenous groups for equity-sharing in the envis-aged hydropower capacities. The key premise in these agreementsis that local indigenous communities are also direct investors inhydro projects, by contributing their lands. Even though an up-front compensation is being paid to the Inuit population for theland, and also for helping them to adjust their productive fishingactivities, the option of equity-sharing was made available aswell. This equity enables the tribal Inuit communities to receivea share of project benefits as a partner, for the long term,proportionately with their land share in the construction of theproject. The power utility provides the full financing and con-structs the dam and power plant, the indigenous populationsprovide the lands, and then they proportionally share in theprofits. This approach avoided the economic displacement oflocal communities, and the risks of impoverishment from underc-ompensated displacement, by recognising their shareholding statusand financial entitlement to part of the project’s benefits. Thiseconomic and financial arrangement is currently in full operation.NorwayDistinct from the approaches to benefit sharing describedabove, Norway employs special tax mechanisms. A country inwhich electricity production and exportation is one of the mainbranches of the economy, Norway adopted a new law in 1997– the Power Taxation Act – intended to ensure new and highertax payments from power companies, which could then beredistributed.The law entitles counties and municipalities to receive threedifferent types of tax revenue from the power sector. First, allelectricity companies must pay a 28 per cent tax on all of theirprofits. The proceeds from these taxes are distributed in virtuallyequal shares going to the central budget and to the county budget,and with 4.75 per cent directly to local municipalities. Second,a 0.7 per cent property tax must be paid by the companies tothe municipalities they are located in. Lastly, a tax on the useof natural resources, based on the average power generatedoverthe previous seven years, to the municipal and countylevelsis levied and then redistributed. The state also collectsa tax for the use of natural resources, at a flat rate from thecompanies’net revenues [Egre, Roquet and Durocher 2007].Beyond taxation, benefit-sharing occurs in Norway in otherways as well. Norway requires that electrical companies provide,at their own cost, 10 per cent of the electricity that they produceto the local municipality. And of course, companies that areowned by the local governments are required to hand over alldividends to the local owners.Given Norway’s low population density, displacements ofpeople have been, historically, very limited. Nevertheless, thesemechanisms transparently channel very substantial financialamounts to the local populations residing in the areas of thehydropower development, whose energy potential is beingharvested and where impacts from development occur.JapanIn an attempt to minimise the tensions and conflicts inherentinland expropriation and population relocation, Japan hasconductedland-leasing experiments, while renouncing the process ofexpropriatinglands required for reservoirs. When the series of
Economic and Political WeeklyMarch 24, 20071041three Jintsu-Gawa small dams were built – the Jintsu-Gawa DamsNos1, 2 and 3 – the Japanese government, rather than applyingthe country’s expropriation law, decided to only lease the landrequired for the reservoirs from its owners [Nakayama andFuruyashiki 2007]. Payment for the land lease was structuredinto two types of financial transfers, deliberately designed tokeeprevenue accruing to the affected people for a long periodrather than to make only a one-time compensation payment anddislocate them.Twin financial transfers were made:(i) One payment upfront to the landowners leasing the landfor the reservoir, which would enable those farmers to developfor themselves alternative livelihoods, and invest the moneyreceived into non-land-based income generating activities;(ii) Regular rent payments for the leased land, to be continu-ously paid to the local small holders for the life of the project.This way the leased land, although now deep under the reservoirwaters, remains nevertheless a source of constant income for theaffected farmers and their children. Rent payments supplementthe initial upfront compensation and help to ensure livelihoodsustainability even if the new alternative economic activities donot succeed from the outset or do not produce enough.This twinned financing proved to be an effective risk-preemptingmechanism, and the test of time validated it. Recentresearch in the Jintsu-Gawa Dam areas, reported by Nakayamaand Furuyashiki (2007), has confirmed that the power companiesare still paying the rents today, 50 years after the constructionof the three dams. The payments are not a significant burdenon the power companies and they accrue to the new generationsof the families of the initial landowners.Japan has pursued another innovative strategy in planning thelarge-scale Numata Dam, whose reservoir was anticipated todisplace about 10,000 people. To procure new lands for thissizeable population, the government made plans to convert 1500haof dry land on the slopes of Mount Akagi into paddy rice fields,introducing irrigation at the government’s cost. The definedobjective was to achieve physical resettlement with improvedlivelihoods for the resettled people. Each resettler was to receiveanarea approximately twice as large than what they had previouslyowned. When not all of the land of a certain family was to besubmerged, the government planned to pay rent for the submergedportion as if the submerged land was leased by the farmers tothe state, rather than merely paying a one-time compensation[Nakayama and Furuyashiki 2007]. Construction andresettlementplans were ready for implementation, but for other macro-economicreasons the construction of the Numata dam was cancel-led in 1972. Yet, this original, creative approach in Numata planningis relevant for possible replication and actual future testing.VIIConclusions on Benefit-SharingThe experiences described above enable us to distil someconclusions.(i) Need for additional financing beyond compensation pay-ments: While mechanisms employed by these different countriesare largely distinct from one another, with some overlaps, it isobvious that they have a common purpose: the transfer offinancialresources to the resettlers as resources additional tocompensation payments. Different procedures reflect countryparticularities, history, culture, and preferences. The differencesin themselves suggest that there is not necessarily a “one sizefits all” solution. There is vast space for replication, adjustments,and innovations in this respect, open to many other countries.(ii) Benefit-sharing requires political will: A further, obviousconclusion is that political will is indispensable for introducingbenefit-sharing. Such mechanisms cannot be enacted by projectmanagers themselves; they require political decisions at the highestlevel of country governments and other elected organisations.(iii) Policies require legislative enactment and enforcement:Additionally, it is clear that all of the countries mentioned aboveconsider that more than policy decisions and statements arenecessary. To ensure long-term constancy in implementation,transparency for the public, and legal accountability of managersand implementers, the policy decisions for better financing indisplacement and resettlement situations were translated into law.Governments promoted the enacting of legislation to enforcesystematic application, compliance, and enable legal recourse incases of transgressions. In some cases, government decisions orministerial decrees were regarded as sufficient to guide thepractices of the public companies subordinate to those authorities.But in most cases the adoption of laws by the countries’ par-liaments was the more common solution. Adopted laws were,in turn, subsequently revised and strengthened, based on lessonsfrom their initial application.We can also note that the legislation described abovespecifiedtheproportions of sharing among stakeholders, in aneffort to not leave distribution to chance and to subjective,idiosyncratic decisions. The laws also prescribed specific usesof the financial allocations, to prevent distortions in the newregulations’ application.The concept of use itself, in the context of these financialtransfers, has received several meanings in various legislations.Sometimes “use” is meant for specific social developmentactivities,intended to alleviate the impoverishment risks andeffects of displacement and increase the affected populations’welfare. Other provisions refer to investing a part of the benefitsin better environmental protections for the project area, whichalso have subsidiary positive effects on the populations’ welfare.In all situations, benefit-sharing becomes an added mechanism,incremental to compensation and not a substitute for it, diver-sifying the instruments used to counteract the risks of impov-erishing the displaced groups.Last but not least, the fact that such mechanisms are beingcrafted and implemented not only in industrialised countries, butalso in developing countries, is the best response to the questionwe mentioned at the beginning of this paper: “where will themoney come from?” The response is clear: the financial resourcesfor resettlement can be enhanced not only ex ante, throughbudgetary allocations to the project before inception, but alsoby mobilising resources that become available due to the projectitself, ex post, since the need for fully overcoming displacement’sdysfunctions and for sharing the fruits of development remainsstrong and is a long-term need.VIIIA False ObjectionObjections to the novel mechanisms of the kind described inthe present paper are sometimes made on the grounds that thedisplaced groups will have access to sharing in the benefits ofthe new projects simply by being part of the general public and
Minimum Maximum1
Economic and Political WeeklyMarch 24, 20071043“advance on two legs”. That these twinned policies have financialsubstance, and are not just flourishing metaphors, is demon-strated by a series of far-reaching political and economic de-cisions made during the 1980s and 1990s and intensified duringthe current decade. These measures concern the levels of com-pensation payments and how these should be calculated. Thesemeasures have been and continue to be issued in parallel withthe laws described above on mechanisms for benefit-sharingwith resettlers.China’s compensation standards for farmlands, for instance,after having been stagnant (or even been once lowered) duringalong period of 30-32 years, between 1950 and 1981,12 have beenradically modified in the last 25 years, between 1981 and 2006,through a series of massive increases introduced through highlevel policy decisions and translated into building legislations.Both the stagnation period and the increases are reflected inthe following time-sequence and in Figure 1.The 1986 decision made it illegal to compensate farmlandbelow five times AOV and gave local administrations the autho-rity to use much higher levels, up to 20 times AOV. Only a decadelater, the 1999 decision broadened the bracket, elevating the legalminimum to 10 times AOV, with the option of going as highas the 30 times output.However, central authorities realised soon that many localadministrations do not take advantage of the option to paycompensation at the higher levels of the brackets, close to 30times AOV, even when conditions require it. Local administra-tions tended to keep compensations too close to the lower pointof the bracket of 10-30 times AOV (Shi 2007, personal com-munication). This, together with abusive land takes, triggereda significant number of peasant protests. The central governmenttook into account the protests and responded by encouraging localadministrations to use the entire range of the compensationbracket. In addition, in 2004 the government increased the upperceiling of the bracket to a “second maximum”, enabling thepayment of up to 40 times AOV amounts for certain lands, underdefined circumstances. Figure 1 (based on Shi, Zhou, and Chen2006) reflects graphically the introduction of the “second maxi-mum”, (Max 2) in 2004, while in prior years the columns forMax 1 and Max 2 were the same.A little perceived but major difference is in the calculationmethod itself. Indeed, basing land compensation calculationsnoton the replacement cost for land at market prices, but onannual output value is, in most cases, a calculation whichbeginsfrom a higher starting point than is apparent. In mostdeveloping countries, land is transacted on the market; thus,market prices for land are taken as reference for calculation.13In China, however, no land market exists and instead, the annualoutput value of the crop is considered as reference. But the AOVis muchhigher than the farmer’s net annual income from the land,since it includes the cost of labour and inputs. Actual net incomefrom the annual crop is only around 50 per cent of output value,on average. This means that compensation that is equal to 20times AOV is in fact equal to a farmer’s real income for a 40-year period (per unit of land); similarly, a compensation levelof 30 times AOV is equal to a farmer’s net income for 60 years.The critical examination of land takings and compensationpractices has continued in China after the compensation increaseof 2004. In September 2006, the state council of Chinaadoptedanother important decision. While the maximum levelof compensation was kept the same, the decision raised theminimum compensation for farmland acquisition from the priorlevel of 10 times AOV to 16 times AOV. This is a mandatedminimum that makes it illegal to pay less. This measure isparticularly significant because it is intended to counteract thetrend, identified in some provinces and counties, to keep theaverage compensation too close to the previous 10 times AOVminimum line. The new decision prohibits any local governmentin China, however intent that local government might be onreducing project costs, from paying farmers a compensationforfarmland that is less than 16 times the average value of anannual crop.Most significant as well is the introduction in 2006 of an annualpost-relocation fund equivalent to US $ 75 per year per capita toallpeople to be resettled for a period of 20 years after their relocation.For farmers who, after land acquisition change their registrationstatus from rural inhabitants to urban citizens without farmland,the new decision provides for the introduction of a new paymenttoward a “social security fund”, somehow also comparable inits effects to a retirement pension [State Council of PRC 2004,2006a; Shi Zhou and Chen 2006]. These cash payments, to bemade with continuity over a long period, are in essence anotherform of development financing. They represent a supplement(over and above the ex ante compensation) of state-made invest-ments in the development, reconstruction and improved welfareof those displaced: “to satisfy basic necessities or to use as ‘seedmoney’ for further development”. In other words, this supplementis to be used by recipients either as a resource to invest forproductive purposes, or for consumption items.Financial payments for rectifying past under-payments: Onceadopted, the principle of chanelling more financial resources forinvesting in post-displacement reconstruction, coupled with theopen recognition of mistakes committed earlier in China’s re-settlement practices, led to another step. China’s state councilannounced its readiness not only to recognise prior insufficientfinancing and past failures in income restoration, but also torectify it through retroactive payments to large numbers of peopledisplaced in prior years.This massive payment was publicly announced in the landmark2006 decisions by the state council (2006a and 2006b). Specifi-cally, the newly instituted annual allocation of 600 yuan (US$75)per capita for every peasant who will be displaced after 2006by dams-reservoir projects during the next 20 years will also applyretroactively. It will be paid also to all farmers displaced by damsduring all the prior 57 years, since 1949. On a micro-scale, sayatthe level of a peasant family of four persons, the paymentrepresents a total of $ 300 per year every year as a “rent” for20 years, a very significant amount for China’s rural population.To our knowledge, this measure is unprecedented in the re-settlement practice of any state. Its significance of principle, asan act of self-correction and reparation, as well as a forwardlooking decision of development policy and social protection,is not less meaningful than its financial weight.The financial outlays these retroactive payments entail areindeed huge. Data received by the author from China’s NationalResearch Centre of Resettlement (NRCR) put the number ofdamdisplaced people between October 1949 and June 2006 toabout 1,80,00,000 individuals, which over 20 years will entailretroactive payments totalling $27 billion.14Further, the state council decided to extend this correctivereparatory measure also to the population growth in the familiesaffected by displacementduring the prior 57 years. This increases
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