Benefit Sharing Mechanisms
The concept benefit sharing
The concept of benefit sharing (BS) is highly relevant both in the political praxis and the scientific literature regarding integrated water resources management (IWRM). The principal idea of the concept is to share the benefits resulting from the development of the water resources in order to satisfy the needs of the concerned populations. Within this broad definition, two dimensions of BS can be differentiated:
Transboundary benefit sharing is based on the presumption that a common management of water resources generates net benefits compared to the unilateral development of the water resources. The concept is about the cooperation of riparian states for the use, protection, or joint development of shared water bodies (transboundary rivers, lakes and aquifers), whereby the riparian states focus on the benefits from water cooperation and the win-win options instead of a potentially conflicting water sharing. Transboundary benefit sharing is presented in detail in another article [add link].
Benefit sharing with the affected local population refers to a commitment to channel some of the returns generated by the operation of a project back to the population of municipalities, where water resources are exploited and infrastructure projects are developed. The relevant forms of benefits sharing are presented in detail in this article.
Relevance of the concept
One of the main critiques to large-scale infrastructure development in developing countries is the notion that most of the benefits go to urban communities, industries and national power supply systems, while at the same time the directly affected communities are the ones bearing economic, environmental and social costs of the infrastructure project. In this context, it has been recognized, that modern compensation policies for project affected people should involve not only basic in-kind and cash compensation for lost assets and lost access to resources, but also measures that aim to restore and improve the livelihoods of the affected populations in the long term.
Benefit sharing has recently become a key element in strategies for the sustainable management of large infrastructure, such as dams, aiming at equitable distribution of project benefits within the society, and particularly with the project-affected people. The concept has been recognized in various national legislations as well as in international compensation policies and guidelines.
Definitions
The definitions presented below are based on the UNEP DDP Compendium “Dams and Development” (2007) and on the Report of the World Commission on Dams (2000), and therefore they refer mostly to large dam projects. However, these benefit sharing mechanisms can be applicable to other types of water infrastructure as well.
Monetary benefit sharing – sharing part of the monetary flows generated by the operation of the infrastructure project with the affected communities, through:
- Revenue sharing
- Preferential rates
- Property taxes
- Equity sharing / full ownership
- Development funds
Non-monetary benefit sharing – integrating project benefits into local development strategies
- Livelihood restoration and enhancement
- Community development
- Catchment development
Monetary benefit sharing
Monetary benefit sharing mechanisms entail sharing part of the monetary flows generated by the operation of the infrastructure project with the affected communities. Five approaches of monetary benefit-sharing are defined below.
Revenue sharing with the local or regional authorities can be arranged through royalties tied to the output of the project (e.g. power generation), or through water charges. The amounts are either settled through negotiations between the local/ regional authorities and the promoter, or defined in the legislation.
Preferential electricity rates or water fees can be negotiated between the local/ regional authorities and the infrastructure operator. In the hydropower context, an important remark in the application of this benefit sharing mechanism is the notion that the benefits would extend to the electricity consumers; however, there may be still local population without electrical connections at all. An adequate measure in such a situation would be to combine this benefit sharing approach with rural electrification programs, for instance.
Another instrument for benefit sharing is taxing the infrastructure operators on the project’s property value or other basis. The State legislation defines the taxes to be paid to the local/ regional authorities, based on a percentage of project sales or net income.
If communities have the means and willingness to invest in the project, benefit sharing can be extended to equity sharing. In such a case, the local authorities get a greater degree of autonomy over the redistribution of the benefits. However, they also share the risks and responsibilities of the venture.
Development funds financed from, for example, power sales and water charges may be established to foster economic development in the project-affected area. The funds can be set up to provide additional long-term compensation to project-affected populations.
These are relatively new mechanisms, and outcomes have been only partially evaluated. The advantages identified so far refer to the opportunities to improve the livelihoods of the project affected communities in the long term, and to establish a partnership between the project developer and the local populations. Therefore, monetary benefit sharing mechanisms could be implemented also in cases where there are no project affected people. Such an approach is valuable to build trust between the project developers and the concerned communities.
Non-Monetary benefit sharing
Non-monetary benefit sharing schemes reflect the development strategy element of a comprehensive compensation policy. There are three possible pathways to generate community profits.
Livelihood restoration and enhancement – by securing income, for example through employment in the construction and in the operation of the project. Depending on the benefits of the water infrastructure, employment can be also offered in the agricultural, fishery or recreational sectors.
Improved community development can be achieved through increasing the access and quality of primary services, such as domestic water supply and electrification, transportation, health and education. The infrastructure project should facilitate the access to markets and common resources (e.g. forests).
Catchment development triggered by the infrastructure projects could improve the opportunities to generate benefits from the management of the catchment area, for example through improved irrigation, reforestation, etc.
Examples
This section contains selected references to benefit sharing in the context of national and international policies.
Benefit Sharing in National Legislation
When the benefit-sharing framework is defined in legislation, it often takes the form of transfers of part of the revenues from hydropower projects to municipalities or regional entities. This is the case in the Norwegian, Colombian, Brazilian and Nepalese legislations.
- Norwegian legislation includes a variety of mechanisms: revenue sharing, equity sharing, development funds, property taxes and preferential electricity rates. This legislation explicitly recognizes that project-affected people, as part of the populations of municipalities in which water resources are exploited, must receive a share of the project benefits, over and above mitigation and compensation measures that are included in project design.
- Colombia’s national legislation stipulates that 3% of revenues from all hydropower projects are transferred annually to the watershed agency to fund watershed management activities working with the basin communities.
Development funds can also be set up to provide additional long-term compensation to project-affected populations, as illustrated by the Chinese legislation on post-resettlement and rehabilitation for hydropower projects. The State specifies the destination of the funds that are transferred to local or regional authorities. Legislation to set up development funds is enacted also in the cases of the Columbia Basin Trust in Canada and the Lesotho Fund for Community Development.
Vietnam
Viet Nam’s current legal framework embodies three forms of benefit sharing suited to people adversely affected by resource development projects.
Equitable sharing project outputs and services(like water and energy services from dam projects) - project-affected people are targeted within existing rural electrification programs and budgets, as appropriate. However, there may be some limitations, such as safety aspects. Also, some communities may prefer to use financial entitlements for traditional livelihood needs first, then improved power services later.
Sharing monetary benefits of resource extraction and use (also hydropower generation) - Local communities who permanently give up their land, or have their resource access permanently transformed due to the project development, can receive a share of project revenue according to a formula defined in regulations.
Non-monetary benefit sharing - People adversely affected by hydropower projects receive extra resource access entitlements to offset permanent loss or reduction of resource access (e.g. enhanced forest access rights; preferential or exclusive rights to develop reservoir fisheries, preferential rights to land downstream to practice freshwater aquaculture, etc.).
The ADB supported the Gov. of Vietnam in the preparation of guidelines for benefit-sharing mechanisms for peoples adversely affected by power generation projects that can be implemented on a pilot basis (project ADB-TA 4689[1]).
Ecuador
Arguably the most advanced and innovative case study in Latin America comes from Ecuador, where the Quito Electric Company (EEQ) has generated hydropower for 40 years. Until recently, the company had a government concession to exploit hydropower in specific locations, and pay nothing for the right to use the water. In 1998, The nature Conservancy (TNC), the NGO Fundación Antisana, the Government of Ecuador, the municipality of Quito, and the Quito water company launched ‘FONAG’ - an initiative to collaborate on the design and development of a water fund for conservation projects and improved watershed management. EEQ signed the FONAG trust fund contract, committing to an annual contribution of 0.5% of profits.
Brazil
Brazil is one of the world’s 3 highest-investing countries in major hydropower dams, with large reservoirs but also severe problems of post-relocation area development and resettlers integration. One-time compensation payments proved disastrously insufficient (e.g.: Tucurui dam; Balbina dam). The Brazilian government adopted several successive policy and legal measures to compel power generation companies and dam owners to ensure continuity of financial support.
The laws introduced financial compensation - 6% of the generation “tariff of reference” - to be paid by power-producing companies (>10MW) to States and Municipalities affected by reservoirs, including local and upstream regularization reservoirs. According to the legal norms, the proceeds are distributed as follows: 45% for States, 45% for Municipalities, 10% for the electricity regulatory agency. The electricity regulatory agency uses the income: 40% for electricity services supervisory activities, 35% for water resources management and data gathering, and 25% for environmental protection. The proceeds distribution scheme is applicable also in the case of Itaipu.
In 2000, a new law increased the amount to be paid by power generation companies from 6% to 6.75%.
Benefit Sharing in Safeguards of International Financial Institutions
World Bank
The World Bank addresses the issue of benefit sharing in its Operational Policies on Indigenous People and Involuntary Resettlement.
Operational Policy 4.10 – Indigenous peoples - Bank-financed projects are designed to ensure that the Indigenous Peoples receive social and economic benefits that are culturally appropriate and gender and intergenerationally inclusive.
Indigenous Peoples Plan (IPP) - The borrower includes in the IPP arrangements to enable the Indigenous Peoples to share equitably in the benefits to be derived from such commercial development; at a minimum, the IPP arrangements must ensure that the Indigenous Peoples receive, in a culturally appropriate manner, benefits, compensation, and rights to due process at least equivalent to that to which any landowner with full legal title to the land would be entitled in the case of commercial development on their land.
Operational Policy 4.12 – Involuntary Resettlement - Where it is not feasible to avoid resettlement, resettlement activities should be conceived and executed as sustainable development programs, providing sufficient investment resources to enable the persons displaced by the project to share in project benefits.
Displaced persons should be assisted in their efforts to improve their livelihoods and standards of living or at least to restore them, in real terms, to pre-displacement levels or to levels prevailing prior to the beginning of project implementation, whichever is higher.
Benefit sharing is also explicitly considered in the World Bank’s hydropower strategy. One of the recommendations in the report Directions in Hydropower to maximize the startegic value of hydropower is:
"Leverage regional development by exploring synergies among complementary projects and development opportunities that can benefit local communities and contribute to broader development objectives. Key mechanisms include multipurpose projects, revenue management, and benefits-sharing."
International Finance Corporation
The Performance Standard 5: Land Acquisition and Involuntary Resettlement mentions benefit sharing only vaguely. Compensations, however, are foreseen:
- Negotiated settlements can usually be achieved by providing fair and appropriate compensation and other incentives or benefits to affected persons or communities, and by mitigating the risks of asymmetry of information and bargaining power.
- When displacement cannot be avoided, the client will offer displaced persons and communities compensation for loss of assets at full replacement cost and other assistance to help them improve or at least restore their standards of living or livelihoods, as provided in this Performance Standard.
Asian Development Bank
The Safeguards of the ADB were recently revised, and benefit sharing is one of the newly introduced aspects in the policy principles.
Involuntary Resettlement Safeguards
- Improve, or at least restore, the livelihoods of all displaced persons through … (iv) additional revenues and services through benefit sharing schemes where possible.
- Provide physically and economically displaced persons with needed assistance, including the following: (i) if there is relocation, secured tenure to relocation land, better housing at resettlement sites with comparable access to employment and production opportunities, integration of resettled persons economically and socially into their host communities, and extension of project benefits to host communities; (ii) transitional support and development assistance, such as land development, credit facilities, training, or employment opportunities; and (iii) civic infrastructure and community services, as required.
Involuntary resettlement should be conceived of and executed as part of a development project or program. In this regard, the best strategy is to provide displaced persons with opportunities to share project benefits in addition to providing compensation and resettlement assistance.
The Resettlement Plan and the Indigenous Peoples Plancontain more detailed provisions for income restoration programs of displaced population through benefit sharing.
Indigenous Peoples Safeguards
- ...Give full consideration to options the affected Indigenous Peoples prefer in relation to the provision of project benefits and the design of mitigation measures.
- The borrower/client should undertake meaningful consultations with affected Indigenous Peoples communities and concerned Indigenous Peoples organizations to solicit their participation in … and (ii) in tailoring project benefits for affected Indigenous Peoples communities in a culturally appropriate manner.
The aspect of benefit sharing is also mentioned in the ADB’s Poverty reduction strategy and Gender and development policy.
African Development Bank
The AfDB addresses the benefit sharing issue in its Involuntary Resettlement Policy, and contrary to the WB and ADB the concept is not mentioned in the Indigenous People Policy.
Involuntary Resettlement Policy - The primary goal of the involuntary resettlement policy is to ensure that when people must be displaced they are treated equitably, and that they share in the benefits of the project that involves their resettlement.
The resettlement plan should be conceived and executed as part of a development program, with displaced persons provided sufficient resources and opportunities to share in the project benefits. The resettlement costs should be treated against economic benefits of the project and any net benefits to resettlers should be added to the benefit stream of the project.
Access to benefits is put forward as one of the “major issues” that should be considered in the integrated environmental and social impact assessments of Bank-supported projects, including irrigation, water supply, and hydropower projects. The Bank requires the identification of the specific groups that are not benefiting from the project, however no details are provided with regard to the required corrective measures.
Inter-American Development Bank
The Involuntary Resettlement Policy applies only to the involuntary physical displacement of people caused by an IADB project.
The policy aims to minimize the disruption of livelihood of people living in the project’s area of influence, by avoiding or minimizing the need for physical displacement, and ensuring that when people must be displaced they are treated equitably and, where feasible, can share in the benefits of the project that requires their resettlement.
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