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FAQ on the Agua Zarca run-of-the-river hydroelectric generation project

09/03/2016

These frequently asked questions are published in light of recent questions raised to Finnfund on the abovementioned project. We hope this information helps our stakeholders to formulate their views. If you have any further questions, please do not hesitate to contact us through info(at)finnfund.fi.

The other lenders of the Agua Zarca Project are the Dutch development finance institution FMO and CABEI (Central American Bank for Economic Integration). FMO and Finnfund both belong to the association of the European Development Finance Institutions (EDFI), and follow similar kind of ESG (Environmental, Social and Governance) standards and procedures in their investments. The information provided here is aligned with the information provided with FMO.


Question 1. What is the Finnfund reaction to the violent death of Mrs. Berta Cáceres?

Finnfund strongly condemns the murder and calls for a thorough investigation on the events. We expect those responsible to be held accountable. We reject any form of violence, and believe our projects are best served when all voices are heard and understood, and these voices should be protected.

QUESTION 2. WHAT IS THE AGUA ZARCA PROJECT?

The Agua Zarca Project is located on the Gualcarque River in the Department of Santa Barbara some 9 km southeast of the community named San Francisco de Ojuera in the Northwest of Honduras. The capacity of this small-scale run-of-river hydro-electricity generation scheme will be 22 MW with an annual energy production of 99 GWh.

The project consist of the following principal elements:

  1. Intake Works
    a) Weir
    b) Intake
    c) Desander
  2. Headrace Tunnel
  3. Penstock
  4. Powerhouse
  5. Discharge Channel
  6. Transmission line

In 2014, due to safety issues surrounding social issues and construction costs the initial project based on the right hand side of the river Gualcarque was modified to the left side of the river with the weir located in a location more upstream of the project.


QUESTION 3. WHAT ARE THE BENEFITS ARISING FROM THE PROJECT?

From the very beginning, the key reason for the participation of Finnfund in the funding of Agua Zarca have been the major development impacts of the project:

  • Honduras is one of the poorest countries in Latin America, and in serious need of investments.

  • When completed, Agua Zarca is estimated to produce some 99 GWh of electric power per year, which corresponds with the power consumption of approximately 120,500 rural Honduran households, or some half a million people.

  • The project is a renewable energy project that will result in CO2 emission reductions. The projected average reduction in CO2 emissions is approximately 61,000 tonnes per year.

  • The area around the Gualcarque river is sparsely populated and mountainous rural area. The project is estimated to offer hundreds of jobs during the construction phase and some 40 jobs after completion.

  • The local population will also benefit through DESA's voluntary corporate responsibility programmes, which include road improvement, planning and co-funding of drinking water systems, donations to schools, and different training programmes. As part of DESA's voluntary programme, electricity has been provided for as many as 1,392 households so far.

  • Honduran power production is currently dependent on imported oil. The estimated positive impact of Agua Zarca on the balance of payments is expected to be significant. 

At the individual community level, the table below shows the main social commitments agreed with each community as part of DESA’s corporate social responsibility program.




QUESTION 4. WHY IS HYDRO POWER IMPORTANT FOR A COUNTRY AS HONDURAS?

Hydro power provides for a clean, low cost and stable source of energy. In Honduras the total primary energy offer is around 53,730.6 GWh. The main source of energy is petroleum (53%) followed by combustible renewable and waste (44%), and coal (3%). The residential energy consumption is around 47% of the national consumption, of which 86% are provided by biomass, primarily firewood.

Gross electricity generation of the national grid (Sistema Interconectado Nacional –SIN) is currently around 6,539 GWh, of which 53% are petrol power plants, 42% hydro power plants, 1% coal power plants, 1% gas and 3% co-generation. The overall electricity coverage is 69%. In rural areas, it reaches only 45%, which contrast with the 94% coverage in urban areas (2006). Currently the supply of energy does not meet demand and this gap is expected to widen with economic and population growth.

Given the context of high dependency on fossil fuels and the increase in energy demand, Honduras’s energy policy revolves around reducing dependency on fossil fuels for generating electricity by promoting the generation of renewable energy such as hydro’s, wind, solar and biomass.


QUESTION 5. WHO OWNS AND DEVELOPS THE AGUA ZARCA PROJECT?

Desarrollos Energeticos S.A. de C.V. (DESA) is the owner and developer of the Agua Zarca Hydroelectric Project.

QUESTION 6. WHAT IS THE RELATIONSHIP OF AGUA ZARCA PROJECT WITH FINNFUND?

DESA as borrower has entered into a financing agreement with FMO (Financierings Maatschappij voor Ontwikkelingslanden) (in coordination with Finnfund) and CABEI (Central American Bank for Economic Integration). FMO is financing the project with USD 15 million and Finnfund with a maximum of USD 5 million. Finnfund participates as a B-lender and channels it’s financing to the project through FMO.


QUESTION 7. WHAT IS A RUN-OF-RIVER HYDRO POWER PROJECT?

Run-of-the-river hydroelectricity (ROR) is a type of hydroelectric generation plant whereby little or no water storage is provided. In ROR systems, running water is diverted from a river and guided down a channel, or penstock, which leads to a generating house. Here, the force of the moving water spins a turbine, which then drives a generator. Used water is fed back into the main river further downstream. The difference between run-of-river and large, conventional storage hydro, is the absence of a dam and reservoir. Run-of-river relies on coursing rivers to generate electricity, as opposed to stored water. Most small hydro facilities use a weir to ensure enough water enters the penstock.


QUESTION 8. IS THIS A LARGE DAM?

No. This is not a dam but a run of the river scheme. This scheme is also not a cascade but consists of one individual scheme. Agua Zarca is considered a small run of the river with only 23MW and with no reservoir. Existing larger hydro power plants in Honduras alone include El Cajon Dam (300 MW and a reservoir of 94 km2) and Rio Lindo Dam (80 MW).


QUESTION 9. HOW MUCH LAND WILL BE USED FOR THE DEVELOPMENT OF THE AGUA ZARCA PROJECT?

The project components will require a total of 35 hectares (0,35 square kilometers).



QUESTION 10. HOW WAS THE LAND OBTAINED?

The land required for the project on the left hand bank was purchased from 16 individuals through the willing-buyer-willing-seller approach. There was no communal land acquired. The land purchase followed the following process:

  • Step 1: Sales agreement – The actual transfer of property between the parties, which defines the compensations. As part of the sale agreement, DESA pays the totality of the land to the previous owners and depending on the agreement defines some other types of compensation.
  • Step 2: Title deed – The title deed is the sale agreement validated by a notary public prior to registering the title deed. The notary public reviews the sale agreement and validates the will of the parties.
  • Step 3: Registered title deed – This is the process by which the land registered under the previous owner is registered to belong to the DESA in the local land registry. This is a bureaucratic process to be completed and paid for by DESA with the required authorities.
  • Step 4: Registered with the PHAZ trust - With the land under DESA’s assets they are often transferred to the project trust as part of the guarantee package. This is also a bureaucratic process to be completed and paid for by DESA with the required authorities.

The table below shows the villages affected by the project per area provided and their ethnic background.

QUESTION 11. HAS FREE, PRIOR, AND INFORMED CONSENT (“FPIC”) BEEN OBTAINED FROM AFFECTED COMMUNITIES?

Yes. FPIC was and still is in existence.

However, Free and prior informed consent (FPIC) is to be obtained in case indigenous peoples will be removed from their lands (as per ILO Convention 169) or relocated from their customary or traditional lands (as per IFC Performance Standard 7), or forcefully removed from their lands (as per UN Declaration on the Rights of Indigenous Peoples). In addition, the latter requires governments to obtain FPIC prior to approving a project affecting their lands, territories or resources. This project will not involve relocation of indigenous peoples from their lands or territories. It will also have no major impact on their livelihoods or any communal land. FPIC is not required for this project.

FPIC was nevertheless obtained through a public consultation process that started in the Right Bank communities in 2011 and with Left Bank communities in 2014. Both processes terminated with the signing of a commitment letter between the company DESA and the communities with government and community leaders as signatories of the letter. The dissemination of the grievance mechanism, the social economic surveys and the continuous public engagement regarding project timelines, recruitment and the rollout of the social programs for the communities continue to confirm that FPIC is still maintained by the majority. This is further confirmed by Lenders’ monitoring visits, Lenders’ independent advisors and more recently a hand- written letter from the community of San Francisco de Ojuera, whose mayor represents 21 communities in the area as well as individual community letters including Valle del Angeles.


QUESTION 12. HOW MANY COMMUNITIES ARE AFFECTED BY THE PROJECT?

After the change in location of the project in 2014, the affected communities of the previous design were no longer affected but are still being involved due to the existing social commitments in place. The new communities affected by the new location have also been involved in line with applicable international standards.

  • 4 Communities are positively affected only by the implementation of the social commitments of the Agua Zarca Project plan including: El Barreal (212); Santa Ana (282); Plan de Encima (250); La Tejera (600).
  • 4 Communities are affected by providing access to the project (they are on route to the project site) or have had their roads improved as part of the social commitments are: El Aguacatal (88), Chorrera Aspera (405); Santa Fe (511)
  • 4 Communities are affected by sale of land for the project structure, providing access to the project site and as beneficiaries of the social commitment include: La Leona (140), Valle del Angeles (364), San Ramon (144) and La Estancia (313).

QUESTION 13. WILL THE COMMUNITIES HAVE FREE ACCESS TO THE RIVER?

Yes. Communities on both sides of the river will continue to have free access to the river. However, during construction times, there will be specific spots near the river outside the purchased land, where access from that spot will be temporarily restricted due to health and safety reasons resulting from the construction activities. This will mainly affect, on an intermittently period Valle del Angeles, San Ramon, La Leona and La Estancia, and as soon as construction is finished, these areas will revert to allow free access.


QUESTION 14. WILL THERE BE ANY RESETTLEMENT AND/OR LOSS OF LIVELIHOODS?

No, this project will not result in any involuntary resettlement or loss of livelihoods. All land that was acquired was acquired free of physical structures and through the willing-buyer-willing-seller approach. The land previously bought by the company from the communities on the right side including La Tejera, belongs to the company but has been left unattended and unfenced since the project moved to the left side.


QUESTION 15. WILL THERE BE ANY FLOODING OF COMMUNITY AGRICULTURE PRODUCE, FOREST RESOURCES OR PHYSICAL STRUCTURES

No. Due to the nature of this type of hydro, there will be NO flooding of community and/or individual land, of forest resources or physical structures. There will be no reservoir on the river.


QUESTION 16. IS THERE ANY RISK FOR THE FISH POPULATION OR AQUATIC ENVIRONMENT?

Aquatic monitoring conducted over a period of two years encompassing two dry seasons and two wet seasons showed no IUCN Red List fish species. In addition, the run of the river design calls for an Environmental Flow of at least 10% of the median flow of the driest month to mitigate any potential impacts to the fish population. This was further mitigated by moving the weir upstream and allowing the Rio Blanco river to flow into the Gaualcarque River thus improving the aquatic and flow environment. Furthermore, the Agua Zarca project has developed a Biodiversity Management Plan to ensure minimal disturbance during construction.

QUESTION 17. SANCTITY OF THE RIVER

The river is considered sacred by the community of La Tejera. A Social baseline study undertaken by the company, including Due Diligence visits by Lenders’ staff and Lenders’ independent advisors concluded that for the remaining communities of the Rio Blanco community and from Valle del Angeles, La Leona, San Ramon and La Estancia, the river is not considered sacred and the company has their consent to build in that location. By moving the weir to the territory of Valle del Angeles, the project is no longer building in La Tejera territory and the Rio Blanco is left untouched as well as the river Gualcarque in la Tejera territory.

QUESTION 18. SECURITY

Finnfund takes security issues into account in line with the IFC performance standards in its due diligence. Performance standard 4 is followed to address our responsibility to avoid or minimize the risks and impacts to community health, safety, and security that may arise from project related-activities, with particular attention to vulnerable groups. Through the FMO Capacity Development Programme, FMO provided capacity training to the Agua Zarca project on security and coordination mechanisms with all relevant security providers in place.


QUESTION 19. EXIT OF SINOHYDRO

In 2013 DESA and Sinohydro decided to replace Sinohydro as main contractor. Current contractor is COPRECA, a Costa Rican company, familiar with local culture and conduct.


QUESTION 20. WHY DOES FINNFUND INVEST IN DEVELOPING COUNTRIES WITH WEAK GOVERNANCE? HOW DOES FINNFUND ENSURE THE COMPANIES THEY WORK WITH ARE TRUSTWORTHY AND WILL BE ADHERENT TO INTERNATIONAL STANDARDS?

Finnfund focuses its investments in developing countries with weak governance because this is where we can make a difference. It is part of our mandate.

We are also aware that in many cases, our clients do not possess the knowledge and/or experience in implementing projects to the international standards of best environmental and social practice that are required as part of our financing. Financiers like Finnfund and FMO add value as Development Finance Institutions through supporting our clients in their journey to undertake their project in compliance to our standards. We use various tools to provide this support and monitor the implementation of the standards, from an in-depth due diligence from both our own staff and international independent E&S advisors, to quarterly monitoring trips by our independent E&S advisors (as well as monitoring trips by our own staff) and capacity building grants. In reference to DESA, two due diligence trips were undertaken before contracting to better understand the environmental and social impacts of the project as well as support the client in devising mitigation measures; the lenders have also undertaken annual monitoring trips and relied on very frequent independent E&S advisors visits.


QUESTION 21. Will Finnfund exit from the Agua Zarca project?

We strongly believe that all concerns raised in the protests around the project have been met through a thorough design. We are, however worried about the possibility of increased tensions in Honduras as a consequence of the murder. At the moment we consider speculation around the exit to be premature – much more information is needed. In case we would be presented with credible new information that would call for us to reconsider our involvement, we would do it. Currently we continue to actively follow up and monitor the situation, also through our independent advisors. In addition, the CEO of Finnfund is prepared to travel to Honduras and visit the project area in cooperation with other financiers, as soon as safety requirements allow this.