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FMO and Finnfund finalize Exit Agua Zarca

06/07/2017

Two of the lenders of the Agua Zarca hydropower project in Honduras, FMO (Netherlands Development Finance Institution), Finnfund (Finnish Fund for Industrial Cooperation), together with owner and developer DESA, mutually agreed to end their existing contractual relations.

This joint conclusion was reached after extensive consultations with a large number of local and international stakeholders and through the work of an independent fact finding mission and an independent consultant.

The lenders have supported this project believing that it would bring positive development impacts for the country and local communities. This view has been shared by many of the communities living in the area of influence of the project but not all of them. Whoever takes the time to visit each of the communities in the area and listen to what their members have to say will find that there is more than one position about the situation, the project and the solution going forward.

The lenders’ exit from the project is intended to reduce international and local tensions in the area. The lenders wish that all external stakeholders allow for local communities to initiate a dialogue among themselves to decide on the future of the area, the development options they have at hand, and if a hydroelectric project should be one of them or not.

The lenders believe such a dialogue should be voluntary, convened by a credible international institution that is acceptable to all parties, allow for all the views of community members to be heard and respected, and should be free from interference from any private or public external institution or group. Furthermore, it is important that a credible international human rights institution that can monitor the situation on the ground before any dialogue is initiated so as to ensure that participants can feel free to speak their minds without fear of retaliation from anyone.

The lenders note that no proven connection has been established between DESA and allegations regarding any illegality. They also appreciate DESA’s willingness to put the project on hold to allow for such a dialogue to happen and their commitment to accept its outcomes. Certain community development projects that were underway will be finalized and measures will be taken to mitigate environmental risks that result from the construction activities being put on hold.

For more information:
Jaakko Kangasniemi, Managing Director, jaakko.kangasniemi(a)finnfund.fi, tel. +358 40 577 7676


Frequently Asked Questions on Finnfund’s and FMO’s exit from the Agua Zarca Project

Why did FMO and Finnfund exit the Agua Zarca project?

Finnfund’s and FMO’s exit from the project intends to contribute to the creation of an enabling environment for the resolution of the situation in the area of the project and it does not respond to any specific allegation against DESA. After our initial decision to seek for an exit from the project, we had extensive consultations with a large number of local and international stakeholders both by Finnfund and FMO and through the work of an independent fact finding mission and an independent consultant. Through these processes, it became clear for Finnfund and FMO, that the complexity of the current situation required that our primary efforts focused on how to contribute to reduce international and local tension in the area of the project.

Are the three lending banks exiting the project together?

FMO (A lender) and Finnfund (B lender) made continuous efforts to realise a formal exit from the project with all lenders at the same time. When it became clear that this was not feasible within a reasonable time frame, FMO and Finnfund decided to continue with their exit of the project without CABEI.

Finnfund has been a so called B lender in the project since 2014. Finnfund has issued a loan to FMO, which has further invested the funds in Agua Zarca. Therefore, Finnfund has had a financial agreement with FMO – not with the project company, DESA.

Why do you think that your exit is responsible?

The exit process that we have now finalized was built on the conclusions of the Independent Fact Finding Mission Report and the recommendations of the independent facilitator. In a very complex situation, FMO’s and Finnfund’s criteria responded to these three principles that in our mind make our exit a responsible one:

  • at least, avoid additional escalation of disputes in the area and internationally and, at best, offer a path for peaceful coexistence of communities.

  • meet some of the development needs of communities in the area, regardless of whether they’ve supported or opposed the Project.

  • respect contractual obligations.

How does your exit contribute to a solution?

The process leading to the exit showed us that a full respect for the communities’ right to decide about their own future is necessary in order to restore a peaceful coexistence in the project area and reduce international tension. Anyone who takes the time to visit each of the communities in the area and listen to what their members have to say will find that there is more than one position about the situation, the project and the solution going forward.

We agree with the recommendation that local communities, if they so wish, hold a dialogue process to determine what development options they have at hand and whether a hydroelectric project should be one of them or not. Accordingly, we expect that our exit from the Agua Zarca project helps to further reduce local and international tensions and serve as an enabling factor for such a dialogue. We do not expect nor plan to play any role after our exit. We can only encourage international institutions with the appropriate mandate to further look into this issue and consider supporting the communities to find common ground among themselves. Similarly, we would hope that the international community would be willing to support such an effort.

What kind of a dialogue process would be helpful after your exit?

We believe a dialogue process should be completely voluntary, should be organised by a credible international institution that is acceptable to all parties, should allow for all the views of community members to be heard and respected, and should be free from any interference by the company, government or anyone else. Furthermore, we believe a credible international human rights institution should monitor the situation on the ground before any dialogue effort is initiated. This dialogue should only happen if the communities want it and, as mentioned before, FMO and Finnfund will not be involved.

What happens to the communities and their development needs once you have finalized your exit?

As a part of their agreements with local communities, DESA committed to a number of important social development projects. The report of the Independent Mission concluded that FMO’s and Finnfund’s decision to withdraw from the project could negatively impact communities if all these social and economic development projects would cease and therefore recommended that FMO and Finnfund should see how some of the expected local projects committed to by DESA could be honoured. The findings of the independent facilitator, discussions with the local communities and DESA confirmed the above. This became an important consideration while designing the exit strategy.

In an effort to meet some of the development needs of communities in the area, FMO and Finnfund have committed certain funds to contribute to the completion of development projects prioritized by the communities that were mostly already underway.

Why did it take FMO and Finnfund so long to exit the Agua Zarca project?

We have made every effort to make both our exit and the process leading to it responsible. A process with so many actors, complex circumstances, sensitive elements and unexpected dynamics to consider cannot and should not be rushed. FMO and Finnfund have consulted independent experts on the design and the conditions of the exit to make sure it addresses the complexity of the situation around the Agua Zarca project. Even if it has taken longer than we had expected and the pressure to complete it has been intense at times, we have achieved our goal of exiting responsibly.

What is the role of FMO and Finnfund after your exit?

A consequence of the final and complete exit of FMO and Finnfund is that we will have no further involvement in the project or in any dialogue process that were to take place.

As mentioned before and following the recommendations, FMO and Finnfund committed certain funds in order to finalise certain community projects, which were underway. These funds will be channeled to an independent trust, which will distribute the monies to the contractors when the selected projects reach a specific milestone as confirmed by an independent engineer. As a result, FMO and Finnfund will have no further involvement in this, either. 

What will happen at the site after the exit?

In terms of the construction site, DESA has assessed the immediate health and safety matters and environmental concerns, and it will address those.

What changes in policy have you introduced lately that can help prevent negative impacts in projects where you face opposition?

Finnfund has strengthened its own investment and monitoring processes. One of the aims is to better account for risks related to changing socio-political environments, and to provide support for the projects and project companies in changing environments. Finnfund also seeks to ensure that indigenous peoples’ rights are respected and local communities and other stakeholders are heard also in countries, where the state is not capable to fulfil its obligations under international principles.

For more information:

FMO: Agua Zarca (reports and background information)

Finnfund: Frequently Asked Questions on The Agua Zarca Run-of-River Hydroelectric Power Generation Project (published 1 March 2017)


Jaakko Kangasniemi, Managing Director, jaakko.kangasniemi(a)finnfund.fi, tel. +358 40 577 7676