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Frequently Asked Questions on The Agua Zarca Run-of-River Hydroelectric Power Generation Project

01/03/2017

The Agua Zarca Project is a proposed small-scale run-of-river hydro-electricity generation scheme of 21MW with an annual energy production of 99GWh. Finnfund has been one of the lenders since 2014.

The other lenders of the Agua Zarca Project are the Dutch development finance institution FMO and CABEI (Central American Bank for Economic Integration). Finnfund participates as a B lender and channels its financing to the project through FMO.

The Honduran company DESA (Desarrollos Energeticos S.A. de C.V.) is the owner and developer of the project. Finnfund decided to co-finance the development of the project because it is designed to provide clean and sustainable energy in Honduras, a country that is largely dependent on fossil fuels. The project would generate jobs, clean energy (including jobs for the local communities) and would help to reduce poverty. In March 2016, Honduran environmental activist Berta Cáceres was murdered. Mrs. Caceres was a vocal activist against this project and led the Non-Governmental Organization COPINH.

Finnfund and FMO publicly expressed the deepest sorrow at this violent death, and continue to call for a thorough investigation and for those responsible to be held to account. In addition, Finnfund and FMO put all disbursements to the project on hold.

In early May 2016, several people were arrested in Honduras as part of the investigation of the murder of Mrs. Cáceres, among them, a person associated with our client. A court case is pending and the outcome is still unknown.

On 9th May 2016, Finnfund, together with FMO, announced that we would seek a responsible exit from the Agua Zarca project. At that time, an independent fact finding mission was commissioned to investigate a range of aspects related to the funding and construction of the Agua Zarca project. The mission published their report in September 2016. Finnfund welcomed the conclusions and recommendations and will use these findings in the search for and development of our responsible exit.

Finnfund and the other Lenders engaged an independent facilitator in October 2016 to assist them with exploring options for a responsible exit which would take into account the interests of all parties. The independent facilitator made several visits to Honduras between October and January 2016.

Finnfund heard the views of directly affected communities around the project site through a number of channels including DESA, the independent facilitator and through personal meetings, both in Honduras, the Netherlands and Finland.

Finnfund is currently in discussion with the other Lenders, the independent facilitator, DESA and other stakeholders in order to realize a responsible exit from the project.

We have listed frequently asked questions on the Agua Zarca project. This is an updated version to the Frequently Asked Questions which were published previously. The information provided here is aligned with the information provided with FMO.


What is the Aqua Zarca project?

The Agua Zarca Project is a proposed run-of-river hydroelectric plant, 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 North West of Honduras. The design capacity of this small-scale run-of-river hydroelectric scheme is 21.3MW with a projected annual energy production of 98.8GWh.

In 2014, the design of the project underwent a significant change; the civil works and construction areas of the project were moved to the left side of the river from the right, and the weir was moved upstream on the river. This was done in order to avoid any physical impacts on the community of La Tejera, which had opposed the project since 2013, after initially supporting it.

Who owns the project and who are its funders?

Desarrollos Energeticos S.A. de C.V. (DESA) is the owner and developer of the Agua Zarca Hydroelectric Project. DESA as borrower entered into a financing agreement with FMO 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 its financing to the project through FMO.

What is Finnfund’s reaction to the violent death of Mrs. Berta Cáceres?

We mourn the violent death of environmental activist and indigenous leader Berta Cáceres and we have called on the Government of Honduras to ensure a thorough investigation into the matter. We want the truth to be known and those responsible held accountable. We have also shared our concerns with our other contacts in Honduras. We reject any form of violence. We strongly believe that our projects are best served when all voices are heard and understood, and these voices should be protected.

Will Finnfund exit from the Agua Zarca project?

Yes, Finnfund is, together with FMO, currently in the process of preparing a responsible exit from the Agua Zarca Project. 

What does Finnfund mean by a responsible exit?

By ‘responsible exit’, Finnfund, together with FMO, believes that they should exit the Agua Zarca project in a way that should:

  • at least, avoid additional escalation of disputes in the area and, at best, offers 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 existing contractual obligations.

What is the current status of Finnfund’s involvement with the Agua Zarca project?

FMO has been the A lender to the Agua Zarca Project since signing a contract with DESA in February 2014. Finnfund participates as a B lender and channels its financing to the project through FMO.

In March 2016, Honduran human rights activist Berta Cáceres who was a vocal opponent of the project, was murdered by an unknown gunman at her home in Honduras. In early May 2016, a DESA employee was among several people arrested in Honduras as part of the murder investigation. On May 9th, 2016 Finnfund and FMO announced that they would seek a responsible exit from the project.

Since then construction was halted and DESA has demobilized most of the workers for the time being. DESA’s Community Liaison Officers are still on site and in touch with the communities that wish to communicate with DESA.

What steps has Finnfund taken since its announcement to seek a responsible exit?

  • Finnfund deployed, along with the other Lenders, a team of independent experts to undertake a fact finding mission to Honduras and the project site in order to provide an independent perspective of the project and also of the processes and performance in funding and monitoring this project. This Independent Mission (IM) visited the project site and held interviews with key stakeholders between 23 and 28 May 2016. A draft report in English and Spanish was made available to all stakeholders in August 2016. Consultations were held in The Hague and in Honduras during the week of 22 August 2016 and all interested parties were invited to make comments orally or in writing. The final report was published on 7 September 2016. Finnfund welcomed the conclusions and recommendations and is using these findings in the development of our responsible exit.

  • Finnfund and the other Lenders engaged an independent facilitator in October 2016 to assist them with exploring options for a responsible exit which would take into account the interests of all parties. The facilitator made several visits to Honduras between October and January 2016.

  • Finnfund, together with FMO, heard the views of directly affected communities around the project site through a number of channels including DESA, our facilitator, and through personal meetings, both in Honduras and in the Netherlands.

  • Finnfund, together with FMO, reached out to influential international bodies with a presence in the region, such as the EU embassy as well as other European embassies in the region.

  • Finnfund is currently, together with the independent facilitator, in discussion with the other Lenders, DESA and other stakeholders in order to realize a responsible exit from the project.

Moreover, Finnfund continues to demand that justice prevail and that the people responsible for the assassination of Mrs. Berta Cáceres be held to account by the government of Honduras.

Was FPIC obtained for the project?

The Independent Mission (IM) finds that FMO, Finnfund and DESA undertook a “consultation process that fulfilled many elements of FPIC”, referring to the ‘cabildos abiertos’ process and community-based decision-making bodies (the “patronatos”). These consultations fulfilled the requirements of IFC Performance Standards 1 and 7. However, a formal process invoking the FPIC principle should have been undertaken with the village La Tejera. This should have been done prior to construction, by FMO, Finnfund and the developer. FMO and Finnfund did not previously consider that this process was required since the new project design, on the left bank of the river, did not physically affect the village of La Tejera. But the IM report provides the clarification that since the community of La Tejera still perceived that there were impacts from the project on their resources, further consultation, ideally leading to FPIC, was required, and had not been undertaken.

The IM report clarifies that FPIC consultation prior to granting concessions is a government responsibility. However, where this is not done, actors such as FMO, Finnfund and DESA, need to take responsibility for FPIC consultations with indigenous communities, which is even more challenging when government-specified means of communicating with indigenous communities are lacking.

Up until September 2016, based on advice from two independent consultants as well as FMO’s and Finnfund’s own judgement, we believed that FPIC had been obtained for this Project according to the requirements of IFC PS7. However, upon the publication of the findings of the Independent Fact Finding Mission (IM) to Agua Zarca, it was concluded that FPIC was not obtained in the village of La Tejera, and even though it had been obtained in all the other local communities within the area of influence of the project, there was a gap in full compliance with IFC PS7.

Is this a large dam?

No. This is not a dam but a run–of-river scheme. This scheme is also not a cascade but consists of one individual hydropower plant. Agua Zarca is technically designated a small run-of-river with 21.3MW capacity and with no reservoir. Existing larger hydropower plants in Honduras include El Cajon Dam (300MW and a reservoir of 94km2) and Rio Lindo Dam (80MW).

What is a run-of-river hydropower project?

Run-of-the-river hydroelectricity (ROR) is a type of hydroelectric generation plant where 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. After turning the turbine, the water is then fed back into the main river further downstream. The difference between ROR and large, conventional storage hydros is the absence of a dam and reservoir. ROR relies on coursing rivers to generate electricity, as opposed to stored water. Most small hydro facilities (such as this one) use a weir to ensure enough water enters the penstock.

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 Finnfund 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. Finnfund is 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 Finnfund requires. Finnfund adds value as a Development Finance Institution through supporting our clients in their journey to undertake their project in compliance to our standards.

Finnfund uses various tools to provide this support and monitor the implementation of the standards, from an in-depth due diligence from both Finnfund staff and international independent E&S advisors, to monitoring trips by our independent E&S advisors (as well as monitoring trips by Finnfund staff). Finnfund strongly believes in accountability. Finnfund is constantly developing its own Environmental, Social and Governance Due Diligence and the processes to evaluate the projects.

For more information, please contact:

Jaakko Kangasniemi, CEO
jaakko.kangasniemi(at)finnfund.fi, tel. +358 40 577 7676

Tapio Wallenius, Director, Impact and Communications
tapio.wallenius(at)finnfund.fi, tel. +358 50 351 0753