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Evading Sustainable Development Standards Global Development Policy Center GEGI WORKING PAPER 019 • 10/2018 GLOBAL ECONOMIC GOVERNANCE INITIATIVE Evading sustainable development standards: Case studies on hydroelectric projects in Ecuador MARÍA CRISTINA VALLEJO, BETTY ESPINOSA, FRANCISCO VENES, VÍCTOR LÓPEZ, AND SUSANA ANDA ABSTRACT China has been a crucial source of development finance for Ecuador over the last decade. In particular, Chinese policy banks and contractors have helped develop six of Ecuador’s eight emblematic hydroelectric dams as part of the nation’s shift away from fossil fuel reliance for energy. This shift, while reducing the carbon intensity of the nation’s energy matrix, also brings new social and environmental risks. Hydroelectric dams can be associ- ated with community displacement, changes in local livelihoods, and threats to the availability and quality of water for fishing and domestic use. Over the last few decades, development finance institutions and the Ecuadorian government itself have developed a series of social and environmental safeguards to mitigate these risks. This paper compares two recent dams to explore the extent to which safeguards have been successfully imple- mented: Coca-Codo Sinclair (PHCCS) financed by the Export-Import Bank of China (China Ex-Im), and the Baba Multipurpose Project (PMB), initially financed by the Inter-American Development Bank but ultimately implemented with funds from the Ecuadoran public budget. It finds that China Ex-Im’s safeguards did not create better outcomes at the PHCCS than at the PMB. Furthermore, in both cases, the extent to which safeguards were effective depended more on the mobilization of local civil society than on the existence of de jure safeguards. This working paper is part of the Safeguarding Sustainable Development project, a collaboration between the Boston University Global Development Policy Center, FLACSO- Ecuador, Universidad del Pacífico, Lima; and INESAD, La Paz. It is supported by the John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, and the Rockefeller Brothers Fund. More information about the project can be found at http://www.bu.edu/gdp/development-banks-in-the-andean-amazon/ María Cristina Vallejom Betty Espinosa, PhD Francisco Venes,M.Sc. Víctor López Susana Anda, Doctor of Development in Applied Economics, Master of Development Social anthropologist, Social anthropologist, Economics from the University of Lovaine, Economics from FLACSO doctorate in human and associate researcher at Facultad Latinoamericana Belgium. Professor & Ecuador, associate sustainable development FLACSO Ecuador. de Ciencias Sociales – researcher FLACSO researcher FLASCO- (UB Chile), associate FLACSO, Professor & Ecuador Ecuador researcher at FLACSO researcher Ecuador. GEGI@GDPCenter www.bu.edu/gdp Pardee School of Global Studies/Boston University Introduction China has been a fundamental ally in infrastructure development in Latin America (Ray, Gallagher, Lopez & Sanborn, 2015; CEPAL 2016; Duran Lima & Pellandra, 2017). In the case of Ecuador, China participates through loans and investments in lieu of traditional development banking. In the 1990s, the World Bank (WB) and the Inter-American Development Bank (IDB) financed a significant portion of large- scale projects, including dams. Subsequently, they have focused on environmentally sustainable and small-scale comprehensive water management projects (IDB, 2018a); in this context, mega-projects have experienced a drop in the availability of resources and now face more restrictive conditions for financing to safeguard social and environmental impacts. In response, Chinese investors and loans have found a niche in which to participate. Chinese financial institutions have financed 6 of the 8 emblematic hydroelectric projects in Ecuador to solidify a strategy proposed by the government of Rafael Correa to change the energy matrix: Coca Codo Sinclair, Sopladora and Minas San Francisco were financed by the Import-Export Bank of China (Ex-Im Bank) through a loan while Delsitanisagua, Quijos and Mazar Dudas were funded by the China Development Bank (CDB). Seven of the EPC contracts1 (turnkey) for these projects were awarded to Chinese companies: Synohydro Corp. for Coca Codo Sinclair, Consorcio CGGC for Sopladora, Harbin Electric International Company Ltd. For Minas San Francisco, China International Water & Electric Corp. for Toachi Pilaton, Hydrochina Corp. for Delsitanisagua and China National Electric Engineering Co. Ltd. for Quijos and Mazar Dudas. This government has prioritized recovering the State’s role in stewarding the electric sector—ceded in 1999 when a privatization process began— and moved to guarantee energy sovereignty and sustainability; increase and diversify participation in renewable energies; and consequently, reduce and replace traditional sources of energy that contaminate the environment (SENPLADES, 2013; ARCONEL, 2015). Ecuador is highly biodiverse, but this natural capital is often affected by the construction of mega-projects of infrastructure in socially and environmentally sensitive territories. In some cases, unrecoverable losses of cultural and environmental legacies are generated. In this context, although the economic benefits associated with financing of large infrastructure projects has been confirmed, it is relevant to analyze if procedures to prevent risks and mitigate as well as repair impacts for communities and ecosystems are in place. The role of these procedures, which are represented in safeguards, would be “to ensure that investments fulfill minimum social, environmental and governance standards. These norms and institutions may originate with a recipient country or investor” (Larsen & Ballesteros, 2014, p. 16). In this context, it is important to look at the degree and effectiveness with which socio-environmental safeguards are implemented on hydroelectric stations that are operational: Coca Codo Sinclair Hydroelectric Project (PHCCS) and Baba Multi-Purpose Project (PMB). The financing structures of these projects reflect a distancing from multi-lateral mechanisms and as such, it is challenging to implement safeguards. The PHCCS was financed by a financial entity of the Chinese state, China Ex-im Bank and was built by another state company from China, Sinohydro Corporation. The PMB was initially financed with a loan from the Inter-American Development Bank (IDB) but finally, the project was built with funds from the State budget. To determine the effectiveness of safeguards, we compared the current national legal framework and the regulations of the development bank, utilizing quantitative and qualitative information that we systematized through secondary visits, observation visits, socio-spatial localization and semi-structured interviews with actors in affected areas, officials linked to the projects and experts. Given that the application of a rule goes well beyond the effects of simple mechanical operations, we attempted to understand the process, beginning with the regulations that govern actions for dam construction; moving on to the social and political contexts in which action is taken; and ending with the effects that are generated by conflicts with actors and rising criticism of experts in socio-environmental experts. We present this information in the methodological section. The comparison of two case studies provided information to contrast the different schemes to apply safeguards. The presence of China in the execution of infrastructure projects may respond to a process of internal deregulation that facilitated its participation. Both of the projects that were studied use national legislation as a baseline; nevertheless, in the case of PHCCS, we examined China’s contributions to efforts to safeguard sustainable development. We contend that a pattern of limited application of social and environmental standards existed, some of 1 EPC, Engineering, procurement, and construction GEGI@GDPCenter 2 www.bu.edu/gdp BU CENTER FOR FINANCE, LAW & POLICY Pardee School of Global Studies/Boston University which originated in Chinese regulations, until state, social and/or public pressure demanded compliance. In the first section of this chapter we provide details on the methods and sources of information that were used. In the second section, we describe the projects analyzed to situate their characteristics within the contexts in which they developed. In the third section, we discuss the safeguards that were in place on two hydraulic infrastructure projects in Ecuador and analyze the mechanisms that facilitated or impeded their application. In the fourth section, we discuss the main findings and compare the results. Finally, we present conclusions and the lessons learned about the application of safeguards in the case of Ecuador. Method and sources of information The methodological approach that was used from April to October 2017 was based on qualitative research, which was conducted through a case study and a subsequent comparative process. The case study (following Olivier de Sardan, 2008) included the review of different sources of information to bring together elements that had been triangulated to compensate for the lack of available information from both Chinese organizations and other bodies of the government of Ecuador. Four types of techniques were used. First, document analysis allowed us to collect quantitative and qualitative information to develop the contextual framework in which the projects were executed and to obtain specific information on each.
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