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Mediating to avoid high financial risk – Carlos José Valderrama


IMI and Mediators Beyond Borders International collaborate proudly in a new series, Mediation 360°, in which experts address the question “What would be the prospects for your organization/industry/society/field of study if the language of conflict were replaced by the language of conflict? collaboration?“. We plan to share stories that describe the power and possibilities of mediation in a variety of situations, some perhaps unexpected. This first piece, by Carlos José Valderrama and Elise Groulx Diggs, considers the power of mediation against the risks of project financing and social conflict in Peru.

Foreign and local investors in Peru have been facing, for many years, the high risk of seeing their operations interrupted by social conflict. Around 50% of “big footprint projects” in mining, oil, forestry and infrastructure are permanently affected by social unrest and related violent protests. This situation creates so much risk that investment in these strategic economic sectors is in constant danger of slowing down and even stopping in some cases. Both domestic and foreign banks are concerned about excessive levels of social risk in financing Peruvian projects.
It is in this context, in 2015, that the Peruvian Banking Authority issued SBS Document No. 01-2015 recognizing that risks to project finance banks were increasing as major development projects were constantly blocked by conflicts with indigenous communities and peoples. In a bold move, the Banking Authority decided to require that banks, before obtaining credit and granting financing for such projects, ensure that companies and project consortiums conduct community consultations and social risk assessments. These consultations were framed in the Regulation as a measure aimed at preventing and/or mitigating social conflicts in order to reduce the financial risk of projects, investments and reduce economic risk.
Unfortunately, social risk assessments and community consultations are not enough by themselves to prevent or mitigate community conflicts. Such as SBS Document No. 01-2015 points out, social conflict can ignite and spread in contagious ways that are very difficult to assess and control.

How do we go from Banking Regulation to developing a Mediation Process?

The Peruvian banking regulation does not specify how to make inquiries. However, we suggest that the basic requirement for community consultation can be used to foster productive forms of engagement by communities (and other affected stakeholders) with project consortia, investors, and project finance banks. Ideally, the goal would be ambitious: not simply “consulting” stakeholders, but actively earning a “social license to operate” from affected communities. While this may seem like a waste of time for project managers, we believe it is significantly less risky and costly than moving forward in the face of community opposition to the project.

How do we move forward and institute such a process?

In our opinion, the first step in designing a successful consultation is to create a safe space and begin an engagement process with all stakeholders, taking the time to understand their needs, wants, interests and complaints. Listening and hearing are key factors for success. Commitment means transformation, ensuring that communities understand the proposed project, how it will change their lives, and accept it. Then, and only then, will they be in a position to grant the company the coveted social license to operate legitimately and preserve it while ensuring that the process is set up to kick in and out when needed.

Next steps to build the mediation

This can be achieved by building a mediation process to regulate relationships with communities that may be affected by a specific project or investment. This type of mediation can prevent ongoing conflict and allow dialogue and trust to develop over time. This is what we call transformative mediation, taking the time to understand the conflict and figure out what makes it flare up, where anger is gradually replaced by constructive building to move forward. When communities embrace the project and understand how they can benefit from it, they can become partners in the project rather than angry opponents.