Tenure risk is the risk that a real asset will face significant financial or operational problems because of local opposition. It is very common across Africa, Asia and Latin America, where concessions of land for agriculture, infrastructure, special economic zones and other commercial purposes have sometimes been offered to companies and investors as unencumbered opportunities.
In reality, the concession areas are almost always inhabited, often by poor or marginalized people. Emerging market laws typically do not recognize these populations’ presence, and agreements with companies and investors do not accord them rights. This leaves local people as a kind of unrecognized counterparty in project development schemes, as well as acquisitions of existing assets.
Local people often respond to being cut out of the process by taking direct action to draw attention to their grievances. There are numerous examples of blockades, protests, invasions, sabotage, threats to employee safety and arson at project sites – any of which can damage the reputations of operators and investors when they are reported by NGOs or the media.
Direct action can also have a financial impact, leading to delays, licensing problems and a spiral of antagonism between investors, the government and local people. Our research shows that such delays are by far the most significant impact of tenure dispute from a financial perspective. But disputes are also associated with increased compensation payments, new or higher regulatory costs, higher resource costs, higher insurance premiums, unplanned capital expenditure, loss of license and inflated legal costs.
What may surprise you is that very few of the 602 disputes reviewed by TMP Systems are primarily about compensation – less than 7 per cent. Our research suggests that you cannot simply hope to pay people off, even if you have a sizeable compensation budget: people are not often looking for a pay off, but rather for real recognition of their social and environmental interests. That is not to say that compensation will not be part of the solution, simply that it is not the primary driver of most disputes.
Local people are unusual counterparties that need to be understood and satisfied in ways that go beyond pure legal and economic considerations. Doing so often sounds messy, expensive or distracting for investors and companies. This is because it can be – if not done properly – and because many of the issues raised in such a process fall outside the typical operational concerns of a mine, plantation, dam or rail project.
Landscope’s purpose is to assist you in the process of identifying and managing tenure risk, and of rationalizing the costs against potential losses to make your due diligence more efficient and effective. To find out more, please watch the introductory video, which you can find here.