The role of Community Development Agreements in facilitating upstream projects

John (Yianni) Nikolaou's picture
John (Yianni) Nikolaou, Founder & President, Center for Industrial Development
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Natural resource development has tremendous potential to be a positive force for economic development in countries well-endowed with energy resources. The stories that most often make headlines, however, are horror stories of environmental degradation, social displacement, and, overall, resource development benefitting the few at the expense of the many. Rethinking corporate social responsibility is key to changing this narrative, and community development agreements (CDAs) provide a promising way forward.

CDAs are voluntary, or sometimes government mandated, agreements between the project developer and the project affected community that defines company commitments to issues such as environmental impact mitigation, benefit sharing, and local employment, for example. When applied to new energy infrastructure projects such as gas pipelines and wells they can help ensure that project development proceeds and that communities benefit.

Where CDAs differ from traditional corporate social responsibility mechanisms is that they put the community at the forefront of negotiations rather than communities solely being on the receiving end of company-government negotiations. CDAs are the results of months-long processes of defining the project affected community, setting negotiation terms, bringing in experts, discussing priority projects, designing fiscal regimes, and more. The result can be a comprehensive agreement that covers many areas of concern, or one that only tackles environmental protection, for example.

Best practices for CDAs are emerging as they are becoming more common. There are three parts of the CDA process that can make or break a CDA: defining the project affected community, designing the fiscal regime, and structuring community trusts or development funds that are fed by the benefit-sharing mechanism.

The first point is critical as it is easy to overlook the fact that a project can have downstream impacts that must be considered alongside the impacts to the immediate community. A comprehensive social and environmental impact assessment is the first step to a great CDA.

Secondly, the fiscal regime is often the heart of the CDA as it describes how the community will monetarily benefit from a project. Combinations of flat fees and production or revenue-tied rates can give the community steady flows of monetary benefits.

And lastly, where these funds flow, whether it be to a trust or a community development fund, is crucial for a CDA to deliver on its promise of using natural resource revenue for continued economic development. A poorly structured fund management board, for example, can squander what was meant to be a multi-generational fund in the matter of a few years.

While much of the literature on CDAs comes from the mining industry, there are several case studies of CDAs being used in the gas industry. The Australian coastal town of Onslow, for example, benefitted from a CDA it negotiated with Chevron in 2011 when the company sought to develop the extensive gas reserves in Western Australia. This agreement included a fiscal regime for a community development fund and funds for a new airport and other much-needed infrastructure projects. CDAs in pipeline projects pose unique challenges given that pipelines can span several countries and cultures. The proposed EastMed gas pipeline, for example, crosses through Greece, Cyprus, and Israel. Each country is concerned with the impact that the pipeline will have on local communities.

While comprehensive processes like CDAs increase the financial and time burden on a company, they are still well worth a company’s efforts. Without a CDA, achieving a social license to operate becomes difficult and this increases the possibility that the community may seek to sabotage the project. With an effective CDA, the company and the government can confidently say that their project is benefitting the community.

Companies and communities must take leading roles in negotiating and coming to agreements regarding their relationships. CDAs can give communities a voice in project development and allow companies to engage in effective and meaningful corporate social responsibility. Gone are the days of building a token school in a town located adjacent to a gas well. The industry has the opportunity to redefine the narrative surrounding resource development and to deliver on the promise of resource-fueled economic development.

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