Effective social and environmental impact mitigation demands viable, sustainable institutional and financial arrangements. At a practical level, mitigation requires people crafting a solution from hundreds, if not thousands, of possible arrangements. The social development scientist organize information and builds theories to determine the effectiveness, sustainability, and costs/benefits associated with such arrangements. Critical evaluations offer excellent opportunities to determine the effectivenss of particular combinations of finances and organizations. Toward that end, in 1995-96, I examined a Chilean company’s (Pangue S.A.) efforts to mitigate the negative consequences of a private sector hydroelectric investment and alleviate extreme poverty on three Pehuenche Indian reservations adjacent to the Project. The project was being funded by the International Finance Corporation (IFC), the private sector arm of the World Bank Group.

In an major innovation for the World Bank Group environmental programs, Pangue and the IFC created a financial and institutional arrangement to mitigate long term impacts of a private infrastructure development on indigenous peoples in the form of a non-profit foundation. Under their financial arrangement with the IFC, the Pangue Company agreed to lay the base for sustainable development. Until 2001, the Company agreed to provide a newly formed, indigenous development foundation with the greater of (i) an annual amount equal to 0.30% of the Company’s net income and (ii) the equivalent of 5,780 Chilean Unidades de Fomento (roughly 130,000 US$). After the year 2001, the Company will provide a new foundation, the Pehuen Foundation, with an annual amount equal to 0.30% of the Company’s net income. This arrangement was intended to provide a small financial platform to overcome undesirable impacts far into the future. Moreover, the Foundation was intended to provide a model for resolving increasingly frequent social and environmental conflicts between indigenous communities and private sector developments.

My analysis of the Foundation’s performance revealed that since its beginning in 1992 until 1995, the Pehuen Foundation had received over one-half million dollars US$, of which 95 percent came from the company, Pangue. Of this, 357K US$ was spent on direct program costs. Expenditures of two-thirds of these funds were used for bulk discount purchases in combination with over 82K US$ in Pehuenche family funds.) The program made 5,111 such purchases, moving over 50,000 items. The remaining third of the Foundation funds were spent on charitable gifts to communities (16.8 %), diagnostic studies (7.4 %), road construction (3.7 %), training (4.5 %) and leveraging to capture government subsidies and private donations (1.6 %). Audited administrative costs are high, averaging 52 percent of direct Project benefits per year. If non-audited costs were included, it is closer to 70%.

The Pehuen Foundation performance was compared to the objectives set forth in an agreement between the International Finance Corporation and the Company. It was also compared to the IFC Environmental Guidelines, the policy which were supposed to govern distribution of IFC investments. Using these objectives, my evaluation found that, after four years, the Company has yet to incorporate four of the five critical elements of the IFC and Pangue Agreement into the Foundation’s statutes and operational agenda: i) make the Foundation a vehicle for sustainable development which will provide long-term benefits to the Pehuenche by promoting their socio-economic development, ii) prepare to mitigate post-boom impacts following construction activities (with construction completed in 1997), iii) preserve and reinforce cultural identity, and iv) make a best effort to arrange for the supply of electric power to the communities.

Instead of incorporating the agreed upon objectives, the Company directed the Foundation to alleviate the state of extreme poverty by organizing a welfare-like system focusing upon provisioning of short-term, material assistance to alleviate the deplorable socio-economic circumstances of the Alto Bio Bio's three indigenous communities. Material assistance is being provided through a discount group purchase program (DGP) in which Pehuenche identify their individual, family needs, and agree to provide counterpart funding in combination with the Foundation’s contribution. A Pehuenche representative to the Foundation Board presents these requests, they are approved by the Board, and the Foundation staff makes and delivers the purchases. By 1995, the program had grown and is using over 80 percent of the funds the Foundation spends in the communities. Many Pehuenche view the DGP as favorable, commercial rather than cooperative ventures with the Foundation.

The funds have been effectively used to supplement the rudimentary demands of poor rural households. They have been used for making household improvements (58.4%), to input price supports (33.9%), materials for student support (5.2%), and cultural activities (0.6%). Some of the Pehuen Foundation monies were spent on productive inputs represent a change from government programs, which charge interest, to the Foundation program, which does not.

Measured by a welfare distribution test, however, the DGP program is not capable of alleviating poverty. Potential indigent beneficiaries are systematically excluded from Foundation programs because they cannot afford the modest co-payments required for discount purchases. Other exclusionary factors include lack of timely information, genealogical and geopolitical distance from the Pehuenche representatives to the Foundation, and fear that cooperation with the Foundation might imply support for Pangue or its owner’s agenda. The result is that 20 percent of the household received over half of the Foundation’s funds. Families which the Pehuenche related as better off in their communities obtained two to three times more benefits than the less fortunate and families living nearer to the Board representative’s sector obtained 3 to 4 times greater benefits. Attempts to correct the inequalities through a work-voucher system have excluded women-headed households, the disabled, the elderly, and the most destitute.

The amount spent for the DGP provides material assistance to individual families. In contrast, the Foundation expenditures for community-wide initiatives and training are small and dwindling. Without a community development or strategic plan, without consultations with the Pehuenche community, the Foundation’s community-wide initiatives have essentially been non-Pehuenche Board and staff purchases and gifts dispersed in many directions. Two diagnostic studies were done: a general socio-economic survey of the beneficiary population to assist in the implementation of the DGP program and an educational diagnostic. The studies were conducted by firms without experience in indigenous development and failed to actively involve the Pehuenche in their preparation or execution. The community is unaware of their findings and the Board and staff have not used them for program development or monitoring.

The most promising return on investment is coming from leveraging Foundation funds to capture federal subsidies for eligible Pehuenche families. In the first attempt at this strategy, the Foundation has used its knowledge of the Chilean welfare system to leverage 58 US$ in Foundation funds and 29 US$ of Pehuenche money to obtain $2,460 US$ homes for 74 families. This amount exceeds Pangue’s annual contribution to the Foundation.

The cultural and logistic problems made the evaluation methodologically challenging. In the scoping and fieldwork design phase, over 61 stakeholders from the public sector, NGOs, environmental groups, academics, consultants, and the Foundation reviewed and improved an analytical framework for the evaluation. In the Alto Bio Bio, a 6 person, Pehuenche team was trained and assisted in 11 focus group, 3 community-wide meetings, and the administration of a battery of participatory tests in Spanish and their native language over a seven week period. Foundation directors and staff worked cooperatively and closely with evaluator.

Without the agreed upon focus on sustainable socio-economic development, sustainability, mitigation, cultural development, and provisioning of electrical power, the impacts of the Foundation programs on the culture of the intended Pehuenche beneficiaries was negligible. In 1992, all households in Callaqui, Pitril and Quepuca-Ralco were below the National Poverty Line (NPL). After four years of Foundation expenditures and with 30% of Callaqui and Quepuca-Ralco households temporarily employed at the Project site, only 1% of the households have risen above the NPL. A third of the population remains indigent. Incomes and poverty indicators show the 3 communities falling substantially below the adjacent, non-Indian settlement of Ralco.

The Foundation's inability to initiate the objectives of intended contractual agreement by its founders, ENDESA and the International Finance Corporation, is a result of the Company’s self-imposed cultural-intellectual isolation and tight circumscription on Pehuenche "participation" within the Foundation. Isolation is evident by the Company’s failure, for its first four four years, to comply with its agreement that Pangue recruit someone of recognized prestige and experience in the field of social development of indigenous people to be at all times on the Board of Directors; the absence of a properly constituted, effective, Advisory Board; and, the absence of any attempt to build the institutional capacity of the Pehuenche communities and their leadership.

Pehuenche participation is narrowly circumscribed, primarily to issues and decisions related to the discount group purchase program. From the Project’s inception, the Pehuenche have not been informed participants of Pangue and IFC actions which have a substantial bearing on their future. Pehuenche Board members had little knowledge of Foundation statutory objectives, finances, their juridical and fiduciary rights and obligations as Board members, or staff salaries or benefits. Several leaders were uncertain that the Foundation would outlast the construction phase. Misunderstandings and lack of information is even greater within the community. Most commonly, the belief was that signing up with the Foundation as a member was a prerequisite for employment on the Project. Some Pehuenche leaders who are not Board members and members of the communities believe that criticism of the Foundation may lead to loss of benefits and opportunities for employment with the Company.

To manage and run the day-to-day affairs of the Foundation, the Company has carefully selected well meaning, but culturally untrained, development inexperienced, and Spanish-speaking only non-Mapuche Foundation staff and consultants. They have made culturally inappropriate gifts and continue to draw a sharp "we/they" distinction. The consultant survey teams have shown cultural insensitive in some of their questions on diagnostic studies and conducted survey research without using Pehuenche or Mapuche cultural translators and assistants.

On occasion, the Foundation programs have stepped outside its statutory community boundaries, involving communities whose lands and opinions were felt to be in the direct interest of the Company or its owner and ignoring those who are not. The Foundation’s model of Pehuenche culture and their inexperience with Indigenous development led them to ignore the fundamental linkage between the ecosystem and Pehuenche culture. This inability to set up a mechanism for dealing with their conflict of interest prevented the Company and its financial backers from detecting an imminent Project-related problems, including extensive deforestation, which is confronting Pehuenche culture.

Measured against the generally accepted standards needed to sustain the organizational integrity, the Foundation is found wanting. Pehuenche Board members need increased training in their fiduciary and legal obligations. Policy guidelines have not been prepared to resolve the material conflicts of interest of Board members and support of training and hiring of Pehuenche staff. The organization’s purpose is oblique to the IFC/Pangue Agreement by not focusing on mitigation, sustainable development, preservation and reinforcement of Pehuenche identity. Program operations outside the three communities fall outside the Foundation charter, especially those in Ralco-Lepoy in which the Foundation objectives are at cross-purposes with its Founder and its Founder’s owner, the Company. Information on Foundation activities is not shared with the beneficiaries. No mid or long range planning and budgeting takes place, even though a solid financial platform has been provided. Audited statements do not include all Pangue contributions and expenditures to the Foundation. And program and management categories do not match the audited financial statement in the annual report.

Human resource development proved a relatively insignificant part of the Foundation’s approach, accounting for less than 4 percent of its direct expenditures. The little training that has been done has yielded over a 200 percent return on investment in four years into the local economy. Despite initial successful efforts to develop training programs that will increase Pehuenche access to job opportunities, the training activities ceased in 1993.

Without a properly constituted Foundation as envisioned by the initial Agreement, the Pehuenche now face a more uncertain future than they faced before the hydroelectric dam. Threats to Pehuenche economy and culture which require immediate mitigation include high deforestation, serious threats of involuntary resettlement, unemployment, and increased non-Indian (huinca) encroachment on their culture and lands.

Deforestation is increasing the impoverishment of the communities and, unless checked, threatens the physical survival of the people and their culture. Pehuenche culture, subsistence, health, and economy are based on the sustained use of the forest as a renewable natural resource. Recognizing this, the Agreement calls for actions to mitigate damages. There is very little room for environmental resiliency or experimental error when dealing with a group already below the poverty line and many of whom are indigent.

Measured strictly in economic terms, at this point, the net loss to the Pehuenche economy from their loss of natural resources far exceeds the benefits the Foundation put back into the communities. The Project road opened up access to the Pehuenche forest, whose exploitation may have been made easier by the privatization of communal land. Before the project road, the communities were located on an unpaved, cul du sac and removal of timber was extremely limited. The paved project road opened the area to unscrupulous contractors who took advantage of the Pehuenche lack of understanding of the law and the limited understanding of the meaning of private property and government forestry contracts. From 1988 to 1994, between 3 and 18 million dollars of timber has been stripped from community lands. Since 1991, the deforestation rate has been unacceptably high, between 1.3 and 8.5 percent per year. Little income from the mining of their forest reached Pehuenche pockets. The cutting by non-Indians on Indian land has left some Pehuenche threatened with huge fines that they are unable to pay and is eroding their civil rights. Pangue’s agreement with the forest ministry (CONAF) has not been put into effect and reforestation programs have failed. Lacking monitoring, the Foundation is not even aware of this problem and has spent an insignificant, 4 percent of its funds on forestry programs.

Three, possibly four, involuntary resettlements of Pehuenche of the Foundation communities loom in the immediate future. Any one of these resettlements will substantially undermine the Foundation’s ability to complete the objectives set forth in the Agreement and may increase impoverishment of the Pehuenche by reducing their access to land, health security, food security, housing security, income, and access to common property. These may also increase the socio-economic marginalization and socio-cultural disintegration of the three communities. One is on the shore of the Pangue reservoir, at Los Avellanos, in the northwestern sector of Quepuca-Ralco, where a potential indigenous resettlement problem is materializing exactly as predicted by the government planning agency, MIDEPLAN, before Board Presentation in 1992. A resettlement plan has neither been prepared nor contemplated.

The other three, upstream related impacts of the Ralco dam, which will likely be constructed by the Company. Although not financed by the IFC and technically uncoupled from Pangue, the Pehuenche view these as related events. This perspective has been reinforced by the expansion of extensive Foundation activities into the staging area for the new dam at Ralco-Lepoy. These three involuntary resettlements pose a substantial threat to the integrity of 70 - 85% of households in Quepuca-Ralco, including the entire settlements (sectors) of Quepuca-Estadio, Palmucho, and Los Avellanos (again). Impacts of preparation for the Ralco dam have already began to effect the Pehuenche and Foundation operations. In addition, there is a high probability of a resettlement "spill-over" effect in which refugees from the threatened resettlement of residents from Ralco-Lepoy may move into the Foundation communities. An improperly executed resettlement within or adjacent to a Foundation community will impoverish a segment of the Pehuenche population and substantially increase demands on already overtaxed Foundation resources. The Pehuen Foundation was not designed, nor is it sufficiently funded, nor is it prepared to mitigate resettlement. And, despite the resettlement of indigenous people by the Pangue dam, the IFC staff failed to submit a resettlement or an Indigenous Development plan, as called for in World Bank Group policy. The effect of this upstream impact on the Foundation communities has yet to be investigated as called for in the Agreement.

Following construction, I expect massive unemployment in Callaqui and Quepuca-Ralco due to the end of construction. This economic crisis might be forestalled by preparatory work on the Ralco dam, but ultimately, the crisis will occur. With the loss of the forest resources and the anticipated impoverishment risks normally associated with the resettlement of indigenous peoples, the cultural future of the Pehuenche is bleak. Rather than being the beneficiaries of development, through the Foundation, the Pehuenche are subsidizing the Pangue dam by losing more than they are gaining. The Pehuenche are not being trained for any new role in the transformed local economy. Internal factionalism, present before the Project, has been exacerbated to the point where one community has politically split. Alcoholism has substantially increased in the community closest to the Project. And, by 1996, arrangements for electrification had not been made.

It would be technically challenging for the Foundation to reach the IFC objectives even if it was adequately funded, properly staffed, properly programmed, under a comprehensive community development and strategic plan, incorporated the Pehuenche as fully informed participants into all Foundation activities, linked to on-going Bank indigenous peoples programs, was monitoring impacts to be mitigated, and with access to best practice and indigenous development knowledge. Unfortunately, none of the above conditions pertained. - And the chance for success would be improved if the Foundation had close cooperative relationships with the public sector - which it does not. The Foundation’s work is further complicated by its persistent conflict of interest between meeting its IFC objectives and representing the interest of its owner, the Company.

The participatory evaluation discovered that the Pehuenche and the Agreement’s objectives may not be that far apart. Once informed of the Foundation’s long term objectives and given an opportunity to discuss their perceived needs, the Pehuenche expressed program preferences which are distinct from the Foundation’s present priorities and closer to the Agreement’s objectives. In initial votes, they preferred major works such as electrification and potable water (41%), employment generation and training (36%) and the group discount program (22%). There was strong agreement that investment of Foundation funds was a serious matter and that all sectors and their leaders should be given an opportunity to engage in long term planning in a culturally appropriate manner. Some suggested suspension of expenditures and saving the money until they had completed their extensive, consensual deliberations. The Pehuenche have a great deal of interest in opening up a thorough dialogue and planning process to consider how they would like to prioritize the use of Foundation resources.

The financial innovation which originally set the Pehuen Foundation in motion may offer the solution to what must appear to be the imminent failure of this attempt to establish a sustainable institutional arrangement to channel finances to the local indigenous population. The evaluation offered specific suggestions for reorganizing the institutional arrangements to more closely align it with participatory, sustainable indigenous development. The financial arrangements also need reevaluation, in light of the extensive environmental damages inflicted on the Pehuenche by deforestation.

Pangue S.A. is primarily owned (97.5) by ENDESA S.A., a major energy group with investments throughout South America. The remaining 2.5% is owned by the IFC. In 1998, it was acquired by ENDESA of Spain. This report refers primarily to Pangue, but the actions of the Company are under the control of ENDESA.

The evaluation subsequently discovered that the Indigenous People had not been a party or were even aware of what was a secret agreement between the IFC and the Company over their future development. Critics of the Bank and ENDESA argued that this agreement was being held secret to protect ENDESA’s interest in a planned second dam, Ralco, immediately upstream from the Pangue dam.

Postscript:

As of July 1999, I am aware of no effort to mitigate the damages discovered by the Pehuenche investors and myself in 1995. Nor am I aware of any efforts to deal with the Pehuenche people, as a group, in their own manner rather than deal with them one individual and one family at a time. This strategy - not recognizing a groups cultural identity, represents a fundamental denial of a groups rights. The Pehuen Foundation, continues to play an active role in Pehuenche affairs.