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Water resource issues have impacted business operations in
multiple locations across Latin American. In addition to the major
drought
affecting the power supply in Brazil and water-based
transportation of key exports in Argentina, water-related issues
have triggered a business occupation in Mexico, growing pushback
against extractive projects in Ecuador, and legislative moves
increasing contract alteration risk in Chile, with other countries
also affected.
Although Latin America possesses roughly 30% of the world's
freshwater resources, mismanagement, overexploitation, pollution,
and climate change-related impacts are increasing the region's
water insecurity. Of the 20 largest Latin American cities, 16 now
face water-related stress. Overall, a growing and persisting focus
on water supply is likely across the region, leaving companies
facing wider and persisting water-related operational
challenges.
Widening protests against water-intensive manufacturing
projects in Mexico threaten contract alteration risks.
In Puebla state, Mexico, around 100 people from the so-called
'Peoples' Front for Water Defence' (Frente de Pueblos en Defensa
del Agua) broke into a private water-bottling plant on 8 August,
damaging and occupying the premises, and physically assaulting
security guards. The incident took place after a four-month-long
blockade that forced the plant to cease operations in March 2021.
Protesters claim the occupation will be permanent. Days before,
another grouping of local communities from Puebla urged the
National Water Commission (Comisión Nacional del Agua: CONAGUA) to
revoke water use permits for at least five European and US
manufacturing and agribusiness companies in the state. Despite
private sector calls for the authorities to recover control of the
water-bottling plant, the government has shown no sign that it will
deploy security forces to achieve this. Based on an April 2020
precedent, in which local community's concerns over water scarcity
resulted in the cancellation of a US company's brewing project in
Baja California state after a referendum, the federal government
appears more likely to propose an ad hoc consultation process to
determine the future of the plant. This would likely incentivise
further protests and increase the risk of other communities
escalating actions against companies operating water-intensive
businesses through blockades and take-over attempts, seeking
eventual project cancellations.
Environmental and community activism is increasing legal
challenges and protest risks for extractive projects.
On 6 August, the Sucumbios department municipal court in Ecuador
issued a ruling in favor of five girls who, supported by indigenous
organizations, brought a lawsuit against the Ministries of Mining
and Non-renewable Natural Resources and the Ministry of Water and
the Environment. Their case claimed that their human right to
access clean water had been violated by pollution from oil and gas
projects. The ruling ordered that all gas burners near populated
areas be disabled within 18 months to preserve water quality.
Indigenous organizations across the region with significant
mobilization capacity have increased their focus on the defense of
water resources.
Community action against water pollution, particularly that
caused by mining, is increasing. Peru's government organization
dedicated to recording social conflicts, the Defensoría del Pueblo
(People's Defence), recorded that, in June 2021, 65% of social
conflicts registered focused on environmental issues, with water
pollution a major trigger. Activists opposing fracking in Colombia
are campaigning for increased community consultation on fracking
projects planned for the Magdalena Medio region of Antioquia
department. Indigenous and social organizations seeking to combat
water and other potential pollution are also gathering support from
activists worldwide, increasing pressure on companies from
consumers. These cases indicate the growing trend towards
water-related activism across Latin America affecting extractive
projects, which is increasing protest, legal, and reputational
risks for extractive companies over water resources.
Water scarcity is driving regulatory changes in Chile,
raising risks of project cancellations or
expropriation.
After a decade of National Congressional discussions, Chile's
Senate approved a water code bill on 4 August. Its passage was
prompted by severe water scarcity caused by a lack of rainfall. The
bill classes water as a national good for public use, prioritising
its use for consumption and sanitation. Until now, water rights in
Chile have been private and permanent, while the proposed
regulation establishes 20- or 30-year renewable concessions for new
water rights. Currently, at the lower chamber of the National
Congress for final discussion, the bill is likely to be approved
and become operational within 2021. Under the water code, holders
of water rights, particularly in the agriculture sector (which uses
approximately 80% of available water), mining, and energy, would
face tougher sanctions for misuse, and contract cancellation for
non-use or speculation. Although existing holders would retain
ownership indefinitely, expropriation of rights would be allowed as
a last resort if there were severe water shortages for consumption,
healthcare, or sanitation, and no more rights were available to
purchase. The classification of water as a public good is also
likely to be enshrined in the new constitution currently being
drafted, potentially adding further restrictions.
Indicators of changing risk environment
Increasing risk
Rising water scarcity across Mexico encourages criminal groups
to seek control of water resources, increasing the risk of
extortion for the agribusiness, extractive, and manufacturing
sectors.
Ecuador's government seeks to expand extractive industries in
protected areas without prioritising community consultation,
leading to wider, larger, and more persistent protests against the
sector.
Chile passes its new water code and includes further
restrictive provisions for water rights in its new constitution,
hindering water-intensive business activity and potentially
encouraging similar legislative moves elsewhere.
Decreasing risk
The Mexican government arranges negotiations between the
occupying communities and the affected water-bottling company,
reducing media focus and permitting an eventual compromise,
reducing spillover risks affecting other firms.
Posted 01 September 2021 by Ailsa Rosales, Country Risk Analyst, Latin America and Caribbean, S&P Global Market Intelligence and
Carla Selman, Principal Research Analyst, Country Risk, S&P Global Market Intelligence and
Jose Sevilla-Macip, Senior Research Analyst, Latin America Country Risk, S&P Global Market Intelligence