I think this sentence is using the sociological definition of agency, meaning the capacity of a person to make choices on his or her own behalf. For example, sometimes a charitable organization will come into a foreign country with the intent of helping a group of people, but will make decisions without taking cultural differences into accounts or consulting the people they are trying to help. This would be denying them their own agency.

It means that someone (or perhaps a government body) refused to set up (establish) an agency for a specific region. This was a mistake. If you "deny" someone the right to do something, you are exercising power and authority over them. In certain cases, this can be justified e.g. when protecting children. But in other cases, the decision can be undemocratic and the people can be upset. I think the phrase here suggests this situation. I hope this helps!