This game was played with standard 2.08. You can see in the first screen that Inca was hemmed in at the start. Somehow it managed to found a third city in scrappy tundra further east on the main continent, but completely misses the island to the west.

http://i91.photobucket.com/albums/k286/playshogi/Civ4ScreenShot0031.jpg

In this screen, you can see just how large that island was. I've seen the AI miss large islands nearby, while finding ones far away.
Is this something Better AI fixes?

http://i91.photobucket.com/albums/k286/playshogi/Civ4ScreenShot0032.jpg

BetterAI has some tweaks to the code so that start positions like that are minimized.

From the release notes:

Start Points:
- Close starts should no longer happen on any map script.
- Polar starts should be less likely.

Starting Point Changes:
- Rewrite of minimum distance stuff to make it more flexible.
- Players should not start very close together.
- Players should not be jammed into unusual spots.
- Changed the food bonus normalizer to be fairer on very dry starts.

- starting location tweaks, the 'greenland effect' toned down (ie Furs wont be upgraded to Grassland)

Actually, the start isn't that bad for Inca, provided it "sees" the island next door which only it can reach by galley (assuming it declines open borders).

Having opposing capitals only 5 spaces apart is bad IMO. Its going to lead to one or the other being knocked out of contention early.