By Federico Lavopa
BUENOS AIRES, Aug 12 2015 (IPS)

The investor-state dispute settlement (ISDS) system has come under increasing criticism in recent years.

Inconsistent decisions, poorly reasoned awards, lack of transparency, parallel proceedings, serious doubts about arbitrator’s impartiality and the sheer size of the compensations sought by investors and awarded by arbitration tribunals are just some examples of the flaws that have been pointed out by detractors of the system.

Federico Lavopa

The dozens of cases that were initiated against Argentina as a result of the outburst of one of its worst economic and financial crises in late 2001 became an often-quoted sad illustration of many of these shortcomings of the ISDS system.

Apart from the tragic consequences entailed by the economic and political crisis which was faced by Argentina, in particular in 2001/2002, which included a fall in gross domestic product (GDP) per capita of 50 percent, an unemployment rate of over 20 percent, a poverty rate of 50 percent, strikes, demonstrations, violent clashes with the police, dozens of civil casualties and a succession of five presidents in 10 days, Argentina received a flood of claims from foreign investors that were filed under different ISDS mechanisms and, in particular, before the International Centre for Settlement of Investment Disputes (ICSID).

Indeed, in the period 2003-2007, claims against Argentina represented one-quarter of all the cases initiated within the framework of the ICSID Convention. These claims before international arbitral tribunals challenged the changes to the economic rules that Argentina had implemented to contain the effects of perhaps the worst economic cycle of its history.

After 1991, Argentina had embarked on an economic deregulation and liberalisation programme. Among others, this programme included the convertibility of the Argentine peso and the creation of a currency board to maintain parity between the peso and the U.S. dollar by limiting the local money supply to the amount of Argentina’s foreign exchange reserves. “If all investors that sued Argentina had obtained 100 percent of their claims, the total amount that the country should have had to bear would have been at around 80 billion dollars”

This economic and pro-market programme was accompanied by a strong emphasis on the attraction of foreign investment which, among other aspects, resulted in the conclusion of 58 bilateral investment treaties (BITs) – 55 of which came into effect.

It also included a mass privatisation process of public companies which, at that time, represented an important part of the domestic economy.

This market-oriented model reached its limits in the late 1990s, and in May 2003 a new president took office, whose government reformed the regulatory framework for the economy – particularly that for the public services privatised over the 1990s – and introduced a package of emergency laws which implied a considerable change in the conditions under which foreign investors and, in particular, public services providers had to run their business in Argentina.

As a consequence, many of them decided to resort to the investor-state dispute settlement mechanisms embodied in the dozens of bilateral investment treaties that Argentina had signed in the 1990s. In total, in the period 2001-2012, exactly 50 cases were filed against Argentina.

A striking characteristic of the Argentinian experience is the amount of requests for compensations made by the companies that sued Argentina. According to estimates made when the peak of cases following the crisis was reached, if all investors that sued Argentina had obtained 100 percent of their claims, the total amount that the country should have had to bear would have been at around 80 billion dollars.

This sum would have been practically impossible to pay, even if Argentina had not been undergoing a period of acute economic crisis, because it represented approximately 13 percent of Argentina’s GDP for 2013.

Although Argentina’s response to this flood of cases was varied and it is still early to offer definite figures, it is already possible to conclude that, in general, arbitration tribunals were prone to render awards in favour of investors.

Almost 45 percent of the cases have received a condemnatory award, although most of these cases could still be reversed by annulment proceedings, whereas only 15 percent of the arbitration proceedings ended up with a final decision completely in favour of Argentina. The remaining 30 percent are mostly cases which resulted in an agreement between the parties or which were altogether suspended.

All in all, of the 80 billion dollars of the possible amount of compensations calculated when the peak of cases against Argentina was reached following the crisis, Argentina has so far received final rulings involving the payment of 900 million dollars.

The first salient conclusion is that the ISDS system has a very low capacity to adapt to totally exceptional circumstances for which it does not seem to have been designed. Despite the efforts of Argentinian attorneys to show that the measures implemented in the post-crisis period were adopted in an emergency context, being so exceptional as to justify any breach of the substantial clauses of the BITs, few tribunals were prepared to sustain this defence.

This notwithstanding, and with most of these cases having already been dealt with, the upcoming scenario for Argentina seems much less drastic than that forecast when the peak of cases was reached.

While they represent a heavy burden for a developing country like Argentina, so far the compensations actually paid amount to a small portion of the sum initially estimated.

The Argentinian case also represents a worrisome example of the failure of the ISDS system to ensure coherence and soundness in its decisions.

Although the dozens of cases submitted against Argentina addressed exactly the same package of measures (the post-crisis emergency laws) and  had to assess very similar arguments of the different claimants and a practically identical series of defences put forward by the Argentinian government, the conclusions at which they arrived have shown striking differences.

Additionally, some of the decisions have been subject to strong criticism and/or declared null and void by annulment committees.

Finally, the experience of Argentina shows the difficulties that arbitration tribunals might encounter when trying to scrutinise the economic policy choices made by governments. On top of the sensitiveness of examining sovereign decisions of States, arbitrators might find themselves in the awkward situation of deciding on highly technical matters which they are clearly ill-equipped to assess.

The case of Argentina thus represents a sad example of the urgent need to reconsider and reform the ISDS system. Yet, the lessons to be drawn from this experience do not seem to lead to clear conclusions about which direction to take.

On the one hand, the system has proved to be extremely inflexible, which prevented it from addressing the exceptional peculiarities of the Argentinian case. On the other hand, however, the wide margin of discretion available for the arbitral tribunals resulted in the adoption of inherently poor decisions, and with high levels of incoherence among them. (END/COLUMNIST SERVICE)

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

*  This column is based on a paper with the same title published as South Centre Investment Policy Brief No 2, July 2015, available here.

Excerpt:

José María Arévalo, Héctor Berríos and Juan Hernán Molina (left to right), on the bank of the Titihuapa river, are three inhabitants of the Salvadoran town of Llano de La Hacienda, who are fighting against the El Dorado mine. Credit: Edgardo Ayala/IPS

By Edgardo Ayala
SAN ISIDRO, El Salvador , May 29 2014 (IPS)

Mining is not viable in this country, say Salvador Sánchez Cerén – who will be sworn in as the new president of El Salvador on Jun. 1 – and his team of environmental advisers.

The struggle waged by many rural communities affected by mining lies behind the position taken by the left-wing president-elect.

One of the highest profile cases is the town of Llano de La Hacienda, in central El Salvador, whose 1,200 inhabitants mainly grow maize, beans and squash, and graze cattle – but who more recently have also been dedicated to fighting gold mining.

Local residents were the first line of resistance against Pacific Rim, the Canadian corporation that sued the Salvadoran state in 2009 for refusing to grant it a permit for the El Dorado gold mine.

The town is in the mountains of the municipality of San Isidro in the department or province of Cabañas, 65 km northwest of San Salvador. The mine is its unwanted neighbour.

The company was acquired in November 2013 by Australia’s OceanaGold, for 10.2 mllion dollars.

The lawsuit was initially for 77 million dollars, but the amount was increased last year to 301 million dollars, in a case being heard in the International Centre for Settlement of Investment Disputes (ICSID), a member of the World Bank Group in Washington.

The decisive hearing is slated to be held in September.

For the people of Llano de la Hacienda, the refusal of a mining permit to Pacific Rim was seen as a major triumph for local communities after years of intense opposition and social conflict that led, according to residents, to the murder of three activists between June and December 2009.

“Our entire struggle began over this river, to keep it from being polluted with cyanide,” local peasant farmer Juan Hernán Molina told IPS while resting on the banks of the Titihuapa river, which winds through the area’s hills and plains. Cyanide is a lethal ingredient used in gold extraction.

The Titihuapa river runs into the Lempa river, the largest in the country, which supplies water to the capital, San Salvador.

Another battle won by the environmental movement in El Salvador was an August 2013 ruling by ICSID which rejected a request by the Commerce Group, a U.S. mining company, to extend a 100 million dollar lawsuit against the Salvadoran state.

El Salvador had refused to renew the permit for the San Sebastián mine in the eastern department of La Unión, which the Commerce Group operated from 1987 to 2009.

In the case of Pacific Rim “a battle has been won, but not the war,” said José María Arévalo, another peasant farmer from Llano de la Hacienda.

“What we want is for it to be definitively banned,” he told IPS, walking along a path outside the town. “In all of these fields there are holes drilled by Pacific Rim, when it was searching for gold,” he adds, pointing them out.

Although the exploration work was brought to a halt, a small group of employees is still working in equipment maintenance and cleaning in the El Dorado mine, local residents told IPS.

Two years ago, environmental organisations grouped in the Mesa Nacional contra la Minería – a national umbrella group against mining – presented a proposed bill in Congress to prohibit mining because of the negative effects on health and the environment.

If it is approved, El Salvador would be following the lead of Costa Rica, which passed a law banning open pit mining in 2010. Panama approved a similar ban two years later, but only on indigenous lands in the western provinces of Bocas del Toro, Chiriquí and Veraguas.

Social organisations believe another bill, presented in 2012 by El Salvador’s Environment Ministry, falls short because it would merely suspend mining activity.

“We don’t support the idea of a moratorium, because it leaves the issue hanging, and gives companies time to prepare, whereas we want to just bring it to a halt once and for all,” said Héctor Berríos, a leader of the Movimiento Unificado Francisco Sánchez 1932 (MUFRAS 32) movement.

For years, the San Salvador-based organisation has been supporting communities in the province of Cabañas in their fight against the mining industry.

But neither the bill for a suspension of mining activity nor the one for a total ban have found support in the 84-member single-chamber legislature, where the right-wing parties, which have a majority, are opposed to both initiatives.

Sánchez Cerén’s left-wing former rebel Farabundo Martí National Liberation Front (FMLN) has only 31 lawmakers, and is unlikely to drum up enough support to reach the 43 votes needed to move forward with the bill that would declare a moratorium on mining.

“The legislators should put themselves in our shoes, and look out for the health and well-being of the people and the quality of the water,” Roxana Ramírez, a young woman in San Isidro, told IPS while making pickles with three other women.

They are taking part in a project aimed at showing that the municipalities around the El Dorado mine can develop and generate employment without the need for jobs and incomes from the mining industry.

Patricia Pineda (front) and Roxana Ramírez, making pickles in the Salvadoran town of
San Isidro. Projects like this one are aimed at creating economic alternatives to mining in the area. Credit: Edgardo Ayala/IPS

“This is an alternative that can be taken up again in other communities,” added Ramírez, as she placed pieces of carrot and cauliflower in small bags with vinegar.

Sánchez Cerén, vice-president in the outgoing government, is a 69-year-old former schoolteacher and guerrilla who won the presidential elections in March, and who will have to prove that he will stand by his commitment to curb mining, which he repeated several times on the campaign trail.

The people he named to the Environment Ministry indicate that he at least plans to try. As deputy minister he appointed Ángel Ibarra, an activist who played a leading role in the struggle against Pacific Rim and against mining in general, in the organisation Unidad Ecológica Salvadoreña (Salvadoran Ecological Unit).

“The new president has reached the decision that mining is not viable in El Salvador,” Ibarra told IPS with conviction.

And the future environment minister is the current deputy minister Lina Pohl, one of the driving forces behind the effort to suspend mining, who recently stated once again that “there can be no mining activity” although she added “under the current conditions.”

But without the necessary number of votes in the legislature to push through a law to suspend or ban mining, it will remain a threat looming over rural communities.

In the shade of a tree next to the Titihuapa river, Arévalo said “We won’t rest until the politicians pass an anti-mining law, that is the only option.”