That's where the World Bank comes in. More specifically, the World Bank investment court, called the International Centre for Settlement of Investment Disputes (ICSID). "And companies need someone familiar with that process to help them navigate it," my flight-mate explained, "because it's really a different ballgame altogether."
Indeed. Recently, the ICSID and the proceedings it oversees have come under fire. Arbitration tribunals at the ICSID have historically been closed, with labor and environmental activists often criticizing this lack of transparency. The right of the ICSID to decide issues between countries and companies has also been called into question. The practice gained popularity and participants via free trade agreements and bi-lateral investment treaties in which developed countries would require developing countries to agree to have disputes handled by the ICSID.
Over the past several years, companies have increasingly invoked these agreements to settle disputes in which some say the World Bank is far overstepping its authority. A paper produced in 2005 by the Institute for Policy Studies and Food and Water Watch noted that these investor-state claims were often disputes over natural resources: At the time, 29% of cases had to do with oil, gas and mining, and 42% related to services (namely water, electricity, telecommunications, and waste management). The report's authors also found that investor protections and lawsuits had exploded worldwide, with over two-thirds of disputes being filed since 2002 and the number of bi-lateral investment treaties increasing from 285 in 1989 to over 2500 in 2006.
As activists began to draw attention to some of the issues surrounding these cases, governments began to take note. Norway put a hold on any further bilateral investment treaties (called BITs). Australia announced that it would no longer agree to investor-state arbitration (and in fact now has a treaty in place with the United States that does not include investor-state arbitration). South Africa said it would not sign on to any further BITs. During the 2008 election, both Obama and Clinton promised to revise the North American Free Trade Agreement (NAFTA) to ensure that laws protecting workers would not be subject to arbitration.
Now a case involving El Salvador and Canadian mining company Pacific Rim is becoming something of a lightning rod for this issue. Pacific Rim bills itself as an environmentally and socially responsible mining company, making it rather crucial that it not be seen as a corporate bully, pillaging El Salvador's gold. The proceedings are also the first in the ICSID's history to be webcast, a big move on the part of the World Bank to introduce more transparency into these disputes (if you've got three hours to spare you can watch the webcast here).
Back in 2002, dozens of mining companies were interested in exploration permits in El Salvador's Lempa River watershed, where they hoped to extract gold. Pacific Rim acquired a firm that already had an exploration permit, a sort of phase-one permit in the mining world that allows companies to explore an area and determine whether mining would make sense there. The exploration permit allowed Pacific Rim to perform exploratory drilling in the area, which is what caught the attention of local communities. Francisco Pineda, a local farmer and organizer who went on to win the 2011 Goldman Environmental Prize, says he began to notice his water source drying up and couldn't figure out why. Pineda joined with other farmers and, blaming Pacific Rim's exploratory drilling for the water problem, began to protest any further permitting of the company's El Dorado mine project.
According to Pacific Rim CEO Tom Shrake, "the water in the local river system has never dried up as a result of any activities by Pac Rim or any other mining company. In fact, the mine design submitted to the Salvadoran authorities would set a new precedent for water protection for any gold mine in the Americas, including the United States."
Pacific Rim set about making its case, speaking with both local officials and community members to ensure them that they would leave their water purer than they found it, and the activists pushed equally hard to encourage the community and government to take a closer look at the potential environmental impacts. The mine became a divisive issue in the surrounding area, with some members of the community pushing for the mine and the jobs and money it would bring to a depressed area, while others continued to voice concerns about water quality and the lasting effect the mine would have on the region. When anti-mining activists began to meet with violent deaths, some blamed the burgeoning drug trade in this part of El Salvador, but most believed the violence to be connected to the mining debate within the community.
Ultimately, the government of El Salvador opted not to grant Pacific Rim an exploitation permit. Pacific Rim took its case to the World Bank, requesting arbitration in 2009 for a loss of its investment, totaling $77 million. El Salvador, as a signatory to the Central American Free Trade Agreement, has already agreed to have these sorts of disputes handled by the ICSID. However, the government of El Salvador is arguing that Pacific Rim, as a Canadian company, is not a signatory to CAFTA, or at least wasn't during the time the disputed claims took place. The company named on the initial permits in El Salvador and in the initial complaint was Pac Rim Cayman, LLC, which was located in the Cayman Islands until it was moved to the United States in 2007. Shrake says Pacific Rim has always been a U.S.-based company, but the issue is complicated.
By all accounts Pacific Rim Mining Corp appears to be headquartered in Canada, where its shares are traded (see the company's recent financing release here and annual report here). In 1997, Shrake set up a subsidiary in Nevada called Pacific Rim Exploration, Inc. as a U.S.-based company to act as the exploration arm of Pacific Rim. However, Pacific Rim Exploration, Inc., was not the company named on permits in El Salvador and is not the named claimant in the case against El Salvador; instead it was Pac Rim Cayman, LLC. Pac Rim Cayman, LLC's headquarters were moved to Nevada in 2007 (according to Shrake's testimony to the ICSID). Also in Shrake's testimony to the ICSID, he said "Until recently, Dayton Mining (U.S.) Inc. owned 49% of a Nevada gold mining operation that earned over US$20 million for the Companies – nearly all of which was invested through Pac Rim Cayman into El Salvador." He goes on to argue that because the money Pac Rim Cayman was using came from the United States and was in essence managed by him, although he was not the named CEO of Pac Rim Cayman, Pac Rim Cayman should be considered, in essence, a U.S. company. The government of El Salvador debates this, arguing that legally, Pac Rim Cayman was not a U.S. company at the time that the complaints arose.
The ICSID has yet to rule on this jurisdictional issue, but when lawyers for the Salvadoran government pushed previously to have the case dismissed on the grounds that Pacific Rim has no right to an exploitation permit, the ICSID ruled in favor of Pacific Rim.
Now those same attorneys, along with Mesa, a coalition of environmental and human rights organizations in El Salvador, need to make the other points in their case. "In order to obtain an exploitation permit, Pacific Rim needed to satisfy various requirements in El Salvadoran law and it doesn’t," explains Dr. Marcos Orellana of the Center for International Environmental Law, which is acting on behalf of Mesa in the case. "So when it applied for that permit, it was told it didn’t comply with the law. They didn’t like that so they tried to change law, but they couldn't. Then they tried to reinterpret the law and couldn’t. And now they’re trying this arbitration route."
In particular, according to Orellana, Pacific Rim failed to provide an adequate environmental impact assessment for its proposed mine and did not meet the Salvadoran requirement that mining companies own the land that would be affected by their operations. Pacific Rim disputes this claim. Shrake says that the company's Environmental Impact Assessment was thorough enough to meet or exceed not only El Salvadoran law, but also U.S. and Canadian law. Its statements to the ICSID also accuse the El Salvadoran government of not telling the company where its EIA was deficient.
According to an independent, third-party technical review of the EIA authored by consultant Robert E. Moran, PhD, however, "The El Dorado Project EIA lacks basic testing and data necessary to adequately define baseline water quantity and quality conditions. It is especially weak in areas relating to the definition of ground water resources, yet it states that no significant impacts to water resources are expected."
Pacific Rim also disputes the land ownership charge, claiming to own or lease all of the lands it is required to own in order to comply with Salvadoran mining laws. The government of El Salvador continues to maintain that it does not.
According to the company, it has dumped most of its time and money over the past decade into development of the El Dorado mine in El Salvador, only to have the government "passively refuse" to issue a decision on the Company's application for environmental and mining permits. In its most recent earnings report, Pacific Rim wrote: "The El Dorado gold project in El Salvador was the focus of virtually all of the Company's exploration work between 2002 and 2008."
No matter what happens at the ICSID, Pacific Rim says it will "continue to seek a negotiated resolution to the El Dorado permitting impasse and to renewing its advancement of the El Dorado project."
The decision in this case could have a huge impact on investor-state arbitration for both sides of the issue. If the tribunal rules in favor of Pacific Rim, it sends the message that a country's environmental laws may not have the last word. If the tribunal rules in favor of El Salvador, activists are hopeful it would address some of the concerns over the use of investor-state arbitration in general.
"There is a serious problem with the legitimacy of arbitration, and it is not that companies are successful, but that environmental, health and safety laws are being challenged before unaccountable, non-transparent tribunals where the public has no adequate voice," Orellana says. "Among other things, it takes the decisions over environmental policy out from the democratic structures established in a state and allows tribunals to scrutinize and second-guess whether measures adopted for environmental protection comply with vague standards in investment treaties."
This post has been changed to correct the following errors:
- The author incorrectly referred to the Lempa region as being in Ecuador. It is in El Salvador
- In 2002, several companies had exploration permits, not exploitation permits in the Lempa watershed.
- The ICSID has not yet ruled on the jurisdiction objection in the Pacific Rim-El Salvador case.
- Pacific Rim is seeking $77 million in damages, not $70 million in expected profits.
- Comments from Pacific Rim's CEO explaining the details of the company's position have been added.
We regret the errors.
