Does El Salvador’s Metal Mining Ban Suggest a Global Trend?

Photo: Archives of the International Allies Against Mining in El Salvador

Photo: Archives of the International Allies Against Mining in El Salvador

By Nora Mardirossian

While a new administration in Washington has shifted toward deregulation of the mining industry, an opposing trend is taking root in jurisdictions around the world. A number of national and local governments are tightening environmental regulations and shutting down specific mining projects, or in some cases the entire industry, due to environmental risks, including those related to water use and pollution.

The most dramatic recent example is found in El Salvador, which on March 29 became the first country to impose a nationwide ban on metal mining. Legislators overwhelmingly voted in favor of the ban, claiming that the country’s dwindling clean water supply could not sustain metal mining operations.

El Salvador has been ranked the most water-stressed country in Central America. Agricultural runoff and deficient sewage processes have contaminated 90 percent of the surface water in the country, according to El Salvador’s Ministry of the Environment and Natural Resources. As a result, the nation’s water resources are vulnerable to activities like metal mining that demand large quantities of water and threaten water quality. In particular, the toxic chemical cyanide is used to separate gold from the surrounding rock and can leach into the soil and water supply.

The risks posed by the relatively new mining industry in El Salvador have become evident in the past decade. A major example was the discovery that an old mine near the town of Santa Rosa de Lima had contaminated the San Sebastián River with cyanide and iron. Government tests have found nine times the acceptable level of cyanide and one thousand times the acceptable level of iron in the water. Due to a lack of clean water from the river and wells, nearby residents have been forced to bear the financial burden of buying bottled water for everyday uses.

Contaminated water in a stream that flows through mine tailings and into the San Sebastián River in El Salvador. Photo: Archives of the International Allies Against Mining in El Salvador

Contaminated water in a stream that flows through mine tailings and into the San Sebastián River in El Salvador. Photo: Archives of the International Allies Against Mining in El Salvador

The growing public awareness of the risks of mining has put pressure on government actors. In 2002, Pacific Rim, a Canadian mining company, acquired a permit for a large gold mine in Cabañas, located near the Lempa River basin, upon which more than 50 percent of the county depends for drinking water, agriculture, fishing, and hydroelectric power, and which is one of the few remaining uncontaminated water sources in the country. Local communities expressed concerns about the environmental and social risks of Pacific Rim’s project, and in 2007, the Catholic Church of El Salvador issued a proclamation against mining. Large public protest drove the country’s president to put a halt to issuing future mining licenses in 2008.

In response, in 2009, Pacific Rim (later known as OceanaGold) appealed to the World Bank’s International Centre for the Settlement of Investment Disputes, arguing El Salvador had violated its rights under trade agreements by failing to approve an extraction permit and, in an amended complaint, claimed damages of $315 million.

The dispute center is an international arbitration institution that resolves legal disputes under the terms of investment treaties or trade agreements. In such treaties, the government parties can give one another’s companies certain rights and protections, in theory to protect investment. For example, agreements can protect foreign companies against the devaluation of their investments or the frustration of their expectations in the host country. If a company believes its rights have been violated, it can sue the host government through the World Bank’s dispute center, or another investor-state dispute settlement tribunal stipulated in the agreement.

In 2016, the World Bank dispute center’s tribunal ruled against Pacific Rim and ordered it to pay $8 million to reimburse the government of El Salvador for its legal costs. When the mining company failed to pay, activist groups and the Catholic Church pushed for the legislative ban.

This reaction reflects a global trend that questions the relative value of mining as an engine of economic development. Germany, the Czech Republic, Hungary, Turkey, several Argentine provinces and the U.S. state of Montana have banned the use of cyanide to extract gold from low-grade ore. Since 2002, Costa Rica has banned open-pit gold mining. In February 2017, the Philippines’ energy secretary ordered the permanent closure of 23 of the country’s 41 nickel mines and canceled dozens of contracts for new mines. In late April, invoking a need to protect farmers and fishermen from the “perpetual liability” of polluting rivers with heavy metals, the energy secretary announced she would ban all open-pit mining in the country.

In recent months, moratoriums on mining have been placed in Malaysia and Uttarakhand, India, due to concerns about water risks. In March 2017, 98 percent of voters in Cajamarca, Colombia, favored a proposal to ban mining projects in their municipality. It is unclear whether the ban will take effect, but the anti-mining public sentiment sends a clear message to politicians.

In addition to bans, aggressive enforcement of environmental regulations has become more common, especially in South America. In 2016, the Chilean environmental regulatory body fined Antogafasta Minerals’ Los Pelambres copper mine $24 million for water mismanagement and suspended Kinross Gold’s Maricunga gold mine. In Argentina, numerous spills at Barrick Gold’s Veladero gold mine in the past two years have resulted in government response. In 2016, courts ordered Barrick to pay a $9.8 million fine for a cyanide spill and in March 2017, a provincial government suspended Barrick’s operations due to a pipeline spill. In Brazil, in addition to a deal with Brazilian authorities to pay approximately $6.2 billion over several years, parent firms Vale and BHP Billiton face prosecution for the deadly Samarco iron ore tailings dam burst in 2015.

Both water risks and a general resistance to the current system of foreign investment have driven these government decisions.

In all of the cases above, communities and governments have expressed concern over mining’s threat to water supply and quality. A recent report by BMI Research predicts that these concerns will continue to drive increasingly strict environmental regulations in Latin America in the coming years. Droughts and arid conditions, BMI says, will provoke social scrutiny of water use and treatment by mining companies, which in turn will lead to elevated costs and tightening environmental regulations.

BMI concludes, “When the negative externalities of gold mining, namely mercury and cyanide exposure to water sources, are left unaddressed, public opinion on all mining activity can motivate extreme legislation.”

Mines are long-term investments that require a social license to operate, or acceptance by the community in which the investments are made. When public opinion against a mine grows strong enough, it can lose this social license to operate. When this public opinion spreads throughout a larger jurisdiction or entire country, it can put pressure on government officials to revoke legal licenses and permits.

Host countries typically desire foreign investments due to the income and development they bring – through increased gross national product, job creation and export earnings. However, the trend toward mining bans and strict enforcement of environmental regulations suggests governments are determining that the benefits they gain from mining are outweighed by the environmental and social costs. Many of these costs arise from the industry’s threat to water supply and quality.

The increased scrutiny towards mining can also be explained in part by a broader trend of skepticism toward foreign investment.

In El Salvador, the social disapproval of mining operations was initially tied to the fear of threats to water, but grew when a mining company sued the government under international trade agreements for compensation following the moratorium on issuing new mining licenses.

Trade agreements and investment treaties have gained increasing public distain in recent years in populations around the world. Europe has seen fierce opposition to the prospective Transatlantic Trade and Investment Partnership between the European Union and the U.S. During the U.S. general election, both Donald Trump and Hillary Clinton opposed Obama’s proposed Trans-Pacific Partnership due to public concerns that its provisions would send jobs overseas. In a report, the Sierra Club also expressed fears echoed by other environmental and human rights advocates that the agreement would accelerate climate change and that the investor-state dispute settlement feature would empower foreign corporations to the detriment of national interests.

Poorer countries are particularly vulnerable to the threat of investor-state disputes because unfavorable rulings can be financially debilitating (the $315 million Pacific Rim sought from El Salvador amounted to roughly two percent of the nation’s GDP). The challenges are also seen as a threat to the host governments’ sovereign right to regulate to protect public health, the environment, and other national interests.

Famously, Philip Morris brought claims against Australia and Uruguay, arguing that the countries’ anti-smoking legislation devalued the company’s investments in the countries. While the host countries won in both cases, the disputes were drawn-out and seen by the public as a means for companies to attack regulations made in the public interest and circumvent the domestic legal system.

In the mining sector, Churchill Mining sought $1.31 billion in damages from the Indonesian government for its revocation of mining licenses. In 2012, an International Centre for the Settlement of Investment Disputes tribunal determined that Ecuador had breached the U.S.-Ecuador bilateral investment treaty, awarding damages of $1.77 billion ($2.3 billion with interest applied), for Ecuador’s termination of a mining contract.

In April 2017, Canada’s Gran Colombia Gold filed a lawsuit against Colombia for $700 million under the Colombian-Canadian free trade agreement, challenging the government’s decision to cease operations at a mine in order to allow consultation with local residents. If the dispute cannot be resolved in six months, it will be brought before the World Bank dispute center.

In a number of host countries, the public and politicians alike have expressed outrage regarding the costly investment challenges, and a growing list of countries have withdrawn from agreements that allow foreign investors to file complaints with international arbitration tribunals. Venezuela, Ecuador, and Bolivia withdrew from the International Centre for the Settlement of Investment Disputes Convention, sending a clear signal that they disfavor the mechanism as a place to settle disputes with investors. Additionally, some countries—including South Africa, Indonesia, Ecuador and India—are systematically withdrawing from their bilateral investment treaties.

This trend will likely continue as companies challenge mine closures and environmental regulations in international arbitration tribunals. Governments, perceiving such challenges as threats to their ability to protect their people and environment, may react by withdrawing from international investment treaties.

The example of El Salvador suggests that public sentiment against mining due to its water risks and government dissatisfaction with the international investment regime may continue to drive governments to ban mining operations and more aggressively enforce environmental regulations.

Nora Mardirossian is a lawyer with a background in business and human rights. She works as a policy analyst at the Columbia Water Center, researching water risk in the mining industry.

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