El Salvador Makes History and Bans All Mining

April 17, 2017

Written By Milos Barutciski and Josh Scheinert

On March 29, 2017, El Salvador’s legislature unanimously voted to ban all metallic mining, including for gold, in the Central American country. El Salvador is the first country in the world to impose a blanket ban on mining activities. The question is, will other countries follow suit? Understanding El Salvador’s political justification for the ban and its claimed experience with mining provides important lessons for mining companies, host states, and home states to mitigate the risk of fractious relationships that could lead others to follow El Salvador’s lead.

El Salvador's government contends that the reason for the mining ban is to protect the country’s water resources from pollution. The decision was stated to be motivated by the country’s challenges arising from the El Dorado gold mine, whose exploration rights were held by Pacific Rim Mining Corporation (Pacific Rim), a company since acquired by OceanaGold Corporation. When El Salvador refused to issue the environmental permits the company needed to acquire an exploitation concession, the company launched arbitration claims under the Central American Free Trade Agreement (CAFTA) and El Salvador’s domestic investment law in 2008. (The claim was brought by Pac Rim LLC, an American company). The arbitral tribunal declined jurisdiction to hear the case under CAFTA, but proceeded under the domestic investment law. The protracted legal dispute concluded in October 2016 when the tribunal dismissed the investor’s claims, and awarded $8 million in legal costs to El Salvador.¹

In the Pac Rim dispute, El Salvador argued that its decision to refuse the permits was rooted in the precautionary principle, arguing that the withholding of environmental permits was necessary to fulfilling its constitutional duty of environmental protection. El Salvador asserted that it was not experienced with metallic mining and lacked capacity to properly assess its environmental impacts.

El Salvador’s decision represents a setback in the global mining community’s efforts to reconcile the interests of investors with development opportunities for host states. It highlights the risks arising from an absence of effective institutions, including civil society mechanisms in some developing countries, that allow local communities and governments to bring concerns to investors in a manner that fosters constructive engagement. In the end, what El Salvador perceived, rightly or wrongly, is that future efforts to protect the environment that adversely affected multinational interests would be met with more costly arbitration claims. Backed into a corner, the government acted.

There are at least three important lessons stakeholders can draw from the El Salvador experience.

1. States may seek shelter under the primary duty to protect their citizens and uphold fundamental laws. The first pillar of the UN Guiding Principles on Business and Human Rights places the primary responsibility for protecting human rights on states. For local communities, issues like clean water and waste disposal can, at their extreme, be issues of life and death. Where questions arise over the health of communities, a state’s primary duty is to ensure its citizens are protected. Notwithstanding a company’s knowledge that its operations will not in all likelihood adversely affect a particular community and may, in fact, improve living conditions, it should consider constructive engagement with local officials and residents to demonstrate that knowledge and opportunities for local benefits. This requires real planning before an investment is made.
2. Effective grievance mechanisms must exist at all stages of a project. The third pillar of the UN Guiding Principles calls for access to remedies. While this is frequently interpreted to mean after-the-fact judicial remedies, what happened in El Salvador reinforces the importance of companies and states putting in place effective grievance mechanisms at the outset in order to mitigate tensions and reconcile interests before political levers are employed. These mechanisms must be founded upon real understandings of numerous issues in play. This requires effective due-diligence at the outset to gain comprehensive understanding of the likely claims associated with potential human and environmental impacts. Companies should also pay close attention to related and potentially underlying factors such as:
   • political and community power structures;
   • benefits the project may have at the national and local level; and
   • how those benefits will be distributed across society.

   All of these factors can lead to claims by stakeholders, real or purported. Without understanding the issues at stake, and implementing proper mechanisms to bring about front-end remedies, projects and future investment may be jeopardized.

3. Home states can do more to reduce tensions. Canada’s strategies on CSR and bribery and corruption are acknowledgments that home states have a measure of responsibility to help ensure Canadian companies are not engaged in improper behaviour abroad. As more international standards crowd the field of global business conduct, companies may feel inundated with new and evolving standards, making it increasingly difficult to keep track of applicable norms, or to make sense of what, if any, demands they impose. Home governments can assist companies to sift through the growing number of international standards for multinational corporations and global business, including through embassies, export credit agencies, and trade commissioners. Home states also have an opportunity to help promote the benefits of investment in the host states. Industry, Industry Associations, and home states should work together in capacity building so that host states are able to implement a regulatory framework that secures optimal benefit for all stakeholders.

Industry is heavily involved in health care and environmental activities around the world. The challenge is how to expand and deepen those efforts across a broad spectrum of issues to bring stakeholders together in a manner that facilitates investment and development, including in natural resources.

Whether or not the situation in El Salvador could have been avoided is now a moot point. The law banning mining will remain in place until political change resets the stage for investment. Future situations will also arise that warrant investors to resort to dispute settlement against host states. In the post-fact world, it remains to be seen whether stakeholders can collaborate and communicate to demonstrate a shared resolve to bridge a potentially growing chasm between foreign investors and host states before disputes lead to a total breakdown between players.

Notes

1. As a prelude to the mining ban, and signalling its dissatisfaction with international investment arbitration, in 2013, El Salvador removed the option of international arbitration through the World Bank’s ICSID dispute settlement mechanism as a means to settle disputes under its investment law.