Local attorneys have warned of the steps foreign sponsors and investors must take to protect future Bolivian mining projects, following moves to nationalise Glencore’s local tin and zinc mine.
The warnings are particularly pressing for US entities, following the Bolivian government’s termination of the countries’ bilateral investment treaty (BIT) last month.
Leftist president Evo Morales has nationalised parts of the hydrocarbon, telecoms and electricity industry since taking office in 2006. But the country’s lucrative mining industry had remained untouched, until now.
“There hasn’t been many mining companies nationalised, this [Glencore] is really the first private company,” said Andres Moreno Gutierrez, a partner with Bolivian firm Moreno Baldivieso.
Despite Morales’ tradition of May Day nationalisations, soaring global commodities prices means the high risk, high reward opportunities presented by the country’s mining sector have attracted large amounts of foreign investment in recent years.
When it comes to protecting their local investments, unfortunately it’s a case of cure, not prevention.
Local mining attorneys told IFLR that the best way to protect an investment is through the coverage of a BIT. “That’s the best legal assurance you can have to protect your investments, because it gives you the right to international arbitration [in the case of expropriation],” said Moreno Gutierrez.
Bolivia has signed 27 BITs, but with some notable exceptions: Mexico and now, it seems, the US. A May 23 posting on the US Federal Register announced that the Bolivian government has terminated the BIT between the two countries.
Sponsors based in countries without a BIT with Bolivia can structure their investment through another jurisdiction to gain the protection of that country’s BIT.
Without the benefit of one of these treaties, it seems difficult to protect investments.
Willing to talk?
Morales’ administration has expropriated assets – including natural resources – on the basis they belong to the state pursuant to the constitution. However the constitution also entitles the owner to compensation – which has historically been provided.
“With Glencore, the problem is not expropriation. The issue here is that it is forced expropriation and we don’t know, as of this time, if the government is going to pay fair, prompt and equitable compensation,” said Moreno Gutierrez.
Aside from this constitutional protection, and BIT protection in the event compensation is not forthcoming, experts disagree on what protections can be put in place.
According to Moreno Gutierrez, the scope for documentary protections is limited: “At first glance, the government will give you all the guarantees and assurances, but at the end of the day they will do what they want.”
However Joao Augusto de Castro Neves, Eurasia Group Analyst for latin America points to some more positive signs.
The government has sought to make legislation more market friendly and draw foreign investment into the oil & gas and lithium sector (of which Bolivia holds 50% of world reserves). For the lithium sector, it has signed memorandums of understanding with Finland, China and Japan to develop the industry.
“That is a sign the government is willing to talk,” Augusto de Castro Neves said. “If the government was purely ideologically driven, they wouldn’t be doing that.”
He said that investors must talk the same language as the government, though. The administration is looking to initialise mining industries to ensure production and product development is kept within the country, rather than minerals being exported.
They want investors to add value to the whole production chain, he said. Investors need to link the project with the net benefit to Bolivia.
An unfortunate coincidence
There are specific circumstances surrounding the Glencore development that suggest it could be an isolated incidence for the mining sector. Announcement of the nationalisation was sparked by the industry’s influential unions turning against the company for the first time.
However others in the sector should heed the warning.
“Beyond the legal level, it is concerning that the government is showing that they are at least open to consider eventual nationalisations in the mining industry when they feel there is strong social pressure for that to be undertaken,” said one La Paz-based mining partner.
But recent talk of a wave of nationalisations throughout Latin America is not merited according to Augusto de Castro Neves.
The Glencore announcement came one month after Morales’ government announced the nationalisation of Spanish-owned power company TDE, and more importantly, one month after Argentina’s parliament approved the nationalisation of YPF.
“This was an unfortunate coincidence. People began to think this was going to be a wave of nationalisations in latin America targeting Europe, and Spain in particular, but this is not the case,” said Augusto de Castro Neves.