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Arbitration Courts: A Dirty Gold Rush

by Alexandra Endres Tuesday, Jan. 19, 2016 at 4:05 AM

Pacific Rim, a Canadian gold mining company, is suing El Salvador for 1 million in lost profits. Salvadorians oppose the mining because of the likely contamination of their drinking water. Can a poor country prohibit its exploitation for the sake of the environment? Is a way of development forced?


El Salvador sits on rich gold reserves and wants to leave them in the ground to protect its drinking water. The investor sues: a test of strength for the young democracy

By Alexandra Endres

[This article published on January 8, 2016 is translated from the German on the Internet, “End poverty, not democracy!” Demonstrators protested before the World Bank in Washington against the arbitration court lawsuit of Pacific Rim versus El Salvador. Alexandra Endres is an economics editor of Die Zeit.]

Any day the judgment could be announced in Washington that will decide over the future of a whole country. The plaintiff is Pacific Rim, a Canadian mining corporation. The court is an arbitration court of the World Bank. The defendant is El Salvador, a little Central American country that is out of control. Rich gold reserves are involved – and the question whether a poor country like El Salvador can prohibit its exploitation for the sake of the environment. The majority of Salvadorians are for that prohibition.

The case goes far back. Eight years ago Antonio Saca, head of state of El Salvador at that time, refused prospecting rights for a vein of gold in Cabanas. The president and his conservative Arena party were open on principle for investors. The only exceptions were mining projects. The worry that the mines could contaminate El Salvador’s drinking water was too great; the public pressure was too massive.

That is the situation today. The two presidents of the left party FMLN that succeeded Saca did not retract his decision. Dozens of contracts are put on ice. The present government under President Salvador Sanchez Ceran would definitively stop the awarding of concessions. The population stands behind him. For example, nearly 100 percent of the residents of Chalatenango voted against the mining. However the legal process in Washington has blocked a definitive decision for years.

An enormous amount of money is involved for Pacific Rim. For six years, the Canadian company explored the gold mine in Cabanas and invested millions of dollars in trial drills. The mine was the most important asset of the firm. Pacific Rim presumes 1.4 million ounces of gold worth 00 per ounce, to much money to simply give up without a fight.

In 2009 the company sued El Salvador before an arbitration court of the World Bank for more than 1 million compensatory damages. For the country, that is an enormous sum, more than 1% of its gross domestic product. In addition, the costs for the trial amount to million. El Salvador could have spent this money more sensibly, the Canadian anti-mining activist Jan Moore says. Pacific Rim argues the government violates the Central American free trade agreement Cafta and national law. Meanwhile the business only exists as a subsidiary of the Australian mining company OceanaGold that is carrying out the lawsuit.


All this seems far removed from Germany. But the case shows the consequences when free trade agreements or national laws put investments under special protection – as is also earmarked in the transatlantic agreement TTIP and in the European-Canadian agreement Ceta. “Foreign investors should not have special rights to sue,” says Pia Eberhardt of the TPP-critical organization CEO. “These rights give foreign businesses the possibility of demanding compensation only because a country follows the democratic will of its population” – by abandoning mining like El Salvador.

In other countries, arbitration court procedures involve individual projects or the direction of a certain political field like energy policy. But El Salvador’s case is different. The development model of a whole country is at stake.

Pacific Rim and its successor OceanaGold are trying “to force a way of development on a country based on exploitation of its natural resources. Only the transnational conglomerate, its shareholders and the buyers of cheap raw materials in industrials states profit,” says Marcos Orellana. The author works for the Center for Environment Law (Ciel) in Washington and supports El Salvador in the arbitration case. “Given the risks for essential sources of water,” the majority of the population in El Salvador is against a development that relies on mining, Orellana explains. In the department of Cabanas, residents began to resist when they noticed the wells were sealed on account of Pacific Rim’s exploratory drilling.


Nevertheless it is rather unusual that El Salvador is abandoning mining. In the rest of Latin America – as in many other developing- and threshold countries – the exploitation of natural resources is the best way to more prosperity and development. Industrial states need iron, copper, wood and gold that developing countries supply – although the international mining companies often hardly pay taxes and the damages for humans and the environment are considerable.

Pacific Rim promised jobs and prosperity to the inhabitants of Cabanas. “The project can be an engine for El Salvador,” a spokesperson of OceanaGold replied to a question. “We believe a modern mining industry that works according to stable sustainable and internationally-recognized best-practices standards represents a sustainable business chance for El Salvador.”

Unfortunately he did not speak about the negotiations before the arbitration court. His business will cooperate with El Salvador in economic and social improvements through mining.


El Salvador could use a little good development. El Salvador is poor and produces textile products and agricultural plantations for export. Call centers offer their services to foreign patrons. However the business only functions with low-wages. Many people still live on the land as small farmers from what their fields give. More than 20 years after the end of the civil war, gang fighting and drug violence make El Salvador one of the most violent countries of the world. Many violent crimes are not prosecuted.

The battle of OceanaGold over its mines seems to fuel the tensions. “OceanaGold tries with its entire means to enforce a mining license,” says Christian Wimberger of the Romero Christian Institute who visited the region in 2015. Through a foundation, Oceana distributes gifts to the population, free doctor visits. Local officials and politicians are up for sale according to activists.

The people in Cabanas are divided while El Salvador’s population elsewhere voted against mining almost unanimously. The lawyer Marcus Orellana says Oceana follows a strategy of “divide and conquer.” That is an irresponsible practice in a country like El Salvador that is still grappling with civil war. This is like playing with fire in a gas station.”

For Orellana, the lawsuit before the arbitration court is simply “extortion.” Through the process, El Salvador’s whole environmental policy including mining is put on ice. “There is a very fundamental underlying question: Can governments protect their citizens as the constitution intends, guarantee their drinking water and the safety of their environment? The arbitration court procedure endangers all this.”

The lawyer says Oceana’s claims are “arbitrary and not legitimated by anything.” His view is confirmed in that judges three years ago rejected the compensation lawsuit on the basis of the free trade agreement Cafta. Now there is only negotiation on the basis of national laws. Orellana has a good chance of winning the case.

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