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Peru: Trade Deal Injustice for the Children of La Oroya PDF Print E-mail
Written by Bill Waren   
Tuesday, 17 April 2012 19:31

Pay the Polluter $800 Million?

Source: Friends of the Earth

“There is a silent epidemic here. The effects on the children are not easily visible, but they have all kinds of serious health problems, and those will only get worse if the smelter reopens,” says Hugo Villa, a local doctor.

According to the Blacksmith Institute, a non-profit pollution think tank, the children of La Oroya, Peru live in one of ten most polluted places on earth. In this town of 33,000 high in the central Andes, a metallic smelter has contaminated the air, land, and water for decades.

The La Oroya smelter is owned by Doe Run Peru, which through a complex network of subsidiaries is controlled by the Renco Group. Renco is the holding company of Ira Rennert, one of the wealthiest men in the United States.

The children of La Oroya have been given a respite from new emissions, but only because Doe Run has shut down the smelter after claiming financial hardship, in part due to their environmental remediation obligations. The company has repeatedly failed to meet its contractual and legal deadlines to clean up the site, and the Peruvian authorities have demanded clean-up costs within the context of bankruptcy negotations.

In the face of this action, Renco has retaliated, and sued Peru before an international investment tribunal that has been convened under the terms of the U.S.-Peru free trade agreement. Renco is seeking $800 million in damages for the cost of complying with Peru’s environmental and mining laws. The company is also demanding that the international tribunal issue a declaration that Peru, not Renco, is exclusively liable for personal injury claims in a case filed on behalf of children from La Oroya before a Missouri state court in the U.S.

The La Oroya health crisis

Dr. Sanjay Gupta, in a 2008 CNN special on the Planet in Peril, put a spotlight on the controversy. “The poisoning of La Oroya, Peru… Smoke stacks from a factory called the Doe Run Peru smelter stand high on the horizon. Rocks and minerals are brought here and processed into metals like lead, copper, and zinc...I’ll tell you, you can taste the stuff in the back of your throat. It burns your eyes a little. It’s sulfur dioxide. It’s arsenic. Its lead, and it’s all the by-products that come from this particular smelting plant.”

Dr. Gupta interviewed Fernando Serrano, a public health expert from Saint Louis University, who has conducted scientific research at La Oroya. Serrano says that among children between 6 and 12 years old living in the town of La Oroya, 97 percent have dangerously high levels of lead in their blood.

The Inter-American Association for Environmental Defense in 2002 released the results of a comprehensive study of the health effects of pollution at La Oroya. Blood samples showed lead levels for children over ten years old in excess of three times the maximum recommended by the World Health Organization -- more than enough to cause brain damage. Levels of sulfur dioxide in the air at La Oroya were at an average of two or three times higher than WHO standards. Sulfur dioxide pollution damages the lungs and leads to higher death rates. Arsenic was detected in the air at levels associated with cancer and reproductive problems, while cadmium, which can damage the kidneys and lungs, was also found.

Rennert’s environmental & financial record

The smelter at La Oroya is owned indirectly and controlled though a series of corporate affiliates, by U.S. billionaire Ira Rennert. He first attracted media attention in the U.S. in the late 1990s when his vast magnesium production facility in Utah was ranked by the U.S. Environmental Protection Agency as number one on its Toxic Release Inventory. More recently, his magnesium company went bankrupt, potentially leaving taxpayers with the bill for cleaning up an 84 square mile evaporation complex, near the Great Salt Lake, consisting of canals and ponds full of waste salt. Rennert has also attracted public attention for his generous campaign donations to politicians, his free spending on top-tier lobbyists, and his construction of a $170 million mansion on Long Island that is said to be the largest private residence in the United States.

Ira Rennert’s U.S. holding company, Renco, acting through intermediaries including Doe Run Peru, acquired indirect but effective control of the La Oroya smelting complex in 1997. Jeffery Zelms, one of Rennert’s top executives, said acquisition of the La Oroya facility fit into the company’s strategic business plan: “We had to take into account the tremendous negative business climate in the U.S. toward natural resources companies.”

What Zelms did not count on was that the courthouse doors in the U.S. state of Missouri were open to the children of La Oroya. Missouri and some other U.S. states allow foreign plaintiffs to bring personal injury claims against companies located in the state if corporate decisions leading to the injury were also made in-state.

The lawsuit in Missouri courts may have had some reasonable chance of success because citizens of the “Show Me” state have seen the dangers of metallic smelting. For example, a Renco subsidiary was required to pay a $7 million penalty and spend $65 million to clean up toxic pollution from its Doe Run Missouri lead refinery near St. Louis.

Apparently to avoid such a “negative business climate,” Ira Rennert invested in Peru in 1997. His company, Doe Run Peru, bought the La Oroya complex, which can refine both base metals like lead, copper and zinc and precious metals like gold and silver. DRP promised to pay for a large part of the environmental clean up at the La Oroya site, including construction of a new sulfuric acid plant. But DRP never built the sulfuric acid plant; it also failed to meet deadlines under its government-mandated remediation plan, despite receiving two extensions on these deadlines in 2006 and 2009.

DRP claimed that the global financial crisis, along with other factors, prevented it from meeting its environmental clean up obligations. But critics have suggested that the company’s heavy debt burden was a major cause of its failure to keep its promises. They claim that Ira Rennert’s business strategy is to load up subsidiaries with junk bond debt and then have them pay huge dividends the Renco Group, leaving the subsidiaries in danger of insolvency and unable to clean up the toxic pollution that they produce.

What is known is that after years of profitability, which allowed it pay large dividends to its U.S. owners, Doe Run Peru reported losses in 2008. Its credit line was cancelled in February 2009, and it stopped paying suppliers. Although DRP obtained a large loan and was able to obtain some new credit from its mineral suppliers, the La Oroya smelter ceased operations in June, 2009 and 3,200 workers were laid off.

In August 2009, DRP was shoved into bankruptcy proceedings in Peru by one of its suppliers. Predictably, the company turned testy. Peru’s Ministry of Energy and Mines requested $ 259 million to complete the clean up of the La Oroya site, as well as for related costs and interest. Ira Rennert claimed that most of Doe Run Peru’s debt was owed to him.

In July 2010, the government of Peru revoked the operating permit for the La Oroya smelting facility, because the company had failed to show that it would secure financing for the project. In March 2011, it was fined $2.5 million for failing to finance the sulfur plant needed to remediate the site.

On April 13, 2012, DRP’s bankruptcy proceedings in Peru reached a dramatic turning point. DRP’s creditors rejected the companies restructuring plan. The company’s plan for reopening the smelter complex would have required the government of Peru to provide another extension on the deadline for DRP to complete its clean up obligations. It also would have required the Peruvian government to take financial responsibility for the personal injury lawsuits filed in the United States on behalf of children from La Oroya.

The board of creditors voted to start a process of “operational liquidation” that could result in Renco losing control of the facility. The creditors may have already started looking for another company to operate the La Oroya smelter. Under the “operational liquidation,” Renco will retain control of the smelting complex for six months with an opportunity to ask for another six month extension, while the smelter remains closed but workers are paid. If Doe Rum Peru does not promptly submit a revised restructuring plan to the board of creditors that meets the board’s approval, then liquidation is likely.

Doe Run sues Peru under U.S. trade agreement

On 29 December 2010, Ira Rennert’s holding company, Renco, filed its notice of intent to sue Peru under the terms of the investment chapter of the U.S.-Peru free trade agreement. Renco argues that Peru’s failure to appear and take financial responsibility for the Missouri lawsuits violates the contract under which it purchased the La Oroya smelting complex from the government of Peru. It also claims that Peru ought to have granted it additional extensions to clean up the La Oroya site. Renco therefore is demanding $800 million from Peruvian taxpayers in compensation for the burden of government interference with its business; it is also asking the tribunal for a declaration that the Republic of Peru is exclusively liable for any damage award resulting from the U.S. litigation.

The investment chapter of the U.S.-Peru free trade agreement allows Renco and its subsidiaries to sidestep Peru’s administrative agencies and courts, in favor of a business-friendly international tribunal. The Renco tribunal will make its substantive decisions based on the text of the FTA investment chapter and customary international law, both of which are to be interpreted in light of the purpose of the agreement: to promote international investment. In other words, values of international commerce may trump other values, such as protecting the Andean environment and the health of the children of La Oroya.

By invoking the U.S.-Peru FTA and bringing suit before an international investment tribunal, a U.S. company like Renco can turn the tables on government regulators and demand money damages for the cost of complying with public health, financial, and environmental measures. Such a damage award can potentially include financial compensation for the reduced value of its investment in light of diminished expectations of future profits. Cynics might say it works as a kind of insurance policy for your business plan covering the risk of unexpected changes in public policy.

These damage awards can be large enough to destabilize public budgets. Argentina now faces billions of dollars in potential liability resulting from international investor claims, for example. The prospect of a ruinous judgment can force a country to back away from protecting the environment and public health, which is a danger right now in Peru as it contemplates Renco’s $800 million claim. Speculation has been rife that Peru may consider a legal retreat on its environmental enforcement actions at La Oroya to allow the smelter to reopen without an adequate clean up in order to put people back to work, restore profitable exports of refined metals, and avoid the financial uncertainty resulting from the Renco suit. On the other hand, Peru’s decision on February 13 to start a process that may lead to the liquidation of Doe Run Peru suggests that the government is in no mood to retreat.

One key to whether the Renco tribunal would ever order Peru to pay such a massive claim of damages lies in the article in the U.S.-Peru investment chapter on expropriation. It requires Peru to financially compensate U.S. investors if it “directly or indirectly” nationalizes or expropriates their investment. Given the vague terms, such as “indirect expropriation,” arbitrators have room to read the language broadly or narrowly. Clearly, if Doe Run Peru is finally liquidated as a result of bankruptcy proceedings, Renco’s argument that its property has been expropriated or nationalized will be bolstering to some degree, as will its demand for at least $800 million in damages.

Another key to whether the tribunal would ever order Peru to pay damages lies in the article in the U.S.-Peru investment chapter related to the “minimum standard of treatment under international law,” or MST. The MST obligation, which includes the right to “fair and equitable treatment,” is a vague standard that permits foreign investors to challenge government actions on the grounds that they are either procedurally or substantively unfair in some fundamental way.

As with many of the obligations in the U.S.-Peru investment chapter, a finding of an MST violation in no way requires proof of discrimination against the foreign investor: MST is an absolute standard that sets limits on the scope of public policy measures, regardless of whether they are applied evenhandedly.

The amorphous concept of “minimum standard of treatment” would allow the tribunal considerable discretion in deciding whether Peru engaged in regulatory overreach. Because there are no specific criteria underpinning the MST concept, it is difficult to predict if the Renco tribunal would find that basic justice has in some way been denied. It would be a very fact-based and subjective call: much like the concept of obscenity in U.S. constitutional law, which Justice Potter Stewart famously referred to as an “I know it when I see it” standard.

Understandably given the lack of criteria for defining it, the MST language has been read broadly by some tribunals, while others have given it a narrow construction. Such inconsistency reinforces the argument that these unelected international investment tribunals are making judgments that are more political or ideological rather than judicial in character.

Tribunal decisions on the application of MST, expropriation and other vague concepts are likely to depend in part on the personal values and instincts of the arbitrators. Most tribunal arbitrators are from the U.S. or Western Europe and have a background in representing business. All arbitrators are selected on an ad hoc basis to sit on a particular tribunal, most of which consider suits against developing countries like Peru. Once they complete their tribunal work on one case, arbitrators may very likely return to representing their business clients, even as a corporate plaintiff’s lawyer in another international investment case.

It goes without saying that Peru’s lawyers, therefore, will find it difficult to assess the legal risk of an adverse judgment in the Renco case, and Peru’s finance ministry and bondholders will find it hard to assess the financial risk of an $800 million hit to the public budget. Again, such legal and financial uncertainty is an incentive for Peru to settle with Renco, and even to relax its environmental and public health enforcement actions at La Oroya.

Another concern, which is more immediate than a budget-busting damage award, is Renco’s relatively novel argument that the tribunal has authority to interfere with the lawsuits brought in the United States on behalf of the children of La Oroya. Renco wants the tribunal to in effect issue an injunction requiring the Republic of Peru to take steps to exonerate Renco from liability, under U.S. law in a U.S. court. Nowhere in the text of the investment chapter of the U.S.-Peru trade agreement is there language that invests international investment tribunals with the power to compel a sovereign democratic government to make public policy decisions in this way, or for that matter to interfere in U.S. court proceedings in this way.

To make matters worse, Renco has already succeeded in interfering with the Missouri lawsuits brought in the name of children from La Oroya. On two occasions, Renco sought to move the Missouri lawsuits to the more corporate-friendly venue of federal court, but was twice denied. After suing Peru under the FTA, Renco again sought to move the suits to federal court and succeeded. Under U.S. law, the introduction of international questions of this sort can justify removing a case from state court to federal court. Arguably, one of Renco’s motivations for filing its investment claim under the U.S.-Peru FTA may have been to remove the Missouri suits to federal court.

The big chill or a battle to the end

Todd Tucker, the research director at Global Trade Watch, points out two implications from the Renco v Peru case. First, the mere threat of such international investment litigation has a chilling effect. It can effectively put pressure on governments to weaken environmental and health policies. The government of Peru might ease up on its plans for a La Oroya clean up. Second, corporations are increasingly seeking to evade justice in domestic courts by manipulating the international investor-state arbitration process. Renco was no doubt motivated to file its investment suit against Peru in part to evade the civil justice system in Missouri.

The consequences of the Renco case, however, could be much more serious, especially given the events on Friday, April 13 in Peruvian bankruptcy proceedings. Doe Run Peru is now in danger of being forced into liquidation. Ira Rennert could lose ownership of the La Oroya smelting complex, and if it comes to that, his lawyers will probably characterize it as a direct nationalization of his property. This could turn into a bitter-end battle: to force Peru to capitulate by accepting a one-sided settlement or by leaving it to the tribunal to decide whether to award as much as $800 million in damages. And what then will become of the children of La Oroya.

 

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