Foreign Direct Investment, International Rules and Sustainable Development: Lessons from the pulp mill conflict between Argentina and Uruguay 1

Transcription

1 Foreign Direct Investment, International Rules and Sustainable Development: Lessons from the pulp mill conflict between Argentina and Uruguay 1 Martina Chidiak Centro de IDEAS Universidad Nacional de San Martín Buenos Aires, March 2009 I. Introduction This paper offers some thoughts on the policy challenges faced by MERCOSUR countries in view of the key role of FDI for the development of their resource based industries and the need to guarantee that they contribute to make that development sustainable (meaning that it takes appropriately into account not only the economic but also social and environmental dimensions of development to make it last over time). It is inspired on the case that led to a dispute between Argentina and Uruguay: installation of a pulp mill nearby the Uruguayan city of Fray Bentos, on the western bank of the Uruguay River (a shared resource of the two countries in its downstream part). The pulp mill was built and is operated by a local subsidiary of Metsä-Botnia Oy from Finland. Since the beginning of building works, Argentina claims that the pulp mill will have severe environmental consequences for the shared resources and, in particular for the Argentinian city of Gualeguaychú nearby, while Uruguay argues that it will have no noticeable environmental effects. This case has gained increasing regional and international attention due to the many instances for dialogue, technical analysis and legal dispute that were involved 2 and failed, over the past 1 This is a revised version of the paper edited as Working Group on Development and Environment in the Americas (GDAE) Discussion Paper nbr. 14 in It is available on 1

2 three years, to provide a solution to the bilateral crisis. This has even led to a chilling of bilateral relations in the framework of MERCOSUR, the regional trade agreement signed by Argentina, Brazil, Paraguay and Uruguay in 1991, with Bolivia and Chile as associate members, and with the recent addition of Venezuela. In an attempt to move the debate beyond the details of the conflict and the confronting national views, a regional perspective is adopted to highlight the policy challenges faced by the region (MERCOSUR) as well as the two involved parties. Summarizing the main argument of the paper, it appears that for many reasons there is an urgent need to strengthen the institutional and regulatory capacities of MERCOSUR in order to guarantee net sustainable development benefits from FDI in general, and to effectively regulate and control the potential environmental impacts of the expanding forestry-based industry in particular. In other words, the problems faced for reaching both a solution to this dispute and an agreement on a mechanism for effectively regulating and monitoring the Fray Bentos pulp mill s operations to minimize environmental impacts (including transboundary effects), suggest that the region is not wellprepared to make sure that the expanding pulp and paper production and its related FDI contribute to regional sustainable development. This view can be supported from two perspectives. To start with, failure to reach a solution to the conflict is somewhat puzzling given the presence of at least two institutions created, among other things, for this purpose. Firstly, the Uruguay River Statute signed by Argentina and Uruguay in Secondly, the regional agreements signed by Argentina and Uruguay in the framework of MERCOSUR in general, and in particular, the Framework Agreement on Environmental Issues signed in This agreement states that MERCOSUR member countries should cooperate for environmental protection and 2 The most relevant to cite are: the Administrative Commission of the Uruguay River (CARU); the Foreign Offices of the two countries -and the High Level Technical Task Force constituted by them-; the consultative process involved in the environmental impact assessment requirements of the World Bank and the International Financial Corporation; the International Court of Justice - two cases were presented by Argentina and one by Uruguay-, and the Finnish focal point for the OECD Guidelines for International Enterprises (who received a complaint of an Argentinian NGO). 2

3 sustainable use of natural resources, as well as to support and promote the implementation of international commitments on environmental matters (including through common policies). It also includes provisions to solve any controversy between member countries in matters related to the object of the agreement: through the MERCOSUR mechanism for dispute settlement. However, this regional mechanism was not involved in this environmental dispute. Secondly and quite related to the previous point, a sadly neglected side of this case lies with the need for regional cooperation in order to effectively deal with potential environmental impacts of FDI. In this connection, this bilateral dispute should be framed by the broader picture of two relevant sets of international rules that have deep effects on local and regional regulatory challenges. Firstly, investment protection rules, mostly developed at the bilateral or regional level (through bilateral investment treaties BITs- and investment protection chapters of free trade agreements FTAs-). Secondly, international environmental rules stemming from multilateral environmental agreements (MEAs), a response to concerns over trans-boundary environmental impacts. In the case of the former rules, it is important to note that one of the foreign investors currently building the pulp mill in Fray Bentos (namely, the Finnish company Metsä-Botnia Oy) is protected by the BIT signed between Uruguay and Finland in As regards the latter rules, Uruguay (like all other MERCOSUR countries) has ratified the Stockholm Convention on Persistent Organic Pollutants. In this framework, MERCOSUR countries are bound to design new regulations to curb unintended emissions of dioxins and furans (pollutants of which pulp mills are a potential source) and to promote the use of best available technologies and environmental practices to this aim. The present situation is one with no formal bilateral dialogue, with Botnia pulp mill in operation (since November 2007) and without joint efforts devoted to design a joint regulatory or monitoring response to the potential environmental impacts of the pulp mill. Meanwhile, there are (partial) third party monitoring reports suggesting that the pulp mill has not had negative 3

4 environmental impacts so far 3. However, concerns for potential impacts remain high as accident and spill reports were known and more recently bad odor episodes and the sight of a large patch of dark algae were reported in the proximity of the plant catching the attention of the population nearby (especially on the Argentinian side), sometimes with contradictory responses by the two governments adding to the confusion. The discussion is organized as follows. To start with, the next three sections present some basic information to adequately frame the case under consideration. Section II below describes the economic relevance of the MERCOSUR region for pulp and paper production, while section III discusses the implications of the ongoing debate related to FDI, BITs and sustainable development. Subsequently, section IV focuses on some stylized facts of the dispute and highlights the institutional weaknesses it revealed. Section V discusses the commitments assumed by Uruguay and Argentina under the Stockholm Convention on Persistent Organic Pollutants and further identifies two associated challenges. Firstly, these commitments may lead to a potential conflict with foreign investors (due to the introduction of new environmental regulations after BITs were signed). Secondly, they pose an additional need for regional coordination of environmental policy in view of the limited national capacities to monitor dioxins and furans releases. To conclude, section VI discusses some general lessons from the case. II. The Southern Cone role as pulp and paper producer Since the 1980s, South America has been recognized as one of the most dynamic and promising regions for forest-based industries such as pulp and paper. The Southern Cone (Argentina, Brazil, Chile and Uruguay), in particular, shows an increasing share in world production since 3 For example, see the air pollution monitoring programme by the NGO Green Cross at 4

5 the late 1980s. This could be explained by a mix of favorable natural conditions (rapid tree growth and availability of low-cost land for forestry) and promotional forestry policies. So far, however, the mounting role of the region in the forestry and pulp and paper sectors is mostly explained by raising production levels in Brazil and Chile, who jointly account for 70-90% of subregional production. Over the past decade, investment in Argentina mostly concerned acquisition of existing pulp and paper plants, notably by foreign companies mostly from MERCOSUR member or associate countries. For example, Alto Paraná (the main pulp producer) as well as Celulosa Puerto Piray were bought by Celulosa Arauco (from Chile). Similarly, another Chilean firm, CMPC, purchased the local company Papelera del Plata and initiated in the 1990s forestry operations in the provinces of Misiones and Corrientes. In addition, some investment in new paper product facilities were also registered, e.g. by Klabin (from Brazil). Argentina, Brazil, Chile and Uruguay have increased their world share in roundwood production from 7 to 9% between 1990 and 2004 in a context of stagnant world production. In the case of paper production, their 3% share in 1990 raised to 4% by 2004 in spite of the fact that world production grew 50% in that period. Nearly all of this regional increase is explained by Brazil. In the case of chemical pulp production, segment in which these countries excel, they increased their production share from 6 to 11% (and their export share reached 24% in 2004). In the chemical pulp case, according to figures for 2004, Brazil and Argentina exported 50% of their production, while this proportion reached 90% in the case of Chile 4. Unlike Chile and Brazil, where local firms are the main players in this sector 5, Uruguay initiated a strategy to expand this sector through FDI. As a matter of fact, a broader strategy to attract foreign investment initiated in the 1990s, comprising a new law for foreign investment (1998), 4 All production and export figures taken from FAOSTAT (2006 update), available on 5 As a matter of fact, in Chile, two local groups (Celulosa Arauco/Celulosa Constitución and CMPC) explain 100% of market pulp production, while in Brazil local companies hold the majority stake in all (seven) large pulp and paper firms. In some cases, atomistic foreign investors hold a large but not controlling- stake of the companies (eg. Aracruz, Klabin, Votorantim (VCP), and Suzano). In one case (CENIBRA) a Japanese company was the cofounder and controls the company jointly with a Brazilian group (CVRD). Other examples of Brazilian groups operating in this sector are Jari and LWART. 5

6 adhesion to ICSID (the World Bank international tribunal for investment-related disputes) (1992) and the signature of 22 Bilateral Investment Treaties throughout the 1990s. In connection with the forest industries, the industrial and forestry promotional regimes are also worth mentioning 6. This strategy is seen as the key to the surge of FDI inflows observed since the mid 1990s. Annual average inflows since then hovers around US$ 300 million, i.e. more than doubled as compared to the 122 million historic record (achieved between ). The FDI stock more than trebled between 1990 and 2004 (from US$ 670 million to 2,110 million) (Bittencourt & Domingo, 2000; UNCTAD, 2005). Even if many industry sectors were favored by the new rules, the forestry case stands alone since deliberate forestry and investment policies have led to the rise of a practically inexistent sector: eucalyptus-based forestry. This sector received most if not all FDI going to the primary sector in the first half of the 1990s. After nearly 15 years of plantation efforts, trees are ready for pulpwood production and this has prompted many pulp investment projects. The two most prominent ones involve the above-mentioned Finnish company (Botnia) and a Spanish pulp producer (ENCE). Originally, the two projects were to be located nearby Fray Bentos (Río Negro Department) in order to produce a total of 1,500,000 tons of (eucalyptus) bleached kraft pulp for the world market, and to lead to FDI inflows of US$ 1,5 billion (the largest investment ever hosted by Uruguay). The ENCE project was finally relocated and is being redefined both in terms of scale and design. For this reason, this article mostly focuses on the Botnia project (aimed at producing of 1 million tons of eucalyptus bleached kraft pulp), which already started operations in November It is also worth mentioning that the two projects (or, even the Botnia project on its own) will rank Uruguay as the third Latin American kraft pulp producer, and allow the country to increase the value added by their raising forestry sector (so far, most production and exports were related to roundwood). 6 The former, dating from 1974 was amended in the 1990s, to extend tax reduction benefits to FDI and to a wider range of sectors. The latter, also involving tax reliefs for new investments, was issued in

7 III. The debate over investment protection and constraints on environmental policy Since the 1990s there is a growing international debate on the contribution of FDI to sustainable development and the role of FDI protection mechanisms in strengthening or weakening that contribution. An impressive number of bilateral treaties aimed at protecting foreign investment have been signed by many developing countries in the past 15 years. Similar provisions were included in another relevant kind of investment protection mechanism: the investment chapters of free trade agreements (e.g. NAFTA s chapter 11). In the case of MERCOSUR, it is worth noting that two separate protocols were drafted for investment protection (one for intra MERCOSUR investment -the 1994 Colonia Protocol- and one for foreign investment the 1994 Buenos Aires Protocol-). Nevertheless, none of them has entered into force since the required full ratification by members was not reached. As a matter of fact, Argentina, Paraguay and Uruguay ratified the Buenos Aires Protocol (i.e. it did not enter into force due to Brazilian non ratification); by contrast, none of the member countries formally ratified the Colonia Protocol 7. More generally, BITs and investment chapters of FTAs are usually criticized for giving priority to inverstors rights over local government and citizens rights (e.g. through ample definitions of investments and expropriation that widen the scope for litigation), for generalizing benefits to all investors (via most favoured nation clauses) and for importing institutions (in particular, 7 Ratification information was obtained from the official web site of MERCOSUR: 7

8 introducing investor-state arbitration, by which investors may sue governments at international tribunals -such as ICSID or UNCITRAL-). More generally, they are seen as seriously constraining governments degrees of freedom for policy decisions, and may virtually lead to a regulatory freeze in order to guarantee a stable business environment (and to avoid conflicts with investors). For a more detailed discussion the interested reader is referred to Mann (2001) and Peterson (2003). Stanley (2004) offers an analysis of BITs focusing on Latin American countries. In general, BITs and investment protection chapters of FTAs make no special provisions for environmental or other areas (e.g. public health) in which governments may want to retain strong regulatory power. As a result, there is evidence that foreign investors have sued host countries because they considered that new environmental regulations or policy decisions implied (i) an (indirect) expropriation of their investment, (ii) the introduction of unjustified performance standards or (iii) unjust treatment to the investor according to minimum standards- (Mann, 2001; Peterson, 2003). While this remains a concern in the environmental community, it is important to note that after a series of cases where governments had to back down from their environmental policy decisions (e.g. Ethyl v. Canada, leading to Canada retreating from its ban on MMT imports) or compensated investors for economic losses due to environmental regulations, in the Methanex v. United States case (where the tribunal ruled that economic impacts of an environmental regulation cannot be considered an expropriation) such precedent was reversed (Mann, 2001; 2005). In addition, some environment and investment chapters of FTAs are evolving in order to recognise host countries sovereignty to protect the environment and natural resources. For example, in the FTA signed between the US and Colombia, the environment chapter makes explicit reference to biodiversity protection and its importance for sustainable development, as well as to the parties sovereignty regarding the use of natural resources. Furthermore, the 8

9 investment chapter of this FTA recognizes that investors may not sue the host country for regulatory changes affecting their activities if those changes pursue public health or environmental protection objectives. Nevertheless, it is important to keep in mind that these exceptions are quite rare in the universe of outstanding FTAs and BITs. In other cases, environmental concerns have been included in FTA provisions or into a specific protocol (eg. those signed by Chile-US and the CAFTA Central America Free Trade Agreement with the US-) but no specific provisions are made to safeguard environmental regulations. Even more worrying, there is no international tribunal to resort to in cases of non compliance with the environmental provisions of investment or environmental chapters of FTAs (as mentioned by Mann, 2001, for the case of NAFTA). In the specific case of the BIT signed by Finland and Uruguay no special provision was made for environmental regulations. Therefore, Botnia could, in principle, sue the Uruguayan Government if new environmental regulations were set for the pulp and paper industry in the future (e.g. changing the standards set in the initial operation permits, or if a new permit is denied, e.g. due to a facility s inability to comply with more stringent environmental regulations). Furthermore, as things stand at present, some analysts argue that investment protection mechanisms put too much emphasis on investors rights but do not tackle investors obligations. In particular, foreign investors are granted ilimited protection through BITs or investment chapters in FTAs, but in contrast, only face voluntary commitments regarding environmental standards in their operations abroad (i.e. they face no compulsory rules to meet the same environmental standards in their home base and foreign operations) (von Moltke & Mann, 2004). One example of these voluntary commitments are the Revised OECD Guidelines for Multinational Enterprises (OECD, 2000) that allow for filing complaints at national focal points (at investors host countries or home countries) in cases where companies fail to comply with environmental, human rights, labour standards, and/or disclosure and transparency guidelines. 9

10 It is true that foreign investors (and TNCs) face local environmental legislation requirements as well as those stemming from international financial institutions project evaluation, as it was the case with Botnia and ENCE when they applied for International Finance Corporation (World Bank Group) funding (see section IV below). However, it is important to note that both the OECD Guidelines as well as international financial institutions requisites necessarily rely on local legislation to judge what are the appropriate environmental standards to be considered and to enforce. The World Bank Group, as set by its operational rules, only required and verified through independent experts that the information provided in the Environmental Impact Assessments indicated that Best Available Technologies were to be applied and that national standards regarding emissions were to be met (according to technology specifications, the evaluation of the local regulatory authority DINAMA-, etc.). The reasons why his may not be sufficient in this case e.g. if national regulations and requirements do not fully acknowledge regional environmental impacts- are further discussed in section IV below. This may well call for the participation of regional institutions in order to address environmental concerns created by investment and trade within the region, which did not happen in this dispute (MERCOSUR was hardly involved), as described below. III. The pulp mills dispute After more than one year of bilateral controversy, in 2006 Argentina brought Uruguay to trial before the International Court of Justice (ICJ) under charges that the terms of the Uruguay River Statute were breached when Uruguay unilaterally authorized ENCE and Botnia (the local company name for the subsidiary of Metsä-Botnia Oy) to build the pulp mills. For its part, Uruguay has also presented claims both at MERCOSUR and before the ICJ due to road blocking by Argentinian protestors which has interrupted traffic in the bridge connecting the cities of Fray Bentos (in Uruguay) and Gualeguaychú (Argentina) during most of the summer months over the past three years, affecting trade, and in particular, Uruguayan income from tourism-. 10

11 From a bilateral and regional perspective, it is puzzling that two partners of a regional trade agreement, with a long historic record of good relations, fail to solve the conflict posed by the potential environmental impact of a pulp mill. In principle, this is a controversy that could be solved at the technical and regulatory levels, provided the technical instances are available and involved. As a matter of fact, MERCOSUR features many working groups for technical and institutional dialogue and cooperation that are relevant for this case. For example, to this aim MERCOSUR may rely on two technical subgroups (among ten that report to the Common Market Group), one on Environment (SGT Nº 6) and one on Industry (SGT Nº 7) issues; on one Specialized Meeting on Science and Technology and on a Technical Cooperation Committee. It is puzzling that none of these technical bodies were involved in dialogue efforts related to this case, regardless of growing importance of this sector in the MERCOSUR region. In addition, it is also important to note that, from a pure cost-benefit perspective, this case poses a regional policy dilemma 8. A preliminary analysis of the available information (notably from the environmental impact assessments EIAs- available) suggests that most economic and social benefits accrue to Uruguay at the cost of some environmental impact (while some environmental risks may be not fully considered by Uruguayan authorities, as argued below), and that some environmental risk is to be faced by Argentina with no clear socio-economic benefits from the projects. Some potential economic gains were sadly relinquished by Entre Ríos province (in which Gualeguaychú is located), when it recently banned wood exports to feed the Uruguayan pulp mills; however other provinces with eucalyptus plantations, like Corrientes and Misiones may still benefit from such exports. Even if the characteristics of the case (indeed, difficult to handle, in view that the defense of environmentalists rights on the Argentine side somehow implies opposing to development 8 It is also important to note that no explicit requirement is made regarding cost-benefit analysis neither in each country s regulations (that only require EIAs) nor at the regional level (in the framework of the Uruguay River Statute or MERCOSUR). 11

12 rights on the Uruguayan side) could explain some political reluctance of MERCOSUR to get involved (in particular at the Common Market Council, the main political body), it is still puzzling that the case was not eventually brought to consideration under MERCOSUR technical or advisory bodies. For example, one would have expected the Common Market Group and its subgroups to make recommendations. Instead, the only intervention of MERCOSUR bodies had to do with the Uruguayan claim for road blocking presented at the dispute settlement mechanism, as discussed below. At the same time, many analysts have stressed that the magnitude of the bilateral conflict is such that it may seriously weaken MERCOSUR ties. In a context where the initial conflict was only temporarily reduced and subsequently has been rather mounting over time (see Table 1 for a stylized chronology), the main arguments of the two parties (before international tribunals) is to show that their share of damages is too high and unjustified. Argentina, in terms of environmental risk if the Fray Bentos plant starts operations as planned. Uruguay, if the Argentinian road blocking protests generating economic loss to Uruguay (due to a fall in trade and tourism flows from Argentina) go on with no check. From a political perspective, it is worth noting that even if each government wanted to put an end to the dispute it could have faced high costs. It is clear that in March 2006 Uruguay was in a difficult position to ask Botnia to halt construction and to relocate its plant after having granted the preliminary authorization for building (and after building works had started). This would have either demanded very expensive compensation or a high risk of facing a dispute under the BIT signed with Finland. On the Argentinian side, it is also true that in the face of the general approval that protestors from Gualeguaychú received in the country at that point 9, ordering (or eventually forcing) an end to the road blocking was a politically difficult decision to make. 9 This is probable no longer the case as of March 2009, but still no means to end protests and road blocking have been found by the Argentine government. 12

13 Table 1: Some stylised facts of the pulp mills dispute cronology 2003 October: Preliminary environmental authorization for the building phase is granted to ENCE by the Uruguayan government (DINAMA, Res.342/2003). Civil Society representatives from Gualeguaychú express their concern over the environmental impact of the pulp mill to the Argentinian government Argentinian note of complaint to the Uruguayan government. Ad-hoc CARU meeting. Argentina questioned unilateral authorization by Uruguay for a project affecting a joint resource, regulated by the Uruguay River Statute March: Political talks between the two governments lead to an agreement to this initial dispute. April: The Foreign Relations Minister of Argentina declares in the Congress that, in the CARU Framework, Argentina will receive all the relevant information to determine whether to agree or not to the project authorization. Further to that, Argentina has agreed again in the CARU framework- to joint monitoring of building and operation phases. May: CARU meeting 01/04. Uruguay argues that the transcript from the meeting reflects that Argentina agreed to the authorization and considered the dispute closed (no transcript is available for consultation) February: Preliminary authorization for the building phase is granted to Botnia by the Uruguayan Government (DINAMA, Res.63/2005) April: Botnia starts building works nearby Fray Bentos. May: The two governments agree on creating a joint high level technical taskforce (GTAN) to evaluate the environmental impact of the pulp mills on the Uruguay River. June: The Argentinian government sent a note to the World Bank Group asking the institution to refrain from funding the Botnia project (knowing that an application for funding had been presented by the company in 2004). As a result, Uruguay postpones the first GTAN meeting. August: GTAN meetings start. December: Draft cumulative impact study released by World Bank Group. Protestors from Gualeguaychú start road-blocking at the San Martín Bridge joining Fray Bentos and Gualeguaychú. Esporadic road blocking also occurs on the bridges joining Colón (Arg)-Paysandú (Uruguay) and Concordia (Arg)-Salto (Urug.)during the summer February: The Argentinian Parliament approves the Executive Power decision to bring the dispute with Uruguay before the International Court of Justice (ICJ). Uruguay demands a special meeting of the Common Market Group of MERCOSUR to discuss the economic impacts of road blocking in Argentina. Argentina (holding the rotating presidency of MERCOSUR) ignores the request. Uruguay files a case under MERCOSUR dispute settlement mechanism (for Argentina s non compliance with MERCOSUR rules of freedom of trade and transport). March: After a series of meetings and the exchange of information and notes, the GTAN could not agree upon a joint set of conclusions. Two separate reports (one from each government) resulted. Road blocking in the bridge near Gualeguaychú was lifted (after 46 days) as well as in the one nearby Colon (after 34 days). The Uruguayan president invites Argentina for joint monitoring of the pulp mills. The Argentinian president asks his Uruguayan Counterpart to consider asking for a halt in building works in both plants for 90 days in order to give more time to assess their cumulative environmental impact. ENCE agreed to stop building works, and shortly after announces that the plant (only terrain preparation works had been undertaken) will not be built near Fray Bentos, but in another Uruguayan location. Botnia refuses to completely stop building works. Bilateral talks came to a halt. 13

14 Table 1 (continued) 2006 April: Independent expert review of the draft cumulative impact study released by World Bank Group (Hartfield report). An Argentinian NGO (CEDHA) presented a claim before the Finnish focal point arguing that Botnia s operations in Uruguay did not comply with the OECD Guidelines for Multinational Enterprises. May: Argentina presents two cases before the ICJ in relation with the bilateral dispute. One case demanding the building works at the Botnia facility to stop, the other one accusing Uruguay of breaching the Uruguay River Statute by unilaterally granting authorization for building the pulp mills July: The ICJ refused to grant (at the demand of Argentina) an interruption of building works at Botnia. The jury stated that building operations did not imply irreversible damage to Argentina. ICJ decision on the other case presented by Argentina (over whether Uruguay s unilateral authorization breached or not the Uruguay River Statute) is still pending. September: The MERCOSUR Tribunal verdict over the Uruguayan complaint on road blocking is released. It recognized that Argentina failed to fulfil its obligations under MERCOSUR by tolerating the road blockings but did not impose sanctions on Argentina (nor compensation for Uruguay). October: World Bank Group releases final cumulative environmental impact study. November: MIGA and IFC (World Bank Group) grant funding to Botnia project (US170 million funding from IFC, and US$350 million guarantee by MIGA). Finland s Ministry of Trade and Industry (national focal point for the OECD guidelines for Multinational Enterprises) dismissed the case presented by CEDHA. It finds that Botnia did not appear in non compliance with the above mentioned guidelines. December: Road blocking on the San Martin Bridge by protestors from Gualeguaychú resumes and lasts all summer (still in force in July 2007). Occasional blocking also occurred on the other two bridges joining the two countries January: The ICJ did not accept Uruguayan claims for compensation for road blocking. The jury found that road blocking did not impose irreversible damage to Uruguay. March: Entre Rios Province enacted a law banning wood exports from the province to feed the Uruguayan pulp mills. April: Botnia announced that the plant is expected to start operations in September Under the mediation of the Spanish Government, Uruguayan and Argentinian representatives meet in Spain for preliminary talks over the dispute. Source: own elaboration. Nevertheless, even when the conflict peaked in March-April 2006, no alternative to maintaining an endless conflict (e.g. to exploit mutual benefits of finding a solution to the conflict) was apparently considered. For example, the Argentinian report to the High Level Technical Taskforce in February 2006 identifies many weaknesses of the EIAs presented by the two companies and in the standards set by the preliminary permit issued by the Uruguayan government. It is worth mentioning that most criticisms regarding the lack of information or 14

15 precision in the EIAs were confirmed by the independent review carried out at the request of the World Bank Group (Hatfield Consultants, 2006) and led to additional analyses in the framework of the WB group impact assessment process. For its part, the Uruguayan government has repeated many times the invitation to its Argentinian counterpart to jointly monitor the pulp mills projects and the subsequent operations, but no joint work on how to improve the situation by revising information requirements and standards in the final building and operation permit has been proposed by either party to the conflict. This is even more worrying after the results of the independent review commissioned by the World Bank Group (Hatfield Consultants, 2006). This report states that catastrophic environmental impacts are not to be expected with the technologies to be included in the plants, but that the actual environmental impact highly depends on more detailed consideration of the plant design, contingency plans, environmental management plans and monitoring plans as well as detailed regulatory requirements. Needless to say, the Hatfield report makes no judgment of local regulation design and their consideration of regional impacts (e.g., no comments on the unilateral building authorization by Uruguay are found, nor on whether environmental impacts on the Argentinian side were fully considered). For almost a year (March 2006-April 2007), no political dialogue or joint technical efforts took place between the two governments since each party set very demanding prerequisites to restart talks. On the Argentinian side, the explicit demand is relocation of the Botnia plant, while there is tacit acceptance of road blocking in spite of Uruguayan complaints before MERCOSUR and the ICJ. On the Uruguayan side, the requirement for resuming talks is the end of road-blocking, while building of the Botnia plant continued in spite of Argentinian complaints that the environmental impacts (in particular on the Argentinian side and on the Uruguay River) have not been thoroughly considered by Uruguayan authorities. 15

16 Pending environmental concerns Even if the scenario of catastrophic environmental impact is dismissed, as suggested by the Hatfield report, some environmental concerns posed by Argentina regarding the Botnia project seem relevant and worth noting. These are summarized below: 1) Water pollution risks nearby Fray Bentos (the Argentinian report from the GTAN also stresses that no available details and quantified analysis of the expected impacts on the Argentinian side, in particular nearby Gualeguaychú, the closest city to Fray Bentos is offered in the EIAs): The main concern is related to dioxins and furans release. The Uruguayan government has in principle agreed to the company s decision not to monitor these releases after the EIA indicated that no noticeable emissions of these pollutants would result from the selected technology (i.e. the emissions standards allowed by the chosen production technology). On these grounds, the preliminary authorization has not set a standard on AOX (Halogenated Organic Compounds), a measure of the presence of dioxins and furans and other persistent organic pollutants (POPs) in water effluents. Another concern is that even if the Uruguay River is generally described as a relatively clean water course, the occurrence of eutrophization episodes has been regularly verified in particular in Spring-Summer months. The analysis of emissions standards for phosphorous and nitrogen compounds do not seem to take this into account and do not limit the risks of increasing eutrophization episodes (with the associated risks of fish mortality and of negative impacts on tourism due to the presence of algae and foam). It is important to note that these two concerns could be managed and solved in the framework of the Uruguay River Statute (and CARU) if parties were ready to negotiate. Eventually, the arguments and evidence presented by the two countries on these issues will be considered by the 16

17 ICJ before making a decision (the timetable of presentations of each party concluded in July 2008 and now the ruling is expected). 2) Air quality concerns: The eventual release of dioxins and furans could also occur through air emissions. Once again, the Argentine government has complained on the lack of monitoring requirements by Uruguay. Even if a maximum limit for annual air releases of these pollutants was set, no specific requirements for monitoring such releases were indicated. This is worrying since Botnia has indicated in the preliminary monitoring plan its intention not to measure dioxins and furans releases continuously (on grounds that such emissions are expected to be negligible). 3) A third major concern of the Argentinian government is the potential impact of the pulp mill over tourism (in particular on the Uruguay River beach that is closer to Gualeguaychú, Ñandubaysal). This relates not only to air and water pollution risks but also to other impacts such as odor and visual disamenity caused by the plant. In this regard, it is worth noting that the Uruguayan authorities have required Botnia to prepare a mitigation plan for all major visual effects. As a final note it is worth noting that these last two concerns will not be addressed by the ICJ ruling, since it will only focus on environmental impacts on the Uruguay River (covered by the Uruguay River Statute). From this perspective, consideration of environmental concerns of the pulp mills in the framework of MERCOSUR would have been more thorough (to involve all transboundary or regional environmental and visual effects). Institutional aspects It is remarkable that the institutional framework that could have prevented the conflict seems quite solid. On the one hand, the uses of the Uruguay River in the area shared by Uruguay and Argentina are regulated by the Uruguay River Statute ratified by both countries in It created the Uruguay River Administration Commission (CARU) aimed at regulating bilateral 17

18 cooperation in several areas (such as navigation, building works, ports building and operation, rescue operations, natural resource management, pollution control, research and dispute settlement). The water quality and pollution discharge standards are gathered in the Uruguay River Digest. The Uruguay River Statute also incorporated other international principles and commitments such as those adopted under MERCOSUR s Framework Agreement on Environmental Issues (2003) that aimed (among other things) at promoting sustainable development and preventing environmental impacts in member countries, in particular in border areas (FARN, 2006). Under the Uruguay River Statute, each party should notify CARU of any building plan or project that may have an impact on the environmental quality of the river and subsequently present all the relevant information to evaluate such impact. Any party wishing to implement such a project should wait for the other party s comments before granting authorization, unless the other party fails to present her comments within 180 days. If the notified party finds that some relevant impact can be expected from the project, the parties have up to 180 days to solve the dispute bilaterally. After that period they may resort to the International Court of Justice (as both parties to the dispute did in 2006). On the other hand, it is worth remembering that the MERCOSUR Agreement on Environmental Issues adopted the MERCOSUR mechanism for dispute settlement (best suited for trade disputes) to solve controversies. Uruguay resorted to this mechanism to file a complaint on road blocking in Argentina. In addition, it is worth noting that there is a specific permanent technical workgroup (SG Nº 6 on environmental issues), made up by representatives from all member countries. This group provides a forum for dialogue and cooperation on environmental matters from a technical and legal perspective and meets at least twice a year. This technical forum was not involved in the controversy. The ICJ will have to decide to what extent Uruguay breached the Uruguay River Statute when it gave preliminary authorization for building the pulp mills without previous consultation with 18

19 Argentina. But there is more to this decision than it may seem. If a project may pose environmental risks, the Uruguay Statute allows the party concerned about environmental impacts to demand information from the other party (promoting the project) and a period of 180 days is given to the concerned party to present and sustain evidence of such impact. The (scarce) available information on the dialogue between the two countries in the framework of CARU between late 2003 and the end of 2005 (no transcripts from the meetings are available) precludes us from finding out whether Uruguay produced all the information necessary for Argentina to evaluate the pulp mills environmental impact (after granting preliminary authorization for building) and if Argentina presented evidence of environmental impact in due time. This is probably what the ICJ will have to determine in the incoming months in order to rule whether Uruguay breached or not the Uruguay River Statute when it granted authorization for building the pulp mills. This tribunal already dismissed both the Argentinian demand to halt building works at the Botnia project and the Uruguayan claim due to road blocking in Argentina. It is also worth noting that both parties to the dispute have incurred serious faults in terms of non consideration of their regional commitments. If it is true that Uruguay failed to comply with the Uruguay River Statute by unilaterally granting authorization to build the pulp mills, it is also true that Argentina fails to comply with the rules of fluid movement of people, goods and currency agreed in MERCOSUR by tolerating road blocking. In view of the previous decisions by the ICJ on this case, and given that Botnia s pulp mill is already operating, it seems highly unlikely that this court satisfies Argentinian demands (to ask Botnia to relocate the pulp mill), regardless of whether the Tribunal finds Uruguay guilty or not guilty of breaching the Uruguay River Statute. In such a context, what should be the next step for Argentinian authorities? First of all, the government should realize that the probability of a favourable ruling of the ICJ is quite low and thus face the need to switch to a new strategy. It seems that the best alternative would be to 19

20 work in cooperation with Uruguay in order to guarantee environmental protection of the Uruguay River (and also other environmental conditions in the surroundings of the pulp mill), by reinforcing regulatory requirements and monitoring. Both governments may also have an interest in cooperating in view of new environmental commitments they are assuming in the framework of the POPs convention. 20

21 IV. Environmental Protection v. Investment Protection? Another piece of relevant information for the FDI-sustainable development debate is related to the responsibility of developing countries for the local implementation of their commitments under multilateral environmental agreements (MEAs). This implies the translation of international commitments into local regulations and their enforcement. If any (foreign) investor fails to comply with such regulations, action has to be pursued through regular administrative channels at national level. That is, institutions to safeguard environmental concerns covered by MEAs are not imported but are rather are subject to national capacities. The most relevant MEA from the perspective of the pulp mills controversy is the Stockholm Convention on Persistent Organic Pollutants (POPs). This convention set a list of 12 chemical substances that pose major environmental and health risks due to their toxicity, persistence (non degradation), bioaccumulation and trans-boundary impacts. The latter stem from their transport through air, water and migratory species, which allows for impacts to occur far from their place of release. This list of POPs targeted for phase out includes dioxins and furans, which are not chemical products traded in the market, but rather are generated as unintentional releases from production processes. Among the sectors and activities that may lead to such releases we find the pulp industry, waste incineration, secondary metal production, uncontrolled combustion of biomass and waste, etc. Uruguay and Argentina (as well as all other MERCOSUR countries) ratified the Stockholm Convention. As a result, they are expected to include the Convention s provisions in national legislation both countries have done so- and specific environmental regulations which are still pending-. With regard to unintended emissions (of dioxins and furans) the Stockholm Convention states that initial focus should be placed on minimizing releases from industrial and waste incineration sources, and that best environmental techniques should be required for new sources (plants) no later than four years after entry into force of the Convention for that Party. Uruguay and Argentina are also bound to present a National Implementation Plan (no later than 21

22 two years after the Convention entered into force for that party) setting how such regulatory commitments will be met. Uruguay issued its National Implementation Plan (NIP) in May 2006 (i.e. two years after the Convention entered into force), and is expected to implement BAT requirements for new sources of unintended emissions of dioxins and furans by May 2008 (i.e. after issuing the operation permit for Botnia in November 2007). As stated in the NIP document, Uruguay faces many challenges to implement the Stockholm Convention provisions (like most countries in the region) (Government of Uruguay, 2006). A first challenge is related to the lack of precise information regarding the actual releases of dioxins and furans in the country (the preliminary inventories of such releases elaborated for the NIPs resort to estimates following a standard toolkit developed in the framework of the Stockholm Convention). A second challenge stems from the fact that this environmental concern is new in the country (and not included in local environmental regulations). A third and major challenge relates to the lack of analytical capacities and equipment (both at public and private sectors) to control and measure releases and concentrations of dioxins and furans. The lack of equipment is a more general concern in all MERCOSUR countries, as reflected in the Chilean NIP and recognized by technical experts of the region (Government of Chile, 2005; UNSAM, 2006). Therefore, some specific efforts towards building institutional and technical capacities are necessary before the Stockholm Convention provision can be met at local (and regional) level. Other than incorporating the necessary equipment, the Uruguayan NIP stresses that an inter-ministerial taskforce should initiate the process of evaluating and drafting new regulatory provisions, organize monitoring routines and requirements and identify priority sectors and sources (Government of Uruguay, 2006). As discussed in section III above, a government s ability to fulfill its commitments under the Stockholm Convention may be hampered if the country has signed BITs which may either limit the country s degrees of freedom for setting environmental policy or increase the risks of litigation if new environmental regulations are introduced. This suggests that a potential conflict 22

23 between a MEA and a BIT may arise. Such a potential case could mean that the importation of foreign institutions by developing countries aimed both at investment protection and at tackling global environmental concerns may clash. In addition, it is important to note that from a regional perspective, the vulnerability of Uruguay in this regard is only matched by Argentina s (in view of the low relevance of foreign investment and BITs in other pulp producing countries in MERCOSUR). Argentina has, in general, a long record of low enforcement of environmental regulations for various reasons, and, in particular, faces complaints from both locals and foreign countries for not effectively controlling pollution from pulp mills (e.g. Paraguayan citizens on the other bank of the Paraná River are affected by emissions originated in Argentinian pulp mills) (UNSAM, 2006). Besides, most of Argentina s market pulp production originates in a Chilean company and Argentina signed a BIT with Chile in the 1990s. Under the Stockholm Convention, some guidelines and recommendations were developed regarding Best Available Techniques (BAT) and Best Environmental Practices (BEP) for pulp production that minimize the release of dioxins and furans (UNEP, 2006). As many documents state -the EIAs, the independent review commissioned by the World Bank Group and the Uruguayan government documents-, the BAT list includes both the Elemental Chlorine Free (ECF) bleaching process (included in the design of both Uruguayan pulp mills, and in particular in the Botnia plant in operation) and the allegedly cleaner Totally Chlorine Free (TCF) processes. Some BEP are also indicated and concern production phases other than bleaching (e.g. knot removal, avoiding pulping of wood contaminated with polychlorinated phenols, using precursor-free additives e.g. defoaming solutions). The approach to technology in the Stockholm Convention is to update the list of BAT/BEP regularly as more information becomes available (UNEP, 2006). In this framework, national regulations in other (notably, industrialized) countries that have already adapted their legal framework to control for POP use and release, consider these two technologies as acceptable. However, ECF pulp mills in developed countries usually have the capacity to convert to TCF processes (which is a source of 23