NAFTA PANEL DIRECTS MEXICAN GOVERNMENT TO PAY COMPENSATION TO U.S. CORPORATION METALCLAD.

In a stunning decision, a special panel established under the North American Free Trade Agreement (NAFTA) has ordered the Mexican government to pay restitution to California-based waste-management company MetalClad Corp. for failing to protect the company's rights as a foreign investor.

The US company requested the creation of the NAFTA panel in 1997 after the municipal government of Guadalcazar in San Luis Potosi and several environmental groups succeeded in shutting down a hazardous-materials storage site constructed by Metalclad's subsidiary, Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (Coterin).

Metalclad built the US$20 million facility in Guadalcazar after securing permits for the project from two federal environmental agencies, the Instituto Nacional de Ecologia (INE) and the Procuraduria Federal de Proteccion al Medio Ambiente (PROFEPA). The company failed, however, to obtain appropriate local and state support before constructing the facility, which turned out to be a mistake.

Acting on the request of Guadalcazar's mayor and environmental organizations like Greenpeace Mexico, former San Luis Potosi governor Horacio Sanchez issued a decree creating an environmental reserve in an area that included the new plant. Sanchez's decree in effect prevented the company from beginning operations at the plant.

Metalclad officials initially lobbied the Sanchez administration to reverse its action. When this strategy did not work, the company requested the creation of the special NAFTA panel.

Panel says company's rights were violated

The five-person panel, which included two citizens of Mexico and three from the US, spent three years investigating the case. This year, the panel ruled that the actions of the San Luis Potosi government did violate Metalclad's rights as a foreign investor, as spelled out by Article 11 of NAFTA.

In its ruling, the panel said the Mexican federal government must assume the liability and pay US$16.7 million to Metalclad, the amount the company is deemed to have lost in its original investment. Under the panel's ruling, the government must pay the sum to Metalclad by Oct. 14 of this year. If payment is not made by that date, interest would begin accruing at an annual rate of 6% or US$84,000.

Mexico has three months to present its arguments and appeal the decision before a tribunal in Canada. "We are analyzing the ruling," Deputy Trade Secretary Luis de la Calle told Reuters. "We reserve the right under NAFTA to request a review or a nullification of the ruling."

PROFEPA director Antonio Azuela said he was surprised by the panel's ruling, since the federal government followed appropriate procedures in awarding the permits to the US company. "Metalclad had not taken into account that a federal permit is not all that is required for a project to be approved," said a PROFEPA spokesperson.

Azuela said the Mexican Constitution gives local communities the right to oppose commercial projects in their jurisdiction. "The federal government can give its authorization, but that doesn't mean municipal authorities are obliged to give theirs," Azuela said.

The panel's decision was criticized by the NAFTA Commission for Environmental Cooperation (CEC). Regina Barba, one of Mexico's members on the CEC's Joint Public Advisory Committee, lamented that a country that lacks sufficient financial resources to meet its domestic social needs is being forced to use public funds to pay a private corporation.

Barba criticized the federal government for failing to consult with state and local authorities before awarding the permits to Metalclad. "All Mexicans will have to pay because some of our public officials did not take the appropriate actions," said Barba.

Company officials were pleased with the NAFTA panel's ruling, but expressed disappointment about the amount of compensation approved. The amount of damages awarded to Metalclad is only about one-sixth of the US$90 million requested by the company. "This is a token amount of money that doesn't really reflect the value of the project," said Metalclad president and CEO Grant Kesler.

Mexico lacks policies to deal with industrial waste

Kesler also said the cancellation of the permit was a setback for Mexico's efforts to develop better strategies to handle industrial waste. "The biggest losers of all are the people of Mexico who continue to have to live in a country that produces 10 million tons of hazardous waste a year and has only one facility in the whole country to handle it," Kesler told The New York Times.

Greenpeace Mexico director Alejandro Calvillo said the government of San Luis Potosi was justified in shutting down the Metalclad plant. "The opposition to the project was obvious and Metalclad could not have mistaken it," Calvillo said. "What they'd ignored was that federal decisions could no longer be imposed on communities."

But Calvillo acknowledged that Mexico must develop better policies to deal with disposal of industrial wastes, since reduction of toxic byproducts could take a long time. "Unfortunately, there is a need for dump sites to deal with the existing problem," aid Calvillo.

The Greenpeace Mexico director called for better coordination among the federal and state governments, corporations, and local communities to choose the best sites together to avoid a repeat of the Metalclad situation.

Two other similar NAFTA cases are pending. In 1999, Canada's Methanex Corp. filed a US$970 million claim against the US government because California had banned imports of its gasoline additive.

The second case involves the Loewen Group, a Canadian- based funeral-home company with operations throughout North America. The company is trying to use NAFTA to overturn a huge judgment against the company for anti-competitive practices in Mississippi. A state jury, which found that the company's practices had tried to drive a local funeral establishment out of business, awarded the local company US$500 million in compensatory and punitive damages. Loewen settled out of court for US$150 million.

But Loewen has requested a NAFTA panel to review the case on the grounds that the Mississippi jury's damage award violated its rights as an investor in the US.

In another case, US-based Ethyl Corp. used the NAFTA arbitration process to win a case against the Canadian government, which had banned imports of gasoline additives.

In the meantime, Canada has called for revisions to Article 11 of NAFTA. Andre Lemay, a spokesperson for Canada's Ministry for International Trade, emphasized that the changes would not eliminate the principle that the rights of investors should be protected. "But in light of recent developments, we must question whether companies involved in these cases have gone too far," said Lemay. (Sources: The New York Times, Reforma, 08/31/00; Notimex, 09/01/00; Excelsior, 08/31/00, 09/08/00; El Universal, 09/01/00, 09/06/00, 09/08/00; La Jornada, 09/08/00; Reuters, 08/30/00, 09/10/00; Bloomberg news service, 09/11/00; El Economista, 08/31/00, 09/12/00; Los Angeles Times, 09/12/00)