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."