Canada: Taking Down the “Resource Nationalists”?
By Paula Butler
“Resource nationalism” has been like a bad dream for Canada’s globalized mining industry. A 2012 slide show on resource nationalism by Liam Fitzgerald of Pricewaterhouse Coopers opened sensationally with the caption “who do you fear most?” accompanied by photos of (the late) Hugo Chavez, former President of Venezuela, and Wayne Swan, former Australian Treasurer and Deputy Prime Minister. In 2011, the Chavez government passed legislation mandating 55% state ownership in all gold mining ventures, while in 2012, Australia introduced a “super-tax” of 30% on mining profits from coal and iron ore. For two years in a row – 2012 and 2013 - Ernst & Young’s report on major risks facing the mining industry listed resource nationalism in the number one spot.
Well before 2011, however, Canadian law firms servicing the mining industry had developed a set of recommended actions to limit, or at least mitigate the effects of, “resource nationalism”. Renewed concern with this form of risk was related to shifting policy directions in a number of countries: Argentina in 2001, South Africa in 2002, and more recently, by Venezuela, Bolivia, Guatemala, Australia, Quebec and many others. Canadian law firms’ advice to concerned corporate investors and mining companies was to press for the establishment of bilateral investment treaties (“BITs”), called in Canada “foreign investment promotion and protection treaties” or “FIPAs”. Such treaties were deemed to offer investors some of the best forms of protection from direct and indirect expropriation, and were a bargain for investors compared to costly political risk insurance. In effect, this was a strategy to socialize the cost of mitigating risks to Canadian mining firms arising from “capital-importing” states’ actions to maximize mining returns to the public sector in their societies. It was also a strategy to discourage “developing” countries from venturing too far down the “resource nationalism” road. And, as I will argue, it is a strategy that engages the Canadian government in support for measures that constrain sovereignty and democracy in “capital-importing” states.
Canada’s Pursuit of Bilateral Investment Treaties
Between 1990 to 2001, Canada engaged in a flurry of FIPA negotiations, bringing into force 18 treaties, mostly with Eastern European (former communist bloc) countries and middle-income Caribbean and Latin American countries. Such action was in line with the Liberal government’s general support for post-Cold War global economic liberalization. Following a short hiatus in the early 21st century, the federal (Conservative) government vigorously resumed the pursuit of FIPAs. Between 2006 to 2014, nine more FIPAs were ratified, while 23 more were either signed, negotiated or in process. Fully 40% of the countries targeted by Canada for FIPAs after 2006 were African countries (Tanzania, Benin, Cameroun, Nigeria, Madagascar, Mali, Senegal, Cote d’Ivoire, Zambia, Burkina Faso, Ghana, Kenya and Tunisia) where Canadian corporate investments in mining and oil and gas sectors proliferated. Significantly, the 2013 conference of the Prospectors and Developers Association of Canada (PDAC) was chosen by trade Minister, Ed Fast, as a venue to announce FIPAs negotiated with Cameroun and Zambia. A Globe and Mail article noted: "The FIPAs are meant to give businesses greater confidence to invest at a time when resource nationalism has become one of the leading concerns of the global mining industry.” Later the same year, the PDAC made a submission to the trade minister on FIPAs:
“The PDAC supports the development of Foreign Investment Promotion and Protection Agreements (FIPA) to facilitate trade [sic] with foreign countries. By placing obligations on host governments, FIPAs help contribute to the creation of stable operating environments for Canadian exploration and mining companies abroad and reduce risks like political instability, regulatory uncertainty, and resource nationalism, which is one of the top risks for exploration and mining operations abroad. […] Countries with substantial amounts of resource-related Canadian investment should be prioritized for the development of future FIPAs.”
What is “resource nationalism”?
Financial services firms and corporate law firms view resource nationalism as almost any “host state” policy that reduces or limits the profits or rights of foreign investors. Ernst & Young’s 2014 “Resource Nationalism Update” identifies four types: government ownership; increased taxes and royalties; import/export restrictions; and mining (law) reform. Other analysts add “performance requirements” (local sourcing of goods and services, hiring locally, etc.) and “mandatory beneficiation” (in-country processing of metals and minerals). “Government ownership” may feature equity stakes from 10% to 100%. While outright expropriations were more common in the 1960s-1970s, in recent years a growing number of countries – often in response to civil society pressure in conjunction with high metals prices – have acted to reclaim ownership and/or control of, and benefit from, the mining sector. Indeed, outright nationalizations occurred in Venezuela and Argentina in 2011 and 2012 respectively. South Africa’s post-apartheid redesign of its mining industry – to racially democratize it in the interests of expanded Black economic participation and benefit – caused one foreign company to sue the state for illegal expropriation and many to threaten similar action.
Of course, resource nationalism can be seen positively, as an expression and exercise of national sovereignty over mineral resources in the interests of the general populace. Via democratic, participatory systems, citizens determine policies to govern the use, exploitation, relative importance and meaning of mineral resources for the nation. The same measures that are regarded negatively by foreign investors (higher royalties, increased taxation, “beneficiation”, restrictions on exports of unprocessed ores, technology transfer, “buy local” procurement requirements, and “hire local” for all employment levels including senior managerial and technical) can keep more resource value in the host country, direct more resources to social programs and stimulate economic diversification. Venezuela’s nationalizations of oil and gold industries corresponded to a reduction in extreme poverty from 23.4% to 8.5% during 1999-2011. Countries such as Norway and Botswana successfully used state ownership of key resource sectors to fuel the state’s capacity to offer a range of public and social services. Moreover, for many Indigenous peoples, metals and minerals are not items to be commodified but are integral parts of holistic political ecologies. Resource sovereignty in this view is not just the right to benefit financially from resources, but encompasses a long-term notion of balance and responsibility (which may include decisions to not extract mineral resources). Indigenous approaches to mineral resource use thus have economic, political, cultural and ontological dimensions. Such an ethic, however, takes us far from the everyday culture and operations of mining, investment and corporate law.
Bilateral Investment Treaties: countering resource nationalism, limiting sovereignty and democracy?
With the rapid expansion of bilateral investment treaties – some 2700 signed globally to date – critiques of their design and effects have proliferated. For example, the fact that all Canada’s bilateral investment treaty partners are “developing” or “emerging market” countries suggests an inherent power imbalance. Canada has no FIPAs with other “developed” nations, and few of Canada’s FIPA partner states has a significant investor presence in Canada; the flow of investment is largely unidirectional. Following from this power imbalance, it is widely acknowledged in the academic literature that “capital-importing countries” cede a significant degree of sovereignty when they ratify bilateral investment agreements. Specifically, as noted above, they agree to refrain from using a number of significant economic policy tools.
In August 2013, Tanzania announced new rules requiring the largest mining companies in the country – including African Barrick Gold, 74% owned by Canada’s Barrick Gold Inc. – to procure at least 80% of goods and services from local businesses. The benefit to local economies is obvious. However, the Canada-Tanzania FIPA, which came into force in December 2013, prohibits such measures (“performance requirements”) under Article 9.1 (c) and 9.3 (b). The Tanzanian government could therefore be subject to international arbitration and forced to pay damages. As political leaders introduce such measures in response to demands from citizens, the limitations on democratic decision-making become evident. In some cases, a “chill effect” occurs; governments refrain from introducing beneficial policies to avoid antagonizing foreign investors. FIPAs can be terminated, with one year notice, but investors typically enjoy a fifteen-year sunset clause. A government newly-elected to seek a better bargain with foreign investors or introduce a different economic vision will potentially have its hands tied for 16 years. Host states’ FIPA obligation to resolve disputes via binding international arbitration, rather than through domestic courts, entails a further exceptional loss of sovereignty. International Court for Settlement of Investment Disputes (ICSID) arbitrators are almost entirely drawn from Euro-Western countries and frequently have worked as litigators on behalf of corporations. The costs of litigation at ICSID can be staggering; in a random selection of cases I reviewed, litigation costs per case for “Respondents” ranged from $4 million to $20 million, apart from any damages in the event of successful claims against the state such as the record US$1.77 billion charged to Ecuador in 2012 for violating its investment treaty with the USA. Citizens who might prefer to see scarce public funds directed into health care, education or other urgent social needs, have no control over these costly processes.
Indeed, despite their significant impact on national economic and resource extraction policy, it appears that most FIPAs are negotiated, signed and ratified with little substantial parliamentary or wider public input or debate. Little or no attempt is made to make the basic content of the treaties, which also apply to local or district governments, known in an accessible manner to the general public. In the case of the Tanzania-Canada FIPA mentioned earlier, a Tanzanian Member of Parliament informed me after it had been signed that he had never seen the text of the agreement. In Canada, there is a nominal period of 21 “sitting days” for parliamentarians to review treaties prior to signing. But most garner little media coverage and are, apparently, of little interest or concern to most Canadians. A rare exception has been the remarkable efforts of the Hupacasath First Nation in British Columbia to challenge the Government of Canada’s right to ratify an investment treaty with China without consultation with Hupacasath (and, implicitly, other First Nations). While Hupacasath alleged potential adverse effects on its constitutionally-protected Aboriginal rights due to possible changes in the legal framework regulating land and resources arising from the Canada-China FIPA, the Federal Court of Canada dismissed these concerns as “non-appreciable and speculative in nature”. By contrast, Canada’s mining industry and the law firms that service it – an elite interest group - continue to present concerns that are taken seriously by the state which uses its authority and fiscal resources to negotiate treaties that protect investors’ rights with little evident appreciation for the impact of such agreements on the economic, social and political rights of citizens of vulnerable nations both at home and abroad.
What are the alternatives?
Bilateral investment treaties are typically presented as win-win deals: poor countries receive increased foreign investment – which they are deemed to require – and rich country investors gain greater security and reduced risk for their investments. However, assessment of the effectiveness of BITs in attracting increased FDI remains inconclusive and at times contradictory; indeed, neoliberalism’s simplistic claim that foreign investment generates economic development in low-income countries is the subject of vigorous debate. Even leaving aside these fundamental questions, it is clear that Canada’s FIPAs have evolved in the direction of greater protection of investors’ interests and greater constraints on “capital importing” countries’ policy options. Two questions emerge: Can Canada’s FIPAs be redesigned (reformed) in a manner that protects investments and allows space for, or respects the rights of, “host states” to implement policies of resource nationalism? Secondly, are FIPAs needed at all?
On the reformist track, certain miminum shifts seem warranted: (1) Rather than being identical, standardized texts developed by Western investment lawyers, FIPAs should express the particularities of different countries’ needs and contexts, and should reflect citizen priorities and input. (2) Canada should remove prohibitions on performance requirements in FIPAs. These did not appear in the 1990s-era FIPAs, and they constitute an indefensible limitation on host countries’ sovereign rights to maximize the benefit from investments in the interests of long-term development. (3) Investor-state disputes should be pursued in host states’ judicial systems. This would be consistent with Canada’s oft-stated claim to support “democratic development, good governance and independent judiciaries” in “developing nations”. (4) The articles pertaining to health, safety, labour and environmental standards are exceptionally weak (language such as “may request” and “should encourage”), appearing to be mere public relations gestures. Rather, investment treaties should hold investors accountable to the relevant international human rights treaties.
Given the problems with investment treaties, the question “are FIPAs needed at all” should be seriously pondered. It is significant that there are no FIPAs between “developed” nations, whose domestic contract and investment laws are deemed adequate. One researcher found that the more economically robust a country was, the less likely it was to have BITs. Some middle-income countries, such as Brazil, have opted not to ratify any bilateral investment treaties; Botswana has only two in force. South Africa is reviewing all its bilateral treaties and has signalled that many will not be renewed in light of the constraints they place on state policy-making. Bolivia, Venezuela and Ecuador have withdrawn from ICSID, and Ecuador’s 2009 constitution made it unconstitutional to submit to international arbitration outside Latin America. Such actions – like the defeat in the late 1990s of the proposed Multilateral Agreement on Investment - signal that the international investment treaty and arbitration system has lost credibility and is seen by many as an exercise of racialized, unequal power by investors and political leaders from wealthy countries.
In the past year, commentary on resource nationalism in the mining and legal sector has shifted. Analysts suggest that the spectre of resource nationalism has diminished, due to a slight dip in metals prices and reduced capital flows. (Or, perhaps, as has happened in the past, investors withhold capital to “punish” countries that take strongly nationalist approaches.) Meanwhile, Canada appears keen to negotiate FIPAs with some of the most economically- and politically-vulnerable but resource-rich African countries before they develop a taste for resource sovereignty. The majority of these FIPAs are still in process. Canadians who care about global justice at least as much as they care about protected investments should demand accountability and review before more FIPAs are ratified. All countries should have the right to pursue “resource nationalism” as a strategy for development and self-determination.
Paula Butler teaches Canadian Studies at Trent University. She is the author of Colonial Extractions: Race and Canadian Mining in African States (University of Toronto Press, forthcoming).