Indigenous “Social License” in Investment Projects: A Pending Challenge in ISDS

Let me start this post with a short story, currently making headlines in my home country. In 2004, Swiss mining giant Xstrata won a public tender to develop one of the most ambitious mining projects in Peru’s history. “Las Bambas”, as the site was called, was supposed to be a model of sustainable development and human rights, featuring a new kind of relationship with local Quechua indigenous populations, long at odds with foreign investors using their lands.

The challenges faced by Xstrata were massive. One of the project’s copper deposits was located directly beneath the indigenous community of Fuerabamba. Xstrata had to find a way to convince the Fuerabambinos to relocate to a new village, “Nueva Fuerabamba”. Nueva Fuerabamba was described by Xstrata as a game-changer. It would grant the isolated community access to fully equipped homes, with running water, electricity, a health center, a school, new agricultural lands, jobs, cash payments, and many other features once considered an unattainable luxury in the faraway Andean regions of Apurímac, in southern Peru.

One of the advantages of the Las Bambas project was that it could benefit from Xstrata’s presence in Tintaya, another mining operation, a few kilometers southeast of Fuerabamba, in Espinar, Cusco. This allowed Xstrata to outbid its competitors, as it did not need to plan for large scale mineral transportation schemes through the Andes, reducing its environmental impact. Xstrata’s plan consisted in sending its minerals to Tintaya through a mining pipeline and using that mine’s already existing processing and transportation scheme to get the materials to the coast, for exportation.

In 2013, as it was implementing Las Bambas, Xstrata was bought by mining giant Glencore. The operation had to wait for the authorization of the Chinese government, Glencore’s biggest client. China ultimately agreed, but only on condition that Xstrata let go of its operation in Las Bambas, which was eventually sold to Chinese mining company MMG. This completely changed the project’s original design, since it could no longer rely on Xstrata/Glencore’s existing Tintaya operation to export its mineral.

MMG’s plan was therefore to cease its dependence on Tintaya, and relocate three key components of the project, from Tintaya to Las Bambas: a Molybdenum plant, a filtering plant and a mineral concentrates storage warehouse (see here, p. 69). In theory, this would require a massive restructuring of the operation’s Environmental Impact Assessment – the document containing its environmental commitments and responsibilities – and, in all likelihood, a new consultation process with the region’s indigenous communities, including the Fuerabambinos, so as to obtain a proper “social license” that allowed the project to move forward. After all, given that mineral concentrates would no longer be sent to Tintaya, the mineral pipeline would no longer be needed, and concentrates would need to be sent directly to the coast from Las Bambas, through some other transportation scheme.

A recently approved Supreme Decree, however, offered an easier way out. Supreme Decree 054-2013-PCM, approved by the government of Ollanta Humala, allowed for the modification of “auxiliary components” of a project without consultation, provided they have “no significative environmental impact”. Instead of a consultation process, MMG simply needed to present an “ITS”, or Technical Supporting Report, in Spanish.

In July 2013, two months after the Xstrata-Glencore merger was announced, Las Bambas presented its first request for an ITS, notifying its intent to relocate the aforementioned plants and warehouses. The Government approved these changes through Directoral Resolution 319-2013-MEM/AAM, concluding that they were “not significant”. At this point, however, there had been no discussion of changing the project’s transportation scheme (even though the relocation necessarily implied it). This would not happen until March 2014, when Las Bambas, now under control of MMG, requested a modification of its Environmental Impact Assessment. Under the new scheme, 125 trucks would transit back and forth between Las Bambas and Pillones every day, each moving 34 tons of mineral concentrates. The modification was approved through Directoral Resolution 559-2014-EM/DGAAM, without undergoing a new consultation process.

According to the NGO CooperAcción, the lack of a consultation process was caused by a legal vacuum in Peru’s environmental legislation regarding who was supposed to evaluate the environmental impacts generated from mineral transportation through land (see here, p. 104). According to their reporting:

“[T]he [Energy and Mines] Minister stated that the evaluation of the Environmental Impact Assessment did not include the transport of concentrates because this is regulated by general transportation rules. He then mentioned that this did not imply that the [Transportation] Ministry ‘had been authorized to evaluate the environmental impact of this component’”.

The result was highly problematic. The constant use of heavy load trucks through a dirt road generated vast amounts of dust and micro-vibrations that damaged the crops and adobe houses of several indigenous communities in the area. The indigenous communities were angry at the lack of transparency, building distrust and discomfort with the project. At the same time, the recently resettled Fuerabambinos began to rethink their decision to move to Nueva Fuerabamba. Testimony gathered in December 2017 shows the inhabitants missed their former lives. The agricultural lands given to them were too far away from their new homes. Many of them chose to stop harvesting their crops after receiving astronomical payments estimated in up to 120,000 dollars (Peru’s minimum monthly salary is around 380 dollars), leading to an increase in alcoholism and suicide rates. The new urbanized concrete town turned out to be too cold for many Fuerabambinos, a people used to living in hay and adobe huts scattered across farmland. “We’re here almost like in a jail” – said one Fuerabambino to Reuters – “in a cage like the little animals that we breed”.

Unsurprisingly, conflict erupted, with indigenous populations blocking the road used to transport concentrates, demanding propper compensation for its use. Confrontations with police caused four deaths between 2015 and 2016. While MMG tried to mitigate these issues through a new modification of its Environmental Impact Assessment in 2018, protests have continued more or less continuously until this day, with the road still blocked. Earlier this year, Gregorio Rojas, President of the Fuerabamba community was detained alongside the community’s lawyers under accusations of trying to extort MMG, requesting money in exchange for lifting the blockade. Rojas was later released. Soon after, the government and indigenous communities signed an agreement whereby the villagers would allow transport of trucks in exchange for additional monetary compensation. Whether this will solve the underlying issues in the long-term, however, remains to be seen.

The key underlying problem in Las Bambas is the collapse of trust between the indigenous populations and the government/investor. There is a lack of understanding of the needs of these ancestral peoples and the legitimacy of their complaints, with many news outlets and opinion leaders simply complaining that the State is being soft with “criminals” (blocking highways is a felony in Peru), demanding that it enforces the “principle of authority”. This notion that the protests are a nuisance to be dealt with, rather than a valid point that needs to be addressed, is also widespread among Peru’s mining sector. In the words of mining mogul and chairman of Peru’s business guild, Roque Benavides, while speaking of Las Bambas, “corporations need to fulfill their commitments, but the issue is that sometimes they do and then the [indigenous] communities want more”. The “social license” is tenuous at best, and the potential for conflict still latent.

I share this story as a sort of prelude to a wider discussion. The kinds of controversies present in Las Bambas are not unique, nor particular to Peru, but rather common all throughout South America, mostly in its Andean regions. The interactions between investors, ministries and indigenous communities is fertile ground for international human rights law disputes to arise. In many cases, as in Las Bambas, the roots of the issues relate to faulty consultation mechanisms and lack of informed consent on part of these ancestral communities to changes made due to entrepreneurial decisions (the merger of two companies, deficiencies in local law, etc.). It is an issue that features prominently in the jurisprudence of the Inter-American Court of Human Rights and that sparks constant discussion in the region. In the human rights context, “the obligation of States to carry out special and differentiated consultation processes when certain interests of indigenous peoples and communities are about to be affected is an obligation that has been clearly recognized” and “is directly related to the general obligation to guarantee the free and full exercise of the rights recognized in the Convention (Article 1(1))” (Kichwa Indigenous People of Sarayaku v. Ecuador, ¶¶165-66).

Human rights courts, however, are not the only fora where these disputes are adjudicated. Many times, the kind of problems arising in cases like Las Bambas frustrates the entire investment, leading to accusations of unfair treatment or expropriation by investors, who can then sue the State in investor-state dispute settlement mechanisms (ISDS), like the one provided for in the China-Peru Free Trade Agreement, applicable to MMG. Human rights lawyers do not frequently end up in these arbitration panels, and so the approach of ISDS mechanisms to human rights has not been as prominent or consistent. Take for example the 2012 case of Bernhard von Pezold v. Republic of Zimbabwe (ICSID Cases No. ARB/10/15), a case dealing with expropriation of timber plantations during Zimbabwe’s land reform program. The case involved an investment located in lands of four Chimanimani indigenous communities. The European Center for Constitutional Rights petitioned to file an amicus curiae to “draw the tribunal’s attention to the fact that these properties are located on the ancestral territories of the native peoples”, including by referencing the applicable human rights standards claimants would need to comply with.

The applicable Bilateral Investment Treaty (BIT) stated that the arbitral tribunal “shall reach its decisions on the basis of this Agreement [and] such rules of general international law as may be applicable”. According to the petitioners, human rights law was part of these applicable rules. The tribunal, however, rejected the amicus, arguing that that language did not “incorporate the universe of international law into the BITs or into disputes arising under the BITs” (¶57). In fact, for the tribunal, there was “no evidence” for the assertion that “international investment law and international human rights law are interdependent such that any decision of these Arbitral Tribunals which did not consider the content of international human rights norms would be legally incomplete” (¶58). This is, of course, surprising. The decisions taken in arbitral tribunals have enormous potential to affect human rights, particularly in cases involving indigenous communities.

While cases like Urbaser v. Argentine Republic have painted a more optimistic outlook (see here for an analysis of the case), it still seems like there is a long way to go before arbitrators and Inter-American judges can see eye to eye in cases like Las Bambas. For example, in the 2017 Bear Creek Mining v. Republic of Peru (ICSID Case No. ARB/14/21), a mining investment project was terminated due to violent protests and demonstrations from Aymara indigenous communities in the Peruvian department of Puno. The facts are not too dissimilar to those of Las Bambas, but in Bear Creek, Peru repealed the decree authorizing the investment claiming it was the only way to calm social unrest. According to Peru, Bear Creek bore responsibility for the project’s collapse because of its inability to secure a social license from the affected indigenous communities, under the terms of ILO Convention 169, the Indigenous and Tribal Peoples Convention that regulates the obligation to conduct consultations.

The Tribunal disagreed, arguing that Peru had not proven a causal link between the investor’s activity in relation to the project and the need to terminate the investment (¶411). The tribunal did not consider the case’s human rights implications separately, but concluded that, having failed to complain about the investor’s conduct at the time, Peru could not “in hindsight claim that this conduct was contrary to the ILO Convention 169 or was insufficient, and caused or contributed to the social unrest in the region” (¶412). Peru lost the case and was ordered to pay Bear Creek over 18 million dollars in damages.

The idea that only the state was responsible for the project’s collapse seems unfair, particularly considering it was the company, not the state, that had the closest proximity to the affected communities (it was the one doing the digging!). Quoting Bear Creek’s brief, however, there seems to be a belief that “a private company cannot ‘fail to comply’ with ILO Convention 169 because it imposes no direct obligations on them” (¶241). In an example of the perception I referenced above, regarding lack of understanding of indigenous concerns, Bear Creek went so far as to concluding that “[t]he only relevant inquiry is whether the consultations were conducted in good faith, adjusted to the circumstances of the project and the affected community, and conducted with the objective of reaching an agreement” (¶241).

This is not a proper understanding of what “social license” means. Rather, it is a mechanical adherence to regulatory procedures, which, as in Las Bambas, arguably lies at the heart of the communities’ dissatisfaction. If a company can avoid further engagement with the indigenous communities by presenting an ITS, then that is legal even if not legitimate in the eyes of one of its major stakeholders: the Fuerabambinos. If they protest, then that is a nuisance – the company complied with the law and the indigenous peoples simply “want more”. The attitude can be summed up in another of Roque Benavides’ quotes, this time, from 2005:

“Well, I hate the term ‘social license.’ I do not understand what ‘social license’ means. License is a very concrete thing, and social is a very ambiguous thing. What we essentially apply is social responsibility, caring for people and trying to be the best citizen possible. But then social license, I expect a license from the authorities, from the Minister of Mines, I expect a license from the regional government. I don’t expect a license from the whole community”.

This is definitely a disappointing approach, one that should not be incorporated into ISDS cases and that arbitrators are in a privileged position to reverse. Investors ought not to treat indigenous communities as another risk factor in their investment plans or a group of people to be paid off in exchange for peace, but as subjects in their own right. So far, however, the ISDS community has struggled to rise to the challenge.

There is, however, room for hope. One of the arbitrators in Bear Creek, Professor Philippe Sands, appended a remarkably important separate partially dissenting opinion, specifically addressing the question of social licenses in investment projects. In his view, “[i]t is blindingly obvious that the viability and success of a project such as this, located in the community of the Aymara peoples, a group of interconnected communities, was necessarily dependent on local support” (¶6). Making specific emphasis on the applicability of ILO Convention 169, he concluded that article 15 of the Convention, related to consultation requirements, was an applicable rule of international law that the Tribunal should have taken into consideration to determine whether Bear Creek had “carried out its obligation to give effect to the aspirations of the Aymara peoples in an appropriate manner” (¶11).

According to Article 15 of the Convention, the affected Aymara communities had a right to “participate in the use, management and conservation of resources pertaining to their lands”, to be consulted “with a view to ascertaining whether and to what degree their interests would be prejudiced”, and to “participate in the benefits of such activities”, including “fair compensation for any damages which they may sustain as a result” (¶13). During the procedures, it became clear that Bear Creek was wholly unfamiliar with these requirements, having “at best, a semi-detached relationship to the vital rights” it set forth and was not “fully prepared” for making an investment in indigenous lands (¶12). In particular, there was “ample evidence” that Bear Creek was negligent when deciding which communities would benefit from its investment and that those who began to protest tended to be those neglected (¶19). According to expert testimony, therefore, “Bear Creek’s activities were not enough to obtain the communities’ understanding and acceptance” (¶26). Bear Creek simply “did not understand the Aymaras and they did not understand their communal relations” continuing to use the same failed engagement strategy despite evidence that it was not working. “If Bear Creek had understood how to work properly with the communities” – said the testimony – “the social conflict would not have reached crisis levels as we saw in the region” (¶32).

In line with the industry mindset, Bear Creek’s response was disappointing. It described the amicus curiae that dealt with indigenous rights as “biased and unsubstantiated” and “representing a radical anti-mining position” (¶36). Professor Sands’ evaluation was categorical: “Claimant is of course entitled not to share the policies or objectives of DHUMA” – the author of the amicus curiae – “but given its investment in a project located thousands of miles from its home, in an area populated by local communities who are recognized by ILO Convention 169 and other rules of international law as having legitimate interests in the use of their lands, it may want to reflect on its approach to such interests” (¶36). For him, damages should be reduced in half to account for Bear Creek’s behavior; a much more just outcome, in my opinion.

Even if a dissenting opinion, Professor Sands arguments are a landmark to be noted and celebrated, hopefully setting the stage for others to follow suit. The lack of preeminence of human rights in ISDS mechanisms is without a doubt one of the key aspects in which this system needs to improve considerably. Perhaps the recent UNCITRAL’s Working Group III on Investor-State Dispute Settlement (ISDS) Reform meeting in New York will produce concrete steps to actual change.