ITALIAN MINING COMPANIES BRING EXPROPRIATION CASE

C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 001816 SIPDIS SIPDIS DEPT PLEASE PASS TO USTR FOR P.COLEMAN TREASURY FOR TRINA RAND BUENOS AIRES FOR DOUG CLIMAN E.O. 12958: DECL: 05/12/2017 TAGS: ECON EINV SF SUBJECT: ITALIAN MINING COMPANIES BRING EXPROPRIATION CASE AGAINST SOUTH AFRICA IN ICSID Classified By: Econ Counselor Perry Ball for reasons 1.4(b) and (d). ¶1. (C) Summary: Italian mining companies have filed a case in the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) alleging that new South African mining legislation amounted to expropriation of their South African property. The companies, unable to find Broad-based Black Economic Empowerment (BEE) partners due to goverment favoritism in the BEE process, were at risk of losing their mineral rights. As a result of the case, the SAG has "unofficially" put on hold negotiations of trade/investment agreements and extended the deadline for other mining firms to file claims. Although losing the case would be a black eye for the SAG, it is doubtful this case would affect BEE or be a signal for other firms to file cases. End Summary. -------------- FIRST MINING EXPROPRIATION CASE -------------- ¶2. (U) Italian-owned mining companies Marlin Holdings, Marlin Corporation, and Red Graniti South Africa have filed a case in the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) alleging that new South African mining legislation amounted to expropriation of their property and denial of national treatment under the South Africa/Italy and South Africa/Belgo-Luxembourg bilateral investment treaties. The companies are claiming total damages of 266 million Euro (about $350 million). ¶3. (U) Enacted in 2004, South Africa's Mineral and Petroleum Resources Development Act (MPRDA) vested all mineral resources in the state and required companies to take specific steps to convert their former mineral rights into long-term licenses. The law aimed to bring South Africa's previous minerals regime into line with "international" mineral rights norms, in which the state owns the mineral rights. The conversion process is subject to time limitations and must take into account the requirements of the Broad-based Black Economic Empowerment (BEE) mining charter, which specifies that mining firms must sell 26 percent of equity to black investors by 2014. ¶4. (C) According to Italian Embassy Economic Counselor Giovanni Brignone, the Italian companies were unable to find acceptable BEE investors and were consequently at risk of losing their mineral rights. Both Brignone and the companies' attorney, Peter Leon, told econoffs that the companies tried for 18 months to amicably settle the dispute with the SAG, but never received responses to their numerous proposals. Leon explained that the Department of Mining and Energy (DME),which had drafted the MPRDA, was quite intransigent and determined to defend its creation, even though it had failed to ensure that its draft legislation took into consideration expropriation language contained in the BITs. Leon also noted that the Department of Trade and Industry (DTI),which is the custodian of BITs, is concerned with South Africa's international reputation and the effect a lawsuit might have on other BITs, but seems unable to influence the DME. This split in government policy continues to plague the case, according to Leon, who said that both DTI and DME are providing the SAG's Paris-based law firm, Freshfields, with case strategies and input without any prior coordination. ¶5. (C) Although the companies' case is based on both expropriation and failure to provide national treatment, Leon conceded that the companies' national treatment claim was farfetched, since the MPRDA applies equally to foreign and South African companies. However, he felt that the expropriation claim was quite strong. -------------- FAVORITISM IN BEE EXACERBATES PROBLEM -------------- ¶6. (C) According to Brignone, the companies were not opposed to BEE and had actually identified a potential BEE partner. However, the SAG had rejected their choice and tried to steer them toward a different partner, one more acceptable to the government. (Note: Econoffs have been told by several contacts in various industry sectors that the BEE process is less than transparent and that SAG officials sometimes press PRETORIA 00001816 002 OF 002 firms to take on specific BEE partners. In some cases, the SAG wants to ensure that BEE partners will be more than "fronts" and take an active role in management. In other cases, the SAG may want to reward ANC loyalists. End Note.) -------------- THE CASE GOES TO THE INTERNATIONAL STAGE -------------- ¶7. (C) Although the MPRDA allows claims for expropriation to be brought in local courts, the companies chose arbitration via ICSID because the BITS impose a higher standard, Brignone told us. Whereas the MPRDA provides for "just and equitable compensation," the BITs require "immediate, full, and effective compensation." The companies also felt more comfortable using an international panel, he said. Leon predicted that the case could easily take two years to resolve in ICSID. He told us that the SAG gives every sign of wanting to fight the case to the bitter end, though he acknowledged this could be a litigation pose. -------------- SHORT AND LONG-TERM IMPACT OF CASE -------------- ¶8. (C) This expropriation case has had both immediate and potentially long-term effects. DTI's Manager for the Americas Cobs Pillay told Trade and Investment Officer that DTI has already begun to "unofficially" put on hold negotiations of trade/investment agreements until the case is resolved. Brignone said that DTI is also being far more careful in drafting its international agreements to ensure they are in line with MPRDA and BEE legislation. Concerned that the case could prompt other mining companies to bring similar actions, the SAG has extended its deadline for mining companies to file claims for the loss of mining rights by two years. -------------- COMMENT -------------- ¶9. (C) While losing this case would be an enormous international black eye for South Africa, we do not expect many other companies to file cases. Equity requirements under BEE are only compulsory in the mining sector, so a loss in ICSID would not extend to other sectors or to the BEE program as a whole. Most local mining companies, while potentially able to file suits under local law, are more likely to avoid making political waves. As Leon said, "You only file an expropriation case when you want to leave a country." Bost