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