POLITICAL RISK MANAGEMENT AND SUSTAINABILITY IN LATIN AMERICAN NATURAL RESOURCE PROJECTS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2013)
CHAPTER 3A
POLITICAL RISK MANAGEMENT AND SUSTAINABILITY IN LATIN AMERICAN NATURAL RESOURCE PROJECTS
Eduardo Quintanilla Ballivián
Partner, Quintanilla, Soria & Nishizawa
La Paz, Bolivia

EDUARDO QUINTANILLA B. is the managing partner of Quintanilla, Soria & Nishizawa, a leading firm in Bolivia founded in 1975 that specializes in business and corporate law. Dr. Quintanilla was born in La Paz, Bolivia in 1963 and graduated from Universidad Mayor de San Andrés, in La Paz (1987), Université de Droit, d'Économic et de Sciences Sociales de Paris, in Paris (1989), and from Harvard Law School in Cambridge, Mass. in 1990. The firm has a broad presence in Bolivia, representing mainly international clients in the mining, finance, energy, oil, and general commercial sectors, such as The Coca-Cola Company, Rio Tinto, General Electric Inc., Orvana Minerals, Pennzoil and Mitsubishi, and has advised on some of the most important investment projects in Bolivia. The firm has also participated as a counsel to the State for drafting corporate, financial, and energy and mining natural resource laws, including the current Bolivian Mining Code. Dr. Quintanilla is a board member of several of such projects, and has led the firm's practice in M&A and the structuring of investment processes in the country. Law school professor for over two decades, Dr. Quintanilla participates as a speaker and panelist in national and international forums. Dr. Quintanilla has participated in national and international publications, including Mathew Bender Publications of International Joint Ventures and has been designated as an Honorary Fellow of the Association of Fellows and Legal Scholars of the Center for International Legal Studies in 2008. Dr. Quintanilla is a listed member of the Inter-American Arbitration Commission and of the Arbitration and Conciliation Center of the National Chamber of Commerce, and is an arbitrator for the Center of Arbitration and Conciliation of the Bolivian Bar. Memberships include the American Bar Association, the International Bar Association, the Rocky Mountain Mineral Law Foundation, the Center of International Legal Studies and the Harvard Law School Alumni Association in which he acts as a country representative.

This article aims to review economic and regulatory developments across Latin America regarding natural resource exploitation, particularly in the mining industry, seeking to understand what lays as a source of the recent path of economic growth in the region, the relevance of aspects such as poverty, inequality and institutional fragility in terms of sustainable growth, focusing on trends in public, private, and community participation, and comparative conditions for foreign investment vis-a-vis the local legal framework, political risk, social unrest, and environmental and community issues.

Our review of these similarities and common problems in Latin America, seek to provide the discussion with certain elements that may help identifying regional common aims as a means for interested parties to construct an environment of institutional inclusiveness, and environmental awareness, that may also meet the common goals of sustainable investment, economic growth and social development in the region.

1. ECONOMIC OVERVIEW

Although the 2008 global economic crisis severely affected Latin American and Caribbean economics, some of them were able to display a certain capacity of reversing the tendencies with a positive performance as compared with other world economics, having most Latin American countries had a sustained GDP growth since 2007, with the exception of 2009, as seen in Chart 1.¹

Two factors appear as the main contributors for such situation, being one the Chinese and Asian demand for commodities and natural resources traditionally exported by Latin American countries, and the other, the high international prices attained by such resources, positively affected by the increase in their demand of supply. Such factors would have also been joined by timely monetary action of the international community as well as by internal factors, such as improved domestic monetary and fiscal macroeconomic management on the one hand, and prudential microeconomic regulation on the other.

[Page 3A-2]

N°	Country	Statistics	2009	2010	2011
1	United States	Gross Domestic Product (GDP) Growth Annual %	-3.5	3	1.7
2	People's Republic of China,	Gross Domestic Product (GDP) Growth Annual %	9.2	10.4	9.3
3	Japan	Gross Domestic Product (GDP) Growth Annual %	-5.5	4.4	-0.7
4	Germany	Gross Domestic Product (GDP) Growth Annual %	-5.1	4.2	3
5	France	Gross Domestic Product (GDP) Growth Annual %	-3.1	1.7	1.7
6	Brazil	Gross Domestic Product (GDP) Growth Annual %	-0.3	7.5	2.7
7	United Kingdom	Gross Domestic Product (GDP) Growth Annual %	-4	1.8	0.8
8	Italy	Gross Domestic Product (GDP) Growth Annual %	-5.5	1.8	0.4
9	India	Gross Domestic Product (GDP) Growth Annual %	8.2	9.6	6.9
10	Russian Federation	Gross Domestic Product (GDP) Growth Annual %	-7.8	4.3	4.3
14	México	Gross Domestic Product (GDP) Growth Annual %	-6	5.5	3.9
26	Argentina	Gross Domestic Product (GDP) Growth Annual %	0.9	9.2	8.9
31	Colombia	Gross Domestic Product (GDP) Growth Annual %	1.7	4	5.9
33	Venezuela	Gross Domestic Product (GDP) Growth Annual %	-3.2	-1.5	4.2
38	Chile	Gross Domestic Product (GDP) Growth Annual %	-1	6.1	6
50	Peru	Gross Domestic Product (GDP) Growth Annual %	0.8	8.8	6.8
63	Ecuador	Gross Domestic Product (GDP) Growth Annual %	0.4	3.6	7.8
71	Dominican Republic	Gross Domestic Product (GDP) Growth Annual %	3.5	7.8	4.5
76	Guatemala	Gross Domestic Product (GDP) Growth Annual %	0.5	2.9	3.9
77	Uruguay	Gross Domestic Product (GDP) Growth Annual %	2.4	8.9	5.7
83	Costa Rica	Gross Domestic Product (GDP) Growth Annual %	-1	4.7	4.2
88	Panama	Gross Domestic Product (GDP) Growth Annual %	3.9	7.6	10.6
93	Bolivia	Gross Domestic Product (GDP) Growth Annual %	3.4	4.1	5.2
96	Paraguay	Gross Domestic Product (GDP) Growth Annual %	-3.5	14.2	6.9
98	Salvador	Gross Domestic Product (GDP) Growth Annual %	-3.1	1.4	1.5
108	Honduras	Gross Domestic Product (GDP) Growth Annual %	-2.1	2.8	3.6
136	Nicaragua	Gross Domestic Product (GDP) Growth Annual %	-1.4	3.1	5.1

CHART 1 ²

The main elements for such good performance, also reflect the degree of dependency of regional economy to international factors, as well as on the region's exports of natural resources.

1.1. Growth and Inequality.

1.1.1. Gross Domestic Product (GDP) as a growth index.

[Page 3A-3]

The concept of Gross Domestic Product, originally developed by Simon Kuznets for a US Congress report in 1934, which despite Kutznets warnings against its use as a measure of welfare, after the Bretton Woods conference in 1944 became the main tool for measuring a country's economy, represents the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita, often considered an indicator of a country's standard of living under such approach, is thus the value of such production divided by the number of inhabitants of a country. Such standard of measure presumes an equal distribution of income with regard to the value of the production of goods and services of a country, but it ignores the most significant disparities in the distribution of wealth.³

Taken this situation, as portrayed by Noble Prize Joseph Stiglitz⁴ regarding the US economy, as a consequence of the great degree of inequality rising in the US economy for over three decades, what is happening to GDP per capita doesn't tell much of what the typical citizen is experiencing, for if Bill Gate's income goes up, the average for America goes up. That is the reason why, different organisations have searched for other mechanisms that may more objectively represent levels of growth in an economy, such as the United Nations Development Program, which has developed a standard of measure of "human development", which aggregates measures of income, health and education, adjusting those numbers to reflect inequality.

1.1.2. Poverty and Inequality Indexes.

Despite the efforts for poverty reduction in Latin America and the Caribbean and the important achievements in the last two decades, poverty and inequality continue placing the region falling behind most other Continents. According to the United Nations Economic Commission for Latin America and the Caribbean (CEPAL/ECLAC),⁵ poverty in Latin America and the Caribbean fell from 48.4 percent in 1990 to 31.4 percent in 2010, and the rate of extreme poverty or indigence (a level of income that does not cover nutritional needs) also fell during this period--from 22.6 percent to 12.3 percent. This means that 167 million people remain in poverty, including 67 million in extreme poverty.

The CEPAL report in 2012⁶ shows significant percentages in poverty reduction in the region in the last decade, particularly in Argentina (from 34,9 in 2004 to a 5,7 in 2011), Bolivia (from a 62,4 in 2002 to a 42,6 in 2009), Brazil (from a 37,7 in 2001 to a 20,9 in 2011), Chile (from a 20,2 in 2000 to 11 in 2011), Colombia, from a 49,7 in 2002 to a 34,2 in 2011), Ecuador (from a 49 in 2002 to a 32,4 in 2011), Peru (from a 54,7 in 2001 to a 27,8 in 2011), Venezuela (from a 48,6 in 2002 to a 29,5 in 2011), and with Uruguay remaining as a regional example to follow (from a 15,4 in 2002 to a 6,7 in 2011), Still, in both, countries that have had important reductions as those with slower pace in such period, poverty indexes in certain cases, remain extremely high.

The same organisation underlined, however, the importance of the recent increase in social public investment in more than a 50% with regard to the GDP undertaken in Bolivia, Brazil, Costa Rica, Honduras...