Bloomberg | 13 May 2013
Coup d’etat to trade seen in billionaire toxic lead fight
by Andrew Martin
Across the river from Belinda Elida Barja’s two-room apartment, the lead and zinc smelters of Doe Run Peru spread smoke and dust in the mountain town of La Oroya.
Her 9-year-old son Kenyi has headaches, memory loss, stomach ailments and difficulty concentrating, Barja said. The lead in his blood measured 41 micrograms per deciliter in a 2007 test — eight times the level the U.S. government considers a cause for action. Barja blames Doe Run Peru.
“They just think about making money,” she said.
Most of La Oroya’s children suffer elevated lead levels, according to the Peruvian government. Parents say some have symptoms — consistent with lead poisoning — that include anemia, convulsions, stunted growth, mental retardation and the ills Barja said her son suffers.
The question of responsibility is at the center of a high-stakes clash between Peru and U.S. billionaire Ira Rennert, who owned Doe Run Peru for more than a decade through Renco Group Inc. Far from defensive, Renco is demanding $800 million from Peru because it ordered a costly pollution clean-up that the company says forced Doe Run Peru into bankruptcy in 2010. Renco has said it’s not responsible for the children’s ailments.
Its demand was made under an arcane, often secretive investor-state arbitration system that is growing rapidly in size and scope, roiling global trade and angering countries from Australia to South Africa over the perceived trampling of their sovereign rights.
“It’s like a quiet, slow-moving coup d’état,” said Lori Wallach, director of the Global Trade Watch division of Public Citizen, a nonprofit that opposes many aspects of trade pacts. Investors and corporations are “using this regime to have another front at trying to limit the governance authority of nation states.”
Arbitration clauses were originally included in treaties to deal with the nationalization of a company’s assets. Now arbitrators hear claims for lost business or costs stemming from public-health laws and environmental regulation and financial policies, with billions of dollars at stake.
In some instances, investors are even demanding that national laws or court judgments be overturned.
Once a “shield of last resort,” arbitration has become a “sword of first resort,” according to a paper by Howard Mann, a senior law adviser at the International Institute for Sustainable Development, a Winnipeg-based nonprofit. “They were never meant to be the first recourse of a foreign investor to create or settle a dispute,” Mann said in an interview.
A record 62 treaty-based arbitration cases were filed last year, bringing the total to 480 since 2000, according to the United Nations Commission on Trade and Development. Before then, there were fewer than three a year dating to 1987, when a Hong Kong company brought the first known case over Sri Lanka’s destruction of a shrimp farm in a military operation against Tamil separatists.
Driving the growth are arbitration clauses enshrined in the “vast majority” of the world’s 3,000-plus international investment agreements, according to the UN. Only 134 such pacts existed in 1980.
Many give the investor the right to choose from a set of procedural rules, usually from the World Bank or UN. Each side gets to pick one arbitrator apiece, usually lawyers, academics and former government officials, with the third selected by mutual agreement or an independent third party.
The scale has grown well beyond shrimp ponds. Last year’s decisions included a $1.77 billion judgment against Ecuador in an Occidental Petroleum Corp. case brought over a terminated oil concession. Ecuador is seeking an annulment of the decision through the World Bank’s arbitration forum, and hasn’t yet paid.
In the largest unresolved case, former offshore shareholders of Yukos Oil Co. are seeking $114 billion from Russia over allegedly illegitimate criminal investigations, tax demands and arrests of Yukos officials, which culminated in the state acquiring most of the company’s assets. It’s one of 19 cases in which investors are demanding more than $1 billion, according to the UN.
The Russian government has argued that the dispute should be resolved in Russian courts, according to a summary of the country’s position by the arbitrators.
The system provides protections for companies seeking to invest abroad where the legitimacy of local laws and domestic courts may be uncertain, according to the Obama administration and other supporters. Investors prevailed in 70 percent of cases decided last year.
Renco, a New York-based metals, mining and industrial conglomerate that owned the La Oroya plant through a subsidiary, contends the pollution-curbing demands Peru made were onerous and unfair, and kept escalating. The government says it was only trying to hold Renco to the terms of the agreement under which it bought Doe Run Peru in 1997.
In addition to $800 million, closely-held Renco wants arbitrators to compel Peru to pay for any damages that may arise from a pending lawsuit filed in federal court in St. Louis, Missouri, on behalf of more than 700 La Oroya children.
“This clause gives more power to foreign investors than the people of Peru,” said Conrado Olivera Alcocer, executive director of Joining Hands Network Peru, a group of charities that focuses on the environment and individual rights. A Peruvian has no right to file a claim in an international forum the way Doe Run does, Alcocer said.
While Peru says it still believes in investor-state arbitration, other nations aren’t so sure. Since 2007, Bolivia, Venezuela and Ecuador have withdrawn from the World Bank’s arbitration forum, which they said favored corporations over sovereign nations.
Within the last year, India froze negotiations on investment treaties and said it wouldn’t agree to future pacts with arbitration clauses that can trump its courts. South Africa, which was challenged in an arbitration case over a law requiring mining companies to sell shares to citizens harmed under Apartheid, decided to terminate investment treaties after deciding the risks outweighed the benefits.
In 2011, Australia vowed that it would no longer include an arbitration clause in trade agreements, a potential complication in negotiations for the Trans Pacific Partnership, a proposed trade pact among 11 countries. The Australian position is at odds with the U.S. stance favoring the process.
Australia is facing an arbitration case filed by Philip Morris International challenging a law that requires cigarettes to be sold in plain packages. The U.S. cigarette maker is asking arbitrators to overturn the law, which was upheld by Australia’s highest court, or award damages for lost business.
The man fighting Peru, Ira Rennert, is a Brooklyn native who used more than $1 billion in junk bonds to a business empire under Renco that includes a magnesium company, jewelry stores, auto-parts suppliers and a defense contractor that introduced the world to the Hummer. Rennert, 78, is worth $5 billion, according to the Bloomberg Billionaires Index. He and Renco officials declined to comment for this story.
Rennert may be best known for his own Italianate version of Xanadu on the eastern tip of Long Island. Called Fair Field, the 43,000-square-foot mansion was built on 65 oceanfront acres, has 21 bedrooms, 14 full baths, three pools, two tennis courts and an assessed value of $248 million, tax records show.
The billionaire has often clashed with bondholders, regulators, business partners and neighbors, many of whom have spent years waging legal battles with him. In January, the Pension Benefit Guaranty Corp. sued Renco for allegedly trying to skirt $97.2 million in pension obligations at its bankrupt RG Steel LLC unit. Renco has denied the allegation.
Renco’s Salt Lake City-based subsidiary, U.S. Magnesium LLC, was sued by the Environmental Protection Agency in 2001 for alleged toxic waste violations; the case is in settlement talks, court filings say. Another Renco unit owns a lead smelter and refinery in Missouri that has been cited by regulators, and sued by neighbors who say they were harmed by emissions. The plant is scheduled to close at the end of the year.
The Renco company that operates the Missouri smelter said it is committed to meeting its environmental obligations, and declined to comment on the lawsuits.
La Oroya was an “uninhabited crossroads” in 1922 when an American company called Cerro de Pasco Copper Corp. built the smelter and refineries. They started producing copper, and now make lead, zinc, gold, silver and lesser known-metals like bismuth and antimony. Renco acquired the facility in 1997 for $248 million and named it Doe Run Peru. The seller was the Peruvian government, which had nationalized it 23 years earlier.
A signpost in the oldest part of town declares it the capital of the metallurgical industry in Peru and South America. About 180 kilometers east of Lima, it’s a four-hour drive of switchbacks, rockslides and steep drop-offs that top out at about 4,800 meters.
La Oroya is at 3,700 meters, a scruffy collection of bodegas, cafes and hostels, many filled with miners. Trucks rumble up and down the main road, and freight trains grind along nearby tracks. Doe Run Peru’s piles of lead concentrate, roaring furnaces, brawny molds and waste treatment plants dominate the banks of the Mantaro River as it winds through La Oroya. One locked room holds $18 million in newly smelted silver bars.
Dust is overwhelming in some parts of the plant, especially near the furnaces, and most workers wear air-filtering masks. Waste is carted by buckets to a black slag heap nearly as high as the surrounding mountains.
Directly across from it, a company sign on the riverbank says, “Doe Run Peru Does Not Contaminate the Mantaro River.”
Under the terms of Renco’s purchase, Doe Run Peru agreed to a 10-year pollution reduction plan that was estimated to cost $107 million, Renco said in its arbitration notice. The Peruvian government agreed to clean up soil around La Oroya that had been contaminated by decades of pollution under previous owners, including a state-owned company.
Neither side complied with the accord, each says.
Doe Run Peru has said it completed many projects, and plant employees showed off equipment that they said reduces dust and particle emissions, treats sewage and industrial wastewater and captures sulfur dioxide before it goes out the smokestack.
The company said it spent more than $300 million, about triple the original estimate. It acknowledges that it didn’t complete a copper-plant upgrade that would have cost more than $100 million and was part of the clean-up plan, according to the arbitration notice.
In 2009, it received a 30-month extension, its second allowance of more time. The Peruvian government passed new regulations “so onerous” that Doe Run couldn’t take advantage of the extension, the notice says.
Unable to obtain financing, Renco closed the plant in 2009 and notified Peru the following year that it intended to file an arbitration case. Most of Doe Run Peru has reopened and is now being run by a management company hired by creditors.
Jose M. Reyes, Doe Run Peru’s vice president of operations, said his former boss got a raw deal. A 43-year veteran of the plant, Reyes said the waste dumped into the Mantaro or going up the smokestack declined after Rennert bought the plant.
Reyes provided charts of company-funded research showing lead emissions declined 50 percent and pollution flows into the river were nearly eliminated between 1997 and 2008.
The state didn’t fulfill its promise to clean up La Oroya’s contaminated soil, he said. “There was unjust treatment on behalf of the Peruvian government.”
The government’s soil cleanup is now under way, said Carlos Jose Valderrama, the Peruvian official responsible for investor-state arbitrations. It didn’t make sense to undertake the project while the pollution continued during Renco’s ownership of the plant, Valderrama said in an e-mail.
“The bottom line is that when Doe Run stopped operating and polluting, the contamination levels dropped,” he said.
Valderrama said Peru supports the arbitration system, but disagrees with Renco’s allegations. While it gave Doe Run extra time to finish the projects, the company failed to do so, Valderrama said.
“Peru has the necessary expectation that investors maintain clean hands, protect the environment and in short follow the rules,” said Jonathan Hamilton, an attorney for Peru in the arbitration and partner at the law firm White & Case. “Renco and Doe Run did not follow the rules.”
In La Oroya, some parents say they believe the plant’s toxins stunted their children’s’ bodies and damaged their minds.
Before the plant closed in 2009, Barja said, white flecks of ash would settle in her son’s hair. It looked like “dandruff falling from the sky,” she said.
Oshin Onofre, a 21-year-old in ripped jeans and a baby-blue sweater, said she started having convulsions and headaches 10 years ago. Although pills have controlled the convulsions, Onofre said she still struggles with memory loss, and had to drop out of nursing school last year. She lives with her mother.
Nashira Chavez is 9 but looks years younger. She weighs just 17 kilograms (38 pounds), according to her mother — a little more than half the average weight of U.S. girls her age. When Nashira was two years old, a government test found 55 micrograms per deciliter of lead in her blood.
“The only possibility is the contamination because I feed them well,” said her mother, Leli Ventura Yupanqui. “I have a 3-year-old granddaughter and she already weighs more than her.”
In the federal lawsuit in Missouri, attorneys for La Oroyan children — including Kenyi, Oshin and Nashira — say Renco is to blame for “negligently, carelessly and recklessly” making decisions that caused the release of toxic substances from the smelter. Renco has denied responsibility for the children’s ailments.
Several studies have confirmed that La Oroya’s children have high levels of lead. Lead poisoning is particularly dangerous for young children because it can interfere with mental and physical development, causing learning and behavioral problems, slowed growth and, in the worst cases, convulsions and death, according to the Mayo Clinic.
In 1999, the Peruvian Ministry of Health tested 346 children from different parts of La Oroya and found an average 33.6 micrograms of lead per deciliter. The highest levels were in Old La Oroya, the part of town nearest the smelter, where the average was 43.5 and the highest reading was 79.9.
Another study in 2005, by Saint Louis University with assistance from the CDC, found that more than 80 percent of children tested who were 6 and younger had blood lead levels of 20 micrograms or more per deciliter, and 8 percent of those had levels of 45 or higher. The average in Old La Oroya was 36.1 for children 6 and younger, the study said.
The Saint Louis University study also found elevated levels of arsenic, cadmium and antimony, metals that have been linked by the U.S. EPA to serious illnesses, in some cases cancer.
More recent blood tests, in 2011 at the La Oroya health clinic, found that lead had mostly declined to between 10 and 20 micrograms per deciliter, a drop that a local health official attributed to the plant’s temporary closure in 2009 and better health habits by residents.
There has been no long-term study tracking the health impact of the plant’s emissions on La Oroya residents.
Prior research has documented irreversible effects of lead poisoning on children, according to Joseph Graziano, professor of environmental health sciences at Columbia University. Children with more than 80 micrograms per deciliter are at risk of seizures and possibly death, Graziano said.
Those whose blood lead levels reach the 30s and 40s “are likely to be experiencing deficits in intelligence, behavior disorders, some loss of motor function, anemia and impaired kidney function” — and except for anemia, none of these effects are reversed by later reduction in blood-lead, he said.
On a recent afternoon, Giovanna Arroya arrived at the clinic around the corner from the La Oroya smelter with her son Paolo, a chubby 7-month-old in a tiger hat. Ushered into an examination room decorated with cut-out letters and hearts, Arroyo, 40, was peppered with questions as Paolo squirmed.
Does Paolo suck his thumb? Does he eat dirt? How long have they lived in Old La Oroya?
“He’s very high risk,” said Herbert Damian, the clinic doctor, noting Paolo was anemic, stuffed things in his mouth and lived near the plant. “You really need to take care of this.”