Abengoa vs. Mexico

How a company could make millions with a project that is harmful to health and the environment.
In 2009, the Spanish multinational Abengoa, invoking the Mexico–Spain investment protection treaty, sued the Mexican government for blocking the operations of a toxic waste landfill in the municipality of Zimapán, a province in the State of Hidalgo. The landfill was to be located just 2 kilometres from a natural reserve and less than 500 metres from the Indigenous Hñañu community, endangering their fragile ecosystem by dumping arsenic that filtered into the water-table, among other impacts, which studies suggest directly affected 14 springs in the area.i The arbitrators of the case ordered the Mexican government to pay Abengoa US$45 million in compensation for lost profits and US$1.7 million for legal fees and the cost of the arbitration proceedings. Mexico reached a settlement with the company for US$41.5 million and agreed not to undertake an annulment proceeding that would delay the case.ii
The case is interesting for four reasons:
First, it is an example of how investors can sue a government for adopting measures to protect the environment and local communities: Zimapán was known as ‘the Mexican city of poisoned water’,iii with the second-highest level of arsenic in its water after Bangladesh.iv Allowing Abengoa to operate its toxic waste landfill would have exacerbated the water contamination. After two years of litigation and confrontations, in March 2010 the municipality of Zimapán permanently cancelled the plant’s operating license, arguing that: ‘a) the Operating License contravenes the constitutional right to enjoy a healthy environment; b) there were irregularities in the project’s environmental impact assessment conducted by the Mexican Ministry of Environment and Natural Resources; and c) the people of Zimapán should not pay the ecological debt of the waste that other municipalities generate’.v None of these assessments was taken into account during the arbitration process.
Second, it demonstrates how the international arbitration system undermines democracy: in a real democracy, leaders listen to citizens and adopt policies that respond to popular demands. The local government’s decision to revoke the operating license for the toxic waste landfill was largely due to social pressure. Organised under the slogan ‘We are all Zimapán’, the local community was fiercely opposed to the project fearing it could have even more deleterious impacts on their health.vi Disregarding the power of popular protest and challenging the independence of the local population, Abengoa argued that the protests and demands were not spontaneous but were incited by local politicians in an electoral context. In agreement with Abengoa, the arbitration tribunal decided that the landfill ‘was instrumentalized by political groups for purely electoral purposes’.vii
Third, it shows the arbitrators’ tendency to rule in favour of investors and ignore people’s rights to a healthy environment and the protection of their health: arbitrators’ decisions are informed by considering only the letter of the investment protection treaty and the impact of government actions on the investment. Using this logic, the tribunal on the Abengoa case ignored the impacts of the toxic waste landfill on people’s health and established that the local authorities’ decision to revoke the operating license deprived the investors of their investment and that their actions were a form of indirect expropriation. Furthermore, the arbitrators argued that ‘there is no evidence that the plant would pose any risk to public health’.viii
And fourth, it forced the Mexican government to pay significant amounts of money that compromise the public budget: although the original investment was US$12 million, Abengoa obtained US$45 million in compensation, an award fixed by the arbitrators based on the company’s expected future profits. This is equivalent to three times the annual gross domestic product (GDP) of the province where Zimapán is located in the State of Hidalgo. ix
Sources
i Pérez, Ana Lilia (2011) ‘Abengoa: el millonario juicio contra México’, contralinea.com.mx, 3 June. http://www.contralinea.com.mx/archivo-revista/2011/03/08/abengoa-el-millonario-juicio-contra-mexico/
ii https://www.italaw.com/sites/default/files/case-documents/italaw3187.pdf
iii https://elpais.com/internacional/2018/01/26/mexico/1516995951_973825.html
iv Pérez (2011), op. cit.
v https://www.italaw.com/sites/default/files/case-documents/italaw3187.pdf (par. 281, page 52).
vi Fach Gómez, Katia (2010) ‘ICSID Claim by Spanish Companies against Mexico over the Center for the Integral Management of Industrial Resources’. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1631835
vii https://www.italaw.com/sites/default/files/case-documents/italaw3187.pdf (par. 672, page 130).
viii https://www.italaw.com/sites/default/files/case-documents/italaw3187.pdf (par. 619, page 119).
ix ProMexico, Ministry of Economy (2017) ‘¿Por qué invertir en Hidalgo?’. http://mim.promexico.gob.mx/work/models/mim/Documentos/PDF/mim/FE_HGO_vf.pdf