World Bank Report Optimistic But Argentina Still Opposed to Mills in Uruguay

American Society of International Law; Center for Human Rights and Environment; International Court of Justice; IFC; Inter Press Service News Agency; Latin Business Chronicle; Reuters; World Bank Group

Last week, Uruguay’s Foreign Minister Reinaldo Gargano announced that his government will file formal complaints against Argentina before a Mercosur Tribunal. This is merely the latest stage in a running dispute with Argentina over the construction of wood-pulp mills along the Uruguay River. The announcement follows renewed blockades on the Libertador General San Martín Bridge (a bridge over the Uruguay River linking Argentina and Uruguay) by Argentine protesters in an effort to thwart construction and pressure the Uruguayan government to abandon the project. The appeal to the Mercosur Tribunal represents Uruguay’s second attempt to recover an estimated US$ 400 million in lost trade attributable to the blockades.

The Argentine protests began in early 2005 after Botnia, a Finnish paper company, received authorization from the government of Uruguay to construct a cellulose processing mill near the town of Fray Bentos. Earlier, in 2003, ENCE, a Spanish paper company, had publicized its plans to build a similar plant in the same area. Opponents claim these mills will harm the region’s environment, as well as the tourist industry.

Both cellulose mills will utilize the kraft process of extracting pulp with sulphate. Approximately 95% of all wood pulp is manufactured through this process, which entails boiling wood chips in a caustic soda to create a strong, brown-colored pulp. The pulp is then bleached, in order to remove the brown-tinted lignin, using chlorine or chlorine dioxin, sodium hypochloride, and oxygen peroxide. The byproducts of this bleaching process are the main cause for alarm among opponents of the mills. Traditionally, the bleaching process used chlorine as the primary agent—today this method is used in approximately 20% of pulp production—which produces high levels of organochlorines (dioxins and furans). These compounds are two of twelve POP (Persistent Organic Pollutants) designated by the Stockholm Convention as being highly toxic to living organisms. Consequently, the majority of pulp mills in operation today use an alternative bleaching process, known as ECF. The proposed mills in Uruguay will use this method. The Elemental Chlorine Free (ECF)­ process—used in nearly 75% of all wood pulp—significantly reduces the amount of organochlorides produced. (A third process, Totally Chlorine Free (TCF), was recently developed and accounts for only 5% of all wood pulp manufactured; it is currently disfavored because it is cost prohibitive and creates an inferior product.)

The estimated cost of Celulosa de M’Bopicua (CMB), ENCE’s proposed mill, is US$ 600 million; it will produce 500 thousand tons of wood pulp annually. ENCE halted construction last month after deciding to move its mill to another region of Uruguay. Botnia’s mill, Orion, is projected to cost nearly US$ 1.2 billion and produce one million tons of pulp per year. Together, the two pulp mills represent the largest foreign investment in Uruguay’s history: US$ 1.8 billion. When completed, the two mills are expected to generate revenues equivalent to 3.2% of Uruguay’s GDP. According to World Bank reports, Orion will create 2,500 new jobs in Uruguay; Botnia predicts their mill will generate 6,500 indirect jobs over the next eleven years. The International Finance Corporation (IFC), the private sector arm of the World Bank, has vigorously endorsed the cellulose processing mills, and recently submitted the project to its board of directors. If the board approves the project when it meets on November 14, the IFC will finance the Orion project while another member of the World Bank Group, the Multilateral Investment Guarantee Agency (MIGA), will provide political risk insurance (guarantees) to investors.

Despite Argentina's continuing resistance to the project, Uruguayans welcome the pulp mills (local polls indicate only 16% public disapproval). Earlier this year, Argentina filed suit against Uruguay in the International Court of Justice (ICJ) in The Hague, for its alleged violation of a 1975 treaty that established a binational administrative body to coordinate policies affecting the Uruguay River. Argentina maintains that Uruguay failed to notify the country of the pulp mill projects and to seek its approval. In its defense, Uruguay contends that it had, in fact, notified Argentina of the projects: in 2004, the two countries discussed the proposed mills, approving their construction, and agreed that Uruguay would disclose information concerning plant operations. In its arguments to the court, Uruguay noted that this was the first time in 31 years that Argentina had claimed a right under the treaty to block Uruguay from developing projects along the river. In addition, Uruguay argued that the environmental impact of the proposed mills will be too insignificant to meet the threshold for triggering the provisions in the treaty. Argentina rejected the environmental impact statements in the record. The ICJ, ruling 14–1, declined to issue a preliminary injunction to halt construction until the case is heard at a later date.

Meanwhile, a World Bank study conducted by independent researchers supports Uruguay's position. The final cumulative impact study, released on October 13, 2006 by IFC and MIGA, concluded that the pulp mills, which have been designed in compliance with Best Available Techniques, pose no threat to air and water quality. Despite assurances from EcoMetrix (the Canadian company which conducted the environmental impact study) that the construction and operation of the mills will not compromise the environment, Argentine protesters intend to continue the blockade of persons and goods as the tourist season in Uruguay approaches.

Questions:
Argentina has ten older-generation pulp mills; once completed, the two new mills in Uruguay, designed to use cleaner technology, will produce more than twice the total output of Argentina's ten mills. To what extent is Argentine opposition motivated by economic rivalry in addition to (or rather than) environmental concerns? (Argentina's environmental record is worse than Uruguay's: Euromonitor reports Argentine daily organic water pollutant emissions are more than seven times Uruguay's emissions rate.) Will Argentina generate its own environmental fact-findings to counter the EcoMetrix reports? If the roles in this conflict were reversed, would Uruguay have the economic or political ability to intervene in Argentina's economic development plans? How should a country balance its interests in increased employment and economic growth against environmental interests? What if the environmental interests are those of a foreign coutntry?