Cost of Environmental Investment in Large-Scale Projects Involving Water - International Law Office

Background
Legal Debate
New Decree
Case Law
Comment

Background

For over a decade Article 43 of Law 99/1993 has caused significant concern in mining, electricity, and oil and gas ventures in Colombia. A particular concern arises from a provision of the law which sets forth that any project subject to environmental licensing which uses water directly obtained from a water source requires an investment of no less than 1% of the total cost of the project for the recycling, preservation and control of the water basin. The recycling, preservation and control of the water basin must be directly undertaken by the interested party pursuant to definitions which, under the law, must be provided by the competent environmental agency in the corresponding environmental licence. However, environmental licences issued since 1993 made no specific reference to the manner in which these investments were to be carried out and did not quantify the value of the obligation.

Legal Debate

This provision should not have affected large-scale projects, as there was a common understanding that the use of water and the cost definition of the 1% investment were proportional. However, the Ministry of Environment investigated and fined several local and foreign investors due to lack of compliance with this obligation. The ministry has thus clarified that (i) the fact that it did not specify the manner in which investment in the water basin was to be undertaken did not imply that such investment was not mandatory, and (ii) the valuation of the 1% investment must be based on the total value of the project, regardless of whether the water use is significant. This clarification implied that many projects could be in breach of the obligation and must quantify the 1% investment on the basis of total capital expenditures and operating expenditures.

New Decree

As a result of the ongoing debate, at the end of 2006 the ministry issued Decree 1900/2006, which regulates the 1% investment. Despite calls from the electric, mining, and oil and gas sectors, the regulation did not address many of the industry's concerns. However, the decree covers the following matters:

• The regulation provides a basis for calculation of the 1% investment, which applies only to the construction phase of the project. Calculation must be based on:
  
  
  • the acquisition of real estate;
    
    
  • civil works;
    
    
  • the acquisition and lease of machinery and equipment used for civil works; and
    
    
  • easements;
    
    
• A plan for the 1% investment must be presented and approved by the environmental agencies;
  
  
• The 1% investment may be used only for specific programmes and activities, as defined in the decree; and
  
  
• No investment provided for in the company's environmental management plan for the project constitutes partial or total compliance with the 1% investment.

The decree does not cover other fundamental aspects, including:

• cases where operations have already started and the company has made investments through its environmental management plan;
  
  
• cases where the water basin raised no significant environmental concerns or the project does not involve significant use of the resource; and
  
  
• the timeframe within which the obligation must be complied with.

In addition, the decree provided for a transitional regime which was poorly drafted. On the one hand, companies which, upon the entry into force of the decree, already implemented programmes for the 1% investment could continue to do so on the basis of the definitions contained in their environmental licence. However, the licences gave no indication in this respect. On the other hand, and of greater concern, the decree indicates that energy projects which did not have a 1% investment plan at the time of entry into force of the decree must submit such a plan and are immediately subject to investigations and fines for breach of their legal obligations.

Case Law

Although case law on this issue is still being established, certain key rulings tend to contradict the official position of the environmental agencies on two issues. In one case the Cundinamarca Administrative Tribunal stressed that there was no specific reason to impose an additional burden on investors by excluding environmental investments contained in the environmental management plan.(1) In another case the State Council pointed out that the environmental agencies' failure to define which investments must be undertaken by companies to comply with the 1% investment obligation constitutes a breach of the agencies' duties, rather than a breach of the investors' obligations.(2)

Comment

Foreign direct investment and local investment in the mining, electricity, and oil and gas sectors have increased significantly over the past year. These investments were made either by key multinational players entering the marketplace or by existing local and foreign market participants. Environmental concerns and corporate responsibility are critical issues which must be addressed in Colombia; the potential effects of the regulations on large-scale energy projects will determine the feasibility of existing and new ventures within the context of sustainable development.

For further information on this topic please contact José V Zapata by telephone (+571 312 2473) or by fax (+571 312 2513) or by email (jozapata@hnpabogados.com.co).

Endnotes

(1) Tribunal Administrativo de Cundinamarca, Sección Primera, Subsección B, Expediente 2003-00115, Demandante TermoEmcali SCA ESP, Restablecimiento del Derecho, February 9 2006, magistrado ponente Carlos Enrique Moreno Rubio.

(2) Consejo de Estado, Sección Quinta, Consejero Ponente Dario Quiñones Pinilla (Radicación AP-124, November 24 2000, Yul Francisco Dorado Mazorra and Ana Sofia Herman Cadena).