Costa Rica

Is the Costa Rican government business friendly?

The Costa Rican government is today in the headlines with regards to a potential $1 billion lawsuit from a Canadian mining company. Calgary-based Infinito Gold believes the government is in breach of the Canada-Costa Rica bilateral investment treaty and is looking for an earlier solution to the problem. The problem goes back to an amendment to Costa Rican laws which effectively outlawed open pit mining across the country and therefore forced Infinito Gold to close its subsidiary operation.

The issue has been further compounded by different rulings from the High Courts in Costa Rica, one of which appeared to side with Infinito Gold, and the other which appeared to support the government’s legislative change. So what next?

Is there any way to resolve this issue?

The Costa Rican government has stated this week that it is unable to overturn the administrative court’s decision to approve the change in legislation and ban open pit mining. As a consequence, at this moment in time, it seems as though Infinito Gold is in something of a quandary because ultimately this issue goes back to pre-2010 and at this moment in time we do not appear to be any further forward regarding a resolution.

The fact that the company estimated it would be able to extract nearly 20 tonnes of gold during the 10 year life of the mine in question is in many ways irrelevant. Of more relevance to the business community is the fact that the government appeared to encourage the initial $92 million investment by Infinito Gold – which the company assumed was protected.

Will this impact upon the international business community?

Any doubt about the policy or strategy of an underlying government will cause concern within investment markets. The very fact that the company appears to have been the victim of a change in policy going forward, which appears to have been based upon constitutional, legal, environmental and technical objections, is a concern.

Quote from Gringos.com : “Can anyone advise me on how much I need to live comfortably in Costa Rica?”

Slowly but surely more details of this specific issue should emerge but the fact is that the Costa Rican government is potentially at risk of scaring off international investors.

The Costa Rican economy

Like many economies within Latin America, Costa Rica does to a certain extent depend upon its large array of natural resources. Mining as well as oil and gas companies dominate the skyline across Latin America and indeed they offer very useful income streams for governments. The Costa Rican economy itself is one of the stronger in Latin America, the government has historically been fairly proactive with regards to international investment but is this now a change in policy?

Open pit mining is perhaps not the best known form of extracting metals from the ground but in the case of Infinito Gold it is certainly a big part of the company’s operation. The Costa Rican subsidiary was alleged to be in on the verge of a $1 billion profit from the mine in question and obviously the company is now looking for some form of compensation if no resolution can be reached.

Conclusion

While this specific issue is obviously very important to investors in Infinito Gold it is the overall investment arena which we need to consider. If the Costa Rican government can effectively backdate legislation, after a significant investment by an overseas company, would they dare to do that again in the future?

The historic fragile nature of investing in Latin America has been diminishing for years now and indeed it is now one of the more powerful economic areas of the world. However, it would not take too many similar incidents, to this experienced by Infinito Gold, for the international arena to become more concerned and to demand a higher return on investment due to a perceived increase in risk.

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