OPIC and Revere

On August 24, 1978, a panel of three members of the American Arbitration Association rendered a decision on a two-year old dispute between Revere Copper and Brass and the Overseas Private Investment Corporation (OPIC). Revere sought a $90 million award from OPIC, a U.S. government agency that insures private investment abroad, for the expropriation of its bauxite-mining and alumina-processing facilities by the Jamaican government. With one member dissenting, the panel agreed with Revere that the actions of the Jamaican government were "expropriatory" but ruled that OPIC should pay the company only $1.1 million.

William F. Collins, President of Revere, called the $1.1 million award a "shocking injustice." On September 26, Revere announced that it had filed a proceeding in federal district court for the District of Columbia to "correct or vacate" that part of the arbitration decision, giving Revere "only 1.1 million for the loss of its insured equity investment of $64.1 million" in Revere Jamaica Alumina, Ltd. (RJA). But regardless of the court's final decision, the panel's judgment that Revere was subject to expropriatory actions is significant because it defines new areas for OPIC insurance compensation.

OPIC insures private companies investing in developing countries against three types of political risk: currency inconvertibility; expropriation; and war, revolution, and insurrection. The controversial Revere case deals with so-called "creeping expropriation," a prolonged action by the host government that interferes substantially with the parent company's control over the subsidiary.

While the dispute between Revere and OPIC began in 1976, the case arose from conflicts between Revere and the Jamaican government dating back several years. Revere's operations in Jamaica consisted of a bauxite mine and a plant to convert the bauxite into alumina. The alumina was then shipped to other Revere operations in the U.S. where it was reduced into aluminum ingot. Commercial operations began in December 1972.

Revere's investment in Jamaica was based on a 1967 agreement with the Jamaican government. The agreement guaranteed that no further taxes or levies would be imposed on bauxite reserves or processing-for. 25 years. This agreement reflected the intent of the government to attract production processes to the island and to discourage the direct export of bauxite.

When Michael Manley was elected Prime Minister of Jamaica in 1972, he promised to "reconstruct the basis" on which foreign corporations share the revenues gained from the country's resources. The government announced plans to increase markedly national revenues from bauxite mining and processing and to establish eventually national majority ownership and overall control of the bauxite industry.

After negotiations with the companies failed, the government imposed a new bauxite levy on June 8, 1974. The levy was based on the price of primary aluminum rather than the often artificially low interim price for alumina. RJA sued the government for breach of the 1967 agreement. But the Jamaican Supreme Court, holding that prior legislative agreements - like other enactments - are not immune from repeal by a present legislature, declared the 1967 tax guarantees null and void.

In August 1975, RJA ceased production despite strenuous efforts by the government to prevent a shutdown, including an offer of relief from the bauxite3 levy. Arbitration between OPIC and Revere began in December 1976, following months of inconclusive negotiations between the agency and the company.

In its recent decision, the arbitration panel agreed with OPIC that the bauxite levy itself was not expropriatory; four other U.S. companies producing bauxite continued operations after settling tax disputes with the Jamaican government. However, the panel's majority found that the levy and other government actions constituted a repudiation of the 1967 agreement. Although Revere's ownership and operations were not interfered with, the panel held that the "uncertainty" caused by the repudiation represented a direct interference with Revere's control of RJA.

The Revere dispute is part of the continuing public controversy that has surrounded OPIC since its creation in 1969. Organized labor is suspicious of OPIC's job-exporting incentives. Small business advocates claim that the largest U.S. corporations have received an excessive percentage of OPIC's insurance policies. Bill Goodfellow, Deputy Director of the Center for International Policy, offers a different analysis. During a July 1977 hearing, Goodfellow testified that "there is a problem about the identity of interest that OPIC creates between the U.S. government and U.S. multinational corporations."

Revere's interest in avoiding the new bauxite levy pitted the company against the Jamaican government. Jamaica faced a situation common to developing nations: the country desperately needed ' new revenues. When the government signed agreements for products such as sugar, bananas, and bauxite in the late 1960's, the price of oil was $2 a barrel; in 1974, the agreements were still in effect, but the price of oil had risen to $14 a barrel. Prime Minister Michael Manley declared that; "the renegotiation of contracts with the aluminum companies is not only a necessity and the right of a sovereign nation, but an obligation to the people."

In the Revere case, the arbitration board held that OPIC insures against business uncertainty caused by the development program of a sovereign state. This is true even if the government does not directly, through intervention, or indirectly, through excessive taxation, deny the parent company possession or control of the subsidiary. Thus OPIC's insurance program aligns the interests of the multinationals and the U.S. government against the developmental objectives of countries.

However, there are other significant factors that relate to OPIC's role. According to documents submitted during the arbitration, RJA never made a profit. Major cost overruns marked the construction of the plant, and RJA's losses increased year by year at a "startling rate" until the plant closed in August 1975. Indeed, the poor prospects for recovering a sizable part of the investment led the arbitration board to declare a $1.1 million award despite Revere's $97.6 million investment in plant facilities and other fixed assets. But even this small settlement opens the possibility that corporations charging "uncertainty" will use OPIC to recoup losses from worthless investments.

According to OPIC's promotional literature, the agency was chartered to "encourage U.S. private investments which support the economic development objectives of participating developing nations." But in the Revere case, OPIC backed - with the "full faith and credit" of the U.S. Treasury - an investment that ran counter to the development interests of Jamaica. Moreover, the Revere case established that OPIC's insurance covers the uncertainty U.S. investors face when a country attempts to implement its development policies.