Ex-USTR Negotiator Vargo Key in CAFTA Case

Pittsburgh-based Railroad Development Corporation (RDC) has hired former US trade agreement negotiator, Regina Vargo, and filed suit against the Guatemalan government under the investor-state provisions within Chapter 10 of CAFTA. RDC is parent to Ferrovias Guatemala, which signed a 50-year concession with Guatemalan President Arzu in 1997 to operate 500 miles of Guatemalan line. The company believes it is the first to file a Chapter 10 suit since CAFTA went into effect on March 1, 2006.

Trade and investment analysts say the result of the case could heavily impact investor-state relations in CAFTA countries, where many state-owned entities operate under the threat of privatization. Some questioned Vargo’s presence in the case and said that contracting with RDC raised ethical questions about the role of trade policy architects who later enter the private sector.

According to a widely distributed RDC press release, the Guatemalan government acted improperly when it sold off railway cars that were included in the 50-year concession agreement. The company says the sale signaled the government’s lack of confidence in the Ferrovias concession and scared off potential customers. Without the revenue from the weary customers, RDC began to lose money on the deal. According to RDC, the Guatemalan government’s actions to shake confidence in the company amounts to an expropriation of $50 million in potential revenue. In the Chapter 10 action, the company also seeks redress for $15 million already invested.

A Failure to Invest
For Guatemalan President Oscar Berger, frustration had mounted from day one over the restoration of the deteriorated line. He complained about the company’s unwillingness to invest and slow results from the RDC concession. A February 2005 editorial in the Guatemalan Prensa Libre, exhorted, “After seven years, it would be more than opportune for Congress to review the terms and non-compliance with the investment schedules. We must recall that the conditions that Ferrovias received were more than beneficial.”  

Political pressure mounted on Berger, and he responded by privatizing the fleet, leaving the track and right-of-way in Ferrovias’ hands. He stopped short of nullifying the contract, fearing reprisals. But the US Embassy and the Guatemalan-American Chamber of Commerce sued the government on RDC’s behalf anyway. The suit was lost in the quagmire of the Guatemalan justice system.

As recent as last September, Berger and company officials traded barbs over the matter. The company accused the government of not clearing squatters off the tracks so that trains could run. Berger himself made a special announcement saying the government had twice cleared the tracks but that, “people return [to live there] because of the lack of personnel from the company, which isn’t doing any work.”

Berger, at the time, announced that the company lacked (ironically) the $50 million investment necessary to get the line running as the concession stipulated.

"Un Vargo de Pisto"
Upon filing, RDC announced that it had contracted Regina Vargo to assist with the case. Vargo is a veteran trade agreement negotiator for the USTR. She was the lead US negotiator for CAFTA, and for trade talks with Peru, Chile, Colombia, Ecuador, and Panama. She led the US Deparment of Commerce Mexico Office during the three years before NAFTA took effect. Contracting Vargo wasn’t cheap, and some see the heavyweight presence as suspect.

“She was paid by the USTR to strike a good deal on behalf of US investors in Central America. And now she is taking the first case to exemplify how treaties like CAFTA favor those investors,” said Wilfredo Berrios of the Salvadoran Union Front (FSS-in Spanish). “This case was in Guatemala, but it could have landed in any of the CAFTA countries. They are looking to create a precedent.”

Berrios said that the investor-state provisions give preferential treatment to foreign investors and pointed to a recent decision by the Salvadoran Supreme Court of Justice which allowed a Constitutional challenge to CAFTA.

“CAFTA should be revoked. It violates our sovereignty and our national rights.”