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Lawyers, other representatives, expert(s), tribunal’s secretary

Award II

TABLE OF DEFINED TERMS IN THE AWARD
"AA Consortium" Aguas del Aconquija (later to become Compañía de Aguas del Aconquija S.A.) (also referred to as "Consortium")
"Argentina" Argentine Republic (also referred to as the "Argentine Republic")
"Argentine Republic" Argentine Republic (also referred to as "Argentina")
"Award" Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Final Award of 20 August 2007
"BIT" Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments (also referred to as the "Treaty")
"CAA" Compañía de Aguas del Aconquija S.A.
"CETI" Centro de Estudio de Transporte e Infrastructura S.A.
"CGE" Compagnie Générale des Eaux (now Vivendi Universal S.A.)
"Claimants" Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A.
"Consortium" Aguas del Aconquija (later to become Compañía de Aguas del Aconquija S.A.) (also referred to as "AA Consortium")
"Decision on Annulment" Decision on Annulment of the ad hoc Committee, constituted on 3 July 2002, comprised of Mr. Yves Fortier, President, Professor James Crawford and Professor José Carlos Fernández Rozas, in Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A.
"Defender of the People" (formerly Compagnie Générale des Eaux) v. Argentine Republic, ICSID Case No. ARB/97/3. Head of the office created 15 August 1995, by Tucumán Law No.
"Defender of the Public" 6644, for the protection and defence of the legal rights and interests of persons and community, as contained in the National and Provincial Constitutions and in the laws passed as a consequence thereof before the acts, events and omissions of the Provincial Public Administration, with the provisional scope of this law (also known as "Defender of the Public", or the "Ombudsman") Head of the office created 15 August 1995, by Tucumán Law No.
"DiPOS" 6644, for the protection and defence of the legal rights and interests of persons and community, as contained in the National and Provincial Constitutions and in the laws passed as a consequence thereof before the acts, events and omissions of the Provincial Public Administration, with the provisional scope of this law (also known as "Defender of the People", or the "Ombudsman") Dirección Provincial de Obras Sanitarias
"DYCASA" Dragados y Construcciones Argentina S.A.
"ERSACT" Tucumán Provincial water regulator created by Tucumán Provincial Law No. 6529, 18 January 1994 (formerly "ERAT") (also referred to as the "Regulator")
"Executive Orders" Resolutions or regulations issued pursuant to the Provincial
"Executive" Constitution of the Province of Tucumán by the Governor of the Province of Tucumán on matters referred to in laws enacted by the Tucumán Provincial Legislature The executive branch of the Tucumán provincial government,
"First Award" composed of the Governor and the Lieutenant or Vice Governor and Ministers appointed by the Governor Compañía de Aguas del Aconquija S.A. and Compagnie Générale
"First Tribunal" des Eaux v. Argentine Republic, ICSID Case No. ARB/97/3, Award of 21 November 2000 (also referred to as the "Original Award") A duly appointed Tribunal, comprised of Judge Francisco Rezek,
"ICSID Convention" President, Judge Thomas Buergenthal and Mr. Peter Trooboff, constituted in Compañía de Aguas del Aconquija S.A. and Compagnie Générale des Eaux v. Argentine Republic, ICSID Case No. ARB/97/3, pursuant to a Request for Arbitration filed by Compañía de Aguas del Aconquija S.A. and Compagnie Générale on 26 December 1996 (also referred to as the "Original Tribunal") Convention on the Settlement of Investment Disputes between
"ILC Articles" States and other Nationals of Other States The International Law Commission’s Articles on State
"Legislature" Responsibility (2002) Tucumán provincial legislature
"Ombudsman" Head of the office created 15 August 1995, by Tucumán Law No. 6644, for the protection and defence of the legal rights and interests of persons and community, as contained in the National and Provincial Constitutions and in the laws passed as a consequence thereof before the acts, events and omissions of the Provincial Public Administration, with the provisional scope of this law (also known as "Defender of the Public", or the "Defender of the People")
"Original Award" Compañía de Aguas del Aconquija S.A. and Compagnie Générale des Eaux v. Argentine Republic Award of 21 November 2000 (also referred to as the "First Award")
"Original Tribunal" A duly appointed Tribunal, comprised of Judge Francisco Rezek, President, Judge Thomas Buergenthal and Mr. Peter Trooboff, constituted in Compañía de Aguas del Aconquija S.A. and Compagnie Générale des Eaux v. Argentine Republic, ICSID Case No. ARB/97/3, pursuant to a Request for Arbitration filed by Compañía de Aguas del Aconquija S.A. and Compagnie Générale on 26 December 1996 (also referred to as the "First Tribunal")
"Province" Province of Tucumán, Argentine Republic (also referred to as "Tucumán")
"Rais Report" Case Study, Concession for the Potable Water and Sewerage Services in Tucumán, by Jorge Carlos Rais, Maria Esther Esquivel, Sergio Sour, Consultants, April 2001.
"Regulator" Tucumán Provincial water regulator created by Tucumán Provincial Law No. 6529, 18 January 1994 (formerly "ERAT") (also referred to as "ERSACT")
"Roggio" Benito Roggio e Hijos S.A.
"San Miguel" San Miguel de Tucumán, the provincial capital of the Province of Tucumán
"Second Request" Claimants’ Request for Arbitration dated 29 August 2003
"Supercemento" Supercemento S.A.
"Treaty" Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments (also referred to as the "BIT")
"Tucumán" Province of Tucumán, Argentine Republic (also referred to as the "Province")
"Vienna Convention" 1969 Vienna Convention on the law of Treaties
"Vivendi" Vivendi Universal S.A. (formerly Compagnie Générale des Eaux)

1. INTRODUCTION AND SUMMARY

1.1. Overview

1.1.1.
This case arises out of the troubled relationship which developed between the parties to a 1995 "Concession Agreement" which privatised (as it turned out, unsuccessfully) the water and sewage services of the Province of Tucumán ("Tucumán" or the "Province") in the Argentine Republic ("Argentine Republic" or "Argentina"). The original signatories to the Concession Agreement were a French company, Compagnie Générale des Eaux ("CGE" now Vivendi Universal S.A., "Vivendi"), its Argentine affiliate, Compañía de Aguas del Aconquija S.A. ("CAA") Benito Roggio e Hijos S.A. ("Roggio"), Dragados y Construcciones ("DYCASA"), and the Province.
1.1.2.
The Argentine Republic was not a party to the Concession Agreement but is party to a bilateral investment treaty signed on 3 July 1991 with the French Republic -Agreement between the Argentine Republic and the French Republic for the Promotion and Reciprocal Protection of Investments ("BIT" or "Treaty").1 Both Argentina and France are also parties to the Convention on the Settlement of Investment Disputes between States and other Nationals of Other States ("ICSID Convention") which entered into force for both states prior to signature of the Concession Agreement.2
1.1.3.
The case has a protracted history, the current dispute having been the subject of prior ICSID proceedings before the Centre. In those proceedings, pursuant to a Request for Arbitration filed by CGE and CAA on 26 December 1996, a duly appointed tribunal comprised of Judge Francisco Rezek - President, Judge Thomas Buergenthal and Mr. Peter Trooboff ("First Tribunal" or "Original Tribunal"), rendered an award on 21 November 2000 ("First Award" or "Original Award").3
1.1.4.
On 20 March 2001, a Request for Partial Annulment was filed by CAA and CGE’s successor, Vivendi, and on 3 July 2002, a duly constituted "ad hoc Committee", comprised of Mr. Yves Fortier - President, Professor James Crawford and Professor José Carlos Fernández Rozas, rendered a Decision on Annulment ("Decision on Annulment").4
1.1.5.
The ad hoc Committee decided, inter alia, that the First Tribunal rightly held that it had jurisdiction over the claims before it, but that it had exceeded its powers by not examining the merits of the claims based on actions of the Tucumán authorities under the BIT. Accordingly, the Committee annulled the First Tribunal’s decision with regard to those claims. The ad hoc Committee did not annul the First Tribunal’s findings with respect to the claims "based directly on alleged actions or failures to act of the Argentine Republic" (the "Federal Claims").5
1.1.6.
On 26 August 2002, Respondent submitted to the Secretary-General of ICSID a Request for Supplementation and Rectification of some aspects of the ad hoc Committee’s Decision. By Decision dated 26 May 2003, the ad hoc Committee denied Respondent’s Request for a Supplementary Decision and, with one minor exception (having to do with a typographical error), denied Respondent’s Request for Rectification.6
1.1.7.
By a Request for Arbitration dated 29 August 2003 ("Second Request"), Vivendi and CAA ("Claimants" in these proceedings) resubmitted the dispute to ICSID pursuant to Article 55(1) of the ICSID Arbitration Rules. Claimants sought adjudication by a new tribunal of the issues as to which the First Award had been annulled, namely the merits of their BIT Claim arising out of the alleged acts and omissions of the Tucumán authorities. As to the merits, Claimants assert that the Tucumán authorities denied Claimants fair and equitable treatment in connection with the Concession Agreement and expropriated their investment without compensation.
1.1.8.
Claimants say that the Argentine Republic is internationally responsible for the impugned acts and omissions of the Tucumán authorities and that Respondent has therefore violated Claimants’ rights under Articles 3 and 5 of the BIT.
1.1.9.
Claimants seek to recover damages in the sum of US$316,923,000.00 plus interest compounded at 9.70% from 27 November 1997.7
1.1.10.
Claimants’ investments having been made in US dollars and/or French francs, Claimants request that any award be made in US dollars.
1.1.11.
As will be evident from this award ("Award") and our previous Decision on Jurisdiction, the "Tribunal" has been greatly assisted by the submissions of counsel, who, in turn, were helped by many others whose names do not appear in the transcription of the hearings. It is therefore appropriate, at the beginning of this Award to record our appreciation of the scholarship and industry which counsel for the disputing parties have brought to bear during these complicated and lengthy proceedings, together with their respective experts, assistants and other advisors.

1.2. The Parties

Claimants

1.2.1.
CAA is a company established and organised under the laws of Argentina with its principal place of business at the following address:

Compañía de Aguas del Aconquija S.A.

Catamarca 444

C4000ITJ - San Miguel de Tucumán

Provincia de Tucumán Argentina

1.2.2.
Vivendi is a company established and organised under the laws of France with its principal place of business at the following address:

Vivendi Universal S.A.

42 Avenue de Friedland

75008 Paris

France

1.2.3.
In its Decision on Jurisdiction,8 the Tribunal found Vivendi to be the successor-in-interest to CGE, a company also established and organised under the laws of France.9

Respondent

1.2.4.
Respondent is the Argentine Republic.

1.3. The Parties’ Representatives

1.3.1.
Claimants were represented in this proceeding by:
1.3.2.
Respondent was represented in this proceeding by:

1.4. The Arbitral Tribunal and Secretaries

1.4.1.
The present tribunal was constituted on 14 April 2004, as follows:
1.4.2.
The Tribunal’s administrative secretary was Dr. Claudia Frutos-Peterson, Counsel, ICSID, World Bank, Washington DC. The Tribunal also acknowledges the considerable support received from ICSID generally and particularly from Mrs. Mercedes Kurowski, Ms. Ashley Grubor, Ms. Michelle Salomon and Mr. Malkiat Singh.
1.4.3.
Ms. Lisa Parliament of McMillan Binch Mendelsohn, Toronto, Canada acted as Assistant to the Tribunal. Ms. Parliament’s appointment was made with the agreement of the disputing parties. As Assistant to the Tribunal she assumed the same obligations of impartiality, independence and confidentiality as the members of the Tribunal.

2. PROCEDURAL HISTORY

2.1. Original Award

2.1.1.
As stated above, the First Award was annulled in part. Given that a number of the parties arguments before us turn on both the First Tribunal’s holdings, and the analysis made by the ad hoc Committee of the First Tribunal’s reasoning, it is useful to highlight here aspects of the First Award and the Decision on Annulment of the ad hoc Committee.
2.1.2.
Because of its importance to an understanding of the First Award and the Decision on Annulment it is helpful to record the terms of Article 16.4 of the Concession Agreement - the exclusive jurisdiction clause - which provides:

"For purposes of interpretation and application of this Contract, the parties submit themselves to the exclusive jurisdiction of the Contentious Administrative Tribunals of Tucumán. "10

2.1.3.
Having joined to the merits all issues which had been raised as to jurisdiction, the First Tribunal, in the Original Award, rejected each of Respondent’s objections to jurisdiction. It also dismissed each of Claimants’ so-called federal claims (ie, claims arising from alleged acts or omissions on the part of the federal authorities). The First Tribunal’s overall conclusion as to those claims was as follows:

"In conclusion, the Tribunal finds that the record of these proceedings does not provide a basis for holding that the Argentine Republic failed to respond to the situation in Tucumán and the requests of the Claimants in accordance with the obligations of the Argentine Government under the BIT"11

2.1.4.
As to the provincial claims, the First Tribunal found that:

"...the nature of the facts supporting most of the claims presented in this case make it impossible for the Tribunal to distinguish or separate violations of the BIT from breaches of the Concession Contract without first interpreting and applying the detailed provisions of that agreement... Accordingly, and because the claims in this case arise almost exclusively from alleged acts of the Province of Tucumán that relate directly to its performance under the Concession Contract, the Tribunal holds that the Claimants had a duty to pursue their rights with respect to such claims against Tucumán in the contentious administrative courts of Tucumán as required by Article 16.4 of their Concession Contract".12

2.2. Annulment Decision

2.2.1.
As previously noted, the ad hoc Committee decided that the First Tribunal rightly held it had jurisdiction over the Claims before it, but that it had exceeded its powers when it failed to examine the merits of the claims for acts of the Tucumán authorities under the BIT.
2.2.2.
In reaching its decision on this latter point, the ad hoc Committee observed:

"...where the "fundamental basis of the claim " is a treaty laying down an independent standard by which the conduct of the parties is to be judged, the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state or one of its subdivisions cannot operate as a bar to the application of the treaty standard. At most, it might be relevant - as municipal law will often be relevant - in assessing whether there has been a breach of the treaty. "13

"In the Committee’s view, it is not open to an ICSID tribunal having jurisdiction under a BIT in respect of a claim based upon a substantive provision of that BIT, to dismiss the claim on the ground that it could or should have been dealt with by a national court. "14

"A state cannot rely on an exclusive jurisdiction clause in a contract to avoid the characterisation of its conduct as internationally unlawful under a treaty. "15

"...it is one thing to exercise contractual jurisdiction (arguably exclusively vested in the administrative tribunals of Tucumán by virtue of the Concession Contract) and another to take into account the terms of a contract in determining whether there has been a breach of a distinct standard of international law, such as that reflected in Article 3 of the BIT. "16

"...whether particular conduct involves a breach of a treaty is not determined by asking whether the conduct purportedly involves an exercise of contractual rights. "17

2.2.3.
After noting that it was not its function to form even a provisional view as to whether or not the Tucumán conduct involved a breach of the BIT, and stating clearly that it had not done so, the ad hoc Committee nonetheless concluded that the conduct alleged by claimants, if established, could breach the BIT. Accordingly, it annulled the decision of the First Tribunal so far as it concerned the entirety of the Tucumán claims.

2.3. The Resubmitted Dispute

2.3.1.
Following the Decision on Annulment, on 29 August 2003, Claimants resubmitted the dispute to ICSID, seeking a determination of the merits of the claims with respect to which the Original Award was annulled. The resubmitted case continues to bear the same case number, assigned to the original case.

2.4. Pleadings and Agreed Procedural Timetable for the Resubmitted Dispute

2.4.1.
The present Tribunal was constituted on 14 April 2004 and held its first session with the parties on 7 July 2004 at the offices of the World Bank in Washington DC.
2.4.2.
At the first session, the parties confirmed that they had no objection to the constitution of the Tribunal. Following the expression of the parties’ views and in consideration of the agreements reached between the parties, a timetable for production of documents, written submissions and a substantive hearing was established.
2.4.3.
At this time, the parties also agreed, inter alia, that statements from witnesses who were not available for cross-examination at the oral hearing were not to be taken into evidence by the Tribunal. The parties further agreed to include with their written submissions not only their legal argument, but also all of the evidence on which they intended to reply for the legal arguments advanced therein. The parties agreed that the Tribunal was not to receive any testimony or other evidence that had not been introduced in writing, unless the Tribunal determined that exceptional circumstances existed. The agreement of the parties with respect to the submission of evidence and the attendance of witnesses proved significant during the course of the hearing, as discussed further below at 2.7.6 et seq.
2.4.4.
Prior to the hearing on the merits, and in accordance with the procedure and timetable established by the Tribunal (with subsequent amendments as to timetabling thereafter), the disputing parties made written submissions to the Tribunal as set out below:

(i) Memorial of Claimants, 24 November 2004;

(ii) Respondent’s Exception to the Jurisdiction of the Centre and the Jurisdiction of the Tribunal, 7 April 2005;

(iii) Claimants’ Counter-Memorial on Jurisdiction, 31 May 2005;

(iv) Respondent’s Reply on Jurisdiction (entitled Rej oinder Brief About Objections Raised), 21 June 2005;

(v) Claimants’ Rejoinder on Jurisdiction, 12 July 2005;

(vi) Counter-Memorial of Respondent, 29 November 2005;

(vii) Reply of Claimants, 15 February 2006;

(viii) Rejoinder Memorial of Respondent, 19 May 2006.

2.5. Argentina’s Objections to the Jurisdiction of the Tribunal

2.5.1.
In accordance with the agreed timetable, Claimants filed their Memorial on 24 November 2004.
2.5.2.
On 23 March 2005, approximately two weeks before the due date for the submission of its Counter-Memorial, Respondent filed an Exception to the Jurisdiction of the Centre and the Jurisdiction of the Tribunal, in which it raised objections to the jurisdiction of the Centre and this Tribunal. Those objections can be summarised as follows:

(i) Vivendi had not established itself as the successor-in-interest to CGE. Rather, through a series of complicated corporate changes that occurred after the filing of the first Request but before the filing of the Second Request, Veolia Environment succeeded to CGE’s majority shareholding in CAA and Vivendi currently owns only 5.3% of Veolia Environment’s issued and outstanding shares (on the date of the Second Request it held only 20.4% of such shares);

(ii) being presently only an indirect minority shareholder of CAA, Vivendi’s current claims are derivative and derivative claims are forbidden under both Argentine and international law;

(iii) with respect to CAA’s claims, CAA had not obtained its French nationality for protection pursuant to the terms of Argentina-France BIT and to the extent that it had acquired any protection under the treaty it had done so illegitimately through transfers and transactions in violation of the Concession Agreement;

(iv) CAA and Vivendi had failed to comply with Rule 36(2) of the ICSID Convention and Rule 2(l)(f) of the Institution Rules; and

(v) the ad hoc Committee’s Decision on Annulment precludes consideration of purely contractual claims (ie, for breach of the Concession Agreement). To the extent that the present Tribunal has jurisdiction, it is limited to claims for breach of the BIT which are grounded in allegations of conspiracy or based on facts which constitute a concerted effort by the Tucumán authorities to frustrate the Concession Agreement.

2.5.3.
On 12 April 2005, having considered Respondent’s objections to jurisdiction and the parties submissions of 1 and 7 April 2005, the Tribunal decided that Respondent’s objections required to be dealt with as a preliminary question. The parties thereupon exchanged a series of submissions on jurisdiction (as described in the next preceding section).

2.6. Decision on Jurisdiction

2.6.1.
After a two-day oral hearing on jurisdiction, held on 16-17 August 2005 in Washington, D.C., the Tribunal issued its Decision on Jurisdiction on 14 November 2005, rejecting each of Respondent’s objections.18
2.6.2.
Because Respondent continues to assert defences based on CAA not being a proper claimant under the Treaty,19 it is helpful to set out here a number of the findings made by the First Tribunal, the ad hoc Committee and this Tribunal in respect of Respondent’s successive jurisdictional arguments concerning CAA’s standing.
2.6.3.
In rejecting Argentina’s initial objections to jurisdiction, the First Tribunal found that:

"This case concerns a claim against the Argentine Republic submitted to ICSID by CGE, a French corporation that operates water and sewage systems in France and other countries, and also by CGE’s Argentine affiliate, CAA. "20

2.6.4.
The First Tribunal explained this finding in footnote 6 of the First Award in the following language:

"Respondent argued that CAA should not be treated as a French investor because this acquisition occurred after disputes had arisen between CGE and Tucumán (Resp. Mem. at App. B, Note relating to CGE’s Acquisition). CGE responded that the critical date for purposes of determining control under Article 25(2)(b) and under precedent interpreting the ICSID Convention is the date for consent to arbitration and that is the date in late 1996 when CGE submitted the dispute to arbitration. All parties agree that by late 1996 CGE had acquired the Dycasa shares.... For purposes of resolving the issues addressed by this Award, the Tribunal has determined that CGE controlled CAA and that CAA should be considered a French investor from the effective date of the Concession Contract. "

2.6.5.
The ad hoc Committee did not annul this positive finding; it expressly endorsed it.

"Moreover it cannot be argued that CGE did not have an "investment" in CAA from the date of the conclusion of the Concession Contract, or that it was not an "investor " in respect of its own shareholding, whether or not it had overall control of CAA. Whatever the extent of its investment may have been, it was entitled to invoke the BIT in respect of conduct alleged to constitute a breach of Articles 3 or 5. It is also clear that CGE controlled CAA at the time the proceedings were commenced, so that there was no question that the Tribunal lacked jurisdiction over CAA as one of the Claimants in the arbitration. In the circumstances, and for the purposes of the present proceedings, the Committee does not need to reach any conclusion on the precise extent of CAA’s and CGE’s treaty rights at different times. "21

2.6.6.
Ultimately, the ad hoc Committee concluded that "the Tribunal rightly held that it had jurisdiction over the claims."22
2.6.7.
Amongst the various objections raised as to the Tribunal’s jurisdiction, Respondent sought to rely on events subsequent to the date CGE submitted its claim to arbitration to show that Vivendi had not established itself as the successor to CGE.
2.6.8.
As to this aspect of Respondent’s objections, this Tribunal rejected Respondent’s allegation that there had been a change in the CAA’s corporate ownership subsequent to the Decision on Annulment of the ad hoc Committee. In doing so, we held that:

"The evidence before this Tribunal demonstrates that, in May 1998, CGE changed its name to Vivendi S.A., which then merged with several other companies to form the company Vivendi Universal. Vivendi Universal continues to this date to hold the majority stake in CAA that was acquired at the time by CGE. "23

"In these circumstances, the Tribunal has no difficulty whatever in concluding that the parties to the resubmitted case are the same as the parties below. "24

2.7. Hearing on the Merits and Evidentiary Matters

2.7.1.
A hearing on the merits was held from 24 July to 4 August 2006, (over 11 working days) at the seat of the Centre at the offices of the World Bank in Washington, D.C. The hearing was recorded by transcript.
2.7.2.
At the hearing, the Tribunal heard oral testimony from the following witnesses presented by Claimants:

Mr. Daniel Benquis Mr. Christian Lefaix

Mr. Charles-Louis de Maud’huy Mr. José Alvaro Padilla

Mr. José Manuel García González Ms. Dominique Perrier

Dr. Herman J. Gibb Mr. J. Alan Roberson

Mr. Gérald Guérin Mr. François de Rochambeau

Mr. Régis Hahn Mr. Walter Velarde

2.7.3.
The Tribunal also heard oral testimony from the following witnesses presented by Respondent:

Mr. Daniel Esteban Arancibia Mr. Angel Maria Garcia Pinto

Mr. Próspero Barrionuevo Mr. Raúl Gil Romero

Ms. Silvia Estela Courel Mr. Emilio Lentini

Mr. Franco Davolio Mr. Raúl Roque Topa

Mr. Fortunato Carlos Duguech Mr. Daniel Arturo Vaca

2.7.4.
In addition to the evidence received at the oral hearing, Claimants filed witness statements and/or expert reports from:

Daniel Benquis Régis Hahn

Alberto B. Bianchi Herve Jauffret

Carmen Broudeur Christian Lefaix

Juan Walter Velarde Carrion Alvaro José Padilla

Charles-Louis de Maud’huy Daniel José Paz

François de Rochambeau Dominique Perrier

Herman J. Gibb J. Alan Roberson

Gérald Guérin Christoph Schrueur

José Manuel García González José W. Vanetta

2.7.5.
Similarly, Respondent filed witness statements and/or expert reports from:

Daniel Esteban Arancibia Ismael Mata (replaces report of Francisco Sassi Colombres)

Próspero Barrionuevo

Jorge A. García Mena

Maria Silvina Bosio

Alejo J. Molinari

Gabriel Bouzat

Maria Gilda Pedicone de Vails

Daniel Chudnovsky

Jorge Carlos Rais

Francisco Sassi Colombres (report

replaced by that of Ismael Mata) Raúl Gil Romero

Sylvia Estela Courel Carlos F. Rosenkrantz

Franco Davolio Raúl Roque Topa

Fortunato Carlos Duguech Héctor Osvaldo Turk

Angel Maria Manuel Garcia Pinto Daniel Arturo Vaca

Juan Carlos Jiménez Daniel Enrique Yáñez

Michael C. Kavanaugh

Emilio Juan Lentini

2.7.6.
On 10 July 2006, Claimants advised Respondent and the Tribunal that one of its witnesses, Dr. Paz, would be unable to attend the hearing on the merits having become severely ill. At the Tribunal’s request, on 17 July 2006, Claimants provided a medical certificate describing Dr. Paz’s condition and his inability to participate in the schedule hearing.
2.7.7.
During the course of the hearing, Respondent advised Claimants and the Tribunal that Mr. Jorge Rais had also become ill and would not be able to attend the hearing as had originally been anticipated. At the Tribunal’s request, Respondent provided Claimants and Tribunal with a medical certificate describing Mr. Rais’s medical condition and his inability to participate in the scheduled hearing.
2.7.8.
The parties agreed that, having regard to the acceptable medical certificates that had been provided, the evidence of both Mr. Rais and Mr. Paz, as provided in their witness statements, was to be admitted in evidence before the Tribunal, despite their inability to attend the oral hearing.25
2.7.9.
Prior to the commencement of the oral hearing, by letters dated 14 and 19 July 2006, Respondent applied to the Tribunal, inter alia, for an order permitting one of its expert witnesses, Mr. Michael Kavanaugh, to testify by video conference, instead of attending in-person at the oral hearing. Claimants made their position known on Respondent’s application in their letters of 18 and 20 April 2006.
2.7.10.
On 21 July 2006, having considered the parties’ respective positions, the Tribunal denied Respondent’s application, noting that no reason had been provided for the proposed non-attendance at the oral hearing of Mr. Kavanaugh. The Tribunal indicated its willingness to reconsider Respondent’s application if Respondent substantiated, for good reason, why Mr. Kavanaugh could not make himself available to attend.
2.7.11.
At the commencement of the oral hearing, Respondent advised the Tribunal it had been unable to reach Mr. Kavanaugh and sought an order either to allow Mr. Kavanaugh’s evidence to remain on the record despite his absence from the hearing, or to permit Mr. Kavanaugh to testify by video conference.
2.7.12.
Claimants counter-applied, seeking an order from the Tribunal striking Mr. Kavanaugh’s evidence from the record in accordance with the prior agreement of the parties and having regard to the fact that no explanation had been provided as to Mr. Kavanaugh’s inability to attend.
2.7.13.
Initially, the Tribunal advised the parties that it would defer a ruling on the parties’ competing applications, preferring to give Respondent a further opportunity to contact Mr. Kavanaugh and to provide an explanation as to his reasons for non-attendance.
2.7.14.
On day eight of the hearing, Respondent advised the Tribunal that one of its former legal advisers had been aware at the time Mr. Kavanaugh’s witness statement was given that he would be unable to attend the hearing on the merits due to a prior commitment. The Tribunal was further advised that, although he had not yet been contacted, Mr. Kavanaugh was expected to arrive in Paris that night or the following day.
2.7.15.
Respondent thereupon renewed its application to have Mr. Kavanaugh’s witness statement received in evidence and for his cross-examination to take place by video conference. Claimants renewed their application to have Mr. Kavanaugh’s evidence stricken from the record.26
2.7.16.
After considering of the Parties’ respective position, the Tribunal denied Respondent’s application to present Mr. Kavanaugh for cross-examination by video conference and granted Claimants’ application to have Mr. Kavanaugh’s witness statements stricken from the record. The Tribunal was influenced, inter alia, by the number of opportunities Respondent had been given to explain the whereabouts of Mr. Kavanaugh and his reasons for being unable to attend the oral hearing and the unwillingness of Claimants to depart from the prior agreement of the parties that statements from witnesses who were not available for cross-examination at the oral hearing were not to be taken into evidence by the Tribunal. The Tribunal’s reasons are set out fully in the transcript.27
2.7.17.
Following the hearing on the merits, and in accordance with the directions of the Tribunal, the Tribunal received further written submissions as follows:

(i) on 23 August 2006, after the conclusion of the hearing on the merits, Claimants sought to file additional evidence not in the record to support alternative approaches to the calculation of damages. By letter dated 1 September 2006, Claimants explained that although "[t]o be sure, there are facts on the existing record that the Tribunal can use for that purpose", Claimants wished the Tribunal to exercise its discretion to accept further evidence offered by Claimants to give the Tribunal the "full picture" relevant to alternative calculation methods. In its letter dated 31 August 2006, Respondent objected to Claimants’ attempt to introduce such evidence. In Respondent’s view, even if the Tribunal sought further discussion from the parties as to the effects of the various methods of calculation on Claimants’ damages claim, the record was clear that no new evidence was to be introduced. The Tribunal communicated its decision to the parties by letter dated 15 September 2006, attached hereto as Schedule A. The Tribunal advised that it declined to exercise its discretion to accept Claimants’ new evidence;

(ii) on 25 August 2006 each of the disputing parties submitted a post-hearing submission;

(iii) on Days 10 and 11 of the hearing on the merits, to assist the parties in developing their closing arguments and post-closing submissions, the Tribunal noted various topics with respect to which the Tribunal thought it would be helpful if the parties provided summaries of the evidence. On 12 September 2006, Respondent submitted to the Tribunal various compilations and descriptions with respect to various of the governmental agencies that were relevant to the proceedings. On 13 September 2006, Claimants objected to Respondent’s submission on the basis that the submission was untimely. After carefully considering the positions of the parties, as expressed by Claimants in its letters of 13 September 2006 and 19 September 2006, the Tribunal has concluded that it will accept the summaries and compilations of existing evidence provided by Respondent. Although it might have been contemplated that the parties would submit all compilations and descriptions with their post-hearing briefs, this was not explicitly required by the Tribunal. The Tribunal notes that Claimants do not suggest that any of the materials provided by Respondent include evidence not already part of the record. In any event, the Tribunal has concluded that there is no actual prejudice to Claimants in permitting Respondent to present this material to the Tribunal;

(iv) on 29 September 2006 each of the parties made their respective initial submissions on costs;

(v) on 6 October 2006, each of the parties made submission commenting on the costs of the other party.

2.7.18.
On 25 May 2007, the Tribunal notified the parties that it had that day declared the proceeding closed in accordance with ICSID Arbitration Rule 38.

3. OVERVIEW OF THE DISPUTE

3.1. Tribunal’s Approach

3.1.1.
It is useful here to set out a summary overview of the disputing parties respective cases so as to provide the contextual backdrop for the next section of the Award -the Tribunal’s review of and findings regarding the facts relevant to the dispute.

3.2. Overview of Claimants’ Case

3.2.1.
To Claimants, this case is all about the mistreatment of a French investor by the authorities in the Argentian province of Tucumán. Almost immediately upon taking over the water and sewage services concessions for Tucumán, Claimants say that CGE / Vivendi and CAA were attacked by the provincial authorities and systematically deprived of their rights under the Argentine/France BIT. The provincial authorities are said to have used their regulatory powers to impose unilaterally modified tariffs, contrary to the terms of the Concession Agreement and at great cost to Claimants. They are said to have used their oversight powers to pepper the concessionaire with numerous, unjustified accusations while themselves acting in flagrant violation of the agreement. It is claimed that they used the media and the public stage to generate hostility in the citizenry towards the foreign Claimants and that they interfered directly with CAA’s customer relationships, inciting its customers not to pay their bills and abetting customer efforts to avoid their payment obligations. After forcing Claimants to renegotiate the Concession Agreement, they are said to have used their law making powers to reject or secretly to undermine the proposals that could have ended the crisis and saved the concession from disaster.
3.2.2.
Claimants argue that these alleged attacks destroyed the economic value of the Concession Agreement and that by mid-1997 CGE/Vivendi and CAA had no choice but to terminate the concession - the first time in CGE / Vivendi’s 150-year history in water concessions that it had been driven to terminate a concession for the fault of the grantor. After the agreement’s termination, Claimants say that they were held "hostage" by the Province and obliged to continue to provide services for a further ten months and, even after they were released from that obligation in October 1998, the provincial authorities continued their harassment, culminating in a series of targeted enactments to prevent CAA from pursuing lawsuits to collect outstanding invoices and, eventually from enforcing any judgments.
3.2.3.
These acts and omissions of the Province, which Claimants say are legally attributable to the Argentine Republic, constituted:

(i) a violation of the fair and equitable treatment standard, as expressed in Articles 3 and 5 (1) and (3) of the BIT,28 and

(ii) an expropriation of Claimants’ investment in its entirety, contrary to Article 5(2) of the BIT29.

3.2.4.
Having thus been deprived of their rights under Articles 3 and 5 of BIT, Claimants seek damages for the harms inflicted upon them, assessed on the basis of CAA’s losses, totalling US$ 3 1 6,923,000,30 plus interest, compounded from 27 November 1997 (the date as of which Claimants have calculated and stated their amounts claimed),31 plus their costs and expenses associated with the arbitration proceedings.

3.3. Overview of Respondent’s Defences

3.3.1.
To Respondent, this case exclusively involves contractual matters (ie disputes arising under the Concession Agreement) over which the Tribunal does not have jurisdiction.32 Respondent also says that CGE’s purchase of its controlling interest in CAA in June 1996 conflicted with the express terms of the Concession Agreement (under which the consent of Tucumán’s executive was required prior to the transfer). Such consent having never been granted, Claimants should not be allowed to pursue a claim for violation of Treaty rights which were acquired unlawfully.33
3.3.2.
Respondent asserts that, shortly after assuming the concession, without warning to an impoverished population and without noticeably improving service, CAA doubled the water bills in the first round of invoices sent to consumers. CAA then proceeded to destroy the confidence of the population by negligently delivering black, undrinkable and potentially unhealthy water over a period of many weeks. Respondent contends that this situation understandably caused consumers to revolt and, in some cases, to refuse to pay vastly inflated bills. CAA then made matters worse by responding to its customers’ grievances in a confrontational and aggressive manner.
3.3.3.
To the extent Claimants’ cite speeches made and actions taken by individual legislative representatives in response to their constituents’ grievances (improperly characterising their comments as arbitrary acts of the state), Respondent contends that that position is untenable. Bilateral investment treaties have never been deemed to protect investors from the consequences of their own mistakes, nor provide them with an insurance policy against the due exercise of the State’s regulatory activity. This is even more so the case when the service provided is as vital as the provision of water and sewage services.34
3.3.4.
When the Province wanted, and was within its rights, to rescind the Concession Agreement, CAA’s owners improperly exerted their wealth and influence to force the Province to re-negotiate the Concession Agreement on terms more favourable to CAA. Notwithstanding their success in imposing new contractual conditions on the Province, CAA then unilaterally abandoned and unlawfully terminated the Concession Agreement, once it realised it had lost the trust and goodwill of the people of Tucumán.35
3.3.5.
Faced with Claimants’ material breaches of the Concession Agreement, the Province had the right and the responsibility to take the requisite steps to ensure the availability of safe drinking water for its population on an affordable and accessible basis. Far from constituting an expropriation or unfair and inequitable treatment, Tucumán’s conduct merely discharged its responsibilities, both as a contracting party and as a government.36 On this basis, Respondent argues that Claimants’ case must be dismissed.
3.3.6.
Finally, in the event that the Tribunal should find that the Claimants are entitled to damages, Respondent says that these should be limited to damnum emergens and that Claimants have failed to provide appropriate and reliable evidence of such loss. Under no circumstances are Claimants entitled to recover any lucrum cessans.
3.3.7.
Like Claimants, Respondent seeks its costs and expenses associated with these proceedings.

4. FACTS

4.1.1.
A review of disputing party’s submissions, witness statements and the oral testimony given at the oral hearing indicates that, with few exceptions, the factual matrix out of which this dispute arises is either agreed or not seriously disputed. Put another way, most of the differences between the parties have to do with the implications arising from or the interpretation to be given to the events which unfolded. Real differences as to what, in fact, occurred or led to certain events exist in relation to four main areas. These involve:

(i) the causes and foreseeability of episodes of turbidity which appeared in the water in San Miguel de Tucumán in late 1995 and January 1996;

(ii) which of the disputing parties initiated (and what motivated) the parties’ attempts to re-negotiate the Concession Agreement, which commenced in early 1996, shortly after the manganese turbidity phenomenon;

(iii) whether the provincial water regulator, ERSACT, took regulatory action against CAA because of the latter’s failure to meet its contractual obligations and in order to ensure adequate supplies of clean and potable water, or as part of a campaign to harass CAA until it agreed to renegotiate the terms of the Concession Agreement; and

(iv) whether CAA had previously agreed to changes that were made to the 6 June 1997 legislative bill (which set out the terms of the proposed, renegotiated Concession Agreement) when the bill was amended in the course of being enacted as law No. 6826 on 13 June 1997.

4.1.2.
We set out in some detail below a summary of the facts most relevant to the dispute - either as agreed, not disputed or determined by the Tribunal. We then turn in Sections 5 and 6 to the party’s competing positions as to their respective rights and obligations arising out of what occurred.

4.2. Privatisation of Water and Sewage Services in Tucumán

4.2.1.
The privatisation of the water and sewage services in Tucumán coincided with a broader investment liberalisation effort across Tucumán and Argentina as a whole. Prior to the Menem presidency, which began in 1989, nearly all public services in Argentina were state-owned and operated. President Menem introduced an ambitious set of economic reforms, including the privatisation of many traditionally-government owned services. Most provinces, including Tucumán, adopted similar measures to assist with the national liberalisation efforts.37
4.2.2.
Before privatisation, Tucumán residents received water and sewage services in one of two ways. Most residents received services from the provincial entity (Dirección Provincial de Obras Sanitarias, "DiPOS"). Some residents, in areas not served by DiPOS, received services from municipalities, local communities, or private entities. Some residents did not receive any water and sewage services.
4.2.3.
Over the years, DiPOS experienced a number of challenges. By the beginning of the 1990s, DiPOS revenues covered only 30% of its expenses, with the remainder of its operating funds coming from state subsidies. Moreover, despite a cumulative inflation rate of approximately 60% between 1991 and late 1994, DiPOS did not raise its tariffs. DiPOS’s physical infrastructure was also deteriorating, and major investments were needed.
4.2.4.
On 17 January 1993, the Governor of the Province (then Ramón Ortega) issued Decree No. 7/1, declaring that the Province’s water and sewage services were to be privatised.38 About three weeks later, Tucumán invited national and international companies to submit bids for the water and sewage concession services in Tucumán.39
4.2.5.
On 15 April 1993, the provincial legislature of Tucumán ("Legislature") passed Law No. 6445, establishing the basic guidelines for the privatisation process. Law 6445 also provided that the Court of Accounts (of which more later) would oversee the privatisation process.40
4.2.6.
On 11 May 1993, Governor Ortega invited consulting firms to bid to advise the provincial authorities on the process of privatisation.41 A consulting contract was granted to Centro de Estudio de Transporte e Infrastructura S.A. ("CETI") in July 1993 and CETI issued its report in 1994. In its report, CETI, citing international health standards, said, inter alia, that fees for potable water services should not exceed 3% of a family’s income.42
4.2.7.
In response to the invitation to bid for the concession, representatives of five interested groups visited the Province at the beginning of 1993. One of the five groups was the consortium known as "Aguas del Aconquija" - later to become CAA ("AA Consortium" or "Consortium").
4.2.8.
On 18 January 1994, the provincial Legislature passed Law No. 6529, which established the minimum requirements for the concession and the mandate, powers and duties of the new provincial water regulator (the "Regulator" or "ERSACT", formerly "ERAT") which had been created by Law No. 6445 the previous year)43
4.2.9.
On 20 January 1994, all five interested consortia successfully pre-qualified to tender for the concession44 A copy of the "Bid Conditions" (a draft Concession Agreement was attached to the Bid Conditions as Annex XIII) was delivered to each of the five pre-qualified bidders on 10 May 1994.45
4.2.10.
Given DiPOS’s heavy reliance on provincial subsidies and its poor physical infrastructure, the provincial authorities understood that the decision to privatise necessitated a complete overhaul of the economics of the system. This meant that the Province’s Bid Conditions would need to be financially viable from a bidders perspective, while still accommodating the Province’s objectives. In short, given the Province’s political decision to shift the cost of services from the public treasury (through subsidies) to customers making use of the service, a significant tariff increase was inevitable.
4.2.11.
In presenting their proposed tariffs, the Bid Conditions required bidders to calculate an adjustment coefficient showing the projected increase in tariff rates for each category of user (Article 3.8.1). Article 15.3 of the Bid Conditions and Article 9.2 of the draft Concession Agreement provided that "[w]ith the exception of the Earnings Tax and Value-Added Tax (VAT) or those they replace, all other taxes, whether national, provincial, or municipal, affecting the concession-holder will be considered as costs for purposes of tariff calculation."46 (emphasis added)
4.2.12.
On 20 July 1994, in a step which later took on considerable importance, the Ministry of Economy issued Circular No. 2, which revised the Bid Conditions’ earlier requirements relating to the treatment of taxes as costs for the purposes of tariff calculation. Article 3.8.1 of Circular No. 2 provided that "[p]ursuant to Article 51 of Law No. 6529 and for selection purposes, the Offeror shall propose adjustment factors based on representative values for the quantity and effective rate for each category of user. In calculating said factors, municipal taxes and/or levies on the use of public property or the stamp tax payable on the concession agreement shall not be counted as costs of the concession."47 (emphasis added)

4.3. CAA’s Initial Bid, Improved Bid, and Bid Approval

4.3.1.
Despite five bidders having prequalified, only one bid was received on the 1 August 1994 tender submission date - that being the bid of the AA Consortium. At that time the AA Consortium comprised CGE, DYCASA, Roggio and Supercemento S.A. ("Supercemento")48
4.3.2.
It is not disputed that CGE and its partners analysed market conditions in Tucumán before preparing a bid for the concession49 Indeed, before the submission of its final bid in mid-1994, CGE conducted extensive additional analyses onsite in Tucumán (see para 4.3.7 below).
4.3.3.
The Consortium’s initial bid proposed a tariff adjustment coefficient of 1,941. Stated somewhat differently, a coefficient of 1,941 would have led to a 94% higher tariff than that being charged at that time by DiPOS.50 As required by Circular No. 2, the Consortium’s initial bid excluded taxes from the service tariff51
4.3.4.
The Bid Conditions upon which the initial bid was based required bidders to assume a final 85% collection rate from customers. Specifically, Article 3.8.4 provided that "in accordance with the provisions of Article 77 of Law N° 6529, Concessionaire shall be responsible for the degree of efficiency of its commercial system, and may not include in its plans or forecasts a non-payment rate higher than FIFTEEN PER CENT (15%) of its total billing."52
4.3.5.
On 22 August 1994, three weeks after the receipt of the Consortium’s bid, the Province’s "Pre-Award Commission" (made up of members of the Provincial legislature and the executive), established to review bids for the concession, recommended acceptance of the technical portion of the bid, after having received, presumably, satisfactory answers to several questions it had posed to CGE.53
4.3.6.
The Ministry of the Economy thereupon approved the technical portion of the initial bid,54 but requested the Consortium to consider revisions to the economic offer to provide a reduced tariff adjustment coefficient and an increased projected recovery rate.55
4.3.7.
At this point the Consortium seemed likely to be awarded the concession and officials from CGE and its partners began to conduct extensive analyses and preparations for the takeover and operation of the concession. Mr. Gérald Guérin, then director of CGE’s regional center in Orléans, France, was asked to coordinate these preparations and to serve as the Consortium’s general manager when it began operations.56 Technicians from the Consortium’s three-partner companies visited Tucumán as early as 1993 to analyse financial, technical and socio-economic conditions that the concessionaire would face. Subsequently, in October 1994, Mr. Guérin visited Tucumán as a representative of the Consortium to investigate, inter alia, DiPOS’s offices, the water and sewage treatment systems, and DiPOS’s laboratory and organisation structure.57
4.3.8.
As requested by the Ministry of Economy, the Consortium submitted an improved economic offer on 7 October 1994. The improved economic offer proposed a reduced tariff adjustment coefficient of 1,679. This was based on the Consortium increasing its projected recovery rates from 85% to 89 % in the first year, 90% in the second year and 91% in the third year.58
4.3.9.
All relevant government entities in Tucumán reviewed and approved the Consortium’s improved offer. The first approval came from the Pre-Award Commission. In a detailed report issued on 14 October 1994, the Pre-Award Commission concluded that the proposed tariff adjustment coefficient in the improved economic offer was reasonable from a commercial and economic perspective.59
4.3.10.
With respect to the increase to the projected collection rate, the Pre-Award Commission noted that:

"Despite progressive improvements in its commercial management, the DiPOS currently has not achieved a collection rate higher than 55%. In any event, the collection rate provided by the Bidder for billings on services is felt to be insufficient, given that it sets a figure of 85% at the start of the concession term, which gradually increases to 90% by the 15th year... Our own projections start from a collection index of 85% and attain 90% by the third year, and 95% after the eight year and through the end of the concession. These returns are considered to be reasonable taking into account the results achieved by the DiPOS and the improvements that can be achieved by effective private management as demonstrated in international experiences ".60

4.3.11.
The Pre-Award Commission concluded that "the values ultimately adopted (in the Consortium’s bid) are reasonable, taking into consideration the collectability indicators achieved by DiPOS and the improved efficiency expected from a private operator."61
4.3.12.
Subsequently, on 18 November 1994, the Tucumán legislature ratified the Pre-Award Commission’s recommendation to award the Concession to the AA Consortium.62
4.3.13.
Thereafter, on 26 December 1994, the Governor formally awarded the concession to the AA Consortium by Decree No. 35 1 2/3.63 In awarding the concession, the Governor cited, inter alia, the Pre-Award Commission’s opinion that the tariff contemplated by the amended bid was "just and reasonable". Approximately three months later, on 10 March 1995, Governor Ortega approved the draft Concession Agreement, pursuant to Decree No. 459/3,64 which was then submitted to the Court of Accounts for its review.
4.3.14.
In a 28 April 1995 report, a consultant to the Province, Dr. Ismael Mata, supported the tariff that had been proposed in the Consortium’s improved offer, stating his belief that the lower tariff adjustment coefficient of 1,679, combined with the two 10% increases provided for in the draft Concession Agreement, essentially implemented his earlier advice to the Province that tariff increases should be introduced progressively.65
4.3.15.
On 17 March 1995, the Court of Accounts, having completed its review of the draft Concession Agreement, issued Resolution No. 398/95, approving the draft, provided that the executive power made certain amendments. Specifically, the Court of Accounts stated that, until the executive branch corrects or modifies "...the contractual text in compliance with the hereinabove indications, neither Executive Order N° 459/3 nor the acts resulting as a consequence shall be executed...".66

4.4. Execution of the Concession Agreement and Delays in Takeover

4.4.1.
Prior to the execution of the Concession Agreement, a take-over date of 1 May 1995 had been projected. This date was subsequently delayed, along with the signing of the Concession Agreement, due to the intervention by the Court of Accounts and the Legislature’s Commission on the Oversight of the DiPOS Privatisation.67 The signing of the Concession Agreement was rescheduled for 5 May 1995, and the take-over for 11 May 1995. In light of further interventions by the Court of Accounts, the signing and take-over of services were delayed twice more.
4.4.2.
Pursuant to the Bid Conditions, the concessionaire was required to be a locally incorporated company.68 CAA was thus incorporated as an Argentine company on 17 May 1995, by the then members of the AA Consortium, CGE and the Argentine companies DYCASA and Roggio; Supercemento having left the Consortium in March of that year.69
4.4.3.
The next day, 18 May 1995, Governor Ortega approved the final text of the Concession Agreement by Decree No. 852/3, and CAA and the Province executed the Concession Agreement.70 The takeover of the service was scheduled for 1 June 1995.71
4.4.4.
With the Concession Agreement now signed and in the belief that the transfer of the service would take place on 1 June 1995, CAA purchased supplies, leased buildings, transferred personnel and arranged for a caravan of trucks from Buenos Aires for the delivery of the supplies. However, a few hours before the transfer was to take place, a messenger delivered a copy of Decree No. 68/3-95 which again postponed the takeover until 14 June 199572
4.4.5.
On 20 June 1995, following the execution of the Concession Agreement, the executive branch issued executive order No. 1142/3, implementing the changes previously required by the Court of Accounts.73 CAA unsuccessfully challenged this Order by way of administrative appeal dated 11 July 1995.74
4.4.6.
On 18 July 1995, the Province responded to CAA’s administrative appeal of Executive Order 1142/3 with Executive Order No. 1371/3-1995. The latter confirmed the validity of the clarifications to the text of the Concession Agreement and set 22 July 1995 as the date for the takeover of the services by CAA. This was the date that CAA assumed the Concession.75
4.4.7.
The disputing parties differ on the reasons for the delay to the takeover of services, each blaming the other. The Province attributes the delay to CAA’s inadequate processes for hiring former DiPOS employees and to its failure to obtain insurance as required by the Concession Agreement.
4.4.8.
Although not much turns on this question, the Tribunal is satisfied that the CAA was not responsible for the delay.76 In the period before the takeover of the service, the Consortium partners, and, subsequently, CAA, operated with a staff of approximately 50 persons. Amongst the tasks of this core team was the hiring of permanent employees to operate the concession after the takeover. Article 8.1 of the Concession Agreement required CAA to employ a minimum of 1000 employees for at least the first three years of the concession and that the concessionaire hire 90% of its permanent employees from personal of the outgoing provider, DiPOS.77
4.4.9.
To comply with the Article 8.1 staffing requirements, Mr. Guerin and his staff instituted a hiring process initially based on the review of resumes of DiPOS employees. After an initial cut, the more promising candidates were interviewed by members of Mr. Guérin’s team, assisted by two psychologists recommended by Roggio. According to the minutes of the meeting of the "Joint DiPOS/CAA Commission" (which had been established in preparation for and to facilitate the takeover), CAA had conducted approximately 1,500 interviews by 17 April 1995. Further, CAA had successfully completed the process of interviewing and selecting more than 900 former DiPOS employees before the 1 June 1995 date initially scheduled for the takeover.78
4.4.10.
As regards the procedural requirements under Article 3.9 of the Concession Agreement, relating to the verification of CAA’s insurance policies, the Ministry of the Economy granted CAA approval with respect to its proposed insurance policies on 18 May 1995.79 The Court of Accounts subsequently certified that it had reviewed and was satisfied with the evidence that CAA had obtained insurance policies as required by the Concession Agreement.80
4.4.11.
Before turning to what occurred when CAA took over the concession it is useful to review briefly some of the more important provisions of the Concession Agreement, and to describe the branches of the provincial government and the provincial agencies which interacted with CAA during its stewardship of the concession.

4.5. Key Provisions of the Concession AgreementLegal Framework

4.5.1.
Article 1.6 of the Concession Agreement sets out rules for and the instruments to be considered (including their priority) in construing its provisions:

1.6 APPLICABLE LA W

’’The rules applicable to this Agreement according to Section 1.5 of the Bid Terms and Conditions, shall be Law 6529 as amended by Law 6537, Law No. 6445, Law No. 5995, Law No. 6071, Executive Order Agreement 7/1, Executive Order N° 288/93, and, where applicable, Law No. 5241.

In the event of any doubt or gap, the following documents shall be relied upon in the order indicated:

1.6.1. This Concession Agreement and the Executive Order granting approval thereof.

1.6.2. The awardee’s Bid and any improvement thereof as qualified by Memoranda 7 and 16 of the Pre-Award Commission.

1.6.3. The Bid Terms and Conditions for Di.P.O.S. Privatisation, approved by Executive Order 1053/3/94 and explanatory circulars thereof.

1.6.4. The Prequalification Terms and Conditions and explanatory circulars thereof.

This Concession Agreement shall be interpreted within the framework of the obligations described in the Bid Terms and Conditions and explanatory circulars thereof and in the hereinabove mentioned legislation. In the event of any discrepancies or contradictions between this documentation and the Concession Agreement, which do not allow for any interpretation maintaining in effect all of the sections in question, the provisions of this Agreement shall prevail. "

Tariffs

4.5.2.
The permissible tariff to be charged by CAA is provided in Article 12.1

"12.1. APPLICABLE TARIFF SYSTEM

...the Concession Tariff System shall be the following: The methods for calculating tariffs shall be the one currently used by Di.P.O.S. based on the provisions set forth in Executive Orders 9022/63 and 1333/74 issued by the Federal Executive Power and Provincial Executive Orders 2611/82 and 1277/85. The rules and elements necessary to do the above-mentioned calculation are included in ANNEX XX. During the first year of the Concession, the tariffs pertaining to each category and class of Users arise from applying the offered adjustment coefficient (K=1,679) to the tariff framework in force. The resulting values are included in ANNEX XXI. During the second year of the Concession, the tariffs pertaining to each category and class of Users arise from applying a multiplying coefficient equal to ONE AND TEN HUNDREDTHS (1.10) to the tariff framework in force during the first year (the values of which are included in ANNEX XXI). The resulting values are included in ANNEX XXII During the third and subsequent years of the Concession, the tariffs to be applied to each category and class of Users arise from applying a multiplying coefficient equal to ONE AND TEN HUNDREDTHS (1.10) to the tariff framework in force during the second year (the values of which are included in ANNEX XXII). The resulting values are included in ANNEX XXIII "

4.5.3.
Article 12.3 stipulated that these tariff values were the maximum amounts to be charged by the concessionaire.

Treatment of Taxes

4.5.4.
Article 9.2 addressed the question of taxes, levies and contributions as follows:

"9.2 INCLUSION IN TARIFF Taxes, duties and/or local contributions shall not be considered Concession costs. The same will apply to stamp taxes to be paid on the Concession Agreement. Any modification to a higher or lower figure, the introduction of new taxes and the abolition of existing taxes that may arise as from the date of presentation of the Bid, shall allow the renegotiation of tariffs and prices so as to properly reflect such modifications in costs. "

Investment Obligations

Concessionaire’s Rights of Enforcement

4.5.6.
To enforce payment by customers for the services provided, CAA was granted the right to cut off service to non-paying customers, subject to certain conditions specified in Article 12.9.81 CAA could not cut service where customers had made an agreement regarding payment of their debts or where ERSACT had issued an order temporarily preventing disconnection (such orders could only be issued in unforeseen or extraordinary circumstances and according to a "well-founded" decision).82

Termination and Damages for Breach

4.5.7.
Article 15.3 of the Concession Agreement permitted the Governor unilaterally to rescind the agreement under certain specific conditions, for example, in case of grave, unjustified violations by CAA of applicable laws, ERSACT regulations or contractual provisions.
4.5.8.
Similarly, under Article 15.4, CAA had the right to rescind in the event of acts or omission either by ERSACT or the Province that resulted in grave, unjustified violations of obligations under the Concession Agreement. Before terminating under this provision, CAA was required to provide the Province with 15 days prior notification and the opportunity to rectify its breaches.
4.5.9.
Article 15.8.3 of the Concession Agreement provided that if CAA’s rescission was due to material breach by the Province, then CAA could obtain an award of damages.

4.6. Provincial Authorities of Tucumán

4.6.1.
The province of Tucumán has three main branches: executive, legislative, and judicial.83

Legislative Branch

4.6.2.
The legislative branch comprises the "Legislature" which, by majority vote, has the power to enact laws and issue proclamations through resolutions.84 Such laws, proclamations and resolutions issued by the Legislature have binding effect throughout the Province.85
4.6.3.
Up to 40 individual legislators may be elected and the provincial constitution grants legislators immunity (fuero) for any opinions they express while discharging their legislative duties.86

Executive Branch

4.6.4.
The executive branch ("Executive") is made up of the Governor and the Lieutenant or Vice Governor.87 The Governor, in whom the powers of government and the provincial administration are vested, heads the Executive. Under the constitution, the Vice Governor is the president of the Legislature. During the pertinent period (late 1995 - 1999) this role was fulfilled by Vice Governor Raul Roque Topa.
4.6.5.
The Governor has the right to regulate / issue resolutions ("Executive Orders") on matters referred to in laws enacted by the Legislature, as provided by the provincial constitution.88 The Governor may also rule on general matters where there is "need and urgency", ie whenever exceptional circumstances prevent the completion of ordinary processes under the constitution. Such Executive Orders are provisional and must be ratified by the Legislature.89
4.6.6.
Ministers, the so-called "hands of the Governor", are non-elected officials, appointed by the Governor and are part of the Executive. During the Bussi government, there were five ministers: the Minister of Government and Justice, the Social Affairs or Health Minister, the Minister of Production, the Minister of the Economy, and the Minister of Education.90
4.6.7.
The Attorney General is the chief legal advisor to the Executive and the legal comptroller of the administration. The Attorney General is the non-elected head of the Attorney-General’s Department and ranks as a minister. He or she reports directly to the Governor. The Attorney General is empowered, by Provincial Law No. 3623, inter alia, to:91

(i) advise the Governor and his ministers on any legal matter, for which purpose the provincial Attorney General may request from the Province’s various administration offices such reports, records and files as may be necessary;

(ii) undertake such studies as may be necessary for the purpose of updating laws and regulations;

(iii) intervene in legislative acts and duties of the Executive; and

(iv) intervene in administrative matters in which the interpretation of the rules in force is at issue.

Judicial Branch

4.6.8.
The judicial branch is comprised of the Supreme Court of Justice, the Court of Appeals, the trial courts in the various forums such as the administrative courts, the labour courts, the criminal courts, the commercial and civil courts.92

Other Entities

4.6.9.
Three of the Province’s administrative entities played an important role in the events which unfolded and it is useful to provide a summary description of each. These are: the Province’s water regulator, ERSACT, the Defender of the People (also known as Defender of the Public, or the provincial Ombudsman -collectively, "Ombudsman") and the Court of Accounts.

ERSACT

4.6.10.
ERSACT was created on 15 April 1993 as an independent provincial agency by the initial privatisation bill, Provincial Law No. 6445. At all relevant times it was responsible for exercising enforcement powers related to the regulation and control of drinking water and sewage service in the province of Tucumán.
4.6.11.
ERSACT’s numerous powers and obligations included:

(i) enforcement of the provisions of Laws No. 6445 and Law No. 6529;

(ii) oversight of the concession and the services provided by the concessionaire to users;

(iii) monitoring of the concession holder’s compliance with its investment obligations, expansion plans, and its timely and proper compliance with the price and rate schedules;

(iv) addressing users’ complaints regarding deficient service or over-billing; and

(v) taking any necessary steps to meet these objectives, subject to the prevailing law and the applicable provisions of the Concession Agreement.93

4.6.12.
Under the applicable law, ERSACT’s finances depended on fees paid by the concessionaire.94

Ombudsman’s Office

4.6.13.
The office of the Ombudsman was created on 15 August 1995, by Law No. 6644.

Articles 1 and 2 of the law explain the purpose and the scope of the office:

"Art. 1 - Create the Office of the Defender of the People for the protection and defence of the legal rights and interests of persons and community, as contained in the National and Provincial Constitutions and in the laws passed as a consequence thereof before the acts, events and omissions of the Provincial Public Administration, with the provisional scope of this law, the head of which shall be an official called "Defender of the People ".

"Art. 2 - JURISDICTION - For the purposes of this law, the concept of provincial public administration, includes the centralised and decentralised administration; self-governed entities; State enterprises; State companies; State-partially-owned Companies; State-majority-owned Companies; and any other agency of the Provincial State whatever is its legal nature, name, special regulatory law, or place where its service is provided. This Office of the Defender of the People shall have jurisdiction over public non-state legal entities that exercise public powers, as well as over private suppliers of public utilities. In this case, and without prejudice to the remaining powers granted by this law, the Defender of the People may demand the competent administrative authorities in pursuance of the powers granted by law. The Office of the Defender of the People shall not have jurisdiction over the Judicial Power and the Legislative Power. "95 (emphasis added)

4.6.14.
The Ombudsman has the power to issue non-legally-binding recommendations only. The Ombudsman is an "independent agency" that must act fairly and equitably and according to law.96 The Ombudsman is obliged to examine all non-frivolous complaints or those made in bad faith and those holding public office are required to assist the Ombudsman’s Office in the pursuit of its duties.97

Court of Accounts

4.6.15.
The Court of Accounts, an administrative body created by provincial Executive Order N° 960/3 is responsible for reviewing the expenditure of public funds by any provincial governmental entity. It also has ex post facto control over all administrative actions, including actions taken by public officials, involving public funds.98 At the relevant time, the Court of Accounts was made up of a number of the directors, nominated by the Governor and whose appointment was then ratified by the Legislature. Between 1995 and 1999 directors served a fixed term and could only be removed following a special political proceeding known as "juicio politico". The directors are not part of the judiciary.99 Though technically not part of the judicial branch, the decisions of the Court of Accounts are binding and are subject to appeal before the Contentious Administrative Court of Appeals (Cámara Contencioso-Administrativo) which is part of the Judiciary.100

4.7. System Condition on Takeover

4.7.1.
The condition of the water and sewage facilities in Tucumán at that time they were transferred to CAA in late July 1995 was very bad and had declined rapidly in the months immediately preceding the transfer. This rapid degeneration appears to have been caused by a variety of factors including neglect (this set in following the April 1993 provincial approval of the privatisation - the Province generally withdrew its financial support while DiPOS was still the official system operator),101 abuse and looting.
4.7.2.
The general deterioration of the system which occurred at this time was not controverted in its essentials and is reflected in the minutes of the Joint DiPOS/CAA Commission:

"[Regarding the state of the facilities at the time of their transfer,] CAA... agrees with what was expressed by DiPOS, since it has also noticed a significant deterioration in the organization and in the state of the equipment, plant, etc., making it very onerous and difficult to place it in a normal working order."102

4.7.3.
Messrs. Guérin and Lefaix gave uncontradicted evidence that, at the time of takeover, many pipes in the network were broken, leaking or permanently backed up. Sewer pipes were overflowing, vehicles, equipment and tools were broken down, missing or stolen. Client files were scattered across the floors of DiPOS offices by the hundreds, and hundreds more files were discarded in heaps outdoors, near trucks and trash bins. DiPOS’s central laboratory similarly appear to have been looted and lacked nearly all supplies.103
4.7.4.
The Minutes of a Joint CAA/ERSACT meeting held on 27 July 1995 (five days after the take-over) characterised the condition of the laboratory as "a pitiful situation of total abandonment".104
4.7.5.
Indeed, in the period immediately prior to the takeover, the system had deteriorated to such an extent that many chlorination facilities were not in service and, in many cases, makeshift systems had been substituted for necessary chlorine injection pumps. In the result, CAA began voluntarily to provide DiPOS with basic supplies and equipment prior to the takeover, including chlorine and trucks needed to clear obstructed sewage lines.105
4.7.6.
In summary, the rapid deterioration experienced by the water and sewage system in the 10 months between the submission of CAA’s economic offer in October 1994 and the transfer of service in late July 1995 left CAA with a system in considerably worse condition than that it had analysed at the time it was preparing its bid.

4.8. Politics of Privatisation Change

4.8.1.
The pro-privatisation views of the Ortega government were not shared by the various provincial opposition parties of the day and, by the time of its execution in late 1994, the Concession Agreement had become something of a political flashpoint in the provincial election campaign that had begun earlier the year. The longstanding opposition of the Fuerza Republicana party, led by General Bussi, which in late 1995 was to succeed the Ortega led Justicialista party government is key to an understanding of the events that occurred in the six to nine months after CAA took control of the concession in late July 1995.
4.8.2.
In December 1994, during the provincial election campaign, General Bussi and his party had proclaimed their "most solid opposition to transferring the patrimonies of the Province".106 Vice Governor Topa explained in his written evidence "our party had announced that one of its government actions - if it was elected - would be to consider examining the details of the concession agreement... taking into account the interests of the users," and that the agreement had been "born defective".107
4.8.3.
At the municipal level, a number of municipalities publicly rejected the Concession Agreement, asserting legal invalidity. The Municipality of Aguilares "municipalised the former DiPOS" and established the Municipal Directorate for Sanitation Works, whilst municipal officials in Monteros formally sought suspension of the concession.108
4.8.4.
In his 2001 report to the World Bank (A Case Study on the Tucumán Water Privatisation - "Rais Report"), Dr. Jorge Rais, the then Undersecretary of Water Resources of the Federal Ministry of the Economy (and a witness for Respondent) explained the political dynamic of the times, "In order to avoid confrontation with the anti-privatisation propaganda of the political opposition, the Tucumán Government chose not to explain the objectives and procedures involved in the transformation of DiPOS, foregoing any kind of public relations strategy." He continued "[t]he decision to privatize DiPOS was generally rejected by the local political forces (one of which took over the government shortly thereafter)...".109
4.8.5.
General Bussi won the election on 2 July 1995 and took office on 30 October, shortly after CAA had issued its first invoices. By then, as detailed more fully below, political opposition was growing within the Legislature more generally and this set the political stage for the intense scrutiny to which the concession and the concessionaire were to become subject.

4.9. Initial Operation of the Concession

4.9.1.
It is Respondent’s case that Claimants precipitated a crisis of confidence in the concession by immediately increasing tariffs to the contractual maximum (doubling the amount of any water bill that customers had ever received before) and by failing to comply with its investment and water quality testing obligations (thus allowing manganese to permeate the domestic water supply, leading to weeks of turbid - at times completely black - water in customer’s taps).110 What actually occurred, however, points to a different explanation of the events of turbidity which occurred December 1995 / January 1996 and, to the extent it existed, any crisis of confidence in the Province’s water service.
4.9.2.
Upon the transfer of service, it is clear that CAA took emergency measures to reduce serious bacteriological risk, to improve water quality more generally and to upgrade the water and sewage infrastructure. In the first five months of the concession (August - December 1995) CAA refurbished the chlorination systems in drinking water facilities (replacing approximately 45% of the chlorination systems in Tucumán wells), arranged for the cleaning of the drinking water distribution system and spent almost US$140,000 to rebuild the former DiPOS laboratory and purchase supplies and new equipment.111
4.9.3.
Christian Lefaix, who served as CAA’s Manager of Operations from 22 July 1994 until mid February 1998, testified as to the poor state of the water and sewer services in Tucumán and the considerable deterioration of the system that had occurred in the six-month period before CAA’s takeover. He also described the water quality, testing, technical operations and improvements made by CAA to the water and sewer services between 1995 - 1998. The chart below summarises Mr. Lefaix’s evidence as to the improvements made during the last five months of 1995. His evidence was unchallenged and the Tribunal accepts it as an accurate record of CAA’s initial activity.

CAA’s Initial System Improvement112

1995 Last Five Months
Water network repairs 5,018
Change and renewed values 188
New interconnections (m) 5,070
Purging and removing encrustations from pipes (m) 18,150
New and renewed connections (m) 118
New chlorinators 115
Removing electrical panels 51
Change of well pumps 42
Repairs of sewer leaks 405
Repairs of manhole covers 166
Clearing sewer network obstructions 2,596
Renovating sewage pumping stations 2
Cleaning sewage pipes (m) 295,800
Water analysis (number of tests) 3,044
Water analysis (parameters of tests) 15,220

4.10. CAA’s First Bills to its Customers

4.10.1.
On 1 August 1995, CAA’s General Manager, Gérald Guérin, wrote to each of Tucumán’s municipalities explaining that, under the terms of the Concession Agreement, taxes were to be charged separately from the service tariff on CAA’s invoices and requested that each municipality inform CAA of the applicable taxes and contributions to be added to CAA’s invoices for its residents.113
4.10.2.
Shortly thereafter, on 4 August 1995, CAA wrote to ERSACT advising that CAA would soon start issuing bills to its customers and enclosing a copy of Mr Guérin’s letter to the municipalities. (A model invoice was also enclosed).
4.10.4.
On 17 September 1995, ERSACT published an advertisement in La Gaceta and Sigio XXI stating that the 67.9% tariff increase, the separate charges for municipal, provincial and federal taxes, and the separate 6% contribution to ERSACT were all mandated under the Concession Agreement.116
4.10.5.
Despite the substantial increase in charges to customers, CAA’s collection rate for its first invoices, for the July - August 1995 billing period, was 64.5%, although, as Mr. de Rochambeau testified under cross-examination, the actual collection rate was closer to 74%, given the fact that CAA had no addresses for 15,000 of its 170,000 customers when it sent its first bills.117

4.11. Post-Election Manifestations of Political Concern

4.11.1.
As noted in 4.8 above, by the time Governor Bassi took office, the political views about water services privatisation in general, and about the Concession Agreement in particular had shifted. As Vice Governor Topa confirmed during his cross-examination, both he and the Legislature held the view that the Concession Agreement had been "born defective":

"Not from a legal point of view, but with everything that was going on, evidently it was out of line in terms of equations, possibility of providing the service, and particularly the possibility of a community to pay. However much, legally it might have been perfectly well adjusted."118

4.11.2.
An example of the early concern of one legislator is Gumersindo Parajón’s proclamation on 6 September 1995, before CAA issued its first invoices, that "[t]he people must join the civil resistance and refuse to pay the bloated invoices they will receive for potable water and sewage services".119
4.11.3.
And Legislator Parajón’s concern was not the expression of a voice in the wilderness. Despite ERSACT’s prior vetting of CAA’s first invoices, the publication of its 17 September 1995 advertisements, and an ERSACT representatives’ confirmation on 28 September 1995 that

"We have not detected any error in the first invoice that CAA has sent to its customers: the invoicing coincides with what is set forth in the Concession Agreement and Annex XIII which the executive power signed for the concession of the sanitation service "120

the Legislature passed a resolution that same day ordering ERSACT to provide information on the tariff increase and inviting members of the public to provide input on tariff rates. The resolution also instructed the Court of Accounts to investigate the legality of each item that appeared on CAA’s invoices. And this occurred before the new government took office on 30 October 1995.121

4.11.4.
After 30 October 1995, opposition to the Concession Agreement increased steadily. On 31 October 1995, legislators argued for a re-evaluation of the privatisation process.122 About two weeks later, on 17 November 1995, the Attorney General suggested that CAA’s tariffs were unrealistic and advocated for "tariff levels that are adjusted to the economic reality which the province is facing."123 In this same time frame a number of individual legislators began to call for the outright suspension of CAA’s tariff structure and the outright repeal of the privatisation.124
4.11.5.
Despite CAA’s protestations to Governor Bussi that what was happening in the Legislature was harming its standing, impairing its ability to collect on its invoices and inconsistent with the Province’s obligations under the Concession Agreement to cooperate with the concessionaire, on 12 December 2005, the Legislature adopted Resolution No. 2 which recommended that the Governor unilaterally impose a temporary tariff reduction to a rate no more than 35% greater than the old DiPOS tariff. The tariff change sought by the Legislature was to be retroactive to 22 July 1995 (the date CAA assumed the concession) and would continue with "the establishment of a just and reasonable new tariff system."125
4.11.6.
The year ended with a legislative debate in which legislator Virgilio Núñez argued in favour of the departure of CAA, the "feudal lord" rather than to require the people to pay the "abusive" tariffs. Mr. Núñez concluded by comparing CAA officials to "pirates" taking the "treasures" that belong to the people of Tucumán".126
4.11.7.
Against this backdrop of political criticism and uncertainty, CAA’s initial collection rate for its first bills fell from 64.5% (for the July - August billing period) to 57.6% (for the September - October billing period) to 52.6% (for November - December billing period).127

4.12. Episodes of Turbidity

4.12.1.
Between December 1995 and February 1996, there were episodes of turbidity in the drinking water in areas of Tucumán. The disputing parties disagreed on the cause, extent and impact of these episodes. Extensive evidence was tendered and much time was spent during the oral hearing on this subject.
4.12.2.
For their part, Claimants contended that it was necessary to distinguish between localised "reddish turbidity" which occurred in certain areas in Tucumán in December 1995 and January 1996 (said to be caused by the iron and copper oxides which were an unavoidable by-product of the cleaning and system improvements made by CAA at this time, and which posed no risk to human health) and the "manganese turbidity" that occurred in late January and early February 1996 (caused by the unforeseeable entry of manganese from the bottom of the El Cadillal reservoir into the water system in San Miguel de Tucumán). The manganese turbidity was also said not to pose any risk to human health.
4.12.3.
According to Respondent, all turbidity was one and the same, having started in mid-December and lasting through February 1996. Respondent argued that CAA should have foreseen the risk of the possible appearance of manganese and that the "Blackwater" was eminently foreseeable and avoidable.128
4.12.4.
On these questions, the Tribunal concludes that there were two distinct and isolated incidents of water turbidity in the Tucumán water system, that neither incident posed any health risk to the people of Tucumán and that both incidents were resolved promptly in a manner which demonstrated CAA’s efficiency and professionalism.

Appearance of Reddish Turbidity

4.12.5.
In late 1995 and early 1996, turbid water of a reddish colour appeared intermittently in localised portions of the water system of the provincial capital, San Miguel de Tucumán ("San Miguel"). As was pointed out by Mr. de Rochambeau, reddish turbidity had appeared periodically when the system was under DiPOS management and was unlikely to have been startling to San Miguel consumers. This turbidity almost certainly resulted, as was the case in late 1995, from the harmless break-away and release into the water supply of by-products of internal corrosion such as iron and copper oxides.129
4.12.6.
Ironically, the reddish turbidity episode which occurred in December 1995 was a side effect of CAA’s initial system improvements. Corroded elements broke away from the pipes, in part due to increases in water pressure, and in part due to reversals of the water flow following installation of new interconnections in the network. When reddish turbidity occurred, CAA responded by purging the system and injecting caustic soda at water treatment facilities, which effectively resolved the problem.
4.12.7.
The Tribunal accepts Claimants’ witnesses evidence (that of Messrs, de Rochambeau, Lefaix, Roberson and Dr. Gibb) that the effects of the appearances of reddish turbidity were minimal. According to data maintained by CAA, the reddish turbidity appeared only in water that passed through or in that part of the system that was interconnected with cast-iron pipes, and affected, intermittently, only about 5-10% of CAA’s customers. Importantly, as was recognised by ERSACT itself, these episodes never posed any health risk and periodic repetition of the treatment process described above prevented any repeat occurrences.130

Appearance of Manganese Turbidity

4.12.8.
In late January 1996, the water system in parts of San Miguel de Tucumán also experienced the appearance of a dark, blackish turbidity due to the presence in the water supply of manganese from the El Cadillal reservoir. The manganese turbidity was far more widespread than the previous episodes of reddish turbidity and, given the unattractive appearance of the water, it had the potential to be, and no doubt was very upsetting to consumers.
4.12.9.
The manganese turbidity episode occurred as the result of a complex chemical reaction, the seeds for which had been sown over many years. In simple terms, manganese exists in the mud at the bottom of lakes (generally old lakes) and under certain circumstances dissolves in the lake water. Such water will turn dark in colour when it comes into contact with chlorine or oxygen.
4.12.10.
In order to understand why the manganese problem occurred, it is necessary to understand the characteristics of the water in the El Cadillal basin. During the summer, the water stratifies into two layers. The temperature in the top layer of water rises, which causes it to circulate and become highly oxygenated. The bottom lawyer is relatively cold, does not circulate freely and contains very little oxygen. The two layers do not mix well.
4.12.11.
Although El Cadillal is a fairly young lake, it turns out the silt at the bottom of the basin contained crystalised manganese. Manganese is soluble in unoxygenated water and in January 1996 the crystalline manganese in the silt in the bottom of El Cadillal dissolved in the unoxygenated bottom layer of water. Manganese crystals do not dissolve easily and will do so only under certain conditions. These occurred that January.
4.12.12.
As Mr. Lefaix explained in his testimony, the water in the El Cadillal basin had not been renewed for sometime (it having not rained for months in Tucumán and because the deep water outlets from the basin had been closed in an effort to prevent mud slides in the bottom of the reservoir comparable to those that had occurred in 1983). These factors, together with the presence of algae, further reduced the oxygen level at the bottom of the lake and increased the volume of the unoxygenated bottom layer of water. This confluence of events caused the manganese crystals to dissolve in the unoxygenated water at the bottom of the lake.
4.12.13.
During December 1995 and until mid-January 1996 CAA had been pumping water from the reservoir to the treatment plant through the raw water intake. CAA tested for manganese at the entrance of the treatment plant in December 1995 and January 1996 and no manganese was detected.
4.12.14.
At the time CAA took over the water service, a second water intake, located at the floating pumping station, was not working. During November and December 1995, CAA had renovated the surface pumping station to restore it to good working order. On 17 January 1996 it tested the floating pumping station. No manganese turbidity occurred at this time.
4.12.15.
However, by 22 January 1996, the lower layer of unoxygenated water had risen above the level of the raw water intake, which meant that the water then being pumped to the treatment station through the raw water intake contained dissolved manganese. Thus water containing manganese in solution was pumped throughout the network. However, since that water was not oxygenated, the manganese remained in solution and the water remained clear. Nevertheless, the manganese in the solution began to collect on the sides of the pipes throughout the system through the process of absorption.
4.12.16.
At about this time, the treatment of water taken from the reservoir though the raw water intake was becoming difficult and CAA decided to start pumping water from the renovated surface pumping station. Within hours of beginning to do so, turbidity started to appear in the water and at dawn on 26 January 1996 a generalised turbidity appeared in the San Miguel network. As a result of highly oxygenated water being pumped into the system from the surface layer of water from the floating pumping station, the manganese that had been dissolved in the water that was already in the system (or deposited on the walls of the pipes) precipitated and turned the water turbid.
4.12.17.
The disputing parties differed sharply as to the foreseability of a potential manganese turbidity problem at the time CAA took over the concession. Respondent contended that the potential problem was entirely foreseeable and could and should have been averted. Claimants argued that nothing in the history of the service suggested the possibility of such an occurrence and that its causes were unique and not reasonably to have been anticipated.
4.12.18.
On this point, the Tribunal accepts as accurate the evidence of Mr. Lefaix, that neither DiPOS nor CAA knew of the presence of manganese prior to the problem in January 1996 and that no historical records indicated that the silt at the bottom of the El Cadillal reservoir contained manganese.
4.12.19.
Mr. Lefaix’s evidence was confirmed by Respondent’s witness, Dr. Courel, who testified under cross-examination that DiPOS did not conduct sampling to detect manganese. As Dr. Courel was in charge of the water quality control service at ERSACT in January 1996, having worked at DiPOS since 1984, we are satisfied by this evidence, and the fact that there were no facilities in place to treat manganese at any of the treatment plants in Tucumán, that the episode of manganese turbidity which occurred in January 1996 was not foreseeable.131
4.12.20.
We are also satisfied that CAA’s response to the manganese episode was swift, professional and effective. CAA diagnosed the cause of the turbidity within hours after it appeared and adopted corrective measures in the early morning of 26 January 1996. The same day, CAA notified ERSACT that it believed it knew the cause of the turbidity.132 Within 72 hours of the peak in turbidity, CAA had in place a standard treatment programme to separate the manganese dioxide from the water, by injecting potassium permanganate and then using filters and decanters. It had also put in place an intensive sampling and analysis programme to prevent such future incidents. By the beginning of February, a few days after the dark turbidity appeared, water distributed through the network already had manganese concentrations below the level specified in the Concession Agreement.133 The Joint ERSACT / CAA Sub-Committee on Water Quality reached the same conclusion, noting as well that CAA’s monitoring of the water quality in the days following the incident which included more than 500 turbidity analyses per week, was "exceptional".134
4.12.21.
Although it is generally well understood that the presence of manganese in water poses no health risk, CAA nonetheless retained an Argentine doctor, an expert in water-borne infectious diseases, who conducted a detailed study and confirmed that no health risk existed. Throughout, the population was informed about the absence of health risks and CAA held a press conference shortly after the incident to explain the phenomenon to its customers. All in all, the manganese episode was resolved in about two weeks and the phenomenon gradually disappeared over that time.135

4.13. Regulatory and Political Responses to "Water Quality" and TurbidityEpisodes

4.13.1.
Despite the measures taken at the outset by CAA to improve the Tucumán water service, despite having confirmed that CAA’s first billings were mandated by the Concession Agreement and despite a six-month contractual grace period (against regulatory fines relating to quality controls),136 in early December, and over the next several months, ERSACT initiated a series of "regulatory" proceedings against CAA for alleged problems with water quality and its invoices. During this same period, members of the Executive and a number of provincial entities also became publicly engaged on these issues.
4.13.2.
An understanding of what motivated these regulatory and political responses to CAA’s initial operation of the concession, its billings and the episodes of turbidity described above is key to determining whether or not Claimants’ Treaty rights were contravened in this case.

101 Charges of Water Quality Control Breaches

4.13.3.
On 6 December 1995, ERSACT accused CAA of breaching its water quality control obligations under the Concession Agreement by not taking samples and testing in 78 different localities in the interior in August and September 1995.
4.13.4.
By letter dated 8 January 1996 (misdated 1995), CAA denied liability, requested that the 78 separate claims be consolidated into a single proceeding, and invoked its rights under the grace period.
4.13.5.
On 7 February 1996, ERSACT rejected CAA’s challenge and levied 78 fines on CAA for a total of US$78,000. On the same date, it accused CAA of 23 further breaches of its water quality control obligations under the Concession Agreement by not taking samples and testing in 23 locations in the interior in October 1995. (These regulatory charges did not result in fines at this time, but were dealt with 20 months later - ERSACT’s behaviour in late 1997 is dealt with later in this Award).
4.13.6.
Dr. Daniel Paz (CAA’s then Director of Legal Affairs) testified that, shortly after these first fines were imposed, he requested (and was granted) a meeting with Engineer Franco Davolio, the Sub-Interventor (the "Intervention" of ERSACT by the Executive on 26 January 1996 is described below), the second highest official at ERSACT. Given CAA’s increasingly difficult relationship with ERSACT, Dr. Paz had become more cautious in his dealings with the Regulator, and had sought an in-person meeting to confirm (against the originals) the completeness of the annexes to an ERSACT Resolution of which CAA had recently been notified. A meeting was fixed for late in the day of Friday, 16 February 1996 and Dr. Paz asked Mr. José Padilla, a notary public, to accompany him to make an official notarial record (Acta) of what transpired. (Under Argentine law, the events verified by a notary public in his or her presence and transcribed in the form of an Acta over his or her signature are to be considered as totally authentic, not only between the parties, but also with respect to third parties).137
4.13.7.
Although Engineer Davolio testified that the 16 February 1996 meeting never took place, the Tribunal is satisfied that the meeting occurred on the date and as described by Messrs. Paz and Padilla. (This on the basis of (i) the contemporaneous letter, prepared in the ordinary course of business, sent by CAA to Mr. Fogliata (Mr. Davolio’s superior) on 19 February 1996 (the Monday following the Friday meeting) that refers specifically to the meeting, its purpose, the discussion that took place and the fact that notarial records had been made,138 (ii) the testimony of Messrs. Paz and Padilla, and (iii) the contents of Mr. Padilla’s Acta No. 60.139 Under cross-examination, Mr. Davolio testified that he saw CAA’s confirmatory letter at the time but, rather than respond, he and Mr. Fogliata decided simply to "set it aside".140
4.13.8.
Because of its importance, that part of Notary Padilla’s record of the Paz / Davolio exchange on the subject of the 78 fines that had just been imposed by ERSACT, is set out fully below:

"Dr. Paz then told Mr. Davolio: "Don ’tyou think we ’re getting buried in paper from all these cases being fded lately? Take the case of the 78 fines: don ’tyou think a single case could have been filed, instead of 78? " Mr. Davolio replied, "[t]hat ’s how I see it. If it were up to me, I would resolve most of these matters with a telephone call. As far as the 78 fines, I agree, but my superiors are asking me to put pressure on Aguas del Aconquija to renegotiate the rates. "

"Dr. Paz then told Mr. Davolio, "Lately our engineers are spending more time on inspections in response to resolutions than on technical work. Do you think a relationship can be kept up under those conditions for 30 years? ".

"Mr. Davolio replied; " Look, this whole problem came about because of the high rates and, what is worse, you had the misfortune that the manganese thing happened, which it never had before in Tucumán. So until the rates are renegotiated like the government wants, the order from higher up is to keep applying pressure with whatever we’ve got"

Mr. Davolio then said "you have no idea how much I want to get out of here. I am sure that right now someone is on the phone saying, "What is Davolio doing meeting with CCA ’s [sic] people for over half an hour? But I don’t care. You two leave and I will deny everything ".141 (emphasis added)

4.13.9.
After the completion of his re-examination Mr. Davolio was invited by the Chairman of the Tribunal to reconsider his testimony - that the 16 February 1996 meeting never occurred - on the basis of his memory possibly being refreshed by reference to CAA’s 19 February 1996 letter to Mr. Fogliata. Mr. Davolio declined to do so, and stated "I’m absolutely certain it did not happen."142
4.13.10.
For the reasons noted at 4.13.7 above, the Tribunal accepts as accurate the testimony of Messrs. Paz and Padilla as to what happened on 16 February 1996.

Regulatory and Political Responses to the Episodes of Turbidity

4.13.11.
As noted above, episodes of red turbidity had been experienced on a recurring basis in San Miguel for many years and were known to be harmless. Indeed, on 19 January 1996, about a week before the occurrence of manganese turbidity, ERSACT confirmed that its own laboratory’s analyses showed that the water in San Miguel posed no risk to human health and was suitable for human consumption.143
4.13.12.
Similarly, the evidence is clear that the manganese turbidity, while disagreeable in the words of Gérald Guérin, even "repugnant"144, never posed a risk to human health. Claimants’ experts testimony to this effect, echoed ERSACT’s announcement, published in Tucumán’s two leading newspapers on 26 January 1996 that the manganese related turbidity did not pose a threat to human health.145
4.13.13.
However, instead of seeking to calm consumers during this difficult period, as might have been expected, government ministers and the executive behaved in a manner which undermined both the water services operator and the Regulator. On 24 January 1996, under the headline "Guraiib says that the water damages our health", La Gaceta reported Tucumán’s Health Minister telling the Legislature that the water in San Miguel could cause cholera, typhoid and hepatitis.146 Thereafter, on 31 January 1996, the Minister of Health, during a legislative debate, stated that CAA was supplying "bacteriologically contaminated water".147
4.13.14.
Vice Governor Topa testified at the oral hearing that the Health Minister had come to see him before making the former statement. His evidence was that, when told that the Minister believed the water could be a risk to public health, he presumed that a health specialist, such as the Minister, would have "conducted a number of analyses and tests with his technicians to say that the water was not drinkable" before making such public statements.148 However, no evidence of any such analyses was submitted by the Respondent.
4.13.15.
Two days after the Health Minister’s first statement, and on the day ERSACT published its advertisements reassuring the public that the manganese turbidity posed no health threat, Vice Governor Topa, acting on behalf of Governor Bussi, "took the decision to intervene in the agency", replaced its board of directors and appointed Mr. Franco Fogliata to serve as "Interventor", heading ERSACT as its "chief government inspector". (Prior to his appointment as Interventor, Mr. Fogliata had served - and continued to do so - as Tucumán’s Minister of Production.) Three days later, Mr. Franco Davolio, was appointed as Sub-Interventor of ERSACT, becoming Interventor on 7 March 1996, "upon the delegation of that office by the Minister of Production".149
4.13.16.
Under Argentine law, the intervention into an agency such as ERSACT is permissible only in an emergency. When an Interventor is installed, his or her job is not to take over the agency permanently, but to reorganise it and resolve the emergency.150
4.13.17.
Vice Governor Topa explained the Province’s decision to intervene ERSACT was based on "a public alert situation", "a public situation with extreme pressure on the government" which resulted from "a sudden increase in the tariff of over a hundred percent in the first bill", "the episode of water turbidity" and with the regulatory agency not responding with clarity, but with ambiguities.151
4.13.18.
That the decisions of ERSACT were "politicised" and directed by the Executive from that point forward is not in doubt. Mr. Davolio testified under cross-examination as to the decision / resolution making process when Mr. Fogliata was Interventor, and after:

"A. The regulatory body, its function was to oversee compliance with the contract in every respect, and when there was what is called a breach or non-performance, then a resolution was issued when that non-performance was well-founded and duly proven. That is what you call resolution against CAA.

Q. Thank you for that clarification. When such a resolution was issued, was the ultimate decision whether or not such a resolution should be issued a decision of Minister Fogliata?

A. Exactly. Until the day that I took over as Interventor, but despite that, even after that, I always consulted with him "... "Well, while he was the Interventor, its not that he would issue it. It would be drawn up by ERSACT. It would be taken to Minister Fogliata for him to it define or decide whether it was appropriate because he would have a political view or policy view beyond the resolution and in light of how the relationship with the company stood"152

4.13.19.
On the same day it was intervened, ERSACT issued Resolution 51/96 declaring CAA to be at fault for the manganese incident and imposing, as a penalty, 35 days free service for affected customers.

4.14. Regulatory and Political Responses to CAA’s Invoices

4.14.1.
As noted at 4.11.3 above, the legality of CAA’s first invoices (specifically, the addition of certain federal, provincial and municipal taxes to CAA’s service tariff) was put in issue initially by the Legislature’s 28 September 1996 Resolution calling for their examination by the Court of Accounts. This was followed shortly by the establishment of the Legislature’s Special Commission and the Attorney General’s call for the CAA’s "unrealistic" tariffs to be adjusted to reflect the economic reality the Province was facing.
4.14.2.
Given the importance that the tax component of CAA’s bills assumed in this dispute, it is useful to summarise briefly the taxes that were involved.
4.14.3.
When the decision was taken to privatise, the Province elected to impose six new taxes (or charges) on users of the water service. These were:

(i) "Ingresos Brutos" ("IB"), a provincial tax on CAA’s gross income equal to 2.5% of the service tariff;

(ii) PACIS, a municipal tax equal to 1.2% of the service tariff;

(iii) Contribución de Ocupación de Suelos ("OS"), a municipal tax that varied between the municipalities but was equal to 6.0% of the service tariff in San Miguel Tucumán;

(iv) a municipal retention levy ("RM"), collected on behalf of the municipalities, and equal to 2.0% of the service tariff;

(v) a federal value-added tax ("IVA"), being 21% of the sum of the service tariff and the IB, PACIS and OS taxes; and

(vi) "ENTE, a charge paid to ERSACT, being 6% of the sum of the service tariff and the IB, PACIS, OS, RM and IVA taxes and levies.

4.14.4.
The total value of the six taxes was approximately 38.7% of CAA’s service tariff (slightly higher when grossed-up as required), and it is Respondent’s present position that the parties dispute over taxes concerned only the addition to CAA’s tariff changes of IB (2.5%), PACIS (1.21%) and a municipal tax (assessment) on the supply of network water and sewage service (4.52%).153 Put another way, whatever may have appeared to be in issue at the time, disputing parties now agree that amounts totalling approximately 30% of CAA’s service tariff were properly to be charged on top of the 67.9% increase over the former DiPOS rates which was permitted in the first year (ie for an undisputed total increase of 98% over the DiPOS rate).
4.14.5.
Although ERSACT’s early position on the propriety of CAA adding the taxes in question to its service tariff is clear - its 17 September 1995 advertisement in La Gaceta stated:

"2. The billings by "AGUAS DEL ACONQUIJA S.A. " include a 67.9% increase over the rate schedule amounts for the last billing by DiPOS, plus the cost to the Concessionaire of provincial taxes and municipal taxes (on the rate for service net of VAT) and the 6% contribution to the Regulatory Agency ".154

Carlos Barrionuevo, ERSACT’s then head, told his board on 20 September 1995, that "the Concession Agreement contains absurd provisions" and asked the board to "issue an administrative act ordering a halt to the attempt to collect all these charges".155 The board minutes record a discussion about the scope of the Regulator’s power to interpret the contractual provisions, but a complete copy of the minutes not having been produced, it is not possible to say what then transpired.

4.14.6.
On 25 September 1996, five days after Mr. Barrionuevo’s presentation to the board, ERSACT requested the Attorney General to issue a report on the difference between the signed Concession Agreement and the Bid Conditions. Three days later, on 28 September 1996, the Legislature ordered ERSACT to provide information on the tariff increase, invited public comment on tariff rates and instructed the Court of Accounts to investigate the legality of each item on CAA’s invoices.
4.14.7.
On 16 November 1996, legislators from the governing party filed a bill to form a commission to investigate the tariff structure of the concession. At the same time, opposition legislators brought forward another bill to create a commission to investigate the privatisation process. The next day, both bills were merged and an Investigative Commission was formed for both purposes. Mr. Prospero Barrionuevo (a member of the legislature and the opposition Justicialista party - not to be confused with Carlos Barrionuevo, Head of ERSACT) was appointed to the Commission.
4.14.8.
Less than a month later, on 12 December 1996, and before receiving reports from the Attorney General, the Court of Accounts or the Investigative Commission, the Legislature adopted a resolution calling for CAA’s tariffs to be reduced -retroactive to 22 July 1995.
4.14.9.
A month after that, on 15 January 1996, the Attorney General issued his opinion, concluding that the Circular No. 2 (described above at 4.2.12) did not justify Article 9.2 of the Concession Agreement - this on the basis that such ministry circulars should be limited to the modification of non-essential provisions. However, no suggestion was made by the Attorney General that CAA had acted improperly, or that its invoicing procedures breached the Concession Agreement. Nor did he recommend that CAA be sanctioned, or that the Province act, on its own, to amend the Concession Agreement. Rather, he stated, "it is necessary to convene the board of directors of Aguas del Aconquija, through its chairman or representative, with the purpose of reaching an agreement that would make it possible to restructure the rate charge... in accordance with our findings.156 (emphasis added)
4.14.10.
About three weeks later (two weeks after it had been intervened), on 9 February 1996, ERSACT issued Resolution 170/96 in which it found CAA’s invoicing procedures to be "invalid acts" and "order[ed] that they be revoked or replaced for reasons of illegitimacy... in order to avoid [ERSACT] issuing an administrative decision that forces CAA to reduce the current rate charged".157 (emphasis added) The resolution also directed CAA, within 48 hours, to submit a corrected rate schedule based on the Attorney General’s opinion and subject to ERSACT’s approval. Until such approval was received, CAA was enjoined from issuing new invoices or collecting on outstanding invoices. The resolution also directed that it be distributed broadly to associations of users and consumers as well as to the Attorney General’s office.
4.14.11.
The next day, in a statement to the press, the Ministry of the Interior, Alberto Germano, stated that CAA’s Concession Agreement should be rescinded, because CAA provides "a very bad service with a high tariff’. The Minister went on to say that the Province was prepared to take over the concession.158
4.14.12.
On 13 February 1996, ERSACT issued Resolution No. 173/96, directing that CAA grant affected customers a 35-days billing holiday (from 2 January to 6 February 1996). ERSACT subsequently affirmed the billings holiday order by Resolution 213/96 on 19 March 1996.
4.14.13.
CAA appealed Resolution 170/96 on 14 February 1996. In doing so, it disagreed with the Attorney General’s opinion, but noted that, even if the opinion were accepted, the resolution was inconsistent with it.
4.14.14.
On 15 February 1996, in a statement to the press, Governor Bussi announced the intention of his government to rescind the Concession Agreement:

"Journalist - is the agreement going to be rescinded? Is the Executive Branch continuing to pursue this issue?

Mr. Bussi - that is the intention. Unless there is a miracle, and I do believe in miracles, but...

Journalist - do you believe that such a miracle is close?

Mr. Bussi - No, no. I have said this before and I will say it again: I don’t see any possibility of a miracle any time soon"159

4.14.15.
The next day, 16 February 1996, the Court of Accounts rendered its opinion. It endorsed the Attorney General’s interpretation and found that CAA should not be invoicing for IB (2.5%) and PACIS (1.21%) taxes. It concluded that the RM (2%) tax was the only municipal tax that could be charged on top of the service tariff (emphasis added). The Court of Accounts endorsed the Attorney General’s recommendation that ERSACT negotiate with CAA to resolve the issue.160
4.14.16.
That same day an advertisement appeared in AMBITO Financiero which was titled "The Water Problem in Tucumán, Governor Bussi’s report to the Tucumán Legislature on "Aguas del Aconquija" ". The advertisement appeared over Governor Bussi’s name and title. The advertisement contained, inter alia, the following relevant statements:

"the company... has not given much thought to the consequences of trying to convert its breach of contract into a political issue..."

’’the concessionaire company has been systematically ignoring and evading performance of the agreement. "

"neither... the Ambassadors of France and Spain have had to suffer what the 700,000 Tucumán residents had to suffer for a good part of the month of January, during which substance which was anything but water was distributed through the pipes. That substance was neither potable nor usable ".

"the possible application to Aguas del Aconquija of the maximum sanction set forth in the Concession Agreement - Rescission - is not a capricious action by Governor Bussi. It is the response to a unanimous request by the entire social, political, guild and business spectrum of the province, duly represented by the Honourable Legislature, which has been supporting without hesitation the actions undertaken by the Executive Branch. "

"I will not hesitate to personally move forward with the administrative measures, as well as to also drive the legislative and legal actions that may be necessary to resolve the problem affecting the people of Tucumán",161

4.14.17.
On 19 March 1996, ERSACT issued Resolution 212/96 by which it (i) rejected CAA’s appeal, (ii) maintained that CAA had breached the Concession Agreement, (iii) stated that ERSACT had not approved CAA’s invoice, (iv) ordered CAA to correct its future invoices and credit users for the items improperly included on past invoices, and (v) informed the Executive Branch of CAA’s "serious and unjustified failure" to comply with ERSACT’s previous order, Resolution 170/96162. The Resolution stated that Resolution 170/96 had immediate effect, despite the pendency of CAA’s appeal, and declared CAA to be in violation of its terms and required notification, amongst others, of the existing users and consumer associations. In support of its decision, ERSACT stated that the Attorney General’s opinion, with which it agreed, "leads to the need and obligation to take urgent measures in view of the serious losses that may be caused, or to attenuate those that have already been caused due to the incorrect billing, in addition to the great social repercussions". It went on to note that "the user is the first victim of this situation because of the undue funds charged, and the disobedience is serious... because of the high amounts involved... (emphasis added)
4.14.18.
As regards the amounts involved, the three taxes at issue (IB, PACIS and OS - or, as now argued, "the municipal taxes on the supply of network water and sewerage services"), total approximately between 8.2 - 9.7% of the service charge. Having regard to Mr. de Rochambeau’s uncontradicted evidence, that the average monthly invoice for water and sewage services in Tucumán during CAA’s operation of the concession was US$25.92. The Tribunal finds that the amount involved in the party’s dispute concerning "improper" charges was approximately US$2.10 - US$2.50 per month - even in Tucumán, a relatively small amount for the average customer. However, from CAA’s perspective, a 3.7% reduction in revenue was substantial when looked at against the 11.7% rate of return it projected when it made its improved economic offer.163
4.14.19.
On 21 March 1996 the Attorney General advised customers "not to pay the last invoice (January - February) until the company responds to the order issued by ERSACT instructing it to refrain from charging for the service provided from January 6 through February 6".164

4.15. First Attempted Renegotiation

4.15.1.
On 20 February 1996, Governor Bussi wrote to CGE’s President, inviting him to a meeting to discuss "the grave situation" facing the Province and CAA.
4.15.2.
The requested meeting by the Governor took place on 26 February 1996. CAA and CGE / Vivendi were represented by Mr. de Maud’huy (CAA’s Vice Chairman and a representative of CGE) and Mr. Erize (a director of CAA and counsel to CAA/CGE). They were accompanied by a representative of the French Embassy. Mr. de Maud’huy testified as to what occurred at the meeting. His testimony was not contradicted and the Tribunal accepts his evidence in this regard.
4.15.3.
Mr. de Maud’huy recalled that Governor Bussi began by saying that there had been a "misunderstanding" between himself and CAA. He went on to say that taxes were part of CAA’s tariff, that CAA must not charge customers the taxes in addition to its tariffs and that this was sufficient cause for the Province to repudiate the Concession Agreement. Nevertheless, in the light of President Menem’s upcoming trip to France, he (Governor Bussi) was willing to negotiate a solution. He requested CAA’s investors to bring forward a proposal for lower tariffs and corresponding adjustments to related contractual provisions that would correspond to the Tucumán population’s ability to pay. Mr. de Maud’huy replied that the tariffs in the Concession Agreement were consistent with the terms set by the Province at the time of privatisation and had been calibrated to the population’s ability to pay. However, Mr. de Maud’huy indicated that, if necessary, CAA/ CGE would negotiate to resolve the crisis. The Governor responded that the investors in CAA had not answered his earlier invitation to renegotiate and that CAA did not seem fully to understand the risk it faced that the Concession Agreement might be declared null and void. He indicated that he was not prepared to continue to debate, that he intended to turn the matter over to the provincial Attorney General, and that if CAA wished to resolve matters by negotiation it should submit a firm proposal on new tariffs. He concluded the meeting by saying that he would wait only eight more days before rescinding the Concession Agreement.165
4.15.4.
On 6 March 1996, CAA submitted a proposal to Governor Bussi for a renegotiation of the Concession Agreement. The proposal contemplated, inter alia, a reduction in the concession area, a reduction in the investment obligations, a change in the tariff system to one based on actual consumption, and a reduction in tariffs.
4.15.5.
On 11 March 1996, Minister Germano, the Head of the Ministry of Government, rejected CAA’s proposal. He noted that the company did not appear to have "welcomed the suggestions" of Governor Bussi.166
4.15.6.
On 18 March 1996, Minister Germano advised CAA of the government’s preconditions for negotiation, which included an immediate tariff cut of 30%.
4.15.7.
On 27 March 1996, CAA and representatives of the Province convened as the "Commission for the Renegotiation of the Concession Agreement" under the chairmanship of Minister Germano. In the course of the meeting, the parties agreed they would work on an analysis of a proposal submitted on the same date by CAA (in essence similar to the proposal submitted on 6 March 1996). The parties also agreed on terms to govern the period during the negotiations in March and April. Specifically, the parties agreed to a temporary 25% tariff reduction and a suspension of CAA’s investment commitments. They also agreed, in principle, on a future reduction in the size of the concession area and on CAA’s proposal to transition to a new usage-based rate structure.167
4.15.8.
As a result of the agreement in principle reached at this meeting, the Province agreed to suspend enforcement of ERSACT Resolutions 212/96 and 213/96 for the duration of the renegotiation. This decision was duly implemented on 14 April 1996, by ERSACT Resolution No. 289/96.168
4.15.9.
The effect of the suspension of these resolutions 212/96 and 213/96 was to permit CAA to recommence invoicing its customers for its services (based on a 25% reduction) as well as for the disputed taxes and fees. ERSACT’s 35-day billing holiday was also suspended (but not the 10-day billing holiday which CAA had offered at the time of the manganese turbidity incident). The Province also agreed to encourage the payment of all outstanding bills, by instalments over 90 days.

Failure of First Renegotiation

4.15.10.
Although the first renegotiation initially seemed to promise an end to the crisis, it foundered as a result of concerns arising from the publication, on 10 May 1996, of the Legislature’s "Final Report of the Special Investigative Commission on the Privatization of DiPOS".169
4.15.11.
The report criticised the privatisation process and expressed concerns of corruption. According to the report, the Attorney General was expected to initiate criminal investigations as to the alleged irregularities. The Governor was also expected to take appropriate action, including nullification of the Concession Agreement if necessary.170
4.15.12.
Although the Attorney General later concluded that the report’s charges were unfounded, it intensified criticism of CAA. Minister Germano stated that the "Government could not continue to deal with criminals" if the Legislature concluded that the Concession Agreement "was riddled with ‘irregularities’ that would be felonies" and on 14 May 1996, the renegotiations were suspended pending instructions from the Legislature.171
4.15.13.
A few days later, a decision by ERSACT brought to an end the provisional arrangements that had been agreed to govern the first negotiations. On 16 May 1996, ERSACT issued Resolution No. 322/96, reactivating Resolutions No. 212/96 (prohibiting CAA from charging for the municipal taxes separately from its service tariff) and No. 213/96 (prohibiting CAA from invoicing for services from 2 January through 6 February 1996).172
4.15.14.
Although the Governor ordered the Interventor to repeal Resolution No. 322/96 (ERSACT complied with this direction on 29 May 1996, by issuing Resolution No. 333/96), the Court of Accounts moved to condemn the legality of ERSACT’s latter resolution.
4.15.15.
Also, on 30 May 1996, the Ombudsman issued his own resolution expressing his approval of ERSACT’s Resolution No. 212/96 and, on the next day, established a claims procedure to permit CAA’s customers to refuse to pay their water and sewage bills.173

4.16. Second Attempted Renegotiation

4.16.1.
Despite the unsettled environment and the failure of the first attempted renegotiation, a second round of renegotiations commenced in mid-1996. This was conducted with the assistance of representatives of the federal government (in particular Under-Secretary for Water Resources, Dr. Jorge Rais) and the World Bank. For the duration of these negotiations, CAA agreed not to exercise its right under Article 12.1 of the Concession Agreement to increase tariffs by 10% in the concession’s second year.
4.16.2.
The second attempted re-negotiation continued through the Argentine winter and reached its tentative conclusion on 30 August 1996, when the parties executed a "Framework Agreement for the Reformulation of the Concession Agreement for the Water and Sewage Services" ("Framework Agreement").174 On the same day, the Province, the national government and the World Bank signed a letter of intent to provide assistance in implementing any agreement between the parties modifying the Concession Agreement.175
4.16.3.
The Framework Agreement provided, inter alia, for the reduction of the concession area, changes in CAA’s personnel structure, reductions in billings to customers and compensation to the concessionaire for reduced billings, inter alia, through decreased investment obligations. Under clause four of the Framework Agreement, customers would receive an average reduction in billings of 28% over a set period. In contrast to the terms of the 1995 Concession Agreement regarding separate charges for service and tax, the reduction in the Framework Agreement applied to "total billings" - in other words, to the sum of the service tariff and the taxes and other charges on the bill.
4.16.4.
The Framework Agreement was then sent to the Legislature for ratification. The parties had agreed that, if the Legislature rejected the Framework Agreement, the Concession Agreement would remain in force as originally negotiated.
4.16.5.
Despite the Province’s participation in this second round of renegotiations, the Concession Agreement, CAA’s billings and its attempt to collect on its invoices remained subject to attack whilst the second renegotiation was in process.
4.16.6.
On 28 June 1996, Carlos Barrionuevo - the former head of ERSACT and now adviser to the Court of Accounts - issued a report commissioned by the Court of Accounts questioning CAA’s invoicing practices.176
4.16.7.
Further to this report, the Court of Accounts reiterated its opposition to ERSACT’s Resolution 333/96 and took the position that CAA should not bill its customers separately for municipal taxes and that ERSACT Resolutions 212/96 and 213/96 should be reinstated.177
4.16.8.
On 15 August 1996, CAA put ERSACT on notice that, while it would comply with any official order not to invoice customers separately for municipal taxes, it would hold the Province responsible for the significant losses that would result.178
4.16.9.
On 22 August 1996, ERACT officially accepted the opinions of Mr. Barrionuevo and the Court of Accounts, and issued a Resolution 484/96 which, once again, resurrected Resolutions No. 212/96 and 213/96.179 Thus, CAA was again prohibited from charging customers for municipal taxes in addition to its service tariff and the 35-day billing holiday was again re-imposed.
4.16.10.
In mid-October 1996, CAA announced publicly that it would cut-off or reduce water to those who were in arrears in the district of Yerba Buena, a residential area near the capital.
4.16.11.
On 4 November 1996, the Court of Accounts, which had been sent a copy of the Framework Agreement for its review, issued a highly critical opinion of the agreement, concluding that it would violate laws No. 6445 and No. 6529 (the original privatisation statutes).180
4.16.12.
At about the same time, Legislator Próspero Barrionuevo published a form letter, advising members of the public of their rights, setting out procedures to be followed if they felt that had a grievance against CAA regarding its invoices for the quality of that service. He included a model letter which customers might use to make such claims. He also explained that CAA was not entitled to cut them off from water if they had a valid claim against the company.181 Legislators Barrionuevo, Seguí and Sangenis also set up a table in the downtown area of San Miguel to advise customers on how to use the legal system to avoid losing service if they chose not to pay their bills.
4.16.13.
On 22 November 1996, the Ombudsman also volunteered his office to advise customers on how to file claims against CAA.
4.16.14.
On 2 December 1996, against this backdrop, the Framework Agreement came before the Legislature for debate and ratification. It was rejected on 3 December 1996, with the Legislature declaring that it "did not conform to the legal framework derived from laws Nos. 6445 and 6529, the Bid Conditions, and the Company’s Economic Proposals".182 At the same time, the Legislature refused to reaffirm the original Concession Agreement, stating that it "must be readjusted". The Legislature also concluded that the separate billing of certain taxes under the Concession Agreement, and the 10% increases provided in the second and third year of the concession were without legal basis.
4.16.15.
On 10 December 1996, following the political collapse of the Framework Agreement, the Ombudsman issued Resolution 504 indicating that the Province would provide a legal defence (including the possibility of seeking an injunction) if CAA sought to challenge non-payment or sought to cut off the service of nonpaying customers.183
4.16.16.
On 26 December 1996, after the failure of the second attempted renegotiation, CAA and CGE initiated ICSID arbitration proceedings. The Province and ERSACT were notified on the same day.

4.17. Third Attempted Renegotiation

4.17.1.
A third and final attempt to renegotiate the Concession Agreement began in early 1997.
4.17.2.
On 8 January 1997, Vice Governor Topa informed officials of CAA/CGE that the Province would engage in further renegotiations if the ICSID proceedings were suspended. This was followed by a series of meetings between CAA and CGE officials and officials of the federal and provincial authorities to discuss possible renegotiations. Federal officials significantly increased their involvement in negotiations following the initiation of the ICSID proceedings.
4.17.3.
Despite these meetings, on 17 January 1997, Vice Governor Topa publicly stated that the original Concession Agreement was "inapplicable" and "unenforceable"184 and on 20 January 1997, the provincial Ombudsman issued a further resolution concluding that CAA had breached Article 12.7.3 of the Concession Agreement and requiring CAA to reimburse its customers for legal fees incurred in the course of legal actions brought against them by CAA for nonpayment of bills.185
4.17.4.
On 7 February 1997, Governor Bussi delivered a note to CAA and CGE inviting them to renegotiate the Concession Agreement under the auspices of an "AdHoc Negotiating Commission" consisting of a variety of stakeholders from across the political spectrum in Tucumán.186 The invitation was accepted and, on 27 February 1997, CAA and CGE agreed to suspend the pending ICSID proceedings as of the commencement of the negotiations on 3 March 1997.187 CAA submitted a new proposal for renegotiation of the Concession Agreement to the Ad Hoc Negotiation Commission on 3 March 1997.
4.17.5.
A week later, Vice Governor Topa gave a television interview, during which he discussed the potential imposition of a two to three year moratorium on payment of all outstanding customer invoices - because the invoices exceeded customer’s economic means and were issued "under great uncertainty".188
4.17.6.
During a meeting of A\q Ad Hoc Negotiating Commission on 15 March 1997, the parties discussed revised terms for the concession which were incorporated into a signed "Acta",189
4.17.7.
On 18 March 1997, on the same day that Governor Bussi was later to appear on television expressing his approval of the revised Concession Agreement -provincial legislator Pedicone led a public rally against CAA in San Miguel. During the course of the rally legislator Pedicone attacked CAA’s intentions in Tucumán, and described CAA and its investors as "French sons of bitches:" as regards the proposed revisions to the Concession Agreement he said:

"the Province has put things in their place... the French have had to take one step back in their excessive ambitions which aimed at getting the people, and above all the poorest people, to have a really hard time as a result of the subjugation of the previous government resulting from the privatization.190

4.17.8.
On 8 April 1997, the parties formally endorsed the Acta and the "8 April Agreement" was signed by Governor Bussi, the President of Legislature, CAA, a representative of Tucumán’s union of sanitary workers, as well as the federal Undersecretary of Water Resources.191
4.17.9.
On 22 April 1997, Governor Bussi submitted a draft law to the Legislature to implement the 8 April Agreement.192 He explained that the draft law, which contained a few minor agreed modifications to the 8 April Agreement, was based on the 15 March Report and the 8 April Agreement (the draft law included several exhibits, amongst which was a detailed draft of the proposed new Concession Agreement).193
4.17.10.
On 6 June 1997, Governor Bussi withdrew the original legislative bill from the Legislature and submitted in its place a modified legislative bill ("Second Version of the Revised Concession Agreement").194
4.17.11.
Between 6 June 1997 and 13 June 1997, the Tucumán Legislature made changes to the Second Version of the Revised Concession Agreement, which it approved on 13 June 1997 as part of Law No. 6826.
4.17.12.
Ultimately, on 13 June 1997, the Legislature enacted a version of the renegotiated agreement which contained approximately 70 changes to the draft law submitted to it on 22 April 1997. The parties were in substantial disagreement as to whether the changes were minor in nature, made known to CAA in advance or negotiated with CAA in advance. Although the Tribunal has concluded that nothing turns on this disagreement for the purposes of this Award, we summarise briefly below what occurred.
4.17.13.
Law No. 6826 was first published without its annexes (ie without the accompanying draft text of the contract) on 23 June 1997, such annexes being published only 11 July 1997. Because most of the changes that had been made appeared in the contract text, they were not evident when the bill was passed.
4.17.14.
The fact that the draft law, submitted by Governor Bussi to the Legislature on 22 April, had been substantially modified was discovered by CAA only in late June. At that time, Vice Governor Topa and Mr. de Maud’huy, amongst others, were part of a Tucumán delegation visiting the World Bank in Washington. Mr. de Maud’huy was advised by telephone of the fact that approximately 70 changes had been made to the negotiated new agreement. He immediately brought his concerns to the attention of Vice Governor Topa whose reaction was to understate the importance of the changes and to suggest that they could be corrected by regulation.195
4.17.15.
After protesting to Governor Bussi, CAA wrote to the Attorney General on 30 June 1997, seeking an official copy of the Annexes to Law No. 6826.196 The Attorney General responded on 4 July 1997, stating that the Annexes would be published on 7 July 1997.197
4.17.16.
Governor Bussi initially ignored CAA’s protests and on 17 July 1997 asked it to sign the modified agreement, but CAA refused. In its response of 23 July 1997, CAA stated that the text of the modified agreement, as found in Law No. 6826, was unacceptable because of its significant adverse effect on the economic value of the renegotiated agreement.198
4.17.17.
Based on unequivocal testimony from CAA, that the changes made to the proposed new concession agreement between the 22 April 1997 version and that found in Law 6826 were not agreed in advance, and based on the equivocal testimony on this point from Respondent,199 the Tribunal concludes that the changes were made unilaterally by the Legislature. The Tribunal also accepts that the unilateral changes modified, in some cases materially, the terms of the renegotiated agreement.
4.17.18.
On 25 July 1997, CAA met with Governor Bussi and a representative of the Federal Ministry of the Economy and reiterated that the modified agreement was not acceptable. Governor Bussi replied that it was not possible to change the law.200

4.18. CAA’s Rescission of the Concession Agreement

4.18.1.
By mid-July 1996, CAA officials had begun to deliberate on the deteriorating situation in Tucumán and authorised Mr. de Maud’huy to take all necessary steps to resolve the situation. Thus, on 27 July 1997, Mr. de Maud’huy advised Federal Secretary Guibert that CAA planned to terminate the Concession Agreement imminently.
4.18.2.
In the hope of somehow resolving the crisis, federal officials requested CAA to postpone the termination.
4.18.3.
After a series of day-to-day postponements, on 4 August 1997, CAA decided to terminate and informed both the French Embassy in Argentina and the Argentine Embassy in Paris of its decision.
4.18.4.
Following further interventions from high ranking officials in the French and Argentine Governments, the decision to terminate was again postponed to allow Mr. Jorge Rottenberg, Chief of Staff to President Menem’s Chief of Cabinet, to seek to save the concession.
4.18.5.
Following a number of fruitless meetings, the Rottenberg mission failed and, on 18 August 1997, CAA concluded that there was no hope of solution to the crisis. However, because of an official visit to Argentina by a member of the French Government, CAA delayed sending notice of its termination until 27 August 1997, when it notified Governor Bussi that it had rescinded the Concession Agreement due to its breach by the Province.
4.18.6.
On the same day, the Provincial Legislature passed Law No. 6837, which revoked Law No. 6826 and reinstated the terms of the original Concession Agreement.

CAA’s Recovery Rate on Bi-Monthly Billings - 22 July 1995 to 27 August 1997

4.18.7.
Over the period from the date CAA took over the concession (22 July 1995) until the date it rescinded the Concession Agreement, CAA’s recovery rates on its billings dropped steadily. From a high of 64.50% for the first bi-monthly period, the rates dropped consecutively to 57.60%, 52.60%, 46.60%, 48.60%, 44.50%, 41%, 39.20%, 36.50%, 33.90%, 34.30%, 24.70% and 2O.1O%.201

4.19. Tucumán Rejects CAA’s Rescission and Terminates Agreement

4.19.1.
The Province’s initial reaction to CAA’s notice of rescission was a series of regulatory responses, the first occurring on 3 September 1997 in the form of ERSACT Resolution 558/97. This resolution, which was dated three weeks earlier, on 13 August 1997, alleged that CAA had not complied with the investment plan under the Concession Agreement.
4.19.2.
The next day, ERSACT notified CAA of Resolution No. 616/97, which alleged non-compliance with Concession Agreement obligations regarding creation of prevention and emergency plans.202
4.19.3.
Between 2 and 4 September 1997, CAA received notification from ERSACT of 19 resolutions (some of which dated back months), according to which CAA had allegedly not complied with the Concession Agreement.203 Simultaneously, ERSACT began to prosecute all pending resolutions - some dating to 1995.
4.19.4.
On 10 September 1997, Governor Bussi issued Decree No. 2270/1, informing CAA that the Concession Agreement was terminated by reason of CAA’s repeated violations of the agreement and its unacceptable and unlawful attempt to terminate the agreement by itself.
4.19.5.
Decree No. 2270/1 also formally rejected CAA’s rescission and purported to extend the duration of CAA’s service for an additional 18 months or until the Province could find a replacement, based upon Article 15.11 of the Concession Agreement.204
4.19.6.
On 25 and 30 September 1997, CAA challenged Decree No. 2270/1.205 Almost a year later, on 11 August 1998, Governor Bussi responded to CAA’s objections, rejecting Decree No. 2270/1.206

4.20. CAA’s Operation of the Services After Termination - the alleged "HostagePeriod"

4.20.1.
On 21 October 1997, the Executive filed an action in the Province’s contentious administrative courts, seeking a declaratory judgement to the effect that the Province had the legal authority to compel CAA to continue to provide services for 18 months. The Executive also unsuccessfully sought an injunction while the lawsuit was pending.
4.20.2.
The 90-day notice period given by Claimants for termination of the Concession Agreement passed without transfer of the services on 27 November 1997.
4.20.3.
By letter from CAA to Governor Bussi, dated 2 December 1997, CAA explained that, as of 27 November 1997, CAA’s legal responsibility as concessionaire had ended and the economic risk of the concession had thus been transferred to the Province. CAA added that the Province was liable for all damages due to the Province’s default.207
4.20.4.
At the same time, CAA sought direction as to the tariff rate to be applied with respect to the continued provision of services. On 2 January 1998, Governor Bussi informed CAA it should apply a tariff rate consistent with the original 1995 Concession Agreement and Law No. 6529, but Governor Bussi made reference to the legitimate expectation of the both the Government and the population that CAA would significantly reduce its tariffs below the rates set forth in the 1995 Concession Agreement because, after rescission, CAA was not longer subject to investment obligations.208
4.20.5.
On 28 January 1998, Governor Bussi approved bid terms for a tender for a new concessionaire. However, the government announced the failure of the tender for a transitional service provider on 5 June 1998.209
4.20.6.
On 6 July 1998, Vivendi President Messier wrote to President Menem expressing his concern that CAA was being forced to provide a service notwithstanding the rescission of the Concession Agreement and on 10 July 1998, the federal government offered to serve as Tucumán’s transitory water and sewage service provider through ENHOSA.210
4.20.7.
On 5 August 1998, the federal government and the Province signed an agreement whereby ENOHSA would supply the service under a power granted by the Province. This agreement was approved by the Legislature on 7 September 1998 and provided that ENHOSA would take over the service within 30 days.211
4.20.8.
Finally, on 7 October 1998, the service was taken over by ENOHSA, which provided the service through an Argentine public entity designated as Obras Sanitarias de Tucumán ("OST"). CAA’s role as operator of Tucumán’s water and sewage services effectively terminated on that date.

4.21. CAA’s Post-Termination Collection Efforts

4.21.1.
From 8 October 1998, after termination of the service, CAA retained a small staff, as well as local counsel in Tucumán, to continue the company’s efforts to collect payment for the services that it had provided to customers.
4.21.2.
In 2000, CAA decided to undertake a fresh effort at collections by preparing formal legal notices containing a detailed breakdown of each customer’s overdue payments. Between July and October 2000, CAA dispatched 146,559 notices to its delinquent customers via registered mail. Initially this effort met with some success and, immediately after the mailing of the first of these notices, customers began remitting payments at a rate of approximately 3,000 pesos per day.
4.21.3.
However, CAA’s collections slowed significantly when the Ombudsman and a number of Legislators advised customers, whom they met as they came to CAA’s offices, that it was not necessary to pay their bills. In this period, CAA received over 17,000 form letters that had been distributed by the Ombudsman, over 5,000 distributed by Legislators Próspero Barrionuevo and Guido Luis Garcia and over 1,700 distributed by DUDAS, a consumer defence association.
4.21.4.
When it became clear that its renewed collection efforts would not work, CAA decided to initiate summary proceedings (executory judicial proceedings known as juicios ejecutivos') against 2000 of its most significant debtors. Having over 150,000 delinquent accounts at this time, CAA hoped that if judgements could be obtained in short order against a significant number of its customers, its other debtors would elect to pay, rather than face suit.212
4.21.5.
At this stage, the Ombudsman and the Legislature intervened. On 20 November 2001, the Ombudsman brought a summary proceeding seeking the suspension of proceedings in all of CAA’s collection lawsuits filed against non-paying customers, as well as a bar against CAA filing any new collection suits.213
4.21.6.
On 20 December 2001, after these proceedings were rejected, primarily on procedural grounds, the Legislature enacted Law No. 7196, prohibiting CAA from pursuing any collection lawsuits for a period of 180 days.214 This law was subsequently held unconstitutional by a civil court in Tucumán on 20 August 2002.215
4.21.7.
Undeterred, on 5 September 2002, the Legislature took a different approach and enacted Law No. 7234, this time barring CAA from enforcing, for a period of 180 days, judgments already rendered or to be rendered in proceedings against debtors. The temporary nature of this enactment was illusory, since the Legislature re-enacted a new version of the same law every 180 days, with the fourth version being in effect at the time Claimants’ case was pleaded.216
4.21.8.
In a statement made during the Legislative debate over Law No. 7322, Legislator Terán Nogues (the former Vice Governor, Mr. Topa’s successor, who had left the Executive one month earlier) explained the need for the enactment of this third version of the law:

"In order to place it on the historical record, I want to specifically state the citizens of Tucumán are the victims of a situation of defencelessness into which they were placed by two state powers: the Executive Power first and, thereafter, the Judicial Power. The only exception is the protection granted by the Honourable Legislature in successive sessions, in defence of their rights.

The Executive Power told the citizens of Tucumán, at a given time not to pay their water bills; it said it in all the tones and in all the forms; additionally it told the citizens the invoicing system did not correspond to the terms of the contract . And for that reason, the people did not pay for the water, in addition to the lack of a culture ofpayment of Utilities, etc., but there was an explicit appeal made by the Executive Power about not paying for the water... . But in the certain fact is that, in spite of my natural demeanour which leads me not to sanction regulations obstructing judicial processes between private citizens, the certain fact is that currently the citizens were urged not to pay by the Executive Power. "217 (emphasis added)

4.22. Respondent’s Post-Termination Tax Claim Against CAA

4.22.1.
On 30 July 2004, the Administración Federal de Ingresos Públicos (AFIP) made an administrative demand on CAA for the payment of approximately 4.5 million pesos in tax liability for the tax years 1998-2002. The AFIP claim asserts that CAA should have paid a minimum presumed income tax in 1998 through 2002 on its customer’s unpaid invoices as well as on assets CAA transferred to the Province at the end of the alleged "hostage period".
4.22.2.
CAA replied to and contested AFIP’s tax assessment on 21 September 2004.218
4.22.3.
On 20 October 2004, AFIP agents obtained a court judgment attaching all of CAA’s assets held in Tucumán bank accounts.219

5. CLAIMANTS’ CASE

5.1. Tribunal’s Approach

5.1.1.
In this section we summarise the elements and scope of the claims made by Claimants, as advanced in their pleadings, written submissions and during the course of the oral hearing.
5.1.2.
Claimants advance two principal arguments. First, the acts and omissions of the Province of Tucumán cannot be reconciled with Argentina's obligation under the Treaty to provide fair and equitable treatment to French investors and their investments. Second, the Province’s actions constitute an expropriation of Claimants’ investment, for which Claimants have never been compensated.

CAA is a Proper Claimant

5.1.3.
Claimants also say that Respondent’s argument, that CAA is not a proper claimant, must be rejected because that issue was decided in the first proceeding and is now res judicata. Claimants point to the Decision on Jurisdiction in which this Tribunal held "[b]ecause the First Tribunal found that CAA was a French company under the ICSID Convention and the BIT and the ad hoc Committee did not annul this finding, the finding remains in force and is res judicata",220 In any event, Claimants submit that Respondent’s argument rests on two erroneous premises. First, CAA did not become a French company until CGE acquired more than 50% of CAA’s shares, and second, CGE acquired its majority shareholding in violation of the Concession Agreement because the Province did not consent to the share transfer.221
5.1.4.
As to Respondent’s first assertion, Claimants point to the fact that CAA has been deemed a "French" national since its incorporation. Claimants rely on the Article 1 (2)(c) of the BIT, which provision contains France’s and Argentina’s agreement that certain companies having the nationality of one party are treated as a national of another party if they are effectively controlled, directly or indirectly, by nationals of that other party. Accordingly, an Argentine company will qualify as a French national where more than half its equity is owned by a French company, or, where a French company exerts "decisive influence".222
5.1.5.
Based on factual findings by the First Tribunal, Claimants claim that CGE clearly exerted "decisive influence" over CAA’s decision-making processes at all times since CAA’s incorporation. Accordingly, CAA is a proper claimant that acquired its Treaty rights on the day it was formed.
5.1.6.
With respect to Respondent's complaints about the process by which CGE/Vivendi acquired its current 85% stake in CAA, Claimants argue that all share acquisitions were either approved by the Province or did not require its approval.223
5.1.7.
Claimants also rely on the conclusion of the Original Tribunal, which finding was not annulled and is res judicata, that "the Tribunal has determined that CGE controlled CAA and that CAA should be considered a French investor from the effective date of the Concession Contract".224

5.2. Claimants were Denied Fair and Equitable Treatment by the TucumánAuthorities

5.2.1.
Claimants contend that the object and purpose of the Treaty is to guarantee the reciprocal protection and promotion of investments. Based in part on the objectives, as stated in the preamble and, in part, on the holdings of the MTD v Chile Tribunal, Claimants say that the signatory states’ obligations under the Treaty are to be read as proactive, rather than as prescriptions for passive behaviour, such as the avoidance of impermissible behaviour or conduct toward the investor.225
5.2.2.
Claimants reject Respondent’s contention that the fair and equitable treatment obligation is synonymous with the international minimum standard of treatment.226 They claim that Respondent’s restrictive interpretation is not supported by the text of Article 3 of the Treaty, and is based on an inapposite reliance on the fair and equitable treatment provision of the North American Free Trade Agreement ("NAFTA").227 Claimants argue that Respondent’s reliance on the minimum standard of treatment lacks support outside the NAFTA context.228
5.2.3.
Claimants assert that the fair and equitable treatment standard has evolved from the minimum standard of treatment long required under international law and that the relevant authorities have found content in the fair and equitable treatment obligation that includes (i) refraining from arbitrary or discriminatory conduct; (ii) providing transparency and due process; (iii) acting in good faith; and (iv) providing security for reasonable, investment-backed expectations.229 Claimants’ position on each of these four propositions is summarised below.

Tucumán Authorities’ Attacks on Claimants and Their Investment were Arbitrary and Discriminatory

5.2.4.
According to Claimants, the Tucumán authorities - from the Legislature, to the Governor, to the Province’s regulatory authorities - relentlessly "attacked" CAA and the Concession Agreement almost from its inception, with a view to pressuring CAA and its investors to renegotiate the terms (in particular, the tariff) of the concession.230 As a result of this regulatory harassment, as well as direct unilateral modifications of the Concession Agreement’s terms, and the Province vitiated the principal asset of a concessionaire - the stream of expected payments from customers - by encouraging customers not to pay their bills and devising means by which customers could withhold payment without fear of adverse consequences.
5.2.5.
The Province’s "relentless attacks" on Claimants, taken singly or collectively, are said to be inconsistent with Argentina's Treaty obligation to provide fair and equitable treatment to investors and their investments and are the direct opposite of Argentina’s affirmative duty to protect and promote investments.
5.2.6.
Claimants say that the Provincial authorities acted arbitrarily when:

(i) Through a misuse of its regulatory power, the Province adopted an excessively and systematically adversarial posture toward CAA - perhaps the best example being ERSACT’s simultaneous issuance of dozens of resolutions and fines, not for regulatory purposes but rather in a deliberate effort to "pressure" CAA to agree to lower tariffs.

(ii) governmental actors inflamed popular sentiments, incited and led protests against CAA, and actively encouraged and facilitated non-payment of CAA invoices.

(iii) ERSACT and the Legislature deprived CAA of all of its legal recourses against delinquent customers, first by preventing CAA from cutting service to non-paying customers, then by attempting to prevent CAA from using expeditious judicial processes, and ultimately by directly blocking CAA’s access to the judicial system to enforce its right to payment.231

5.2.7.
Claimants also point to the Province’s treatment of CAA’s successor, OST, which was demonstrably more favourable than its treatment of CAA - even in the face of service problems and OST's express admission that it was unable to maintain or properly provide the service.232 In contrast to the treatment of CAA, the Province publicly supported OST, subsidized it, exempted it from significant tax and investment obligations, protected its ability to collect from customers and even its ability to restrict service to defaulting customers.233 The Province also downplayed important service problems. Claimants’ argue unjustified discriminatory treatment is by definition unfair and inequitable.234
5.2.8.
Claimants also argue that the actions of the office of the federal tax authorities, in seizing CAA’s bank accounts and threatening to impose tax liabilities premised on the CAA’s unpaid invoices - whose value the Province has destroyed, have further violated the fair and equitable treatment obligation.235
5.2.9.
In so acting, Claimants say that the Province and, through it, Argentina exhibited arbitrary and capricious hostility toward Claimants and the Concession Agreement under which Claimants invested, thereby violating Respondent's obligation of fair and equitable treatment under Article 3 of the Treaty.236

Lack of Transparency and Due Process in the Treatment of Claimants

5.2.10.
Claimants define transparency as requiring the legal framework for an investor’s operations to be readily apparent and that any decision affecting the investor to be traceable to that legal framework. Due process or "fair procedure" is said to be an essential complement to transparency and includes, inter alia, proper notice of legal action and the opportunity to appear and be heard. Due process may be violated not only by the courts, but also through legislative and administrative actions.237
5.2.11.
Claimants contend that the Province violated the principles of transparency by failing to provide Claimants with due process on multiple occasions, and that, individually and collectively, these violations constitute a breach of the obligation to provide fair and equitable treatment under Article 3 of the BIT.238
5.2.12.
To illustrate, Claimants provide six examples of the Province’s deficient treatment of CAA:

(i) ERSACT unilaterally overrode the terms of the Concession Agreement by arbitrarily and without legal foundation issuing Resolution 212/96 (which implemented Resolution 170/96). Further, Resolution 212/96 was repeatedly imposed, suspended and then re-imposed again and again, in a manner that Claimants’ allege tracked the Province’s need for leverage in different phases of its renegotiations with CAA.

(ii) the Province created an environment of legal uncertainty, in violation of its obligations to provide a transparent and predictable legal environment.

(iii) ERSACT issued 78 resolutions and fines on a single day, not for legitimate regulatory purposes, but, in an admitted attempt to pressure Claimants to renegotiate the terms of the Concession Agreement. That action was also in direct violation of the express terms of the Concession Agreement, which restricted ERSACT’s ability to sanction CAA for a six-month period.

(iv) the Tucumán authorities' actions in the face of concededly harmless manganese-related turbidity - a situation that CAA did not create, could not foresee, and acted professionally and promptly to correct - were illegitimate and unfair to CAA.

(v) ERSACT’s and the Governor's actions after CAA’s notification that it was terminating the Concession Agreement, based on the Province’s defaults, further confirm the lack of transparency and due process in Tucumán's treatment of CAA. Following CAA’s notice, ERSACT proceeded to issue a number of Resolutions, which were not received by CAA on a timely basis, violating the transparency and due process obligations of proper notice. The Governor later relied on ERSACT’s Resolutions in Decree 2270/1 as a basis for (purportedly) terminating the Concession Agreement for fault of CAA.

(vi) the Governor and the Legislature - unilaterally and secretly - introduced some seventy changes into the text of the 8 April Agreement regarding amendments to the Concession Agreement, and presented it to Claimants as a "fait accompli".239

Province’s Bad Faith During Contract Renegotiations

5.2.13.
Claimants say that it is not necessary to prove bad faith to establish a violation of a fair and equitable treatment standard. Nevertheless, Claimants note actual bad faith dealings with an investor by a government is necessarily inconsistent with Article 3 of the Treaty.240
5.2.14.
Relying on, inter alia, the principle of good faith articulated in Aminoil241 Claimants say that, having been invited by the Province and the National Government to engage in a third round of renegotiations in early 1997, they were entitled to expect that the Province would act in good faith in those negotiations. However, they say that the submission of the unilaterally amended version of the agreement to the Legislature, and further unilateral amendments made by the Legislature, violated not only transparency, stability and the Claimants’ legitimate expectations, but also the elemental requirement of good faith dealings. In particular, the manner in which the amendments were made - unilaterally and without any attempt at notification or consultation with Claimants - is impossible to reconcile with any notion of good faith.242

Tucumán's Actions Deprived Claimants of Their Legitimate Expectations With Respect to the Concession

5.2.15.
Claimants further assert that the fair and equitable treatment standard imposes an affirmative obligation on government to treat investors in good faith in a reasonable and measured manner that respects the contractual provisions that embody the expectation of the parties and to promote the realisation of their expectations - including a fair profit for the investor.
5.2.16.
In Claimants’ submission, the Province not only failed to protect, but itself directly undermined, Claimants’ legitimate, investment-backed, expectations with respect to the Tucumán concession when the Province:

(i) directly and unilaterally modified the terms of the Concession Agreement. This occurred when ERSACT issued Resolution 212/96 which reversed the Province’s own pre-contract specifications and contradicted the terms of the Concession Agreement, by requiring CAA to include certain taxes within its tariff caps; when CAA was prevented from cutting service to non-paying customers; and when the Legislature put into force reduced tariffs and other economically harmful contractual terms under Law 6826;

(ii) incited the population of Tucumán to refuse to pay CAA’s bills and shielded customers from the legal consequences of such refusals; and

(iii) forced CAA to continue providing services in Tucumán for over ten months in violation of the termination provisions of the Concession Agreement.243

Tucumán Authorities Deprived Claimants of Fair and Equitable Treatment in the Form of Protection and Full Security

5.2.17.
Claimants contend that the text of the provisions of Article 5(1) of the Treaty intimately links the protections there granted with Article 3, such that protection and full security is an application of the principle of fair and equitable treatment.
5.2.18.
Claimants argue that the protection and full security required extends beyond physical security, to encompass security against harassment that impairs the normal functioning of an investors business. They say that the Tucumán authorities not only failed to guarantee Claimants protection and full security, but went further and themselves participated in and encouraged acts that affirmatively undermined any such security. They engaged in illegitimate regulatory harassment of CAA, and they deliberately incited the population to inflict harm on Claimants’ investment.

5.3. Tucumán Authorities Expropriated Claimants’ Investment

5.3.1.
Claimants rely on six principal arguments in support of their case that the Province expropriated their investment without compensation in breach of Treaty Article 5(2):

(i) the Treaty’s guarantee against uncompensated expropriation is broad;

(ii) Article 5 bars the expropriation of concession and contract rights;

(iii) the Tucumán authorities’ deprivation of Claimants’ reasonably expected economic benefit constitutes expropriation;

(iv) whether taken singly or cumulatively, the Province’s acts and omissions constitute expropriation;

(v) the forced provision of services during the alleged "hostage period" constitutes expropriation; and

(vi) the effects of the Tucumán authorities’ actions are determinative.244

Treaty's Guarantee against Uncompensated Expropriation is Broad

5.3.2.
Claimants say that the concept of "expropriation" has been broadly defined in ICSID jurisprudence to include any unjustified interference with an investor's property that deprives the investor of the use or value of that property. For example, a state is responsible for an unlawful expropriation when it subjects alien property to regulatory or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of that property. Further, Treaty Article 5(2) has been drafted with particular care to be inclusive, as it refers not only to indirect measures of expropriation, but also to equivalent measures that have a similar effect to dispossession.

Article 5 Bars the Tucumán Authorities from Expropriating Concession and Contract Rights

5.3.3.
Claimants point out that Article 1 of the Treaty specifically defines the term "investment" to include "concessions granted by law or by virtue of an agreement". The Treaty’s provisions are thus consistent with the well-established principle of international law that the taking of contract rights constitutes an expropriation or a measure having an equivalent effect. Accordingly, the Province’s taking or denial of valuable contract rights under the concession, and the destruction of the economic value of the concession itself, constitute expropriation affecting Claimants’ "investment" as defined under Article 1, for which compensation is required under Article 5(2) of the Treaty.
5.3.4.
In cases such as this one, involving an investor’s rights under a contract with the government itself, international law distinguishes between a mere commercial breach and an expropriation of a contractual right. Claimants say that expropriation occurs when the government does not act in its role as a commercial party to the contract, but instead exercises its sovereign powers to defeat the expectations of the parties by undercutting or destroying the value of the contract.
5.3.5.
Here, the Province’s actions cannot under any circumstances be characterised as mere commercial breaches of contract terms, and are precisely the type of sovereign actions that constitute expropriation by a government authority. Three non-exhaustive examples of the Province’s unilateral alterations of contract rights are said to be particularly significant in terms of their effects on the economic balance of the concession.

(i) First, the Provincial Government used its regulatory authority to compel CAA to stop invoicing customers for certain taxes, contrary to the Province’s own prior instructions and to the express terms of the Concession Agreement. Specifically, Claimants argue that ERSACT Resolution 170/96, Court of Accounts Resolution No. 015, and ERSACT Resolution 212/96 forced CAA to reduce its tariffs by almost 10%, with severe adverse consequences for the economic balance of the concession.

(ii) Second, the Province used its authority over CAA effectively to deny CAA the 10% tariff increases to which it was entitled in each of the second and third years of the concession. In the hostile atmosphere that government officials in Tucumán had created, CAA had no choice but to agree to try to renegotiate the Agreement, not once, not twice, but three times during the two-and-a-half year effective life of the concession.

(iii) Third, the Legislature unilaterally changed the legal framework that governed CAA in June 1997, drastically altering the economic balance of the concession. Law 6826 purported to approve a new contract to govern the concession, but the version enacted contained approximately 70 economically significant changes to the terms agreed upon by Claimants and the Governor in the 8 April Agreement. Nevertheless, Law 6826 was legally effective in its own right and remained in force from 1 May 1997 (the third bi-monthly invoicing period for 1997) until its repeal on August 27, 1997.

5.3.6.
Claimants further contend that as a party to the Concession Agreement, the Province had an obligation not actively to undermine the Agreement’s viability. The provincial regulator was also expressly obliged to "cooperate with the Concessionaire in a manner such as to facilitate the fulfillment of the Concession Agreement, exercising the powers to police, regulate, and control in a reasonable manner...".
5.3.7.
Claimants assert that the Tucumán authorities breached those obligations with vigorous and sustained attacks on CAA that substantially destroyed the value of the concession by driving down the company's collection rates.
5.3.8.
These actions of the Province destroyed the value of Claimants’ investment in the Tucumán concession and the prospect of continued such losses forced the termination of the Concession Agreement, completing the Province’s expropriation of Claimants’ investment.

The Tucumán Authorities' Deprivation of Claimants’ Reasonably Expected Economic Benefits Constitutes Expropriation

5.3.9.
According to Claimants, it is well-established in international arbitration decisions that expropriation may arise, not only from the deprivation of valuable contractual rights through sovereign acts, as discussed above, but also from government interference with an investor's ability to obtain reasonably expected economic benefits from their investment.
5.3.10.
In this case, based on the Province’s own undertakings in the Concession Agreement, Claimants legitimately expected that their investment would operate and be governed consistent with those terms. The Province’s actions thus worked an expropriation, not only as a direct deprivation of valuable rights, but also as an interference with Claimants’ reasonably expected economic benefits of their investment in the concession. The Tucumán authorities also crippled the asset that is at the heart of a concession investment - the revenue stream of payments from users of the service. Claimants legitimately expected that they would be paid for the services they rendered, but the Tucumán authorities actively and relentlessly undermined that expectation.
5.3.11.
In support of this proposition, Claimants point out that the government attacks against the concession began in July and August 1995, when the municipalities demanded that they be given control over the water and sewerage services. These actions were followed quickly by public statements from the Governor, legislators, and the Attorney General condemning the concession. By the end of 1995, the Legislature had introduced a series of bills and other proposals demanding the nullification or renegotiation of the Concession Agreement. The Legislature also appointed an Investigative Commission to review the privatisation and analyse the options for renegotiating the tariff. The intent of these actions was made clear by Franco Davolio, the Deputy Engineering Supervisor of ERSACT, who, when asked why ERSACT was harassing CAA in violation of the language and spirit of the Agreement, stated that "my superiors are asking to put pressure on [CAA] to renegotiate the rates... So until the rates are renegotiated like the government wants, the order from higher up is to keep applying pressure with whatever we have at hand."
5.3.12.
Claimants assert that the attacks continued in 1996, when the Attorney General issued an opinion impugning the validity of the Concession Agreement. ERSACT then adopted Resolution 170/96, which prohibited CAA from issuing invoices, and Resolution 212/96, which affirmed Resolution 170/96 and forced CAA to reduce its tariffs below the levels permitted under the Concession Agreement. Resolution 212/96 was alternately suspended and reactivated on several occasions, contributing further to the confusion over the applicable tariff rates which had been precipitated by the government’s arbitrary actions.
5.3.13.
Legislators handed out 3,000 applications in the public square to encourage people to submit claims against CAA and to block CAA’s collection efforts. Similarly, the Ombudsman established a claims procedure that would allow users to refuse to pay for CAA’s services. It also issued a formal resolution which effectively prevented CAA from cutting the service to customers who refused to pay their bills and to provide a legal defence to customers if CAA challenged their refusal to pay.
5.3.14.
Claimants contend that in 1996 and 1997, the Province and the Argentine government left Claimants no choice but to engage in multiple rounds of attempted renegotiations. However, the provincial authorities continued to backtrack and undercut the proceedings, demanding the nullification or renegotiation of the Concession Agreement. And though the parties were twice able to reach preliminary agreements on a renegotiated Concession Agreement in 1996, the provincial government quickly backed away from those settlements. The final blow to the concession came when the Governor unilaterally and secretively rewrote the 8 April Agreement and then submitted it to the Legislature for approval.
5.3.15.
Against this relentless assault, CAA’s recovery rate declined steadily throughout the life of the concession, even after the tariffs had been lowered. By the time CAA notified the authorities that the Concession Agreement was rescinded, CAA’s recovery rate hovered around 20 percent, in stark contrast to the rate of 89-90% upon which the Concession Agreement was premised. This interference with Claimants’ legitimate expectations constituted a clear deprivation of their property. And when government officials incite the population to take action against a specific foreign party, as happened here, the government under international law is responsible for the actions taken by the population.

Province’s Acts and Omissions Constitute Expropriation Whether Taken Singly or Cumulatively

5.3.16.
Claimants emphasise that it is well established under international law that even if a single act or omission by a government may not constitute a violation of an international obligation, several acts, taken together, can warrant a finding that such obligation has been breached. This concept is reflected in Article 15(1) of the International Law Commissions’ Articles on Responsibility of States for Internationally Wrongful Acts (2002) ("ILC Articles"). Article 15(1) also defines the time at which a composite act ‘occurs’ to be the time at which the last action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act without it necessarily having to be the last of the series.
5.3.17.
Here, Claimants contend that the Province’s actions, beginning in the opening months of the concession and culminating in the secret and unilateral changes to the