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I. Introduction


The Claimant, Azurix Corp., is a corporation incorporated in the State of Delaware of the United States of America (hereinafter "Azurix" or "the Claimant"). It is represented in this proceeding by:

Mr. Doak Bishop
King & Spalding
1100 Louisiana, Suite 4000
Houston, TX 77002
United States of America

Mr. Guido Santiago Tawil
M&M Bomchil
Suipacha 268, Piso 12
C1008AAF Buenos Aires


The Respondent is the Argentine Republic (hereinafter "Argentina" or "the Respondent"), represented in this proceeding by:

Mr. Osvaldo César Guglielmino
Procurador del Tesoro de la Nación
Procuración del Tesoro de la Nación Argentina
Posadas 1641
CP 1112 Buenos Aires

II. Procedural background

On September 19, 2001, Azurix filed a request for arbitration against the Argentina Republic, with the International Centre for Settlement of Investment Disputes (hereinafter the "Centre"). Azurix claims that Argentina has violated obligations owed to Azurix under the 1991 Treaty Concerning the Reciprocal Encouragement and Protection of Investment between the Argentine Republic and the United States of America (hereinafter "the BIT"), international law and Argentine law in respect of Azurix's investment in a utility which distributes drinking water and treats and disposes of sewerage water in the Argentine Province of Buenos Aires. Azurix alleges such breaches were made by Argentina both directly through its own omissions and through the actions and omissions of its political subdivisions and instrumentalities.
On October 23, 2001, the Secretary-General of the Centre registered Azurix's request for arbitration, pursuant to Article 36(3) of the ICSID Convention on the Settlement of Investment Disputes between States and National of other States (hereinafter "the Convention").
On November 12, 2001, the parties agreed that the Arbitral Tribunal would consist of three arbitrators, one to be appointed by each party and the third presiding arbitrator to be appointed by the Chairman of the Administrative Council of the Centre. Accordingly, the Claimant appointed Professor Elihu Lauterpacht, C.B.E. Q.C., a British national, and the Respondent appointed Dr. Daniel H. Martins, an Uruguayan national. Dr. Andrés Rigo Sureda, a Spanish national, was appointed President after consultation with the parties.
The Tribunal was deemed to have been constituted on April 8, 2002 and the proceeding to have commenced. On the same date, the parties were notified that Ms. Claudia Frutos-Peterson, Counsel, ICSID, would serve as Secretary of the Arbitral Tribunal.
In accordance with Arbitration Rule 13, the Tribunal held its first session with the parties in Washington D.C. on May 16, 2002. Mr. R. Doak Bishop of King & Spalding represented the Claimant at the first session, and Mr. Hernán Cruchaga and Ms. Andrea G. Gualde of the Procuración del Tesoro de la Nación, Buenos Aires, acting on instruction from the then Procurador del Tesoro de la Nación, Dr. Rubén Miguel Citara, represented the Respondent at the first session.
At the first session, the parties agreed that the Tribunal had been properly constituted and that they had no objection to any of the members of the Tribunal, and it was noted that the proceedings would be conducted under the ICSID Arbitration Rules in force since September 26, 1984 (hereinafter "the Arbitration Rules"). In respect of the pleadings to be filed by the parties, their number, sequence and timing, it was announced after consultation with the parties that the Claimant would file its Memorial within 150 days of the date of the first session, the Respondent would file its CounterMemorial within 150 days of the date of receipt of the Memorial, the Claimant's Reply would be filed within 60 days of the date of receipt of the Counter-Memorial, and the Respondent's Rejoinder would be filed within a further 60 days of its receipt of the Reply. It was further noted by the Tribunal that, in accordance with the Arbitration Rules, the Respondent had the right to raise any objections it might have to jurisdiction no later than the expiration of the time limit fixed for filing its Counter-Memorial. If such objections to jurisdiction were made by the Respondent and rejected by the Tribunal, it was agreed that the above timetable would be resumed following the resumption of proceedings on the merits.
In accordance with the timetable decided during the first session, Azurix filed its Memorial on the merits on October 15, 2002, claiming that Argentina had breached the BIT by expropriating its investment by measures tantamount to expropriation without prompt, adequate and effective compensation (Article IV(1)), by failing to accord to it fair and equitable treatment, full protection and security, and treatment required by international law (Article II(2)(a)), by taking arbitrary measures that impaired Azurix's use and enjoyment of its investment (Article II(2)(b)), by failing to observe obligations Argentina entered into with regard to Azurix's investment (Article II(2(c)), and by failing to provide transparency concerning the regulations, administrative practices and procedures and adjudicatory decisions that affect Azurix's investment (Article II(7)). In addition, Azurix requested orders for the payment of compensation for all damages suffered and the adoption by Argentina of all necessary measures to avoid further damages to Azurix's investment. Azurix expressly reserved its right to request a decision on provisional measures under Article 47 of the ICSID Convention and Arbitration Rule 39.
On March 7, 2003, Argentina filed a Memorial on jurisdiction raising two objections to the Tribunal's jurisdiction. The first was that Azurix agreed to submit this dispute to the courts of the city of La Plata and waived any other jurisdiction and forum; the second was that Azurix had already made a forum selection under Article VII of the BIT by submitting the dispute to Argentine courts. On March 12, 2002 the Tribunal suspended the proceeding on the merits pursuant to Arbitration Rule 41(3), and set dates for filing pleadings on jurisdiction. Accordingly, Azurix filed its Counter-Memorial on jurisdiction on May 13, 2003.
Azurix filed a request for provisional measures on July 15, 2003 (dated July 14, 2003), subsequently supplemented by two letters dated July 21 and 28, 2003. The request sought a provisional measure recommending that Argentina refrain from incurring by itself or through any of its political subdivisions in any action or omission capable of aggravating or extending the dispute, taking into account especially the reorganization of Azurix's Argentine subsidiary, Azurix Buenos Aires S.A. (hereinafter "ABA"), or any other measure having the same effect.
At the request of the Tribunal, Argentina filed observations on Azurix's request for provisional measures on July 24, 2003, seeking dismissal of the request for provisional measures together with costs and requesting that the Tribunal request the Claimant to produce an original copy of the Decision of the Appeals Chamber of the Province of Buenos Aires.
The Tribunal, in a decision of August 6, 2003, rejected Azurix's request for provisional measures, considering that, in the circumstances of the case and at that stage of proceedings, it was not in a position to recommend the specific measure requested or to propose others with the same objective. The Tribunal did, however, invite the parties to abstain from adopting measures of any character which could aggravate or extend the controversy submitted to arbitration, and took note of statements made by Argentina affirming that the Province of Buenos Aires (hereinafter "the Province") recognizes that the receivables for services rendered by ABA before March 7, 2002 belong to ABA, and that those collected or to be collected in the future have been or will be deposited in a special banking account, and that the situation described in Azurix's request would not affect the enforceability or execution of any award rendered on the merits. The Tribunal postponed its decision on costs in respect of the provisional measures request to a later stage of the proceedings and considered it unnecessary to request the Claimant to furnish the Tribunal with the Decision of the Appeals Chamber.
Argentina filed its Reply on jurisdiction on August 4, 2003
Azurix filed a Rejoinder on jurisdiction on August 29, 2003.
The hearing on jurisdiction took place in London on September 9 and 10, 2003. The parties were represented by Messrs. R. Doak Bishop, Guido Santiago Tawil, Ignacio Minorini Lima and Craig S. Miles, on behalf of the Claimant. Messrs. Carlos Ignacio Suárez Anzorena, and Jorge Barraguirre, and Ms. Beatriz Pallarés, from the Procuración del Tesoro de la Nación, and Mr. Osvaldo Siseles, from the Secretaría Legal y Administrativa del Ministerio de Economía y Producción, represented the Respondent. On December 8, 2003 the Tribunal issued its Decision on Jurisdiction, which is part of this Award, declaring that the dispute was within the jurisdiction of the Centre and the competence of the Tribunal.
During the hearing on jurisdiction, the Respondent had requested an extension of 90 days to file its Counter-Memorial on the merits should the Tribunal find that it had jurisdiction. On December 8, 2003, the Tribunal issued Procedural Order No. 1 establishing the schedule for the further procedures on the merits. According to that schedule, the Respondent was granted an extension of 50 days and its CounterMemorial on the merits was due within 60 days from the date of that Procedural Order; the Claimant was to file its Reply within 60 days from its receipt of the Respondent's Counter-Memorial, and the Respondent was to file its Rejoinder within 60 days from its receipt of the Claimant's Reply.
On February 9, 2004, the Respondent filed its Counter-Memorial on the merits. In the Counter-Memorial, Argentina requested the Tribunal to order the Claimant to produce all reports, analysis and other documentation related to the Claimant's participation in the privatization of the water supply and sewerage services of the Province and the Claimant's IPO. The Respondent also requested, if considered appropriate by the Tribunal, that the Tribunal ask the United States Congress to furnish the reports related to ENRON's scandal and its relationship to Azurix.
On February 20, 2004, it was agreed that the hearing on the merits would take place in Paris from October 4 to 8, 2004 and, if necessary, extend it to October 1112.
On March 8, 2004, the Tribunal invited Azurix to comment on Argentina's evidence request in the Counter-Memorial. Azurix objected to the request on March 15, 2004 and requested the Tribunal that, in case it would agree to Argentina's request, Argentina be invited in turn to produce all documentation related to AGOSBA's services, their privatization, the original setting of the tariffs, all documents of the Privatization Commission, the ORAB, and the files related to ABA, AGOSBA and ABSA. The Respondent commented on Azurix's objection on March 29, 2004 and manifested its willingness to request the Province to produce evidence that the Tribunal considered relevant under Arbitration Rule 34.
On March 29, 2004, the parties agreed to extend by three weeks the schedule for the presentation of the Reply and the Rejoinder.
On April 19, 2004, the Tribunal issued Procedural Order No. 2 inviting the Respondent to request the Province to furnish the documentation filed with the Province for participating in the bidding process (Envelop No. 1 –the technical offer- and Envelop No. 2 –the economic offer) ("Envelops No. 1 and No. 2"), and postponed consideration of the production of the remainder of the evidence requested until the Tribunal had an opportunity to review the Reply, which was due by May 7, 2004.
The Respondent furnished the documentation requested under Procedural Order No. 2 on May 17, 2004. At the same time, the Respondent requested that the Tribunal do not distribute such documentation until Azurix had furnished its own copies of Envelops No. 1 and No. 2. At this point, the Respondent alleged certain irregularities in Circulars 51(b) and 52(a) and pointed out changes in the Concession Agreement which were not part of the draft agreement included in the bidding documents.
On May 24, 2004, the Tribunal issued Procedural Order No. 3 requesting Azurix to furnish the Tribunal its own copies of Envelops No. 1 and No. 2 and withheld the documentation received from the Respondent.
Azurix, instead of presenting its own copies of Envelops No. 1 and No. 2, sought copies directly from the Province allegedly for convenience's sake. On May 31, 2004, the Respondent objected that, by seeking the documents from the Province, Azurix had not complied with Procedural Order No. 3, withdrew its request related to the production of Envelops No. 1 and No. 2, informed the Tribunal on irregularities it had detected in Envelop No. 2 and requested that the Tribunal charge to the Claimant the costs related to this procedural incident.
On July 24, 2004, the Respondent requested an extension of 10 days to file its Rejoinder. The extension was granted on August 10, 2004.
On July 29, 2004, the Tribunal issued procedural Order No. 4 rejecting the request for production of evidence formulated in the communication of the Respondent of July 22, 2004 because of its general nature and failure to justify it.
On August 3, 2004, the Secretariat notified the parties that Professor Lauterpacht had resigned as an arbitrator for health reasons, and suspended the proceedings in accordance with Arbitration Rule 10(2). On the same date, the Secretariat notified the parties that the Tribunal had consented to Professor Lauterpacht's resignation in accordance with Arbitration Rule 8(2). On August 4, 2004, Mr. Marc Lalonde, a Canadian national, was appointed as an arbitrator by the Claimant in replacement of Professor Lauterpacht. On August 10, 2004, the Tribunal was reconstituted and the proceedings were resumed.
On August 16, 2004, the Tribunal issued Procedural Order No. 5 rejecting a further Respondent's request, dated August 2, 2004, for production of evidence because it considered that it was not adequately justified even if more precise than the request of July 22, 2004. On the same date, Argentina notified the appointment of Mr. Osvaldo César Guglielmino as the Procurador del Tesoro de la Nación Argentina.
On August 17, 2004, the Respondent filed its Rejoinder on the Merits.
On August 23, 2004, the Respondent requested the Tribunal to reconsider Procedural Order No. 5. The Claimant reiterated its objections to the Respondent's request on August 26, 2004. The Tribunal, after considering anew the Respondent's request and having then had the opportunity to review the Rejoinder, issued Procedural Order No. 6, requesting the Claimant to submit, not later than September 17, 2004, the study prepared by Hytsa Estudios y Proyectos, S.A. ("Hytsa") referred to in paragraph 35 of the Rejoinder, and the Respondent to submit by the same date the bid evaluation reports related to each stage of the bidding for the Concession.

As previously decided, the hearing on the merits was held, from October 4-13, 2004, at the World Bank's office in Paris, France. Present at the hearing were:

Members of the Tribunal

Dr. Andrés Rigo Sureda, President
The Hon. Marc Lalonde, P.C, O.C., Q.C., Arbitrator
Dr. Daniel H. Martins, Arbitrator

ICSID Secretariat

Ms. Claudia Frutos-Peterson, Secretary of the Tribunal

On behalf of the Claimant

Mr. R. Doak Bishop (King & Spalding, Houston, Texas)
Mr. John P. Crespo (King & Spalding, Houston, Texas)
Mr. Craig S. Miles (King & Spalding, Houston, Texas)
Ms. Zhennia Silverman (King & Spalding, Houston, Texas)
Ms. Carol Tamez (King & Spalding, Houston, Texas)
Mr. Guido Santiago Tawil (M & M Bomchil, Buenos Aires, Argentina)
Mr. Francisco Gutiérrez (M & M Bomchil, Buenos Aires, Argentina)
Mr. Federico Campolieti (M & M Bomchil, Buenos Aires, Argentina)

Also attending on behalf of the Claimant

Mr. Steve Dowd (Azurix Corp.)
Mr. Lou Stoler (Azurix Corp.)

On behalf of the Respondent

Mr. Osvaldo César Guglielmino (Procurador, Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Raúl Vinuesa (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Gabriel Bottini (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Juan José Galeano (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Mr. Ignacio Pérez Cortés (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)
Ms. María Soledad Vallejos Meana (Procuración del Tesoro de la Nación, Buenos Aires, Argentina)

Also attending on behalf of the Respondent

Ms. Guillermina Cinti (Provincia de Buenos Aires)
Mr. Roberto Salaberren (Provincia de Buenos Aires)
Mr. Juan Carlos Schefer (Provincia de Buenos Aires)

On November 29, 2004, the Respondent filed an application to disqualify the President of the Tribunal under Article 57 of the ICSID Convention. In accordance with Arbitration Rule 9(6), the proceedings were suspended. Pursuant to Article 58 of the Convention, the co-arbitrators issued a Decision dated February 25, 2005 on the Challenge to the President of the Tribunal declining the Respondent's disqualification proposal, which was notified to the parties on March 11, 2005.
On March 14, 2005, the proceedings were resumed in accordance with Arbitration Rule 9(6).
On March 15, 2005, the Centre transmitted to the Tribunal the parties' Post- Hearing Briefs of November 29, 2004.
The Tribunal met in Washington, DC from September 7 to 9, 2005 to discuss a draft of this award, and decided to request Azurix to explain, not later than September 28, 2005, certain discrepancies in the amounts in the financial statements of ABA for fiscal years 2000 and 2001. Azurix furnished its explanation on September 27, 2005 and the Tribunal invited the Respondent to comment on it by October 17, 2005. The Respondent sent comments on October 14, 2005.
On April 17, 2006, the Tribunal declared the proceedings closed pursuant to Arbitration Rule 38. By letter of June 13, 2006 the Tribunal extended by a further 30 days the period by which the award would be drawn up, in accordance with ICSID Arbitration Rule 46.

III. Background to the Dispute

Azurix declared to know and accepted the bidding conditions and committed itself to undertake all measures necessary to ensure that OBA would fulfill the obligations set forth in the bidding conditions and the Concession Agreement as operator of the Concession during the first 12 years of operation. Similarly, Azurix accepted to be jointly responsible for the obligations of AAS and that during the first six years of the Concession there would be no change in the control of AAS.
The Claimant contends that its investment in Argentina has been expropriated by measures of the Respondent tantamount to expropriation and that the Respondent has, in addition, violated its obligations, under the BIT, of fair and equitable treatment, non-discrimination and full protection and security; that such measures are actions or omissions of the Province or its instrumentalities that resulted in the non application of the tariff regime of the Concession for political reasons; that the Province did not complete certain works that were to remedy historical problems and were to be transferred to the Concessionaire upon completion; that the lack of support for the concession regime prevented ABA from obtaining financing for its Five Year Plan; that in 2001, the Province denied that the canon was recoverable through tariffs; and that "political concerns were always privileged over the financial integrity of the Concession",1 and "[w]ith no hope of recovering its investments in the politicized regulatory scheme, ABA gave notice of termination of the Concession and was forced to file for bankruptcy".2
The Respondent has disputed the allegations of the Claimant. For the Respondent, the dispute is a contractual dispute and the difficulties encountered by the Concessionaire in the Province were of its own making. In particular, the Respondent has argued that the case presented by the Claimant is intimately linked to Enron's business practices and its bankruptcy; that the price paid for the Concession was excessive and opportunistic and related to the forthcoming IPO of Azurix at the time Azurix bid for the Concession through AAS and OBA and that the Concessionaire did not comply with the Concession Agreement, in particular its investment obligations, and the actions of the Province, including the termination of the Concession Agreement by the Province, were justified.
Before proceeding to examine the facts and the parties' allegations, the Tribunal will make the following preliminary observations concerning the responsibility of the Respondent for actions or omissions of the Province, the scope of the jurisdiction of the Tribunal, the Claimant's ENRON relationship, allegations of corruption, Argentina's economic crisis and the law applicable to the merits of the dispute.

IV. Preliminary Observations

1. Responsibility of the Respondent for Actions and Omissions of the Province

(a) Positions of the Parties

The Claimant alleges that Argentina is responsible for the actions of the Province under the BIT and customary international law. Indeed, the definition of investment covers investments made in the territories of the parties to the BIT, and the BIT in its preamble refers to the territory of each of the parties in reference to its reach. Furthermore, Article XIII makes the BIT explicitly applicable to the political subdivisions of the parties. The Claimant also refers to the responsibility of the State for acts of its organs under customary international law and cites, as best evidence, Articles 4 and 7 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts of the International Law Commission ("ILC") ("Draft Articles").
The Claimant also notes the decision on the merits in Compañia de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic ("Vivendi ") where the tribunal stated that: "It is well established that actions of a political subdivision of [a] federal state, such as the Province of Tucumán in the federal state of the Argentine Republic, are attributable to the central government."3 The Annulment Committee confirmed that statement: "in the case of a claim based on a treaty, international rules of attribution apply, with the result that the state of Argentina is internationally responsible for the acts of its provincial authorities."4
The Respondent has not disputed that the BIT applies to the Province or the responsibility of the central State for acts of provincial authorities under customary international law. The Respondent has based its counter-argument on the fact that the Claimant's allegations are in all instances based on breaches of obligations contractually assumed by the Province. Hence, according to the Respondent, the Tribunal does not need to reach the stage of whether the BIT imposes absolute responsibility on the central government for actions of a political subdivision because the Claimant has failed to allege facts that are attributable to the Argentine Republic under the BIT.

The Respondent considers that the Claimant takes for granted the highly debatable proposition that contractual breaches result in a violation of the BIT. The Respondent then refers, among others, to statements in the Annulment Decision in Vivendi II to the effect that: "As to the relation between breach of contract and breach of treaty in the present case, it must be stressed that Articles 3 and 5 of the BIT do not relate directly to breach of a municipal contract. Rather they set an independent standard", and "A state may breach a treaty without breaching a contract, and vice versa, and this is certainly true of these provisions of the BIT… It may be that "mere" breaches of contract, unaccompanied by bad faith or other aggravating circumstances, will rarely amount to a breach of the fair and equitable treatment standard …" From these statements, the Respondent concludes that "a claimant in similar cases may not invoke as events or facts giving rise to international responsibility the same facts that constitute a breach of contract … international rules are 'independent rules'. Therefore, a State's international responsibility may not be asserted by disguising mere contractual breaches." The Respondent concludes by recalling that to address the conflicts of a contractual nature raised by the Claimant, both ABA and Azurix have waived their right to submit them to any other jurisdiction other than the administrative courts of the city of La Plata.5

(b) Considerations of the Tribunal

2. Scope of the Jurisdiction of the Tribunal

The Tribunal recalls that its decision on jurisdiction is based on the finding that the Claimant had shown a prima facie claim against the Respondent for breach of obligations owed by Argentina to the Claimant under the BIT. In that decision, the Tribunal noted that:

"The investment dispute which the Claimant has put before this Tribunal invokes obligations owed by the Respondent to Claimant under the BIT and it is based on a different cause of action from a claim under the Contract Documents. Even if the dispute as presented by the Claimant may involve the interpretation or analysis of facts related to performance under the Concession Agreement, the Tribunal considers that, to the extent that such issues are relevant to a breach of the obligations of the Respondent under the BIT, they cannot per se transform the dispute under the BIT into a contractual dispute".6

The Tribunal also recalls that Azurix and the Respondent have no contractual relationship. The Concession Agreement is a contract between the Province and ABA, and Azurix made certain commitments and undertook certain guarantees to the Province at the time of the bidding for and signature of the Concession Agreement. None of the allegations made by the Claimant refer to breaches of the Province in relation to Azurix itself. The obligations undertaken by the Province in the Concession Agreement were undertaken in favor of ABA not Azurix. As the Respondent itself has asserted, Argentina is not party to the Concession Agreement, and ABA is not party to these proceedings. Therefore, the underlying premise of Article II(2c) of the BIT – that a party to the BIT has entered into an obligation with regard to an investment – is inexistent. Neither the Respondent nor the Province, as a political subdivision of the Respondent, has entered into a contractual relationship with Azurix itself.
The Tribunal, in evaluating the facts and the allegations of the parties, is mindful that its task is to determine whether the alleged actions or omissions of the Respondent and the Province, as its political subdivision, amount to a breach of the BIT itself. For this purpose, and since the allegations of the Claimant are based on disputes related to the Concession Agreement, the Tribunal will need to determine the extent to which the Province was acting in the exercise of its sovereign authority, as a political subdivision of the Respondent, or as a party to a contract. As stated by the tribunal in the case of Consortium FRCC c. Royaume du Maroc, a State may perform a contract badly, but this will not result in a breach of treaty provisions, "unless it be proved that the state or its emanation has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign."7 It should be noted, however, that this was not just any contract as between two private parties. It was a Concession Agreement embodying the tariff regime of the Concession and the actions taken by the Province were taken in its capacity as a public authority and by issuing resolutions through its regulator and decrees, actions which can hardly be treated as those of "a mere party to the contract."
As noted earlier, Argentina has questioned the ability of a claimant to invoke as events or facts giving rise to international responsibility the same facts that constitute a breach of contract. The Tribunal has no doubt that the same events may give rise to claims under a contract or a treaty, "even if these two claims would coincide they would remain analytically distinct, and necessarily require different enquiries."8 To evoke the language of the Annulment Committee in Vivendi II, the Tribunal is faced with a claim that it is not "simply reducible to so many civil or administrative law claims concerning so many individual acts alleged to violate the Concession Contract or the administrative law of Argentina", but with a claim that "these acts taken together, or some of them, amounted to a breach" of the BIT.9 This is the nature of the claim in respect of which the Tribunal held that it had jurisdiction and which the Tribunal is obliged to consider and decide.

3. The ENRON relationship

Argentina has placed substantial emphasis on the fact that Azurix was a subsidiary of ENRON and has alleged that Azurix followed the aggressive and dubious practices of ENRON in its bidding for and subsequent operation of the Concession. For purposes of the dispute before this Tribunal and based on the documentation submitted by the parties, the Tribunal considers that nothing has been proven that relates the case before this Tribunal to ENRON's case. The proven facts are that ENRON was invited by the Province to bid for the Concession and ENRON declined in 2001 to guarantee a loan of Banco de la Nación Argentina to ABA under the program of the National Sanitation Works Agency ("ENOHSA") financed by the Inter-American Development Bank ("IDB").

4. Corruption

In 2002, at the time Argentina was preparing the Rejoinder on jurisdiction, it realized that Section 12.1.1 of the Concession Agreement was added after the award of the Concession. ABA's exemption of fines during the first six months of the Concession for failure to meet the Concession's performance standards was also added after the award of the Concession. The Tribunal was informed by Argentina that an investigation of this matter had been initiated by the office of the Procurador del Tesoro. During the hearing on the merits, and as a reaction to insinuations of corruption during the examination by Argentina of a witness presented by Argentina, counsel for the Claimant asked the witness whether to his knowledge there had been any corruption in connection with the award of the Concession. The witness replied that he was not aware of any improper conduct, and the Procurador General present at the hearing confirmed that the investigation was continuing but that no evidence of improper conduct had surfaced. No further information has been transmitted to the Tribunal.

5. Argentina's Economic Crisis

Argentina has pleaded that the institutional, social and economic crisis that it endured in the period 1998-2002 was the worst in its history.10 On the other hand, the Claimant has alleged that the Respondent deliberately confuses the economic recession starting in 1998 with the economic and political crisis that began in 2001. According to the Claimant, the recession and economic crisis took place after termination of the Concession Agreement, are irrelevant for the purposes of this arbitration and cannot justify the Province's breaches of the Concession Agreement. The Claimant further observes that Argentina does not claim any justification based on the recession and only notes it as a background fact.11 The Tribunal notes that the parties have not argued that the actions of the Province, ABA or Azurix had been influenced by the economic crisis. The crisis may provide context to the dispute, but none of the parties has pleaded that the economic crisis was the cause of the actions taken by the Province, ABA or Azurix.

V. Applicable law

1. Positions of the parties

The Claimant has argued that Article 42 of the Convention, in its first sentence, directs the Tribunal to look first to the rules of law agreed by the parties. Since the parties have not agreed to the governing law, the Tribunal should apply the BIT as lex specialis between the parties, and international law. The BIT expressly requires Argentina to comply with international law, and the BIT and international law have been incorporated by Argentina in its domestic law.12
The Claimant refers, among others, to Professor Weil's opinion that: "the existence of a Bilateral Investment Treaty raises the question of compliance with the rights and obligations contained therein to the level of a matter under international law, with respect not only to relations between the States party to the treaty but also to relations between the host State and the investor." According to the Claimant, the BIT requires "the Argentine Republic to afford U.S. investors like Azurix treatment no less favorable than that required by international law, both with respect to investment generally, and in particular with respect to expropriations or measures tantamount to expropriation of an investment."
The Claimant also relies on the statement of the Annulment Committee in Vivendi II on the law applicable to the determination of whether a breach of the BIT has occurred, "In such a case, the inquiry which the ICSID tribunal is required to undertake is one governed by the ICSID Convention, by the BIT and by applicable international law. Such an inquiry is neither in principle determined, nor precluded, by any issue of municipal law, including any municipal law agreement of the parties."13

The Claimant adds that international law also applies under the second sentence of Article 42(1) of the Convention. The Claimant relies here again on the authority of Professor Weil,

"no matter how domestic and international law are combined, under the second sentence of Article 42(1), international law always gains the upper hand and ultimately prevails. It prevails indirectly through the application of domestic law where the latter is deemed consistent with international law or incorporates it. It prevails directly where domestic law is deemed deficient or contrary to international law. Thus, under the second sentence of Article 42(1), international law has the last word in all circumstances: international law is fully applicable and to classify its role as 'only' 'supplemental and corrective' seems a distinction without a difference."14

The Respondent draws a different conclusion from the fact that the parties have not agreed on the applicable law. In such a case, the Tribunal shall apply "the law of the Contracting State party to the dispute, including its rules on the conflicts of laws, and such rules of international law as may be applicable." (Article 42(1) of the Convention). In accordance with this article, the dispute is basically governed by Argentine law, which is also applicable to contractual matters and provincial administrative law underlying the claim. However, the Respondent admits that the BIT is "the point of reference for establishing the merits of the Argentine Republic's obligations in connection with Azurix's investment. Non-contractual international law is relevant to the extent that the Treaty refers to it, or to the extent relevant to interpretation of the contract, or to the extent included in Argentine law."15
In its Rejoinder, the Respondent reaffirms its considerations in the Counter-Memorial whereby, pursuant to Article 42 of the Convention, "the dispute is basically governed by Argentine law which is also applicable to contractual matters and by the provincial administrative law underlying Azurix's claim."17

2. Considerations of the Tribunal

The Tribunal notes first the agreement of the parties with the statement that the BIT is the point of reference for judging the merits of Azurix's claim. The Tribunal further notes that, according to the Argentine Constitution, the Constitution and treaties entered into with other States are the supreme law of the nation, and treaties have primacy over domestic laws.18

Article 42(1) has been the subject of controversy on the respective roles of municipal law and international law. It is clear from the second sentence of Article 42(1) that both legal orders have a role to play, which role will depend on the nature of the dispute and may vary depending on which element of the dispute is considered. The Annulment Committee in Wena v. Egypt considered that "The law of the host State can indeed be applied in conjunction with international law if this is justified. So too international law can be applied by itself if the appropriate rule is found in this other ambit."19

Before the Tribunal considers the meaning of each of the standards allegedly breached by the Respondent, and because this discussion is closely related to the conflicting views of the parties on the facts of the dispute and their implications, the Tribunal will now consider at length the facts and then each of the standards of treatment of the BIT supposedly breached by the Respondent. In considering the allegations of the parties under each of the factual situations, the Tribunal will assess to which extent the established facts evidence actions on the part of the Province in the exercise of its public authority or as a party to a contract. The Tribunal will follow the order in which the facts have been presented in the memorials taking into account the witness statements, the documentation submitted, expert opinions and the written and oral arguments made by the parties.

VI. The Facts

1. The Takeover of the Concession

(a) Positions of the Parties

The Claimant has alleged that on the day of the transfer of the Concession, July 1, 1999, no representatives of the Province or AGOSBA were present to ensure an orderly and safe transfer. According to the Claimant, critical documents were burnt in the facility located at the Plaza San Martín, and in nearly all branches tools and equipment to operate the Concession were missing. The Claimant alleges also to have found certain anomalies in the customer database, – i.e. the archives of large account customers were missing and so were the methodology for calculating VAT amounts, interest calculation, whether or not a property was a vacant lot, the due date of installments, etc. According to the Claimant, ABA communicated the specific deficiencies of the database to the MOSP and ORAB in October 1999 after it received an inadequate response from AGOSBA, and did not receive an "effective response" from either.20
The Respondent has pointed out that Claimant alleged no difficulties at the takeover of the Concession in the request for arbitration, in the grounds for the termination of the Concession Agreement adduced by the Claimant or in the discussions on the Memorandum of Understanding (MOU). According to the Respondent, the execution of the Concession Agreement took place in the presence of all the relevant provincial authorities, the Concession area is very large and it was not possible for officials to be present physically at all locations, and the Bidding Conditions provided a remedy in Article15.1.3 for such a situation. ABA never notified the Province of any conflict or negligence by the Province in connection with the takeover.
The Respondent affirms that all necessary information was made available to the bidders as part of the privatization related documentation and drawings and maps were made available to ABA on July 2, 1999 and that, in accordance with Section 2.4 of the Terms of Reference, Azurix acknowledged full access to all information and waived any claim to insufficient or non-delivery of information. The Respondent also points out that no claim was ever made in connection with defective equipment or tools and considers that the allegations of the Claimant in respect of the database are inadmissible. The Respondent refers in this respect to a communication of ABA to AGOSBA in terms that show deference and gratitude rather than offense for lack of cooperation. According to the Respondent, the database may have contained errors and defects but they were known to all bidders. The Respondent concludes by affirming that the takeover took place in a "context of mutual cooperation."21

In its Reply, the Claimant alleges that the Respondent relies on formalisms. It disputes the meaning given by the Respondent to Article 15.1.1, since this section could only be invoked if the 'legal' transfer was not made. Equally, the Claimant considers misplaced the reference to Section 2.4, since this Section presumes good faith in the Province's discharge of its duties and cannot be invoked when insufficient information was not received because of obstruction and sabotage by provincial employees.22 The Claimant contests the affirmation that no complaints were ever made. In fact, numerous complaints were filed with the Privatization Commission, the ORAB, the Provincial Governor and Argentine federal officials.23

The Claimant admits in its Reply that 12,700 maps were received on July 2, 1999, but that they were in total disarray and ABA had to engage the services of Halcrow to digitalize and organize the documentation. The maps were old, outdated and failed to describe the current state of the Concession. In contrast, ABA's employees were approached by former AGOSBA staff to offer them digitalized updated maps of the Concession, that, according to them, could substantially reduce the number of network expansions required under the Concession Agreement.24
The Respondent in the Rejoinder reaffirms its understanding of Article 15.1.3 of the Bidding Conditions and disputes that it only applies to the "legal" transfer. The takeover was a defined term in the Concession Agreement: "The act whereby the Concessionaire assumes the provision of service according to Chapter 15."25 The Respondent confirms that all documentation, including blueprints, maps and the users' database, was provided to the Concessionaire. ABA had the obligation under the Concession Agreement to digitalize the maps, and, if the Concessionaire employed Halcrow for this purpose, it was to fulfill an obligation not because the Province did not comply with providing the pertinent information.26 The Respondent finds that none of the evidence provided by the Claimant shows that ABA voiced any complaints during the six-month period following the takeover. ABA did not even mention it at the time of submitting its First Five-Year Plan proposal.27
The Respondent concludes by alleging that the evidence shows that the conflict identified as "takeover" was created by Azurix for these proceedings and that ABA and Azurix raised concerns about facts related to the takeover before provincial and federal authorities when their officers were warned about possible international arbitration proceedings.28

(b) Considerations of the Tribunal

2. Measures related to the tariff regime

The measures under this heading include the elimination of zoning coefficients, the valuation applicable to non-metered customers whose property had undergone construction changes, the so-called Valuations 2000, and the RPI. The Tribunal will consider them in that order.

(a) Zoning Coefficients

(i) Positions of the parties

On April 9, 1999, the Privatization Commission issued Information Communiqué No.12 on zoning coefficients. This communiqué attached a list of coefficients that "will apply for the correction of fiscal valuation of property and allow for determining the billing ranges as per Sanitary Rates in each district to which AGOSBA provides services according to provisions of Act 10,474 Section 7". The communiqué added: "Please note that the tariff scheme that shall apply to the Concession shall be the one contained in Annex Ñ, which does not contemplate any zoning coefficients."
The Privatization Commission was asked the following question on Communiqué No. 12:

"Question No. 160: Annex Ñ Concession Contract. The information communiqué No. 12 leaves evidence that the tariff system, which will rule the concession, will be the one included in Annex Ñ, which does not contemplate zoning coefficients. Is it correct to assume that the new billing could surpass the one determined in the last billing previous to the taking over due to the fact that it was affected by such adjustment?"

On April 23, 1999, the Privatization Commission replied:

"It is clarified that as regards the tariff system, it is governed by what is established in Annex Ñ of the Concession Agreement and the tariffs set not only for metered system but also for the non-metered system in Section 4 of the aforesaid Annex should be especially taken into account."

The Claimant concludes from this exchange that it was reaffirmed that Annex Ñ would govern the application of the non-metered tariff regime and that water bills would be increased for those persons who previously benefited from zoning coefficients.29
According to Circular 59(A) of June 25, 1999, AGOSBA issued the first billing cycle after the transfer of the Concession so that the new Concessionaire would have sufficient time to prepare. When ABA sent the bills for its first billing cycle (the second billing cycle after the transfer) without applying the zoning coefficients, consumers reacted badly to the resulting price increase. This event happened during the presidential campaign in which the governor of the Province, Mr. Duhalde, was running for president of the country.
On August 4, 1999, the ORAB issued Resolution 1/99. According to this resolution, ABA was precluded from billing amounts in excess of those amounts billed by AGOSBA for non-metered service prior to the granting of the Concession, and it ordered ABA to credit those amounts that exceeded AGOSBA's final billing for non-metered service during the month of August. ORAB based Resolution 1/99 on Article 4a-1 of Title II of Annex Ñ which states: "The tariff that results due to the application of the scale shall not exceed the one determined by the final billing prior to the Taking of Possession, for the same real estate, i.e., provided no building developments have been recorded."
ABA appealed administratively Resolution 1/99. ABA argued that Resolution 1/99 equated the terms tariff and bill, that a bill increase is not necessarily a tariff increase, that it did not change the tariff; and that it had simply eliminated the zone coefficient and, while the bills were higher, the tariff remain unchanged. The ORAB rejected the appeal by Resolution 2/00 of January 19/00 and dismissed ABA's interpretation of Annex Ñ as inconsistent with the regulatory framework promulgated by the Law.
The Claimant alleges that the action taken by the ORAB was politically motivated under pressure of the Government of the Province which was concerned that higher water bills would damage the chances of Mr. Duhalde in the presidential race. According to the Claimant, the press reported statements by the Minister of Public Works (MOSP) to the effect that the bills issued by ABA were incorrect and that consumers should not pay them until the issue was clarified (testimony of Mr. Castillo quoted in the Memorial p. 33). The Claimant further alleges that the Minister of MOSP "wanted to ease and postpone the solution in any way" till after the presidential election.30
The Claimant maintains that the action taken by ABA was correct and permitted under the Concession Agreement. The Claimant bases its position on the interpretation provided by Circular 27(A) and on the different meanings of the terms bill and tariff. Tariff is "a public document that includes a description of the company services, rates and charges, as well as the governing rules, regulation and practice in relation to those services".31 It is inappropriate to use tariff as a synonym of rates or prices, "the tariff is nothing else that a list of prices or rates".32 According to the Claimant, the ORAB contravened the Law by not providing a well-founded decision in dismissing the appeal of ABA as required by Chapter III, article 13-II of the Law.
The Respondent argues that the position of the Claimant has no basis on the Contract or on the Communiqué or the Circular. The Respondent first recalls that the non-metered system was a temporary system that should have been replaced 100% by a metered system by year five of the Concession, and that the Communiqué is not part of the contractual documentation of the Concession. In rejecting the understanding by the Claimant of the Communiqué and the Circular, the Respondent explains that, according to article 4 of Annex Ñ, the Concessionaire needed to follow two criteria for billing purposes: first, the bill should be the result of multiplying the presumed consumption by the price per cubic meter established on the basis of the valuation of the building concerned, and second, the resulting bill should not exceed that of the last bill prior to the takeover of the Concession. Thus, if the bill resulting from applying the values in the table included in article 4 exceeded the bill before the takeover, then the consumer should be charged only what had been charged then. The exceptions were only for new customers that, by definition, would not have received a bill prior to the Concession takeover, and in the case of construction variations which would affect the fiscal valuation of the building.
The Respondent expresses its inability to understand how the Claimant can rely on the distinction between tariffs and rates to justify its position. The Respondent agrees with the definition of tariffs and rates provided by the Claimant and affirms that the Province never maintained that these concepts were the same or were used indistinctly.33 The Respondent cannot follow how a bill for a building for a non-metered service may be increased without at the same time increasing the tariffs.34
The Respondent considers that it was always clear that Annex Ñ did not contemplate zoning coefficients and the clarification in Communiqué No.12 would have been unnecessary. This does not mean that bills for the first month of the Concession could be increased; the function of article 4 (a-1) was to avoid this effect.35 Equally irrelevant, for purposes of the Claimant's interpretation, is Circular 27(A). This circular replied to the question by simply referring to the provisions of Annex Ñ, in particular what is provided in article 4.36 According to the Respondent, once the appeal of Resolution 1/99 was rejected, the decision of the ORAB became administratively firm and unassailable under the administrative law of the Province.37

(ii) Considerations of the Tribunal

Both parties agree that zoning coefficients are not included in Annex Ñ. They also agree on the meaning of the terms tariff, bills and rates. Communiqué No.12 was issued by the Privatization Commission at its own initiative, so it may have considered it necessary to point out that Annex Ñ did not include zoning coefficients. When applied to a bill, coefficients had the effect of reducing it. Hence the follow up question to the Privatization Commission - question No. 160 - specifically asking whether "Is it correct to assume that the new billing could surpass the one determined in the last billing previous to the taking over due to the fact that it was affected by such adjustment?" The Commission replied – item No. 20 of Circular 27(A) - by referring generally to the tariff regime in Annex Ñ and stating that "the tariffs set not only for the metered system but also for the non-metered system in Section 4 of the aforesaid Annex should be especially taken into account".
This statement evaded the answer to the question asked and left ample room for misunderstanding. The interpretation of paragraph 4(a) by the Claimant is based on the difference between tariffs and bills which is reflected in the terminology of the Concession Agreement. In the key subparagraph of article 4, we read: "the resulting tariff from the application of said scale shall not exceed that determined in the last billing…" The paragraph clearly refers to tariffs and billing as two different matters, what should not be exceeded is the tariff applied in the last billing, not the billing itself. This being the case, the reading by the Claimant of the Concession Agreement and of the information provided by the Privatization Commission would seem reasonable. Indeed, if there is a subsidy resulting from the application of a zoning coefficient and such subsidy ceases to be applicable, the bill will necessarily be higher without any increase in the underlying tariff. To interpret the Contract otherwise, it is to admit that the Information Communiqué No. 12 was openly misleading and Circular 27(a), at best, evasive.
To conclude, the ORAB provided an interpretation of the Concession Agreement not in accordance with the concepts of tariff, rates and bills underlying it and with the information provided the bidders at the time they prepared the tenders. The decision of ORAB seems to reflect a concern with the political consequences of the elimination of the coefficients rather than with keeping to the terms of the Concession Agreement.

(b) Construction Variations: Resolution 7/00

(i) Factual background

The Concession Agreement permitted the Concessionaire to re-categorize non-metered customers whose fiscal valuation had changed because of construction improvements. On February 17, 1999, March 8, 1999 and March 24, 1999, the Claimant requested the Privatization Commission for the updated records of property valuations of the Dirección Provincial de Catastro Territorial (DPCT). On May 5, 1999, the Commission issued Circular 44(A) stating that the records had not been updated since 1994 except for individual updates "which occurred on a daily basis by customers visiting local branch offices."38 Allegedly the Claimant continued to press for the records39 and on June 23, 1999, the Commission issued Circular 58(A) with a CD containing the valuations of the DPCT.
Based on this information, ABA identified about 60,000 non-metered customers whose properties reflected a valuation increase. In January 2000, ABA informed the ORAB that it would re-categorize these customers into a higher tariff scale. On February 8, 2000, the ORAB issued Resolution 7/00 ordering ABA to abstain from re-categorizing these customers until the ORAB would have verified the valuation changes with DPTC. After three weeks, ABA appealed Resolution 7/00.
On March 17, 2000, the ORAB, by Resolution 15/00, authorized retroactive increases for construction variations of lands that were paying for the water service as uncultivated land and appeared as built lots in the CD attached to Circular 58(A). In these cases, it was evident that the different valuation was due to construction.
On June 26, 2000, the ORAB issued Resolution 54/00 rejecting the appeal of ABA. Resolution 54/00 recalled that, in the presentation made by ABA, it was not evident that the changes in fiscal valuation were due to construction variations and, therefore, the ORAB considered it necessary to conduct a study to determine the rationale of the variations. Resolution 54/00 affirmed that Resolution 7/00 only requested the Concessionaire to abstain from re-categorizing the properties and did not alter the procedure established in the Concession Agreement for the application of the valuations furnished by the Cadastre.40
The study conducted by the ORAB revealed that 76% of the variations presented by the Concessionaire were due to construction on the properties concerned.41 On November 22, 2001, after ABA had terminated the Concession, the ORAB issued Resolution 62/01 authorizing the re-categorization of those properties subject to the approval of a business plan to mitigate the impact on users. ABA presented the business plan on December 11, 2001. The ORAB requested further information on the plan on December 28, 2001. ABA responded on January 29, 2002. According to the Respondent, the relationship of ABA with the Province and the ORAB and the delivery of the service had deteriorated to such an extent that the ORAB requested the MOSP Undersecretary to include this matter among those to discuss between the Province and ABA.42 Thereafter, the MOSP Undersecretary advised ABA by letter not to proceed with the re-categorization. According to Azurix and based on press reports, the re-categorization took place once the Concession was transferred to Aguas Bonaerenses.
The facts as described have not been contested by the parties.

(ii) Considerations of the Tribunal

Resolution 7/00 did not refer to the reasons why the ORAB considered it necessary to verify the variations with DPCT. The Resolution ordered ABA to refrain from re-categorization until the ORAB had determined whether the variations were actually construction variations. The ORAB acted on the basis of an internal report of February 8, 2003 that alerted it to the fact that the CD attached to Circular 58(A) did not distinguish between variations in fiscal valuations for construction or other reasons. This simple factual information was not referred to in Resolution 7/00.
Construction variations had been the subject of several questions during the bidding process so a clear understanding of what the term meant seems to have been important from the bidders' point of view. According to Annex Ñ, the real estate fiscal valuations to be applied were those furnished by the DPTC. When the information was furnished to the bidders with Circular 58(A), this Circular did not refer to variations in fiscal value. When ABA identified the variations, it had no way to know whether they were caused by construction activity or other reasons. When the ORAB became aware of the issue, it would have seemed appropriate to base its reasoning on this fact, rather than to simply refer to the need to verify the valuation changes, which was understood as a delay tactic by the Concessionaire. The reason for the verification became only apparent when Resolution 15/00 was issued and the appeal was rejected.
The ORAB proceeded to identify the previously uncultivated lots with relative speed as compared with the time that it took to verify the other valuation changes. Resolution 15/00 was issued within 5 weeks of Resolution 7/00. On the other hand, Resolution 62/01 was issued more than 21 months after Resolution 7/00. Even if the tariff increases could be applied retroactively and the number of variations to be verified was large, this seems to have been an unduly protracted process. The delay also meant that the application of the new level of tariff would result in larger amounts to be paid retroactively with the consequent negative perception from the consumers' point of view. When the ORAB authorized the re-categorization, a plan to mitigate the impact was required from ABA and, even when such plan had been approved by the provincial authorities, the re-categorization by ABA was not authorized by MOSP.
To conclude, the bidders were not provided with accurate information on the variations, and the Province seems to have engaged in a protracted dilatory process; first in identifying the construction variations and then in delaying the recategorization. As in the case of the zone coefficients, the concern was on the political effect rather than with applying the terms of the Concession Agreement.

(c) Valuations 2000

The Concession Agreement specified that the 1958 valuations methodology or its equivalent be used to determine the appropriate tariff schedules for non-metered customers. The 1958 valuation was discontinued by the DPCT in early 2000 by law 12,397 of the Province.

(i) Positions of the Parties

The Claimant argues that the change in property valuation methodology caused a fundamental problem for ABA as it became impossible to apply accurately Valuations 2000 to the existing non-metered tariff scale.43 The new methodology prevented the application of the tariff regime to new real estate created and to updated valuations for existing real estate that had experienced construction variances.44 Since the Province did not provide an equivalent methodology, as required by the Concession Agreement, ABA proceeded to prepare an equivalent methodology and presented it to the ORAB on November 22, 2000. According to the Claimant, the ORAB avoided responding on the equivalent methodology proposal notwithstanding persistent communications of ABA, and no determination was ever made by the ORAB.45
The Respondent argues that it was not the role of ABA to prepare equivalent valuations and that the Concession Agreement was clear that the equivalent valuations had to be determined by the DPCT. Furthermore, the change to Valuations 2000 would have a minimum impact on the Concessionaire since it would only affect construction variations in existing properties and new properties in the Concession area. In any case, the Concession Agreement provided the way to calculate the applicable tariffs when there was inadequate real estate valuation. According to the Respondent, the methodology proposed by ABA was a disguised effort to increase tariffs, a fact that is denied by the Claimant.
The Respondent points out that ABA in fact made a proposal to valuate ex officio properties which had no valuation on February 29, 2000. The DPCT informed ABA that it could not decide on this matter because the system in effect did not permit the establishment of a valuation mechanism such as proposed by ABA. However, the ORAB, by Resolution 45/00 of June 13, 2000, permitted ABA and AGBA to carry out ex officio valuations as proposed by ABA.46

(ii) Considerations by the Tribunal

The Province proceeded to change the valuation system in the first quarter of 2000, shortly after the Concession was awarded. The bidders were not informed of the upcoming change. When the change occurred no alternative methodology was provided. The complaint of Azurix seems to be more on the lack of a meaningful response by the Province than anything else. Even the arrangement proposed by ABA in February 2000 was put forward at its own initiative, although it was the Province's responsibility to provide alternative methodologies as explained by the Respondent. Irrespective of the merits of ABA's proposal and whether it meant a raise on applicable tariffs to the properties affected by the valuations, this tariff conflict could have been avoided by simply instructing the Concessionaire on what to do at the time the new law was issued and as part of its implementation. It seems that the administration of the Province was not very pro-active in search of solutions to a problem that the Province itself had created.

(d) Retail Price Index (RPI) issue

(i) Background

The Concession Agreement provides for extraordinary revisions of the tariffs on account of, inter alia, variations in cost indices. According to Article, the concept of such revisions is as follows: "These revisions shall be carried out where the Concessionaire or the Regulatory Entity alleges an increment or fall in the Concession cost indexes when its absolute value exceeds three per cent (3%), in accordance with the provisions set out in clause" Article sets forth the formula for the calculation of the percentage cost index variation. For this purpose, the formula uses as a basis 50% of the change in the Consumer Price Index of the United States and 50% of the change in the Producer Price Index, Industrial Commodities, also of the United States.
ABA requested the commencement of the procedures for the tariff review foreseen in Article of the Concession Agreement on December 20, 2000 based on a 6,659% increase in the RPI. On January 3, 2001, the ORAB regulatory department noted in a letter to the Board of the ORAB that ABA had met the formal regulatory requirements of said article and was authorized to seek an RPI review.47 On January 30, 2001, Mr. Pievani, the head of the economic regulation area of the ORAB, sent a further report to the ORAB president confirming the 6,659% RPI increase but considering the request inadmissible based on consequences related to the provision of the service and to the users, in particular, he referred to the Bahía Blanca incident, which is considered later in this award. On February 8, 2001, the President of the ORAB notified the MOSP Undersecretary of ABA's request and recommended the denial of the tariff review. On February 27, 2001, the MOSP instructed the ORAB to solicit from ABA a detailed cost study justifying the impact of the variance of prices on ABA's cost structure, to conduct its own cost study and to condition the review and ultimate submission of the request to the Executive Branch on ABA's presentation of the cost study. On March 9, 2001, the ORAB notified ABA of the need to present a cost study.
ABA responded to the cost study request in a note to the ORAB, dated March 18, 2001, requesting ORAB to clarify the procedural or contractual framework on which ORAB based its request.48 The ORAB reiterated the request for a cost study within five days on April 5, 2001. On April 16, 2001, ABA responded by explaining "the economic and financial principles behind the RPI adjustment as an integral element of price cap regulation and price controls, and the importance of the regulator's objectivity to insure the transparency of the regulatory process".49 On May 14, 2001, ABA sent the ORAB a more comprehensive analysis of the economic and financial principles underlying inflationary adjustments and a discussion of the automatic and objective nature of the inflationary review process.50
On May 30, 2001, the ORAB sent a letter to the MOSP Undersecretary informing him of ABA's concerns with the handling of the RPI request by the Province and requesting the advice of the provincial Organismos de Asesoramiento y Control (Asesoría General de Gobierno, Contaduría General and Fiscalía de Estado). After these organs had expressed their opinion, the ORAB issued, on October 24, 2001(after ABA had terminated the Concession Agreement) Resolution 53/01 whereby it summoned ABA "to furnish the ORAB with a study on costs that warrant the incidence of such indexes on tariffs in order to verify the admissibility of an extraordinary tariff revision" within ten days under the penalty of the tariff revision request be disallowed. Since ABA did not provide the cost study requested, the ORAB issued Resolution 23/02 on March 26, 2002 (after the Province had taken over the Concession) dismissing the request.

(ii) Positions of the Parties

The controversy on the RPI is related to the extent that the review had an automatic character under the Concession Agreement. The Claimant argues that such review was automatic once the correctness of the elements underlying the percentage calculation had been verified, that this was an essential element of price-cap regulation and that there was no need to present a cost study. Such study was required only for the extraordinary tariff review foreseen elsewhere in the Concession Agreement. The Claimant notes that it was notified of the need of a cost study nearly three months after it filed its RPI request when in accordance to the contract the review of ORAB was to be completed within 30 days, and that the cost study was mandated by the MOSP Undersecretary but it did not figure in the ORAB's early evaluation of the review, nor in the separate report of Mr. Pievani. The Claimant alleges that the protracted process outlined by the Regulatory Group in the ORAB and the addition of a cost study were politically motivated and that there is no basis for them in the Concession Agreement. Furthermore, the public hearings do not have the role in the case of the RPI review attributed to them by the Respondent. Their objective is to provide transparency in the process of tariff reviews. According to the Claimant, the last paragraph of Article proves that, once the revision is considered pertinent, the percentage of variation in the RPI had to be applied to the tariffs established in US dollars.
The Respondent has alleged that the procedure for the extraordinary tariffs reviews was common to all such reviews, and that there was no automatic raise of tariffs simply by the fact that a review had been triggered by a certain level of inflation. The steps required to be undertaken for such review were followed by the ORAB without the cooperation due by ABA to the regulatory organ of the Province and without any political motivation on the part of the Province which at all times followed the provisions of the Law and the Concession Agreement. The function of the public hearing goes beyond that attributed to it by the Claimant and it is the same for all tariff reviews. The ultimate decision to approve a tariff review request was the function of the provincial Governor.

(iii) Considerations of the Tribunal

As in the other controversies under the generic heading of tariff conflicts, the issues are based to a large extent on the interpretation of the Concession Agreement, in particular, Article 12. This Article has the following structure: General Principles (12.3.1), Procedure (12.3.2), Automatically Unacceptable Assumptions for Increases in the Tariffs and Prices (12.3.3), Ordinary Five-Year Reviews (12.3.4), Extraordinary Reviews based on Variations in the Indices of Costs (12.3.5), and General Extraordinary Reviews (12.3.6).
One of the general principles applicable to all revisions ("modificaciones") is that revisions of the tariffs and prices can compensate only the costs arising from the delivery of the Service provided that there is compliance with the terms of the Agreement. The procedure to be followed is common for all revisions and includes, inter alia, the requirements that the revisions be based "on prior analyses and technical, economic, financial and legal reports, and on proof of the facts and actions that justify the revision", and that there be an evaluation of the consequences that may result from the revision in respect of the delivery of the service and of the users. In addition, the proposed revisions shall be debated in a public hearing before the executive approves or rejects proposed revisions.
In the specific context of the revisions for reason of variations in the cost indices, Article entitled "Verification of Revision Admissibility" provides that, once it is established that a variation is above the percentage set forth in Article, the procedure moves on to "the verification stage" where the ORAB is required to verify the existence of the elements that justify the revision in accordance with the general principles of Article 12.3.1 and the provisions of Article 12.3.5. Once the verification is completed, the ORAB shall determine whether the revision is justified and the modification to be introduced to the existing tariffs and prices. If the ORAB finds the revision justified, then a public hearing on the proposed revision should take place. The conclusions of the ORAB and the minutes of the hearing are sent to the executive which decides whether to agree to the revision or reject it.
It is evident from a reading of the contractual provisions that the Concession Agreement applies the same procedure to all reviews, therefore, a review for variations in cost indices is not more or less automatic than an ordinary five-year review. The elements that trigger the review are objective and whether a review should or should not take place could be seen as automatic once the correctness of the calculations have been verified, but this is the first step in the process. The ORAB then had to decide on the appropriateness of any revisions taking into account the general principles in Article 12.3.1, one of which is that modifications may only compensate for actual costs in the delivery of the service, and the consequences that the modification may have for service delivery and the users. The fact that the revision would be the subject of a public hearing and that the executive may or may not approve it show that a cost indices variation revision was not assured, under the terms of the Concession Agreement, to produce the result of simply transferring the variation in the costs indices to the tariffs and prices.
The parties have also argued whether the cost study requested from ABA by the ORAB was appropriate. The Claimant has placed special emphasis on the political motivation of the request since it was not in the original assessment of the ORAB. Given that under the terms of the Concession Agreement the ORAB was obliged to evaluate whether the modification based on variation in the cost indices was justified in terms of the general principle that modifications should reflect the costs of the service, the request would seem to be legitimate.
In interpreting the Concession Agreement and as affirmed by the parties and required by the Agreement itself, it is necessary to proceed with a harmonious reading of all the relevant provisions. While the last paragraph of Article 12 would seem to indicate that once the review is considered justified then the price index increase shall be applied to the tariffs retroactively as calculated, this provision cannot be read in such a manner as to contradict the general principle established in Article 12.3.1. The Tribunal is not convinced that the position taken by the Province would have changed the economic equilibrium of the Concession, as Azurix has claimed, as long as the principle to reflect actual cost variations due to inflation had been respected. In any case, this point is speculative since the review was never completed.

3. The Works in Circular 31(A)

The Privatization Commission issued Circular 31(A) on April 23, 1999 on the subject of works under execution. This circular lists works in progress for purposes of Article 15.3.1 of the Concession Agreement and explains that, once the works would have been completed, they would be transferred without charge to the Concessionaire. Each work is listed with the location, a brief description, the amount budgeted and the percentage of completion. It is disputed whether the works were ever completed. ABA either refused to accept them because it considered them defective, or accepted them provisionally, according to ABA, in order to prevent a collapse of the water supply system. We will consider each of these works in the sequence presented by the Claimant in its Memorial and the allegations made by the parties in their respect.

(a) Bahía Blanca: Algae Removal Works

The so-called "Algae removal works at the Paso de las Piedras Dam" in Circular 31(A) consisted of the construction of a micro-filtering plant, refurbishment of certain key aspects of the Patagonia WTP filters, the repair of the system that evenly distributes the incoming water between the two filtration modules at the Patagonia WTP ("the Equipartition system"), the modification of certain elements of the direct filtration system at the Patagonia WTP ("Direct Filtration"), and the construction of a chlorine dioxide dosing facility ("Chlorine Dioxide Dosing System"). The Province retained the responsibility for the operation of the Reservoir and supplying raw water to the Patagonia WTP.

(i) Positions of the Parties

In the Memorial, the Claimant alleges that the Algae Removal Works had serious defects in their design and construction. The Claimant gives as examples that the Micro-Filtration Plant as designed permitted raw untreated water to by-pass microfiltration, the Direct Filtration system was only partially completed and the items installed were never connected, the Equipartition System was only partially completed and did not allow even distribution of water to the filter modules, the Patagonia Filters were not completed, and the Chlorine Dioxide Dosing system was defective in its design and construction and posed operational safety hazards.
On August 24, 1999, explains the Claimant, ABA provided the ORAB with a list of necessary short-term corrective measures to be completed prior to ABA taking possession of the Algae Removal Works, including that the water level at the Reservoir was unusually low, the new Micro-Filtering Plant was overloaded, the sand filters at the Patagonia WTP were old and overloaded, and the repairs to the Equipartition system failed to evenly distribute water. ABA also proposed the creation of a technical committee for the operation of the dam and reservoir to define contingency plans for drought periods and determine minimum quality standards to be met by the raw water supplied by the Province.51
The Claimant alleges that the failure to complete the Algae Removal Works caused an extraordinary algae bloom in the reservoir on April 10-11, 2000 resulting in the water appearing cloudy and hazy and with earth-musty taste and odor. According to the Claimant, the complaints of the consumers were picked up by the press and politicians and it became a major media and political event. The Claimant contends that none of the factors that caused the algae bloom were subject to ABA's control nor could the algae bloom have been foreseen based on the information supplied by the Province. This notwithstanding, observes the Claimant, provincial officials issued statements that caused panic in the population and did not conform with the analyses of the provincial Central Laboratory of the Ministry of Health which had determined that, "although the Bahía Blanca network water is not drinkable from a physical/chemical standpoint, no microbial contamination that could cause infectious diseases was detected."52
The Claimant points out that, as reported in the press, the Governor invited the citizens not to pay the bills, and that the ORAB ordered ABA to discount the invoices from April 12 until the ORAB deemed the drinking water to meet quality standards. The Claimant alleges that the ORAB took this action bowing to political pressure even if the president of the ORAB had indicated to the press that there were no grounds for a penalty because the quality parameters were in accordance with the standards defined in the bidding terms and conditions.53 On April 28, 2000, the ORAB, by Resolution 24/00, prevented ABA from invoicing any amounts until the service was normalized. The prohibition was lifted by Resolution 33/00, dated May 8, 2000. On May 18, 2000, at the request of MOSP, the Provincial Domestic Trade Bureau forbade ABA from invoicing and collecting for services until water quality was deemed acceptable to users.
The Claimant notes that this action was taken under the Consumer Defense Act which applies to situations not covered by a specific regulatory framework, and disputes the authority of the Provincial Domestic Trade Bureau to issue this measure because the ORAB had exclusive jurisdiction on billing matters. The Claimant also notes that the press reported that the governor was studying the means to remove the ORAB officials responsible for the decision to allow ABA to receive payments when the service was not in good condition and that a lawsuit was filed against these officials.54 Under such pressure, ABA agreed with the ORAB to extend the service discount from May 5 to May 31, 2000 but stating that it did not accept responsibility for the water problems and reserved the right to seek reimbursement for its damages from the Province. On June 2000, the ORAB issued Resolution 43/00 ordering a 100% discount on invoices for services provided in Bahía Blanca and Punta Alta from April 12 through May 31, 2000.55

The Committee of Control for Privatized Public Services and Companies, and the Consumer and User Defense Committee of the Provincial Legislature held hearings on the algae incident. According to the Claimant, ABA, MOSP and the ORAB were summoned to appear before said committees. MOSP and the ORAB arranged for a separate meeting closed to the public. In that meeting, the MOSP Minister stated:

"We are aware that, in association with the ORAB, we have forced certain decisions that are of a political nature, particularly by requesting the ORAB to apply a resolution whereby the Concessionaire is to receive no payment for each day in which water supply quality is not as agreed; by doing so, we breached the concession agreement, and this was a political decision. We took a step further beyond the general meaning of the agreement itself."56

According to the Claimant, the MOSP Minister also recognized that the problems that occurred had pld causes and the Mayor of Bahía Blanca attributed them to the lack of investments for many years.57

In the Counter-Memorial, the Respondent recalls that, according to Circular 31(A), 98% of the works had been completed. This percentage reflected the fact that the Micro-Screening Plant of the Paso de las Piedras dam had been refurbished and started up by June 23, 1998, and on December 9, 1998 eight additional filters were released for use.58 The Respondent points out that Azurix was aware of the condition of the works at the time it submitted the bid for the Concession and ABA had taken over the operation of the service, including algae treatment.59

The Respondent explains that, under the Concession Agreement, the Concessionaire was responsible for carrying out all tasks to guarantee efficient provision to users, the protection of public health and the rational use of resources, and it was specifically responsible for the quality of unfiltered water and the quality and quantity of drinking water. The Respondent further notes that the Concessionaire was also responsible for the quality of unfiltered and drinking water taken from the Paso de las Piedras dam. The Respondent affirms, based on Article 1 of Exhibit O to the Concession Agreement, that "even when the Province was in charge of the operation and maintenance of the Dique Paso de las Piedras dam, the latter was explicitly exempted from any responsibility regarding the 'quality and quantity of water delivered' to the Concessionaire."60

The Respondent affirms that ABA infringed the biological parameters for drinking water required in the Concession Agreement. The Respondent points out that the audit report ordered by the ORAB stated that all water coming from superficial sources is susceptible of being treated for human consumption and what varies is the intensity of the required treatment. The same report considered that the Concessionaire managed the crisis in an improvised and imprudent manner and the measures adopted by ABA were not technically suitable to remedy the problem and, hence, the ORAB imposed a fine for not non-compliance with its obligations under the Concession Agreement.61
The Respondent further notes that a crisis in the drinking water supply is a serious and alarming event for the community and, if the image of ABA deteriorated in the eyes of the users, it was because of the negligent manner in which ABA addressed the problem.62
In its Reply, Azurix alleges that the Province did not disclose to the bidders information in its possession related to the reservoir situation and points out that Argentina fails to recognize that the April 2000 algae bloom was an extraordinary occurrence that ABA could not predict or avoid on the basis of the information or assets under its management.63
Azurix contests Argentina's assertion that since the beginning ABA was in charge of algae treatment operations. Azurix recalls that the Algae Removal Works were the exclusive responsibility of the Province, and the works that concerned the Patagonia plant were never completed. Furthermore, ABA could not avoid operating this plant in its existing condition because of its critical importance. Azurix also explains in this context that it needed the ORAB's prior permission for any operation to be carried out in connection with the Algae Removal Works and to access the Micro Filtration Plant facilities. The Claimant notes that this plant was never transferred to ABA and ABA was involved in its operation during the algae crisis in order to take emergency measures.64
The Claimant disputes the interpretation of the Concession Agreement by the Province and argues that Article 3.6.1 only applied to raw water sources under ABA's management and considers it nonsensical the extension of ABA's obligation to sources exclusively controlled and operated by the Province. In fact, according to the Claimant, none of the action that could have prevented the algae incident was under ABA's control: the Province had exclusive control of the dam and reservoir, could control agricultural run-off into the reservoir, fail to complete the Algae Removal Works and lowered the water level of the reservoir favoring algae blooms.65
The Claimant explains that the fine imposed by the ORAB on account of the algae incident was imposed after the service had been transferred to the Province more than two years after the algae bloom event and four days before the deadline for filing petitions in ABA's bankruptcy proceedings. The Claimant also points out that the fine was in excess of the amounts permitted under the Concession Agreement. Azurix contests the grounds on which the fine was imposed. Azurix argues that the guidelines values in Table IV of Annex C to the Concession Agreemnt are only reference values in line with the World Health Organization (WHO)'s recommendations and that the Respondent turns them in strict limits.66
The Claimant affirms that ABA took all measures required to remedy or mitigate the effects of the situation caused by the Province and that at no time was there any risk to public health, and observes that the Respondent relies exclusively on the audit report prepared by the ORAB to argue that ABA was negligent in dealing with the crisis. Azurix further observes that such report is not reliable given the lack of independence of the ORAB from the Province's political will.67
The Claimant contests the Respondent's assertion that ABA voluntarily gave a discount to customers and affirms that ABA was forced by the ORAB to apply such discount to the water bills.68 Furthermore, it is unacceptable to Azurix that public statements by officials with a view "to inciting fear, uncertainty and even violence against ABA" be described by the Respondent as "the free exercise of a democratic society's rights."69
In the Rejoinder, Argentina reiterates in substance its previous arguments, mainly, that at the time of the bidding for the Concession the Algae Removal Works were 98% completed, that Azurix and ABA were aware of the condition of the works and submitted themselves to Section 2.4 of the Bidding Conditions,70 that Azurix inspected the works before submitting its offer, that since the beginning of the Concession ABA was in practice responsible for the operation of the Service and the treatment of the algae, that the Concessionaire was responsible for the quantity and quality of raw water from the Paso de las Piedras dam even if the operation and maintenance was under the charge of the Province, that Table IV of Exhibit C to the Concession Agreement required that the drinking water had no phytoplankton and zooplankton, and that failure to meet these biological parameters meant that the ORAB was required to impose a fine.71
The Respondent alleges that the community unrest was not due to intervention of provincial officials, as claimed by Azurix, on the contrary, these officials were responding to the population concern over the foul smelling and tasting water. The Respondent argues that Azurix has admitted as much by recounting how the problem with the water smell and taste had "gradually attracted the attention of politicians and journalists and became an issue widely covered by the media."72

(ii) Considerations of the Tribunal

The allegations of the parties relate to their understanding of the Concession Agreement, the causes of the algae incident and the reaction of the provincial authorities.
It is a matter of dispute between the parties whether the Concessionaire was responsible for the quantity and quality of the water from a source not under its management. The dispute relates to whether Article 3.6.1 of the Concession Agreement applies to the raw water supplied from the Paso de las Piedras reservoir. The Tribunal notes that this Article does not differentiate between sources of raw water and Annex O specifically exempts the Province from responsibility from the quantity and quality of water supplied from said reservoir.
It is also disputed between the parties whether the Concessionaire breached the biological parameters set forth in Annex C to the Concession Agreement. The Tribunal has difficulty with the Claimant's understanding of the wording of Annex C and the concordant provisions in the Concession Agreement. Article 3.6.2 is very clear in requiring that the Concessionaire meet the parameters established in Annex C and in specifying that in all cases the failure to meet the technical parameters shall be considered a potential risk for the public health.
However, the Concession Agreement was based on certain factual assumptions that did not turn out to be correct. It is not contested that the Algae Removal Works were not completed notwithstanding that at the time of bidding for the Concession they were represented to be 98% complete and expected to be completed by April 1999, at least two months before the beginning of the Concession and a full year before the extraordinary algae bloom occurred. The reservoir was kept by the Province only 25% full to permit completion of the works. In turn the low water level contributed to the extraordinary nature of the algae bloom. The works undertaken by the Province had the objective to obtain treated water at the outlet of the Patagonia plant with "levels of the chlorophyll photosynthetic pigment below 1mg/m3, irrespective of the species or number of cells, pH, etc. present in the water." This objective was not achieved. The filters installed at the micro-filtering plant were inadequate for filtering algae, a fact on which the ORAB and the consultants of Azurix agreed. The Bahía Blanca Drinking Water Supply Monitoring Report prepared by the ORAB noted that it had not found domestic or international precedents where these micro-filtering systems were used for the primary elimination of this type of plankton organisms.73 Similarly, the report prepared by the consulting firm JVP employed by ABA concluded that the direct filtration system at Paso de las Piedras was not fit for the treatment of water because of the high concentration of algae/chlorophyll reaching the Patagonia plant due to the properties of the water from the reservoir and the removal capacity of the micro-screens system.74 Since August 1999, ABA had repeatedly advised the ORAB, to no avail, of the measures necessary for ABA to take possession of the Algae Removal Works. For instance, in a letter to the ORAB dated August 24, 1999 (less than two months into the Concession and eight months before the April 2000 incidents) ABA alerted the ORAB that there was an increase in "the algae problem" due to the unusual low level in the reservoir.75 In the same vein, ECODYMA, the contractor engaged by AGOSBA to carry out the Algae Removal Works, wrote to the General Administrator of Sanitary Works of the Province on July 19, 1999 to bring to her attention that the quality of the water of the reservoir did not meet the standards used as a base for its bid because of the high level of turbidity of the water and the algae bloom in large number and variety.76
Given this factual situation, the reaction of the provincial authorities shows a total disregard for their own contribution to the algae crisis and a readiness to blame the Concessionaire for situations that were caused by years of disinvestment and to use the incident politically, as admitted by the MOSP Minister in hearings held by commissions of the provincial parliament on the algae incident. It equally shows the willingness of high placed provincial officials, including the Governor, to interfere in the operation of the Concession for political gain whether by forcing ABA not to bill the customers or threatening the staff of the ORAB for lifting the billing interdiction. These actions by the Province are clearly actions taken in use of its public authority and go beyond the contractual rights as a party to the Concession Agreement. The Tribunal understands that governments have to be vigilant and protect the public health of their citizens but the statements and actions of the provincial authorities contributed to the crisis rather than assisted in solving it.

(b) Moctezuma

(i) Positions of the Parties

As explained by the Claimant in its Memorial, the works as described in Circular 31(A) included two elements: "Drilling Construction Works" and "Construction of Aqueduct and Injection Pipelines". These works were only 10% and 25% completed according to Circular 31(A). The drilling component consisted of drilling 16 wells capable of extracting 300 m³ per hour. Under the drilling contract, AGOSBA had the right to reject the work performed if the water flow was lower than 50% of the required capacity or the water did not meet sanitary requirements. The aqueduct was intended to transport water from Moctezuma to the cistern in Carlos Casares for delivery to this town and the town of Pehuajó. These works were to be completed in 18 months, by June or early July 2000.
According to the Claimant, on March 14, 2000, AGOSBA informed the ORAB that there would be a two-month delay and the works would be completed by September 2000. The dateline was postponed further and the Claimant finds it disconcerting that the ORAB, instead of pressing the Province to fulfill its obligations, informed ABA that "Azurix [sic] cannot assert completion of works as the grounds of non-compliance of the parameters for water quality in such localities."77 The completion occurred nearly 18 months after the original completion date and after ABA had terminated the Concession. The Claimant explains that ABA was willing to accept the works provisionally subject to a technical and functional evaluation and that the evaluation performed on January 3, 2002 showed that the works were unsuitable for the purpose and were not accepted by ABA. In particular, the wells could supply only a third to half the agreed water flow.78
In the Counter-Memorial, Argentina describes a different situation. It refers to the study submitted by ABA to the ORAB in May 2000 where it acknowledges that the wells have been drilled and 13 km. of aqueduct completed. In the same study, ABA recommended to cut the extraction of water by 50% to preserve the geological reserves. The works were completed and ABA was notified on October 2, 2001. ABA accepted the works provisionally on October 10 because it had terminated the Concession on October 5. The civil works were completed by end of August but the electricity connection could not be installed because of flooding in the area. The External Audit of September 2001 presented by ABA to the ORAB states that access to some drillings was not gained because they were in a flooded area. The works were not essential to meet service quality targets because of the 3-year exemption in Annex F of the Concession related to physical and chemical parameters of water quality. ABA was never penalized nor has Azurix claimed any damages on this account.
In its Reply, Azurix points out that Argentina has failed to mention that the wells were expected to solve quantity of water issues and not only quality, and that the quality of the water did not comply with the parameters originally provided in the work specifications.79 The fact that there was no deadline in Circular 31(A) does not mean that this Circular can be considered in isolation of the contracts and specifications for the works in question. The flooding only took place after April 15, 2001, more than eight months after the expiration of the deadline and after the works had been suspended because of lack of payment to the contractor.80 Azurix maintains that ABA did not even accept the works provisionally but "subject to the conditions mentioned in Note GRP 1882/01, particularly its completion in accordance with the specifications and the contract signed for their execution…"81 As already pointed out, the ORAB warned ABA that non-completion of the works in Moteczuma could not be used as excuses for noncompliance with water quality parameters. The ORAB also determined that there was decreased pressure in the cities of Pehuajó and Carlos Casares and ordered ABA to solve this issue. ABA had to drill five new wells, implement a pumping scheme to optimize drinking water distribution in Pehuajó, and started the construction of an arsenic treatment plant because the Moctezuma wells failed to meet the standard required in relation to arsenic levels.82 According to the Claimant, the worst part was the damage to the image of ABA among the customers since the works had been presented by the Province as the solution to the water problems of the previous 40 years and created high expectations among the authorities and local people.

(ii) Considerations by the Tribunal

(c) Polo Petroquímico ("Polo")

(i) Positions of the Parties

AGOSBA had entered into an agreement with Profértil and the Province for the supply of industrial water for a fertilizer plant under construction. The water supply contract was assigned to ABA as part of its takeover of the Concession. To meet the water requirements, the Province had started construction of an aqueduct which was listed as 95% complete in Circular 31(A). Azurix claims that the Province failed to deliver the aqueduct. In a letter of August 25, 1999 to ABA and AGOSBA, Profértil noted the defects "in the construction and design of the Industrial Aqueduct and the inferior quality of the equipment and materials used". In January 2000, ABA informed Profértil that the aqueduct did not meet the requirements to provide the service and it would not be possible to supply Profértil with the quantity and quality of water agreed by the Province. Azurix received the Industrial Aqueduct in March 2000 provisionally and subject to "final acceptance upon the satisfactory result of routine technical evaluation and the Province assuming full responsibility for any service failures not caused by ABA".84 On August 2000, the Province, Profértil, PBB and Polisur (other industries in the Polo) signed a letter of intent to construct a new pipeline. Azurix considers this fact as an admission that the existing aqueduct was "not fit for its intended purpose". Azurix lists a series of steps that it took to minimize the deficiencies of the aqueduct, including the building of a by-pass between the aqueduct and an existing water pipeline, and supplying the companies in the Polo with industrial water while bearing the cost of the raw water paid to the Province.85
Argentina points out that pursuant to Article 15.4.1 of the Concession Agreement, the contracts signed by OSBA listed in Annex N would be transferred to the Concessionaire. Circular 39(B), item 2, Annex O, established guidelines for the supply of industrial water to the companies in the Polo. The guidelines established the price to be paid to the Province and the responsibility of the Province for the amount of water delivered. The quality of the water should be that of water in its natural state at the Paso de las Piedras dam treated at the micro-screening plant.86 The President of the ORAB informed ABA about the transfer of the aqueduct on March 28, 2000. In the "Inventory of Fixed Assets" of ABA, the aqueduct was listed as an asset assigned to the Concession with April 15, 2000 as "Date of Origin" and in excellent condition.87 Argentina argues that ABA tried to generate conflicts with Profértil because it did not consider the contract advantageous, and with the Province to renegotiate the Concession.88
Azurix in its Reply reaffirms that the poor condition of the work prevented adequate service provision to the industries in the Polo. In addition, the deficient operation of the dam affected the quality of the water to such an extent that ABA could not "invoice the industrial water it delivered in order not to become committed to an operation that it could not guarantee through the Province's facilities".89 Furthermore, the commercial negotiations that ABA may have held with the industries of the Polo are alien to the issues raised by Azurix. There is no doubt that the deficiencies experienced by the aqueduct created a negative image of ABA in the eyes of the industries located in the Polo.90
In the Rejoinder, Argentina reaffirms its previous arguments on the assignment of the contract and ABA's acceptance of the aqueduct. If ABA had made investments to ensure the continuity of service, it is because ABA considered it necessary to comply with its obligations. They are not the Province's or Argentina's responsibility.

(ii) Considerations of the Tribunal

The Tribunal considers that the fact that the Province agreed to build a new aqueduct proves that the one delivered to the Concessionaire was inadequate. The tests conducted by ABA, which have not been disputed by Argentina, provide also evidence of the low level of pressure acceptance by the water pipeline. The letter of August 1999 from Profertil to AGOSBA and ABA speaks by itself and its content has not been refuted by Argentina. However, this is a matter of a contractual nature that does not go beyond the relationship between the parties to the Concession Agreement acting as such.

(d) Florencio Varela

(i) Positions of the Parties

This component of work in progress for which AGOSBA took responsibility consisted of drilling four wells. According to the drilling contract, the wells were to be completed in 180 days from the date of the contract, December 30, 1998. Circular 31(A) stated that the wells were 70% completed, which Azurix disputes. Azurix alleges that the Province failed to deliver the wells and hence it was impossible to keep up with the summer water demands and such failure caused service interruptions. On December 27, 1999, the ORAB ordered ABA "to conform the service to the established service levels within 24 hours". To comply, ABA "took control of the Florencio Varela Extraction Wells on a provisional basis in order to begin providing water service to the local citizens".91 On December 28, 1999, ABA explained to the ORAB that the Province's failure to complete the wells made it impossible for ABA to comply with its obligations to provide water service. ABA's first Annual Report noted that the drilling ended before reaching the aquifer "to avoid more complicated works, which rendered said works useless".92
According to Argentina, the wells were "practically completed" at the end of July 1999 and the final measurement was carried out. ABA’s Service Report states that the wells were available for service. The wells were included in the inventory of assets on June 15, 1999. The wells needed to be supplemented with the pertinent interconnection pipes. Their installation was the responsibility of the Concessionaire. ABA’s Annual Progress Report on the POES and Service levels for the year July 1999-June 2000 includes at least three of the wells in the actual service provision. In any case, ABA did not suffer any damages nor did the ORAB impose any penalties.93

In its Reply, Azurix finds that Argentina has failed to address the evidence presented in the Memorial. Azurix notes that it took five months for the ORAB to authorize ABA to assume operation of the Florencio Varela wells, to conduct tests, to adapt them and to complete them in order to address the summer increased demands.94 Azurix contests the significance of the quoted reports and the measurement statement. According to Azurix, the purpose of the Service Report was "to evaluate the condition of the water system 'at the time of ABA’s take over of the Concession".95 The Report noted that the four wells were not in operation and the equipment was missing. The date of origin in the Fixed Assets Inventory does not have the relevance that Argentina attributes to it. Date of origin is merely a technical term that does not explain why the ORAB did not authorize ABA to take material possession till December 27, 1999. Prior delivery of the wells was essential for the installation of the water pipes. Once ABA obtained the authorization, it immediately proceeded to complete them at its own expense and connect them to the network. Only three wells were put in operation, the fourth could not be used due to construction problems, was abandoned and new drillings had to be made at ABA’s own expense.96


In the Rejoinder Argentina contends that the completion of the works during the first month of the Concession was duly proved by Argentina. Argentina points out that Azurix quoted only partially from the Service Report which stated that "only the ducted well was available. The equipment is missing. The equipment is stored at the 'Centro' operating location".97 Contrary to Azurix's allegations, it was not necessary to equip the wells to interconnect them. In any case, no fine was imposed since no fines could be imposed during the first six months of the Concession.98

(ii) Considerations of the Tribunal

From the parties allegations it emerges that Argentina does not contest that ABA was authorized to use the wells on December 27. The inventory of fixed assets showing the wells as an asset added on June 15, 1999 indicates that assets were added before work was completed or were in service. On June 15, the Concession Agreement had not been signed yet and there is no dispute that, on that date, the works were not completed. Argentina claims the works were completed in July and ABA claims never to have accepted them. There is no dispute that only three out of the four original wells went into service and that they produced low water flow. The certificate of measurement of July 20, 1999 simply recorded the fact that the final measurement took place and it is signed by OSBA and the Contractor. Hazen & Sawyer ("H&S") stated that: "The concessionaire had to unilaterally take over the unfinished wells from AGOSBA and to put them into production before they were formally transferred as stipulated in ABA's concession contract".99 There seems to be a difference of view between simply executing the works and accepting them as works satisfactorily completed under the terms of the civil works contract concerned. ABA considered works completed when accepted in terms of the specifications in the contract, while the Province seems to have been concerned with the physical completion of the works even if they did not meet the contract specifications. The Tribunal concludes from these considerations that that this is a matter in which the Province did not exercise its public authority and acted as any other contractual party.

4. Rejection of Financing by the Overseas Private Investment Corporation ("OPIC")

(a) Positions of the Parties

Azurix submits that, in the privatization of public water systems, the private investor usually needs to compensate for under-investment in the infrastructure during the previous State-run operation.100 ABA estimated that it would need $311 million to comply with the POES goals. ABA contacted OPIC and the Inter-American Development Bank ("IDB") to obtain $100 and $150 million loans, respectively, in the fall of 1999. In April 2000, both institutions expressed interest in providing financing and in May 2000 Azurix submitted formal applications.101 These institutions engaged H&S to perform a comprehensive due diligence investigation of the Concession and H&S staff visited Argentina in August 2000. During a second visit in October 2000, H&S focused primarily on ascertaining "how the Provincial authorities viewed the ongoing development of the Concession and what role the Province would play in promoting investment security and stability over the course of the Concession".102 On September 21, 2001, OPIC rejected formally the application. The letter described the issues identified by their due diligence that required "clear and definitive resolution to ensure the concession’s long-term viability and render it an acceptable credit capable of borrowing funds."
The issues identified by H&S were uncertainty on tariffs, substantial scope of the capital plan required to meet the service goals compared to the level of cash ABA is expecting to generate from forecasted revenues based on tariffs in place, lack of clear definition of roles or responsibilities and unclear commitment of the Province to the Concession given unmet obligations.103 The letter concluded:

"We understand that since our meeting in Argentina during November 2000, ABA has continued discussions with ORAB and Buenos Aires Provincial government and no significant progress has been made regarding the core issues related to tariff setting and the capital expenditures program. From a creditworthiness perspective, this failure to reach an agreement regarding modifications to the concession to restore a sustainable situation for ABA precludes us from moving forward with potential financing."

According to Azurix, the denial of financing by OPIC made it impossible to obtain long-term financing from other sources. It meant that Azurix would have to fund ABA's operational expenses itself.104
In the Counter-Memorial, Argentina alleges that Azurix was always short of funding. Argentina points out that Azurix prepared an IPO to obtain funds that it could not obtain otherwise but that the IPO funds benefited ENRON instead. Furthermore, the World Bank denied funding to Azurix in Ghana because of its totally non-transparent policy. In any case, Azurix was responsible for obtaining funding, and it was its decision where to find it whether using its own capital or becoming indebted to multilateral institutions or other entities.105
Azurix contests the assertions of Argentina on financing, the link of OPIC financing to the denial of a World Bank loan to Ghana and the lack of resources. Azurix draws attention to the fact that the denial of financing in Ghana took place in March 2000 while OPIC and the IDB expressed interest in providing financing in April and June 2000. The H&S report in January 2001 did not mention the issue and the letter of OPIC sent on September 21, 2001 neither.106
Argentina points out in its Rejoinder that the conflicts that eventually led OPIC to deny funding were generated by Azurix itself. The notification of Azurix on January 5, 2001 of a dispute under the BIT would have affected the denial of funding by OPIC. Argentina adds another instance of funding denial not mentioned by Azurix. ABA requested a US$50 million loan from ENOHSA under an IDB-financed program. The loan was denied because the lender requested the guarantee of ENRON or a suitable bank guarantee, which ABA could not provide. ABA was notified on September 21, 2001, the same date as OPIC's letter, and no reference was made to any conduct or omissions by the Province or the Regulatory Agency but to lack of plans, excessive budgets, lack of environmental impact assessments, etc.

(b) Considerations of the Tribunal

The rejection of the loan by OPIC was very clear and specific in its reasons. The World Bank was not mentioned nor ENRON. The Tribunal has no reason to second guess the management of OPIC in its reasoning for rejecting the request. As regards the ENOHSA loan, ENRON was not prepared to guarantee the loan as required by Banco de la Nación Argentina, the administrator of the program. By September 21, 2001, ABA had already requested the Province to cure its noncompliance with the Concession Agreement. Evidently, each institution had a different choice of reasons for denying funding. For the Tribunal, the significance of the reasons given by OPIC and the due diligence analysis on which they are based stems from the fact that OPIC is unrelated to any of the parties involved and the consultants hired to do the due diligence had no allegiance to any of the parties to this proceeding. The H&S report shows that the lack of funding for ABA could not be attributed to the relationship of Azurix with ENRON or to whichever denial of funding by the World Bank. H&S’s assessment noted the politicization of the Concession, the lack of commitment of the provincial authorities to the Concession, and the impact of those two factors on its viability. However, these were not the only reasons adduced by OPIC to reject Azurix’s financing request. OPIC’s letter also referred to "the substantial scope of the capital plan required to meet the service goals of the concession in terms of both aggressive timing and cost, as compared to the level of cash ABA is expecting to generate from forecasted revenues based on tariffs currently in effect."107 In other words, the current tariff level was insufficient to sustain the scope of the capital plan.

5. Memorandum of Understanding (MOU)

(a) Positions of the Parties

On January 5, 2001, the Claimant notified Argentina of the existence of a dispute under the BIT. According to the Claimant, at that point the Province renewed its discussions with ABA to remedy the breaches of the Concession Agreement, and on February 15, 2001 the MOSP and ABA signed a Memorandum of Understanding (MOU). The Claimant alleges that:

"the MOU implicitly recognized that the guarantees given by the Privatization Commission (including Circular 52(A) were essential to the attraction of qualified investors. Moreover, it implicitly recognized that the Province, as the granting authority, had the ability to revisit the purpose and goals of the Concession Agreement to optimize intended social purposes. Finally, and importantly, it recognized implicitly that the economic equilibrium of the contract was broken. These principles were incorporated into the MOU under the mutual understanding by ABA and the Province that the economic equilibrium of the Concession needed to be restored."108

To implement the goals of the MOU a committee was established ("the MOU Committee"). This committee had to produce an interim report of the negotiations within 30 days and a resolution of the issues outlined in 60 days. During the discussions, the MOSP Undersecretary took the view that the Canon was subject to business risk and he proposed an amortization scheme as a percentage over sales and the remaining unamortized value to be recovered through the re-bidding of subdivided areas of the Concession. According to the Claimant, throughout the discussions "the approach of the MOSP was centered on questioning the privatization process and discarding key assurances that had been provided to ABA", and the affirmation that the Concession was based on the risk principle.109 The Claimant alleges that by the end of the negotiating period "the repeated promises that the Province made to cure the outstanding breaches related to the application of the tariff regime remained unfulfilled" and the Province opted for deferring ABA's rights under the Concession. Thus as told by Mr. Clark, a member of the MOU Committee representing ABA, in his witness statement:

"As a condition to the signing of MOU II, the Province asked Azurix to withdraw its arbitral claim with ICSID and to release the Province from any claims... when ABA stressed the urgent need to increase cash flow, the Province responded that ABA should address this at the first tariff review at the end of the five-year period … ABA was not in a position to wait until the end of the five-year period, and needed immediate solutions to the threat of its financial collapse."110

The Claimant summarizes the MOU process results by affirming that by September 2001 the promises made by the Province to resolve the tariff issues were conditioned to withdrawal of the arbitration claim and the renunciation to recover the Canon, "In essence, after nearly a year of pursuing the rectification of Provincial breaches through the MOU efforts, nothing had changed to make the Concession economically viable. The breaches of the Concession Agreement, which affected the viability of Azurix's investment, were still uncured."111 According to the Claimant, this situation prompted ABA to consider the termination of the Concession Agreement due to the Province's continuous breaches.
From the Respondent's point of view, the MOU was simply an agreement to create a committee to look into possible negotiating procedures.112 It was "a negotiating process in which the parties, regardless of the rights to which they are legally entitled or for which they may have a rightful claim, try to reach a sustainable understanding for the Concession Contract within the framework of Law No. 11,820 and the rules and regulations applicable to the service."113
The Respondent alleges that no agreement was reached in the context of the MOU negotiations because ABA adopted an unyielding position to be released of its obligations and transfer entrepreneurial risk to the Province. As a result, no proposals were ever submitted to the MOSP as it had been foreseen in Article 2 of the MOU, and the quality and expansion targets in the Concession Agreement and in the approved First Five-Year Plan were never modified.114

(b) Considerations of the Tribunal

The MOU was part of a process to revisit certain aspects of the Concession. Its purpose and function was to conduct "the joint analysis of the issues" listed in Section 2 of the MOU. All items listed are couched in terms of work to be done – studies, discussions, preparation of a "regulatory model" - except for the second item – POES goals (Section 2.2) – which in part is drafted as a decision to establish, right there and then, a "priority works" plan to be performed during the current year because "the current critical service condition cannot be resolved by goals based contracts." (2.2, first paragraph) A detailed plan of works and actions for 2001 was attached as an exhibit to the MOU.
The second paragraph of Section 2.2 recognizes the need to revise the goals of the POES in view of Resolution 179/00 of the MOSP and Resolution 59/00 of the ORAB which established sanitary vulnerability, risk and access criteria. The third paragraph of this section entrusts the ORAB with the control and regulation of the service "by following up on the Priority Works Plan."
The MOU was signed by the Minister of Public Works and Services and the General Manager of the Concessionaire in the presence of the Secretary General of FENTOS and the Secretary General of SOSBA and city mayors, all of whom acknowledged the contents by subscribing the exhibit on works and actions for 2001. The signature took place also in presence of members of the provincial Senate and House of Representatives.
While the Respondent has played down the importance and significance of the MOU, it seems that it reflected a moment in which the parties were prepared to give serious consideration to the problems that had surfaced during the first year of the Concession. The level of the positions held by the persons who signed it and the context of the signature ceremony show the importance that the parties attached to the MOU. In particular this is significant for the decision to establish the Priority Works Plan and have it subscribed by the city mayors. At least in this respect, the MOU was more than a simple agreement to establish a committee as has been submitted by the Respondent. The Tribunal will now consider the implications of the MOU for purposes of assessing the performance of the Concessionaire against the POES in 2001.

6. The Program for Optimizing and Expanding Service (POES)

(a) Positions of the Parties

The Respondent points out in its Counter-Memorial that the Claimant had failed to comply with the POES, the core of the Concession. It argues that as part of the POES, the Concessionaire presented a Five-Year Plan proposal with serious shortcomings because from the very beginning it knew that it would not fulfill its obligations. As early as June 2000, ABA tried to reformulate the POES so as not to comply with the Five-Year Plan. The POES obligations were enforceable from the beginning and the MOU did not exempt ABA from complying with them. ABA did not meet the POES goals and investment commitments to such an extent that it prompted the Province to impose fines and terminate the Concession Agreement by fault of the Concessionaire.
In response, the Claimant alleges that the Province failed to provide accurate information to the Concessionaire necessary to define the POES goals and delayed approval of these goals for so long that they were no longer relevant. According to the Claimant, the POES goals were superseded by the MOU which recognized that "the economic equilibrium of the concession had been materially altered, and the parties agreed to a finite Priority Work Plan to replace the POES."115 Furthermore, the compliance with the POES was subject to certain pre-conditions, such as the proper application of the tariff regime and the cooperation of the Province and the ORAB with the Concessionaire.
The Claimant alleges that the provincial authorities failed to provide the Concessionaire with complete and accurate information for purposes of the definition, presentation and subsequent performance of the First Five-Year Plan. The documents promised in Circular 66(A) were not delivered to the extent promised and ABA had to request information on, among others, updated network plans, business documentation, computer center documentation, billing unit records and documents, information and documents related to personnel, debits and credits and technical operating documentation. The documentation requested was never delivered to ABA notwithstanding that it existed: "lt was held by former AGOSBA officials - closely connected to the Union - who sought to require ABA to enter into commercial arrangements to acquire the same information that should have been delivered by the Province at the takeover."116
The Claimant maintains that it presented the Five-Year Plan diligently given the circumstances and that delays in its approval occurred by factors not mentioned by the Respondent such as the request, on February 23, 2000, three months after filing the Five-Year Plan, for information that was in fact in the hands of former officers of AGOSBA to pressure ABA into arrangements with them, or the introduction of the sanitary risk concept that the Province requested that be included by Resolution No. 59/00 of July 21, 2000. According to the Claimant, the introduction of this concept meant that the Concessionaire was instructed to prioritize investment based on new criteria -accessibility, risks and sanitary vulnerability- and "with no consideration to the relevant compensation required to preserve the economic balance of the concession."117 The Five-Year Plan was not approved until February 21, 2001 by Resolution 11/01.
The First Annual POES Progress Report was approved by the ORAB by Resolution 16/02 on February 19, 2002, 18 months after the submission of the Report. According to the Claimant, "these delays jeopardized the Concessionaire’s performance and evidenced the ORAB’s arbitrary conduct. Furthermore, the lack of certainty and the impossibility to foresee the plan that would be approved by the ORAB or the criteria that would be used to measure compliance with the goals placed ABA in an uncertain situation, which affected its operations."118
The Claimant disagrees with Argentina's argument that the Priority Work Plan included in the MOU was independent from the POES. For the Claimant, this would mean that ABA would have undertaken new investment obligations in addition to those in the POES notwithstanding that the MOU recognized the economic imbalance of the Concession; it was clear that the MOU suspended the goals for the second year of the Concession.119
According to the Claimant, the Province, not ABA, sought to modify the POES because of a political shift in how the new provincial government viewed the Concession Agreement. Minister Sícaro had expressed the intent in February 2001 to change the model from one based on objectives to a model based on investments and a return to a cross-subsidy scheme implementing a social tariff for low income users.120
The Claimant disagrees with the description of POES non-compliance provided by the Respondent. According to the Claimant, the Respondent carries the evaluation without taking into account the non-application of the tariff regime and the agreement on a Priority Work Plan in the MOU. According to the Claimant, the ORAB could never have evaluated compliance with the POES because it had failed to define the methodology to assess the goals of the POES. The Claimant points out that the evaluation is based on investment amounts rather than goals as required in the Concession Agreement, that the analysis of the expansion goals disregards the setbacks concerning determination of serviced populations, excludes the connections installed within the serviced areas, and that includes, as alleged breaches, goals to be reached in a three or five-year term.121
The Claimant also alleges discriminatory treatment to the extent that public – ABSA - and private companies – AGBA - were exempted from POES compliance. According to the Claimant, this exemption was due to the unreasonableness of the POES goals when the Province refused for political reasons to apply the tariff regime. The Claimant points out that, in the case of AGBA, the goals for year 2001 were suspended even though the economic crisis did not start until the end of 2001.122
The Respondent affirms that the MOU did not operate to amend the Concession Agreement or the targets under the POES, "it was merely an attempt by the parties to create a committee to consider the issues and submit a proposal designed to overcome certain difficulties, which was never put together".123 The POES was enforceable from the beginning of the Concession. The quantitative and qualitative targets were established in the Concession Agreement and the Five-Year Plans were merely designed to provide additional details, adjustments or updates.124 The POES and the Five-Year Plans were specific contractual obligations to be discharged in accordance with the terms of the Concession Agreement and were not merely guidelines towards the targets as argued by the Claimant.125 Compliance with the POES was an exclusive obligation of the Concessionaire and the Province did not hinder or affect negatively compliance of ABA with the POES.
The Respondent also contests that the Province discriminated in favor of other companies. AGBA, a private company, had complied with the applicable POES notwithstanding that it had higher targets during the first year of its concession and had only requested, on July 20, 2001, a temporary postponement of the POES deadline for the second year in view of the extraordinary economic crisis of the country. The postponement was not related to the rate system as asserted by the Claimant.126
As regards ABSA, the Respondent justifies the exemption from the service expansion obligations because it was owned by the Province, the temporary nature of the service transfer, the fact that the Concession had been abandoned, and the deep crisis prevailing at the time.127
The Respondent contests that the Province had any responsibility for the delayed approval of the First Five-Year Plan. It had provided ABA all the necessary information and the delay was the result of the many requests for postponing the submission deadline. The original deadline of three months from the date of takeover of the Concession was first postponed by two months, and then it was extended by an additional 45 days. As this was not yet enough, two further postponements were granted by ORAB. All together these postponements delayed presentation of the draft Five-Year Plan by nearly nine months. It was submitted on June 12, 2000.
According to the Respondent, it was always ABA that attempted to change the POES. When ABA was supposed to submit the Five-Year Plan, in fact it submitted an Emergency Investment Plan and sketched the structure of a plan for the five years, there was a second draft Five-Year Plan, an appeal for reversal of Resolution 10/00, a Supplementary Report to the Five-Year Plan, and a letter to ORAB of July 17, 2001.
The Respondent considers that the notions of vulnerability, accessibility and sanitation risk did not modify substantially the POES. Inclusion of these notions was to direct the targets already established to areas that were more intensely exposed to sanitation risks.128
The Respondent argues that the MOU was only the first step in a process of renegotiation that was never completed because of ABA's desire to walk away from its obligations and transfer all business risks to the Province. The Priority Work Plan never became effective and it could not have amended the Concession Agreement or changed the targets established in the POES for the second year of the Concession.129
The Respondent affirms that the obligations under the POES were not conditional upon the definition of evaluation criteria regarding performance under the POES, and the achievement of the targets regarding the expansion of drinking water and sewerage works did not call for any regulatory criterion beyond the terms of the Concession Agreement.130 ABA did not comply with the minimum requirements for region and county during the first two years, the annual renovation and reconditioning of pipes' target, and the target of maintenance or reconditioning of effluent primary and secondary treatment plants. ABA failed to make sufficient progress in the micromeasurement by year two of the Concession to such an extent as to make it unlikely that the 40% target prescribed in the Concession Agreement could be reached by year five. ABA equally failed to complete the infrastructure works contemplated in Exhibit I to the approved Five-Year Plan. In the second year, ABA prepared the second progress annual report for the POES based exclusively on the Priority Works Plan attached to the MOU and hence failed to reach the targets established in Exhibit F of the Concession Agreement.131

(b) Considerations of the Tribunal

The Priority Works Program was not additional to the POES. It is doubtful that, in its financial condition, ABA would have undertaken new obligations in addition to the POES. The sanitary risk was a new element which would have an effect on the POES and was introduced by the Respondent. It is evident that the MOU was an attempt to solve the problems that had developed and the attempt failed. The POES was never amended and the parties to the Concession Agreement continued to be bound by its original terms, including the tariff regime. However, the failure by the Province to honor the tariff regime contributed significantly to Azurix's inability to implement the POES as planned.

7. Circular 52(A) and Canon Recovery

(a) Introduction

The issue of Canon recovery and the meaning of Circular 52 (A) first emerged during the discussions in 2001 in the context of the MOU as we have already seen. On July 18, 2001, ABA sent a communication to the Province requesting that the Province cure the breaches of the Concession and warning that, if these were not cured, ABA would terminate the Concession. The Province replied on August 29, 2001 denying any wrongdoing and, in particular, denying "ABA's right to recover its investment (including the initial Canon), as expressly stated in Circular 52(A) and Article 12.1.1 of the Concession".132 The controversy is linked to the level of risk assumed by the Concessionaire and the principles inspiring the Concession.

(b) Positions of the Parties

Azurix claims that the Province issued Circular 52(A) in an attempt to attract the highest bids from prospective investors. Azurix maintains that Circular 52(A) assured bidders that the Canon would be considered an investment fully amortizable through tariffs.133 In this respect, Azurix refers to LECG's expert report: in which it is stated:

"Although the Province did not issue ex-ante details on regulatory methodology and accounting principles for the tariff reviews, it issued Circular 52(A). In this Circular, the Province indicates very clearly that the initial payment will be treated as an investment. As such, bidders, including Azurix Corp. must have properly assumed that, in the context of a price-cap regime, the canon would be included in the asset base for tariff review purposes, after accounting for its amortization.
This expectation was based on international and Argentine regulatory experience."134

Argentina contests the interpretation given by Azurix to Circular 52(A). In its Counter-Memorial, Argentina explains that the fee paid for the Concession is the price to run a monopoly. Argentina considers that this issue was not "a real conflict between ABA and the Province as Law No. 11,820 and the Contract would have never allowed such transfer. The issue was introduced within the framework of negotiations with the Province, in a desperate attempt by Azurix to alter the obligations assumed and the Contract".135 Argentina draws attention to Article 12.3.1 of the Concession which provides that the tariffs shall be in force during the term of the Concession and their review may only occur based on events after the takeover of the Concession (Article 12.3.4, 5 and 6 of the Contract and Section 23-II of the Law).

Argentina refers to the expert report of Mr. Chama, one of Argentina's experts, who explains that the bidding process for the Concession sought to select "the economic player that is willing to pay the highest price, usually called 'fee', for the right to exercise the monopoly; and the selection consists simply of determining who is willing to pay the highest price as from a certain rate level, with a rate adjustment system primarily based on service conditions established in the bidding documents and in the regulatory framework governing the service."136

According to Argentina, the offer of Azurix was opportunistic in the sense that the purpose was the immediate renegotiation of the Concession Agreement to recover the profits renounced in the competitive bidding process. Mr. Chama states that "it could never be argued that the concession fee can be defined as a component of the cost of service and become a factor determining the rates or prices of the service itself".137 Argentina wonders what would be the point of competing in a bidding process if the concession fee would be subsequently transferred to users.138 Argentina further argues that the transfer of the concession fee to the tariffs would result in "the absurdity of having different tariffs in different areas depending on the concession fee offered by the winning bidder."139
Argentina points out that, in the letter of August 29, 2001, the Minister of Public Works of the Province stated that Azurix's representative, after several months of negotiations, requested "an additional condition: to study the mechanisms to adjust the Tariff Regime, aiming at recouping the concession fee paid for taking over the Concession."140 The Minister adds: "under the Bidding Conditions, payment of the concession fee corresponded to the price that you bid for the concession, assuming the risk that you may not recoup it, considering that if the [C]oncession guaranteed the reimbursement of the price paid plus a rate of return thereon, the business started by Azurix would not be a risky one, as it is stated in Article 12.3.1 of the Concession Contract."141
As part of Argentina's arguments on this issue, Argentina brings to the attention of the Tribunal certain alleged irregularities regarding Circulars 51(B) and 52(A) and Section 12.1.1 of the Contract. According to Argentina, these two circulars were the last circulars issued by the Privatization Committee before bidders presented their economic offer.142 Circular 51(B) reduced the volume of water that the Concessionaire was to deliver annually free of charge established only the week before, on May 5. The reduction for ABA exceeded 57%. In contrast, the water volumes fell only by 1.48% in Region B, the only Region not awarded to ABA.143
As regards Article 12.1.1 of the Contract, Argentina draws the attention of the Tribunal to the statement of Azurix in the Memorial whereby the Province, in need of money to balance the budget in 1999, wanted to maximize the Canon and "To this end, it issued Circular 52(A), saying that the Canon would be recognized as an amortizable investment, and thus, included in the tariff rate base. The Province confirmed this by adding Article 12.1.1 to the Contract. "144 Argentina observes that this section of Article 12 was not in the model contract which was part of the bidding documents and did not establish that the concession fee could be transferred through tariffs. The original Article 12 simply stated a general principle to be taken into account in the determination of the tariff regime. Azurix's interpretation would make this section contrary to law. The Concession Agreement could not be substantially altered after the bidding process. Amendments to the Concession Agreement were done through letters of amendment, no such letter was used in this case and it might have also been absent in another change also introduced after the award of the contract, i.e. the introduction of a 6-month period of grace for penalties on account of any infringements.145
Argentina alleges that the Tribunal took Article 12.1.1 of the Concession Agreement into account as a decisive factor in its decision on jurisdiction in disregard of the possible irregularities that affect this section which "could have led the tribunal to error."146 Argentina informs that its courts will solve the issues dealing with the inclusion of Article 12.1.1 and considers that, "In any case, the impact on the progress of Azurix's claim before this Tribunal is evident, as well as the fact that the Tribunal is not competent to decide on the facts described."147
Azurix contests that the Canon is only an access fee for the Concession. Circular 52(A) explained that the Canon constitutes an investment to be amortized. According to Azurix, utility investors understand that, when access to other markets is prohibited, canon payments are considered investments to be recovered through regulated tariffs. This is standard regulatory practice in Argentina and the Province. Azurix refers to an internal MOSP report on the MOU process in which Mr. Sícaro states: "the proposed scheme accounts for the fact that there is a canon to be amortized by the expiration of the Concession term".148 This is in contrast with the statements made by him before the Tribunal as a witness. According to Azurix, the Province simply lacked the political will to allow its recovery in accordance with representations made by the Privatization Commission, the Concession Agreement and Circular 52(A).149

Azurix dismisses the concept of "unbounded risk" claimed by Argentina. According to Azurix and relying on LECG rebuttal: "The 'unbounded risk' concept introduced by Mr. Chama, is deadly off the mark. Were concessions based on the 'unbounded risk' concept, no private investor will ever pay anything for the concession."150

Azurix also dismisses the unconstitutionality alleged by Argentina if similarly situated customers would pay different prices for public services. This is actually a fact in the Province and Argentina.151
Azurix also rebuts the notion that Circular 52(A) is only an accounting clarification and points out that Argentina fails to explain how this clarification was to be applied or its practical meaning. Furthermore, argues Azurix, Argentina's allegations in respect of the Canon are not consistent with the facts and recognized utility practice. Azurix points out that in the case of another Argentine public utility, Transener, specific provisions like Article 7.8 and Circular 52(A) were not deemed necessary to include the Canon in the tariff rate base.152

Azurix affirms that it was the behavior of the Province that was opportunistic. The additional capital contributions made by Azurix and exceeding US$106 million do not indicate behavior of an opportunistic investor seeking additional advantages through a post-bid negotiation. Azurix observes that if the Province, advised by Mr. Chama himself during the bidding process judged Azurix's bid opportunistic or reckless could have rejected the bid and did nothing of the sort.153 On this point, Azurix concludes that, 'in light of the guarantees offered by the Regulatory Framework, the Concession Agreement and Circular 52(A), the Province should have recognized the implications of accepting Azurix bid. If the Province chose to ignore long-term effects for the benefit of short-term political interests, then it did so under the legal obligation to honor commitments made."154

Azurix also contests the supposed irregularities of Circular 52(A) and Article 12.1.1. As Argentina itself admits, this Article merely reiterates what is already contemplated in the Regulatory Framework and the Concession Agreement: "It is Azurix's view that Article 12.1.1 is consistent with Article 28-II(d) of Law 11,820, Article 7.8 of the Concession Agreement and Circular 52(A). They all fit together into a harmonious and systematic whole. Therefore any suggestions that this introduction substantially changed the scope of the Concession Agreement is wrong. It merely clarified it."155 According to Azurix, by its actions, the Province repudiated Circular 52(A).
In the Rejoinder, Argentina refers to statements made by a World Bank expert, Mr. Guasch, to support the allegation of opportunistic behavior of Azurix. According to Mr. Guasch,

"…operators should be held accountable to their bids, and if petitions for renegotiation are turned down, operators ought to feel free to abandon the projects, if they choose to do so (with the corresponding penalties). The appropriate behavior for the government is to uphold the sanctity of the bid and not concede to opportunistic request for renegotiation and, in such cases, allow concessions to fail. Such outcomes would reduce the incidence of renegotiation. That is a key issue in private concessions of infrastructure services –yet one that is often resolved in favor of operators. Thus aggressive bidding and the high incidence of renegotiation should not be surprising."156

And again more specifically on the issue of valuation of concession assets:

"What clearly should not be used for the value of the concession in the capital base –from which the operator is allowed to earn a fair rate of return- is the value paid at the bidding stage, regardless of depreciation method. Doing that would take away the efficiency-competitive angle of the auction, by allowing a rate of return on whatever price was paid for the concession."157

Argentina considers reasonable that the bidders take into account the return on the investment in order to calculate the concession fee, but it is illogical and unreasonable that the fee be passed through to rates. While every bidder may expect to make reasonable profits above the concession fee, this is not an acquired right.158
Argentina refers also to NERA's advice to defend the concepts of regulatory and accounting amortization advanced in the Counter-Memorial. According to NERA:

"Regulatory amortization is the annual percentage of the asset base that is deducted from the regulatory book value in accordance with the standards established by the regulator. Accounting amortization is the percentage of the asset base that may be written off the accounting books every year in accordance with the standards set by the tax authority and the professional council of economic sciences. These are two different concepts. While regulatory amortization serves the purpose of setting rates, accounting amortization is used to calculate taxes and determine the accounting book value."162

According to Argentina, ENRE, the regulator, took into account these observations.

Argentina considers Article 7.8 of the Contract to be very clear. It consists of three elements: the amortization of assets in service acquired or built by the Concessionaire and the improvements made thereon by the Concessionaire.163 As regards Article 1.8, Argentina considers that this Article is also clear in showing that the concession fee was not an investment but the price paid to be awarded an area. Argentina refers to Mr. Chama's expert advice and affirms that, for the Concessionaire to earn a reasonable return, Azurix's assessment underlying its Offer would have to have been reasonable and the fee compatible with the financial equilibrium of the Concession. The Concession fee presupposed an appropriate economic offer, otherwise the Concessionaire would offset its deficits derived from ordinary business risks, a compensation expressly prohibited in the Concession Agreement.164
Argentina points out that, as there was no rule permitting it, there was no submission by ABA to the ORAB requesting the transfer of the concession fee paid onto rates or the increase in rates to cover a part of the concession fee. Argentina alleges that the dispute only arose at the end of the negotiations with the Province in search of an overhaul of the rate system or an excuse to provide grounds for termination.165 The circulars issued by the Privatization Commission could only introduce clarifications of or amendments to the Terms of Reference provided they were not substantial in nature. If Circular 52(A) would be interpreted as Azurix suggests, it would have introduced a substantial amendment to the rate system contemplated in the Contract. Professor Comadira in his expert opinion states that, in that case, "it would be unreasonable and incompatible with the rest of the provisions of the terms of reference.'"166 According to the same expert, the rate system could only be modified after the third year of the Concession (Article 30-II(c)), the rates167 and prices should have been effective during the term of the Concession (Article 12.3.1), and the values and prices could only be modified by virtue of the procedures and for the reasons disclosed in Article 12.3.2. Therefore, ABA's interpretation of Circular 52(A), "apart from being inconsistent with the harmonic and systematic interpretation of all the clauses of the Terms of Reference, which it may only clarify but never modify substantially under penalty of becoming an absolute nullity, disregards clear legal regulations applicable to the Concession Contract."168 Professor Comadira even affirms that:

"A modification of the contracting conditions as the one provided for in the Circular under analysis should have necessarily meant a new call for bids to enable the possible participation of any potential bidders that would have been self excluded under the original conditions. Since that was not the case, the equality guarantee has been clearly violated, thus corrupting the whole procedure."169

In addition, Professor Comadira explains that the addition of Article 12.1.1 and its interpretation by Azurix would mean that the essential principle of equality in a bidding process would have been violated, this being "a fundamental principle of the general law and administrative law." He concludes by inviting the Tribunal to rule this article as manifestly void of absolute and incurable nullity in response to "an ethical or juristic requirement."170
According to Argentina, the studies leading to the presentation of the offer could not have taken into "account an interpretation that would have distorted the rate system contemplated in the contract, on the grounds of a nonexistent provision." Azurix could not have entertained any expectations in this respect.171

(c) Considerations of the Tribunal


It will be useful to quote first in full the relevant legislative and contractual provisions:

Article 28 of the Law:

"Prices and tariffs will tend to reflect the economic cost of providing potable water and sewer services, including the Concessionaire's margin of profit for and the resulting basic infrastructure costs of the POES."

Concession Agreement:

Article 12.1.1:

"Determination of the tariff level required under Article 28-II of Law No. 11,820, shall be based on the general principle under which tariff values shall cover the operating, maintenance and amortization costs of the services and allow for a reasonable rate of return on the amounts invested by Concessionaire within an efficient operation and management environment, as well as full achievement of the agreed-upon service expansion and quality goals."

Article 7.8:

"The Service-related assets acquired or built by the Concessionaire and belonging to it as well as all improvements made thereon shall be capitalized by accounting procedures and shall be depreciated integrally over the term of the Concession or over their Useful Lives, whichever term is shorter; the provisions of the fourth paragraph hereof notwithstanding.

The investments the Concessionaire makes in the assets received by/from the Province upon Take Over shall be considered as acquisition and/or maintenance costs of the Concession in accordance with provisions of clause 1.8 and shall be amortized over the term of the Concession."

Article 1.8:

"The grant of the Concession shall be in consideration of payment of an initial canon equal to … by the Concessionaire. Said amount has been paid up by the Concessionaire to the Province upon the signing of the Agreement, and it is equivalent to the amount offered by the Awardee [sic] under the Bidding Process, to be credited as the price for the Concession Area. However, the Concessionaire does hereby undertake to make all necessary investments to execute the POES and to secure the correct provision of Service under the Agreement, the description of which is detailed in Annex F hereto, the tariffs increments being subject to the guidelines stated in Annex Ñ being subject to compliance with said obligations."

Circular 52(A):

"It is clarified that the initial royalty which is referred to in Section 1.8 of the Concession Contract constitutes an amortizable investment during the concession period (article 7.8 correlative and concordant of the Concession Contract)."

The Tribunal will turn first to the relationship of Circular 52(A) to Article 1.8, second to the meaning of the additional provision 12.1.1 of the Concession Agreement, third to the rationale of the Concession, and fourth to asset depreciation in the asset regime of the Concession Agreement (Article 7.8).

(i) Circular 52(A): The Canon as an Investment

The parties have discussed the meaning of the term "canon" and whether the Canon is an investment. Article 1.8 of the Contract refers to the Canon as "the consideration" for the granting of the Concession and, in the next sentence, as "the price for the Concession Area." The following sentence deals with the undertaking related to the POES investments. It starts with the word "however" as a counterpoint to the consideration paid by the Canon, as if to emphasize that the payment of the Canon were not the only contribution to be made by the Concessionaire. This reading of Article 1.8 is reinforced if compared with the terms of Article 28 of the Law. Article 28 sets forth the general principle that: "the prices and tariff will tend to reflect the economic cost of the provision of the services of water supply and sewer services", and continues by saying: "including a profit margin and the cost arising from the POES related to basic infrastructure." The economic cost of a service would include, by definition, all costs related to the provision of the service. The specific reference to investments arising out of the POES would seem to be a clarification rather than an exclusion of other investment costs. In case there was any doubt about its meaning at the time of the bidding for the Concession, the Privatization Commission issued Circular 52(A) which clearly states that "the initial canon…constitutes an investment." The Tribunal has no reason to doubt the interpretation given by the Privatization Commission. It had the power to issue clarifications of the Bidding Terms and Conditions and all bidders would have been aware of the clarification when they submitted the bid as in the case of any other circular issued by the Privatization Commission. Argentina had argued that Circular 52(A) was issued close to the deadline for the submission of bids and was the last circular issued by the Commission. The evidence provided to the Tribunal shows that Circular 52(A) was not the last circular to be issued by the Commission and that other significant circulars were issued after the date of Circular 52(A). The issue is not so much whether the Canon is an investment but whether being an investment makes it a recoverable investment beyond the given tariff at the time of bidding and as adjusted through the extraordinary reviews.

(ii) The Addition of Article 12.1.1.


In arguing that Article 12.1.1 of the Concession Agreement is not extraneous to the Concession regime, the Claimant states that: "it is Azurix's view that Article 12.1.1 is consistent with Article 28-II(d) of Law 11,820, Article 7.8 of the Concession Agreement and Circular 52(A). They all fit together into a harmonious and systematic whole. Therefore, suggestions that this introduction substantially changed the scope of the Concession Agreement are wrong. It merely clarified it."172 In support of this statement, the Claimant refers to the expert opinion of Professor Fernández who affirms:

"Section 12.1.1 of the Contract is not a word-by-word reproduction of the section with the same number of the sample agreement attached to the Bidding Terms and Conditions; however, under no means does it imply a modification to the agreed-upon terms since it merely incorporates into the contract the provisions of Section 28(ii) of Law 11,820 and the statement made at the time by means of Circular 52(A), acknowledging that the Canon was an 'investment to be amortized throughout the term of the concession.'"173

In the Counter-Memorial, Argentina considered that Article 12.1.1 established a general principle already taken into account in Annex Ñ of the Concession Agreement in order to determine the tariff regime. The resulting rate for the duration of the Concession was "fair and reasonable and allowed a reasonable return."174 For Argentina, it was impossible to build Azurix's interpretation into the terms of Circular 52(A) and Article 12.1.1 of the Concession Agreement without amending substantially the terms of the agreement against the provisions of the Law, which did not permit the passing through of the Canon to the rates.
In the Rejoinder, Argentina argued differently and, instead of admitting that Article 12.1.1 established a general principle, it stated that the insertion of Article 12.1.1 is not being supported by any legal provision and that this article could not have been part of the considerations present when Azurix submitted its bid for the Concession.175
Article 12.1.1 provides that the tariff level required under article 28-II shall be based on the general principle that the tariff values cover the operation, maintenance and amortization costs of the service and permit a reasonable return on the investments of the Concessionaire in the context of an efficient administration and operation and exact fulfillment of the agreed quality and expansion objectives of service. While article 12.1.1 refers to article 28-II of the Law, it introduces a notion, "return on assets", not present in this article 28, and, conversely, there is no reference to the "profit margin" of Article 28-II in Article 12.1.1. Taking a long term view of the Concession, profit margins and rates of return may come to the same result, but they are different concepts and the concession regime does not contemplate a regime based on rates of return as explained by the Claimant's own experts and to which we will now turn.

(iii) Rationale of the Concession

At the time of bidding, the bidders knew the tariff level and that this level could not be changed except as provided in the model contract. These provisions are usual in concession tariff regimes known as price cap regulatory regimes. Both parties agree that the tariff regime under the Concession Agreement followed the price cap model.176 However, the parties' experts draw different implications for purposes of determining whether the Canon was part of the tariff review. The expert report of LECG submitted by the Claimant explains this regime and affirms that:

"The strong incentives for greater efficiency are probably the major innovation of the price cap regulatory regimes, and reflect an essential benefit of the system. A second benefit…is the reduction in regulatory costs as compared to the traditional rate of return regulation, which required continuous supervision of investments and costs, thus increasing regulatory costs."177

This report quotes from a World Bank study:

"For a concessionaire that has paid a transfer to government to operate a business at a predetermined set of prices, these issues [asset valuation and depreciation] could be important. Regulatory disputes could emerge relating to what the concessionaire actually bought with that transfer – a stream of future earnings or a return on the preexisting and future asset base ? Issues relating to the depreciation profile of both old and new assets therefore assume particular importance and should be signaled by the government during the bidding process.

[…] If the criterion is the largest lump sum offered to run a franchise, however, the outgoing concessionaire could receive the highest bid, since this bid reflects the value of the assets as they currently exist. However, this value is based on the future stream of earnings, which is determined by the price set by the regulator throughout the new franchise. If the regulator unreasonably ratchets down prices for the period of the new concession, this effectively expropriates the value of the assets built in the previous concession. Generally, therefore, new investment by the concessionaire needs to be transparently treated by the regulator at each review, as part of the process of rolling forward the asset base and charging depreciation on it."178

Somehow contradictorily, the LECG report argues for linking the Canon to the tariff review in a price cap regime when the quoted literature explains that in lump sum situations the value of the assets has been calculated by the bidder on the basis of the stream of estimated earnings within the set level of tariffs and the periodic adjustments permitted by the Concession Agreement.
LECG analyzes what would be the evolution of tariffs if the Canon were not included in the tariff base,

"At the first ordinary rate review the regulator, following standard regulatory practice as well as the regulatory framework and the Concession Contract, would consider the expected investment and operating costs, add the amortization of capital additions for the previous four years, and derive a tariff rate that would provide a normal rate of return only on the additions to the capital following the privatization. The result would be a price that would fall substantially below the long run marginal cost of the system. This is because such rates would remunerate only the capital added since privatization but not the capital already in place when the company started operations. Since, to be able to provide the service efficiently and effectively, both kinds of assets (i.e., that in place prior to privatization and the additional post-privatization) are needed, rates have to remunerate both of them."179

LECG concludes,

"Adding the canon to the tariff base provides the right incentives for both consumption and investment. Consumers will be facing the long run cost of providing the system and investors will have incentives to invest."180

In its reasoning, LECG ignores the current tariff level at the time that the Concession was granted. That tariff level was already in effect and future adjustments were meant precisely to remunerate the capital added since privatization. LECG's argument assumes that the current tariff would not be taken into account in the calculation of the adjustment, while the Concession Agreement considers it the base from which to start the review. The existing tariff provides the remuneration for the capital invested in the Concession ab initio.
Paradoxically, LECG itself seems to agree with this conclusion. When discussing the issue of the elimination of monopolistic rents through a competitive bidding process, the report adds a footnote stating that:

"Observe that although the investor bids the expected net present value of future cash flows, the investor makes money on the investment. Indeed, when discounting future cash flows, the investor uses a discount rate. This discount rate is the rate of return the investor gets on the initial investment (the canon) over the life of the concession."181

The Tribunal will now analyze asset depreciation in the asset regime of the Concession Agreement.

(iv) Article 7.8

Article 7.8 on depreciation ("amortización") is part of Article VII of the Concession Agreement on "Assets" ("Régimen de Bienes"). The first paragraph of this article provides for the capitalization and depreciation of assets over the term of the Concession or their useful lives whichever is shorter, with an exception which we do not need to refer to for purposes of this analysis. The assets to be capitalized and depreciated are those assets, and improvements on them, which are service-related, have been acquired or built by the Concessionaire and belong to the Concessionaire. They need to meet these three conditions. The term "belonging" is a translation of "que sean de su titularidad." They need to be assets to which the Concessionaire has legal title. Article 7.2 on "Title" distinguishes between the possession of assets received by the Concessionaire from the Province and assets and movable assets and real property acquired or constructed during the term of the Concession which shall be owned by the Concessionaire. Title to these assets shall be recorded in the Real Property Registry and in the respective registries of movable assets. This is not the case of assets received from the Province.
The distinction becomes clearer when Article 7.2 and 7.8 are read together with Article 7.6 on disposition of assets. In the case of disposition of assets "owned by the Province … the Concessionaire shall act as the Province's agent." This distinction then carries over to the second paragraph of Article 7.8 which establishes that, "The investments made by the Concessionaire in the assets received by [sic] ["de" in Spanish, "from" would be the correct translation] the Province upon Take Over shall be considered as acquisition of and/or upkeep costs of the Concession in accordance with provisions of clause 1.8 and shall be depreciated over the term of the Concession." This paragraph limits the definition of investments to those made in the properties received from the Province without including the properties themselves.
The distinction between assets received and those acquired or improvements on the assets received carries over to the requirement for approval of acquisition and disposal of assets and how administrative silence to a request for acquisition or disposal of assets needs to be interpreted. In the case of movable assets owned by the Province, and those owned, whether movable or not, by the Claimant, silence to a request for their disposal shall be understood as approval (Article 7.6.2). On the other hand, silence by the ORAB in the case of non-movable assets registered in the name of the Province shall be understood as rejection of the request (Article 7.6.1).
The distinction is particularly relevant when it comes to the termination of the Concession. In the case of termination due to acts of God or force majeure (Article 14.2.1), the Province is required to pay the non-amortized value of investments and Service-related assets acquired or built by the Concessionaire in accordance with Article 7.8. Under the terms of this article, the assets received from the Province are not acquired assets. The Concessionaire did not become the owner of the assets transferred by the Province, nor did it ever have registered title to them.
The Claimant has argued that the existing assets at the time of the transfer and those acquired later form a unit. The argument is based on Articles 42-II and 43-II of the Law. Article 42-II provides that: "The assets that are covered by this article and which must be included in the Concession Contract are the assets the Concessionaire receives by virtue of the Contract. Also included are assets that the Concessionaire acquires or builds in order to fulfill its obligations under the Concession Contract." Article 43-II reads as follows: "Assets that are transferred to the Concessionaire are part of a group known as the appropriated unit [‘unidad de afectación' in Spanish]."
The Tribunal considers that the indivisibility of the unit has to be considered in the light of the other provisions on assets in the Concession Agreement and it cannot override the distinctions made between them regarding the ownership of assets, and their administration and disposal.
The Tribunal concludes after this analysis of the relevant provisions of the Law and the Concession Agreement that a harmonious interpretation of these provisions does not permit to consider the Canon as if it would be an investment not included in the existing tariff at the time of the transfer. The Tribunal has no doubt that the Canon is an investment, but, for purposes of tariff setting and amortization, the investor, in preparing the bid for the Concession, had to make a calculation of the value of the earnings stream of the Concession, and the price paid for the Concession was the result of this calculation. It is interesting to note, in that regard, that the Claimant seems to be the only bidder to have interpreted Circular 52(A) as it did, the other bidders presenting canons with values at least ten times lower than that submitted by the Claimant.
While the principle of amortization may have applied to the initial Canon as a matter of principle, whether it was amortized or not during the duration of the Concession would depend on whether the Concessionaire had estimated correctly the worth of the future earnings of the Concession based on the initial tariff and the discount rate to be applied to this estimate of future earnings. The discount rate used by the Claimant in the preparation of the bid was the rate of return on the Canon as an "investment". This seems to be inherent to a price cap concession regime and the terms of the Concession Agreement.
To conclude the consideration of the issue of Canon recovery, the Tribunal refers to the statement made by Argentina that the Tribunal may have erred by disregarding the irregularities of Article 12.1.1 in affirming its jurisdiction. According to Argentina, the Tribunal took this Article as a decisive factor in its decision. The Respondent refers specifically to paragraph 62 of the decision on jurisdiction, which reads as follows:

"The Tribunal finds difficulty in following the Respondent's reasoning on the basis of the definition of investment in Article I.1(a) of the BIT. First, a concession contract, such as that entered by ABA with the Province, qualifies as an investment for purposes of the BIT given the wide meaning conferred upon this term in the BIT that includes "any right conferred by law or contract." The Concession Agreement itself refers repeatedly to investments. For instance, in the context of the determination of the tariff level, the Concession Agreement refers to "a reasonable return on the amounts invested by the Concessionaire," [Article 12.1.1] and "the Concessionaire does hereby undertake to make all necessary investments to execute… [Article 7.8]"

In that paragraph, the Tribunal refers to Article 12.1.1 as an example of references to investments for purposes of the definition of this term under the BIT. The reasoning of the Tribunal would be the same without this example, which is not the only example in the paragraph. The other example, Article 7.8, has not been questioned by the Respondent. It should be apparent from the preceding discussion that what is an investment under the BIT and what is a recoverable investment under the Concession Agreement are different matters, and that whether an investment is or is not recoverable may be irrelevant for purposes of it being considered an investment under the BIT.

8. Termination

(a) Introduction

As has already been noted, ABA requested the Province to cure its breaches of the Concession Agreement on July 18, 2001. The Province replied on August 29, 2001 denying any wrongdoing; in particular, the letter denied the right of the Concessionaire to recover its investment, including the initial Canon. On October 5, 2001, ABA terminated the Concession Agreement. On November 1, 2001, the Province issued an Executive Order rejecting the termination of the Concession Agreement and ordering ABA to cease and desist from claiming that it had terminated the Concession Agreement, and to refrain from engaging in conduct that would disturb the provision of the service.
ABA filed for bankruptcy reorganization proceedings on February 26, 2002. On March 7, 2002, the Province deemed that ABA had abandoned the service. On March 12, 2002, the Province terminated the Concession Agreement alleging ABA's fault: non-fulfillment of service expansion and quality goals, fines imposed on ABA, difficulties of ABA in obtaining chemical supplies in February 2002 and paying for electric power, Enron's bankruptcy and service abandonment. On March 15, 2002, ABA delivered the service to the Province.

(b) Positions of the Parties

The Claimant has asserted that Article 48-II of the Law expressly delegated the definition of the right to terminate the Concession to the Concession Agreement, and that Article 14.1.4 of the Concession Agreement did not require the intervention of any authority to be terminated. On the other hand, Article 14.4.4 provides for court intervention for purposes of the reception of the service. Thus, concludes the Claimant, when the Province had considered it necessary to include reference to court intervention, it did so.182

The Claimant also addresses the need for the competent authorities to intervene in case of termination of a concession required by Article 49-II of the Law. According to the Claimant, this Article has to be construed appropriately and can "only be interpreted as appointing the competent governmental authorities for the purposes of declaring termination of the Concession Agreement upon the occurrence of events allowing the grantor its right of termination […] It cannot be construed as a reference to termination when it is not declared by 'an authority'".183

The Claimant also draws the attention of the Tribunal to the different treatment of termination on account of the grantor's fault in the case of the Concession Agreement as compared to other concession agreements previously entered into by the Province and in which intervention of the courts is required to declare the agreement terminated in the event of resistance on the part of the Province. The Claimant draws the conclusion that these previous agreements were taken into account by provincial officials in drafting the Concession Agreement and departed from them, inter alia, in respect of the Concessionaire‘s right to terminate the Concession Agreement.184
The Claimant maintains that the many serious breaches of the Concession Agreement caused an irreversible imbalance of the economics of the Concession and that, in these circumstances, the demand by the Government that ABA continue to provide the service and complying with the expansion goals constituted overt and unwarranted abuse of its rights.185 On the basis of Professor Fernández's legal opinion, the Claimant affirms that, if it were not possible for the Concessionaire to terminate the Concession Agreement unilaterally without further intervention of the Province the contractual provision would lack any practical application; because the final settlement of this matter would be entirely left to the discretion of the Government, ignoring what the law specifically intended to avoid.186 The same expert considers that:

"whenever the Law or the agreement recognizes in contractors the right to terminate said agreement, the general rule that sets forth that the termination of the agreement always requires a formal pronouncement by the Government must be replaced by the maxim exceptio non adimpleti contractus, as the only possible way of avoiding an abuse by the Government under this rule, disregarding the contents of its provisions and forcing the contractor into a ruinous situation."187

The Claimant adduces extensive doctrinal opinion and Argentine and European administrative case law to defend the applicability of the exceptio non adimpleti contractus to the termination of the Concession Agreement.188 The Claimant also refers to Aucoven where the arbitral tribunal, when faced with a similar situation found that, if the parties had intended to subject the termination of the concession agreement to a ruling by a judicial body, they would have expressly referred to such requirement in the clause in question.189 The Claimant further argues that, if Article 14.1.4 is ambiguous, then it should be construed against its drafter.190
According to the Claimant, the Province fabricated a case against Azurix to hide its own breaches while the Concessionaire continued to provide the service. The Concessionaire informed the Province on the day of the termination that it would continue to provide service for 90 days. In fact, it provided it for more than five months, which proves that the Concessionaire did not abandon the Concession.191
The Claimant draws the attention of the Tribunal to the fact that the Respondent continued to take measures that have aggravated the situation notwithstanding the Tribunal's order to refrain from doing so. In particular, the Province indicated that it would not approve ABA's proposal to creditors, collected payments of ABA's customers, and cashed ABA's and OBA's performance bonds.192
The Respondent argues that the Province had the exclusive power to terminate the Concession, that the Concessionaire had to request termination from the Province and, if the Province denied it, then the Concessionaire could file an action in the local courts to seek a judgment declaring contractual termination. In fact, ABA lodged an appeal against the Province's termination before the Argentine Courts. According to Argentina's expert, Dr. Solomoni, Article 14.1.4 does not authorize the Concessionaire to declare the Concession Agreement terminated but it regulates the Province's prerogative to terminate the Concession Agreement even in the event of non-compliance by the Province. The Respondent alleges that the defense of the Claimant based on the exceptio non adimpleti contractus is not applicable here because it was never used by ABA when it defended its action. ABA always maintained that it had the right to terminate the Concession Agreement unilaterally.193
The Respondent also raises the issue of a conflict between the BIT and human rights treaties that protect consumers' rights. According to Argentina's expert, a conflict between a BIT and human rights treaties must be resolved in favor of human rights because the consumers' public interest must prevail over the private interest of service provider.194 On this point, the Claimant argues that the user's rights were duly protected by the provisions made in the Concession Agreement and the Province fails to prove how said rights were affected by the termination.195

(c) Considerations of the Tribunal

Article 14.1.4 – Termination due to Fault of the Granting Authority - reads as follows in the translation furnished by the Claimant:196

"The Concessionaire may claim termination of the Agreement based on the Concession Grantor's fault where a rule, act, fact or omission by the Concession Grantor results in a substantial noncompliance with the obligations undertaken by the Concession Grantor under the Agreement reasonably impairing its performance.

In such event, within thirty (30) days from knowledge or occurrence of said event, the Concessionaire shall demand the Concession Grantor to cease such noncompliance, and grant a reasonable term of at least thirty (30) days. In the event that Grantor fails to observe its obligations, the Agreement shall terminate."

The Tribunal notes first that the last sentence quoted is not an accurate translation from the original Spanish version, which reads: "En el supuesto que el Concedente no cumpla con sus obligaciones, deberá declarar rescindido el Contrato."
The Claimant has read this sentence as if the subject of the verb "deberá" were the Concessionaire. However, the Concessionaire is not mentioned at all in the sentence and it is more logical to consider the "Concedente" (the Grantor) as the subject. This reading is consistent with the first paragraph of the Article which refers to the ability of the Concessionaire to request the termination of the Agreement ("podrá solicitar"). The mandatory use of "deberá" ("shall") would also seem to refer to the obligation of the Grantor since the Concessionaire may or may not wish to pursue its right. If the subject of the sentence were the Concessionaire, the term "may" would have been more appropriate.

This interpretation fits with Article 49-II of the Law that provides:

"The rescission of the contract or the salvaging of the services must be resolved by the Provincial Executive Authority with the intervention of ORAB."

This text does not differentiate between rescission at the initiative or the nonperformance of one or the other of the parties. In all cases, the issue must be resolved by the Grantor. In the specific case of the Concession Agreement, the Grantor had no alternative but to declare the termination if its noncompliance continued, but this is where the parties disagreed. Both parties alleged noncompliance as a cause for their respective rescission of the Concession Agreement.

The above interpretation does not match the procedure for the rescission of the Concession Agreement on grounds of the Grantor's fault in Article 14.4.4. When the Concession Agreement is terminated because of the Concessionaire's fault, Article 14.4.3 provides that the Concessionaire shall deliver the service once it has been notified of the decree of the Grantor terminating the Concession. In contrast, Article 14.4.4 does not refer to any administrative act of the Grantor to rescind the Concession Agreement. It simply states that "Once the Contract shall have been terminated because of the Grantor's fault…" without indicating by whom or by what action. The comparison of the two provisions seems to reflect the difference between the procedure to be followed by a public authority which acts through decrees and resolutions and a private party which may simply notify the Grantor.
The difficulty in interpreting the provisions of Article 14 harmoniously is compounded by Article 49-II of the Law which, as already noted, prescribes that termination "must be resolved by the Provincial Executive Authority with the intervention of ORAB." The Law does not distinguish between termination by the Grantor or the Concessionaire. It would seem appropriate that the Concession Agreement be interpreted consistently with the provisions of the Law. On the other hand, the Tribunal cannot ignore the practical result of this interpretation: if taken to the extreme, a concessionaire would be obliged to continue to provide the service indefinitely at the discretion of the government and its right to terminate the Concession Agreement would be deprived of any content. For this reason, the application of the maxim exceptio non adimpleti contractus provides a balance to the relationship between the government and the concessionaire. The Tribunal considers it immaterial whether ABA raised this defense in its recourse to the Argentine courts. The Tribunal is assessing the conduct of the Respondent and its instrumentalities in the exercise of its public authority against the standards of protection of foreign investors agreed in the BIT, and the application of the maxim exceptio non adimpleti contractus has been raised by the Claimant in these proceedings. This exception is not unknown to Argentine law and to legal systems generally as it is a reflection of the principle of good faith. The Tribunal will take it into account when evaluating the actions of the Province under the standards of protection.
The Respondent has also raised the issue of the compatibility of the BIT with human rights treaties. The matter has not been fully argued and the Tribunal fails to understand the incompatibility in the specifics of the instant case. The services to consumers continued to be provided without interruption by ABA during five months after the termination notice and through the new provincial utility after the transfer of service.

9. Conduct of the Province after Service Transfer

(a) Positions of the Parties

The Claimant points out that, on March 20, 2002, the ORAB issued Resolution 20/02 preventing ABA from collecting amounts owed in its accounts receivables for services provided prior to the date the service was transferred. Two days later an announcement in the press advised the public that all amounts payable to ABA for service before March 7, 2002 and not yet paid should be paid to the new service provider, and that payments made to ABA would not be honored. ABA requested the bankruptcy court to issue a protective measure. This measure was issued on June 4, 2002, "ordering the appropriate entities and agencies to refrain from collecting payments on invoices issued for services rendered by Azurix during periods preceding March 7, 2002, which shall only be paid to the debtor in these reorganization proceedings, at the domicile of such company. Furthermore, in the event that payments have already been collected on any such invoice, the appropriate entities shall deposit such amounts into an account opened for these proceedings and all other amounts shall be deposited at the Tribunales branch of Banco de la Ciudad de Buenos Aires."197
The Claimant notes that only one sanction had been imposed on ABA before the letter of July 18, 2001. Thereafter, there was a radical change and numerous penalties were levied against ABA as a clear harassment by the Province. The ORAB continued to impose sanctions on ABA even after the service was transferred. The Province was driven by the bankruptcy proceedings and the deadline to request the court to allow their claims. The deadline was June 3, 2002 and on such date the Province and its instrumentalities filed claims for AR$187 million and US$2.85 million as compared to AR$15 million by all other creditors. The Claimant points out that the claims were filed four days before ABA itself was notified by Resolution No. 46/02, dated June 7, 2002, and that ABA was denied access to the documentation on which the penalty was based and an extension of the deadline to file an appeal. ABA filed an appeal to the trustee in bankruptcy who, according to the Claimant, considered most of the claims without merit.198
Based on the report of the University of La Plata ("UNLP Report"),199 the ORAB adopted Resolution No. 52/02 approving the final credit and debit account of the Concession resulting in a credit of the Province against ABA of AR$640 million. According to the Claimant, the supporting documentation and a request for an extension of the deadline to file an appeal were denied. ABA filed an appeal on September 30, 2002 based on the hypothetical nature of the claims and their lack of grounds. Specifically, the Claimant alleges that damages concerning assets were estimated even though the ORAB never made the inventory required by Sections 14.4.3 and 14.4.4 of the Concession Agreement; the cost of new water and sewage connections were claimed although the Province released the new provider of making such investments; obligations not enforceable until years 3 and 5 of the Concession were considered unfulfilled and related damages were claimed; and damages concerning the same assets were duplicated. Furthermore, the credit and debit account includes hypothetical damages such as the loss in tax collections caused by the loss of possible increases in real estate properties value due to the interruption of the POES, the cost of a new bidding for the Concession which was never organized, increases in tax collection that the Province could have obtained from hotel, restaurant and tourism activities if ABA had continued as Concessionaire for 30 years.200
In the Counter-Memorial, the Respondent contests that the penalties reflected anything more than the non-performance of ABA. The Respondent notes first that the Claimant had failed to indicate to the Tribunal that ABA had a penalty holiday of six months after the takeover of the Concession. This grace period was a change introduced to the model contract included in the Bidding Documents. There was no doubt that such grace period was not part of the draft contract as confirmed by a reply of the Privatization Commission to a question.201 The Respondent cites two other penalties imposed on ABA by Resolution No. 34/00 and Resolution No. 50/00. The Respondent points out that before imposing a penalty ORAB had to determine nonperformance and follow the pertinent administrative proceedings. It was not a hostile attitude but respect for the administrative procedures to impose sanctions.202
According to the Respondent and on the basis of the UNLP Report, the damages to be borne by the Province as a result of failure to meet the goals undertaken in the POES and termination of the Concession Agreement for causes attributable to ABA exceeded AR$149 million and the economic impact of the environmental damages caused by ABA amounted to over AR$467 million.203 The Respondent observes that, in the statement of credits in favor of the Province, the amount collected for service prior to March 7, 2002 has been taken into account and that the relevant protective measure was revoked on appeal by the Commercial Court of Appeal. The Respondent also notes that ABA brought an action against Decree 508/02 terminating the Concession Agreement before the Supreme Court of the Province.204
In its Reply, the Claimant alleges that the sanctions imposed on ABA were part of a strategy to overwhelm Azurix's claim in these proceedings. They were a set of measures taken in a wider context of abusive measures by the Province and Argentina, including measures taken after the Decision on Provisional Measures of this Tribunal.205
In its analysis of the penalties imposed, the Claimant finds that: (i)14 out 16 fines were imposed after the termination of the Concession Agreement by ABA, (ii) during the two months that Decrees No. 2598/01 and 3039/01 were issued, ABA was fined seven times for a total of US$555,000, (iii) seven more fines were imposed after the transfer of the service for a total of US$1,960,000, and (iv) four fines for a total of US$1,800,000 were levied between the filing of reorganization proceedings and the deadline for creditors to file a petition for allowance of claims.206