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
Suipacha 268, Piso 12
C1008AAF Buenos Aires
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
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)
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
Counter-Memorial, paras. 932-937.
"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 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
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
Wena Hotels Limited v. Arab Republic of Egypt, (ICSID Case No. ARB/98/4). Ad hoc Committee Decision on Application for Annulment, dated February 5, 2002, 41 ILM (2002) p. 941.
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
Reply, paras. 76-77.
Ibid., para. 68.
"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?"
"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 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
Ibid., p. 84, quote from the parliamentary record.
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
Ibid., para. 624.
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
Reply, para. 390.
Ibid., para. 393. Emphasis in the original.
Ibid., paras. 394-395 and footnote 429.
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
Rejoinder, para. 679.
Ibid., para. 686.
"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."
"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
"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
"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 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
Ibid., para. 861.
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
Ibid., para. 255.
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
Ibid., paras. 266-267.
Ibid., para. 268.
"…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
"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
"constituted the basis of the calculation, then, any amount paid should be recovered through rates (circularity of rates)" and, "if the rates can be calculated on the basis of the value of the company at the time of privatization or, if the rate of return of the company is guaranteed on the bid price, there is nothing to prevent an economic agent from offering a large amount if the implicit regulatory rate of return is higher than its own weighted capital cost."161
"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.
"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
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."
"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."
"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."
"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."
"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)."
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
Reply, para. 272.
Legal Opinion of Professor Fernández, para. 56, Reply, Annex 1, para. 271.
"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
"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
"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
"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 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]"
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
Ibid., para. 517.
"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 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."
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.