Investment Arbitration Reporter

By Luke Eric Peterson

An arbitral tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has held the Republic of Tanzania in breach of several provisions of the UK-Tanzania bilateral investment treaty in relation to Tanzania’s treatment of the UK-based water-services firm Biwater-Gauff (Tanzania) Ltd. (BGT).*

Notwithstanding a finding of multiple treaty breaches, the tribunal rejected in its entirety a bid by BGT for upwards of $20 Million (US) in compensation, citing the dire state of the firm’s water project by the time that the Tanzanian Government took a series of abusive and unnecessary actions which deviated from the treaty protections owed.

From a purely financial perspective, these actions by Tanzania - that included the seizure of BGT assets and the deportation of local executives - merely served to accelerate (in a fashion contrary to the treaty) a process of winding up an investment which was teetering on the brink of collapse.

Background to the dispute and the fate of the project

The investment by BGT in Tanzania was facilitated by several multilateral funders, including the World Bank, which provided $140 Million (US) in funding for Tanzania to upgrade and improve the delivery of water and sewage services in and around the capital of Dar es Salaam.

As part of this funding, Tanzania was obliged to appoint a private operator to manage and operate the system. Following a bid process, BGT was selected to run the process, and a local entity, City Water, was incorporated in Tanzania for purposes of managing the system and entering into contracts with the Tanzanian side.**

Given the dilapidated and inadequate state of the public water system, the investment called for various capital improvements and repairs, as well as the provision of meters to improve the measurement of consumption by individual households.

From the outset, BGT saw no prospect for profitability over the first seven years of the 10 year project. For City Water to stay afloat in the short term it would rely upon equity investments by the project investors as well as a loan facility provided by a state entity. Over the longer term, it was expected that improvements in customer billing and payments would mean that the tariffs charged for water-use would support City Water’s operations.

Ultimately, the investment would not make it to its seventh year, much less its tenth year. The arbitral tribunal, in summarizing the facts of the case, observed that both sides experienced difficulties in performing their contractual obligations. While the tribunal conceded that City Water did make certain improvements, it determined that the local entity has made a poorly structure bid, failed to meet its subsequent obligations (including installation of crucial new billing software), and found itself in financial difficulty “at a very early stage.”

As a consequence of its failings, City Water was collecting far less revenue than it had projected before the first year of operations had concluded. This had further knock-on effects including a failure by City Water to make all of its promised investments, and the improper use by City Water of funds which were supposed to have been held in trust for the express purpose of connecting poor customers to the water system.

Although City Water pleaded that changes in material circumstances warranted an increase in the tariffs it could charge to customers, an independent auditor appointed to review these claims reached the conclusion that no tariff increase was warranted.

Very rapidly, doubts grew as to the financial viability of City Water. Mandatory payments owed by City Water to the Dar es Salaam Water and Sewerage Authority (DAWASA) –representing the latter’s share of water tariff collections and lease fees for the use of stateowned facilities – began to falter as early as January of 2004.

Tanzanian officials urged BGT to inject more capital into the project; however, the company sought a more radical restructuring of the terms of the investment. Ultimately, a renegotiation process was initiated in early 2005 – even though the government was not strictly obliged to renegotiate - however the parties failed to reach agreement on terms.

The tribunal noted that it was abundantly clear to City Water that the failure of this renegotiation process would likely lead to a move by DAWASA to terminate the key contract with City Water.

Indeed, at a May 12, 2005 meeting of DAWASA’s Board a formal decision was taken to put in motion steps to terminate this contract, and to call in a performance bond which City Water had posted at a local financial institution. City Water dug in its heels and called for arbitration under the contract, according to the UNCITRAL rules of procedure.

That contract arbitration ultimately resulted in a December 2007 award against City Water for some $7 Million (US) for breach of its contractual obligations. However, it remains to be seen whether DAWASA will be able to collect on the award given the parlous financial state of City Water, which is currently subject to liquidation proceedings in the Tanzanian courts.

In a recent statement Biwater says that Tanzania “squandered” millions of dollars in persisting with the contract arbitration: “Since City Water is, for all practical purposes, defunct, has no functioning board and no assets, the action was completely pointless.”

Meanwhile, long-time Biwater critic, and UK campaigning group, The World Development Movement, has called, in a recent press statement, on Biwater and its shareholders to honour the debts of City Water in relation to the unfavourable contract arbitration ruling.

Following DAWASA’s move to terminate contract, Government breaches treaty

While the process of winding up the City Water project was set in motion by DAWASA in May of 2005, a series of actions by Tanzanian Government officials over the subsequent 3 week period were ultimately deemed by the ICSID arbitration tribunal to be excessive and “abusive”, and in breach of the UK-Tanzania investment treaty.

Among the actions which were held to have breached Tanzania’s treaty obligations were a series of public announcements by a Government Minister to the effect that the Government was terminating the City Water contract; a unilateral withdrawal of a tax exemption earlier granted to City Water; and the occupation of City Water’s facilities and the unceremonious deportation of key company executives.

These (and other) substantive treaty breaches – as well as the tribunal’s reasons for not awarding any damages for such breaches – are discussed in greater depth in two separate articles: here and here.

* This article was first published under a lengthier headline in the email version of IAReporter: "In an unusual outcome, Tanzania held to have violated treaty protections owed to foreign water services company, Biwater Gauff, but no damages flow from these breaches; ICSID tribunal holds that firm's ill-managed operation of Dar es Salaam water supply had brought company to brink of collapse by the time Tanzanian Government actions served to breach UK-Tanzania investment treaty"  The award is available on the ICSID website: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=GenCaseDtlsRH&actionVal=Lis tConcluded. ** City Water was 51% owned by BGT, and 49% owned by a Tanzanian investor. BGT was required by the tender conditions to include a local partner with at least 20% ownership of City Water. Relations between the two partners deteriorated over time, contributing to the difficulties faced by BGT in Tanzania.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com