Disputes between States and multinationals - The paradigm : The dispute between Suez and Argentina

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Multinationals Observatory | 13 April 2015

Freely translated by Anoosha Boralessa (June 2015) ; not revised by bilaterals.org or any other organisation or person.

Disputes between States and multinationals - The paradigm : The dispute between Suez and Argentina

by Olivier Petitjean

An international arbitral tribunal has just ordered Argentina to pay nearly 400 million Euro to Suez. This is because in 2006, after years of conflict, Argentina renationalized the water services in Buenos Aires. The French firm had recourse to the very “investor state dispute resolution” mechanisms (“ISDS”) that today are the focus of controversy in the EU/US draft trade agreement. This decision illustrates just how the ISDS procedure in practice fails to take due account of human rights or the responsibility a state owes to its own citizens, and chooses instead to apply the iron law of investor protection.

ICSID [1], a trade tribunal that is under the wing of the World Bank, ordered the Argentine State to pay compensation totalling approximately USD $ 405 billion (380 million euro) to Suez, following the cancellation of a contract regulating water privitization in Buenos Aires in 2006. An arbitration took place as part of the so-called “investor state dispute resolution procedures” or ISDS, provided for in the bilateral investment treaty signed between France and Argentina in the 1990s. Today, such mechanisms are controversial issues in the debate on the draft “Transatlantic Trade and Investment Agreement” (commonly referred to by the acronym TTIP or TAFTA). The ICSID ruling perfectly illustrates why the ISDS mechanisms are today subject to a barrage of criticisms.

These private arbitral tribunals (which include ICSID as the leading tribunal globally), have been charged with operating in a less than transparent manner and of having a structural bias in favour of private interests. Notably, they generally make their decisions with exclusive reference to investment treaty provisions and more generally on the basis of private trade law, without really taking into account other international law concepts, notably the duty to protect human rights. The dispute between Suez and Argentina is a particularly striking example since the Argentine government unsuccessfully tried to invoke, “the doctrine of necessity” in the face of a “serious and imminent danger” resulting from the dramatic financial crisis in 2001- 2002 as well as its duty to protect the “right to water” to justify cancelling its contract with Suez.

The Right to Water against the Law of the Marketplace

A chapter of a collaborative work on the remunincipalization of water (read The Rising Wave of the Remunicaplization of Water) that the Multinational Observatory has just published in collaboration with several partners, specifically focuses on ISDS mechanisms and their threat to the current trend of returning water to public management following the failures of privitization. Satoko Kishimoto authored this chapter and her thesis is that,

“ISDS mechanisms are included in numerous bilateral investment treaties and are used by water multinationals to demand exorbitant sums be taken from the public funds for contracts that have been cancelled… Private water companies have generally been successful in disputes because compensation for investments made do not take into account profits made elsewhere through the privitization contract, and because private trade law, when it addresses these issues, fails to take account of the quality of the services rendered.”

A trade treaty with an ISDS clause considerably reduces public authorities’ discretionary powers faced with the iron law on the protection of trade interests. It becomes extremely difficult for a town or State to assert “public interest” or “protection of fundamental rights” objectives without being threatened by an arbitration proceedings where it will be judged, not on the merits, but on the basis of an extremely narrow and formal conception of protection of “investor” rights - an abstraction of actual practice.

One sees this again today in Jakarta, where for 16 years, Suez has had a privatization contract that has been hotly disputed. This contract permitted the French firm to be guaranteed large profits while the town’s water service remained in a deplorable state even though the highest tariff in South-East Asia was imposed. A tribunal, seized by a coalition of citizens, has just declared that water privitization is non-constitutional (read our article). In theory, this decision opens the door to a unilateral cancellation of a contract unaccompanied by compensation. But Suez (which has never tried to defend its track record in Jakarta on the merits) has already made known its decision to “vindicate its rights” all the way. [2] According to an internal source of the Jakarta government, the French business clearly threatened public authorities with an international arbitration claim.

The dispute between Suez and Argentina over Buenos Aires was one of the first instances that an arbitral tribunal has been led to rule explicitly on the link between the international law on investment and the protection of human rights in the context of the right to water. A researcher, Tamar Meshel [3], asserts that as a general rule :

“arbitral tribunals have abstained from expressly recognizing the right to water and from seriously discussing its impact on state obligations to protect investments.”

This is exactly what Suez pleaded before ICSID with reference to the Buenos Aires dispute. It asserted that “the international law on human rights was not relevant to the decision”. [4] The arbitral tribunal ultimately decided that the Argentine government had “to give equal regard” to its obligations to investors and human rights and that it would have to find a way to reconcile them [5] … The arguments Argentina martialled to justify recovering the water service - failure to comply with the terms of the investment, problems with the quality of water – were thus swept aside.

Argentina : a guinea pig for the evils of ISDS

The Buenos Aires water service was privatized in 1993 and the French multinational made a profit from this. At the time (i.e. before the signing of the Jakarta contract), it was the most important water privitization contract in the world. It was fully promoted as a pioneer contract which would be rolled out throughout the world. It is no secret what happened in these two capitals as well as many other cities throughout the world. After repeated conflicts with the private provider, and following Argentina’s dramatic financial crisis in 2001 – 2002, the Argentine government ended up cancelling its contract with Suez in 2006 and created a public enterprise to take over the service. [6] In 2003, when it put pressure on the Argentine authorities and so that the contract would be renegotiated in its favour, Suez made an ICSID claim.

In 2010, ICSID rendered a ruling against Argentine government ; it would need five more years before making a final determination on the quantum of compensation. Suez’s initial claim was for 1.2 billion dollars. It was this that enabled the Argentine Minister of Economy to declare that the final award was actually a “defeat” for the French business. The award has still not been published but according to the Argentine officer, ICSID has only considered compensating Suez’s “investments” and has refused to grant additional compensation for “non-pecuniary loss” and abuse of the right to cancel the contract. Such were the claims of Suez. Argentina announced its intention to file a request to annul the decision.

Argentina carried out a massive privatization of its public services in the 1990s. This wave of privitization was accompanied by Argentina signing a number of bilateral investment treaties aimed at attracting foreign capital. Today Argentina is paying the price for adopting this policy since, in addition to its disputes with various multinationals, it finds itself today prey of “vulture funds” [7]. In the water sector, the country concluded no less than 18 privitization contracts. A third of these ended up in failure and conflict ; the majority resulting in ICSID proceedings. [8] SAUR pursued the province of Mendoza ; Veolia, the province of Tucman ; Enron, the province of Buenos Aires and Suez yet again, the province of Santa Fe. Each one of these arbitrations was rendered in favour of the multinational. In the case of Santa Fe, Suez claimed USD 180 million.

Right from the beginning, water privitization contracts in Argentina have proved highly controversial. From year one, providers demanded that the contract be renegotiated and a tariff hike imposed. The 2001 – 2002 financial crisis and the end of pegging the peso to the dollar ended up aggravating the situation. These are the decisions that the Argentine government took at that time, in an emergency, and included the decision to switch pegging public services tariffs from the dollar to the devalued peso. Today, arbitral tribunals are challenging these decisions. Multinationals claimed that the dollar peg should have been maintained. The net effect of this would have been an explosion in the price of water.

It must be stated that at first, the Buenos Aires contract was highly lucrative for Suez. Suez was guaranteed a high rate of profits without respecting the investment objectives that it had agreed to. [9] The root of the problem – which was totally ignored by ICSID - is that the business – instead of financing its lean investments made of its own funds, had taken out dollar loans, thus profiting from the prevailing favourable exchange rate and interest rate. But when the peso was devalued, Suez was suddenly faced with a colossal debt. Such were the famous “investments” that Argentina today has been ordered to compensate ! One would have thought that it should instead be Suez’s subsidiary in Argentina and its French parent company that should assume the risks and consequences of economic decisions that they themselves had taken…

Judicial Aggression

Suez’s claim for compensation for “non pecuniary loss” and abusing its right to cancel its contract in Buenos Aires nicely illustrates how recourse to international arbitration has been driven by purely economic considerations and sometimes with the intent to punish or intimidate. As Satoko Kishimoto highlights,

“only the threat of an ISDS proceedings before less than transparent international tribunals can suffice to convince a government to continue with private management despite its poor performance. … The threat of proceedings often prevents governments from passing laws or adopting new regulations designed to protect the public interest.”

She cites the Sofia case as an example. In Sofia, the municipality accepted thousands of homes being disconnected from water and prevented an anti – privitization referendum from being held on the grounds that the private provider (which in this case was Veolia) — threatened an international arbitration claim if the municipality did not satisfy its demands. Even in France, the town of Montbeliard took the decision to remunicipalize its water but then overturned its decision following its most recent local elections. The new mayor’s argument (which appears to lack any rational basis) was that it would imply paying compensation of 95 million Euro to Veolia.

Moreover, Suez appeared to be a leading expert in these aggressive judicial efforts. In addition to the two proceedings in Argentina and the consequent threat of an ISDS action against Indonesia, it is noteworthy that it has targeted Pecs, a town in Hungary as well as Puebla, a town in Mexico. Yet another striking example is the town of Casters in France which remunicipalized its water in 2004. Suez succeeded in obtaining compensation of 30 million euros for its investments despite the considerable profits that it had made in the past on this investment and even though a tribunal had ruled that the contract was illegal.

Whilst the interest of private businesses already seem to be given excessive protection, Satoko Kishimoto concludes,

“with the new trade and investment treaties such as the TTIP… that could even further strengthen the ISDS mechanism, the power balance is going to swing even further towards the interests of private firms, leaving public powers without any genuine possibility of controlling essential public services.”


Notes:

[1International Centre for the Settlement of Investment Disputes.

[2Source

[3Tamar Meshel, “Human Rights in Investor-State Arbitration : The Human Right to Water and Beyond”, Journal of International Dispute Settlement, 2015, forthcoming.

[4Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A. v. Argentine Republic ICSID Case No ARB/03/19, Decision on Liability (July 30, 2010). Cited by Tamar Meshel, supra note 3.

[5Probably, by accepting the steep demands of Suez at the time which were :
- a 60% increase in the price of water ;
- State aid for obtaining a loan of 250 million dollars ;
- government financing of 48% of investments ; and
- a total exemption from taxation.
On this subject, see the chapter focusing on the Buenos Aires case study in the book, Remunicipalisation : Putting Water Back into Public Hands, published by Transnational Institute, Corporate Europe Observatory and the Municipal Services Project.

[6The Argentine state holds 90% of this and the employees providing the service hold the remaining 10%. Investment has increased considerably without there being a significant tariff increase and the water service seems to have shrug off the problems documented in the 1990s and at the beginning of 2000s.

[7See here and there. In contrast, its neighbour Brazil, has never signed an investment treaty.

[8Hulya Dagdeviren, “Political Economy of Contractual Disputes in Private Water and Sanitation : Lessons from Argentina”, Annals of Public and Cooperative Economics 82:1 2011.

[9According to Huyla Dagdeviren, supra note 8, Suez will, at the end of the day, only have made the final 55% of the investment that it had initially committed.