Tanzania: Thirsty for justice

Multinational Monitor | Nov-Dec 2008

Tanzania: Thirsty for Justice

British water giant Biwater cannot use an investment treaty to make Tanzania pay millions for an abrogated water privatization contract, an international tribunal ruled in July.

But it remains unclear if Tanzania will be able to collect millions in damages awarded to it by a separate international arbiter, or whether Biwater will be able to use its corporate structure to avoid liability.

After Tanzania cancelled its contract in 2005 on the grounds that Biwater had failed to deliver promised services, Biwater sued the country twice. In a case filed in the UK under UNCITRAL (United Nations Commission on International Trade Law) rules, the company alleged Tanzania violated the terms of its contract with Biwater. In January 2008, the tribunal deciding the case ruled that Biwater should actually pay $8 million to Tanzania.

Biwater also filed suit at the World Bank-administered International Center for Settlement of Investment Disputes (ICSID), where it sought to enforce the terms of a Tanzania-UK investment treaty. In July 2008, the ICSID panel ruled for Biwater, but refused to grant any damages.

The Tanzania case at ICSID follows a long line of corporate investor cases arbitrated under bilateral investment treaty rules.

According to Nathalie Bernasconi, an attorney who works in Geneva with the Center for International Environmental Law, there are currently 2,500 bilateral investment treaties, under many of which corporations can initiate arbitration against a country.

Critics say the investment treaties give multinational companies access to international rules and global forums (like ICSID) that are heavily tilted in favor of private investors. Seventy percent of cases filed under bilateral investment treaties are resolved in favor of investors, either by final ruling or settlement.

“Biwater never performed”

Biwater signed a 10-year contract to manage the water system in the Tanzania capital city of Dar es Salaam in 2003.

The Tanzanian water deal was part of the privatization wave that swept through Africa in the 1990s, imposed through aid conditions from government donors and multilateral banks. The UK, Tanzania’s biggest benefactor, strongly supported the water deal. The UK even provided funds for a pop song in Swahili promoting privatization, with the lyrics, “privatization brings the rain.”

The Tanzanian deal offered generous terms for Biwater. It received a five-year tax holiday and no cap on profits from reducing operating costs (the standard for regulated utilities in the United States). Donors committed to directly fund required upgrades.

But Tanzanian and global activists said from the outset that privatization was a bad deal for Tanzania.

A report by ActionAid pointed out that 80 percent of Dar es Salaam’s residents would receive benefits from only 2 percent of the promised new investments, through a fund designed to connect households to the water system.

Tanzanian critics said the contract effectively redlined the poorest neighborhoods - a practice common in the world of corporate water privatization, because poor families do not have sufficient income to pay for high-priced, high-volume water services. Those in the poor neighborhoods of Dar es Salaam, without water connections, would continue to walk to pay inflated rates for small amounts of unsafe water from mobile water vendors, or hope for charity organizations to invest in water infrastructure.

It turned out that Biwater had trouble even servicing wealthier communities. Shortly after project inception, problems appeared. Households complained of increasingly unreliable service; scheduled investments in pipes and infrastructure upgrades were not made; and required progress reports to the Tanzanian regulator were not submitted.

A number of consultants, paid in part by the German government and the World Bank, assessed Biwater’s performance. All found that Biwater had not fulfilled its contractual obligations.

Starting in October 2004, the government and Biwater sought to renegotiate the deal, but could not reach an agreement.

Even the company acknowledged that Biwater’s management was a complete failure. Biwater’s chairperson admitted that there was “corporate failure all the way to Dorking,” the UK town where Biwater is based.

“Biwater never performed under the contract,” says Mussa Billegeya, campaigner for the Tanzania Association of NGOs. “They were supposed to increase revenue, but couldn’t collect the water fees. They didn’t even pay the lease fee to the government. They owed around $3.5 million to the government in 2005. They did not contribute to a collection fund -which was meant to connect the poorest people. They were doing almost none of what they were supposed to do.”

Tanzania Prevails

In May 2005, after the failure of the negotiations, Tanzania announced it would cancel the contract. After City Water’s contract was cancelled, a new public corporation took over operations of Dar es Salaam’s water system.

The same month the contract was cancelled, Biwater initiated its contract case against Tanzania in the UK.

In August 2005, Biwater filed its claim at ICSID, saying Tanzania treated it unfairly under the terms of the UK-Tanzania investment treaty, and that it potentially lost as much as $25 million due to a government “expropriation.”

The July 2008 ICSID ruling agreed that Tanzania’s conduct had violated its treaty obligations, but found that City Water - the Biwater’s subsidiary handling the Dar es Salaam contract - had been operated so poorly that its economic value was “nil.”

Biwater condemned the decision. “The rationale is hard to fathom,” says Larry Magor, Biwater director. “We had invested approximately $14 million in City Water over a two-year period. The Tribunal found that the Government of Tanzania violated the terms of its investment treaty with the UK on four separate counts, and yet it did not provide any effective remedy in respect of these violations.”

Meanwhile, Biwater says it will not pay the $8 million awarded to Tanzania in the UK case - an amount sufficient to connect 50,000 people in Dar es Salaam to the water system. Biwater’s position is that the City Water subsidiary no longer exists, and so there is no entity to pay the award.

J.J. Gass, an attorney with the law firm Freshfields Bruckhaus Deringer LLP who served as lead counsel for the Tanzanian government in the Biwater cases, still has hope that the company will face up to its responsibility. “If Biwater leaves the government holding the bag in this fashion, one hopes the World Bank and other development institutions would remember that behavior the next time Biwater and its affiliates bid to participate in a donor-funded project.”

- Maj Fiil is the former director of Water for All