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Argentina has suffered for more than a decade as the global guinea pig for water privatization experiments. But, after years of social turmoil surrounding these failed experiments (lack of investment in the maintenance, repairs and expansion of water utilities, rate hikes, cut-offs for those who cannot afford the service, water contamination due to lack of appropriate treatment, and on-going contention regarding contractual incompliance) Suez and other major water corporations are going home.

Azurix v. Argentina

Protecting Investor Profit While Ignoring the Public Right to Affordable Water

In July 2006 an ICSID tribunal determined that Argentina should pay $165.2 million to Azurix, the water division of the scandalous Enron Corporation which has become a symbol of willful fraud and corruption. Azurix had claimed $565 million in compensation from the government of Argentina although the ICSID tribunal decided to award them less than a third of this amount.

The water privatization project began when, in 1999, Azurix agreed to pay $438 million for the exclusive right to provide water and sanitation services to the Argentine Province of Buenos Aires for 30 years. Relations with the government were rocky from the start, as officials refused to let the company raise water rates as high as they wanted. Then in April 2000 further controversy erupted when an algae outbreak led provincial officials to warn citizens that they should boil their water before consuming it, prompting some customers to refuse to pay for the water. Azurix blamed Argentine government officials for the situation, which they said was caused by years of disinvestment. In October 2001, shortly after parent company Enron announced it would break-up Azurix and sell its assets, the company withdrew its contract in Argentina, accusing the provincial government of “serious breaches” and filing a compensation claim with ICSID.

People's Summit in Cordoba, Argentina condemns Suez

Azurix claimed that the government’s actions subjected them to expropriation without compensation. They also argued that Argentina had violated vaguely worded clauses in a U.S.-Argentina BIT that require “fair and equitable treatment” and “full protection and security.” Argentina argued that their regulatory measures were taken in pursuit of important
public interests – ensuring that citizens have access to essential public services such as clean, safe, affordable water. The Argentine government distinguished between “legitimate regulation and confiscatory regulation.” However, the ICSID tribunal concluded that “the issue is not so much whether the measure concerned is legitimate and serves a public purpose, but whether it is a measure that, being legitimate and serving a public purpose, should give rise to a compensation claim.”

In the end, the ICSID tribunal decided that the actions of the Argentine government did not rise to the level of an expropriation but rather there were breaches of the “fair and equitable treatment” and “full protection and security” clauses of the BIT. The tribunal acknowledged that some recent U.S. investment agreements limited the concept of “full protection and security” to physical police protection required under customary international law. Nevertheless, the tribunal was of the view that this clause did not have a merely physical protective component, but further required that host governments ensure the “stability afforded by a secure investment environment.” Regarding fair and equitable treatment, the tribunal stated that: “(t)he standard of conduct agreed by the parties to a BIT presuppose a favorable disposition toward foreign investment, in fact, a pro-active behavior of the State to encourage and protect it.”

The Azurix tribunal interpreted “fair and equitable” treatment to be not merely a negative obligation to refrain from bad faith, but a positive obligation to facilitate the success of the foreign investor. The result is that if governments decide to serve the public good rather than narrow corporate interests, they must be ready to pay a high price.

Read more about the water struggles in Argentina:

• Buenos Aires – Collapse of the privatization deal
• Santa Fe – Suez flees and citizens fight for new public utility
• Tucuman – French company pushes case in World Bank court
• Cordoba – The Last Stronghold for Suez