Buenos Aires Province Water and Sewerage System

Cancelled

In July 1999 the Government of the Province of Buenos Aires awarded a 30 year concession for the water and wastewater systems in 60 municipalities of the Province to Azurix Buenos Aires S.A., a subsidiary of Enron Corporation. The concession covered an area with 2.5 million inhabitants. The service area included the large industrial city of Bahia Blanca and the provincial capital of La Plata, as well as some municipalities from the Buenos Aires Metropolitan Area. In 1999 it was estimated that 58% of the covered population had a water connection and 37% a sewerage connection. The concession contract was divided into 5 periods of 6 years each. Both the Government and Azurix were required to make investments in each period to expand and improve the water and sewage systems. Azurix’s contribution was expected to be approximately $300 million during the first 5 years, with additional investments to be decided in later periods. The 30 year concession was granted to Azurix following an open tender held in May 1999. Three other companies participated in the tender: Saur, Urbaser and Agba. Azurix offered approximately a $428 million for the concession, some five times more than the next highest bid. The concession contract stipulated that there would only be tariff increases when a combination of US$ inflation indexes – CPI and PPI – exceeded a threshold of 3%. Extraordinary tariff increases could also be requested to the regulator, but were subject to the government’s discretion. Azurix experienced problems almost immediately. In April 2000, an algae bloom in the dam used as water source for the city of Bahia Blanca led to severe water quality problems in the city, moving different local and provincial authorities to request the termination of the concession based on the alleged inefficiency of the company to solve the problem. During the crisis, the Regulator ordered the concessionaire not to bill the customers for those days when the quality was not adequate. Azurix disputed who was responsible for the problem. Between February 2001 and October 2001, Azurix and the Government unsuccessfully attempted to renegotiate the concession agreement in order to have a more viable contract for both parties. As the Enron Corp experienced severe financial difficulties and Argentina’s economic situation worsened, the concession arrangement did not appear to be sustainable. In September 2001, Azurix’s Board of Directors approved a plan to sell certain assets, including most of its water and wastewater subsidiaries in Latin America. In October 2001, Azurix notified the Province of Buenos Aires that is it was terminating the concession agreement, claiming various breaches in the contract by the Provincial Government. The Provincial Government rejected the termination request in November 2001 and required Azurix to continue providing service. In the wake of Enron’s collapse, Azurix abandoned the project in February 2002. The Province of Buenos Aires, through a new, partially employee-owned, provincial water service provider called Aguas Bonaerense (ABSA), took over management of the concession. Azurix went bankrupt and sold almost all of it assets. Azurix filed for arbitration with the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), under the Treaty Concerning the Reciprocal Encouragement and Protection of Investments between Argentina and the United States. Azurix claimed that the Provincial Government had violated investment agreements, had impaired operations and management, had denied allowing Azurix to increase the tariffs according to the contract and had failed to provide treatment in accordance with international law. Azurix sought $600 million in damages. For its part, the Provincial Government accused Azurix of breaching the contract citing unmet expansion and other investments requirements. In July 2006, ICSID ordered Argentine authorities to pay Azurix some $165 million as compensation for breaking the contract. For updates in the international arbitration proceedings, check http://www.worldbank.org/icsid (case n. ARB/01/12). None