In the previous posts (Part I and Part II), we read about the Stabilization Clause and its
importance in International Investment Agreements. In the present post, we will
understand the concept of PPP in the context of International Investment Law
and the investment disputes relating to it.
Public-Private Partnerships (PPP)
A PPP is nothing but a partnership between
private and public stakeholders that encompasses multiple phases of a project,
works toward a common goal, and allocates any given risk of a project to the
partner best able to manage it[1].
There are several advantages of having a PPP such as[2]:
1. It overcomes government failures such as
inefficiency, slow decision making etc.
2. The legal framework is usually adequate and
predictable which provides a conducive environment to the investors.
3. The private parties use their expertise to
mitigate risks by meeting the performance requirements.
Types of PPPs
PPPs can generally be divided into five
categories:
A. Operate-Maintain (OM) – This involves
least private stakeholder participation. Here, the private parties do not
contribute financially to the project.
B. Design-Build-Operate (DBO) – This
category also involves no financial contribution from the private parties.
C. Design-Build-Finance-Operate (DBFO) –
Under this category, the full ownership of the project vests with the public
stakeholder.
D. Build-Operate-Transfer (BOT) – Under
this category as well, the full ownership is vested with the public
stakeholder. This includes long term leases as well.
E. Build-Own-Operate (BOO) – This type
of project is a fully privatized one.
It is essential to distinguish PPPs from privatization.
Under privatization, the government either sells public assets to the private
sector or entirely transfers the responsibility for providing a public service
to the private sector. Unlike with PPPs, the public sector retains no
responsibilities or ownership and is not involved in establishing any
expectations for the performance or delivery of the asset[3].
But, PPPs are not without bumpy stretches of
road. Usually, the developed countries are specialized to deal with the private
investors and implement the PPPs. However, same is not the case with the
private investors when they visit the developing countries. A lot of developing
countries do not have the requisite expertise and sophistication to negotiate
efficient PPPs. Also, such countries are apprehensive about losing control over
the infrastructure assets and try to create unnecessary technical hurdles to
show their dominance over the private investors. Hence, such acerbities and
distrust invariably results into disputes that are needed to be resolved by an
independent forum. One of the most interesting cases in this respect is that of
Tanzania. Let us have a brief overview of the same.
The Curious Case of Tanzania[4]
Brief Facts
BGT was a company incorporated in UK by Biwater, an English Company
and Gauff, a German Company. Biwater had controlling stakes in BGT and
BGT was the controlling shareholder of City Water Services Limited (City
Water). ‘City Water’ was incorporated in Tanzania and successfully bid
for a Water Contract with the Dar-es-Salaam Water and Sewage
Authority (DAWASA). City Water agreed to provide water and sewerage
services on behalf of DAWASA. After that, things between both the parties started
deteriorating and BGT filed a claim for expropriation under the
UK-Tanzania BIT.
Background
The agreement included a revenue sharing
clause asking the ‘City Water’ to bill customers and give a share of
the revenue to DAWASA. DAWASA also provided short term loans to ‘City
Water’. However, there were many problems with this arrangement such as inefficient
management, poor billing systems etc. As a result of the poor bid, coupled
with numerous management and implementation difficulties, BGT (and City Water)
did not generate the income which had been foreseen, and accordingly the
project quickly encountered substantial difficulties. After sometime, the ‘City
Water’ lost most of its revenue source and failed to pay back the debts it
owed to DAWASA. Thus DAWASA terminated the contract, government occupied
the facilities and deported the City Water Staff.
The matter came up before ICSID. The
main question was whether there was a breach of the BIT “in a way that
demonstrates a denial of justice”?
Held
It was held that the cumulative effect of the
DAWASA’s acts entirely destroyed City Water’s rights in the agreement which was
anyways going to expire in a few weeks. According to the tribunal, this
amounted to an indirect expropriation. The tribunal also explained that an economic
test is not the only way of deciding whether expropriation has taken place or
not, the main focus must be on the interference with the investor's rights.
Thus, in the present case, even though no financial damages were caused to City
Water, still the inability of City Water to exercise its rights before the
contract's termination constituted as indirect expropriation[5].
Analysis
We observe that, in the present case, the
government acted within its sovereign capacity. Such an action includes any
action relating to the investor’s rights that is made known to the public. In
such cases, the courts/tribunals look into whether the investor has suffered a
substantial deprivation of the investment's value and/or how the government's
measures have resulted in a substantial deprivation of the investor's ability
to use and enjoy its rights. What really matters in such cases are the measures
that are taken by the government to resolve the crisis. Nationalization or
Expropriation are just some of the measures that the government usually
takes to protect its investment from turning infructuous in such PPPs.
In the next post, we will talk about the diminishing Utility of
Expropriation Clause in the Context of PPPs.
4. Expropriation Clause, Stabilization Clause and Public-Private Partnership
5. The Darker Side of Stabilization Clause in Investment Agreements
5. The Darker Side of Stabilization Clause in Investment Agreements
[1] Young
Hoon Kwak, Ying Yi Chih & C. William Ibbs, Toward a Comprehensive
Understanding of Public Private Partnerships for Infrastructure Development,
2 Cal. Mgmt. Rev. 51, 52 (2009).
[2] Asian
Dev. Bank, Public Private Partnership Handbook 1 (2008), available at http://www.adb.org/sites/default/files/pub/2008/Public-Private-Partnership.pdf.
[3] Benjamin
Falber, A Unique Expropriation Framework for a Unique Category of
Investment: The Rights of Foreign Investors in Public-Private Partnerships,
22 Transnat'l L. & Contemp. Probs. 510 (2013).
[4] Biwater
Gauff (Tanz.) Ltd. v. United Republic of Tanzania, ICSID Case No.
ARB/05/22, Award, P 4 (July 24, 2008).
[5] Id.
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