Date of dispatch to the parties: July 14, 2006 INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES WASHINGTON, D.C. IN THE PROCEEDING BETWEEN AZURIX CORP. (CLAIMANT) AND THE ARGENTINE REPUBLIC (RESPONDENT) ICSID CASE No. ARB/01/12 AWARD Members of the Tribunal Dr. Andrés Rigo Sureda, President The Honorable Marc Lalonde P.C., O.C., Q.C., Arbitrator Dr. Daniel Hugo Martins, Arbitrator Secretary of the Tribunal Ms. Claudia Frutos-Peterson Table of Contents I. INTRODUCTION..................................................................................................................1 II. PROCEDURAL BACKGROUND ........................................................................................2 III. BACKGROUND TO THE DISPUTE ..................................................................................10 IV. PRELIMINARY OBSERVATIONS.....................................................................................13 1. Responsibility of the Respondent for Actions and Omissions of the Province ..........13 (a) Positions of the Parties.....................................................................................13 (b) Considerations of the Tribunal..........................................................................14 2. Scope of the Jurisdiction of the Tribunal ...................................................................15 3. The ENRON relationship...........................................................................................17 4. Corruption..................................................................................................................17 5. Argentina’s Economic Crisis......................................................................................18 V. APPLICABLE LAW ...........................................................................................................18 1. Positions of the parties..............................................................................................18 2. Considerations of the Tribunal ..................................................................................20 VI. THE FACTS .......................................................................................................................21 1. The Takeover of the Concession ..............................................................................21 (a) Positions of the Parties.....................................................................................21 (b) Considerations of the Tribunal..........................................................................24 2. Measures related to the tariff regime.........................................................................24 (a) Zoning Coefficients...........................................................................................25 (i) Positions of the parties.........................................................................25 (ii) Considerations of the Tribunal.............................................................28 (b) Construction Variations: Resolution 7/00 .........................................................29 (i) Factual background...............................................................................29 (ii) Considerations of the Tribunal.............................................................31 (c) Valuations 2000................................................................................................32 (i) Positions of the Parties.........................................................................32 (ii) Considerations by the Tribunal............................................................33 (d) Retail Price Index (RPI) issue...........................................................................34 (i) Background............................................................................................34 i (ii) Positions of the Parties.........................................................................36 (iii) Considerations of the Tribunal.............................................................37 3. The Works in Circular 31(A) ......................................................................................39 (a) Bahía Blanca: Algae Removal Works...............................................................39 (i) Positions of the Parties.........................................................................39 (ii) Considerations of the Tribunal.............................................................45 (b) Moctezuma.......................................................................................................47 (i) Positions of the Parties.........................................................................47 (ii) Considerations by the Tribunal............................................................50 (c) Polo Petroquímico (“Polo”) ...............................................................................50 (i) Positions of the Parties.........................................................................50 (ii) Considerations of the Tribunal.............................................................52 (d) Florencio Varela ...............................................................................................52 (i) Positions of the Parties.........................................................................52 (ii) Considerations of the Tribunal.............................................................54 4. Rejection of Financing by the Overseas Private Investment Corporation (“OPIC”) ..55 (a) Positions of the Parties.....................................................................................55 (b) Considerations of the Tribunal..........................................................................57 5. Memorandum of Understanding (MOU) ....................................................................57 (a) Positions of the Parties.....................................................................................57 (b) Considerations of the Tribunal..........................................................................60 6. The Program for Optimizing and Expanding Service (POES)...................................61 (a) Positions of the Parties.....................................................................................61 (b) Considerations of the Tribunal..........................................................................66 7. Circular 52(A) and Canon Recovery .........................................................................66 (a) Introduction.......................................................................................................66 (b) Positions of the Parties.....................................................................................67 (c) Considerations of the Tribunal..........................................................................75 (i) Circular 52(A): The Canon as an Investment ......................................77 (ii) The Addition of Article 12.1.1. ..............................................................78 (iii) Rationale of the Concession ................................................................79 (iv) Article 7.8................................................................................................82 8. Termination ...............................................................................................................86 (a) Introduction.......................................................................................................86 (b) Positions of the Parties.....................................................................................86 ii (c) Considerations of the Tribunal..........................................................................89 9. Conduct of the Province after Service Transfer ........................................................92 (a) Positions of the Parties.....................................................................................92 (b) Considerations of the Tribunal..........................................................................96 VII. BREACH OF THE BIT.......................................................................................................96 1. Expropriation without compensation .........................................................................96 (a) Positions of the Parties.....................................................................................96 (b) Considerations of the Tribunal........................................................................108 (i) Interpretation of the BIT......................................................................109 (ii) Effect, Intent and Duration of Expropriation Measures ...................109 (iii) Breach of Contract and Expropriation...............................................112 (iv) Legitimate Expectations .....................................................................113 2. Fair and Equitable Treatment..................................................................................116 (a) Positions of the Parties...................................................................................116 (b) Considerations of the Tribunal........................................................................129 3. Failure to Observe Obligations................................................................................137 (a) Positions of the Parties...................................................................................137 (b) Considerations of the Tribunal........................................................................138