GOB SETTLES INVESTMENT DISPUTE INVOLVING BECHTEL

UNCLAS LA PAZ 000083

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND LPETRONI
COMMERCE FOR JANGLIN
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: EINV ETRD ECON PGOV BL
SUBJECT: GOB SETTLES INVESTMENT DISPUTE INVOLVING BECHTEL


1. (U) Summary: The legal chapter of the 2000 Cochabamba
"water war" has come to a close, with the GOB and two
international shareholders (one of them half owned by U.S.
engineering multinational Bechtel) settling their
long-festering investment dispute. Under the agreement, the
GOB will purchase - for a total of USD 25 cents - eighty
percent of the shares in Aguas del Tunari, the joint venture
company selected to manage the Cochabamba water concession
(and whose assets were allegedly expropriated by the GOB),
and assume the company's liabilities. The settlement averts
a possible ruling against the GOB in a case before the
International Center for the Settlement of Investment
Disputes (ICSID) and suggests that the threat of arbitration
is less leverage in Bolivia than it might seem. End summary.

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BACKGROUND
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2. (U) In April 1999, the GOB issued a tender to improve
water and wastewater services for Cochabamba's 600,000
residents, many of whom lacked piped water or effective
sanitation services. Two foreign investors, International
Water Limited, a firm half-owned by U.S. engineering and
construction multinational Bechtel, and Abengoa, a Spanish
construction company, pursued the tender, forming a joint
venture company called Aguas del Tunari. The two
international investors owned 55 and 25 percent of the
shares, respectively, with four Bolivian firms accounting for
the remaining 20 percent.


3. (U) Aguas del Tunari won the bid, and in painstaking
contract negotiations, secured GOB acquiescence to a 35
percent average hike in unit rates for water and sewerage
services, effective January 1, 2000. According to the agreed
tariff structure, low-income residents would pay only 10
percent more, while the largest hikes (106 percent) would be
reserved for high-volume users.


4. (U) Aguas del Tunari began operating Cochabamba's water
and wastewater system in November 1999, increasing water
supply by 30 percent in its first two months through repairs
to the city's existing network. Improved supply and
availability led residents to use significantly more water,
which meant many incurred substantially higher bills.


5. (U) In mid-January 2000, the rate hikes began to fuel
opposition to the contract. Several civic groups began
demonstrating in early February, and protests then spread
across the country. The GOB dispatched military personnel in
early April to attempt to quell the unrest, but additional
violence erupted. In the course of several protests, six
Bolivians were killed. Aguas del Tunari discontinued
operations, and the GOB cancelled the contract.


6. (U) In May 2000, Aguas del Tunari suggested that the GOB
negotiate an amicable settlement of the company's claims for
compensation, estimating the value of assets allegedly
expropriated by the GOB at USD 25 million. After 17 months
of fruitless discussions, Aguas del Tunari filed a request
for arbitration with the International Center for the
Settlement of Investment Disputes (ICSID),a World-Bank
affiliated body with jurisdiction over the case by virtue of
a bilateral investment treaty between Bolivia and the
Netherlands, where the company's majority shareholder,
International Water Limited, is registered.


7. (SBU) Comment: Many see these developments, broadly
referred to as the Cochabamba "water war," as the opening
volley of a gathering popular revolt against Bolivia's
so-called neo-liberal economic model. In this view, the
MAS's decisive victory in the December elections represents
the culmination, or at least the latest accomplishment, of
this powerful social movement. End comment.

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THE SETTLEMENT
--------------


8. (SBU) While waiting for ICSID to determine whether it
would reject GOB objections to its jurisdiction and review
the case, Aguas del Tunari's international shareholders
continued settlement negotiations with GOB officials.
Michael Curtin, President of Aguas del Tunari and a Bechtel
consultant to International Water Limited, told us the GOB
agreed in mid-December 2005 to purchase - for a total of two
bolivianos, or USD 25 cents - the shares held by
International Water and Abengoa. In so doing, the GOB will
acquire 80 percent ownership of Aguas del Tunari and avert a
possible negative arbitral finding in the ICSID case. As
both defendant and (as Aguas del Tunari's new owner)
claimant, the GOB can now simply cancel the arbitration. The
settlement agreement also freed the two international
shareholders of any and all liabilities relating to the case.


9. (SBU) Putting a positive spin on the deal, Curtin told
Econoff January 10 that all sides win in the agreement:
President Rodriguez and President-Elect Morales can say they
avoided arbitration and saved Bolivia a potential USD 25
million negative arbitral finding, and the two international
shareholders can relinquish any remaining liabilities and
extricate themselves from a longstanding investment dispute.
Curtin said the investors hope to sign the settlement
agreement before January 22, when the new administration
takes office.

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COMMENT
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10. (SBU) While resolving a long-festering problem is a
definite plus for all sides, the significance of the deal for
investors in Bolivia is ambiguous at best. Aguas del Tunari
negotiators appear to have decided that accepting a
settlement now is better than trying to retrieve a USD 25
million investment in protracted arbitration negotiations
from a government whose future willingness and ability to pay
up is in doubt. The case suggests that arbitration is less
leverage in Bolivia than it might seem - a lesson that
hydrocarbons companies, seven of which have sent arbitration
trigger letters to the GOB, are likely to view with concern.
GREENLEE