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Biwater fails in Tanzanian damages claim

The Guardian, UK

Biwater fails in Tanzanian damages claim

By Xan Rice, Nairobi

28 July 2008

A British water company thrown out of Tanzania over a bungled privatisation deal has failed in its bid to win up to £10m in damages.

Biwater, whose local management team was deported from Dar es Salaam in 2005, took Tanzania’s government to the World Bank’s business tribunal in 2006, arguing that its assets had been expropriated and its contract illegally terminated.

The claim outraged anti-poverty campaigners who say the privatisation contract was forced on Tanzania, and accused the Biwater-led consortium, known as City Water, of performing worse than the state-run utility it replaced.

The International Centre for the Settlement of Investment of Disputes (ICSID) ruled on Friday that Tanzania’s government had violated its bilateral investment treaty with the UK by expelling City Water.

But the Hague-based tribunal said there were no damages to award as the company’s value was "nil" at the time of expropriation. Both parties were liable for their own legal costs - running into millions of pounds - and for the cost of arbitration, the judges ruled.

The UK-based World Development Movement, which campaigns against water privatisation deals in poor countries, described the verdict as "a good day for the people of Tanzania". In a statement, Biwater director Larry Magor said: "The rationale [not to award damages] is hard to fathom."

Biwater was awarded the licence to run Dar es Salaam’s water and sewage service from 2003, following heavy pressure from the World Bank and the International Monetary Fund, which made debt relief and further loans to Tanzania contingent on the sell-off of state-run organisations.

The UK government backed the privatisation push with nearly £10m in support, including £440,000 on a publicity campaign to highlight the benefits of private enterprise.

But City Water, which also included a German engineering company and a Tanzanian investor, soon found itself in trouble. It was collecting less revenue than the former government-owned utility, and could not meet performance targets.

The company demanded its operating fee be increased, but reports by independent consultants rejected its arguments. Internal World Bank reports were also highly critical of City Water’s performance.

With the public angered by sharply higher water prices but little improvement in supply, Tanzania unilaterally cancelled City Water’s contract in May 2005, and deported its three top executives, all Britons.

"The Tanzanian water privatisation project was a scandal right from the beginning," said Vicky Cann of the World Development Movement. "It’s absolutely right that this court has found that Tanzania owes Biwater nothing, but shocking that Biwater saw fit to drag the government of such a poor country through the courts in the first place."

ICSID’s 250-page ruling showed that while Biwater publicly denied culpability for City Water’s poor performance at the time, its executives were aware of the company’s shortcomings.

"Our City Water staffing was totally with non-Biwater staff with a weak leader, no clear experience or qualified business plan," wrote Adrian White, a former BBC governor, who holds the majority stake in Biwater, early in 2005.

"No professionally installed accounting and corporate governance and an overall corporate failure all the way to Dorking [Biwater’s headquarters]".

Biwater, which said it invested £7m in City Water, pointed out that one of the three judges issued a dissenting opinion and said the decision not to award damages "sent an extremely negative message to the international investment community".

In a separate case earlier this year, the arbitration panel of the United Nations Commission on International Trade Law, based in London, found in favour of the Tanzanian government.

The tribunal ordered City Water to pay £3m in damages to Tanzania, and £500,000 towards legal costs. But Biwater said today the money would not be paid, and that the Tanzanian should reflect "on the million of dollars squandered by their government" in pursuing the earlier case.

"Since City Water is, for all practical purposes, defunct, has no functioning board and no assets, the action was completely pointless," Biwater said.