The Supervisory Council of AS Tallinna Vesi has decided to give notice of potential international arbitration proceedings against the Republic of Estonia for breaching the undertakings it is required to abide by in a bilateral investment treaty (the Treaty). This follows three years of intensive effort by the Company in trying to agree a solution which regretfully, despite both local and European intervention, has not been achieved.
As a signatory to the Treaty the Republic of Estonia undertook the obligation of ensuring the fair and equitable treatment of investments protected by the Treaty. The Company requests that the Republic of Estonia complies with its obligations under the Treaty. In the event that Estonia is unable or unwilling to do so, AS Tallinna Vesi reserves the right to commence international arbitration proceedings against Estonia, on the terms which the parties agreed in the Treaty.
International arbitration is a procedure where an independent, international tribunal issues a final ruling on the dispute. Pursuant to the Treaty, arbitration would be carried out through the International Centre for the Settlement of Investment Disputes (ICSID), which is part of the World Bank.
If the Republic of Estonia does not comply with its obligations and AS Tallinna Vesi is forced to commence its arbitration, AS Tallinna Vesi will claim compensation for potential damages of over 90 million euros for total losses over the lifetime of the contract to 2020. Of this amount, over 50 million euros of damage has been already caused by the refusal to permit tariff increases in the period of 2011 - 2013, and its ongoing impact to the period 2014 - 2020.
AS Tallinna Vesi has always been open for meaningful dialogue to resolve the dispute, at the same time respecting the terms and conditions of the 2001 privatization contract.
Background to the dispute
In 2001, at the request of Estonia, United Utilities (Tallinn) BV made an investment in AS Tallinna Vesi by purchasing 50.4% of the shares in The Company. This was a part of Estonia's privatisation of AS Tallinna Vesi. The privatisation was sponsored and closely supervised by the European Bank for Reconstruction and Development (EBRD). The privatisation of AS Tallinna Vesi was undertaken by the City of Tallinn for three main reasons:
- To avoid political tariff setting;
- To achieve the water quality and service standards required by national and European regulations. The tariff mechanism set as part of the privatisation was directly related to the required service level and the resultant investment required to achieve these service levels;
- To allow the replacement of sovereign guarantees granted by Estonia to the EBRD as security for an EBRD loan to AS Tallinna Vesi.
United Utilities (Tallinn) BV and AS Tallinna Vesi have fully complied with their obligations undertaken at the time of the privatisation. Estonia and the City of Tallinn have received the full benefit of the privatisation and the investment. Pursuant to the terms and conditions of the privatisation, the investment made by United Utilities (Tallinn) BV and the quality improvements in the City of Tallinn's water services were made in the first part of the 15 year licence period. The returns which United Utilities (Tallinn) BV and AS Tallinna Vesi would earn would, through the 15 year agreed tariff mechanism and the 15 year approved financial business plan, occur in the latter part of the 15 year licence period.
Background to International arbitration
As the Company has not been able to find a solution to the dispute concerning its privatisation contract AS Tallinna Vesi has taken the decision to escalate the dispute. United Utilities (Tallinn) B.V., the controlling shareholder of AS Tallinna Vesi, is a Dutch company, which enables both United Utilities (Tallinn) BV and AS Tallinna Vesi to take advantage of the protections in the Treaty, which was entered into between the Republic of Estonia and the Kingdom of the Netherlands.
In the Treaty, in order to encourage investment, the Republic of Estonia and the Kingdom of the Netherlands each undertook to observe any obligations entered into with each other's nationals in relation to their investments, to ensure fair and equitable treatment of their investments, and not to discriminate against investments by investors from each other's country.
AS Tallinna Vesi and United Utilities (Tallinn) BV believe that the Estonian authorities' refusal to honour the terms and conditions of the contracts agreed and approved by the Estonian government during the privatisation of AS Tallinna Vesi in 2001 is a breach of these undertakings.
In their notice, AS Tallinna Vesi and United Utilities (Tallinn) BV request that the Republic of Estonia complies with its obligations under the Treaty. In the event that Estonia is unable or unwilling to do so, AS Tallinna Vesi and United Utilities (Tallinn) BV reserve their right to commence international arbitration proceedings against Estonia to require Estonia to comply with its undertakings in the Treaty and to compensate AS Tallinna Vesi and United Utilities (Tallinn) BV for all the losses they have suffered as a result of Estonia's actions.
In the Treaty, Estonia agreed that disputes should be resolved by international arbitration through the International Centre for the Settlement of Investment Disputes (ICSID), part of the World Bank. International arbitration is a procedure where an independent, international tribunal issues a final ruling on the dispute. Estonia has agreed to be bound by the ruling of such a tribunal.
Mariliis Mia Topp AS Tallinna Vesi Head of Communications Tel: (+372) 62 62 275 mariliismia.topp@tvesi.ee
