Arbitration in Sovereign PPP Contracts

1. Introduction

Public-private partnership (PPP) contracts are long-term arrangements under which a private party undertakes to finance, design, construct, operate, maintain or otherwise provide public infrastructure or services in cooperation with a State or public authority.

Examples include:

highways and toll roads;

airports;

ports;

electricity-generation projects;

renewable-energy projects;

water and wastewater systems;

hospitals;

railways;

telecommunications infrastructure;

desalination plants; and

public housing.

Arbitration is particularly important in sovereign PPP contracts because the relationship combines private commercial interests with sovereign governmental powers. The private investor wants contractual stability and an effective remedy, while the State must retain the ability to regulate in the public interest.

International PPP practice commonly uses a tiered dispute mechanism, potentially including negotiation, mediation, expert determination and ultimately arbitration. The World Bank PPP framework identifies international arbitration as a common last-resort mechanism for PPP disputes. (P3 Resource Center)

The central legal question is therefore:

To what extent can a State or public authority agree to arbitration without surrendering its sovereign powers or immunity?

2. Why Arbitration Is Important in Sovereign PPPs

PPP projects normally involve enormous investments and long contractual periods.

A concession may last:

20 years;

30 years;

50 years; or even longer.

During that period, governments may change.

There may be:

tariff regulation;

changes in taxation;

environmental regulation;

currency restrictions;

changes in public policy;

termination of concessions;

compulsory acquisition;

changes in subsidies;

political instability.

A private investor therefore needs an effective dispute-resolution mechanism.

Arbitration provides:

neutrality;

specialist decision-makers;

procedural flexibility;

confidentiality;

international enforceability;

protection against exclusive reliance on domestic courts.

3. Contract Arbitration and Investment Arbitration Must Be Distinguished

This distinction is fundamental.

A. Contract arbitration

The investor relies upon an arbitration clause contained in:

concession agreement;

PPP agreement;

implementation agreement;

power-purchase agreement;

construction agreement;

operation and maintenance agreement.

The dispute is normally contractual.

For example:

“The government failed to make availability payments required by the PPP agreement.”

The tribunal's jurisdiction comes from the contract.

B. Investment treaty arbitration

The investor instead relies upon:

bilateral investment treaty;

multilateral investment treaty;

investment legislation;

treaty consent to ICSID or another arbitral mechanism.

Claims may concern:

expropriation;

fair and equitable treatment;

discrimination;

arbitrary governmental conduct;

denial of justice.

A single PPP project can therefore generate both contractual and treaty-based arbitration.

The World Bank notes that PPP disputes may proceed through different mechanisms, including institutional international arbitration and ICSID arbitration where applicable. (P3 Resource Center)

4. Sovereign Immunity

One of the most important issues is sovereign immunity.

A State may traditionally claim immunity from:

jurisdiction;

arbitration;

court proceedings;

enforcement;

attachment of State assets.

But a State that expressly agrees to arbitration generally accepts that the arbitration agreement must have legal effect.

A particularly important modern illustration is the UK Supreme Court's 2026 decision in The Kingdom of Bahrain v Shehabi, where the Court discussed the effect of a State's agreement to arbitration on immunity from proceedings relating to that arbitration. The Court explained that agreeing to arbitration can amount to consent to the jurisdiction necessary to make the arbitration effective. (Supreme Court UK)

Important distinction

Waiver of immunity from jurisdiction ≠ automatic waiver of immunity from execution.

A State may accept arbitration while retaining significant protection for certain sovereign assets.

Therefore, a PPP contract should address separately:

immunity from arbitration;

immunity from court jurisdiction;

immunity from interim measures;

immunity from enforcement;

immunity of diplomatic or military assets;

immunity of central-bank assets.

5. Six Major Case Laws

Case 1: Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v Argentina

ICSID Case No. ARB/97/3

Background

The dispute arose from a water and sewerage concession in Tucumán, Argentina.

The private investor operated the concession pursuant to a contractual arrangement with the provincial authorities.

The project subsequently encountered serious difficulties involving governmental measures and contractual performance.

The investor commenced ICSID proceedings under the Argentina-France BIT.

The ICSID record identifies the dispute as concerning a water and sanitation concession and records the final award of 21 November 2000. (Investment Policy Hub)

Importance

The case is foundational because it illustrates the distinction between:

contractual claims and treaty claims.

The fact that the concession contract contained arrangements involving local courts did not necessarily eliminate the investor's ability to bring an independent treaty claim against Argentina.

PPP lesson

A sovereign PPP contract can create two separate legal layers:

Contractual relationship + international investment protection.

A State therefore needs to understand that governmental conduct affecting a PPP may generate consequences beyond ordinary breach of contract.

Case 2: Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania

ICSID Case No. ARB/05/22

Background

The dispute concerned a water and sewerage infrastructure project in Tanzania.

The claimant's investment vehicle had entered into agreements concerning implementation of the water and sewerage project with a Tanzanian public corporation.

The relationship deteriorated, eventually involving the takeover of the business and assets.

The ICSID record identifies the project as a water and sewer concession and records the tribunal's 24 July 2008 award. (Investment Policy Hub)

Decision

The tribunal found breaches of investment-protection standards, including fair and equitable treatment and indirect expropriation-related findings, but ultimately awarded no monetary damages. (Investment Policy Hub)

Importance

This case is extremely important for sovereign PPPs because it demonstrates that:

Winning on liability does not necessarily mean receiving substantial damages.

PPP lesson

Investors should maintain detailed evidence of:

investment expenditure;

government interference;

contractual performance;

causation;

financial loss.

States should also recognize that termination or takeover of a PPP can produce treaty consequences even where the State believes it is acting under contractual or regulatory powers.

Case 3: Suez, Sociedad General de Aguas de Barcelona and Vivendi v Argentina

ICSID Case No. ARB/03/19 and related proceedings

Background

The dispute concerned a concession for water distribution and wastewater treatment services in Buenos Aires.

The investors alleged that Argentina had failed to maintain agreed tariff-adjustment mechanisms.

The investment included a local company holding the concession.

UNCTAD records the dispute as involving alleged governmental failure or refusal to apply agreed tariff-adjustment mechanisms affecting the investment. (Investment Policy Hub)

Importance

Tariff regulation is one of the most sensitive issues in PPP projects.

Governments must balance:

Investor economics

against

affordable public services.

PPP lesson

PPP contracts involving:

electricity tariffs;

water tariffs;

tolls;

airport charges;

public transport fares;

should establish a transparent mechanism for:

adjustment;

review;

inflation;

currency fluctuations;

extraordinary events;

regulatory changes.

An ambiguous tariff clause can become the centre of a major arbitration.

Case 4: CMS Gas Transmission Company v Argentina

ICSID Case No. ARB/01/8

Background

CMS invested in Argentina's gas transportation sector.

Following Argentina's economic crisis, governmental measures affected the regulatory framework and tariff arrangements.

The investor alleged treaty violations.

Decision

The tribunal rejected the claim of expropriation but found Argentina liable for breach of the applicable investment-protection standard concerning fair and equitable treatment.

The case became particularly significant for the treatment of regulatory changes affecting infrastructure investments. The OECD's analysis identifies CMS as one of the important infrastructure arbitrations arising from Argentina's tariff measures. (OECD)

PPP lesson

A State cannot necessarily assume that because it is regulating a public service, its actions are immune from investment-arbitration scrutiny.

At the same time, investment arbitration does not automatically prevent legitimate regulation.

The crucial issue is often:

Was the regulatory intervention proportionate and consistent with the State's legal obligations?

Case 5: Aguas del Tunari S.A. v Bolivia

ICSID Case No. ARB/02/3

Background

The dispute concerned a water concession in Bolivia.

The concession became highly controversial following widespread public opposition to water pricing and the government's response.

The investor brought treaty arbitration.

The case raised important jurisdictional issues concerning:

the investor's nationality;

corporate structure;

contractual concession;

treaty protection;

State consent to arbitration.

The OECD identifies Aguas del Tunari among the major water-concession disputes involving governmental intervention in infrastructure projects. (OECD)

Importance

The case illustrates how corporate structuring becomes important in PPP investment arbitration.

A multinational investor may hold its PPP investment through:

a local company;

a regional holding company;

a foreign parent;

a consortium.

PPP lesson

Before signing a sovereign PPP, investors must examine:

nationality requirements;

treaty protection;

corporate structure;

ownership;

assignment rights;

succession;

restructuring risks.

A State may challenge jurisdiction if it believes the claimant does not fall within the relevant treaty definition of investor.

Case 6: Suez and Interagua v Argentina

Background

This dispute concerned a water-distribution and wastewater-treatment concession in the Argentine Province of Santa Fe.

The investors challenged governmental measures affecting agreed tariff mechanisms.

UNCTAD identifies the project as a concession involving water distribution and wastewater treatment and records claims relating to governmental failure to apply agreed tariff-adjustment mechanisms. (Investment Policy Hub)

Importance

The case demonstrates the recurring importance of economic equilibrium in long-term public-service concessions.

PPP lesson

A PPP agreement should contain mechanisms addressing:

inflation;

devaluation;

extraordinary economic circumstances;

changes in law;

tariff revision;

cost increases;

force majeure;

political risk.

Without such provisions, the tribunal may be forced to determine whether the State's conduct amounted to a contractual or treaty violation.

6. Additional Important Case: AWG Group Ltd v Argentina

This dispute also concerned the Buenos Aires water concession and tariff adjustments.

The jurisdictional proceedings involved multiple investors and treaty instruments.

The case demonstrates how a single PPP project can generate claims under several investment treaties and involve multiple investors with different nationalities. (Jus Mundi)

PPP significance

A State negotiating one concession may therefore face multiple arbitration pathways if different shareholders possess treaty protections.

7. The Sovereign's Right to Regulate

One of the biggest tensions in PPP arbitration is:

Investor protection

versus

Regulatory sovereignty.

A PPP investor may seek stability because it has committed capital based on long-term assumptions.

The State, however, cannot realistically promise that:

“No laws or regulations will ever change.”

The State must retain the ability to regulate:

public health;

safety;

environment;

taxation;

labour;

consumer protection;

public utilities.

Consequently, a sophisticated PPP contract should distinguish between:

Legitimate regulation

and

Arbitrary or discriminatory governmental interference.

8. Stabilization Clauses

A PPP contract may contain a stabilization clause.

Its purpose is to protect the investor against adverse changes in:

taxation;

legislation;

regulation;

licensing requirements.

There are several approaches.

Freezing clause

The law applicable at contract signature remains applicable.

Economic-equilibrium clause

The State may change the law, but the investor receives compensation or contractual adjustment to restore economic equilibrium.

Hybrid clause

Certain fundamental changes trigger renegotiation while ordinary regulation remains applicable.

For modern PPPs, an economic-equilibrium model can often provide a better balance between investor protection and governmental regulatory authority.

9. Change-in-Law Clauses

A long-term PPP should clearly identify what happens when the law changes.

For example:

If a change in law materially increases the private partner's cost of performance, the parties shall adjust the tariff, payment mechanism or other economic terms so as to restore the agreed economic equilibrium.

The clause should define:

qualifying legislation;

threshold of financial impact;

exclusions;

calculation methodology;

notification requirements;

expert determination;

arbitration.

10. Termination by the State

Sovereign PPPs often provide the government with termination rights.

Termination may occur for:

private partner default;

insolvency;

prolonged force majeure;

public interest;

national security;

regulatory reasons.

The most important drafting question is:

What compensation follows termination?

Possible formulas include:

Debt-based compensation

Payment of outstanding project debt.

Investment-based compensation

Recovery of eligible investment.

Market-value compensation

Compensation based on the value of the investment.

Revenue-based compensation

Compensation calculated according to expected future revenues.

The formula should be precise because termination disputes can generate enormous damages claims.

11. Public Interest Termination

A government may argue:

“The project was terminated because continuation was contrary to public interest.”

That does not automatically resolve the arbitration.

The tribunal may examine:

contractual termination powers;

applicable public law;

proportionality;

compensation provisions;

investor misconduct;

treaty obligations.

A State's public purpose can be legitimate while still giving rise to contractual compensation.

12. Force Majeure and Political Risk

PPP contracts should contain detailed provisions concerning:

war;

terrorism;

civil disturbance;

pandemic;

government embargo;

currency restrictions;

expropriation;

supply disruption;

natural disaster.

The parties should distinguish:

Force majeure

from

governmental acts

because the economic consequences may differ.

13. Arbitration Clause Design

A sovereign PPP arbitration clause should address at least:

Seat

For example:

Manama, Bahrain.

Institution

For example:

BCDR, ICC, SIAC, LCIA or ICSID where jurisdiction exists.

Rules

The contract should identify the applicable arbitration rules.

Language

Arabic or English should be specified.

Number of arbitrators

For many PPP disputes:

three arbitrators for major disputes;

sole arbitrator for smaller disputes.

Governing law

The contract should specify the applicable substantive law.

Interim measures

The parties should clarify tribunal and court powers.

14. Sovereign Immunity Waiver

This deserves particular attention.

The PPP agreement should distinguish:

Waiver of immunity from jurisdiction

The State agrees to participate in arbitration.

Waiver of immunity from execution

The State agrees, within the limits of applicable law, that an award may be enforced against specified commercial assets.

These are not necessarily the same thing.

The World Bank's PPP contractual guidance specifically recommends addressing immunity from jurisdiction and immunity from execution separately. (P3 Resource Center)

Model PPP drafting can expressly characterize the transaction as commercial and include carefully defined immunity waivers, although their effectiveness ultimately depends on applicable mandatory law. (World Bank)

15. Enforcement Against State Assets

Even after an investor wins an arbitration, enforcement can be difficult.

State assets may include:

embassies;

military property;

central-bank assets;

diplomatic accounts;

public-service property;

commercial property.

Many legal systems provide stronger immunity for sovereign/public assets than for commercial assets.

Therefore, the investor should identify commercially usable assets before investing.

A contractual waiver should not be treated as guaranteeing that every State asset can be seized.

The 2026 UK Supreme Court discussion in The Kingdom of Bahrain v Shehabi illustrates the distinction between jurisdictional immunity and immunity from execution. (Supreme Court UK)

16. Domestic Public Law Versus Arbitration

A sovereign PPP may be governed simultaneously by:

contract law;

administrative/public law;

procurement legislation;

PPP legislation;

arbitration legislation;

constitutional rules;

investment treaties.

This creates a potential conflict.

A private party may say:

“The State breached the contract.”

The State may respond:

“The decision was an exercise of statutory regulatory power.”

The tribunal must then determine whether the relevant conduct is:

contractual;

sovereign;

regulatory;

mixed.

This distinction can significantly affect jurisdiction and liability.

17. PPP Dispute Escalation Mechanism

A well-designed PPP should normally use a multi-tiered dispute mechanism:

Step 1 — Project-level negotiation

Senior project representatives attempt settlement.

Step 2 — Government/private partner escalation

The dispute is referred to senior officials and executives.

Step 3 — Technical determination

An independent engineer or expert decides technical questions.

Step 4 — Mediation

The parties attempt consensual resolution.

Step 5 — Arbitration

Only unresolved disputes proceed to binding arbitration.

This is consistent with international PPP practice, where multiple mechanisms may be combined before international arbitration becomes the final step. (P3 Resource Center)

18. Technical Disputes

Not every PPP dispute requires a full arbitral hearing.

For example:

concrete specification;

road quality;

power-output measurement;

water-quality testing;

construction delay;

equipment performance.

These may be suitable for:

independent expert determination.

Arbitration can then be reserved for:

legal disputes;

major financial claims;

termination;

compensation;

regulatory issues.

This can dramatically reduce costs.

19. Damages in Sovereign PPP Arbitration

Damages can be particularly complex because PPP projects frequently involve future revenue streams.

Potential methods include:

Discounted cash flow

The tribunal estimates future project cash flows.

Actual investment

The tribunal examines capital actually invested.

Comparable market valuation

The project is compared with similar transactions.

Lost profits

The claimant seeks profits it would allegedly have earned.

Book value

The value of assets and investments is calculated.

The longer the remaining concession period, the greater the potential difference between these methodologies.

Therefore, PPP contracts should establish clear compensation principles whenever possible.

20. Public-Service Tariffs

Tariffs are a recurring source of PPP disputes.

Examples include:

electricity;

water;

toll roads;

public transport;

airport charges.

A government may want low consumer prices.

The private partner may require a commercially viable tariff.

The contract should therefore include:

automatic adjustment formulas;

regulatory review;

inflation indexation;

currency adjustment;

extraordinary-event mechanisms;

dispute procedures.

The water-concession arbitrations involving Argentina demonstrate how tariff disputes can evolve into major international investment claims. (Investment Policy Hub)

21. Arbitration and Public Accountability

A legitimate concern is whether confidential arbitration is appropriate for disputes involving public infrastructure.

PPP disputes can affect:

taxpayers;

electricity consumers;

water users;

commuters;

public finances.

Therefore, modern sovereign arbitration increasingly requires an appropriate balance between:

confidentiality

and

public transparency.

Possible mechanisms include:

publication of awards;

redacted documents;

transparency rules;

public-interest submissions;

amicus participation where appropriate.

The objective should be to protect commercially sensitive information without making major public infrastructure disputes completely opaque.

22. Advantages for the Private Partner

Arbitration gives the private investor:

Neutrality

The investor does not have to rely exclusively upon the State's domestic courts.

Expertise

Arbitrators can understand complex PPP structures.

International enforceability

Awards can potentially be enforced across New York Convention jurisdictions.

Procedural flexibility

The parties can design the process.

Finality

Judicial review is ordinarily limited.

23. Advantages for the State

Arbitration can also benefit the State.

It provides:

neutral resolution;

specialist adjudication;

predictable procedures;

protection against arbitrary domestic judicial outcomes;

greater investor confidence;

improved bankability of PPP projects.

A State that offers credible arbitration may find it easier to attract international infrastructure investors and financing.

24. Risks for the State

Nevertheless, States should be cautious.

Potential risks include:

large damages awards;

regulatory disputes becoming investment claims;

parallel contract and treaty proceedings;

enforcement proceedings abroad;

expensive arbitration;

confidentiality concerns;

challenges to sovereign immunity;

disputes over concession termination.

Accordingly, government PPP units should obtain specialist arbitration advice before signing, rather than only after a dispute develops.

25. Particular Relevance to Bahrain

For Bahrain, arbitration in sovereign PPP contracts is particularly relevant to projects involving:

infrastructure;

ports;

airports;

energy;

renewable energy;

water and desalination;

transportation;

real estate development;

healthcare;

technology infrastructure.

Bahrain's arbitration environment provides a Model Law-based framework, while BCDR provides an institutional arbitration mechanism.

For a Bahraini PPP, a carefully constructed clause could therefore provide:

Negotiation → technical determination → mediation → BCDR/international arbitration → limited judicial review → enforcement.

For international investors, treaty protections may provide an additional layer depending upon the applicable investment treaty and the investor's nationality.

26. Key Lessons from the Case Law

27. Best-Practice PPP Arbitration Clause

A sophisticated sovereign PPP agreement should ideally contain provisions dealing with:

1. Arbitration consent
Express and unequivocal consent to arbitration.

2. Seat
Clearly identified legal seat.

3. Institution
BCDR, ICC, ICSID or another appropriate institution.

4. Rules
Precisely identified arbitration rules.

5. Tribunal
Number and qualifications of arbitrators.

6. Language
Clearly stated language.

7. Governing law
Contractual and, where necessary, public-law issues carefully addressed.

8. Sovereign immunity
Separate provisions concerning jurisdiction and execution.

9. Interim relief
Tribunal and court powers clearly addressed.

10. Multi-tier procedure
Negotiation, expert determination and mediation before arbitration where appropriate.

11. Consolidation and joinder
Particularly important for project companies, lenders, contractors and subcontractors.

12. Confidentiality/transparency
Appropriate protection of commercial information while recognizing public-interest considerations.

28. Conclusion

Arbitration is one of the most important risk-allocation mechanisms in sovereign PPP contracts. Its significance arises from the fundamental tension between the private investor's need for contractual and regulatory security and the State's continuing responsibility to protect the public interest.

The major cases demonstrate that PPP arbitration is not merely ordinary commercial arbitration. Vivendi, Biwater, Suez, CMS, Aguas del Tunari and AWG show how concession disputes can involve contractual obligations, investment treaties, regulatory powers, tariff mechanisms, corporate nationality and sovereign conduct simultaneously. (Investment Policy Hub)