Spanish firm Cobra files ICSID arbitration against Peru over Majes Siguas II project dispute

Executive summary:  Concesionaria Angostura Siguas, S.A., a subsidiary of the Spanish group Cobra, filed a request for arbitration against the Republic of Peru over the Majes Siguas II irrigation project (ICSID Case No. ARB/24/43) with the ICSID Secretary General on 16 October. While the precise grounds of the claim have not been made public, media reports suggest that Cobra is seeking damages of USD 1.4 billion. At the heart of the dispute are delays, breaches of contract and increased costs resulting from technical changes to the project, in particular the switch to a pressurised irrigation system. Awarded to Cobra in 2015, the project has made minimal progress, with only 11% completed in 14 years. In spite of efforts to restart work, including a transfer agreement between the national government and the regional government of Arequipa, arbitration proceedings have now escalated, with Cobra alleging multiple breaches of contract.

The ICSID Secretary-General registered, on 16 October 2024, a request submitted by Concesionaria Angostura Siguas, S.A. owned by the Spanish Group Cobra, for the institution of arbitration proceedings against the Republic of Peru (ICSID Case No. ARB/24/43) related to the concession contract for the Majes Siguas II irrigation project in the Arequipa region of Peru.

Although the grounds and the subject matter of the claim have not yet been made public, various media reports indicate that the amount claimed by the Spanish group amounts to USD 1.4 billion.

The Peruvian Ministry of Agrarian Development and Irrigation declared that the beginning of the arbitration process was already contemplated in the agreement for the transfer of the project to the National Government signed with the Regional Government of Arequipa.

The Irrigation Project

The Majes Siguas project is an agricultural infrastructure initiative located in the Arequipa region, designed to promote the economic and social development of the area through the irrigation of arid lands. Its main objective is to expand the agricultural frontier by harnessing the waters of the Apurimac and Colca rivers to irrigate more than 38,500 hectares of desert land. This would increase agro-industrial production, generate jobs, and promote exports, mainly of agricultural products.

The project includes the construction of a dam on the Apurimac River, called Angostura Dam, and a system of canals and tunnels that will carry water to the agricultural areas of Majes. Technified irrigation networks (such as drip irrigation) will be created to maximize water use efficiency and favor the cultivation of high commercial value crops.

The Majes Siguas II project was awarded in 2015 to Concesionaria Angostura Siguas, a consortium composed of Cobra Instalaciones y Servicios SA, Cobra Infraestructuras Hidráulicas SA and Cobra Perú SA, all subsidiaries of the Cobra Group.  The consortium was awarded the public-private partnership contract to design, build, operate and maintain the infrastructure needed to develop the irrigation system. The concession contract was entered into with the Regional Government of Arequipa (GRA).

As part of the project, the regional government initiated in 2016 the expropriation and purchase of 52 local lands to flood them and build the Angostura dam, the main component of Majes Siguas II, the second stage of the Majes Siguas irrigation project.

The project faced a series of delays due to technical, financial and social problems. A key aspect of the delays was the need for technical modifications to include pressurized irrigation instead of traditional systems in order to optimize water use in an area with limited water resources. In addition, disputes arose regarding financing and concessioning, as well as protests from some local communities concerned about environmental impact and water distribution. The work has been stalled since 2017.

But the focal point of the dispute was the implementation of the pressurized irrigation system instead of the initially planned gravity irrigation. This change was requested in 2017 by the GRA to improve water use efficiency, as it would allow irrigating 2,000 additional hectares to the 38,500 initially planned. However, this also increased the costs and technical complexities of the project.

For that reason, Cobra filed a series of financial claims with the Peruvian authorities, seeking compensation for the higher costs and additional time required to complete the project after the requested modifications. The company alleged that the changes in the terms of the original contract implied additional costs that were not contemplated in the initial agreement.

In the absence of a response, in October 2021, Cobra notified the Peruvian authorities of its intention to withdraw from the project. 

In July 2022, the GRA signed Addendum No. 13 with the Angostura Siguas consortium, increasing the cost of the project, which would mean the resumption of work. Under the terms of the document, both parties had until December 2022 to comply with their obligations before the project could be relaunched. At the concessionaire's request, the deadline was extended to April 2023.

In April 2023, the consortium informed the GRA of 25 alleged breaches of the agreement that needed to be remedied immediately.

Finally, in June 2023, a little over a year after the signing of Addendum No. 13, Angostura Siguas filed with the GRA and the National Government a request to initiate direct treatment for the expiration of the Majes Siguas II contract. In its request, Cobra alleged that seven of the contractual breaches had not been remedied within the established term, especially those related to the handover of control of the project, mainly with the delivery of land.

In turn, Rohel Sanchez, regional governor of Arequipa, announced that if Cobra did not restart the works, the GRA would terminate the Majes Siguas II concession contract. To this end, he granted the concessionaire a term of 45 working days.

Likewise, Fernando Cornejo, Arequipa's counselor, had stated that the GRA had indeed delivered the land, pointing out that it was the Angostura Siguas consortium that had to correct the observations made by the concessionaire.

As reported by Ojo Público, over the span of 14 years, the Majes Siguas II irrigation project has progressed by only 11% of its planned execution. The dam, which prompted the displacement of families, remains unbuilt, and those displaced have yet to be relocated.

Steps to Resume the Project

Despite all the aforementioned drawbacks, the national government intends to resume the project. To this end, on 31 July 2024, the Peruvian Ministry of Agrarian Development and Irrigation (MIDAGRI) signed a transfer agreement for the Majes Siguas Project with the GRA, whereby the national ministry assumed the technical, budgetary, legal, judicial and arbitration actions to guarantee the execution of the project.

Previous arbitration before the Lima Chamber of Commerce

In a previous attempt to resolve the dispute, the GRA had initiated arbitration proceedings against the Angostura Siguas consortium at the arbitration center of the Lima Chamber of Commerce (CCL).

However, Cobra opposed this arbitration, arguing that the dispute should be resolved in an international instance, such as ICSID.

In July 2024, the arbitration tribunal appointed in Lima found that it had no jurisdiction to resolve the dispute, ordering the GRA to assume the costs of the proceedings.

The arbitration tribunal also declared all of the GRA's claims raised in the proceedings to be inadmissible. The decision, taken by two of the three members of the tribunal, is based on the fact that the GRA did not comply with its obligation to initiate direct treatment, as provided in clause 16 of the Sole Orderly Text (TUO) of the concession contract, as a prior step to requesting arbitration before the CCL.