International Project Finance and Arbitration with Public Sector Entities: When is Arbitrability a Fiction?

This article reviews the events surrounding two prominent arbitration decisions related to two Indonesia geothermal power projects sponsored by CalEnergy Company, Inc. ("CalEnergy"), known as the Patuha and Himpurna projects, and a Pakistani power project developed by the Hub Power Company, Ltd. ("HubCo"). The aggressive involvement of local courts in the CalEnergy and HubCo proceedings does not reassure investors relying on the perceived neutrality of international arbitral institutions to mitigate the risk of uncertain justice in unstable countries. The author asks: Are problems between State entities in troubled developing countries and international project sponsors simply not arbitrable as a practical matter when economic and political crisis intersect in a highly corrupt economy? Or, are there means of protecting the arbitrability of investor-State disputes in the midst of such turmoil?

This review concludes that few devices will be effective to overcome these hurdles. Thus, arbitration may in reality be a fiction in such circumstances upon which investors should not rely exclusively.