Asia Times | 23 January 2019
World Bank could hit Pakistan with $11 billion fine
By F.M. Shakil
Pakistan’s economy is facing a potentially crippling jolt, with the International Centre for Settlement of Investment Disputes (ICSID) expected to levy a US$4 billion fine on Pakistan, with actual liabilities having the potential to stretch as high as $11.5 billion.
This comes after an Australian mineral exploration company filed a damages claim worth $11 billion against the cancellation of its contract for Reko Diq copper and gold mines in Balochistan.
The ICSID website confirmed that the tribunal decided on the admissibility of new evidence from the respondent as the case is still pending. The World Bank arbitration tribunal earlier in 2017 ruled in favor of the Tethyan Copper Company Private Limited (TCC), a conglomerate of Cuban and Canadian mining exploration companies registered in Australia. They had acquired a lease for copper and gold mines in Reko Diq, Balochistan from Australian company Broken Hill Proprietary (BHP).
Reko Diq mines are located in the sparsely populated Chagai district in northwestern Balochistan. Its annual production is estimated at 200,000 tons of copper and 250,000 ounces of gold from 600,000 tons of concentrate. According to TCC’s estimates, expected profits worked out at about $1.14 billion for copper and $2.5 billion for gold, totaling $3.64 billion annually. The TCC’s calculation puts the total profit over the 55-year life of the mine at $200 billion, far lower than independent estimates which put the profit at $500 billion.
The government of Balochistan rejected the company’s mining license application for the Reko Diq gold and copper project in 2011, saying that experts found the feasibility report submitted by TCC to be unsatisfactory. They alleged that the company did not mention anything in its report about the processing of precious metals, which was the main concern of the Balochistan government. The government, they claimed, would allocate substantial funds for the installation of its own refinery for the processing of gold and copper.
Following this, the Supreme Court in January 2013 declared the Chagai Hills Exploration Joint Venture Agreement void for being in conflict with the country’s laws. A three-member bench of the supreme court, headed by then chief justice Iftikhar Muhammad Chaudhry, annulled the agreement originally signed between the Balochistan government and Australian mining company BHP in 1993. BHP later sold its stake to TCC, which administered the mine until 2008 when legal proceedings contesting the agreement were launched.
While litigation was ongoing, TCC approached the ICSID in 2012 against Pakistan for loss of investment amounting to $400 million. The total damages claimed by the company runs into billions of dollars. Due to the ruling, Pakistan may face a penalty of $11.5 billion for not awarding the project to TCC in violation of the agreement signed with the mother company.
Ahmad Bilal Sufi, a leading Pakistani industrialist who has been part of the project for years and is and an expert on international law told Asia Times that, if Pakistan resists the ruling, collecting on the ICSID award would be a cumbersome and long-drawn-out process. However, “TCC could enforce the award through Pakistani courts and in the foreign courts in whose jurisdiction Pakistan owns assets,” he said.
The ICSID in 2015-16 rejected Pakistan federal and provincial government applications seeking admittance of new evidence allegedly showing TCC’s corrupt practices in Reko Diq affairs. TCC had argued that Pakistan abused its discretion and denied its mining rights without any legal grounds in 2011 after the company spent a substantial amount of money on mining exploration and feasibility studies over a period of around 10 years.
“I always favored an out-of-court settlement of disputes with the foreign investors, as they seldom want animosity with the host countries,” Sufi said. He further added that the foreign investors prefer to scale down their damages claims if the host agrees to an amicable settlement. Sufi claimed that the government achieved its strategic objective of retrieving the mines, and that now settlement with the foreign investors was the only available solution to this issue.
Last week, a Pakistani newspaper dropped a bombshell by carrying a report claiming that ICSID slapped a fine of over $4 billion on Pakistan in damages after the latter lost the famous Reko Diq case to an Australian company. The report cautioned that if Pakistan failed to pay the damages to the company, the flights of national flag carrier Pakistan International Airline (PIA) would not be allowed to touch down at 60 international airports all over the world.
The next day Pakistan Attorney General issued a denial saying ICSID had not issued any award against the country, as they will take five to eight months to impose financial penalties. The rebuttal revealed that the tribunal had initially ordered Pakistan to pay nearly $846 million in another claim filed by a Turkish energy firm, Karkey Karadeniz Elektrik Uretim (KKEU). Besides this, $78.6 million was partially imposed by the London Court of Arbitration (LCA) against Pakistan in a case brought forward by eleven independent power producers. Interestingly, the newspaper removed its bombshell story in a mysterious manner without any rejoinder or clarification.
Moreover, Asia Times has found that Dr Arsalan Iftikhar, son of the chief justice who cancelled the Reko Diq agreement in 2013, was appointed as vice chairman of the Board of Investment Balochistan (BIB), only months after his father’s dramatic ruling. The role assigned to Dr Arsalan, among other things, was to bring investors to the Reko Diq project.
The Public Accounts Committee (PAC) of Parliament had also observed in early January 2018 that Pakistan faced damages claims in the Reko Diq mining case due to “corrupt practices” and “inefficiencies” of successive governments of Balochistan. The PAC also raised serious questions over the manner in which the provincial governments allowed change of ownership from BHP to TCC despite the fact that there was no provision for such an event in the original Chagai Hills Joint Venture Exploration Agreement.
Naveed Qamar, a Pakistan People’s Party (PPP) senior parliamentarian and member of the National Assembly PAC told Asia Times: “We have approached the relevant ministries to send us the details of the Reko Diq and other such cases where arbitration tribunals issued awards against Pakistan. We asked them to provide the latest position and identify the individuals or institutions responsible for making erroneous decisions and causing huge financial losses to the government.”
According to Qamar, the government insisted that since these cases remain under appeal, responsibility cannot be fixed. “It’s a very serious issue and involved huge sums of money, the PAC would leave no stone unturned to get to the bottom of this issue and fix the responsibility on the person involved,” he added. “In our considered opinion (the) fault does not lie in the contracts or execution phases but the problem starts when the judiciary intervened and the Supreme Court declared the agreements void,” Qamar said.