Regaining sovereignty

Dawn | 25 April 2021

Regaining sovereignty

by Adeel Wahid | Kabir Duggal

THE erudite Mr Makhdoom Ali Khan, then serving as Pakistan’s attorney general, received a call one day from the secretary of law in October 2001. The secretary wanted to know about a letter he had received from the International Centre for the Settlement of Investment Disputes (ICSID), with a claim of $110 million. It was brought by Société Générale de Surveillance (SGS), invoking the bilateral investment treaty (BIT) between Pakistan and Switzerland.

Mr Khan was clueless. SGS had unsuccessfully litigated its rescission of contract claims against Pakistan, both in Switzerland and Pakistan, since 1996. A letter from Washington DC, indicating the commencement of a new claim, did not seem to make sense. The letter prompted Mr Khan to google ‘BIT’ and ‘ICSID’; that is how he first got to learn of the BITs. This entire episode is relayed by Prof Poulsen in his PhD thesis, with a highly suggestive title: Sacrificing Sovereignty by Chance: Investment Treaties, Developing Countries, and Bounded Rationality.

BITs are treaties between two countries that accord protections to investments of an investor belonging to one signatory country, investing in the other. Pakistan, which entered into its first BIT with Germany in 1959 — which also was the first BIT ever entered — has concluded 53 BITs with 48 countries. This is a massive portfolio for a Third World country.

Pakistan’s approach to BITs has been flawed.

The treaties that Pakistan has entered into allow the investors of signatory countries investing in Pakistan, to invoke the jurisdiction of foreign arbitral forums, such as ICSID, in case of a purported breach of any of the terms of the treaty. Since the language of these treaties is overly broad — often interpreted in favour of investors as opposed to states — the investors, in many cases, end up obtaining favourable results.

This has proved to be costly for Pakistan. ICSID, for instance, announced a massive $1.2 billion judgement against Pakistan in the Karkey case, and an even higher $5.6bn in the Reko Diq case. The investors, in both these cases, had invoked the BITs that Pakistan had entered into with their respective governments. Apart from humongous costs, these decisions also undermine Pakistan’s sovereignty. The actions of the country’s executive branch and decisions of its courts are adjudicated in foreign jurisdictions, unsympathetic to local conditions, translating into massive awards against an already cash-strapped country.

This sacrifice of sovereignty makes for a sad tale that prominently features Pakistani bureaucracy’s ineptitude and indifference. When the SGS saga came about, Mr Khan, for instance, was unable to locate any treaty negotiating documents or notes. Then, there is a belief held by some, that entering into BITs results in greater foreign investment; the evidence regarding this is inconclusive, and in any event, does not justify signing the investment treaties in their current form. Some in the bureaucracy also do not want to relinquish any opportunities of foreign travel, at the expense of the public exchequer, which the process of BITs allows for.

But importantly, this is also a tale of Pakistan’s institutions’ failure to learn from its mistakes. As the SGS saga unfolded, Mr Khan took on the mantle of educating the government officials about investment treaties. Under his tenure as AG, Pakistan became more cautious in its approach in signing new treaties. But, Mr Khan, in a 2009 interview, revealed that when he resigned as AG in 2007, “the approach to negotiating BITs was still haphazard and piecemeal”, and that “there is not a shared understanding in Pakistan that negotiating BITs requires a lot of effort and — perhaps most importantly — legal expertise”.

Meanwhile, there are lessons in how India handled its BIT conundrum. The first major claim against India, under a BIT, was instituted in 2011. On receiving other similar dispute notices, India immediately, in 2013, withdrew from signing any BITs, and engaged in an inter-ministerial deliberation, churning out a Draft Model BIT in 2015 which was circulated to the public at large for feedback. Thereafter, India began to terminate various BITs, to renegotiate on the basis of its draft. The latter, importantly, required the exhaustion of administrative and judicial remedies in the host state for at least five years, before instituting an international arbitration proceeding.

Pakistan seems to be toying with the same idea. The Board of Investment has recently suggested that a model text is to be developed, on the basis of which all the existing BITs will be terminated and/or renegotiated. Further, the prime minister recently “called for a moratorium on the exorbitant claims adjudicated against some developing countries in investment disputes” at the UN.

But more needs to be done, and sooner. Pakistan needs to regain its sovereignty, that in the words of Prof Poulsen, it sacrificed by chance.

The writers are lawyers.

source: Dawn