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July 20, 2019

Reko Diq: a canary in a coal mine


July 20, 2019

Seen in a larger context, the adverse judgment of an international tribunal in the Reko Diq case is a canary in a coal mine regarding the manner in which the country has tried to integrate itself into the multilateral economic system. It also warns us against the perils of making alleged corruption the leitmotif of national narratives.

Pakistan has been slapped with a $5.9 billion penalty by an arbitration tribunal of the International Centre for Settlement of Investment Disputes (ICSID). The tribunal had ruled against Pakistan in 2017. Now it has announced its calculation of the award that Pakistan is required to pay to the claimant, the Tethyan Copper Company (TCC). The sum includes $4.087 billion in damages to the claimant, which the arbitrators calculated as the fair value of the Reko Diq project when the company went into arbitration, $1.75 billion in interest and $62 million in legal costs.

A subsidiary of the World Bank Group, the ICSID provides facilities for settling international investment disputes, particularly those involving a foreign investor and the host government. The award handed down by an ICSID arbitration tribunal is binding on all parties. In the event of the failure of a party to comply with the award, the other party can seek to have the pecuniary obligations enforced in the courts of any ICSID member state.

In the case at hand, the TCC, which is a joint venture of Canadian and Chile-based multinational enterprises, conducted the exploratory work for mining copper and gold in Reko Diq in district Chagai of Balochistan, and invested a pretty penny. The company’s request for grant of a mining lease was, however, turned down by the Balochistan government in 2011. The project feasibility report submitted by the company was also termed unsatisfactory. Thus ensued a legal battle in Pakistani courts, which ended when in 2013 the Supreme Court upheld the provincial government’s decision not to award the mining project, on the ground that the agreement between the two didn’t guarantee that the TCC would be allowed to convert is exploration licence into a mining lease.

While the courts in Pakistan were adjudicating on the matter, the company invoked the jurisdiction of the ICSID in 2012. The complainant rested its case on Pakistan’s 1998 Bilateral Investment Treaty (BIT) with Australia, where it was incorporated. The treaty provides that each party shall ensure fair and equitable treatment to investments from the other; and that – subject to its laws – it shall accord protection and security to investments and “shall not impair the management, maintenance, use, enjoyment or disposal of investments.”

The treaty also puts in place a mechanism for settlement of disputes arising between the governments of the two countries as well as between the government of Pakistan or Australia and an investor of the other state. As Pakistan is capital deficient while Australia is relatively capital abundant, it is Australian enterprises that will be mostly investing in Pakistan. Therefore, the investor-state dispute provisions are almost always likely to be invoked by the businesses down under.

For resolving investor-state disputes, as in the Reko Diq case, the Pak-Australia BIT provides for both domestic and international remedies. In the event that the domestic judicial remedies are exhausted or otherwise, the foreign investor or the host government may invoke the compulsory jurisdiction of the ICSID, which the company did and got a favourable verdict. In its judgment, the ICSID tribunal has been critical of the apex court for being ‘oblivious’ to international law and conventions regarding agreements and contracts. However, it may also be mentioned that – regardless of the merits of the Reko Diq case – the ICSID system tends to favour foreign investors over host countries, especially when they fall into the category of developing nations.

At any rate, the award handed down by an ICSID tribunal is final. However, under the ICSID Convention, Pakistan – being an aggrieved party – has recourse to four post-award remedies: it can request a supplementary decision; it can seek interpretation of the award; it can get the award revised; and finally it can request annulment of the award. In case Pakistan chooses to avail itself of any of the first three remedies, the case will preferably be adjudicated by the original panel.

A party may request a supplementary decision on the ground that the tribunal has omitted to decide a question in the award. In case of a dispute between the parties with regard to the scope or meaning of the award, either may seek its interpretation. A party may request revision of the award if a new fact is discovered that can decisively affect that award. Finally, and in exceptional circumstances, a party may seek annulment of the award on the ground that the arbitration process circumvented fundamental legal principles. If the annulment challenge is successful, a party may request constitution of another tribunal to hand down another award.

While opting to use any of these remedies, Pakistan may also seek stay of the award’s enforcement. Of course, an ‘out-of-court’ settlement is always open. The TCC has also indicated its willingness to strike a deal with the government.

While the Reko Diq case will be settled one way or the other, it points to a deeper malaise: Pakistan has gone headlong into opening up its economy over last three decades in the name of economic reforms. It all started in the 1990s when customs duties were scaled down in the name of tariff rationalization. From 225 percent in 1988-89, maximum applied import tariffs were slashed to 100 percent by 1992-93. Likewise, average applied tariffs, which were 91 percent in 1992-93, were cut to 51 percent by 1995-96. By 2007-08, the average applied tariffs were further curtailed to 13.5 percent.

Few other developing countries have reduced import tariffs so drastically. To make matters worse, the economy was opened without preparing the domestic industry to face up to the increased foreign competition. As a result, the manufacturing sector, which on average grew 9.9 percent during the 1960s and 8.2 percent during the 1980s, registered modest growth of 4.8 percent during the 1990s. It was even less than the 5.3 percent growth recorded during the 1970s – the decade of nationalization. Thus the country had to face de-industrialization.

In a related move, since the turn of the century, Pakistan has been on a spree to sign bilateral trade and investment agreements without shoring up the capability of domestic stakeholders to fulfil – and in some cases to even understand – the commitments undertaken, on the premise that the conclusion of such treaties will be sufficient to drive up exports and foreign direct investment (FDI) inflows.

Take Pakistan’s Free Trade Agreement (FTA) with China, which came into force in 2007. Between 2008-09 and 2017-18, manufacturing registered lackluster growth of 3.2 percent. At the same time, Pakistan’s imports to China have gone up from $4.1 billion in 2007 to $14.5 billion in 2018, as machinery and electronic equipment are importable from China duty free.

The perceived relationship between bilateral investment treaties (BITs) and increased FDI inflows is also mistaken. The key determinants of FDI are market size, the pace of economic growth, a stable macroeconomic environment and strong and credible institutions of economic governance. To these we may add the strategic priorities, such as the China-Pakistan Economic Corridor (CPEC), of world powers. The BITs, if adroitly negotiated, can complement the FDI-conducive domestic conditions but they can never be a substitute for them. Pakistan has a BIT with most of the major economies of the world but it has been receiving meagre FDI over the years, because of unsuitable market conditions. Before 2015 when CPEC started, the US was the principal source of FDI in Pakistan with which Pakistan does not have a BIT, while China with which we signed an investment treaty in 1989 didn’t invest much in Pakistan. By the same token, Pakistan doesn’t have a trade agreement with the US but still it’s the country’s largest export market with $3.8 billion exports. Conversely, Pakistan’s exports to China are only $1.8 billion despite receiving preferential market access under the bilateral FTA.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi