The International Centre for Settlement of Investment Disputes (ICSID), the World Bank’s arm for this purpose, has ruled that Pakistan’s government had ‘expropriated’ the assets of foreign investor Karkey Karadeniz Electric Uretim A S, a Turkish firm, when the Supreme Court of Pakistan (SCP) declared its contract to supply power from four ship-mounted generating plants on rental basis “non-transparent, illegal and void ab initio” in March 2011. The SCP held that an increase in the upfront payment from seven percent to 14 percent violated the transparency provisions of Articles 9 and 24 of the Constitution and Section 7 of The Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997. It ordered Karkey to repay its advance of $ 180 million and the detention of its four vessels anchored in Karachi. Since the issue was taken up by the court of then Chief Justice Iftikhar Chaudhry through a suo motu notice under Article 184(3), no appeal was available. Karkey decided to take its case for breach of contract to the ICSID and has now reportedly won a $ 700 million damages claim. In a similar vein, the ICSID is seized of arbitration proceedings in the case of Reko Diq, a copper and gold mining project in Balochistan. That project too was cancelled by the SCP under Article 184(3). In this case, an even larger award is expected. While the government hopes Karkey will accept an out-of-court settlement, the Reko Diq case is likely to blow a big hole in our finances. The brief facts of these two cases are that Karkey was contracted under the Rental Power Producers policy by the then PPP government to supply 232MW power for five years at a contract value of $ 560 million in 2008. After about a year, Karkey withdrew, accusing the government of failure to honour sovereign payment guarantees. Amidst allegations of corruption surrounding the contract, the SCP stepped in in 2009. In the Reko Diq case, Tethyan Copper Company (TCC) went for international arbitration after the SCP concluded that the terms offered by TCC were disadvantageous to Pakistan. Since TCC had sunk considerable resources in geological surveys of the area and producing a feasibility report of the project, it has taken Pakistan to the ICSID to claim damages.
For many years now, the global community has been expanding protections for foreign investors against arbitrary actions by host governments. Toying with foreign investors’ stakes therefore is now fraught with prohibitive penalties through international arbitration forums such as the ICSID. The Karkey contract fell prey to internal political rivalries when Faisal Saleh Hayat (of the PPP Patriots then, who is now back in the PPP) and Khawaja Asif, the current foreign minister, challenged the project on grounds of the standard procedures not being followed. Reko Diq faltered amidst complaints by Baloch political leaders that the province was justified in feeling hard done by insofar as the project was concerned. These two cases and the current controversy about LNG imports point to the need for domestic political rivalries to be kept out of foreign investment issues. They also point to the need for adherence to the law and rules when signing contracts with foreign investors and during implementation after. Last but not least, they illustrate the pitfalls of the superior judiciary’s activism in such cases under Article 184(3). The Karkey judgement, and the expected one on Reko Diq, indicate that the SCP failed to take account of the penalties threatened under international arbitration. As it is, Pakistan is hardly the preferred destination for foreign investment. To that if is added foreign investors’ concerns about incumbent governments and their successors sticking to the terms of binding international contracts, we already have a milieu that discourages foreign investors visiting our shores. Now these two international arbitration cases are bound to further erode Pakistan’s credibility and standing as a fit destination for foreign investment.