By: Hadia Mukhtar
On 12 July 2019, the International Centre for the Settlement of Investment Dispute (ICSID) ordered the government of Pakistan to pay $5.8bn in damages to Tethyan Copper Company over the denial of the mining lease for the project in Baluchistan. This was the largest fine ever levied against Pakistan by the international court and the second-largest fine in the ICSID history. So how did Pakistan landed up with so much fine as large as its most recent IMF program?
Background of Reko Diq Case
Reko Diq is named after the mountain in the remote Chaghi hills of District Chagai which is wedged within 100 miles of Pakistan’s western borders with both Iran and Afghanistan. The story of the Reko Diq begins in 1993 when the Baluchistan Development Authority signed an agreement known as the Chaghi Hills Joint Venture Agreement or CHEJVA with the Australian-based mining firm BHP minerals for the enlargement of mining capabilities in the Tethyan belt. From the geostrategic standpoint, the Tethyan belt expanses from Iran and Turkey into Pakistan and contains the world’s fifth-largest gold mine reserves along with copper resources. Despite having ample valuable natural resources, it is unfortunate that their supply in the Tethyan belt remained untapped because of Pakistan’s lack of technical and financial expertise required to extract these resources. Accordingly, the contracts were signed with multiple foreign mining companies who were granted mining leases and exclusive rights for mining exploration. These companies in turn claimed a huge share in benefits that severely injured national interest. For instance, the BHP was entitled to 75% benefit in the share of profits whereas BDA received 25%. Moreover, when the Reko Diq mine was run by an Australian incorporated firm Tethyan Copper Company owned in turn by British mining company Antofagasta and Canadian company Barrick Gold they claimed a 50% stake each in profits earned. Thus, in the broader concept of international political economy, the Reko Diq affair and the unprecedented influence of the foreign companies under the guise of development can be linked with modern colonial imperialism.
The Reko Diq story gained momentum when 2006, the 1993 CHEJVA agreement was challenged in the Baluchistan High Court on the grounds inter alia that it was illegal and corrupt and therefore should be annulled. The petitions signed against the CHEJVA agreement questioned the credibility of the licenses that were granted to the mining companies as they were intransigent and unfair as they violated the national laws protecting the core interests of the people of Pakistan at large.
Public outrage and Supreme Court verdict
Along with the allegations of harming the national interests of Pakistan, there was a growing media narrative that the CHEJVA agreement had been signed in a dubious and corrupt manner that deliberately undervalued the size of the minerals reserves in the Reko dig mine. Thus, the Baluchistan government renounced its earlier support of the project and consequently rejected the TCC application for mining license despite its submission of the feasibility report. Moreover, the Supreme Court of Pakistan in a single stroke dismissed the whole legal superstructure governing the exploration contract of the Reko diq on legal and human rights implications and the fact it was against public policy and law. Amid the celebrations over the court’s ruling, the petitioners ceased to realize that they did not have the final authority to decide on this case. As per Section 15(4)(1) of the CHEJVA, the authority laid with the ICSID. Thus, based on this provision, TCC went ahead and filed for damages at ICSID. In 2017, ICSID ruled in favor of TCC, held Pakistan liable for breaching a bilateral investment treaty, and determined that Pakistan owed TCC $5.8bn dollars in investment.
Pakistan’s perceived failures in the Reko Diq affair
The Reko Diq case has brought into the limelight incompetency and corruption which has plagued Pakistan’s institutions and legal governance at large. Lack of comprehensive understanding of international law which is otherwise crucial in resolving matters of concern domestically was missing. Moreover, the supreme court of Pakistan created a bad precedent by taking a pre-determined which was both detrimental for the country’s economic interests and for foreign investors who will be reluctant to invest millions of dollars in a country that lacks the necessary legal framework to resolve matters domestically and exhibits a reluctance to follow international obligations.
Therefore, recourse to international arbitration was the only way since domestic remedies and desires to resolve contentious issues amicably were absent. In this respect, the Supreme Court of Pakistan should have not missed the elephant in the room by ignoring the clause of the CHEJVA agreement that gave the right to the foreign respondents to invoke the arbitration clause for their foreign investment claims.
Moreover, Pakistan ceased to realize that cases like Reko Diq can raise significant public interest concerns, and therefore ignoring the necessary legal transparency and apt understanding of its obligations to the matters concerning bilateral investment treaties and international investment tribunal is something that should not be taken lightly. Thus, the Reko diq case is a painful reminder of Pakistan’s poor and flawed management of its resources which are significant assets to alleviate the economic crisis it is battling presently.
Even though Pakistan has managed to extricate its assets such as Roosevelt Hotel, Paris properties, and Virgin Island Court has unfrozen PIA assets from legal attachment, the challenges are still not over. The greatest challenge for the government is to take responsibility for the crisis of governance and management that created the Reko diq fiasco and how significant it is to devise a coordinated strategy to tackle future international investment in the backdrop of multiple concerns the country is already battling with.
What’s next for Pakistan?
Reko Diq case has led Pakistan to learn hard lessons. For developing economies such as Pakistan, it must aim to resolve foreign investment disputes domestically so that it can avoid liability imposed through international tribunals. It is because undeniably, the network of international courts helps powerful multinational corporations to get away with questionable practices. The ICSID or any other Investor-State Dispute Settlement Tribunals are not without their flaws and often fail to act as fair arbitrators of justice.
Moreover, ICSID’s decisions are also not subjected to external judicial review or effective public scrutiny. Therefore, they are not bound by any judicial precedent except their own. This combination of factors has led to unfathomable ruling such as the Reko Diq case where ICSID determined that TCCs owners owed $5.9 billion for a mining project that has been purchased in 2006 for a mere $170 million and had received an investment worth only $200 million and had never begun operations.
The fine is worth 2% of Pakistan’s entire GDP which will have to be paid back by Pakistani taxpayers who had no knowledge of the deal and whose consent was never asked for by the caretaker provincial government that signed the deal in dodgy circumstances in 1993. The methodology ICSID used to determine the size of the award is also questionable as it was based on TCC argument that it had the right to receive from Pakistan the full present discounted value of all future profits from this non-existent project using notoriously unreliable and fluctuation prone future prices of gold and copper calculated for 56 years of hypothetical operations.
Unfortunately, once a tribunal decision is handed down by ICSID, countries like Pakistan can only file for a revision or annulment of a decision, not an appeal. An annulment only assesses a tribunal’s decision from narrow criteria of procedural issues rather than an appeal which would have a broader scope to consider whether the tribunal simply got the decision wrong.
Additionally, since developing countries such as Pakistan often suffer from corruption and lack of investment, they are unlikely to attract many foreign investors without agreeing to ICSID arbitration, to begin with. So, what alternatives do Pakistan have to safeguard its interests?
The answer may lie with our next-door neighbors. In 2017, India not only ended 58 existing BITs but also prepared a model BIT that severely restricts a foreign investor’s right to initiate international arbitration without first exhausting local remedies On the other side of the world, the new agreement, the United States Mexico Canada Agreement USMCA o has similar provisions while also narrowing down the jurisdiction of ISDS cases.
Another possible model could be the EU’s proposal to create a multilateral investment court to resolve foreign investment disputes rather than ICSDID or other tribunals. Unlike the tribunals which are constituted on a case-by-case basis keeping in mind a single bit, the EU court has a permanent roster of judges having a much stronger conflict of interest rules and appeals process and consistency in its rulings across all bilateral agreements.
Furthermore, dispute resolution other than arbitration can be envisaged for settling foreign investment disputes. In this respect, the establishment of an effective multi-tier dispute resolution framework along with constant monitoring by government officials on the transparent implementation of the agreements and conducting fact-finding missions only then instances of escalating conflicts between investors and states can be avoided.
Introducing technology and attracting foreign investment with transparency and a robust legal framework in the mining industry is the need of an hour. The mining sector promises multiple perks in terms of employment and accelerating economic growth. As Pakistan has a youth bulge, it has the potential to strategically utilize its human resource through training and increasing its productivity and remodel its mining industry through effective policy making, and creating lucrative opportunities by striking profitable deals with foreign mining companies by securing maximum national interests.
In sum, there is no question that BITs and ISDS mechanisms undoubtedly need to be reformed. But in the meantime, the government of Pakistan has to address one unavoidable fact: it must finally start negotiating deals based on public interest rather than private gain. Since Pakistan is an emerging economy, policymakers need to synergize various possibilities on how to improve its governance particularly in the domain of law and management of resources.
The writer is a geopolitical analyst with a keen interest in international politics. She can be reached at [email protected]
