ISLAMABAD, Aug 2: Pakistan has lost a $10 million arbitration against a Malaysian power company for terminating its contract for the construction of a 288-mw thermal power project near Karachi.

A senior government official told Dawn that having won two awards against Pakistan through arbitration, the company has now expressed its willingness for an out of the court settlement.

The government has constituted a high-level negotiating committee comprising chairman Wapda Lt-Gen Zulfiqar Ali Khan, Advisor to the finance minister Dr Tariq Hassan and director legal of the Private Power and Infrastructure Board (PPIB) to negotiate a settlement deal, the official said.

The negotiations are expected to take place within this month in Dubai and dates for which are being finalized in consultation with the Malaysian company.

A finance ministry official said that Sabah Shipyard SDN BHD of Malaysia had been issued a letter of support (LOS) in January 1995 under the 1994 power policy to set up a 288-mw residual furnace oil-based power plant in Korangi, Karachi at a cost of $240 million.

Subsequently, three different agreements were signed in March 1996 to implement the project. These included Sabah Shipyard’s implementation agreement (IA) with government of Pakistan, Power Purchase Agreement (PPA) with Karachi Electric Supply Corporation (KESC) and Fuel Supply Agreement (FSA) with Pakistan State Oil (PSO). The federal government also guaranteed these agreements through a sovereign guarantee in May 1996.

The official said the company’s original average tariff for first 10 years was agreed at Rs1.8 per kWh (unit) and 30-year levelised tariff of Rs1.67 per unit.

In November 1998, the government served a termination notice to the company for not executing the project in a diligent manner according to contractual terms. Later, the government also encashed Sabah Shipyard’s $6.9 million performance guarantee under provisions of the power policy and various agreements.

The Malaysian Independent Power Producer (IPP) went into arbitration against the government in Singapore and claimed an amount to the tune of $227 million as compensation from the government.

The arbitrator gave a $10 million award against Pakistan in addition to the refund of $6.9 million performance guarantee encashed by the government. The PPIB moved a civil court in Islamabad to stop implementation of the award but the company went to London for another arbitration.

The arbitration bench in London upheld the Singapore arbitration award and said the civil court in Islamabad had no jurisdiction to stop arbitration award because it was related to business interests of a foreign investor and Pakistan had provided in the agreements to settle disputes with the IPP through an international arbitration.

Meanwhile, the KESC approached Sindh High Court (SHC) but London bench of the arbitration did not accept SHC’s jurisdiction as well.

The official said the Malaysian IPP had realized that although arbitration awards were in its favour it would be a very lengthy legal process to finally get the real compensation. It had, thus approached the government for out of the court settlement.

The official said it was a welcome offer to the government and it decided to negotiate a settlement deal which is acceptable to both the parties.