ISLAMABAD, Aug 12: Pakistan has lost a $12 million international arbitration case to a Malaysian power firm after terminating its contract to construct a 288-mw thermal power plant near Karachi, Dawn has learnt.

Inter-ministerial procedural disputes in the federal government are now causing delays in negotiating an out-of-the-court settlement, a senior government official said. So far, the federal government has spent $1 million in in litigation in the case, while Karachi Electric Supply Company has separately incurred a cost of $100,000 and the cost goes on increasing with each day.

The Malaysian firm, Sabah Shipyard SDN Bhd, has won two awards against Pakistan through arbitration and has now expressed its willingness to arrive at an out of the court settlement. The negotiations were scheduled for July 15-17, 2004 at London but were postponed at the eleventh hour owing to an inter-ministerial row.

Pakistan's foreign lawyers, the attorney general of Pakistan and the Private Power and Infrastructure Board (PPIB) have "strongly urged to proceed with negotiations urgently before any further step gets taken adverse to our (Pakistan's) interests in the UK litigation.

The settlement formula, if any, agreed as a result of such, litigation, will explicitly be only conditional, and subject to GOP approval", official documents suggest. 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 and later increased this claim to $510 million.

To Pakistan's advantage, the company is now under liquidation and has suspended $510 million case for penalty, otherwise it would have pursued the case. The arbitrator gave an initial $10 million award against Pakistan, later increasing it to $12 million 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 international arbitration.

Meanwhile, the KESC approached Sindh High Court (SHC) but London bench of the arbitration did not accept SHC's jurisdiction in the subject under the same argument.

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