Prime Minister Nawaz Sharif’s mid-September visit to Turkey has brightened the prospect of an early out-of-court settlement of the lingering dispute between Pakistan and the Turkish energy firm Karadeniz Holding’s subsidiary Karkey.

Karkey was one of the 12 rental power companies that were awarded contracts in 2009 by the previous government to overcome the electricity crisis on an immediate basis. The plan was, however, wrapped up after the Supreme Court cancelled all the contracts in March 2012 for lack of transparency and the companies’ failure to produce power despite having received money in advance.

Since April 2012, four of Karkey’s vessels, including two power ships and a crew of 30, are under detention near Port Qasim on charges of failing to reimburse the money.

Turkish leaders, during bilateral talks, conveyed their deep concern over the matter to Mr Nawaz Sharif, and asked him to play his role in settling the dispute. Mr Sharif told the Turkish leaders that since the matter is in an accountability court, they will have to wait for the court’s decision before any step is taken regarding the release of the vessels.

But the National Accountability Bureau (NAB) had been without a chairman since May 28, and no decision could be taken since then on many important matters. Now that the government and the opposition in parliament have found a mutually agreeable candidate for the post, NAB will return to normal functioning. And the chances of an amicable out-of-court settlement over how much Karkey should pay the Pakistan government have become bright.

The fact remains that for Pakistan, and particularly for the PML-N government and the Sharif brothers, relations with Turkey are too precious to be allowed to be undermined by financial disputes.

After China, Turkey is seen as one of our closest friends. During his visit aimed at seeking Turkish investment into the country, the PM described Pakistan and Turkey as ‘one nation, two states’ during an interview. A number of agreements and memorandums of understanding were signed between the two sides for cooperation in education, transport, security, anti-terrorism, infrastructure, energy and solid waste management.

Pakistan has, over the years, become a favourable destination for Turkish firms that are interested in construction and infrastructural work. Only a few days ago, a leading Turkish business group, Nurol Group, expressed its readiness to invest in the Gadani Power Park, and to assist Pakistan in building the Karachi-Lahore Motorway as well as the Bhasha and Bonji dams.

During the past five years, Turkish firms have invested billions of rupees in various sectors of Punjab in particular. They entered the Pakistani market in 1992, and have since completed 37 projects worth $2.4 billion until now. In 2011, Turkey’s exports to Pakistan were $213 million and imports $873 million.

The Karkey case took an adverse turn when a disagreement emerged between NAB officials and other stakeholders over what amount the Turkish firm should pay before leaving Pakistani waters. Several figures were cited by different entities. A NAB inquiry showed that a deal had been struck with Karkey under which the latter would reimburse $17.5 million to Pakistan, but the Supreme Court insisted on recovering $120 million from the Turkish firm. Earlier, the figure was $80 million.

Makhdoom Faisal Saleh Hayat, who had emerged as an important stakeholder and a bitter opponent of the rental power scheme, in a letter insisted on $243 million. The Transparency International Pakistan put the figure at $210 million.

These varying claims were rejected by the owners of the ship. Pakistani authorities then increased the refund claim after discovering that the government had spent a huge amount of money on laying down infrastructure and cables for the transmission of power to the national grid. But Karkey failed to generate 230MW power, as was required under its contract, and produced only 30MW.

Turkish Prime Minister Recep Tayyup Erdogan, finding Karkey in trouble, had rushed to Pakistan on November 21, 2012, and held a meeting with then-Prime Minister Raja Pervaiz Ashraf on the issue. He made it clear that if the issue of the Karkey power plant was not resolved amicably, it would have a negative impact on Turkish investors, who were keen to invest in Pakistan.

The ship, observed Erdogan, had been mounted with state-of-the-art devices, which were likely to be damaged with the passage of time. He asked Pakistani officials to find a way to resolve this matter.

Unable to reach a satisfactory settlement, Karkey later opted to seek relief from the World Bank-affiliated International Centre for Settlement of Investment Disputes (ICSID) in Washington, by invoking provisions of the Pakistan-Turkey Bilateral Investment Treaty. The Turkish firm’s case was registered on February 8, 2013.

The first hearing of the case took place on September 16, the day Prime Minister Sharif arrived in Turkey. According to the ICSID website, on the recommendation of the Chairman of the Administrative Council, David A.O. Edward (British) accepted his appointment as arbitrator on June 19, 2013. The tribunal was constituted on July 25, 2013 with its president Yves Derains (French). Normally, the ICSID tribunals take about three years to complete hearings and give their verdict.

Karkey is seeking compensation of $700 million for the losses incurred by its vessels in terms of damage or depreciation after they were not being allowed to leave Karachi port for almost 16 months.

The national courts have no jurisdiction under international law to challenge ICSID awards. In case Pakistan loses, and does not implement the verdict of the ICSID, the World Bank can stop Pakistan’s funding, as the ICSID is an arm of the Bank that deals with investment-related disputes.

Meanwhile, after showing reluctance for some time, the finance ministry released Rs260 million last month to the ministry of water and power for paying legal fees to the law firm that is contesting Pakistan’s case, and for the ICSID secretariat fee. In a statement issued in Islamabad, the Turkish company said that the legal dispute between Karkey and Pakistani authorities has undermined the prospect of enhanced bilateral cooperation in energy between the two countries.

A Karkey spokesman said, “Increased economic cooperation between Turkey and Pakistan is in both countries’ best interest. This unnecessary dispute has clouded the climate for bilateral cooperation and damaged investor and business confidence. We hope it can be settled quickly and fairly; [thus] preventing it from becoming an obstacle to successful future Turkish collaboration with the Government of Pakistan in the energy and other sectors”.