Powering into trouble

Updated September 28, 2017


Another critical case of international arbitration has been lost by the government of Pakistan, this time involving nine private power producers, all domestic. Later this week, the London Court of Arbitration is set to decide the quantum of damages and claims owed by the government to these parties in a dispute whose origins lie in the days of high oil prices and skyrocketing circular debt back in 2011.

The amount involved is far smaller than the award just given to Karkey Karadeniz by the ICSID, and certainly smaller than what the same forum is likely to award the Tethyan Copper Company in the Reko Diq award. As per initial reports, the IPPs are likely to ask for around Rs22 billion while half of that amount is what the neutral expert in the case has determined to be the loss suffered by the power producers, the remainder being interest.

No doubt both parties have their view on the justness of the award. But the facts are starkly neutral: the government of Pakistan did its level best to keep the dispute in the local courts, while the IPPs took it to the international arbitrator as per their power purchase agreements. In the local courts, the government failed to secure a decisive outcome, but managed to get enough stay orders to drag the proceedings out.

But in June, the London Court of International Arbitration ruled that the government is bound to pay them in the dispute, and set a date in late September to hear the quantum claims by the IPPs. So just like the Reko Diq dispute, this one too has turned out badly for the government, and the only thing left to decide now is the amount that will be required to be paid.

Why does the government almost always lose when it comes to international arbitration cases?

The nature of the dispute itself is highly technical. In a nutshell, in the years from 2011 onward, as the circular debt skyrocketed, the government fell behind in its payments to many of the power producers, causing them to shut down periodically because without payment, they could not afford to pay for fuel. As a result, the government charged them a penalty, amounting to about Rs11 billion in total, which the power producers contested, saying they should not be penalised because the government failed to make its payment. The matter was partially settled when a new government came to power in 2013, and the undisputed amounts involved in the matter were all settled. But the penalty had already been deducted at source, and the government did not reimburse this, so the matter first went to local courts, then to international arbitration after a neutral expert determined that the government could not charge a penalty for its own payment default.

When looked at more closely, undoubtedly the matter will reveal far more complicated intricacies. Lawyers from both sides will present complex arguments about the justness of their clients’ position. But the fact of the matter is that the case is lost, and the government could be liable to pay, although when that happens is not clear at the moment.

So here is one question: why does the government of Pakistan almost always lose in international arbitration cases? It is possible that this is a pattern for Third World governments where rapacious capitalists get their way in these forums because they are inherently tilted towards ruling in favour of private investors and against Third World governments.

But there is another possible explanation. The state in Pakistan has grown too accustomed to acting in an arbitrary manner towards investors, and in a globalised world, where investor disputes can be referred to international forums for arbitration, arbitrary action is being penalised. One is reminded of cases like the attack on Hubco and the other IPPs in the late 1990s, when the option for arbitration in a global forum was not activated, but international pressure was brought to bear on the government through the offices of the World Bank, which was an important shareholder in the enterprise.

One is also reminded of the time when the FBR arbitrarily imposed a tax liability of Rs47bn on the telecoms, arguing that they had not paid tax on interconnection charges, and even raided and sealed the offices of one operator briefly.

Then came the court intervention in the Steel Mills deal in 2005, followed by the striking down of the LNG agreement and the Reko Diq case. In other forums, like the World Bank’s arbitration under the Indus Waters Treaty, Pakistan claimed to have scored a victory in the Baglihar dam case, but in reality all that was gained was a reduction in the height of the dam and a slight shrinkage in the size of the pondage. Now once again Pakistan is pushing for international arbitration in two other similar hydropower stations, and is likely to emerge with an equally feeble victory.

Across the board, whether it concerns dealings with the bureaucracy, the courts or the FBR, the state has grown accustomed to acting in a way that international forums find to be arbitrary and in violation of the covenants against which the investment in question has been made. Perhaps we, the taxpayers and the ultimate owners of the state, are being shafted by global capitalism. Or perhaps resort to arbitrary action is increasing because the investors find themselves caught in the crossfire between the contending factions that vie in an endless, and merciless, power struggle to drag each other down in the political arena.

In the case of water disputes with our neighbour, perhaps we fail to get the kind of victories we seek because we are the smaller party that gets unfair treatment. Or perhaps it is because both countries are channelling their territorial and emotional disputes through the mechanisms of arbitration in the Indus Waters Treaty.

In any case, the story remains the same. Another defeat is on the horizon, and unless resort to arbitrary action is not halted, more such defeats are inevitable.

The writer is a member of staff.


Twitter: @khurramhusain

Published in Dawn, September 28th, 2017