PAKISTAN lost two international arbitration cases in quick succession over the last two months, involving more than $900 million compensation payable to local and international business firms.
In the first case, the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) awarded around $800m compensation to Karkey Karadeniz Elektrik Uretim of Turkey in a rental power case and held that Pakistan “expropriated” Karkey’s assets.
Weeks later, the London Court of International Arbitration (LCIA) asked Pakistan in its final arbitration award to pay around Rs14 billion ($135m), including a markup, to a group of nine local power producers for breaching contractual obligations.
Pakistan has been unable to develop its own specialised pool of experts in arbitration and contract writing despite a recent rise in the number of cases
In both cases, there is still room for out-of-court settlement and litigation delays. The government may not have to make payments upfront, but the loss of its reputation is a serious issue. It brings to the fore the casual attitude of successive governments in finalising business deals in a rush to achieve narrow objectives at the cost of national and public interests.
In fact, Pakistan has lost almost all cases, some of them of strategic importance, at all international arbitration forums. The only exception in recent past was the Progas LPG case in which claims by an individual against the government of Pakistan were rejected by an arbitration court of London in August last year.
Even in that case, Pakistan accrued substantial financial expenses in the shape of legal fee and related arbitration costs.
Pakistan has also lost to India in the case of Kishanganga hydropower project before the international court of arbitration, besides an unsatisfactory outcome of the neutral expert decision in the matter of Baglihar hydropower project.
The experience of international litigations by the National Accountability Bureau and the Federal Board of Revenue has also been unimpressive.
The outcome of the Reko Diq arbitration, initiated by Chilean and Canadian mining firms, also appears to be going against Pakistan as indicated by the ICSID and allowed the parties to find out an out-of-court settlement before it gives a final determination.
Despite a recent rise in the number of international arbitration cases, Pakistan has been unable to develop its own specialised pool of experts in arbitration and contract writing. The selection of arbitration counsels and law firms at home and abroad is made on the basis of relationships, friendships and pick and choose at exorbitant cost, rather than on the basis of a transparent process.
In the Karkey case alone, Pakistan is estimated to have paid almost Rs1.5bn to the foreign law firm, besides expenses on visits of official delegations.
One reason why Pakistan faces international arbitration cases is its inability to evolve a uniform law for the standardising of contracts and the choice of arbitral frameworks. In most cases, the government agrees to the demands of external investors in long-term deals and cherry-picking in dealing with jurisdictions of the local legal system to bypass contractual enforcement.
Karkey and Reko Diq are classic examples of adopting such a route. The country’s apex court intervened in business disputes in both cases to get rid of apparently unfavourable business deals and yet found to its embarrassment that contracts involving international arbitration end up attracting expensive compensation in case of the violation of provisions of contracts.
It also brought to the fore the need for productive institutional input for the preparation of contracts and business terms, along with the selection of the arbitration forum and proper preparatory mechanism in selecting law firms and arbitrators having expertise in special areas and jurisdiction.
On top of that, there is no reward and punishment mechanism for the preparation of contracts, selection of dispute settlement mechanism in contracts and the negotiation strategies where the public-sector entities readily agree on international arbitration without input from experts. In the process, they willingly waive its rights over sovereign immunity in matters of enforcement of arbitral awards, thus giving up the jurisdictions of local courts.
In fact, those involved in the process mostly try to come up to the expectations of the boss, irrespective of pros and cons of the deal, to get rewards in the shape of promotions and lucrative postings.
Moreover, besides signing tens of bilateral investment treaties with other countries, the government has not yet been able to standardise agreements and heavy stakes are parked against Pakistan’s interests as public functionaries fail to take care of wilful delays by the investors selected without a transparent bidding process.
The latest trend of bypassing procurement rules to award contracts without bidding on the premise of saving time or bilateral agreements or foreign policy objectives often results in varying terms and authorities without delving into consequences of future liabilities. Such examples are particularly evident in recent contracts mostly going to Chinese, Turkish and Qatari firms.
In the absence of transparency, such contracts become the subject of political controversies, which not only affect the country’s image as an investment destination, but ultimately bilateral relations and the public interest at large.
Because of the bilateral element, the terms of contracts keep on changing in the shape of tax exemption and favours to the sponsors here and there because the person signing agreement seldom comes to know about the contents.
Confidentiality clauses of such agreements also make it difficult for critics to point out weaknesses and agreements are skewed against the government.
In many cases, those negotiating agreements are not a direct party to the contract, and process investment proposals on behalf of third parties, such as in the case of imported LNG and power projects.
Then comes a stage when the government tries to contain its obligations at a later stage, which ultimately forces investors to invoke international arbitration jurisdictions. To cover up the weaknesses, government functionaries then tend to hire foreign firms at exorbitant costs with minimal expert support from home.
Published in Dawn, The Business and Finance Weekly, November 13th, 2017