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A blistering cost

Dawn | 7 November 2022

A blistering cost

by Khaleeq Kiani

It is like a settlement at gunpoint — an unusual requirement from the apex court to pre-sanctify precisely a commercial deal between a sovereign under distress and a top global mining firm with overwhelming powers of international jurisdictions.

Subject to the clearance by the country’s top court, the provincial assemblies will pass special resolutions, and the parliament, through a joint sitting of both houses, will provide constitutional cover to a new binding document — Foreign Investment (Promotion and Protection) Act (FIPPA), 2022.

All this will set a new precedent in the country’s investment, trade and business agreements with far-reaching future consequences. It may be recalled that an earlier similar attempt for settlement of a commercial dispute, although not under any constitutional jurisdiction, in the matter of K-Electric had been declined by the Supreme Court of Pakistan.

It would be rather depressing to witness a fait accompli being stamped that had been brushed aside over a decade ago as a trivial matter. The apex court in May 2013 had ruled that the original Chaghi Hills Exploration Joint Venture Agreement (CHEVJA) with an Australian mineral firm that subsequently led to two international mineral majors — Barrick Gold of Canada and Antofagasta of Chile — taking over the Reko Diq Copper-Gold Project was illegal and null and void, hence all subsequent agreements were also void.

This was, unfortunately, overruled by International Centre for Settlement of Investment Disputes (ICSID). The ICSID said that notwithstanding the Supreme Court of Pakistan’s judgement, it had jurisdiction to proceed with the arbitration because the Pakistan government’s obligations under the Pakistan-Austria Bilateral Investment Treaty (BIT) were independent of Pakistan law. And thus, the obligations were unaffected by the SC judgement, and the Reko Diq investment was protected under the BIT.

The ICSID held that the cancellation of the mining lease was not bona fide but a deliberate decision of the government to develop the project by itself.

Meanwhile, all those who had created a smokescreen that dozens of other investors were making beeline with highly attractive offers to take over the project with billions of additional dollars of return to the governments and the people of Balochistan and Pakistan simply vanished.

The ICSID rendered a cumulative arbitration award of over $6.5bn with continuously accruing interest against Pakistan as Islamabad failed to provide evidence of corruption. A simultaneous award for damages from the international court of arbitration of the international chamber of commerce (ICC) could add another $2-3bn — which put together totals more than the foreign exchange reserves of Pakistan.

With this, the Reko Diq joint venture had the upper hand in dealing with Pakistan, starting with attempts to attach Pakistani assets abroad, including those of PIA in many jurisdictions and risking Pakistan’s ability to launch bonds in the international market. Thus the negotiations were carried out between unequal parties, under duress and in unavoidable circumstances.

Imagine, at the outset, Pakistan transferred $900 million in an escrow account for one of the investors — Antofagasta — to exit the project by transferring its interest to the other investment partner — Barrick. Barrick can continue as operator of the reconstituted Reko Diq Project Mining Company (RDMC) that would have 50:50pc shareholding with government entities.

The court is now required to respond to two questions: whether the 2013 judgment of the Supreme Court, laws or the constitution prevent the government from entering into the new implementation and definitive agreement. And secondly, when enacted, will the proposed FIPPA be valid and constitutional? Will this mean the court will overturn its own judgment while considering the arbitration award as a ‘nuclear bomb’?

Once, and if, the court answers these questions in favour of the proposed deal, the provincial assemblies, particularly those of Balochistan and Sindh, will pass resolutions under articles 144 and 147 of the constitution, delegating certain powers to the federal government.

The federal government will then enact the FIPPA through a joint sitting of the national assembly and the senate if required so that RDMC and its investors will be provided taxation exemptions which “will be legislatively entrenched so as to protect them from withdrawal through executive action”.

The RDMC will be granted two mining leases for an aggregate 164 sq km area for 30 years, renewable for another 30 years. The company will have an exploration license for an area comprising 312 sq km and a surface lease for 643 sq km.

Its 50pc contributing interest will be held by Barrick — which had earlier about 37.5pc stake — while federal entities and Balochistan will hold the remaining 50pc interest. Balochistan will have 25pc shares, while the remaining 25pc shares will be equally owned by Oil & Gas Development Company, Pakistan Petroleum Limited and Government Holdings Pakistan Limited — three state-owned oil and gas firms.

Interestingly, the International Finance Corporation, the commercial arm of the World Bank, under whose aegis the ICSID issued an award — will become a partner with Barrick Gold in the Reko Diq firm. A Barrick subsidiary will be appointed as the exploration, operations and development operator of the Reko Diq.

On completion of these legal formalities, Barrick will finalise in 30 months an environment and social impact assessment and update the feasibility study, including drilling. Based on the updated feasibility, construction decisions would be presented to the board of directors for approval within six months for construction activities under phase one.

Phase one, expected to take five years, will entail an initial investment of $4.2bn to establish a processing capacity of 40 million tonnes per annum. Subsequently, phase two will take four years, involving a cumulative investment of $3.3bn to increase the processing capacity to 80m tonnes per year.

 source: Dawn