Socio-legal imperatives for CPEC

Strict anti-corruption measures should be adopted before implementing foreign invested projects in the country

Jahanzaib Durrani October 07, 2017

Most of the discussions about the China-Pakistan Economic Corridor (CPEC) to date have revolved around its socio-economic considerations. The government in power has seldom stated, and hardly ever discussed, the socio-legal challenges attached to the projects.

Pakistan is a major developing country in the region, and perhaps one of the ideal places for investment in the world due to its strategic location. Yet it is notoriously difficult to set up and operate businesses in Pakistan. Reason being, the Foreign Direct Investment (FDI) regime of the country appears complex since it lacks unified codification, systematic organisation of legal and regulatory framework and is diffused in the complex structure of economic and policy directives. Hence, if an investor lacks clarity about the legal regime of the host country, it would upset his entire business plan.

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Therefore, one of the immediate steps of the government should be: to assemble all the legal and regulatory laws concerning FDI in one source, which should then be explained and illustrated in simple and clear language. Such a compendium should be translated into languages of countries we hope to attract the most investment from. This would provide a comprehensive guide to all the stakeholders, particularly foreign investors regarding the FDI regime.

Secondly, it is the time to revise Pakistan’s overall approach towards Bilateral Investment Treaties (BITs). It has been seen in a number of studies that there has never been a consistent procedure behind formulating a BIT in Pakistan; successive governments have introduced their own set of policies, which have resulted in an unstable investment climate with adverse effects on FDI. In a number of international arbitration cases filed against the government of Pakistan, it has been witnessed that far too many protections were given away to investors at the expense of national sovereignty.

An especially egregious giveaway was not requiring these investors to exhaust domestic remedies before opting for international arbitration. Hence, putting a liability on the host state to incur the economic burden of international arbitration. The reasons behind these discrepancies in executing BITs, if simply put, were lack of meaningful negotiations before signing BITs and little knowledge of the technical terms such as investment, expropriation, most-favoured-nation treatment, fair and equitable treatment, and, importantly, full protection and security, among others.

Therefore, it is important to have a sound understanding of the technicalities involved in negotiating an international investment treaty and a masterly competence over the jurisprudence of international investment law. This could be achieved if substantive law matters relating to investment protection are examined in the light of arbitral decisions. For this, a case-by-case analysis of important arbitral cases should be adopted along with factual circumstances behind those cases in which the particular issue was raised and that provided an arbitral dictum about investment protection clauses, through which the customary law was drawn. This methodology would pave the way towards Pakistan’s own model BIT template and let investors know how Pakistan perceive investment protection.

Thirdly, policymakers should bear in mind that with large-scale foreign investment comes wide-ranging litigation as well. It would be hard for the judiciary in the current scenario to successfully tackle investment dispute matters concerning CPEC. The government needs to realise that due to severe overload the litigants’ cases are already languishing in the courts. Hence, it’s time to start focusing on the alternatives. Currently, ‘arbitration’ is considered a powerful dispute resolution alternative. Therefore, the importance of arbitration in commercial dispute matters should be highlighted and steps should be taken to revise domestic legislation to accommodate the proceedings of investment disputes at the arbitration centres.

For this purpose, the government should establish an Alternative Dispute Resolution Authority at the Gwadar free zone, for its geo-economical location; it can provide a spectacular venue for arbitration to both, local and international investors. Furthermore, this initiative can be a source of economic activity, with conference centres, hotels and local lawyers all set to benefit. For any country, a recognised arbitral centre is also a great show of ‘soft power’, helping to underline a broader message about political and legal stability and give comfort to foreign investors.

The authority should be fully autonomous under the Constitution, empowered to enact rules for its commercial matters, and has its separate and distinct arbitration court system that should be specialised to deal with domestic and foreign investment disputes. It is not advisable to rely on our existing judicial system for the amicable solution of investment matters where the backlog of cases has reached to almost three million.

Further, the centre may draft arbitration rules under the Arbitration Act of 1940, but coming to grips with the international best practices, the parties should be given a choice to any other set of arbitration rules, which they may prefer such as UNICITRAL Model Law.

Fortunately, Pakistan has now transposed the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) into the domestic law — the Foreign Awards Act of 2011, hence the international awards will now be recognised and enforced in the state of Pakistan without any impediment; otherwise, it could have been a serious problem in enforcing arbitral awards in the absence of domestic legislation.

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Lastly, the government should ensure financial transparency in foreign invested projects. A number of international initiatives have been taken to fight corruption and promote transparency. These range from the Organisation for Economic Cooperation and Development’s (OECD) convention on bribery, to the recent EU Directives on Accounting and Transparency. The international community has come to realise that the epidemic of corruption and bribery cannot be tackled on the national level alone, but that rather international arrangement must be made to curb it. In this debate, the role of international NGOs and civil society has gained immense importance. The multi-stakeholder initiatives (MSI) are also introduced at the global level, which tend to bring civil society, government officials and the private sector under one roof to address complex development challenges and improve the management of public resources without usurping state’s authority. One such MSI is, Global Initiative for Fiscal Transparency (GIFT) that is a network working to improve “fiscal transparency, citizen engagement, and accountability for the use of public funds,” and establish legal frameworks that support public access to information.

Recently, the United Kingdom (UK) and Canada have introduced new laws that obligate large foreign enterprises incorporated in their jurisdictions to publicly disclose their financial reports at the end of the fiscal year. Similarly, Pakistan should also make sure that the companies listed on the Pakistan Stock Exchange should become part of ‘Publish What You Pay’ campaign to diminish the likelihood of dodgy transactions and ensure the civil society’s oversight on the terms of agreement involving billions of dollars.

It is recommended that Pakistan should join such MSIs to improve its standing at the global level. Moreover, strict anti-corruption measures should immediately be adopted before implementing foreign invested projects in the country. If aspects mentioned above are not catered, the benefits from CPEC will remain limited and increase in the foreign investment will rest in an unfulfilled dream.

Published in The Express Tribune, October 7th, 2017.

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