Pakistan’s policy on ICSID arbitration

With Karkey Karadeniz’s arbitration by the International Centre for Settlement of Investment Disputes (ICSID) going against Pakistan and another potentially adverse Reko Diq award on the way, Pakistan needs to rethink its policy to facilitate, promote and protect foreign investors. With a view to promoting FDI, Pakistan has signed several bilateral investment treaties (BITs) over a period of 50 years starting with the first BIT with Germany in 1959 (revised in 2009, but not yet enforced) and the recent BIT signed with Turkey in 2012 (not enforced, intended to replace the earlier BIT with Turkey signed in 1997). Most of the existing Pakistani BITs contain clauses providing for ICSID arbitration to resolve any disputes with foreign investors and the government of Pakistan.

Pakistan has faced at least seven ICSID cases, which is a relatively high number as compared with other developing countries. In addition to many logistical and public policy issues, the ICSID arbitration is costly. Some countries, such as Indonesia, South Africa and Venezuela, have announced that they will terminate their BITs. Another policy alternative is to revise and negotiate the existing BITs as they do bring some benefit in terms of FDI promotions.

Over the last few decades, the ICSID arbitration tribunals have produced a bulk of cases interpreting various standard BIT provisions, explaining and redefining the BIT jurisprudence, and in that light countries have changed their BIT practice and domestic policies to avoid disputes with foreign investors. This did not happen in Pakistan. In the light of emerging international BIT practice, Pakistan should adopt three sets of FDI policies in order to avoid ICSID cases in the future:

Dispute prevention policy: The UN Conference on Trade and Development has recently published a Global Action Menu for Investment Facilitation and its proposals can be used as a guide to frame a prospective dispute prevention policy: i. Transparency and information available to investors; ii. Efficiency in administrative procedures for investors; iii. Predictability of the policy environment for investors through consultation procedures; iv. Accountability and effectiveness of government officials; v. Mitigation of investment disputes; vi. Cross-border coordination and collaboration initiatives such as links between outward and inward investment promotion agencies; vii. Technical cooperation and other support mechanisms for investment.

Pakistan should carefully study the presence, implementation and effectiveness of each of the above in its domestic policy. Where the frameworks are absent in the existing policy, possible avenues should be devised to implement them. They should be revised in three tiers:

Firstly, public sector transparency is a key input to effective governance, development and investment facilitation. Although transparency by itself can be an independent policy goal, it can be linked with efficiency in administrative procedures for investors, predictability of the policy environment for investors through consultation procedures, and accountability and effectiveness of government officials. The sense behind this juxtaposition is that transparency, administrative efficiency, predictability of policies and administrative accountability falls under the consolidated ‘whole-of-government’ approach to investment climate reform. The role of the Pakistan Board of Investment (PBOI) as lead investment promotion agency (IPA) is central to this policy framework.

Secondly, the importance of mitigation of foreign investment disputes cannot be overemphasised. Many countries have established, or are considering establishing, investor complaint cells in their IPAs to mitigate investment disputes. There are also suggestions to establish mediation cells within IPAs to amicably decide investment disputes locally.

Thirdly, international collaboration initiatives, such as links between outward and inward investment promotion agencies of other countries, can provide support mechanisms for investment facilitation and to develop, revise and amend key investment facilitation policies. The PBOI is already a member of the World Association of Investment Promotion Agencies. However, there is no clear domestic policy to promote and develop understanding and cooperation amongst other IPAs and strengthen information gathering systems, promote the efficient use of information and facilitate access to data sources and technical assistance.

Alternatives to ICSID policy: In order to avoid ICSID arbitration, Pakistan should consider creation of government-backed national investment arbitration centre or enter into partnership with existing domestic private arbitration centres.

A major part of the problem is that there is no domestic arbitration centre in Pakistan. In 2009, a draft legislation emerged which proposed the creation of a national arbitration and conciliation centre, but it never became a law. If Pakistan needs to develop indigenous capacity to better understand and resolve investment disputes, it needs to create new national institutions that create new policy space and provide alternatives to international institutions and remove dependency on them. Recognising that this is an innovative and highly ambitious proposal, it is nevertheless possible that Pakistan can lead the world by creating a National Investment Arbitration Centre (NIAC) to resolve all types of investment-related disputes between government entities and foreign investors. This will not only provide a viable alternative to ICSID but also enhance domestic capacity to better understand and resolve investment disputes.

There is a need to study the existing private arbitration centres in order to ascertain their possibility to provide a local alternative to ICSID. This proposal comes with a caveat whether any such institutions are in fact functional in Pakistan as there might be some visible online presence, but nothing exists on ground. However, the study of such centres will provide feasibility for partnership with any of such centres and a comparative guideline for the creation of a NIAC.

The future BITs policy: Any proposed changes in policy regarding alternatives to ICSID depend on the existing and future BITs partner countries and whether they agree to those changes. In other words, any change in the existing foreign investment disputes-resolution policy can be effective only when they have been properly negotiated and included in the existing or future BITs so that the investors can be made subject to those changes. The revision of BITs model is the most important aspect of Pakistan’s foreign investment policy because BITs provide the most effective way to revise the existing and future commitments given to foreign investors. Pakistan should revise both substantive and dispute resolution provisions of its model.

Pakistan should develop substantive provisions based on its domestic regulatory needs to be included in the BITs model. This will ensure that the country can protect its domestic public policy interests effectively.

Published in The Express Tribune, October 14^th, 2017.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.