Govt seeks to deposit Karkey review security fund in State Bank

Arbitrator requires $150m deposit in escrow account by June 30 to keep stay on $760m award in effect


Zafar Bhutta May 17, 2019
State bank of Pakistan. PHOTO: EXPRESS

ISLAMABAD: Pakistan has proposed that it would open an escrow account in the State Bank to deposit $150 million as a partial security payment to seek a stay in the enforcement of the award in the Karkey rental power plant case.

The International Centre for Settlement of Investment Disputes (ICSID) had imposed the payment condition on Pakistan to extend a stay on the enforcement of the multimillion-dollar award given against the government of Pakistan.

Officials said that the proposal sent to the international court for consideration requests that Pakistan may open an escrow account in the State Bank of Pakistan (SBP) rather than in foreign or local commercial banks. Officials said ICSID has set June 30 as the deadline to deposit the security amount.

Around $10 million spent on international litigation under PTI govt

ICSID had initiated court proceedings on March 23, 2018. The international court decided on a $760-million award in favour of Karkey, along with any due interest, on August 22, 2018. Following this decision, Karkey had moved US, UK and German authorities to enforce the arbitration decision against Pakistan.

Pakistan’s assets abroad also run a major risk of being frozen or seized as security to enforce the arbitration verdict, which would cause further financial complications for Pakistan.

A senior government official familiar with the issue said Pakistan had filed an application to resist the recognition and enforcement of the award. In revision proceedings against the award, the ICSID tribunal decided on the request of extension of stay on the enforcement of award provided that Pakistan deposits $150 million in an escrow account.

If the deposit is not made, the stay shall be lifted, the official said, adding that they further decided that if Pakistan does deposit the money, the stay of the enforcement of award shall be further extended until the tribunal decides on the admissibility of the revision - meaning whether or not Pakistan’s review plea is acceptable.

Earlier, it was decided in a meeting involving former finance minister Asad Umar that such an arrangement should be done in the SBP instead of a foreign or local bank. This point of view was later confirmed by Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh. Based on this, the government of Pakistan’s counsel proposed this mechanism to the ICSID tribunal on May 1.

Turkish power company Karkey Karadeniz Elektrik Uretim was one of 12 companies awarded rental power contracts. It had installed a 232-megawatt boat-based rental power plant during the Pakistan Peoples Party’s most recent tenure in the Centre. It had signed rental services agreement with Lakhra Power Generation Company Limited in April 2009 under the Rental Power Policy 2008.

Pakistan awaits major verdicts with bated breath

The government of Pakistan had issued a sovereign guarantee to secure payment obligations.

The Turkish power company began commercial operations in April 2011. But in 2012, the Supreme Court had taken suo motu notice of several rental power projects and declared illegal all agreements signed under the Rental Power Policy.

The apex court had also directed the National Accountability Bureau (NAB) to initiate a probe. The anti-corruption watchdog held investigations and restricted Karkey’s ship from leaving Pakistan.

Karkey then filed arbitration claims against Pakistan before the ICSID under the Pakistan-Turkey Bilateral Investment Treaty (BIT).

According to NAB, the ship was brought to Karachi Port in April 2011 to provide electricity to the national grid under the then government’s Rental Power Policy to overcome the energy crisis. However, it failed to generate 231 megawatts as required under the agreement, although $9 million was paid in advance as capacity charges to its management.

The plant produced only 30-55MW and that too at a cost of Rs41 per unit, which was a serious breach of the contract. This led to a 50% increase in the refund claim by the government, from $80m to $120m.

The government had formed a committee to negotiate with the Turkish firm and reach an out-of-court settlement with Karkey for the minimum penalty against the actual penalty of $760 million plus costs imposed by the ICSID.

The government had been trying for an out-of-court settlement with Karkey for minimal penalty payouts and believed that government-to-government engagement could deliver the results.

But no success had been achieved in this regard.

Published in The Express Tribune, May 17th, 2019.

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