Cost of bilateral investment treaties
Recent news that the British Virgin Islands High Court released frozen assets of Pakistan International Airlines (PIA) in the Reko Diq case has come as a big relief for the airline and the country.
But claims that it is a historic legal victory for Pakistan are far-fetched. As yet, there is no change to the original damages of $5.8 billion awarded by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) tribunal, which is currently under review by the same tribunal.
In the meantime, the government should do its best to find a negotiated settlement rather than drag it for further complications.
In the other recent arbitration case where the London Court of International Arbitration (LCIA) penalised the National Accountability Bureau (NAB) for $21.6 million plus interest for breaching its contract with Broadsheet LLC, Pakistan has already ended up paying most of this demand.
The sketchy report by the Commission of Inquiry, led by Justice Azmat Saeed, did not highlight the full facts. Still, it clarifies that NAB had poorly negotiated the agreement and there was little oversight by the relevant government agencies and ministries.
In the recent past, Pakistan has had to face 14 disputes before various international tribunals, even though there is little investment coming into the country (the total stock of FDI until 2019 was only $34.8 billion).
This affects our reputation for breaching contractual commitments and costs big amounts in legal fees.
Compare this with China, which is the world’s second-largest FDI recipient with an FDI stock of $1,769 billion, but has had only seven investment disputes so far and was able to resolve three of those without ever paying any penalties while the remaining four are pending.
Primary reasons for litigation against us are that whenever the government changes, the incoming one does not feel bound to follow the commitments made by its predecessor.
Then there are poorly negotiated agreements. The key players who signed the deal with Broadsheet claim that they did not intend to grant such extensive legal rights and did not foresee the implications.
Furthermore, there is no effective and independent dispute resolution mechanism. Our courts have little expertise in ruling on economic issues.
On average, it takes them over 10 years to resolve a commercial dispute, and often the foreign investor feels that the decisions are biased.
Currently, we have over 50 Bilateral Investment Treaties (BITs). Even when there is no bilateral investment treaty, the multinationals can exploit other loopholes or what is known as “treaty-shopping” as they did in the Reko Diq dispute.
Lead investors, Antofagasta of Chile and Barrick Gold of Canada, incorporated an Australian subsidiary and used it as a corporate vehicle since Pakistan has a bilateral investment treaty with Australia.
In any event, the number of investment disputes has recently been rising rapidly.
Some developing countries, realising this problem and their inability to fight legal battles against multinationals, are trying to terminate or renegotiate their investment treaties to limit their scope.
When the Paris-based tribunal of the International Chamber of Commerce found India in contravention of a mining contract and awarded damages of 4 million Australian dollars to White Industries (an Australian joint venture), India started reviewing its investment treaties.
It developed a draft model of BIT in 2015 for negotiating new ones. At the same time, it took steps to reform and expedite domestic resolution of commercial disputes.
Indonesia and South Africa are taking similar measures for their BITs. Even developed countries are reducing their BITs to reduce possible litigation. For example, the EU states terminated about 300 intra-EU BITs.
Since Pakistan is already facing problems in attracting any new investment, it may not be in a position to terminate its bilateral treaties en bloc. Therefore, the only option is to review and renegotiate the scope of existing treaties and enter into any new negotiations with utmost care.
In this connection, the recently launched Toolkit of the Asian Development Bank (ADB) can be of considerable assistance. This database compares 1,200 investment treaties and 200 free trade agreement (FTAs) or over 2,000 provisions.
This instrument provides a wealth of information and many possible applications. This can be used to benchmark our existing treaties and frame a model treaty for the future. It would be advisable to set up a technical group of experts who can familiarise themselves with the Toolkit. Once we know the weaknesses of our existing treaties, we would be better positioned to approach our bilateral partners to negotiate a better deal.
Time is of the essence. We need to ensure that utmost care is taken to resolve any investment dispute at the local level and have a mechanism in place to not end up in the same situation as we are currently facing.
The writer has served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations
Published in The Express Tribune, June 14th, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.