Leading economist slams World Bank’s unjust arbitration fine on Pakistan

Prominent economist Jeffrey D Sachs has added his voice to concerns that a World Bank-led arbitration process is helping multinational companies exploit developing countries while deciding commercial disputes. 

In a scathing article titled ‘How World Bank Arbitrators Mugged Pakistan’, he questioned the way in which the International Center for Settlement of Investment Disputes (ICSID) awarded multi-billion dollar compensation for a business that was still in its infancy. 

“Thanks to the World Bank’s arbitrators, the rich are making a fortune at the expense of poor countries. Multinational companies are feasting on unapproved, non-existent projects,” he said. 

Sachs, who was once in the race to head the World Bank, has joined the rising number of experts who say the ICSID has become a money-making machine for lawyers and multinational companies. 

Earlier this year, the ICSID, a secretive court that conducts proceedings away from public scrutiny, decided that Pakistan has to pay $5.9 billion to a consortium of two mining giants for cancelling a gold and copper concession. 

It’s one of the largest ICSID awards and it drew criticism because the amount far exceeds what the Tethyan Copper Company (TCC) had invested in the project. 

TCC is a subsidiary of Barrick Gold of Canada and Chile’s Antofagasta, the two main shareholders in the project. 

The Reko Diq mine, located in the troubled Balochistan province, hadn’t produced a single ounce of gold or a ton of copper as it was years away from becoming operational when it ran into legal trouble. 

Yet, the tribunal of arbitrators decided to penalise Islamabad for the loss of the income that TCC might have earned in the future if the mine had started production. 

When it came to deciding the size of the compensation, the arbitrators relied on the testimony of a TCC expert named Professor Graham A Davis of the Colorado School of Mines. 

Davis, who specialises in mineral economics, came up with a contested method to calculate what the mining companies ‘might’ have earned over the 50-year lifespan of the Reko Diq mine.   

Experts have argued that there’s no sure way to calculate the future price of a mineral and the expected profit as political uncertainty and factors such as environmental impact are hard to predict. 

Robert Howse of the New York University calls this way of ascertaining a project’s value “junk science.” 

“How do we predict how a particular business is going to do in 20 years? Do we take into account climate change? What presumptions do we make about technology and how it will change?” Howse said in an interview. 

From El Salvador to Egypt and Australia, governments have been forced to pay billions of dollars to large companies in recent years. 

ICSID was established in the 1960s as a way to protect foreign investment. But experts say that high profile lawyers and consultants now deliberately find gaps in international trade treaties to encourage arbitration cases. 

"The original idea was to protect foreign investors from bad behavior of host governments. Yet now ICSID simply protects foreign investors, full stop. The system is absurd and dangerous as implemented," Sachs told TRT World in an emailed response. 

"The system should be deeply reformed or closed."

TCC wants Pakistan to compensate $60 million towards its legal expenses.

“The ICSID is not an honest broker. One of the tribunal members in the TCC case is using the same expert put forward by TCC for another case in which the arbitrator is acting as counsel!” says Sachs. 

The decision against Pakistan came at a time when Islamabad was facing a debt crisis and has signed a loan deal with the International Monetary Fund (IMF). 

“I find it so appalling. This is a ridiculous sum of money,” Dr Kyla Tienhaara, a Canadian academic told TRT World at the time. “I don’t know how can you come up with this kind of award if you had taken into consideration the implications for the country.”

Barrick Gold and Antofagasta have approached the US District Court in Washington DC to enforce the arbitration. Pakistan’s central bank had foreign exchange reserves of little over $8 billion on November 28. 

Sachs says it’s time to make amends. 

“Fixing the broken arbitration system should start with a reversal of the outrageous ruling against Pakistan and a thorough investigation of the flawed and corrupt process that made it possible,” he says.