Multi-billion dollar fine on Pakistan puts the spotlight on a secret court

Last month, the International Centre for Settlement of Investment Disputes (ICSID), a global quasi-court, slapped more than a $5 billion fine on Pakistan in an arbitration case involving a gold and copper mine. 

But the ICSID, which is part of the World Bank Group, didn’t initially announce its decision. There was nothing on its website. Except for perhaps the lawyers involved in the case, hardly anyone had seen the judgement*. 

Instead, the news of the award came through Antofagasta and Barrick Gold, the two multinational mining companies seeking compensation, which is one of the largest ever awarded by the ICSID.

ICSID is part of what is known as the Investor State Dispute Settlement (ISDS) mechanism, which was formed to address the grievances of foreign investors. 

The controversial system allows multinational companies to sue countries - but the countries can’t sue the companies. 

In recent years, ISDS tribunals, such as the ones at the ICSID, have faced increasing scrutiny. The secret nature of the proceedings, the hefty legal fees, the impartiality of lawyers, and how compensation awards are decided have all come into question.

Pakistan’s case has generated an unusual buzz among people who follow such legal issues as the award is sure to hurt a country reeling from an economic crisis — its currency has lost more than a third of its value, the stock market is one of the worst-performing in the world and GDP growth has tapered off. 

ICSID’s award is almost as much as the $6 billion bailout loan that Prime Minister Imran Khan’s government will receive from the IMF over the next three years. 

“It is extremely rare to see awards of this size even though it has happened in a few cases,” says Dr Lauge Poulsen, an associate professor in international political economy at University College London. 

Poulsen wrote a book that looks into the impact of ICSID decisions on developing countries, including Pakistan (the book cites a previous case). 

The fine has left experts wondering if the three-men tribunal considered Pakistan’s economic woes or if Islamabad’s lawyers, including Cherie Blair, wife of former British Prime Minister Tony Blair, brought up the possibility that paying such an award could cripple the country. 

For Islamabad, which is struggling to pay off its foreign debt, the mine at the centre of the dispute has become a mirage — Pakistan saw riches and a path to prosperity, but when it got closer, it disappeared and became a liability. Many are wondering how it all came to this. 

Mountain of Gold 

In 1993, Australian mining giant BHP (formerly BHP Billiton) began exploring gold and copper prospects in Balochistan, Pakistan’s insurgency-hit province that borders Iran and Afghanistan. 

The Reko Diq mine is located in the Chagai district where Pakistan carried out its nuclear tests two decades ago. The area is a desert overlooked by an imposing peak called Koh e Dalil (which translates to 'the Mountain of Evidence'). 

When exploration teams landed there for the first time, there were no roads, no water and no electricity. People in nearby villages lived in tents made of goat and sheepskin. The dust storms were blinding. 

“There is no doubt the mining company invested in the project. They built an entire airfield and there used to be daily flights bringing in engineers and supplies,” says Sardar Shaukat Popalzai, head of a Balochistan-based think tank. 

The mine, which is part of the geological Tethyan belt, is considered one of the richest in the world. 

BHP drilled dozens of holes, dug out samples and concluded that the mine could produce substantial quantities of minerals at a profit. 

In 2006, the ownership of the project passed on to a consortium of Chile’s Antofagasta and Canada-based Barrick Gold, the world’s largest miner of the precious metal. 

They began work on the mine under a subsidiary called Tethyan Copper Company (TCC). 

But in 2011, the Balochistan government refused to permit the mining companies to start digging for the minerals, saying it was not getting a good deal.

Aslam Raisani, the then chief minister of the province, says he wanted the companies to smelt the metals in the country instead of exporting the concentrate. 

"In the first meeting I had with them they brought a proposal to build a long pipeline to transport the slurry and export it. I couldn’t allow that. The mining rules didn’t allow export of the concentrate,” Raisani told TRT World. 

“Then they came again a short time later with the same proposal. I said no, I won’t let this happen.”

On their part, the investors feel they have sufficiently compensated Balochistan, which has a share of 25 percent in the expected profit from the mine. 

Raisani is not alone in insisting that the mineral ore be processed within the country. Pakistan doesn’t have labs to adequately test samples and confidently estimate the quantity of minerals that can be extracted from the ore. 

In recent years, mineral exporting states such as Tanzania and Zambia have taken multinational companies to court in similar situations. 

They say mining firms siphon off profit through a web of offshore subsidiaries that bloat up the cost of mining operations - a practice known as transfer pricing.

A bilateral conundrum 

Failing to get a mining permit, Antofagasta and Barrick took Pakistan to international arbitration at the ICSID in late 2011.

The ICSID Convention was adopted on October 14 1966, to appease rich countries concerned with their investments in developing nations. Pakistan signed the convention two days later, among a handful of countries to do so that year. 

But the convention didn’t guarantee that a country where an investment is being made will necessarily allow an ICSID tribunal to arbitrate in case of a dispute. 

This gap was inadvertently filled by what is known as Bilateral Investment Treaty (BIT) agreements that governments sign to promote private investment from other countries, Andreas F. Lowenfeld, who helped draft the convention, said in a 2007 speech. 

“[The] developed world was worried about protecting their corporations. There was a lack of trust about local governments, courts and about being getting treated fairly,” says Dr Kyla Tienhaara, a Canadian academic, who was among the first to express concern about ICSID’s decision in Reko Diq case. 

“So the West wanted to protect their firms going abroad, and they came up with bilateral investment treaties.” 

And here again, Pakistan took the lead when it signed the world’s first BIT with West Germany in 1959. 

For more than three decades, ICSID was almost dormant with only a handful of investors reaching out to seek arbitration. That began to change in the early 2000s and ever since there has been a steady rise in arbitration requests. 

Experts say that’s primarily because creative lawyers saw a loophole in the BITs, which allowed companies to threaten and sue governments. More than 60 percent of the arbitrations heard by ICSID tribunals stem from BITs. 

The Reko Diq case in Pakistan has been decided under the BIT that the country signed with Australia in 1998. 

“This is a textbook case. We have companies, which are from Chile and Canada but they have a subsidiary office in a third country - because Australia has this investment treaty with Pakistan,” says Nicolas Roux of Bilaterals.org that keeps tracks of trade treaties. 

It is only in recent years that governments have realised the negative impact of such deals and a few countries like South Africa and Indonesia have started to cancel them. 

Pakistan has more than 60 BITs with different countries - one of the largest portfolios held by a developing country. Many of them were signed by officials who had no idea what they were doing. 

“Even government records admit that the Pakistani government did not fully appreciate the nature of the obligations they were undertaking,” says Poulsen of University College London.

“In many cases, Pakistani officials in the past looked at the BITs mainly as a photo opportunity; something for the press, a kind of a diplomatic token of goodwill.” 

Pakistan’s former Attorney General Makhdoom Ali Khan has on record said that he had to Google what BIT and ICSID were when the country was first hit by an arbitration case in 2001 by Swiss firm SGS.

Voodoo finance

Antofagasta and Barrick had long written off their $220 million investment in the Reko Diq project. The companies no longer mention it in their financial statements. 

It remains unclear what parameters the tribunal considered to award multibillion-dollar damages based on that investment. 

“I find it so appalling. This is a ridiculous sum of money,” says Tienhaara, the Canadian academic. “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.”

In previous cases, the arbitrators have considered what an investor might have earned from a project over its life to decide the compensation. 

But Robert Howse of the New York University calls it “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 a recent interview. 

While both sides bring experts including financial consultants, the arbitrators who make the final decision, are mostly lawyers who are not well-versed in such complex financial projections. 

Back in 2011, the consortium was planning to invest $3.4 billion over a period of three years to develop the mine. It also said Pakistan would earn a revenue of $25 billion over the 56-year lifespan of the project. 

But Antofagasta and Barrick’s history, which involves allegations of corruption and manipulation of tax records, raises a lot of questions about what the companies say publicly in their published statements. 

Barrick was in a long dispute with the Tanzanian government, which accused the Canadian miner of hiding the real profits at its mines, says Jamie Kneen of the watchdog MiningWatch. 

“A big problem is how do you verify what the companies say. In Tanzania, there was a network for customs officials who were conspiring with the company to hide the quantity of gold in the concentrate.” 

The ISDS system also faces criticism for not taking up disputes that involve the concerns of local communities and the environmental degradation where these mining companies operate. 

“The irony of the whole arbitration system is that the citizens have no access to it,” says Kneen. 

Not a happy ending

Soon after the award was announced, Antofagasta said it was willing to negotiate a settlement. Pakistan responded positively - the country was left with no other option. 

Reaching a settlement is a drawn-out process. And if Pakistan fails to pay, then the companies can try to seize its international assets as is happening in the case of Venezuela. 

The consortium has already approached a US court in the District of Columbia to enforce the award.  

Khan wants to investigate the entire matter and pin responsibility on the officials who put Pakistan into a difficult, possibly crippling, situation. 

It remains unclear whether Islamabad told the tribunal that it was almost impossible for the country to pay the compensation considering its foreign exchange reserves are barely enough to pay for a few weeks of imports. 

“There’s no way but to come to some sort of settlement,” Ahmar Bilal Soofi, who was part of Pakistan’s legal team, said in brief remarks to TRT World. 

What that means financially for Pakistan is something only the lawyers can tell us.

*Editor's Note: The judgement was made public in August this year around the same time the companies filed a petition in a US court to enforce the award.