On July 12 2019, the International Center for Settlement of Investment Disputes (ICSID), a subsidiary of the World Bank, announced a penalty of $6 Billion to be paid by Pakistan following the events of the Reko Diq case. This is not only alarming because Pakistan is going to be pressured into applying for more loans to keep up with the payments of the penalty, but this award is also deeply reflective of graver long standing issues in Pakistan in terms of planned economic reforms and strategic lawfare.
What Happened in Reko Diq?
Located in the remote areas of Balochistan, Siah Rek and Humai (the initial site of the Reko Diq Project) were known to have huge deposits of gold with a possibility of other mineral deposits to be found as well. In essence, it was the ideal location for a foreign company to come and invest in a developing country and use their mining and extraction expertise to reap millions. The Reko Diq Gold and Copper Mining Project came into existence in July 1993 when the Chagai Hills Exploration Joint Venture Agreement (CHEJVA) was signed between the Balochistan Development Authority (BDA) and BHP Minerals which was incorporated in Delaware, USA.
As per the terms of the agreement, the parties aimed to initially apply for ten prospecting licenses and gain exclusive rights to the exploration activities being carried out in the area with the intention of also attaining mining licenses in the long run. As outlined in article 5 of CHEJVA, the BDA was entrusted with the responsibility of applying for all required licenses and managing all approvals and administrative support as required by the provincial Balochistan government. Additionally, the percentage interest in the Joint Venture was 75% and 25% for BHP and BDA respectively, with the investment being made proportional to these percentages as elaborated on in Article 3 of the Joint Venture Agreement.
In 2007, the TCC were fully set to start mining operations in Reko Diq area because of which they submitted a heavily one sided draft agreement to the GOB
Subsequently, through extremely effective lobbying and capitalizing on the lack of technical and legal knowledge among the officials of the Balochistan government, BHP successfully managed to get the provincial government of Balochistan to relax 13 provisions from the Balochistan Mineral Concession Rules of 1970 (BMR 1970). This was vital as it mandated minimal regulation on BHP and even drastically affected royalty payments to be paid to the government. Thus, BHP soon found itself in an unprecedented position of freedom that no foreign company had ever enjoyed before.
Despite being in such a favorable position and establishing an absolute monopoly over the mineral exploration projects in Balochistan, BHP did not stop here and pushed for even more changes that would facilitate their long term plans including getting a mining license. Firstly, BDA was replaced by the Balochistan Government as a signatory of CHEJVA perhaps to further increase access to government approvals and bypass regulations. Secondly, BHP attained the right to now involve other parties into CHEJVA and the Reko Diq mining project through partnerships and alliances. Both these changes combined turned out to be extremely pivotal in the Reko Diq case as this was the path used by Tethyan Copper Company (TCC) to enter the picture and later gain control of all mining related activities in Balochistan.
Under the Novation Agreement of 2006, BHP was fully replaced by TCC in CHEJVA and now the shareholding in CHEJVA stood at 75% and 25% for TCC and the Government of Balochistan respectively. It is also important to note that TCC had been incorporated in Australia and had been created by Mincor Resources; however, its shares were then fully bought by Antofagasta (a Chilean company) and Barrick Gold (a Canadian company).
Ever since its initial involvement, the management of TCC adamantly continued the approach of political lobbying and influenced the Government of Balochistan to relax regulations and provisions in addition to the ones that had already been relaxed in the BMR 1970. Thus, the Balochistan Government soon announced Balochistan Mineral Concession Rules 2000. The legal firm advising the Government of Balochistan while drafting these rules also boasted TCC as one of its clients which evidently explains why these rules were heavily biased towards TCC. For instance, TCC had its exploration licences renewed despite failing to submit required feasibility reports as had been mandated previously.
In 2007, the TCC were fully set to start mining operations in Reko Diq area because of which they submitted a heavily one sided draft agreement to the GOB. More importantly, they aggressively lobbied local politicians in order to get their agreement passed as soon as possible and without any amendments. However, in 2008 when Nawab Aslam Raisani took charge as the Chief Minister of Balochistan, it took him no time to identify the unusual nature of the draft agreement that had been submitted and he also took immediate notice of TCC’s lobbying which would have had severe repercussions on the future of Balochistan and its minerals. Thus, Nawab Aslam Raisani took an unprecedented measure by unilaterally revoking CHEJVA in December 2009; a decision that was soon overturned.
In terms of the legal and judicial system of Pakistan, the Balochistan High Court was first called into action in 2006 when Maulana Abdul Haq challenged the legality of CHEJVA and asked the court to revoke it. However, the court found no intention of wrongdoing in CHEJVA and deemed it legal. Following this, Maulana Abdul Haq along with his fellow petitioners challenged the verdict in the Supreme Court, hoping that the decision of the Balochistan High Court would be overturned.
In fact, additional petitions advocating the illegality of CHEJVA were submitted to the Supreme Court in 2009 and 2011. Soon, Justice Iftikhar Chaudhry, the then Chief Justice of Pakistan, issued an order that the Supreme Court did not have any legal authority to investigate into the feasibility report presented by the TCC, nor did it have the right to decide the fate of CHEJVA as these powers rested exclusively with the Government of Balochistan as outlined in the 2002 rules. Thus, the Supreme Court put their trust in the GOB and expected the GOB to adequately inquire into the feasibility report and grant or reject TCC’s application for a mining lease as deemed fit after their inquiry.
In recent years, the image of Pakistan has taken a number of hits in the international community; be it in terms of security threats or incompetency of law enforcing agencies
In 2011, the Balochistan Government rejected TCC’s request for its exploration license to be turned into a mining lease; thus, the Supreme Court was called into action once again to decide the legality of the entire situation and review the decision that had been made by the GOB. An extensive legal battle thus ensued at the end of which in 2013 the Supreme Court announced a ruling that was far more drastic and actionable than its previous order.
The ruling declared that the provincial government’s refusal to grant a mining lease was justified on the grounds that there was no provision in the agreement that gave an actual guarantee to TCC that its exploration license would be converted to a mining lease. Additionally, the ruling explained that CHEJVA itself was not binding and was void as the substitution of BDA with GOB was illegal and was not permissible by law in the first place. Thus, the TCC lost all its rights and could not proceed with mining operations as it had planned.
In the midst of this legal battle, in 2012 TCC approached the ICSID in hopes of getting the dispute settled and proving the legitimacy of their claims and how they had been wronged by the Pakistani legal system. Their argument was premised around Pakistan’s 1998 Bilateral Investment Treaty with Australia (where TCC was incorporated) and how this agreement ensured that companies like TCC would be properly catered to without any complications; something that TCC felt had not been adequately upheld in their scenario. Despite the Supreme Court ruling in 2013, this past July, ICSID has found the Pakistani Government to be guilty and has announced an award requiring the Pakistani government to pay $6 Billion.
There are a number of key takeaways to be taken from the Reko Diq case and the unfortunate fate that Pakistan met at the end of it. This entire case embodies the lack of class of technocrats in the Pakistani Government. In the status quo, developing countries currently need to be wary of economic neo-colonization in terms of how foreign investment can forge unfair agreements and exploit the weak legal structures and lack of technical knowledge in countries like Pakistan.
Political lobbying and corruption is something that has plagued Pakistan for decades; however, this is increasingly relevant for Pakistan given that the country is moving towards inviting foreign investment because of which Pakistan needs to be extra cautious and make sure that it learns from its mistakes in the Reko Diq case. Thus, the Pakistani Government needs to employ a class of qualified technocrats that can assist the government in formulating economic agreements with other countries and supplementing them with legal frameworks that will ensure the protection of the interest of Pakistan and its people.
Additionally, the Reko Diq case is also vital for Pakistan as it has raised a question mark on the Pakistani Judicial System in the international community. ICSID siding with TCC after the Supreme Court had failed to fulfil TCC’s demands shows that Pakistan also needs to rethink the involvement of the Supreme Court in matters of foreign investment; specifically those that fall under the ambit of provincial governments and provincial courts. In recent years, the image of Pakistan has taken a number of hits in the international community; be it in terms of security threats or incompetency of law enforcing agencies. The repercussions of this are not only limited to penalties like the one Pakistan is required to pay in the Reko Diq case; in fact, what is more alarming is how investor confidence is severely damaged because of these instances which can be devastating for Pakistan in the long run.
In order to restore Pakistan’s image in the international community and forge foreign partnerships to catalyze Pakistan’s economic growth, the country now needs to integrate strategic thinking into its legal structures so that Pakistan can efficiently use lawfare in the international community for its own welfare and the prosperity of its people.
Syed Abdullah Ali is an undergraduate student at the Wharton Business School of the University of Pennsylvania with a keen interest in international law. He can be reached at: firstname.lastname@example.org. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.