After seven years of trial in the Reko Diq case, the World Bank’s investment tribunal has awarded damages to the aggrieved party, Tethyan Copper Company (TCC). Pakistan, which had in 2017 failed to establish its case on why the company was denied the mining lease in 2011, has a $6 billion penalty to pay.
It may be recalled here that the case started in September 2009, when the Pakistan government and Tethyan Copper Company (TCC), a Canadian and Chilean joint venture, got into a row over the multibillion-dollar Reko Diq copper and gold mining project. The controversy started after TCC got a certification of proven copper and gold reserves at the project site from an international firm and was poised to kick off commercial mining. Following the finding that the Reko Diq project area, located in Chagai district of Balochistan, had vast deposits of copper and gold, several players showed interest in getting a slice of the pie, complicating the issue.
The Reko Diq area falls in the same belt that starts from Turkey and Iran and then enters Pakistan. TCC had got a licence for exploring copper and gold over some area of the belt. In a feasibility report submitted to the Balochistan government, it had projected that the Reko Diq project would have a turnover of over $60 billion over a period of 56 years. The projection was based on a price of $2.2 per pound of copper and $925 per ounce of gold in the year 2009. The price could vary with the rate of gold, which has now jumped to around $1,280.2 per ounce in the international market.
The mine has an estimated reserve of 11.65 million tons of copper and 21.18 million ounces of gold. Reko Diq had also attracted the Metallurgical Corporation of China (MCC), which was already working on the Saindak gold and copper mining project in Balochistan. The Chinese company entered the race to get the Reko Diq contract, but did not succeed.
Subsequently, the controversy deepened and the case landed in the International Court of Arbitration. The judgment of the tribunal was not unexpected. It may be recalled here that in March 2017, the presiding tribunal determined that Pakistan had violated several clauses of its bilateral investment treaty with Australia by denying a mining lease to the consortium that had conducted the exploratory work in the area. The company had invested five years and a reported $220m before submitting a feasibility study and an expression of interest to commence mining operations back in 2011. But the company was denied a mining lease after it had made the investment to discover the resource and prepared a commercial feasibility study of its extraction.
In 2007 the Balochistan High Court heard a case involving allegations of wrongdoing. The high court upheld the grant to the Tethyan Copper Company. But, in 2013, the Supreme Court struck down the lease. The International Arbitration Court began hearing the case in 2012, when the Balochistan government denied the TCC’s application to convert its exploration licence into a mining licence. The TCC claimed it was its right as per the agreement under which the exploration work was carried out. Even at this point, an out-of-court settlement would have been possible, and the deal could have been rescued because it lay within the executive’s domain.
It may be pointed out here that in its judgment, the Supreme Court had cited examples from other international tribunals which found that “where an investment results from the commission of crimes such as fraud or bribery, the tribunal possesses both the ability and the obligation to prevent the investor from benefiting from the rights under the relevant bilateral investment treaty”. However, what has happened in the present case is that fraud and bribery had been alleged but not proven.
The challenge now is to deal with the fallout from a $5.9bn penalty imposed by the international court. As things stand, experts are of the opinion that Pakistan is in no position to challenge the ruling but can petition against the amount awarded. That will give the country at least one year before the award is implemented. In the given circumstances, a reasonable way out for both parties would be to strike a compromise deal. In the meanwhile, the TCC has come out publicly in favor of reaching a bargain, and the federal government has also welcomed the company’s willingness to negotiate.
The government should spare no effort to reach an amicable settlement in order to send a positive message to international investors. Learning from the Reko Diq case, the authorities concerned in Pakistan should undertake a comprehensive review of Pakistan’s policy and institutional landscape for mineral development and remove the anomalies in order to address the concerns of prospective international investors.