It was only last week that the International Monetary Fund approved a loan of US$6 billion to cash-starved Pakistan. But when the country was barely beginning to breathe a sigh of relief, it got clobbered by an arm of the World Bank that decided Pakistan had to pay $5.8 billion in compensation to settle an eight-year old dispute with an allegedly corrupt mining company.
The two decisions coming on the heels of each other speaks volumes about the whimsical and arbitrary nature of current international financial governance. Why would one international agency working to foster global monetary cooperation and development issue a loan, only to have it snatched away by another agency, which is also purportedly working to support the global economy?
The IMF loan, issued under uncompromising guidelines has meant that Pakistan had to implement strict austerity measures that proved unpopular and resulted in nationwide strikes last week. In the midst of this unrest, Pakistan was ordered to cough up $5.8 billion in compensation to the mining firm by the International Centre for the Settlement of Investment Disputes (ICSID), an organization under the World Bank.
The ICSID was established in 1966 to oversee arbitrations between foreign companies and states in a process known as the investor-state dispute settlement. These closed-door arbitrary tribunals are highly controversial for a variety of reasons, including secrecy of the hearings, the back-door political pressure to influence decisions, the huge costs associated with defending a claim, and the ability of corporations to challenge health and environmental measures in a country. For instance, recently tobacco major, Philip Morris had claimed compensation from the governments of Uruguay and Australia for imposing the sale of cigarettes with plain packaging.
The case against Pakistan dates back eight years, when a provincial government in Pakistan had to backtrack over an alleged sweetheart deal it offered to mining company Tethyan Copper — owned by Canada’s giant Barrick Gold and Chile’s Antofogasta. The mining company, in its claim before the ICSID said that it had spent $220 million on exploration activities before its license was revoked by the government.
To any arbitrator, other than ICSID, it is obvious that a fair outcome would be to order the government, if it is found to be at fault, to compensate the company concerned for its ‘sunk costs’ plus any interest on that amount. But by deciding on a compensation amount that is more than 25 times higher, the ICSID has taken a decision that runs counter to what the World Bank and the IMF professes as their creed.
So how did the ICSID come to the figure of $5.8 billion? Since the discussions were held behind closed doors it is not clear what calculations were involved, but it is fair to assume that the mining company was probably compensated for its lost ‘future profits’. But how did the ICSID determine what profits the mining company would accrue in future? For this, they apparently turned to the so-called ‘mining experts’ brought in by the two contesting parties.
The Pakistan government ‘expert’ would understandably have cited a low figure, while the mining company ‘expert’ would have quoted a much larger figure as potential future profit. Faced with two widely divergent numbers, the ICSID must have taken the middle path. In this case, the lawyer for the mining company had initially asked for $11 billion in damages and the ICSID then arrived at an ‘acceptable’ figure of $5.8 billion.
No matter how the arbitrator arrived at the compensation value, it is quite apparent the ICSID did not consider that despite writing off the Pakistan project years ago, the mining companies involved have continued to rake-in huge annual profits. The arbitrator also did not seek to learn whether the bribery and corruption allegations against the company had merit. Nor did they take into consideration that the compensation ordered amounted to nearly 84 percent of the entire $7 billion Forex reserves of Pakistan, or that it was more than 20 times the combined annual health and education budget of the country.
It appears that, perhaps unwittingly but nevertheless quite effectively, the ICSID has become a party to perpetuating poverty in Pakistan and prolonging the economic woes of the country.
Perhaps it is time for the world to rethink the ICSID model of investment dispute settlements.
