Feisal Naqvi

The Reko Diq fiasco

In Uncategorized on December 21, 2010 at 4:25 am

The interesting thing about the internet is that it is as great a force-multiplier for ignorance as for knowledge. Take, for example, the Reko Diq project. The average Pakistani newsreader is convinced that (a) the Federal Government is an evil stooge of western interests; (b) the people of Balochistan are being ripped off yet again; and, (c) it is now up to the Supreme Court to save us. All three beliefs are completely wrong.

Here are some facts about the Reko Diq project.

In 1993, the Government of Balochistan (GoB) signed a joint venture agreement with an international mining company (BHP Billiton of Australia) to set up a new company for exploration purposes. BHP Billiton got 75% of the new company (called Tethyan Copper Company (TCC)) while the GoB got 25%. Note, the GoB paid nothing – zip, zilch, zero – for its 25% share of TCC. Note also that normally the GoB does not get any equity stake when it dishes out exploration license (which is the normal case worldwide when it comes to mining agreements).

In 2000, BHP Billiton sold out its 75% share of TCC in equal proportions to Barrick Gold (a Canadian company) and Antofagasta PLC (a Chilean company). Between 2000 and 2010, the new investors invested US$ 220 million in exploring their licensed area. Note again that the GoB contributed precisely zero dollars.

In August 2010, TCC submitted a feasibility report in which it estimated the value of the find at US$ 260 billion, with production commencing in 2015 after a further investment of US$ 3.3 billion. The feasibility report also argues that if provincial and federal taxes are taken into account, international investors will actually receive less than 50% of all profits with the GoB and the GoP taking the rest.

Not surprisingly, the hard estimates of the value of the mine have set off a mad scramble. The current position of the GoB is apparently that its agreement re TCC stands cancelled and that it will develop the find itself. On the other hand, TCC claims that it has not yet received a cancelation notice and that it remains committed to its joint venture agreement.

To return to the three issues I noted in the beginning, the first point to note is that the Federal Government is not involved at all in this case. The original 1993 agreement was signed by the GoB, not the Federal Government. Similarly, it is the GoB, not the Federal Government, which is a 25% equity holder in the project. Finally, the fate of the project lies in the hands of GoB and nobody else’s. More specifically, the issue now is whether or not the GoB grants a mining license to TCC (as applied for) or whether the GoB decides to reject the application. The Federal Government has no legal role to play in that decision whatsoever.

Second, the deal is not a rip-off, at least not by any obvious standard. The investors have put in US$ 220 million but will get less than half the profits. Had the exploration failed, they would have received nothing. For the GoB to claim that it should receive a larger share on equitable grounds is simply rubbish. In fact, the deal represents exceptionally good value for the GoB.

The sceptics argue that irrespective of the merits of the original deal, the GoB can evidently get a better deal now. Why should it give away 75% or 50% of a multi-billion dollar resource when it can keep everything?

Well, the answer is the GoB has no option. It does not have the capacity to develop the mine itself. Even if it did, it also does not have the US$ 3 billion plus it would take to successfully develop the mine. The only way the GoB can develop the mine is through a joint venture with a mining company; i.e., replace the current investors with a different bunch. However, it does not seem as if investors are lined up to work with GoB. The only reported interest so far seems to have come from a Chinese company which has offered the GoB an additional 5% royalty on top of a 25% equity stake. That additional 5% royalty hardly seems worth the hassle.

Assume, however, that there is a plethora of suitors out there and that it is possible for the GoB to get a bigger share of the Reko Diq pie. Even if that is true, bringing in fresh investors would still be a disaster for the GoB.

It would be a disaster first because it would destroy the GoB’s credibility. International investors are not idiots and they do not invest upwards of US$ 200 million without a cast-iron guarantee that they will get to reap the benefits of their investment. If the GoB takes over Reko Diq, it can pretty much forget about any international investment in Balochistan’ s mineral wealth, at least for the foreseeable future.

Second, the GoB needs to understand that the legality of its takeover will be decided not by friendly Pakistani courts but by international tribunals. My understanding is that the 1993 agreement contains an international arbitration agreement but, even if it does not, the international investors have access to the International Centre for the Settlement of Investment Disputes (ICSID) under the terms of a 1998 bilateral investment treaty with Australia (TCC’s parent company is Australian). Either way, if the GoB stiffs the international investors it will face a judgment in which it has to pay back not just the amounts invested (i.e., US$ 220m) but also the investor’s share of future profits (US$ 130b).

What then is the role of the Supreme Court in all this? To my knowledge, there are three cases pending before the court. The first is an appeal from a 2007 decision of the Balochistan High Court which upheld the validity of the 1993 agreement. The other two are constitutional petitions arising out of the Supreme Court’s original jurisdiction in which ostensibly well-meaning lawyer/activists have turned a news story (Shaheen Sehbai’s article in The News dated 25.8.2010) into a legal document through the simple addition of paragraph numbers.

So far as the merits of the appeal are concerned, I have nothing to say because the issue is sub judice. However, so far as the two constitutional petitions are concerned, what I will say is that they have been drafted on the assumption that it is the job of the Supreme Court to rewrite business deals in order to ‘protect the interests of Pakistan’. So far as my legal knowledge goes, this is completely wrong. It is not the job of the Supreme Court – or indeed of any court – to direct the revision of business terms. Instead, what courts do (or are supposed to do) is to examine the process by which government agreements are reached. Courts cannot – or rather, should not – examine the substantive fairness of government agreements. Simply put, that is none of their business.

This column appeared first in Pakistan Today on 21 Dec. 2010.

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