How World Bank arbitrators mugged Pakistan

how

Thanks to
the World Bank’s flawed and corrupt investment arbitration process, the rich
are making a fortune at the expense of poor countries. The latest shakedown is
a $5.9 billion award against Pakistan’s government in favor of two global
mining companies for an illegal project that was never approved or carried out.

By Jeffrey
D. Sachs

Wall Street
hedge funds and lawyers have turned an arcane procedure of international
treaties into a money machine, at the cost of the world’s poorest people. The
latest shakedown is a $5.9 billion award against Pakistan’s government in favor
of two global mining companies Antofagasta PLC of Chile and Barrick Gold
Corporation of Canada  for a project that
was never approved by Pakistan and never carried out.

The Patriot
versus the President Chip Somodevilla/Alex Wong/Getty Images In 1993, a
US-incorporated mining company, BHP, entered into a joint venture (JV) with the
Balochistan Development Authority (BDA), a public corporation in Pakistan’s
impoverished Balochistan province. The JV was set up to prospect for gold and
copper, and in the event of favorable discoveries, to seek a mining license.
BHP was not optimistic about the project’s profitability and dragged its feet
on exploration. In the early 2000s, it assigned the prospecting rights to an
Australian company, which created Tethyan Copper Company (TCC) for the project.

In 2006,
Antofagasta acquired TCC for $167 million, and sold half to Barrick Gold. Soon
after the purchase, however, the original JV agreement with BHP was challenged
in Pakistan’s courts. In 2013, the Pakistan Supreme Court found that the JV’s
terms violated Pakistan’s mining and contract laws in several ways and declared
the agreement  and thus the rights
claimed by TCC  to be null and void.

Specifically,
the Court ruled that the BDA did not have authority to bind Balochistan to the
terms of the JV agreement; that it awarded the contract without competition or
transparency; and that it had greatly exceeded its authority and violated the
law by promising extensive deviations from the rules normally applicable to
mining projects. Moreover, the JV failed to obtain, and even to pursue, many
mandatory approvals from the state and federal governments, and BHP failed to
undertake prospecting in a timely manner required under the mining law.

The Supreme
Court’s decision came after years of public-interest litigation challenging the
deal for violations of domestic law and the rights of the public. In the
meantime, the BDA’s chairman was found to have conflicts of interest and to be living
beyond the means afforded by his official salary, which in the Court’s words
was tantamount to corruption.

In a normal
world, the Court’s judgment would be respected absent proven evidence of
corruption or other wrongdoing against the justices. But in the world we
actually inhabit, the so-called international rule of law enables rich
companies to exploit poor countries with impunity and disregard their laws and
courts.

When TCC
lost its case in Pakistan’s Supreme Court, it simply turned to the World Bank’s
International Center for the Settlement of Investment Disputes (ICSID), in
complete disregard of Pakistan’s laws and institutions. A panel of three
arbitrators with no expertise in or respect for Pakistan’s legal system ruled
that TCC deserved compensation for all future profits that it allegedly would
have earned if the non-existent project, based on a voided agreement, had gone
forward!1

Because
there was no actual project, and no agreement for one, the arbitrators had no
basis to say what terms royalties, corporate taxes, environmental standards,
land area, and other basic provisions 
the governments of Balochistan and Pakistan would have set. In fact,
disagreement on many of those terms had stalled negotiations for years.

Nonetheless,
the ICSID panel arbitrarily decided that TCC would have had the right to mine
1,000 square kilometers, though the mining law forbade licensing such a vast
area. The arbitrators ruled that TCC would have received a tax holiday for 15
years, even though there is no evidence that such a tax holiday was in the
offing  or even legal. The arbitrators
decided that TCC would have benefited from a royalty rate several percentage
points below the mandatory statutory rate, though there is no reason why
Pakistan would have set such a low rate.

The
arbitrators also ruled that TCC would have met all environmental standards, or
that the government would have exempted TCC from relevant requirements, though
the mining area is in a desert region subject to extreme water stress, and the
mining project would have demanded vast amounts of water. And the arbitrators
ruled that to obtain the land needed for TCC’s pipeline, the government would
have taken it from its owners and inhabitants.

The
arbitration ruling is utterly capricious. An illegal project, declared null and
void by Pakistan’s Supreme Court and never pursued, was found by the World
Bank’s arbitration panel to be worth more than $4 billion to TCC’s owners, who
had paid $167 million for it in 2006.

Moreover,
the tribunal declared that Pakistan must compensate TCC in full, with back
interest, and cover its legal fees, raising the bill to $5.9 billion, or
roughly 2% of Pakistan’s GDP. It is more than twice Pakistan’s entire public
spending on health care for 200 million people, in a country where 7% of
children die before their fifth birthday. For many Pakistanis, the World Bank’s
arbitration ruling is a death sentence.

The ICSID
is not an honest broker. One of the tribunal members in the TCC case is using
the same expert put forward by TCC for another case in which the arbitrator is
acting as counsel! When challenged about this obvious conflict of interest, the
arbitrator refused to step down and the ICSID proceeded as if all were normal.

Thanks to
the World Bank’s arbitrators, the rich are making a fortune at the expense of
poor countries. Multinational companies are feasting on unapproved,
non-existent projects. Fixing the broken arbitration system should start with a
reversal of the outrageous ruling against Pakistan and a thorough investigation
of the flawed and corrupt process that made it possible.

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