By Lauge Skovgaard Poulsen and Damon Vis-Dunbar
16 March 2009
Pakistan inked the first ever bilateral investment treaty (BIT) with the government of West Germany 50 years ago, before going on to accumulate one of the largest portfolios of BITs held by a developing country: some 47 in total, 35 of which were signed in a flurry of activity between 1988 and 1999.
However, in recent years, the expansion of Pakistan’s investment-treaty network has slowed down substantially. The timing is no accident; the brakes were applied at the same time that Pakistan faced its first lawsuit under a BIT in 2001 by the Swiss multinational Société Générale de Surveillance (SGS) under the Switzerland-Pakistan BIT. While the SGS dispute ended in a settlement favourable to Pakistan, its effect on the Pakistani administration at the time was considerable.
Pakistan’s Attorney General during the SGS dispute, and others that followed, was Mr. Makhdoom Ali Khan. To learn more about the impact of these disputes on Pakistan’s investment-treaty program during his tenure as Attorney General, ITN spoke to Mr. Khan in Karachi.
ITN: How did you get involved with Pakistan’s BIT-program?
The Secretary of Law called me up in 2001 and asked what I knew about the International Centre for Settlement of Investment Disputes (ICSID) and this thing called a bilateral investment treaty (BIT). He informed me that Pakistan was being sued by SGS at ICSID and asked how SGS could do that. To be perfectly honest, I did not have a clue, so I had to look it up on Google. I typed in ‘ICSID’ and ‘BIT’, and that’s how I learned about these instruments for the first time.
I asked the Ministry of Industries, who were responsible for BITs at the time, how these treaties were signed. I was told that when the President, or Prime Minister, went abroad, our foreign missions would tell the Ministry that BITs are ‘one of the doables’. Since Pakistan had signed BITs without any consequences for a long time, everyone simply considered the treaties a piece of paper, something for the press, a good photo opportunity—and that was the end of it.
Now, one option was of course not to participate in the SGS proceedings and instead try to rely on our local courts to avoid enforcement of a possible award. But I advised against this option, as it would give Pakistan’s courts a bad reputation internationally. The government at the time agreed, but we knew it was going to be expensive. Recall that in 1999 and early 2000, most aid had been cut off to Pakistan due to our nuclear tests, so the case had the potential to wipe-out our entire stock of foreign reserves had it gone in the investor’s favor. Luckily for Pakistan, it didn’t.
ITN: What subsequent impact did the SGS case have?
The secretariat of the Chief Executive [former President Pervez Musharraf] issued a directive which provided that no more BITs were to be signed by Pakistan until the Attorney General’s office was consulted and all other government stakeholders were onboard. This was a first for Pakistan. Previously, I don’t think any ministry—except that in charge—even knew that the BITs had been signed, and I couldn’t find files on record demonstrating that meaningful negotiations had actually taken place. The maximum level of input to the negotiations from Pakistan appears to have been proof-reading, and at times, albeit rarely, some not very significant suggestions on the text.
Secondly, the Board of Investment BOI [the agency now in charge of BITs] and I brought in experts from abroad to speak with the government stakeholders. If someone of any note in the world of public or private international law was visiting the region, we would invite them to come and speak. This was an education process of sorts, allowing us to understand what could, and could not, be the consequences of signing BITs. This, combined with a couple of excellent officials within the BOI, meant that Pakistan’s negotiating capacity was upgraded significantly at the time.
ITN: Has this ‘education process’ succeeded?
I don’t think that is the case. While the Pakistani team involved in the long and difficult BIT-negotiations with the United States [which remain ongoing] has been relatively well-prepared and rigorous in their approach, these negotiations were special because of the political relationship between our two countries and the scope of the U.S. proposal. So despite these efforts, I’m afraid the worst is yet to come. When I resigned as Attorney General in 2007, the approach to negotiating BITs was still haphazard and piecemeal. Notwithstanding a few very learned officials within the bureaucracy, there is not a shared understanding in Pakistan that negotiating BITs requires a lot of effort and—perhaps most importantly—legal expertise. Pakistan has therefore continued to sign BITs without seriously considering the implications. This is particularly troubling as Pakistan is not able to fulfill many of the legal obligations enshrined in BITs, which makes us an easy target for expensive investor claims.
ITN: With this in mind, do you think Pakistan should stop signing BITs?
I am not against BITs as such; I’m simply against the approach Pakistan has taken in the past, which is to passively sign these treaties, with no real negotiations, or sense of the risks involved. If Pakistan is going to seriously negotiate BITs, it needs to set aside an appropriate budget, so that the bureaucracy is well staffed and informed on these matters. Unfortunately, the Government of Pakistan has never considered BITs an important enough issue for this. But look at the legal costs in the three cases against us so far; I’m sure they exceed US$10 million as a very conservative estimate. For less than a fraction of that amount you can set up a department, hire lawyers—perhaps even get some assistance from outside Pakistan—and start looking at this process properly. But I don’t think the will is there because the need is not felt. But come a day where we are faced with a similar situation as Argentina is now, this may change.
Lauge Skovgaard Poulsen is a PhD-candidate at the London School of Economics (email: [email protected]). Damon Vis-Dunbar is Editor of ITN.