A $5.8bn fine: questions for Pakistan’s massive mining dispute

The World Bank has levied a massive $5.8bn fine against Pakistan for refusing to award a mining licence to an Australian-Chilean joint venture. While the case is ongoing, JP Casey finds out how international actors and the vast sums of money involved could set a precedent for legal disputes in international mining.

While Pakistan is not among the world’s largest mining countries, the government is eager to expand its minerals sector and take advantage of its strong natural resources. Pakistan is home to 92 different minerals and boasts the world’s second-largest salt mines, second-greatest coal reserves, and fifth-largest stores of copper and gold. Yet with the mining sector responsible for just 3% of the country’s GDP according to government figures, there is still considerable work to be done to realise this potential.

Against this backdrop of prospective development, Pakistan has been rocked by an international legal dispute. The state government of Balochistan has refused to grant a mining licence to the Tethyan Copper Corporation, a joint venture of Australia’s Barrick Gold and Chile’s Antofagasta, despite granting an initial exploration licence, and the company has taken the state to court over what it considers to be a breach of trust.

Initially, the World Bank’s International Center for Settlement of Investment Disputes (ICSID) ruled in favour of Tethyan, and ordered Pakistan to pay a fine of $5.8bn to compensate the company for its spending on exploration work, and potential losses from not developing the mine.

The figure is astonishing in size, equal to 2% of Pakistan’s total GDP, and could impede its ability to both develop its mineral reserves in the short term, and its broader economy in the long term. With the fine suspended as investigations continue, the case could set a precedent for future disputes in international mining.

What is the issue?

The dispute traces its origins back to 2006, when the Balochistan Government awarded an exploration licence to Tethyan to search for copper and gold deposits in Pakistan’s south-western province. With considerable reserves of other commodities, such as nearly 30 million tonnes of iron ore, the company was eager to explore for other minerals, and the state seemed supportive of foreign investment in the sector.

The company uncovered 5.9 billion tons of ore at the Reko Diq deposit.

Over the next five years, the company uncovered 5.9 billion tons of ore at the Reko Diq deposit, 2.2 billion tons of which are economically mineable, which would enable the firm to extract 200,000 tons of copper and 250,000 ounces of gold a year. Tethyan invested $220m into the project, as it expected its exploration licence to be upgraded into a full-scale mining licence, and the Balochistan Government gave no indication that it would not continue to support the project.

However, in November 2011, the state rejected the company’s application for a mining licence. This angered Tethyan as the state had, according to legal documents presented to the US district court of Columbia, “created the legitimate expectation that [Tethyan] would be entitled to convert its exploration license into a mining lease, subject only to compliance with routine government requirements”.

Why did Pakistan cancel the license?

On one level, Pakistan claims that Tethyan acted in bad faith regarding the project. In an interview published in Pakistan newspaper The Express Tribune, Nawab Aslam Raisani, then chief minister of Balochistan, claimed that the state wanted to operate the mine itself so as to ensure the mine would be operated “in people’s interest”.

He went on to say that Tethyan had sold its shares without consulting the state government, suggesting the breakdown of an unspoken bond of trust between the two parties.

Furthermore, there is a compelling argument to be made that, as several years passed between Tethyan’s initial application for an exploration permit and eventual application for a mining licence, the government is within its rights to change policies as political and economic contexts shift.

For instance, a 2008 report from the World Bank found that while Balochistan displayed the weakest long-term growth of any Pakistani state, with the economy growing just 2.7 times between 1972 and 2004 compared to 4.0 times in Punjab, it also had significant potential for economic development if sustained investment could be used to create jobs and profitable enterprises.

While Balochistan displayed the weakest long-term growth of any Pakistani state, it also had significant potential for economic development

The report also noted that “Pakistan's five-year economic recovery has improved Balochistan's growth prospects”. It is entirely possible that the state government would want to see the benefits of a potential mine siphoned directly into state projects, rather than into a foreign company, a move which could sour relations between Balochistan and Tethyan, but would not necessarily be illegal.

This dispute also exists in a wider context of growing resource nationalism, a phenomenon where a country’s natural resources are exploited and traded with the specific goal of strengthening existing diplomatic ties, or diplomatic tensions, on the world stage.

The most obvious example is the US’s recent interest in mining rare earth minerals in North America to reduce reliance on Chinese imports with Australia already a major mining centre, Pakistan may be uneasy to help contribute to Australia’s growing mineral dominance. 

In a 2018 document, Pakistan set out a number of policies to improve the output and financial viability of its mining sector, aiming to improve regulatory framework, financial backing, and technological innovation over the next five years. The ownership of a key resource in Balochistan by a foreign company runs counter to this project.

Why is the World Bank involved?

While the presence of an international organisation in a dispute between a country and a joint venture company may appear unusual, the World Bank has every right to be involved in the dispute. As Tethyan is an Australian company, its work is protected by a treaty signed between Australia and Pakistan intended to encourage investment from one country into another.

A clause of the treaty allows any party to appeal to the World Bank’s ICSID if they are unable to reach an agreement with a party from the opposite country, a clause which Tethyan has taken advantage of to bring this case to the international stage.

In response, ICSID formed a tribunal to reach a verdict, led by German arbitrator Dr Klaus Sachs, a veteran of fifteen ICSID cases who was jointly approved by both Balochistan and Tethyan.

In November 2017, the tribunal announced its judgement, which included three key decisions: that Pakistan had violated articles of the Australia-Pakistan treaty in its conduct by not awarding Tethyan a mining licence, expropriating the value of Tethyan’s investment, and impairing Tethyan’s use of its investment.

What is the penalty?

The tribunal concluded that Tethyan would be compensated for “all damages and losses” resulting from Pakistan’s conduct, figures which were finalised in July 2019. The state would have to pay $4bn in compensation to the company, rising to the eventual figure of $5.8bn when considering additions amounting to the US Prime Rate plus 1%, alongside $2.5bn for the costs of arbitration, and $59.4bn for the company’s legal fees and what the tribunal called “other expenses”.

The tribunal concluded that Tethyan would be compensated for “all damages and losses” resulting from Pakistan’s conduct.

This figure also aligns with the $6bn given to Pakistan in 2019 by the International Monetary Fund to aid with its own economic reform plans. Should the fine be enforced, Pakistan will not only lose out on a considerable portion of its total GDP, but also on the funds it had set aside to help its economy develop in the long term.

There is certainly a precedent for such a verdict considering other ICSID cases. In 2017, the court ruled in favour of Canadian miner Bear Creek Mining, which had a licence revoked in Peru following local protests against the mine.

The case has a number of parallels to the Pakistan case, such as the attempts of a foreign mining company to begin operations in a country with a less lucrative domestic mining industry. The ultimate verdict, that Peru was in the wrong and would have to pay compensation to Bear Creek, is also broadly in line with the verdict for the Pakistan case.

What happens next?

Pakistan has protested against the fine, not least due to its incredible scale. For comparison, in the Bear Creek case, Peru was only ordered to pay $30.4m to the company. Even this was just a fraction of then $522m initially claimed by the miner, and Pakistan objects to the vastly different sums of money involved in the two somewhat comparable cases.

In response to Balochistan’s complaints, ICSID has formed a secondary tribunal, led by Korean lawyer Professor Joongi Kim and featuring none of the arbitrators involved in the initial decision, to assess whether Pakistan’s complaints are legitimate.

Yet beyond these legal decisions, there is a socio-political element to this debate. Those opposed to the World Bank ruling claim that the case is a perfect example of wealthy companies, based in developed
countries, trying to exploit natural resources in developing countries.

The dispute is a new form of exploitation of under-developed countries by foreign investors.

Chief among the dissenters is Farooq Tariq, general secretary of the Pakistan Kissan Rabita Committee, a network of peasant organisations in Pakistan, who wrote in an article for Global Justice that the dispute is “a new form of exploitation of under-developed countries by these foreign investors where corruption is a way of life and lobbying to force the government to sign unjust contracts through retired military officers is done as routine”.

He went on to dismiss the ICSID as a “World Bank institution acting against developing countries”, suggesting that the court exists to add legal justification to this unfair and exploitative power dynamic.

Ultimately, the case is unlikely to be resolved soon, with the latest development being a decision announced on 17 September by the second tribunal that ICSID will suspend the enforcement of the fine as investigations continue. While this suspension is a small victory for Pakistan and its domestic mining industry, the case still looms large as a precedent for future international mining agreements, and the results are far from certain.