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The Wrecking Ball

by Feisal Naqvi

A factory worker looks on at a steel mill in Islamabad on Jan. 15, 2010. Behrouz Mehri—AFP

Judging the economic legacy of Pakistan’s Supreme Court

As and when Chief Justice Iftikhar Chaudhry finally hangs up his robes of office, he will have changed the jurisprudence of Pakistan. For the most part, that change will have been for the better. The judiciary today is more independent, active, committed to democracy, and free from the taint of corruption than at any other point in its history. But all of these plaudits hide the very mixed legacy the chief justice will leave behind when it comes to economic issues.

The starting point for any analysis of the Supreme Court’s performance on matters of the economy is the 2006 Pakistan Steel Mills Corporation judgment. That judgment not only prevented the privatization of the Steel Mills but has also thwarted the sale of other public sector white elephants since. In brief, the judgment held that the Steel Mills was being sold for a song because the land on which it was sited had not been separately valued.

Unfortunately, that fundamental point was completely mistaken. In simple terms, there are two ways to value an asset. The first is to see how much that asset can be sold for if reduced to its component bits (in the case of, say, a goose, this would be the value of its meat). The second is to see how much income that asset can produce as a going concern (for example, by breeding and selling geese). These two valuation approaches are mutually exclusive. Just like a goose can be either alive or dead, an asset can either be measured using its liquidation value or its going-concern value; not both simultaneously. But this is precisely the error that the court made in the Steel Mills case.

Some people defend the Steel Mills judgment on the basis that it is not the fault of the judiciary if the executive fails to follow prescribed rules and regulations. There is a problem with this argument though. Major privatization and procurement deals normally take place over years, and there can literally be hundreds of decisions involved prior to the final transaction. It is one thing to examine that process to see if there has been a fundamental error, and quite another for every single decision to be examined microscopically by a hostile court.

Part of the problem caused by the Steel Mills judgment is that it established a vicious circle in which the Supreme Court seemed to be playing to the media by taking a hardline approach to all errors of the executive while the media responded by singing hosannas of extravagant praise to every judgment by the court. This unfortunate circle is clearly at work in the Reko Diq mines case.

BHP Billiton, the Anglo-Australian mining giant, signed a joint venture agreement with the Balochistan government—which was provided 25 percent equity in the project—to prospect for gold and copper in Chagai district’s Reko Diq in 1993. Nine years later, the multinational sold its interest in Reko Diq to the Tethyan Copper Company Pakistan—a partnership between Canada’s Barrick Gold Corporation and Chile’s Antofagasta. Tethyan says it has spent over $220 million since 2006 on exploration and technical studies, discovered commercially exploitable reserves, and estimates the initial set-up costs at $3.3 billion.

The Reko Diq case landed in the Supreme Court after a breathless November 2010 lead story by Shaheen Sehbai on the front page of The News, “$260-Billion Gold Mines Going for a Song, Behind Closed Doors.” The story quoted an unnamed American executive imploring the chief justice of Pakistan to enter the fray since Reko Diq was “just the right case” for judicial intervention, which should “put a hold on whatever is going on before any binding contracts and deals are signed, which may cause losses of billions of dollars, yes, billions of dollars to Pakistan.” This executive was only identified as a “reputed three-term Congressman.”

After the court took notice of the Reko Diq “scandal,” The News followed up with another, less coy story. This was dedicated to reproducing allegations against Tethyan by one New York-based Benway Corp., whose then-chairman was William H. Zeliff, Jr., a three-term Congressman from New Hampshire. The company’s activities appear to be limited to prospecting in Kosovo only since last year, and in Pakistan’s Reko Diq (where it has two exploration licenses) and Gilgit-Baltistan (where it has six licenses) since 2005. With palpable disdain, Benway’s website refers to Barrick Gold and Antofagasta as “mega mining companies.” (Benway has been in litigation over Reko Diq at the Balochistan High Court since 2008.)

Sehbai’s court-baiting article does not hint that there may be a scandal, it asserts that claim categorically. “The picture that emerges is one of a grand deception, loot and plunder that never happened before on such a scale, and the facts, untruths, half-truths, attempts to sabotage, frauds and backdoor bribes are all documented,” he writes about Reko Diq. And yet Sehbai’s principal source for such claims was a direct business competitor of and litigant against Tethyan, a fact that was entirely glossed over.

Sehbai wrote at least another five stories of a similar nature on the subject as the court examined Reko Diq. Other media organizations did not miss the righteous bandwagon either. In January 2011, The Express Tribune ran a front-page piece, “Tarin Assails Reko Diq Deal,” claiming that the former finance minister had raised alarm about the purported lack of transparency in the government’s dealings with Tethyan. Tribune’s cable news channel aired the story as well. In actual fact, Tarin had said no such thing. But Pakistan’s press, livid at the “great injustice” being suffered by Pakistan at the hands of foreign companies, continued to believe the fiction.

Earlier last month, on Jan. 7, the Supreme Court declared the agreement with Tethyan as void and illegal. Consequently, the company which invested $220 million in Reko Diq has no rights to develop the area which it explored. The court’s short order, at least, makes no reference to criminality on the part of any entity, only to illegality. However, even if the court does ultimately clarify that the basis for its decision was a finding of bad faith or mala fides, there remain grave issues regarding the process by which this matter has been adjudicated.

If the court has set aside the 1993 agreement purely on technical grounds then the decision is extremely troubling, both from a policy and jurisprudential perspective. On the other hand, if the agreement has been declared void because the court found it to have been procured illegally (e.g., through bribery), the decision is still troubling because the court is neither in the business of determining criminality nor should it be.

Asif Hassan—AFP

The short order makes no mention of malfeasance or criminality. It says only that the 1993 agreement and successive agreements were not valid, in part because they were not properly executed or authorized. If the court does not, in its final order, proceed to give any finding of criminality or illegality what we will be left with then is the fact that despite hundreds of millions of dollars poured in, international investors have been deprived of their contractual rights to a multibillion dollar asset—not because of any fault of their own, but that of the Balochistan government’s. Is it fair to punish investors for the mistakes of the government? The legal answer to this is that there is no estoppel against law—estoppel being a legal principle that bars a party from denying or alleging a certain fact owing to that party’s own previous conduct—and that where the law provides for things to be done in a certain way, then those things must be done either that certain way or not at all. As with many other aspects of the law, that answer is both true and misleading.

It is true that one cannot challenge prosecution for securities fraud on the grounds either that everybody knew about the fraud or that other brokers were also doing similar acts of fraud. But the picture gets more complicated in other fields. Take the common law concept of adverse possession. Under this doctrine if one takes unlawful possession of someone’s property for long enough (normally 12 years), then ultimately the squatter gets to say the property is his. What happens to no estoppel against law then?

The law is flexible. What it recognizes is that it is not possible to have perfect harmony in a legal system and that there is a multitude of considerations requiring to be balanced. The normal legal rule is that the buyer of a property only gets the same rights as those which the seller had to give. At the same time, if one unknowingly buys property from someone who had no right to sell it, one can still claim good title so long as he can show he acted in good faith.

What links all these concepts is the idea of good faith. There is no estoppel against prosecution of a criminal act because a criminal act is, by definition, an act done with evil intent. At the same time, estoppel operates in the civil domain because the law recognizes it is not fair to punish people for the evil done by others. So one cannot simply declare “no estoppel against law” and leave it at that. The no-estoppel argument is justified only in some contexts. It is not a concept which can be blindly applied everywhere as if no further discussion was then possible.

In the case of Reko Diq, assuming there were some procedural irregularities in the original grant of exploration rights 20 years ago, what further arguments should the Supreme Court have been looking at?

One possible response comes from the realm of company law, where the issue of authorized and unauthorized actions arises. Here, the indoor-management rule provides that people dealing with a company are entitled to assume that all internally-mandated procedures have been followed. If a director signs a contract in violation of a board resolution forbidding him to do so, the company is still bound by that contract by virtue of this rule.

The obvious criticism of this argument is that countries and their governments are not companies: governments are the rulers of a sovereign state, bound by the will of a people expressed in the form of a constitution; companies are artificial persons dedicated to making money. This is no counterargument. Leaving aside the moralistic posturing, unauthorized corporate action and unauthorized governmental action represent similar problems. In each case, there is a foundational document. In each case, the issue is about who should bear the costs of actions which are ultra vires (beyond the powers) of that foundational document. When it comes to normal commercial transactions, the settled law is that the company bears the cost of its directors’ illegalities. But why then are we supposed to believe the opposite when it comes to governmental transactions? As far as international law is concerned, a sovereign state is entitled to be treated the same as a common person when it comes to commercial transactions.

Another basis for not applying the indoor-management rule to governments is the “floodgates” argument, the contention that if we let thieves get away with plunder, the treasury will be stripped bare in a matter of days. Flowing from this, “for the sake of the country,” a zero-tolerance policy is propounded even if a few innocents get hurt in the process. Given that the current crop of Pakistan’s rulers have treated their country about as gently as a plague of locusts, it is not difficult to sympathize with the view that opening the door for protection of unauthorized deals will result in a virtual flood of robberies. But this argument infantilizes the government and, by extension, the people of Pakistan.

What foreign investors are effectively being told is that they do business in Pakistan at their own peril, that they cannot trust any government representation, and that it is their job to ensure the sovereign state of Pakistan stays not just within the express boundaries of the law but also within new ones creatively reimagined decades later. The basic foundation of any business deal is trust. Who would want to do business with an entity which proclaims loudly to all and sundry that it cannot be trusted and that it may change its mind at any moment?

The Supreme Court’s 2006 Steel Mills judgment was accompanied by great gusts of verbiage, and pronouncements that Pakistan had been saved from ruin and plunder of its vital assets. And yet, so far as one can see, Pakistan has lost more than $1 billion as a consequence of that one judgment. Fact: The original bid for the Steel Mills was $362 million, and the winning consortium had committed to investing $250 million in rehabilitating the facility. Fact: Losses footed by the people of Pakistan since the scuttled privatization now stand in excess of $400 million. (Even a Senate Committee recently concluded that the Pakistan Steel Mills Corporation is a bottomless pit and that any further government funding there is unwarranted.) Fact: No privatization can take place in Pakistan any more.

It is too early to know the economic costs of the Reko Diq verdict. But Pakistan will be lucky if these costs don’t make losses from the Steel Mills judgment look like peanuts.

Naqvi is a lawyer who worked on the review petition challenging the Supreme Court of Pakistan’s 2006 Steel Mills judgment.

From our Feb. 8, 2013 issue

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