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Reko Diq: technical knockout?

The honourable Supreme Court of Pakistan has finally declared the award of Reko Diq copper project’s lease to a foreign joint venture Tethyan as illegal. This almost seals the fate of the project, as protracted legal battle may continue on international fora.

The decision has been received variously among circles in Pakistan; some are happy and others are sad. Happy are petitioners and their supporters who do not regard the project in national or provincial interest on various counts such as self-reliance, patriotism, fair mineral value perceptions and other classical political economy issues etc. Sad are those who consider foreign investment, technology and exports as much desired prerequisite for the growth of country’s economy. We will attempt in this article to enlighten the readers of the bona fides of the opposing arguments and present a balanced view premised on data and facts.

Supreme Court’s decision came after it gave sufficient time to the parties to negotiate a mutually acceptable formula. The apex court has not made its judgement based on the value-laden arguments as indicated earlier; it has not made any judgement on the merit or demerits of the project. SC’s decision is more a technical one based on procedural violations done by the provincial authorities of their time in granting mineral lease. Both views could have been taken; irregularity smacking of corruption or supportive policy actions done in good faith to encourage foreign investment. Fortunately or unfortunately, the SC decision upheld the irregularity indications. Those who made those determinations are not at the helm of affairs and thus could not have defended their decisions. It is a common habit in Pakistan for successive administrations to negate the policies and actions of their predecessors. A unique situation has developed having negative consequences for foreign investment in Pakistan. Corruption in Pakistan is endemic and the worst province in this respect happens to be Balochistan. Rules and regulatory environment, being in developmental stage, suffer from a variety of lacunae and loopholes. Courts can and will determine any local or foreign investment to be null and void on the allegations of irregularity, irrespective of the stage of project or the sums of money involved. In this case, the aggrieved party claims investments of some 200 million USD already. Thus before expecting any foreign investment, country would have to be made corruption-free?

The real issue in the minds of the opponents of the Reko Diq project is as to whether a fair income is being generated to Balochistan and Pakistan under the terms proposed by the foreign company. Not many details have been made public by either party; however, the Tethyan proposal appears to be in line with national and provincial mineral policy in terms of royalty and other income provisions. Based on some data published on Tethyan’s website, we have made the following external assessment of the projects output, yield and income and revenue streams for the parties involved, which summary is reproduced here.

The issue in question is a copper ore deposit in Chaghi district (where nuclear explosion was made) containing a copper metal of 12.3 million tons and 650 metric tons of gold. In ore terms, the deposit is in billions of tons but that includes waste material. Only 41 grams of metal is obtained from one kilogramme of the ore. Although gold prices keep going up, copper prices vary cyclically making many rich at times and making other paupers at other times. Depending on the copper price, the annual turnover and exports are estimated at 1.5 to 2 billion USD based on an annual production of 200,000 tons of copper and 12 tons of gold. Gross profits of 3-400 million USD are expected, generating corporate profits of 100-150 million USD. Based on the royalty rates provided in the National Mineral Policy also adopted by government of Balochistan is 2% of sales revenue on copper, an annual income of 300-400 million USD can be expected for the Balochistan. A proposed equity of 25% may incur an additional income of 40-50 million USD can be expected. In 50 years of project life, a total income of 15-20 billion USD can be generated. The foreign investor would also be making a comparable amount of money. Many uninformed people term this as unfair. They value the resource at around 100 billion USD, but forget that more than half of this sum would have to be spent in extracting the ore and taking it to markets. Nobody would be able to pay billions in upfront. National and provincial governments would be able to generate this income over a period of time as will the investor in annual tranches in the range of hundreds of millions of USD as indicated. The 19th century stories of exploitation by mineral companies are no more valid. Companies are registered in international stock markets which are subject to stringent regulations and transparency. There are other myths and misconceptions that create a negative environment for not only this project but other investments in this sector in Balochistan. Reko Diq in fact is not an extra-ordinary mineral deposit. There are many competing projects in other countries with better mineral grade around and in excess of 1% as opposed to 0.41% of Reko Diq.

So what do we lose? An FDI of 3.2 billion USD, annual foreign exchange and exports worth 1.5-2 billion USD and an annual income of several hundred million USD and the direct and indirect benefits to the economy of the region and the country. A comparable new party and project may be decades away as legal battles can be long and expensive. And our ranking among the list of recipient countries of foreign investment goes down further.

The alternative being offered by the winners of the case is very questionable. A project being financed by the poor government of Balochistan and executed by enthusiasts(well meaning but economically naïve) from NESCOM who claim expertise in all possible areas of human endeavour, from nuclear weapons to Thar Coal to what not. Their proposed project is hardly of a size of one-tenth of Tethyan with all the risks and shortcomings of small scale mining. No new income would be generated as the Saindak would be supplied from Reko Diq in their scheme of things. Instead of being a Cash-Cow, it may bankrupt its financiers, the poor government of Balochistan.

We are suffering from a kind of syndrome. All of a sudden, a man appears on the scene, who rejects everything being done and offers his own maverick solutions. There is a consensus by now in the country that government cannot run businesses as has been proved in the case of PIA, Pakistan Steel and other public sector enterprises. The government is suffering from budgetary and trade deficits. Whatever little resources that may be available ought to be invested in much vital and needed social sectors than being wasted in projects of questionable commercial success.

What is painful is that the Government of Balochistan did not enter into formal negotiations with Tethyan and rejected the proposal without a meaningful discussion and entertained extraneous arguments and misgivings initiated by third parties. The federal government cannot escape blame as its institutions and experts have misguided the Government of Balochistan into all kinds of fantasies and wrong data and projections.

The government of Balochistan should enter into a purposeful and meaningful dialogue with the foreign company to sort out the differences that might be there and possibly to seek some reasonable and practicable enrichments in the terms of the agreement, now that its negotiating position has been significantly strengthened by the rulings of the Supreme Court and ICISID, although too much should not be read into the latter’s decision of conceding a small area to be exploited by the local enthusiasts for a small production level.

General elections are around the corner and new government would be in saddle in near future. The new government should be able to revive meaningful negotiations with the foreign investors and hopefully would be able to eliminate the role and influence of the spoilers. We would also advise Tethyan to try to seek solutions within Pakistan, earnestly rather than jumping to international fora.

(The writer has recently published his book “Pakistan’s Development; economy, resources and technology”)

Akhtar Ali, "Reko Diq: technical knockout?," Business recorder. 2013-01-30.