Pakistan’s legal win but economic loss

In a recent legal triumph, Pakistan successfully defended itself in an arbitration case initiated by Tuwairqi Steel at the Permanent Court of Arbitration in The Hague. The dispute, brought forth by prominent Saudi investors, Dr Hilal Hussain Al Tuwairqi and Al Ittefaq Steel Products Company Ltd, alleged breaches of the Organisation of Islamic Cooperation (OIC) investment agreement in connection to a substantial investment in a steel-production facility in Port Qasim, Karachi.

The tribunal’s decision, absolving Pakistan of breaching its obligations under the OIC investment agreement, stands as a notable victory in the courtroom. However, the complexities surrounding the Tuwairqi Steel Mills project reveal a more nuanced and costly narrative, extending beyond legal proceedings into the heart of economic repercussions.

The ambitious Tuwairqi Steel Mills project, a joint venture between Saudi Arabian and South Korean companies, had set out to establish Pakistan’s largest steel complex, boasting a staggering production capacity of 1.28 million tons per annum. The initial phase, involving a $340 million investment in the completion of the direct-reduced iron (DRI) plant, was completed. However, the subsequent phases, requiring an estimated investment ranging from $850 to $900 million, hinged upon the success of the DRI plant and availability of feedstock gas.

The economic potential of the project was significant. Beyond the substantial initial investment, Tuwairqi Steel Mills held the promise of being a major employment generator. The project aimed to employ 1,100 people directly and contribute significantly to the economy through both forward and backward linkages by a establishing a vertically integrated state of the art project. The project’s downfall originated from a dispute over gas pricing issues. The Saudi investors alleged that Pakistan failed to honour sovereign assurances, specifically the committed supply of natural gas at a predetermined tariff. This dispute led to a halt in operations, triggering a legal battle and subsequent arbitration.

Despite the legal victory, the economic fallout is palpable. The government’s failure to secure necessary approvals for a concessional gas tariff from the Economic Coordination Committee (ECC) not only halted the Tuwairqi Steel project but also initiated a series of adverse consequences. The project’s suspension led to a notice served by Al Tuwairqi Holding Company, demanding Rs1 billion in damages due to stalled operations at the steel mill. The subsequent escalation of the matter to the international court of arbitration further underscores the fragility of investor trust. The company, despite the halted project, continues to incur monthly expenses to maintain the plant and support its workforce.

The crux of the matter lies in the pricing of Pakistan’s natural gas and the policy of according priority to consumers irrespective of the economic utility of such allocation. In our merit order, we give top priority to domestic consumers at a very unrealistic and subsidized price. In recent years, we have been diverting highly expensive imported LNG to domestic consumers during winter months at the same old price. The delta was either partially picked up by the government through additional allocation by the Finance Ministry or the payments are still to be recovered, effectively becoming part of the gas sector circular debt.

It is imperative that Pakistan reevaluates its merit order for natural gas provision, giving due consideration to the industrial sector’s needs instead of continuing to use this valuable resource inefficiently in domestic kitchens.

In conclusion, while Pakistan may have secured a legal victory in The Hague, the economic toll and the erosion of investor confidence present a sobering reality. The Tuwairqi Steel case serves as a stark reminder of the imperative for a consistent and reliable approach to attract and retain foreign investments.

As legal triumphs unfold, the economic losses suffered by the nation underscore the importance of upholding commitments and fostering an environment conducive to sustainable and mutually beneficial investments. The need for a strategic reevaluation of natural resource allocation and pricing policies is paramount to ensuring long-term economic growth and investor trust.

Copyright Business Recorder, 2023