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ISLAMABAD: The country’s Attorney General Office has advised Power Division and NTDC (National Transmission and Despatch Company) to negotiate with M/s Star Hydro to settle the arbitration award to mitigate risk of MIGA guarantee called by the Project Company, well informed sources told Business Recorder.

AG Office, sources said, referred to the letter of April 24, 2024 sent by the Power Division requesting an opinion from AG Office on the potential liability and legal strategy for the Government of Pakistan (GoP) if the MIGA guarantee is called on by Star Hydro pursuant to the Arbitration Award rendered against the GoP under the sovereign guarantee of April 17, 2024.

According to the AG Office, its letter of December 26, 2023 had advised Power Division and the National Transmission and Despatch Company to consider honouring payment of the First Arbitration Award in light of the serious reputational risks for the GoP if the MIGA Guarantee is called upon by Star Hydro.

MIGA-covered GoP guarantee for Star project: Islamabad apprised about arbitration award

The sources said, the issue of Star Hydro was also discussed at the Prime Minister Office to find out a way forward. AG Office is of the view that in light of the meeting held in the Prime Minister’s Office on April 25, 2024, it once again advised Power Division and NTDC to negotiate with Star Hydro to settle the Arbitration Award to mitigate any risks of the MIGA guarantee being called upon by Star Hydro.

Recently Pakistan’s Executive Director at the World Bank, Dr Tauqeer Shah apprised Islamabad about severity of the arbitration award delivered under the MIGA-covered GoP guarantee for Star Hydropower project.

World Bank’s Aradhana Kumar-Capoor informed Pakistan’s Executive Director at the World Bank, that the Bank has been informed by the investor that the award under the government guarantee has been delivered and it is in favour of Star Hydro.

Pakistan Government has three weeks from the date of the award (April 17, 2024) to pay the award.

She further stated that subsequently Star Hydro will try to enforce the award and it they are not successful, the investor (MIGA’s guarantee holder) will have the right to file a claim under the MIGA (Multilateral Investment Guarantee Agency) contract, adding that it is, therefore, extremely urgent to resolve this matter.

The Project is a 147 MW run-of-the-river hydropower plant situated 120 km north-east of Islamabad in the territory of Pakistan on the Kunhar river under a 30-year Build-Own-Operate-Transfer (BOOT) scheme. MIGA provides breach of contract over a South Korean equity investor in the project, KDS Hydro Pte Ltd (the guarantee holder) for its equity investment in Star Hydro Power Limited.

In September 2022, Star Hydro commenced arbitration proceedings in London against Pakistan under the MIGA-covered Government of Pakistan Guarantee (GoP Guarantee), which guarantees payment obligations of the state-owned power off-taker (the National Transmission and Despatch Company Limited (NTDC) under the Project’s Power Purchase Agreement (PPA).

The arbitration under the GoP Guarantee was initiated by Star Hydro because the NTDC refused to pay an earlier arbitration award obtained by the Project Enterprise against the NTDC under the PPA relating to liquidated damages resulting from delayed commencement of operations of the Project, and under which NTDC was ordered to pay the following amounts: Rs 2,019,318,458, (as delay invoices), $16,452,807 (as principal debt damages), $2,727,240 (as a portion of Star Hydro’s claimed Legal Costs), and £51,180.02 (as Star Hydro’s share of the arbitration costs) (together, the “outstanding amounts”).

On April 17, 2024, the arbitrator rendered an award (the GoP Guarantee Award) against Pakistan and in favor of Star Hydro under the GoP Guarantee, as follows: (i) first, ordering Pakistan to pay the Outstanding Amounts to Star Hydro within 21 days; (ii) second, ordering Pakistan to pay to Star Hydro interest at a simple annual rate of 8% per annum from the date the payments became due; and further ordering Pakistan and Star Hydro to endeavor to reach an agreement on the amount of interest within 21 days, failing which the parties should file further submissions to the arbitrator setting out their respective interest calculations; and (iii) third, ordering the parties to file submissions on the allocation of costs of the arbitration within 21 days following which the arbitrator will issue a separate award as to the costs of the arbitration.

The sources said the GoP Guarantee Award is covered by MIGA under Breach of Contract risk - which means that MIGA would have to pay the Guarantee Holder the amount of the GoP Guarantee Award, should Pakistan fail to enforce and make payment in a timely manner.

The Guarantee Holder can file a claim for Breach of Contract if the GoP Guarantee Award is not paid within 180 days after the date thereof. MIGA has never paid a claim under Breach of Contract risk in its history. Moreover, if MIGA were to pay such claim, there could potentially be negative consequences for Pakistan, including the fact that the amount paid by MIGA constitutes an international obligation of the state that MIGA would have to recover from Pakistan.

The payment would be notified to the MIGA Board and MIGA’s reinsurers, and that could negatively impact the investment climate in Pakistan. MIGA, source said, has offered its support to the government in exploring a negotiated settlement with the Guarantee Holders and Star Hydro.

Copyright Business Recorder, 2024

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