LCIA trial: Pakistan govt may pursue out-of-court settlement with Star Hydro

ISLAMABAD: The government is likely to pursue an out-of-court settlement with the Star Hydropower Project, which initiated arbitration proceedings at the London Court of International Arbitration in October 2024, according to sources in the Finance Ministry.

The issue was reportedly discussed during Finance Minister Senator Muhammad Aurangzeb’s visit in April 2025, where he met with Hiroshi Matano, Executive Vice President of the Multilateral Investment Guarantee Agency (MIGA). Matano emphasized the importance of resolving the matter through negotiation.

The Star Hydropower Project is a 147 MW run-of-the-river plant located 120 kms northeast of Islamabad on the Kunhar River. The project operates under a 30-year Build-Own-Operate-Transfer (BOOT) model. MIGA, a member of the World Bank Group, has provided a political risk guarantee to a South Korean equity investor in the project, KDS Hydro Pte. Ltd., against breach of contract by the Government of Pakistan.

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Sources said the Finance Ministry has convened a high-level meeting to explore options for an amicable settlement with the power company to avoid further legal and financial complications.

In April 2024, an arbitration award under the MIGA - covered Government of Pakistan (GoP) guarantee was issued in favor of Star Hydro. Pakistan was given three weeks from April 17, 2024, to fulfill the payment obligations. Failure to pay would allow the investor to initiate enforcement proceedings, and if unsuccessful, MIGA’s guarantee holder could file a claim under the breach of contract coverage.

The dispute dates back to September 2022 when Star Hydro initiated arbitration under the GoP Guarantee after the National Transmission and Despatch Company (NTDC) — the state-owned power off-taker—refused to honor an earlier arbitration award. That award ordered NTDC to pay significant sums for liquidated damages caused by delays in the project’s commercial operation date. The amounts included: (i) Rs. 2.02 billion in delay-related invoices; (ii) $16.45 million in principal damages; (iii) $2.73 million in partial legal costs; and (iv) £51,180 in arbitration costs. These remain unpaid.

Under the terms of the MIGA guarantee, Pakistan is obligated to pay the awarded amounts. If it fails to do so within 180 days, MIGA would be required to compensate the investor, creating an international obligation for Pakistan. Notably, MIGA has never had to pay a claim under its breach of contract risk in its history. Should that change, the implications for Pakistan could be significant, both financially and diplomatically. The Finance Ministry is therefore weighing a negotiated settlement to mitigate potential long-term consequences and uphold Pakistan’s international financial commitments, the sources added.

Copyright Business Recorder, 2025