PAKISTAN: An Introduction to Corporate/Commercial

Political instability in Pakistan started in early 2022. The same year the country faced devastating floods that “submerged one third of the country, affecting 33 million people”. These floods damaged “most of the water systems in affected areas, forcing more than 5.4 million people to rely solely on contaminated water from ponds and wells”. The estimate of the loss to the already fragile economy was more than USD15 billion.

These factors took a very heavy toll on the economy. In May of 2023, inflation reached 38% - the highest in four decades - and the foreign exchange reserves dropped to less than USD4 billion, hardly enough to meet imports for one month. In one year, the Pakistani rupee lost more than 50% of its value against the dollar.

These crises left Pakistan with no option but to go back to the International Monetary Fund (IMF). After protracted negotiations, in July of 2023, Pakistan and the IMF agreed on a nine-months USD3 billion Stand-By Arrangement that supported the government’s stabilisation programme.

The above challenges compelled Pakistan to embark upon an aggressive programme that introduced, and in a sense entirely changed, its investment climate, in particular the one related to foreign investment. Massive and unprecedented changes were made in numerous laws, and new laws were also introduced, to boost and facilitate foreign investment in several sectors of the economy.

The Special Investment Facilitation Council (SIFC)

In July 2023, the Board of Investment Ordinance 2001 (BOI Ordinance) was amended to establish the SIFC. The Prime Minister of Pakistan is the president of the SIFC which consists of apex, executive and implementation committees. The SIFC has a permanent secretariat.

The SIFC is structured as a one-window set-up to facilitate investments into and privatisations of the defence, agriculture, infrastructure development, strategic initiatives, logistics, minerals, IT, telecommunications, and energy sectors. More sectors can be added to the ambit of SIFC by the federal government.

A provincial government may also refer any project to the SIFC for its implementation. The law allows the SIFC to “execute commercial transactions” with the local and foreign investors.

The SIFC can evaluate and process all investment proposals, including individual investment proposals, and recommend additional incentives and relaxations in the regulatory and policy frameworks. The instructions of the SIFC are binding on all the institutions of the federal government. Under the new law, for any projects referred to the SIFC by a provincial government, the SIFC has the authority to issue binding instructions to all provincial institutions in such province.

The federal government, upon the recommendation of the SIFC, may relax or exempt from a regulatory requirement any project being implemented by the SIFC. These amendments to the BOI Ordinance have an overriding effect notwithstanding anything to the contrary contained in any other law.

The Pakistan Sovereign Wealth Fund  

In August 2023, a new law was passed for the establishment of the Pakistan Sovereign Wealth Fund (PSWF) owned and controlled by the federal government. The assets of the PSWF consist of, inter alia, the existing assets of the federal government and the state-owned enterprises (SOEs) and the shareholding of the federal government in the SOEs transferred to the PSWF. The federal government has already transferred to the PSWF its entire shareholding in the seven largest SOEs of the country.

PSWF can invest in new assets and allow divestment of its existing assets through sale. The PSWF has a supervisory council and an independent board of directors.

Under Pakistani law, any divestment of federal government’s interest in any assets can only be made in accordance with the provisions of the Privatization Commission Ordinance, 2000 (the “Privatization Ordinance”). Likewise, any procurement in any form by the federal government can only be made in accordance with the public procurement law. The law of PSWF excludes the application of, inter alia, the Privatization Ordinance, as well as the public procurement laws to the activities of the PSWF.

A Closure to the Reko Diq Saga  

In 1993, an entity owned by the provincial government of Baluchistan entered into a joint venture agreement with a foreign investor for the exploration of copper and gold in that province. Subsequently, a dispute arose between the successors of the foreign investor and the governments of Baluchistan and Pakistan. Eventually, arbitration proceedings were started by the investors against the two governments under the rules of International Chambers of Commerce, as well as the Pakistan-Australia Bilateral Investment Treat (BIT). The BIT claim against the government of Pakistan was registered as an arbitration case with the International Centre for the Settlement of Investment Disputes (ICSID).

In 2019, an ICISD tribunal announced its final award against the government of Pakistan of USD5.9 billion. The government of Baluchistan also apprehended an ICC award against it of around USD2-3 billion.

In this backdrop, settlement negotiations started between the governments and the investors wherein settlement agreements were finalised between the parties containing certain conditions precedent. One condition precedent required an opinion from the Supreme Court of Pakistan (SCP) on the legality of the proposed settlement agreements, as well as the proposed Foreign Investment (Protection and Promotion) Bill, 2022. In December 2022, the SCP opined that the proposed settlement agreements, as well as the Foreign Investment (Protection and Promotion) Bill 2022, were inline with the Pakistani law.

The government subsequently enacted the Foreign Investment (Protection and Promotion) Act 2022, which applies to all qualified investments as notified by the federal government. Schedule 1 to this law contains the names of the projects designated by the federal government as qualified investments. The government of Pakistan has designated the settlement of the Reko Diq matter and the subsequent restored copper and gold project as a qualified investment.

This law, inter alia, provides a legal cover and an assurance, to the extent permitted by Pakistani law, that any tax and other incentives and relaxations granted to this project would not be withdrawn by the government of Pakistan to the disadvantage of the investors.

Conclusion  

For around one decade, the Reko Diq dispute remained a major concern for the existing investors and an obstacle in the way of new foreign investments. New foreign investors largely remained reluctant to invest in Pakistan as it was generally believed that the foreign investors were wronged in the Reko Diq project. It is expected that the resolution of this dispute by the government of Pakistan will restore, to a large extent, the confidence of foreign investors in Pakistan’s investment climate.

The government of Pakistan is making all-out efforts to make Pakistan an investor-friendly destination for the foreign investors by, inter alia, introducing new laws and amendments in the existing laws. However, it is quite common for the litigants in Pakistan to challenge the validity of a legislation in judicial review. The legality and the soundness of a legislation is not firmly established until such time that it has passed the test of judicial review. The new legal framework established by the government will get established and receive wide recognition after the new legislations have passed the scrutiny of the local courts in judicial review.