Pakistan and the Energy Charter Treaty

The Nation | 20 March 2018

Pakistan and the Energy Charter Treaty

by Maria Rafique

Pakistan has been an observer to the Energy Charter Treaty (ECT) since 2005 and has subsequently indicated its intention to become a full member. The ECT is a multilateral legal framework, which was established during the early 1990s in order to promote long term, inter-state cooperation in the field of energy. Some (50) countries – mostly from the European Union and the former-Soviet Union, but also other European states as well as Japan and Australia – are members of this legally binding international agreement. Member states of the Treaty apply its rules on investment, trade, transit, energy efficiency and other dimensions of energy cooperation. ‘Common rules, for global energy’ is the motto of the ECT constituency. Treaty members abide by its provisions on investment protection and dispute resolution mechanisms, whilst membership also helps countries to attract foreign investment into the domestic energy sector.

Pakistan’s observer status – the country is one of some (40) ECT observers – provides it with some privileges, including access to the flow of strategic information within the framework of the Energy Charter Conference – the ‘trade and investment club’ of countries created under the Treaty. However, Pakistan needs to finalise its accession to the Treaty to cash in on the full spectrum of benefits accorded to members only, including the application of the ECT’s robust legal framework which is widely deemed to be conducive for the attraction of FDI into the energy sector, particularly from the EU countries but also the likes of Japan. With regular power cuts and other forms of energy shortages draining Pakistan’s growth potential, it may be wise for the government of Pakistan to look at joining international structures such as the ECT in order to mitigate these losses.

The Brussels-based Energy Charter Secretariat has been in ongoing talks with Pakistani government officials, providing the required information on accession procedures through meetings and workshops with the concerned stakeholders in the country. While Pakistan has on previous occasions publically announced its plans to accede the ECT as a full member, at present it must be admitted that a degree of skepticism about Treaty membership exists in some quarters of government. Much of the area of concern of the Pakistani authorities exists in the area of what is sometimes referred to as ISDS (Investor State Dispute Settlement) clauses, which are incorporated into the provisions of the Treaty.

These are provisions on the legal protection of foreign investment, which are often incorporated into Bilateral Investment Treaties (BITs) and other inter-state agreements. Pakistan is signatory to some of the oldest BITs in the world and has a mixed record with ISDS, losing some cases of international arbitration to foreign investors whilst winning others. Discussing the topic with Pakistani decision makers, one gets the sense of ‘BIT fatigue’ setting in within some areas of officialdom dealing with foreign trade and investment.

Pakistan officials have also recently expressed some other questions about their potential obligations under the Treaty, including the fact that the country would be obliged to offer ‘national treatment’ to foreign investors, that the investment protection standards under the ECT may override existing regulatory and legislative arrangements, and that Pakistan’s rights to interrupt energy transit through the country will be reduced. Further, there is a concern that accession to the ECT will confer protection upon companies incorporated on the territory of an ECT member state although such companies may be owned and controlled by non-ECT nationals.

Indeed, these may be appearing to be legitimate concerns and it is of course the duty of each government to defend its national interest. That said, lets briefly review the benefits that accession to the ECT will likely bring Pakistan in order to promote a debate as to whether the risks outweigh the benefits. It should be noted from the outset that all international agreements confer both benefits as well as obligations upon signatory governments. In the case of the ECT, indeed, it does confer the obligation that signatory governments offer foreign investors ISDS through international arbitration as a mechanism to defend their rights. That said, we should also be realistic and accept that the right to defend invested capital and manage risks is just as legitimate for bona fide investors as the right of the state to regulate. A middle ground needs to be found and the ECT does exactly that: the Treaty does not compel parties to a dispute to resort to international arbitration, rather offering them this option in the event that they so prefer. Additionally, the Treaty is based on a core value that disputes should be settled amicably.

Further, we need to be honest and also accept that many countries, including Pakistan, do not have an ideal image in terms of how they are perceived by investors themselves. International markets are a highly competitive space and governments have to compete – and often court – investors in order to persuade them to channel their capital to one country or another. Offering energy investors, who may have an interest in Pakistan, the option of defending their capital through ISDS would only strengthen investor confidence in the country by sending a firm signal of Islamabad’s readiness to apply international standards in the recognition of investor rights.

Indeed, many of our neighbours and regional peers, including Turkey and the Central Asia republics of the ex-USSR, are founding members of the ECT. These governments fully endorse investor protection under the Treaty and do not seem to be worse off for wear. Pakistan, despite lingering questions about the country’s external image and perhaps insufficient efforts to market the country effectively vis a vis the Foreign Direct Investment (FDI) community, entertains largely liberal, outward oriented trade and investment policies. The country is open to FDI, offering investors in energy, as well as other sectors, many incentives.

There are several other strategic facts to consider when assessing the benefits of Pakistan’s accession to the ECT. First, while Pakistan’s overall volumes of investment are low by head of population, the investment inflows coming into the country have become heavily concentrated from a handful of source destinations. The Arabian Peninsula has tended to be a large investor in Pakistan, and has been recently joined by China, while Turkey is also an important trading partner. There is also money coming into the country from the Pakistani diaspora. Very little investment is evident from EU countries, however.

While investment from China – and to a lesser degree the Gulf – may be experiencing some form of honeymoon at present, it is risky to put all of your eggs into one basket, particularly into an important sector like energy. Accession to the ECT will assist Pakistan in diversification of FDI source regions/countries, by putting the country far more firmly on the map of European and EU energy investors. Furthermore, Pakistan’s accession to the ECT will also enhance investor confidence by reinforcing the view that the country belongs to a strong and stable ‘trade and investment club’ within the international energy sector.

It will also help improve the attractiveness of the investment climate in Pakistan’s energy sector, sending a signal that the risk levels associated with investment in the country are manageable. Finally, and perhaps most importantly, accession to international agreements such as the ECT will assist Pakistan in lessening dependence on politically-tied foreign aid and associated credit lines, instead empowering an economy driven by free flowing investment, provision of modern-day services and greater productivity.

Undoubtedly, the benefits of Pakistan’s accession to ECT outweigh any sense of risk perception, which the country’s decision makers may have about membership. Both the Treaty itself, and the process established by the Energy Charter Conference on 17th December 1994, provide an effective legal framework for the purposes for which it was drafted, as has been briefly outlined above. It covers energy strategy, efficiency, and preservation of the natural environment and opens up dialogue and new partnerships in the energy sector. Here in Pakistan, the jury is still out and we are still learning before finally deciding on acceding to ECT.

The writer is a lawyer based in Lahore. She has an LL.M from Cornell Law School with experience in energy law and international commercial arbitration.

source: The Nation