Proposed BIT with Hungary: Differences emerge between BoI, ministries over proposal

ISLAMABAD: There is a reported difference of opinion between the Board of Investment (BoI) and some related ministries including National Security Division (NSD) on some of the clauses of proposed Bilateral Investment Treaty (BIT) with Hungary, sources close to Secretary BoI told Business Recorder.

Pakistan and Hungary are in the process of signing a Bilateral Investment Treaty. So far, two rounds of negotiations (1st in Islamabad and 2nd in Budapest, Hungary) have been carried out for finalizing the draft made by the technical teams from both countries. The third round is expected to be held in Islamabad tentatively from 13-15 December, 2022.

In an inter-ministerial meeting on proposed draft of BIT, it was noted that most of the Treaty provisions (contents) have been discussed and a consensus has been reached.

There are only two sticking points, one is “Expropriation” and the other is “Subrogation”. In terms of “Indirect expropriation” and “Subrogation” the advice from M/o Law and AG Office is required.

The representative from M/o Law stated that views/ comments on the merged draft of the 2nd round of negotiations are under process in M/o L and all questions will be addressed. The issue of Expropriation, especially “Indirect Expropriation” will be taken up in M/o Law independently as the Secretary M/o Law is himself looking into the matter. Secretary BoI highlighted that there should be a clear stance given by M/o Law on “Indirect Expropriation”.

Furthermore the representative of National Security Division (NSD) stated that “Indirect Expropriation” narrows down the Investment Policy space. Attraction of FDI is a need but Pakistan has to defend itself against harmful effects of indirect Expropriation. She further stated that even at the time of finalizing model BIT Template, “Indirect Expropriation” was not placed in the template.

“Although BITs protect rights of foreign investors but at the same time the host country should also be in a comfort zone. Most of the experts are of the opinion that BITs with such provisions are dangerous for developing countries,” she said adding that AG Office and M/o Industries might not support the idea to include this provision in the BIT with Hungary. Hence, “Indirect Expropriation” should not be included in the BIT with Hungary.

The Secretary BoI emphasized the creation of Zone of Possible Agreement (ZOPA) to overcome this issue and that without it BIT cannot be finalized. He also stated that finalization of BIT while defending Pakistan’s interests is really a hard task which is to be done carefully in the case of “Indirect Expropriation”. The BIT with Hungary will not only benefit Pakistan financially but also politically. “It is in our interest that this BIT be finalized as it has implications for the entire EU,” he said adding that out of 26 Articles of draft BIT, both countries have agreement on 24 Articles.

There has to be an alignment between the new investment laws and the BIT document, so argued Zulfiqar Ali, DG (BoI) and requested M/o Law to share their views on “Indirect Expropriation” within 15 days.

Representative of NSD further stressed that the terms of loans, debentures & bonds given in the definition may again be reviewed to avoid arbitration cases. NSD went against the “Subrogation” to avoid State to State dispute and also supports the forum of ICSID for dispute settlement although Federal Cabinet has approved UNCITRAL Forum in the Model BIT Template.

“There should not be multiple dispute settlement forums, only single forum should be there,” she added. There is no review system in UNCITRAL Forum which can be disadvantageous. She gave the example of Reko Diq case wherein Pakistan got benefit from the provision of appeal in the rules of ICSID.

Director General (Law) as representative of PPIB and Ministry of Energy while commenting on the stance of NSD stated that being standard practice prevailing all over world, all APPI’s have the “Subrogation” clause. However, it may be possible to impose some limitations/ restrictions on the “Subrogation” clause as is the general practice in the world.

Secretary BoI clarified that such possibilities have already been discussed during the rounds of negotiations.

Jalal Hassan, CEO of PBIT, Lahore was satisfied with the drafting of “Subrogation Clause” in the draft BIT with Hungary.

Additional Secretary, M/o Commerce said that there are certain issues in the merged draft BIT with Hungary, developed in the 2nd round of negotiations in Budapest.

Secretary BoI apprised that divergent points will be discussed in the 3rd round of negotiations expected to be held in Islamabad from 13-15 December, 2022.

The concerned Section Officer from M/o Industries & Production maintained that the term “significant” within the definition of portfolio investment should be quantified.

Both Secretary BoI and Policy Expert of NSD clarified that the needful has already been done in the definitions clause stating 51% control.

Regarding the “freely convertible currency” the representative of MoI suggested that the convertible currency should be in Euros or in Dollars to avoid any financial issue. This point was well taken and Secretary BoI desired representative of MoI to reconsider their suggestions especially “compulsory licences for IP Rights (Article-6.8)” and “Investment & Labour (Article-11)”which was accepted by the MoI representative.

The Joint Director of SBP, Karachi argued that the phrase “without any restriction” regarding transfer fund mentioned in article-7 (Para-1) may be deleted. In response Secretary, BOI commented that earlier SBP was satisfied with this clause and now SBP is asking for such deviation which is hard to understand. Secretary, BoI requested the representative of SBP to get in touch with Abid Nazir, former JD (SBP) who supported this point earlier and was included on his insistence and noted that SBP was going back on a committed position which will not leave a good impression.

The representative of Intellectual Property Rights Organization of Pakistan (IPOP) was satisfied with the concerned/ relevant clause.

Copyright Business Recorder, 2022