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

ISLAMABAD: Pakistan’s Executive Director at the World Bank, Dr Tauqeer Shah has apprised Islamabad about the arbitration award delivered under the MIGA-covered GoP guarantee for Star Hydropower project, well-informed sources in Finance Ministry told Business Recorder.

World Bank’s Aradhana Kumar-Capoor has 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.

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Earlier, in a communication with Dr. Tauqeer Shah, Director and General Counsel, IMGA (Multilateral Investment Guarantee Agency) Aradhana Kumar-Capoor shared the background of the case, according to which 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).

This arbitration under the GoP Guarantee was commenced 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 canfile a claim for Breach of Contract if the GoP Guarantee Award is not paid by180 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.

Replying to the letter of Director and General Counsel, Multilateral Investment Guarantee Agency, Pakistan’s Executive Director at the World Bank, said that he has already briefed the Ministers for Power and Finance and Secretaries for Power and Finance including PM Office, adding that the email is also being shared with them.

Copyright Business Recorder, 2024