Countries often face serious economic challenges and Pakistan is no exception. There are countries that went bankrupt and then successfully turned around. The standard tool for revival is to reform the things that went bad. Addressing one wrong with another is no solution. In the wake of recent economic challenges, one often hears about renegotiation and amendment of investment contracts. Should these contracts be forced to be renegotiated and amended?

Contract sanctity is one of the key features that attracts foreign investment into a country. It requires that legally binding agreements must be honored and upheld by the relevant parties unless fraudulent or contrary to public policy. Notwithstanding, Pakistan has had a few instances of undue intervention into investment contracts, both by the executive and judiciary. This only adversely impacted the investor confidence, certainty of legal system and predictability of policy incentives.

Consider the annulment of gold mining contracts of Reko Diq in 2013 which led to ICSID arbitration award of USD 6 billion against Pakistan in 2019. Further consider the cancellation of rental power contracts with Karkey which resulted in an award of USD 1.2 billion against Pakistan in 2017. Further consider power purchase agreements signed with private producers with guaranteed returns which were renegotiated years later. Further consider bar on capital flows in the extraordinary events of late 1990s. These examples only sent discouraging messages to foreign investors about the country’s investment climate.

Unless there are legal violations, tampering with investment contracts to provide momentary solutions will be inappropriate and harmful to the investment climate of the country.  Any sectoral or systemic issues must be properly evaluated in their own right and fixed by taking into account the best practices that may be customised to adjust to local conditions. Trying to cure the symptoms and not the underlying disease brings back bigger problems in the future!