Reko Diq Agreement

A fair deal or a mine of controversies?

To ensure sustainable economic activity and growth, it is necessary to improve the investment climate in Pakistan by way of providing incentives in direct and indirect taxes and ease of transfer and repatriation of foreign investments to large-scale foreign investment and by protecting such incentives from withdrawal and providing an expedient and efficacious mechanism to address grievances of investors of qualified investment. A big step in this right direction has come in the form of the Foreign Investment (Promotion and Protection) Act, 2022, which is aimed to protect investors from court proceedings in relation to the Reko Diq project.
The passage of this piece of legislation symbolises a positive step forward just when the country perhaps may be in need of one. Later, on December 15, Pakistan inked the final deal with representatives of Barrick Gold and Antofagasta PLC in London for the revival of the Reko Diq project and the settlement of an $11 billion dispute.
The Reko Diq project promises nearly $10 billion worth of investment in the province of Balochistan and will also focus on social uplift initiatives in particular such as roads, schools, hospitals and the creation of technical training institutes for mining. The investment is estimated to also create 8,000 new jobs.
One of the largest undeveloped copper-gold projects in the world, Reko Diq would be owned 50% by Barrick; 25% by three state-owned enterprises — the Oil and Gas Development Company Limited (OGCDL), Pakistan Petroleum Limited (PPL) and Government Holdings Private Limited (GHPL); 15% by Balochistan on a fully-funded basis and 10% by the province on a free-carried basis.
The fresh Reko Diq deal is termed a game-changer for Pakistan. On the one hand, it would annually pump huge amounts of dollars into the national economy, and on the other, it would bring progress and prosperity to Balochistan. According to a rough estimate, nearly 8,000 new jobs will be created, and preference will be given to the locals. The initiation of such a huge project in Balochistan will also give a boost to the economic activity in the province as well as the country. The resumption of the project would save Pakistan from having to pay the company $11 billion in penalties for the deal’s suspension on orders of the Supreme Court of Pakistan in 2011.
According to a report “Revival of Reko Diq Project,” the scope and earnings this project would generate are massive, to say the least.
The project is divided into two phases, with a total projected capex cost of $7 billion, with the first phase requiring $4 billion and the second phase requiring $3 billion. In addition, the project’s total entry amount is $2.2 billion, bringing the entire project size to $9-10 billion.
Annual copper output is predicted to be between 650 and 700 million pounds per annum for the first ten years, increasing to 800 to 850 million pounds per annum when phase 2 is completed. Furthermore, gold production is estimated to be 300,000 to 350,000 ounces on yearly basis for the first ten years (first phase) before increasing to 450,000 to 500,000 oz. following the planned expansion.
To estimate the overall value of the project we’ll assume constant pricing for both gold and copper, taking the average price of the commodities over the period of the last ten years.
If we were to only look at the first phase of the project, keeping in mind the numbers above, it would generate an estimated $ 14 billion for the government in only the first 10 years of its operation.
A significant portion of the revenue would be dominated by the sale of copper and would account for 83.25% or $11.67 billion of the revenue in the first phase, whereas gold would account for the remaining 16.75% or $2.35 billion.
Likewise, with the expansion envisioned for the second phase, the output of the mine would increase, and, with it, the revenues generated would also rise. An accumulative revenue amount of $62 billion is expected to be generated over the course of the second phase which has a stipulated time period of 35 years.
In terms of the revenue mix, copper again would account for the bulk of the revenue in this case 80.6% or $49.9 billion. Whereas the mining of gold would amount to 19.4% or $12 billion of the total revenue expected to be generated in the second phase.
To sum it all up, the government of Pakistan would be able to generate an average of $1.4 billion annually over the course of the first phase and an additional $1.7 billion over the next 35 years during the second phase of the project. This would amount to a whopping $76 billion over the next 45-50 years.
Although these estimates and calculations provide a simplistic understanding of the monetary returns expected to be generated by Reko Diq, these are still estimates, nonetheless. The considerations taken to keep the number-crunching consistent do not account for the variable price of copper and gold in the international market as well as other direct and indirect factors.
Concerns
A key concern that still requires attention is the logistical aspect of this mega project, considering the remoteness of the project site, and consequently the logistics required to make this a feasible project have to be further developed.
Taking the example of the Saindak silver mine located in Chagai, the silver ore extracted from the mine has to be transported 1,127 km from the site to the port in Karachi by trucks. That is absolutely ridiculous, as the costs associated with using trucks would have an adverse effect on the bottom line and overall feasibility of the project.
If a similar plan is on the table for Reko Diq, the margins of Barrick and the government would significantly diminish.
Water was highlighted as the project’s “most critical” issue in the Risk Assessment Report pertaining to Reko Diq published by Behre Dolbear in October 2007, and Pakistan underlined it during the ICSID hearings whilst examining the feasibility of ensuring water supply.
Water is most commonly used in mining to process ore and to water mine roads to reduce dust. Aquifers, surface water, collected precipitation, and even water from the mine itself, provided the mine is actively dewatered, are all possible sources of water for mining.
Naturally due to the remoteness of the site location, developing infrastructure and building a sustainable water source for the next 45 years for the mining operations is a monumental challenge.
Historically, as Pakistanis, all of us have been witness to unsuppressed corruption, inefficiencies as well as plain and simple stupidity on part of the decision-makers and various government entities. The country has a chequered past of poorly executed projects and pitiful government oversight and next to little or no support to investors. To compound all this, bureaucrats and politicians in positions of power never fail to get their kickbacks from projects like these.
Analysis
Under the new agreement, finalised after 10 years of legal battle, Barrick will get half of the project ownership, with Balochistan and three federal state-owned firms 25pc each of the remainder.
The agreement will help Pakistan avoid $11bn in fines ordered by the international arbitration court against its decision to deny the joint venture of Barrick and Antofagasta the licence to develop Reko Diq. Islamabad will, however, pay $900m to Antofagasta, which is exiting the project, to purchase its shareholding.
Although the Balochistan government is on board with Islamabad on the agreement, some Baloch nationalist parties like the BNP-M — and even the JUI-F — do not seem happy with it, and the way the government rushed the Foreign Investment (Promotion and Protection) Bill, 2022, through parliament to guarantee the protection of foreign investment in connection with Reko Diq to meet the Dec 15 deadline for signing it.
There’s no doubt that the reconstituted deal is mostly tilted in favour of the investor. But as they say a bird in hand is worth two in the bush; it’s time to move on and make the best use of the pact.
The project will bring significant growth opportunities to Balochistan by creating jobs, promoting the regional economy and increasing investment in healthcare, education, vocational training, food security and the supply of potable water.
It is, however, also time for our policymakers to build institutional capacities to craft international agreements to protect the interests of the country, and not of the investors.