Juan Carlos Boué.* In his General Theory, John Maynard Keynes noted that “[o]ur knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible”. The Discounted Cash Flow (DCF) method relies on such prospective factors to calculate asset values, which is why judges are not keen on DCF being used in court proceedings.
However, DCF’s inherently speculative nature does not bother international arbitration tribunals greatly, and a number of them have used it to assess compensation for multi-decade projects lacking any record of profitability, and even for paper projects that have not progressed beyond the planning stage.
One such recent case is Tethyan Copper v. Pakistan, in which a World Bank tribunal determined that rejection by a provincial government of an application for a copper mining licence amounted to a violation by Pakistan of its bilateral investment treaty with Australia, entitling the investor to compensation in the form of the present value of all the profits that the project would supposedly have generated over its lifetime.
The award came to US$4.1 billion, plus US$1.9 billion in interest, which is equivalent to 86% of Pakistan’s foreign reserves. It is 7.5 time the healthcare budget and 22 times its education budget (all for 2019).
Enforcement of the Tethyan award has been stayed, pursuant to an annulment petition by Pakistan (on corruption and arbitrator bias allegations), and on 18/09/2020, the Tethyan annulment committee decided that Pakistan would be harmed if the stay were lifted and, conversely, that maintaining it would damage Tethyan.
Thus, the continued stay was conditioned on Pakistan posting a security for 25% of the award, and undertaking that it would pay it if the annulment bid failed. Now, the annulment success rate is barely 7% (because the grounds for annulment are extremely narrow), although the controversial track record of one of the Tethyan arbitrators may marginally improve Pakistan’s chances.
But even were this colossal award to be annulled, this would not be because it was considered unacceptable to ruin a country on the basis of a ludicrous forecasting exercise predicated on “guesstimates” imbued with a totally fictitious and misleading certainty. So, Germans can rest easy that it is this system which shall determine Germany’s liability to Vatenfall for the decision to phase out nuclear power in the wake of Fukushima.
*Juan Carlos Boué is a Mexican national and London-based counsel in the’ international corporate and arbitration practice of the international law firm Curtis, Mallet-Prevost, Colt & Mosle. Boué has combined an academic career with a decade at the helm of the international trading arm of Mexico’s state oil company, PEMEX, overseeing commercial aspects of all of Mexico’s crude oil exports. He also served on the committee which reviewed the country’s oil export pricing and policies, among other strategic roles in the oil industry, was a special adviser to the Ministry of Energy and Petroleum of Venezuela and sat on the boards of various oil refining companies. From 2010 to 2018, Mr. Boué was a senior research fellow at the Oxford Institute for Energy Studies. He has written widely on the industrial economics of oil and gas exploration and production, petroleum refining, auction design for oil and gas bidding rounds and the taxation and general political economy of oil.
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