For more information on the application of corruption laws to the Energy Industry in Pakistan, please feel free to email us at aemen@joshandmak.com
A common query and complaint from our foreign clients wishing to invest in Pakistan concerns the lack of specific Federal and Provincial laws addressing commercial bribery. While the Pakistan Penal Code 1860 includes provisions that can be applied to cover cases of commercial bribery, such as criminal breach of trust (Sections 405 and 406) and cheating (Section 420), these sections do not explicitly cover commercial bribery. Sections 405 and 420 prescribe up to seven years imprisonment for offences that could encompass commercial bribery, but the applicability of these provisions can vary depending on the specific circumstances involved .
Chapter 9 of the Pakistan Penal Code specifically deals with bribery of government officials, and the Prevention of Corruption Act 1947 also addresses this issue. However, there are few laws that discuss the legal limitations on gifts to government officials, and Pakistani laws do not set explicit limits on such gifts. To regulate kickbacks and corrupt practices among government officials, the Federal Government initially issued the Ehtesab Ordinance 1996, which was later replaced by the Ehtesab Act 1997. The National Accountability Bureau Ordinance 1999, which is currently in force, repealed these earlier laws but allowed pending proceedings to continue as if the laws had not been repealed (Generally, all corrupt practices subject to penalties under the OECD Convention on Combating Bribery and the US Foreign Corrupt Practices Act are also punishable under Pakistani laws. However, it is commonly complained that enforcement of these anti-corruption laws is selective and often influenced by political agendas. As such, we advise foreign companies operating in Pakistan to strictly adhere to local anti-corruption laws. If a government official solicits a bribe or kickback, it should be reported to the relevant government agencies as well as the company’s embassy in Pakistan.It is also worth noting that recent developments have improved the situation, with increased whistleblowing mechanisms and proactive measures by the judiciary to combat corruption. For instance, the dynamic efforts of Chief Justice Iftikhar Chaudhry significantly contributed to the elimination of corruption during his tenure.
With regard to specific Pakistani Federal and Provincial laws concerning commercial bribery, we advise that there are no specific laws relating exclusively to this subject. However, the provisions of the Pakistan Penal Code 1860, which deal with general offences such as criminal breach of trust, cheating, mischief, making false documents, extortion, and theft, can be invoked to address cases of commercial bribery. Relevant sections include Sections 405, 406, and 420 of the Pakistan Penal Code 1860. These sections prescribe up to seven years imprisonment for offences that can encompass commercial bribery. Nonetheless, since none of these provisions specifically cover commercial bribery, their applicability would vary on a case-by-case basis .
Generally, all corrupt practices subject to penalties under the OECD Convention on Combating Bribery and the US Foreign Corrupt Practices Act are also penalized under Pakistani laws. Despite these anti-corruption laws, corruption remains widespread at all levels in Pakistan. The enforcement of these laws is often selective and politically motivated, with investigations typically targeting political opponents or projects sanctioned by previous governments. Consequently, it is crucial for foreign companies operating in Pakistan to strictly comply with local anti-corruption laws. If a government official solicits a bribe or kickback, it should be reported to the relevant government agencies and the company’s embassy in Pakistan. The recent case involving Hubco Power Company has demonstrated that foreign companies accused of corruption cannot successfully claim coercion by a senior government official as a defense against improper practices.
The Hubco Power company scandal
The Hubco Power Company scandal involves a complex and contentious history of alleged corruption and contractual disputes between Hubco and the Water and Power Development Authority (WAPDA) in Pakistan. The core issue arose from discrepancies in the amendments to the Power Purchase Agreement (PPA) between the two entities, particularly the sudden and unexplained execution of supplemental deeds and amendments after prolonged negotiations, raising suspicions of improper conduct and misuse of power.
The Supreme Court of Pakistan ruled that these matters required detailed examination due to prima facie evidence suggesting misuse of power by public officials for extraneous considerations. The court observed that important procedural safeguards were not followed, such as the lack of proper authorization and signatures on key documents. This raised substantial questions about the legality and validity of the contractual amendments, which the court determined were not arbitrable due to their implications on public policy and potential criminality
The scandal highlighted significant procedural improprieties, including unauthorized signatories and the failure to regularize essential documents. The court noted that schedules containing crucial tariff rates and terms were signed by individuals who lacked the necessary authority, casting doubt on the legitimacy of the agreements .
The Hubco case also underscored broader issues in Pakistan’s handling of foreign investments and arbitration. The Supreme Court’s stance against allowing international arbitration in this context, as demonstrated in the Hubco and Reko Diq cases, has created uncertainty and concern among foreign investors about the fairness and neutrality of Pakistan’s judicial system in resolving such disputes. This skepticism arises from the perception that national courts may not provide an impartial forum, particularly when the State is involved as a party to the dispute.
The implications of the Hubco scandal extend beyond the immediate parties involved, reflecting systemic challenges in ensuring transparency and integrity in large-scale infrastructure projects and foreign investments in Pakistan. The controversy also emphasizes the need for robust procedural checks and adherence to legal standards to foster a more conducive environment for international commercial arbitration and foreign direct investment .
What other instances of corruption have occurred in the Energy sector of Pakistan in the recent decades?
In recent decades, Pakistan’s energy sector has faced numerous instances of corruption, significantly impacting its efficiency and reliability. Key examples of corruption include:
- The RPP (Rental Power Projects) Scandal (2008-2011): This involved allegations of corruption and financial irregularities in awarding contracts to rental power companies to address electricity shortages. The Supreme Court of Pakistan declared these contracts illegal in 2012, citing that they were awarded without proper competitive bidding, resulting in financial losses for the government. The National Accountability Bureau (NAB) pursued several high-profile figures, including former Prime Minister Raja Pervez Ashraf, for their alleged involvement.
- The IPP (Independent Power Producers) Dispute: Similar to the Hubco case, various IPPs faced allegations of overcharging and manipulating contracts to extract higher payments from the government. The scrutiny of power purchase agreements revealed that many IPPs benefitted from excessively favourable terms, leading to inflated tariffs and substantial financial strain on the energy sector. These issues have been a recurring source of contention, often leading to legal disputes and calls for renegotiation of contracts.
- Circular Debt Crisis: Chronic corruption and mismanagement have exacerbated the circular debt issue in Pakistan’s energy sector. This debt arises from delayed or non-payment to power producers by distribution companies, which, in turn, do not receive payments from consumers. Corruption in meter reading, billing, and collection processes contributes to the inefficiency and financial instability of the energy sector, with the debt ballooning to alarming levels in recent years.
- K-Electric (KE) Mismanagement: K-Electric, the sole power utility in Karachi, has frequently been accused of corruption and mismanagement. Issues include overbilling, poor service delivery, and failure to invest adequately in infrastructure. Investigations have often revealed that systemic corruption within KE hampers its ability to provide reliable electricity to Karachi’s residents, exacerbating the city’s chronic power outages.
- Thar Coal Project: Despite its potential, the Thar Coal Project has been marred by allegations of corruption, delays, and financial irregularities. Mismanagement in the allocation of funds and resources has hindered the development of this critical energy resource, which is vital for addressing Pakistan’s long-term energy needs.
- Energy Theft: Widespread electricity theft remains a significant issue, with losses due to power theft estimated to reach Rs520 billion annually. This practice is rampant across various regions, contributing to the high circular debt and reducing the financial viability of energy projects.
These instances of corruption reflect systemic issues within Pakistan’s energy sector, affecting its capacity to meet the country’s energy demands efficiently. Addressing these issues requires robust reforms, transparent governance, and stringent enforcement of anti-corruption measures to ensure sustainable and reliable energy provision for Pakistan’s socio-economic development
