Supreme Court Intervention in Power Sector Agreements: A Case for Caution to Protect Investor Confidence

Husnain Arshad Khokhar

It was reported on December 3, 2024 that a petition has been fixed for hearing before the newly constituted Constitutional Bench of the Supreme Court of Pakistan whereby the Court stated that it can interfere in the case pertaining to the agreements with the independent power producers as public interest issue is involved in it. While the grounds pleaded in the petition seem convincing that the current case has some distinguishing factors compared to the Reko Diq case, however, the potential direct intervention at this stage by the Supreme Court in a case where binding legal agreements and sovereign guarantees with the government are involved must be carefully weighed. In case the Court decides to intervene, the broader economic implications in such a matter may suggest that judicial overreach would be counterproductive, particularly given the already strained investor confidence in Pakistan’s power sector. This may lead to the perception that while the judicial system discourages investors by delaying court cases for decades, it simultaneously intervenes through its apex court in matters that fall under the jurisdiction of the relevant regulatory authority, leaving little to no room for appeals.

The Reko Diq Precedent and the Current Context

The Reko Diq case is a cautionary tale on how judicial interference can affect commercial contracts. In Reko Diq, the Supreme Court's revocation of the mining lease agreements due to accusations of corruption and breach of conditions led to legal struggle which resulted in a settlement which has been detrimental to the interest of Pakistan to say the least. Although the conditions of the IPP contracts are unique, but the common implication of such decisions is the chances of lowering investor’s confidence which is hardly there anymore.

The present case however has one major distinguishing feature which are the local agreements. The power contracts, unlike the Reko Diq lease, were implemented through a policy framework designed to encourage the participation of the private sector to ease the government’s financial burden. These contracts were not completed under secretive or exclusive arrangements, and moreover they were critical in addressing Pakistan energy demands at the time. Still, the presence of these agreements should not mean the solution to the government’s mismanagement of those agreements is punishing the very investors that were going by the legal system of the state.

Investor Confidence: A Fragile State

The investor climate in Pakistan is already fragile and the current government is trying to repair a lot which was largely the result of policy missteps and governance failures from its previous regime(s). The power sector despite its capacity to generate substantial energy is affected by financial mismanagement, rising circular debt, and high tariffs. The shift to alternative energy sources like solar, driven by both economic necessity and policy failures, which should have been a success story has caused further strain on the grid due to various mismanagement issues. As a result, both local and international investors have become increasingly cautious about the long-term sustainability of the energy market in Pakistan.

In this context, judicial intervention, even if legally justified, would send a signal of instability that could further deter foreign investment. Investors have already fled to more stable regions, and any perception that contracts, especially those awarded by the government, can be rescinded or modified by judicial fiat will only accelerate this trend. The consequences of such actions could be catastrophic for Pakistan’s economic future, especially in a sector as capital-intensive as power sector. If the Supreme Court steps in and invalidates these contracts, it would essentially send a message that the government cannot honor its agreements, even those executed under its own policies, putting the country in the same league as nations with unstable regulatory environments.

?Why the Government Should Be Held Accountable instead, Not the Investors

The key difficulty at hand is that the IPP contracts were awarded by the government, and any failure to properly review the agreements before execution falls squarely at government’s shoulders. It would also suggest that the investors acted in good faith and fulfilled their part of the terms and conditions which were set by the government and regulatory authority. The government must instead take responsibility for its own mismanagement, as it is the one that created and signed these agreements. The investors, who entered the market based on government assurances, should not bear the brunt of these failures.

The energy sector, which has long been viewed as a backbone of industrial and economic growth, needs the confidence of both local and international stakeholders. Any action by the Court that undermines this confidence will set Pakistan’s development back by decades.

?The Need for Amicable Settlement, Not Judicial Intervention

Although one can agree with the arguments regarding the flaws in the bidding process and the need to address corruption within the energy sector, it is important that the resolution comes through negotiation and reform led by the federal government and the regulator together, not through judicial interference. The main object and focus should be on renegotiating the contracts in good faith, and in a manner which is not only transparent but fair for all parties.

Conclusion

The Supreme Court holds the wisdom to protect and guide us, but in the interest of stability the solutions may be grounded in collaboration, not intervention. The government must take ownership of its past missteps, renegotiate contracts transparently and very carefully, and work towards a solution which may lead to sustainable energy future that rebuilds investor trust and strengthens Pakistan’s economy.

To read the previous Article: Pakistan’s Power Sector Emergency: Why Time is Running Out (click here)