France-Pakistan economic relations under threats

Columnist Tanvir Zahid discusses Pakistan’s economic relations with the crucial EU nation.

France and Pakistan have been enjoying good friendly relations and cooperation in economic and other fields over the years. But these economic cooperation relations between the two friendly countries have recently survived a rather serious threat of breaking of economic ties from Paris to Islamabad. However, this was averted only at the intervention of the highest level though after lingering delay of more than a decade. Matter was allowed to be dragged so far despite the fact that France heads the Paris Club, consortium of countries providing economic assistance to Pakistan and while keeping things in cold storage for so long, nobody seemed to realize the serious damage being caused to the economic relations between France and Pakistan.

Dispute arose over payment of a credit facility utilized by the Civil Aviation Authority (CAA) for the construction of Jinnah Terminal Complex at the Quaid-i-Azam International Airport, Karachi. The amount in question was not all that big for which risk of endangering otherwise quite friendly relations with Paris should have been taken. But, somehow, the dispute was unnecessarily allowed to linger on for more than a decade to the extent that the French authorities were forced to hurl threats on Islamabad of freezing all economic assistance to Pakistan till the dispute is amicably settled and the amount demanded reimbursed.

It all started when the French Bank Credit Lyonnais provided French Franc (FF) 423.38 million loan facility to the CAA under an agreement signed on September 28, 1988.

The credit was guaranteed by COFACE (French State Reinsurance Authority) on behalf of the French Government and by the External Finance Wing of the Federal Ministry of Finance on behalf of the Pakistan Government.

The credit was utilized by the CAA for the construction of Jinnah Terminal Complex at the Quaid-i-Azam International Airport Karachi. The contract for this purpose was awarded to M/s SOGEA of France also on September 29, 1988.

As per contract terms, the work was to be completed by June 1991. But, actually it was completed in August 1992 with a delay of 14 months. The French firm had alleged that the delay in execution was caused due to changes in the design made by the CAA and as such they were not to be blamed for the delay.

French firm SOGEA made a claim of about FF 830 million (equivalent to US $ 126.7 million) as compensation and took the case to the International Chamber of Commerce (ICC) at Paris in 1993.

While the ICC constituted an Arbitration Tribunal, the CAA sought intervention of the Sindh High Court on the ground that the contract explicitly provided that in case of any dispute, Pakistani laws will be applicable. Sindh High Court issued stay order in favour of the CAA on April 3, 1995.

However, not caring for the stay order issued in the matter by the Sindh High Court in favour of the CAA, the ICC Arbitration Tribunal set up in Singapore completed its proceedings and announced its award in April 1996. Under the award, the CAA was required to pay an amount of FF 509.910 million (equivalent to US $ 76.8 million) to M/s SOGEA. CAA filed an appeal in the Sindh High Court on June 11, 1996 against the ICC Arbitration Tribunal Award.

The matter was in the meantime also referred to the Federal Ministry of Law and Justice for eliciting its considered views. The Ministry accordingly was of the opinion that M/s. SOGEA or COFACE of France were not legally entitled to reimbursement of any amount as compensation from CAA.

As the dispute lingered on and threatened Islamabad relations with Paris, as reflected through communications taking place at the appropriate level between the two countries, the Federal Cabinet considered the matter in December 1997 and constituted a Ministerial Committee which was headed by the Finance Minister and included Ministers for Foreign Affairs, Law and Justice for resolving the issue which had somehow lingered on for that long.

For resolving the matter, a meeting was held in the office of the Finance Minister in March 1998 and it was also attended by French Ambassador in Islamabad.

Subsequently, a French delegation headed by M. Paul Henri Ravier, Deputy Director of the Division of Foreign Trade Relations held a meeting with the Ministerial Committee headed by the Finance Minister.

The Pakistan side offered to pay FF 346 million by no allocation of certain unutilized French Soft Loans in the meeting which was held on May 26, 1998.

Both the side presented their respective views followed by detailed discussions on the points made by Pakistan delegation headed by the then Finance Minister Mr Sartaj Aziz as well as the French delegation.

Finally, the Finance Minister proposed the following package for consideration by the French delegation:-

a)  The net award excluding the amount to be withheld by CAA for settling the tax liability of the French Contractor amounts to about FF 471 million. The financial charges included in the Award amount to about FF 100 million while another FF 25 million have been awarded as the cost of the Arbitration proceedings. This aggregate of FF 123 million should be deducted from the Award leaving an amount of FF 546 million as payable by CAA to M/s SOGEA/COFACE.

b)   This amount of FF 346 million would be payable by CAA/Pakistan Government over five years in ten, six monthly instalments. The French delegation should help us and ensure that the interest rate on the outstanding balance is kept of the minimum.

Further, the amount of FF 346 million should be earmarked out of the existing French loans which had been given to Pakistan till date but had not been allocated to any particular project or by re-allocating amounts from projects which are slow moving or unviable. The Economic Affairs Division (EAD) and the French Embassy will work out these details in a meeting on May 27, 1998. The sum of FF 346 million carries very soft terms. This amount will then be reprogrammed so that it can be used as co-financing for a structured quick disbursing loan to Pakistan such as the Banking Sector Reform Loan which is being given by the World Bank and Japan or the Capital Market Development Loan which is being financed by the Asian Development Bank. The objective is to utilize French funds (as a loan to Pakistan) in order to facilitate Pakistan for making payments to the French State Reinsurance Agency. However, the repayment of FF 346 million to M/s COFACE over five years and the French co-financing of an already structured quick disbursement loan to Pakistan would be two separate transactions.

On his part, the French delegation headed of M. Paul Henri Ravier promised that he will go back and inform his government on the proposal made by the Finance Minister. He will either come back or convey the views of the French Government through the French Ambassador in Islamabad or the Pakistan Ambassador in Paris.

Earlier, during deliberations, the French side had, however, insisted that the amount payable is FF 476 million and not FF 346 million offered by Pakistan. In addition, they insisted for the payment of interest on overdue amounts from the date of award till the date of payment of FF 476 million. The French claim constituted the following:—

            FF 346 million offered by Pakistan.

            FF100 million as financial charges.

            FF 25 million cost of arbitration, legal and witness costs.

            FF 5 million as arbitration cost, service charges.

            FF 476 million total (equivalent to US $ 72.671 million).

As the matter remained unresolved, the French Embassy in Islamabad addressed a communication to the Ministry of Foreign Affairs on December 14, 1998 wherein the following was stated while stressing for resolving the matter on the basis of claim made by the French side:

“France is aware of the difficulties presently faced by Pakistan’s economy. It has fully supported the conclusion of an agreement between Pakistan and the International Monetary Fund (IMF), despite the political context which followed the nuclear tests conducted by Pakistan. Being the Chairman of the Paris Club as well as a bilateral lender to Pakistan, France fully favours an early conclusion of an agreement within the framework of the Paris Club. The rescheduling of the debt will contribute significantly to the financing of the programme recently set up with the IMF.

“The French authorities are of the view that this global negotiation should be an occasion for Pakistan to honour all its commitments and particularly to resolve the outstanding Karachi Airport issue. Following the visit of the Deputy Director of the Directorate of External Relations (Ministry of Economy and Finance) on the 25th and 26th of May 1998, France has taken note of Pakistan proposal for settlement of the amount of 347 MN FRF with a period of repayment ranging from 3 to 5 years and a reallocation of certain unutilized French soft loans towards a financial support to the balance of payment.

“As already expressed by the French authorities during the past discussions, it is hereby reminded that the amount France is referring to is actually higher (i.e. 476 MN. FRF excluding interest on delayed payments). The modalities of repayment will have to be examined within the global framework of the negotiations to be held between France and Pakistan on the rescheduling of the Pakistani bilateral debt. Thus, it will bring a substantial relief to Pakistan’s balance of payments.”

The matter has been under discussion since then at various levels for a settlement on bilateral basis.

Efforts have been made through Pakistan Ambassador in Paris and the French Ambassador in Islamabad for resolving the matter.

Negotiations were also held with the French Government as latest as from September 25 to October 1, 1999 in the context of a briefing approved by the Finance Minister and subsequent directive of the then Prime Minister Mian Nawaz Sharif.

The delegation was authorized to negotiate settlement of SOGEA claims in respect of Jinnah Terminal contract on the following lines:

“The French authorities may be persuaded to agree to the payment not exceeding FF 346 million for repayment over a period of 10 years free of interest.”

Pakistan Ambassador in Paris, who headed the delegation, made the following recommendations in the light of his deliberations with the French authorities:

a)  France would not agree to a figure less than FF 476 million for the settlement of the dispute. This has been their consistent stand based on the fact that they have actually paid the sum to SOGEA. I would recommend that we accept this figure.

b)  The rate of interest and repayment period could be negotiated further and French terms softened. I shall continue my efforts in this regard at a high level, specially at the Foreign Office, the P.M. Office and the Presidency. Possibly, a meeting at Ministerial level could lead to a satisfactory agreement. I would recommend that we accept an interest free, repayment period of 3-7 years. I do not believe that the French will accept a 10 year-interest free repayment period.

c) The most important factor would be for the French to give us an understanding that since the SOGEA dispute is resolved, a quick disbursing loan would become available to ease our burden of repayment. This understanding need not to be formally linked with the SOGEA settlement, Pakistan Ambassador further pointed out: “The advantage of settling the SOGEA dispute even on current French terms far outweighs the disadvantages. As time is running out with every passing day, provided we receive from the French an understanding of a substantial inflow of French financial assistance blocked out by the SOGEA dispute, we should agree to the best terms available.

The French side even subsequently did not budge a little from their stand of a payment of FF 476 million (equivalent to US $ 72.7 million). And repercussions which accrued as the matter remained unresolved, as mentioned in a summary on the subject to the Federal Cabinet in December 1999, all French development assistance in the pipeline (FF 95 million equivalent to US $ 145.8 million) stood frozen pending the settlement of SOGEA dispute and even signing of bilateral dent rescheduling (FF 2587) million equivalent to US $ 395 million) had also been linked with the settlement of outstanding claim by M/s SOGEA.

The summary also pointed out that no aid had been committed by the French since 1997 and even the pipeline of FF 956.67 million has been frozen and no future inflows are expected till Islamabad resolved SOGEA claims and signed rescheduling agreement.

As much was at stake, the Federal Cabinet acceded to the French demand and agreed to pay FF 476 million in six-monthly instalments of US $ 143000. First instalment was accordingly paid in January 2000, second in July 2000 and so on and so forth.

Though the matter has after all been resolved, but no agency or official has been held responsible and made accountable for dragging things so far unnecessarily that France had to resort to an extra-ordinary measure and only then high-ups in Islamabad had realized the seriousness of the matter and took the decision to settle M/s SOGEA claims according to the French Government satisfaction. 

ABOUT THE AUTHOR

A Lahore-based freelance journalist, specializing in economic, planning and development fields and been associated with dailies “Business Recorder” Karachi/Lahore and “Frontier Post” Peshawar/Lahore.