Storm brewing against Pakistan Steam Gas Pipeline

ISLAMABAD: In a shocking development, Pakistan has asked Russia that it has no money to fully fund its 74 percent shareholding in the $3 billion project of Pakistan Steam Gas Pipeline (PSGP) and asked Moscow to raise debt financing up to $1.4 billion against its shareholding for the project raising eyebrows of many if the huge amount of Rs 295 billion ($1.83 billion) collected in the head of GIDC (gas infrastructure development cess) by Finance Ministry till August 2020 has been utilized by the government. So much so that Pakistan also asked Russia to jack up its shareholding maximum up to 49 percent from 26 percent showing that Islamabad does not have the required amount to finance its own shareholding of 74 percent. This develops a strong impression if the government that collected over Rs385 billion has utilized the GIDC amount either in budget financing?.

Besides, the government has now decided to extend sovereign guarantee against the debt financing to the lenders to be arranged by Russia.

According to the official document, Inter State Gas System (ISGS) ---Pakistan’s nominated company would arrange the local component for the project from the finance division, local commercial banks and other financing sources. And for the foreign currency component Pakistan would explore financing options through RNE--- the Russian nominated company. And Russia has also been asked to work out its strategy with options of arranging supplier credits, debt financing and increase in its shareholding by up to 49 percent.

The Petroleum Division to this effect has submitted a summary with ECC that meets today (Wednesday) seeking permission for a visit of a high powered delegation headed by Federal Energy Minister, Hammad Azhar comprising secretary petroleum, additional secretary finance ministry and officials of Inter-state gas system (ISGS) to Russia for holding a discussion on the specifics of the debt and equity for the project and agree on sources and terms of borrowing of loans including EXIM (Export and Import) financing, senior officials at Energy Ministry and official documents submitted to ECC, revealed this to The News.

However, the new situation poses the question as to what will the government reply to Supreme Court on utilization of GIDC as GoP has told the SC about presence of Rs 295 billion in the consolidated Account Number 1 and ironically the finance division has not refused the Russians during July 12-15 talks, the unavailability of money to spend on this project during current fiscal year.

The Supreme Court of Pakistan (SCP) through their Judgment dated August 13, 2020 dismissed petitioners’ (Fertilizers, Captive Power and others) appeals and upheld the levy and collection of GIDC in accordance with GIDC Act 2015. The government had given the undertaking to SC that it has by 13 August 2020, collected Rs 295 Billion under GIDC head and remaining amount of Rs400 billion is held up with various economic players due to litigation.

Under SC verdict, the amount collected so far will be disbursed on mega gas infrastructure initiatives including North-South gas pipeline, TAPI, IP and ancillary projects.

The finance ministry had given the undertaking to SC that whenever there will be a cash call from the petroleum division for any project, it will release the amount collected under GIDC. The SCP had directed to collect the remaining amount over Rs. 400 billion through 24 monthly equal installments, for which recovery proceedings have to be started by the Petroleum Division/ Sui Companies.

The SCP has suspended further levy and collection of GIDC with the direction that the government has to start work on North-South gas pipeline which is now renamed as PSGP (Pakistan Stream Gas Pipeline) within next 6 months and the government must take all necessary steps to also start work on IP once the sanctions on Iran are lifted, besides GoP must start work on TAPI, once the pipeline reaches from Afghanistan at Pakistan border and failing to take any action even though the circumstances are conducive, the purpose of the Cess will be considered as frustrated and the Act will be considered as permanently dead.

The SAPM on Power and Petroleum Tabish Gauhar who opposed the pipeline project with Russia on print and electronic media arguing local gas companies should complete the project as it will lower down the project cost and to this effect petroleum division with input of Tabish Gauhar managed to get nod from Cabinet Committee on Energy (CCOE) on June 24, 2021 for initiating alternate pipeline project and CCOE had asked petroleum division to come up with firm proposal for alternate project by July 15, 2021. Now the question arises as to why the petroleum division kept CCOE in the dark and got approval of the alternate pipeline project when it had not taken the finance ministry on board as to whether the finance division has the required amount to spend on the project.

Gauhar is being seen by ‘powerful circles’ as saboteur of many projects which include PSGP, payment to IPPs installed under 2002 power policy, AMI (Advanced Metering infrastructure) project and it is also being felt that Ministry of Energy lacks the will to take right decision on its own when it comes to issues of dry docking and pipeline with Russia. Because of the inordinate delay in the AMI project, Pakistan is facing a penalty of $2.2 million from ADB in the shape of commitment charges for not utilizing the loan of $400 million loan fixed for the AMI project.

Every time Prime Minister was asked to step in and take final decision on the issues like dry docking of FSRU at Engro Terminal and pipeline with Russia showing how incompetent authorities are perched at Ministry of Energy. The powerful circles also feel that the incompetence of this level at the Ministry of Energy has never been seen before. “SAPM and secretary petroleum acts will take all to NAB when PTI is not in power and now will definitely be going to ruin the sector in particular and the government in general.”

Now after four days of talks on heads of terms about the PSGP project with Russia ended on July 15, 2021, the critics are saying that the PSGP project is again back to the BOOT model which was agreed 6 years ago.

In 2015, IGA was signed under which Russia will provide 100 percent financing for the pipeline project. However, on May 28, 2021, amended IGA was signed keeping in view the availability of GIDC amount with Pakistan and Russia shareholding at 74:26 percent respectively. “In this case definitely the GoP is going to give sovereign guarantees,” independent energy experts say.

Under the amended IGA (Inter-governmental Agre ement) signed in Moscow on May 28, 2021, with Pakistan having 74 percent shares and Russia 26 percent. Pakistan requires to provide almost $2 billion against its shareholding and Russia needs to come up with $700-800 million investment as per its 26 percent shares.

Russia will come up with over 50 percent equity and the rest will be arranged by it through debt financing. However, keeping in view Pakistan’ rating, 30 percent equity and 70 percent debt is required. During the talks on PSGP held in Islamabad from July 12-15, the situation SAPM on Revenue, Dr Waqar Masood Khan appeared on the scene in the last day of talks and held secret talks with Russia side informing them that Pakistan cannot afford for outflow of huge amount of US dollars in next two years keeping in view the foreign exchange reserves situation. However, Islamabad is ready to provide the amount in rupees not in dollars required for the purchase of 56 inches pipeline and compressors urging the Russian side to arrange debt for the Pakistan side.

Dr Waqar Masood Khan was quoted by the top sources as saying during the fourth day talks that Pakistan wants debt with repayment of loans and interests in next 4 to 5 years not in two years’ time. The Finance ministry representative also said during the talks that the government will provide Rs30 billion each year till 2023. This means that Pakistan will provide Rs90 billion which is equal to $600 million for the project and for the remaining $1.4 billion out of $ 2 billion Pakistan wants Russia to generate through debt financing against Pakistan’s shareholding.

The Russian side then sharply reacted, posing the question what would happen to the fate of their investment against their 26 percent shareholding and repayment of loans and interests to the lenders in the next 4-5 years in case the new government comes to power. The Russia side also responded saying it has not been mandated by Moscow to decide on increasing its shareholding when Pakistan time and again asked it to increase its shareholding up to 49 percent. However, Russian side said that right now it will commit 26 percent shareholding. However, after getting input from top authorities in Moscow, it will share its mind with Pakistan’s authorities about its new demand seeking increase in Russian shareholding by up to 49 percent when both sides will meet within 30 days to finalize the shareholders agreement.

The SAPM on Revenue Dr Waqar Masood Khan, SAPM on Petroleum Tabish Gauhar and Secretary Petroleum Dr Arshad Mahmood were sent questionnaires. Secretary Petroleum just said that the questions asked by The News were based on gross misunderstanding about the project structure, financing structure and way forward. When stressed for more explanation as to why Pakistan is asking Russia to arrange debt financing for the project and urging Moscow to jack up its shareholding by up to 49 percent from 26 percent, he said: "We have never insisted on Russia for this. This is just an option subject to some conditions precedent. Now there are two components of financing - local where Pakistan will take lead and foreign where Russia will take lead but all exposure will be on the balance sheet of SPV which is JV of Pak Russia." The Secretary Petroleum also went on to say that all structuring has been done in consultation with the Finance Division which is witness to the signed head of terms. He believes the government is moving in the right direction. The GIDC is not an issue. The foreign currency cover of requisite funds needs extra efforts under normal principles of external financing in Project mode.

The SAPM on Petroleum and Secretary Petroleum was asked, saying: “Sir, Pakistan and Russia signed an amended IGA in Moscow on May 28, 2021. But on June 24 CCOE on the summary prepared by the petroleum division with input of SAPM on Petroleum approved the alternate pipeline project keeping in view the GIDC amount of Rs 295 Billion parked with the Finance Ministry. But during recently held talks with Russia, finance ministry representative additional secretary Anwar Shaikh told Russian side that GoP has no money to allocate funds from GIDC head during current financial year for Pakistan Stream Gas Pipeline project and also asked Russia to raise debt for Pakistan from international market against its share in the project against sovereign guarantee. Sir I want to know where the GIDC amount of Rs295 billion which the finance ministry had collected. Finance ministry had given the undertaking to SC that by August 2020 it collected Rs295 billion which will be made available to the Petroleum Division on its cash call for the project. Sir has the government spent the amount collected in GIDC head?. Sir, in meeting with Russian delegation, the finance ministry asked to Russian side to increase their shareholding up to 49 percent from 26 percent because Pakistan has no financing available to fund its 74 percent shareholding in the project. Sir, why did the petroleum division mislead CCOE on an alternate pipeline project when there was no money available with the Finance Ministry. Don't you think the petroleum division has not only kept CCOE in the dark on the availability of GIDC amount for an alternate pipeline project but also offended Russia.

Sir, The News has also came to know that a delegation from Pakistan headed by the Energy minister comprising you sir and officials from ISGS and the Finance ministry wants to go to Russia for talks on debt financing issues for the project. And under the new scenario, the petroleum division wants Russian side to increase their shareholding from 26 to 49 per cent. Don't you think it will violate the amended IGA which says Pakistan and Russia will be having 74:26% shareholding. Plz sir give your detailed version.”

The News also sent a questionnaire to SAPM on Revenue Dr Waqar Masood Khan asking if the amount of Rs295 billion collected under GIDC head by August 2020 has been utilized for budget financing or in any other head as finance ministry has asked Russia to arrange debt financing to fund its 74 percent shares in the project.

However, Finance Division's top officials said that In the presence of GIDC allocation for CFY and direction of the SCP for funding on IP, TAPI and this newly included North South in the judgement, He said the Finance Division can’t say that Finance Ministry has no GiDC to fund this project . He said that in the agreed scheme of funding Pakistan is due to allocate 75 billion over next 3 years from GIDC ( if project cost $ 2 billion is assumed). He said that actually debt portion is required for an economically feasible project also. He said that in case a project is awarded on preferential terms, it also requires supplier credit on preferential terms generally provided by the equipment supplier country's Eximbank and, the FEC (foriegn exchange component) constitutes 70% of project cost estimated.

According to the summary of the Petroleum Division sent to ECC, both parties finalized the project structure in the form of Protocol on the Amendments to the IGA in November 2020 to implement the Project through a Special Purpose Company (SPC) to be incorporated in Pakistan.

The two governments signed the Protocol to the Amendments to the IGA on 28 May 2021 in Moscow after approval of the Federal Cabinet on 9 March 2021. The Protocol envisages signing of a Shareholders Agreement (SHA) within 60 days from the signing of the Protocol. Further, the Ministry of Defense has also given approval of the pipeline route alignment, proposed by this Division, on 30 June 2021, The next steps involve Feasibility Study, Route survey, land data for land acquisition, Environmental studies by NESPAK.

Ministry of Energy. Petroleum Division had shared a draft Shareholders Agreement (SHA) with the Ministry of Energy Russia on 23 December 2020, In response, the Ministry of Energy, Russia shared Heads of Terms (HOT) for SHA on 17, March 2021 and a revised Heads of Terms through letter dated 2™ July 2021. Moreover, the Russian

Ministry of Energy also conveyed the Russian Nominated Entity under the IGA “PAKSTREAM LLC” established by the consortium of Federal State Unitary Enterprise, Centre for Operational Services, ETK und PAO TMK on 7" June 2021 and requested holding discussions on the HOTs as soon as possible.

The summary submitted to ECC also highlights the details of the signed heads of terms (HoTs) which say that PAKSTREAM LLC (RNE) and ISGS (PNE) are the “Shareholders” of SPC (Special Purpose Company) that will complete and run PSGP project. The RNE will have not less than 26% shares, while PNE will have up to 74% shares in the SPC.

The SPC, with the participation of RNE and PNE, shall be responsible for the arrangement of funding for the Project through equity and debt. The debt component shall consist of local currency and foreign currency components.

The equity component in the respective ratios of the parties shall be financed through capital and subordinated debts. For the local currency component, SPC through the lead role of ISGS would explore funding lines from the Finance Division of Pakistan, local commercial banks and other sources of financing. For the foreign currency component, the lead role of RNE, the Russian company would explore financing options through International Financial Institutions, foreign banks and other avenues including bilateral financing arrangements.