The federal government is reportedly facing "ifs and buts" situation on the proposed revival plan of M/s Tuwairqi Steel Mills Limited(TSML) as there is clear division with the stakeholders with respect to supply of gas at subsidized rates and fiscal incentives, well informed sources told Business Recorder.
Some of the stakeholders, sources said, are under considerable pressure for clearance of the proposal which is why everyone except one of the aides of Prime Minister dealing with energy matters are trying to pass the buck to others.
Explaining the case to the ECC, Ministry of Industries and Production stated that the government had signed a Memorandum of Understanding (MoU) with TSML on May 28, 2004 for setting up of Direct Reduced Iron (DRI) unit followed by an Implementation Agreement (IA) of June 8, 2007.
The installed capacity of TSML for producing iron and steel products was projected to be 1.28 million tons per annum. TSML had filed a suit for $ 419.698 million against the Government of Pakistan (GoP) in the Permanent Court of Arbitration (PCA) for not providing gas at the subsidized rate.
M/s Addleshaw Goddard, the legal counsel pleading Pakistan's case, cautioned that any proposed meeting between Government of Pakistan and representative of Al-Tuwairqi Group should not take place until after Pakistan has filed its defence arbitration. Subsequently, the legal firm further advised that any such imperative that no representations are made to this effect.
The Attorney General for Pakistan in his letter of November 19, 2019 suggested a way forward for attracting potential investment in DRI sector through formulation of a general over-arching DRI policy in consultation with respective stakeholders.
In line with the advice received from the Attorney General's office consultation with the stakeholders including Pakistan Association of Large Steel Producers (PALSP) was conducted. Similarly, Board of Investment (BoI) shared the representation from the PALSP with the Ministry of Industries and Production proposing promotion of coal-based DRI plants instead of gas-based DRI plants.
The MoI&P informed the ECC that the CIENA Group has shown interest in the DRI sector, through potential purchase of TSML and has asked for certain considerations from the Government of Pakistan indicating the Group is willing to expand the facility with both forward and backward integration.
In order to make the whole unit viable, M/s CIENA Group, owned by a Pakistani American, who is willing to invest $ 700 million in a phased manner spread over a period of 13 years. The Group has requested for the supply of gas to a fully integrated DRI unit after the first three years, once portion of the overall investment has been made.
On November 27, 2019, the ECC while considering its summary on this issue, had constituted a committee under the chairmanship of Minister for Planning, Development and Reforms, Asad Umar, who is an admirer of TSML's head in Pakistan, with Advisor to the Prime Minister on Industries and Production, Commerce and Investment, Abdul Razak Dawood, Special Assistant to the Prime Minister, on Petroleum, Nadeem Babar, Secretary Finance, Secretary MoI&P and Chairman FBR, as member for finalizing the DRI Policy.
Ministry of Industries and Production pointed out that in order to promote DRI technology in the country through domestic and foreign investment, following systemic incentives have been proposed to all the investors either in Green Filed ( the new investors) or Brownfield category by extending the following: (i) gas, if available, would be provided at the cost of $ 4.65 per MMBTU to a DRI units on the basis of first come first serve to be used as feedstock for a maximum period of up to 10 year.
The investor under Green field category shall be entitled to receive system gas supply on commissioning of the unit, and the investor under Brown field category shall be entitled to receive system gas supply after three years of signing the agreement.
This shall be reviewed after every five years in order to ascertain the availability of system gas; (ii) in case of non availability of system gas, the government would help provide gas through other available resources including imported RLNG on terms and conditions with respective investors' to be decided on case to case basis depending on the international price of RLNG; (iii) exemption from minimum turnover tax slab under section 113 of Income Tax Ordinance, 2001 for the prospective investors on case to case basis with the approval of FBR;(iv) exemption from additional custom duty of two percent on iron oxide pellets shall be considered on case to case basis by FBR without creating market distortions and ;(v) Government shall encourage DRI units to be set up in Export Processing Zones or Special Economic Zones subject to land availability on standard terms and conditions.
Ministry of Industries and Production further pointed out that Brown Field units shall receive the same privileges and obligations after reviving the Grown field units through additional FDI or domestic investment either by the existing management or through transfer to new investor.
However, the approval of granting Brown field status under the framework shall be contingent upon the advice and clearance from the Attorney General office so as to ensure that the prospects of Pakistan's stance in the ongoing arbitration are not affected in any way. Applications for availing DRI technology through the framework shall be submitted within two years of its notification.
MoI&P is of the view that promotion of DRI technology through the framework shall help bridge supply and demand gap in the country. The government is committing to reviving PSM which has an installed capacity of 1.1 million tons. Similarly, TSML, if it avails the benefit provided under this framework can contribute by producing another 1.28 million tons.
Both units require uninterrupted supply of gas for operations. Regarding gas allocation to PSM, Petroleum Division on January 10, 2020 has identified two standard/ marginal gas fields supplying approximately 25-27 MMCFD for 6-7 years.
This proposal was discussed with stakeholders in the inter-ministerial meetings. Petroleum Division argues that the price of $ 4.65 per MMBTU does not require any subsidy if supplied from domestic sources. Petroleum Division has identified two fields that can provide up to 25-30 MMCFD for 7-10 years and can be developed if committed to by the proposed DRI investor on first come first serve basis. However, any required supply beyond this point will require identification of new fields.
FBR in its comments have not supported exemption from minimum turnover tax. However, exemption of additional custom duty on iron oxide pellet has been supported subject to approval from the federal cabinet and parliament.
During discussion, FBR did not support the proposal regarding exemption from minimum turnover tax over the tax slab under section 113 of the Income Tax Ordinance, 2001 on case to case basis, for prospective investors in DRI technology due to commitment with IMF and ongoing import compression which caused revenue shortfall. Moreover, FBR is not empowered to grant exemption on case to case basis. Approval from the federal cabinet and the parliament would be required to grant any such exemption.
During discussion, it was also highlighted that no details regarding the CIENA Group have been provided nor has any information been given whether the potential purchase of TSML shall be accompanied with purchase/ withdrawal of litigation at PCA.
Similarly, no confirmation from the BoD/ majority creditors of TSML has been provided from creating the requisite legal basis for MoI&P to consider or approve the proposed framework(which potentially availed by CIENA Group in view of their letter on file) envisaging grant of fiscal benefits amounting to billion of rupees.
Such indication to potential investor in TSML may likely weaken Pakistan's position at PCA. He suggested that in the interest of transparency, fair play and to dispel any impression of granting tailor made incentives, a clear mechanism be included in the proposed framework for granting incentives on well-defined merit order within the timeframe given for availing the proposed benefits on first come first serve basis.
Secretary Industries and Production who apparently under pressure stated that in conclusion there were two aspects to the draft policy, neither or which was the direct domain of the MoI&P but both of which had the capacity to nullify the implementation of the policy.
One of the arbitration arguments hinged on the fact that at the time the mill was given the industrial rate for gas, whereas they were asking for the rate to be reduced, which was essentially the cause of litigation. While the actual numbers in rupee terms in the draft policy may seem well above the original task in the arbitration.
The second aspect is the availability of gas, which seems a scare commodity. In writing Petroleum Division has communicated that the original allocation of gas to PSM is no longer available and amongst other options suggests that the two stranded gas fields with combined 25-27 MMCFD gas for 6 to 7 years can be considered while in the case of draft policy same stranded gas fields are suggested with capacity of 25-30 MMCFD for 7 to 10 years. In any case, gas is a scarce commodity and PSM is undergoing the privatisation process and will need gas in a few months and under this policy only steel mill is going to run in the foreseeable future. He was of the view that if gas is so scarce, then possibly the government should be looking to auction it rather than allocate it.
He pointed out that the latest opinion of the Attorney General for Pakistan who suggested a way forward which says, ".. objectivity establish through verifiable fact and figures and recorded policy deliberations that the DRI policy has been conceived to address a genuine concern of a growing gap between demand and supply of DRI products and it is not disguised attempt at benefitting any particular enterprise.
It would be helpful to show credible evidence that other investments in the sector are likely and that TSML is welcome to take advantage of the DRI policy."
The sources said, the proposal was again submitted before the ECC on February 19, 2020 but sailed through as the Finance Advisor, Abdul Hafeez Shaikh suggested that it should be reconsidered. However, another source revealed that the proposal was deferred till next meeting.
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