ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has put approval of incentives for Turkmenistan Afghanistan Pakistan India (TAPI) pipeline project on ice, till their professional assessment, Federal Bureau Revenue’s(FBR) support and in synch with the International Monetary Fund’s (IMF) Stand By Arrangement (SBA), well informed sources told Business Recorder.
Sharing the details, sources said, Petroleum Division has briefed the ECC that TAPI Gas Pipeline Project aimed to bring natural gas from the Galkynysh and adjacent gas fields in Turkmenistan to Afghanistan, Pakistan and India. In order to strengthen the common understanding made by the TAPI parties and to further implement the project, Inter-Governmental Agreement (IGA) and Gas Pipeline Framework Agreement (GPFA) were executed on December 11, 2010 after approval of the Cabinet. The GPFA had provided certain protections and incentives to the project company for the execution, implementation and operation of the pipeline for the life of the project. Moreover, given that TAPI was a transnational pipeline project, the government of Pakistan (GoP) had agreed, under the GPFA, to adopt and implement uniform legal and regulatory framework for the project.
As per the GPFA, Afghanistan and Pakistan were required to execute Host Government Agreements (HGAs) with TPCL (TAPI Pipeline Company Limited), the project company. The Head of Terms of the Host Government Agreement were signed between the GoP and TPCL on March 12, 2019, after obtaining Cabinet’s approval. Petroleum Division was negotiating the full form of HGA with TPCL. In this regard, in order to take all concerned Ministries/ Government Entitles viz Ministries of Foreign Affairs, Finance, Interior, Commerce, Law & Justice, State Bank of Pakistan, Federal Board of Revenue and Board of Investment, on board, three Inter-Ministerial meetings were held (i.e. on 8th, 11th and 17th August 2023).
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Petroleum Division further noted that under the TAPI HGA, Government of Pakistan and its authorities/ institutes/ organisations would allow certain concessions and permission to TPCL including investment protection, tax concessions, authorization to remit foreign currency, facilitation to grant authority, permissions covering approval/ NOCs, licenses, etc., uninterrupted transit of gas, freedom of contract, excess pipeline capacity utilisation, transportation tariff approval, provision of land, security protocol/agreement, change of law protection, travel concessions covering visas and permits, etc. The HGA would authorise TPCL to implement and operate Pakistan segment of the TAPI project for next 30 years.
It was explained that to provide for the promotion and protection of certain qualified foreign investments, the federal government of Pakistan has enacted Foreign Investment (Promotion and Protection) Act, 2022 (FIPPA). The fundamental purpose underlying this enactment was to provide protection to investors and extend investment incentives covering direct or indirect taxes, duties, levies, cess, property taxes, simplifying and streamlining the approval processes, and facilitating transfer and repatriation of foreign currency etc. Under FIPPA 2022, the federal government is empowered to declare certain investments, sectors, industries or projects as qualified investments to be included in the First Schedule of the FIPPA 2022.
In this context the TPCL had submitted a formal request for the declaration of TAPI Gas Pipeline Project as a qualified investment under the FIPPA 2002 as it qualified the threshold of $500 million. The inclusion of the project in FIPPA would enable TPCL to secure the required financial commitment of prospective international investors and lenders. In pursuance thereto TPCL had requested, under the draft HGA, certain investment incentives, which primarily covered investment protection, taxes and duties concessions and foreign currency related matters (bank accounts and repatriation of funds). The requested incentive package by TPCL was very much in line with the investment incentives under FIPPA 2022. In view of the GoP’s international commitments given under the GPFA and Heads of Terms of the HGA of TAPI project, the following were proposed in relation to TAPI project: (i) TAPI Project be declared, as a qualified investment under FIPPA 2022; and (ii) approve the investment incentives for the TAPI Project.
During the ensuing discussion, it was stated that Pakistan was importing LNG worth billions of dollars to meet shortage of gas. It was observed that summary did not mention the time period for which concessions are to be given. Further it was also noted that concessions were usually linked to Internal Rate of Return (IRR), ROR, Rate on Equity (RoE), Return on Investment (RoI), etc. It was also observed that usually concessions are given for the period of construction of a project and were usually tapered off as constructions proceeded ahead.
It was apprised that the TAPI project would provide saving of foreign exchange of USS 1 billion per annum. It was pointed out that the Foreign Investment (Promotion and Protection) Act, 2022 was meant to promote and protect foreign investments of the private sector in the country. However, the TAPI project was an Inter-Governmental Project between the four countries; therefore, it should be scrutinised with the proposed incentives mentioned in the summary and to see whether these were to be applicable on TAPI. It was further observed that a draft notification for the proposed incentives would be required duly vetted by Law and Justice Division in case it was decided to give cover of FIPPA Act 7022. It was also suggested that consultation with relevant provinces was not done which was required.
It was highlighted that the proposed incentive for the TAPI project was in the form of the tax exemptions which was not in line with the IMF Standby Arrangement; therefore, this aspect should be taken into account before making an informed decision thereon. It was responded that the said incentives were only for the construction period of the project.
It was apprehended that current geopolitical situation of Afghanistan was not conducive to implement the project though Turkmenistan was found fully on board. The forum further observed that there was a need for detailed consultation on tax issue with the concerned provinces, Petroleum Division and FBR before making an informed decision on the proposal.
After detailed discussion, the ECC deferred the proposal and subject to following conditions: (i) Petroleum Division to carefully make a professional assessment of the proposed concessions with the time period for which concessions are to be allowed and then discuss these with the FBR and relevant provinces where needed; and (ii) Petroleum Division to discuss the proposal with the Law & Justice Division for vetting of notification of concessions after above direction is fulfilled.
Copyright Business Recorder, 2024
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