Ministry of Industries and Production (MoI&P) is said to have set aside its own seven-year old unusual agreement to extend Rs 25 billion financial benefit to M/s Tuwairqi Steel Mills Limited (TSML) in five years in the form of subsidy in feedstock gas, well informed sources in Finance Ministry told Business Recorder.
M/s TSML, a joint venture project of Foreign Direct Investment (FDI) by Al-Tuwairqi Group of Companies of Saudi Arabia and Pohang Steel (POSCO) of South Korea was established at Bin Qasim Karachi over an area of 220 acres in pursuance of Memorandum of Understanding (MoU) signed with the Government of Pakistan (GoP) on May 28, 2004. TSML envisaged a "Steel Complex" of 1.28 million tons per annum capacity, the single largest in Pakistan. The project was planned to be set up in three phases which include a Direct Reduction of Iron (DRI) plant, melt shop for flat/ long products and mechanised mining or iron ore in Pakistan as a forward and backward integration.
In 2007, the government signed an agreement with M/s TSML that industrial tariff would apply to the steel mill as notified by OGRA from time to time.
M/s TSML has approached to government to get special tariff of Rs 123 per MMBTU whereas industrial tariff is Rs 588 ( Rs 488 sale price + Rs 100 GIDC). Ministry of Industries and Production tabled a hurriedly prepared summary dated July 17, 2014 to the Economic Co-ordination Committee (ECC) of the Cabinet which met the same day but the Finance Minister Senator Ishaq Dar gave the task to a committee headed by the Finance Secretary Dr Waqar Masood for favourable recommendations instead of taking decision on his own in the same ECC meeting.
Ministry of Petroleum and Natural Resources which administered the affairs of gas utility companies maintained that both gas companies are licences of OGRA operating under a cost plus return on equity pricing formula. The present average prescribed price (cost of supply) of SSGC as determined by OGRA is Rs 434 per MMBTU (which is on the rise with addition of expensive gases and in future may further increase when gas or LNG are imported).
Present tariff for fertilizer feed stock is Rs 423 per MMBTU including Rs 300 per MMTBU GIDC while industrial sector including M/s TSML are being charged a tariff of Rs 588 per MMBTU including Rs 100 per MMBTY GIDC.
Petroleum Ministry further argues that GIDC for these sectors is being levied at the maximum level and it cannot be increased for these sectors.
The proposal of allowing sale price of Rs 123 per MMBTU to TSML for feed stock entails a revenue loss of Rs 5 billion per annum to SSGC requiring Rs 3.3 per unit increase in gas sale price of all other consumers excluding domestic and fertilizer sectors.
It is also apprehended that processing industry including textile sector will also seek similar dispensation and managing such kind of subsidies will become more difficult especially with the injection of imported gas.
Finance Ministry, in its comments stated that the present tariff for fertilizer feedstock is Rs 423 per MMBTU and industrial tariff being charged to TSML is Rs 588 per MMBTU. Therefore, the feedstock rate of Rs 123 per MMBTU as proposed for TSML cannot be supported.
Finance Ministry has argued that allowing special tariff will cost Rs 5 billion annually to the national exchequer while further distorting gas tariff structure for different categories of consumers. Moreover, this tariff revenue loss will be shifted to general consumers and will be met through cross subsidisation which is not desirable.
According to the Finance Ministry profit and loss account of M/s TSML for the year ended December 31, 2013 reveals that the company incurred a loss to the tune of $ 19.240 million as a result of a gap between cost and sale price. The cost structure reveals that the cost of fuel was just over 16 per cent. Therefore, if the cost of fuel is reduced from industrial tariff of Rs 588 to special tariff of Rs 126 per MMBTU the impact on cost structure will not be significant and the company will still be incurring losses.
The meeting was further informed that the DRI plant, phase-1 at TSML has been completed with an investment of $ 340 million whereas the investment is envisaged to be in the range of $ 850-900 million. This, however, was linked with the commercial success of the ongoing project of DRI plant. In the MoU signed by the Government of Pakistan with Al-Tuwairqi Groups of Companies an undertaking was made by the GoP as per clause 2(v)& 3(d) of MoU, that 40 MMCFD natural gas for use of as feed stock and 30 MMCFD natural gas for use as fuel would be provided to the company and as regards tariff of gas it would be supplied on the same industrial rate as applicable to other such industries.
The meeting was briefed that utilisation of natural gas of DRI process on TSML was one of the most efficient in the country ie about 85 per cent meaning thereby, the loss was only 15 per cent. Efficiency utilisation was better than for the fertilizer and evidently other widely used applications of natural gas. The support required on concessionary rate of natural gas would be about Rs 4-5 billion annually whereas the estimated contribution to the country from operating the DRI plant would be Rs 12 billion annually. In addition there would be FDI of Rs 89 billion for the forward and backward integration of the DRI plant. On completion integration there would be a contribution to the country of Rs 100 billion annually as import substitution/ F.E. earning.
It was observed that Finance Division and Ministry of Petroleum and Natural Resources have not supported the proposal on the grounds that GoP was under no legal obligation to extend concessional tariff to TSML and shipment of shipment of about Rs 5 billion loss to the general consumer. It was pointed that the financial impact of concessionary tariff @ Rs 123 MMBTU would be approximately Rs 5 billion per annum to SSGC requiring 3.3 per cent increase in gas sale price of all other consumers excluding the domestic and fertilizer sector.
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