Sharing the details, the sources said, in order to discuss iron and steel production in the country through Director Reduced Iron (DRI) technology, a meeting was chaired by the Prime Minister Imran Khan on February 6, 2020. Prior to this meeting, Ministries of Industries and Production, based on the advice of Attorney General of Pakistan, moved two summaries-on November 26, 2019 and January 18, 2020 for approval of the framework for promotion of DRI manufacturing in the country and both the summaries were returned by the ECC with certain observations.
In the meeting, it was decided that DRI technology is required in the country in order to cater to the need of high quality iron steel products of the local market. On the other hand, DRI policy is not feasible because of shortage of gas in the country. However, Tuwairqi Steel Mills (TSML), a DRI unit exits in the country and has been dysfunctional since, June 2013. The unit can be revived with available gas resources.
The sources said, related to this there is pending litigation against Government of Pakistan in the Permanent Court of Arbitration (PCA) filed by TSML. The genesis of the legal suit dates back to May 28, 2004, when the government signed a Memorandum of Understanding (MoU) with the TSML for setting up a DRI unit followed by an Implementation Agreement (IA) of June 8, 2007. The installed capacity of producing iron steel products was projected to be 1.28 million per annum. TSML filed a suit of $ 419.698 million against the GoP in the PCA for not providing gas at a subsidized rate. M/s Addleshaw Goddard, the legal counsel pleading Pakistan's case, cautioned that any proposed meeting of GoP and representative of TSML Group should not take place until after Pakistan has filed its defence in arbitration. Subsequently, the firm further advised that any such suggestion may prejudice Pakistan's position in the ongoing arbitration and it is imperative that no representations are made to this effect.
The Attorney General of Pakistan, in a letter of January 15, 2020 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.
The CIENA Group, US-based Company owned by an American of Pakistani origin is interested in the purchase of TSML subject to the following concessions/exemptions through a letter of October 8, 2019: (i) supply of gas at $ 4.65 MMBTU inclusive of all tariff to be used as feedstock. The plants needs 50 MMCFD for its operations; (ii) exemption from minimum tax under sector 113 of the Income Tax Ordinance 2001 for a period of ten years;(iii) exemption from additional custom duty of 2 per cent on the import of iron oxide pellets till the time backward integration is complete ;(iv) TSML to be given status of special economic zone; and (v) as a special case, a waiver to TSML from the regulatory duty and additional custom duty on the import of DRI based billet for a period of approximately one and half years.
According to the Ministry of Industries and Production, the CIENA Group, as a prospective investor, shall expand the existing facility of TSML plant with forward and backward integration with an additional Foreign Direct Investment (FDI) of $ 700 million in a phased manner spread over a period of 13 years, claiming that the Group has requested for supply of gas to a fully integrated DRI unit after the first three years, once a portion of the overall investment has been made.
The draft summary was circulated to the Petroleum Division, Law and Justice Division, Revenue Division, Board of Investment and Attorney General for Pakistan for comments.
Law Division, through a letter of February 7, 2020 was requested to provide comments on the draft summary with specific emphasis on the legality of the proposal. However, no response has been received so far. Revenue Division and the FBR were similarly requested for comments. The FBR provided a partial on February 14, 2020 and did not support the proposal for exemption from minimum tax under section 113 of the Income Tax ordinance 2001 for a period of ten years.
Board of Investment through an O M while responding to the draft summary stated that though section 15(1) of the SEZ Act, 2012 allows conversion of existing industrial estates into SEZ subject to completion of codal formalities required under the law but section 15(2) specifically bars the existing industrial units working in such industrial estates to avail the incentives under the SEZ.
Attorney General for Pakistan on February 11, 2020 was requested to provide comments on the draft summary mainly keeping in litigation against GOP filed by TSML in PCA. It was requested to advise as to what impact the TSML specific DRI proposal will have on the ongoing arbitration in PCA.
The sources said, previously, the Attorney General office advised for a policy framework for DRI. It was also requested to confirm the quantum of actual damages that can be brought against Pakistan in case of AGP/ HUDU of February 14, 2020 and relevant excerpts are reproduced: "Irrespective of this office's views on the veracity of the DRI policy, merely given the gas at the price which was offered by TSML earlier and not accepted by the GoP will adversely affect the arbitration proceedings directly. In addition, it is emphasized that the price of gas requested by TSML and rejected by the GoP earlier, is now being offered at the same price despite the fact that rupee dollar parity has changed whereby the rupee factor has increased. The contents of this office's opinion of January 15, 2020 are reiterated wherein guidance on scenarios whereby the GoP may be able to successfully defend itself with respect to concerns arising from the prospective DRI policy. In addition to DRI, policy should be announced by a public call through proper advertisement, equally applicable to whoever can possibly abide by it and thereafter allowed in terms of the that policy. The only way to substantially reduce the apparent risk to arbitration proceedings would be through formulating a proper DRI policy as made for the fertilizer industry and to offer the policy to the general public for appropriate investment. Alternatively, CIENA and TSML may wish to engage in settlement negotiations before the GoP commits to potentially onerous obligations,"
After carefully examining the comments and advice of Attorney General of Pakistan, Ministry of Industries and Production has recommended that CIENA Group may be advised to engage with TSML in settlement negotiations.