26/09/14 – Concessional gas facility for DRI plant: ECC to mull TSML proposal of 7 percent free of cost GoP equity

M/s Tuwairqi Steel Mills (TSML), a joint venture of Saudi and Korean investors, has reportedly proposed 7 per cent free of cost GoP equity in lieu of financial benefit of Rs 5 billion per annum through the supply of feed gas for Direct Reduced Iron (DRI) at concessional rates, sources close to Secretary Finance told Business Recorder.

The Economic Co-ordination Committee (ECC) of the Cabinet headed by Finance Minister, Ishaq Dar will consider this proposal on Friday (today). A delegation of M/s TSML is already in the federal capital seeking a support from the members of the ECC. Giving the details, the sources said, the Economic Co-ordination Committee (ECC) of the Cabinet deferred the consideration of the summary of July 17, 2014 submitted by the Ministry of Industries and Production on “the provision of natural gas as feed stock in the Direct Reduced Iron(DRI) process to the TSML on concessional rates” and constituted a committee comprising Secretaries Finance Division(convenor), Secretaries Petroleum and Natural Resources, Law, Industries and Production and Board of Investment (BoI) to deliberate upon the issue and finalise its recommendations by August 15, 2014 for further consideration of the ECC of the Cabinet.

The first meeting of the committee was held on August 22, 2014 under the convenership of the Finance Secretary and was attended by the Secretaries Petroleum, Law, Industries and Director General BoI. During the meeting, the Ministry of Industries and Production briefed the committee on the background of the case and the issue under consideration. Legal aspects of the matter also came under discussion. It was decided that the provisions of MoU, IA and GSA relating to gas pricing would be kept in view during committee deliberations.

The second meeting of the committee was held on August 25, 2014 under the convenership of Finance Secretary and was attended by Secretary Petroleum, Law and Industries. The Secretary BoI who could not attend the meeting due to access problems indicated to go ahead with the recommendations of the committee.

At the outset, the committee considered the provisions of MoU, Implementation Agreement and Gas Sale Agreement (GSA) relating to gas pricing. The committee noted that a mention to this effect was found in the MoU signed in 2004 for consideration on merit. The IA signed three years later did not stipulate a provision on this account. Law Secretary indicated that referred MoU is not a simple MoU rather it may be tantamount to an agreement leading to complications in any adjudication.

The committee, however, underscored that M/s Tuwairqi Steel were not pressing for the concessional rate on the basis of any GoP obligation under the available documents. Rather their case was based on the recognition that the economics of their project was otherwise unviable. The company was requesting GoP for concessional gas facility for economic survival of the nascent DRI plant in the country.

The Ministry of Petroleum highlighted the financial implications of the proposed concessional tariff rate. The present industrial tariff rate applicable to the company under the IA was Rs 588 per MMBTU (tariff Rs 488+100 GIDC) while the company has requested for concessional tariff rate of Rs 123 per MMBTU as applicable to the fertilizer industry. It was, however, noted that with effect from July 1, 2014 an additional charge of the GIDC at the rate of Rs 300 per MMBTU has been imposed which will bring the effective tariff rate to Rs 423 per MMBTU. If the government decides to provide gas at concessional rate of Rs 123 per MMBTU excluding GIDC, it will require an amendment in the GIDC Act, besides involving a financial impact of Rs 5 billion per annum. This financial impact will have to be absorbed by GoP through a subsidy to the SSGCL to maintain the prices at the existing level. In case this subsidy is not provided then this cost will have to be passed on to the consumers of gas, through an increase in tariff by 3.3% for all other categories of consumers. The committee also noted that average gas purchase cost of the SSGCL was Rs 499 per MMBTU while the company was requesting supply of gas @ Rs 123/MMBTU. The committee further noted that the provision of gas to steel industry including Pakistan Steel was @ Rs 588/MMBTU.

Secretary P&NR invited the attention of the participants to the potential benefits that will accrue if the plant is able to sustain its operations which include import substitution of Rs 100 billion per annum, saving in forex of Rs 6-10 billion per annum in import of scrap, Rs 4.9 billion direct and indirect issues, additional FDI of Rs 89 billion on forward and backward integration of DRI plant, 1.100 existing employment with potential of additional 5,000 employees. He observed that the TSML has presented these potential benefits on the basis of cost/benefit comparison of concessional tariff for the company’s DRI operations.

Secretary P&NR observed that keeping in view the investment in TSML project and its econometric benefits, the GoP may consider allowing a special tariff as an exceptional case subject to independent recommendations of M/s Industries & Production. He also endorsed the proposal of the TSML for 7% free of cost GoP’s equity (58 million shares valuing Rs 580 million) in the project as a consideration for the proposed dispensation. According to sources, the committee unanimously decided to place the recommendations and facts before the ECC of the Cabinet.

Source – Business Recorder