Equity for IP gas pipeline project: MoF asked to arrange 40pc financing

MUSHTAQ GHUMMAN

ISLAMABAD: The Ministry of Petroleum and Natural Resources has given one month to the Finance Ministry for arranging 40 percent finances as equity for Iran-Pakistan (IP) gas pipeline project, which has been opposed by Washington, sources told Business Recorder.

"The MoF should make all necessary arrangements, within a month, to ensure public sector entities injection (40 percent equity) in the project and, in case of their inability, it will get the funding arranged through other means and investors," sources said, quoting Petroleum Ministry.

The Economic Coordination Committee (ECC) of the Cabinet on January 3, 2012 approved $ 200 million sovereign guarantee for the project, in principle, on the request of Petroleum Ministry.

According to official documents, IP project has entered implementation phase and work on Front End Engineering & Design (FEED) and feasibility and detailed route survey has already been started by consultant, ILF/Nespak joint venture. The FEED and feasibility report is scheduled to be completed by middle of 2012. After completion of the FEED, bids will be invited from EPC contractors for construction of the pipeline.

In relation to project financing plan, the steering committee/subcommittee of the ECC of the Cabinet (SC) in its 9th meeting held on 22nd August 2009, decided on public-private partnership (PPP) with debt equity ratio of 70:30, and advised to follow an equity mix of 40:40:20, representing PSEs, private investors and IPO respectively; and advised Inter State Gas System (ISGS) to start process of appointment of a top class Financial Advisor (FA) for arrangement of equity and debt required for the project.

In pursuance of SC's advice, ISGS through international competitive bidding selected an international consortium, comprising of Habib Bank (HBL), Industrial & Commercial Bank of China (ICBC) and Ernst Young Ford Rhodes Sidaat Hyder (EYFRS), being the lowest bidder.

Subsequently, the Board authorised ISGS management to execute the contract for Financial Advisory Services.

According to the official documents, in order to ensure completion of the project and commitment of the FA, certain conditions have been requested by the FA for the provision of debt and equity. These conditions are as follows: (i) availability of draft bankable feasibility study; (ii) issuance of irrevocable and unconditional guarantee by GoP through Ministry of Finance (MoF) for IP project payment obligations of the project implementation company; (iii) equity commitment by public sector entities; and (iv) tariff approval by GoP/Ogra.

SC in its 11th meeting held on 22nd December, 2011 was updated about the appointment of FA as per terms and conditions and, after deliberations and commitment of Finance Ministry, following was decided by SC.

Execution of contract by ISGS for the Financial Advisory Services with consortium comprise of HBL, ICBC and EYFRS.

1- MPNR to give policy guidelines to Ogra for tariff structure approval of the IP project, covering operating cost, debt repayment to the lenders, provision for escalation in any or all related costs and licensing requirements of the project company.

2- Endorsement of its earlier decisions of setting up a Special Purpose Vehicle (PipeCo), which shall finance, construct and operate the IP gas pipeline and earn a gas transportation fee guaranteed from the GoP and offering Return on Equity (RoE) (dollar denominated) to investors of ISGS/PipeCo "ongoing risk premium + 6 percent" and recommended to take up matter to ECC for approval.

The Ministry had sought in principle approval to issue irrevocable and unconditional GoP guarantee through MoF (required by FA) for payment obligations of the IP project company. MoF is scheduled to complete the process in one month's time.