Al-Tuwairqi Steel Mills dispute lands in international court

Dispute hinges over govt’s refusal to supply subsidised gas; Rs110 million set aside for legal fees alone

Zafar Bhutta May 16, 2019

ISLAMABAD: Pakistan and Saudi Arabia’s Al-Tuwairqi Group of Companies have landed in a legal battle in an international court of arbitration.

The government has approved a supplementary grant of Rs110 million to pay foreign counsel to pursue the case. Officials said that the office of the attorney general for Pakistan had requested the Ministry of Industries to arrange €125,000 (Rs19.79 million) to pay the initial fees of the permanent court of arbitration and $132,168 (Rs18.72 million) for the initial fee of Addleshaw Goddard LLP to defend the case in Permanent Court of Arbitration at The Hague.

The request also mentions that total fees payable to Addleshaw Goddard may not exceed $2,000,000 (Rs283.25 million).

Al-Tuwairqi Steel Mills Limited (TSML), a foreign direct investment project by Al-Tuwairqi Group of Companies in a joint venture with a South Korean firm, was established at Bin Qasim, Karachi over an area of 220 acres. The Saudi firm had stopped work on the plant after the refusal of the previous Pakistan Muslim League- Nawaz (PML-N) government to provide gas at a discounted rate.

The plans were for TSML to eventually become Pakistan’s largest steel complex, with a capacity of 1.28 million tons per annum. Its direct reduced iron (DRI) plant was shut down for several months in 2014 due to the dispute over gas supply.

Phase-I of the DRI plant had been completed at a cost of $340 million, while the capital injection in phase-II and III was expected to be in the range of $850 to $900 million. This investment was subject to the commercial success of the DRI plant.

The TSML management had requested gas supply at Rs123 per million British thermal units (mmbtu) in order to effectively operate the plant. However, the government had refused, saying that this would amount to a subsidy of Rs25 billion over five years.

The Finance Division and the Ministry of Petroleum and Natural Resources had also opposed the plan, arguing that the government was not legally bound to provide gas at a concessionary rate.

The then-ambassador of Saudi Arabia had also taken up the matter with then-finance minister Ishaq Dar in the hope of reaching a solution, but the government remained reluctant.

The officials added a lobby in Pakistan had played a key role in keeping the matter from reaching a settlement as it wanted to buy the TSML plant.

In November 2014, while addressing a press conference, Al Tuwairqi Holdings Chairman Dr Hilal Hussain Al-Tuwairqi had warned that the mill’s operations might end if the government did not provide the promised gas supply at a discounted rate.

In an effort to reach a settlement, the company had even offered 15% (126 million) shares in the steel mill to the government without any payment in return for the gas. Later, the company offered to give 17% shares to the government, but the issue remained unresolved. In May 2004, a Memorandum of Understanding (MoU) was signed with Pakistan, under which the government was to provide a level playing field in the provision of gas as fuel and feedstock.

The Tuwairqi Steel management stated that it was promised that gas would be supplied at a lower tariff to enable the company to compete in the international market. The Ministry of Industries had recommended a tariff of Rs123 per mmbtu for five years.

However, the Ministry of Petroleum and Natural Resources had cautioned then that the financial impact of the reduced tariff on Sui Southern Gas Company will be about Rs5 billion, requiring a 3.3% increase in gas prices for all consumers, except for domestic and fertiliser sectors.

The Ministry of Industries had argued in the Economic Coordination Committee (ECC) that though the mill was seeking support of Rs4 to Rs5 billion per annum, its DRI plant will contribute an estimated Rs12 billion to the country’s economy. Apart from this, foreign investment of Rs89 billion will be made in forward and backward linkages of the DRI plant. After establishing the linkages, the ministry had said, the mill would contribute Rs100 billion per year to the economy in the form of import substitution. 

Published in The Express Tribune, May 16th, 2019.

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