A cabinet body has approved to sell majority stake in a government-owned company to the United Kingdom through its controlled entity by converting a 12-year-old “grant” into equity in a legally questionable manner and despite strong opposition from the Ministry of Finance.
The Economic Coordination Committee of the Cabinet on Thursday approved to sell 51% stakes in the Pakistan Credit Guarantee Company (PCGC) to Karandaaz Pakistan.
The UK’s Department for International Development and Bill Gates Melinda Foundation own the Karandaaz – an entity that is set up to give small loans.
The ECC also endorsed in principle the Rs739 billion Karachi Transformation Plan. The plan did not require any vetting of the ECC. The ECC also allowed the Water and Power Development Authority (Wapda) to float $500 million Eurobond for raising money for Diamer Bhasha dam.
“The ECC also approved the change in the shareholding structure of the PCGC,” the Ministry of Finance said in a statement. According to the new structure, the shareholding of the government of Pakistan in the company has been reduced to 49% from the earlier 70%.
The State Bank of Pakistan (SBP) has been managing the Credit Guarantee Scheme (CGS) for Small and Rural Enterprises in collaboration with the UK's Department for International Development (DFID) since 2010.
However, the ECC decision is not only legally questionable but it has also raised the transparency concerns in the deal, according to the sources.
The UK had provided £50 million as grant or Rs2 billion in 2008 to support small and medium companies in Pakistan. The agreement had been signed in July 2008 between the DFID, the Economic Affairs Division and the SBP.
However, through an amendment letter signed in January 2015, after closure of the programme, all unspent funds were either to be reverted to the DFID or be provided to the DFID’s enterprise.
“Any clause signed subsequently that runs counter to the main/primary agreement within the MoU is ab-initio invalid,” the Ministry of Finance documents said.
“The DFID intends to become a shareholder of the PCGC by utilising the aforesaid grant allocated for Credit Guarantee Scheme as its own equity in the PCGC, including the amount of markup on the grant amount,” the August 2020 office memorandum of the Ministry of Finance said.
“The Finance Division is of the view that the MoU between EAD, SBP and DFID was a grant agreement. Grants are one way transactions. They may be tied to specific utilisation but are not refundable. If they are otherwise, they are not a grant,” said the official documents.
Yet the ECC went ahead with the plan to convert grants into equity of a foreign country. The sources said the decision to convert grants into equity of a foreign country could land the government in trouble.
The UK had provided Rs2 billion equivalent grant and the government approved to transfer Rs4.1 billion worth of shares to the DFID-sponsored firm by not only returning the grant money but also giving up interest earned on the grant, according to the Finance Ministry sources.
“In view of the Finance Division proprietary rights of the grant money and markup earned rest with the government of Pakistan and cannot be utilized as equity of some other entity,” the Finance Ministry documents said.
The sources said since the PCGC was the government-owned firm, its shares cannot be offloaded without following the competitive bidding process.
Also, Karandaaz Pakistan was a Section 42 company, which required the Securities and Exchange Commission of Pakistan’s (SECP) approval for change in shareholding.
Even the DFID documents acknowledge that the money is part of the federal consolidated fund.
“The DFID will authorise and make payment of the funds into the account. Crown Agents Bank will then transfer the funds to an account, which forms part of the consolidated fund or equivalent account of the government for amounts provided in support of the general revenue budget”.
Against the Rs2 billion equivalent UK grant, the SBP had issued Rs4 billion guarantees to back the loans.
The decision may also open the Pandora’s Box, as other countries like the United States can also demand converting its grant into equity and take control of assets created by using the grant money, said a senior government official who spoke on condition of anonymity.
The Ministry of Finance has been opposing the decision of converting grant into loan and in order to remove obstacles a joint secretary level Ministry of Finance official was also transferred a few months ago.
Karachi Package
“The ECC discussed the plan [Karachi Transformation Plan] thoroughly and endorsed [it], in principle, with the direction to secure approval from all relevant quarters before submission to cabinet,” said the Ministry of Finance statement.
The ECC chairman directed the relevant officials to follow all codal formalities with reference to various components of the Karachi Transformation Plan, it added.
However, the financing framework presented to the ECC seemed unrealistic. It seeks Rs509 billion in funds from the private sector under the public-private partnership mode and Rs125 billion from the Supreme Court out of the Bahria Town funds.
The Ministry of Finance has already refused to provide additional funds and instead asked the Ministry of Planning to meet all the additional needs from its own sources, in case it does not get financing from the two other planned sources, the private sector and the Bahria Town funds.
Prime Minister Imran Khan had announced the Rs1.1 trillion package in the first week of September. But the government could not give necessary approvals for its swift execution.
The proposed mode of financing does not ensure full implementation of the package in three years, as 87% of the funding is proposed to be secured from the private sector (Rs509 billion) or from the Supreme Court (Rs125 billion).
The center plans to fund just Rs98.2 billion worth of projects from the budget.
Eurobond
The ECC approved the issuance of $500 million Eurobonds, in principle, and directed relevant authorities to work out modalities in consultation with the Finance Division and the SBP.
According to the financing plan of the Diamer Bhasha and Mohmand dam projects, about $2.1 billion have to be raised through foreign commercial borrowings.
“The pricing rationale proposed by the co-bookrunners has indicated a spread in the range of 40 to 60 basis points over the sovereign curve”.
The ECC approved income tax exemption and the permission to float bonds under the US regulations.
The Ministry of Maritime Affairs presented amendments in the master plan, originally formulated in 2001, regarding establishment of five terminals on build–operate–transfer (BOT) Basis.
The ECC approved amendments in the master plan for establishing five terminals including two LNG terminals, two multipurpose cargo terminals and one integrated container terminal on BOT basis.
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