€100 million loan tied to Danish suppliers

Draft agreement approved for investment in renewable energy, water sustainability

ISLAMABAD:

Public Procurement Regulatory Authority (PPRA) has raised concerns over the €100 million interest-free Danish loan facility being tied to Danish suppliers only.

A draft framework agreement was circulated and cleared by the Finance Division, Ministry of Foreign Affairs, Federal Board of Revenue, Ministry of Planning, Development and Special Initiatives, Ministry of Law and Justice, Auditor General of Pakistan and Attorney General of Pakistan.

However, PPRA has raised concerns over terms of the agreement that would give priority to Danish suppliers in procurement. PPRA’s role is to create market competition between suppliers. However, under terms of this agreement, Danish suppliers would be hired, which would discourage competition in the procurement process.

Denmark had offered to provide Pakistan with a €100 million interest-free loan for investment in renewable energy, energy efficiency and water sustainability under the framework of bilateral economic cooperation.

The Economic Affairs Division informed the cabinet that Pakistan and Denmark had been partners in successful development cooperation since 1969.

Denmark has provided technical and financial support to the government of Pakistan in disaster management, peace building, governance and human rights in the past through public and civil society channels.

The last framework agreement amounting to $50 million was signed between Denmark and Pakistan on September 30, 2013 to mark the start of a new programme cycle for 2013-2016.

However, since 2017, there has been no active bilateral financial engagement through interstate channels. Instead, most of the Danish assistance was being channelled off-budget through UN and other international development organisations.

After considerable efforts from both sides, Denmark agreed to revive economic cooperation with Pakistan through bilateral channels. In this regard, an inter-governmental framework agreement between Pakistan and Denmark was shared by the Danish side for signing.

The inter-governmental framework agreement offered Danida Sustainable Infrastructure Finance (DSIF) facility, which would provide interest-free, but tied loans of up to €100 million in the renewable energy, water supply and wastewater treatment sectors. This endeavour is also aimed at transfer of technology and technical expertise to Pakistan.

The Danish loans would constitute tied aid and would have a 35% concessional element to reduce the total amount of loan for Pakistan. DSIF subsidy would cover the interest on the loan, export premium, bank margin and an upfront grant if these expenses did not amount to 35% of the contract amount.

The loans would have a 10-year maturity period generally and 15 years in exceptional cases. Loan agreements include the fees and costs of the lender for each project that would be negotiated on a case by case basis between the lender (commercial bank or a financial institution with representation in Denmark) and the borrower (buyers with a guarantee from the government of Pakistan). The inter-governmental framework agreement would remain effective for 15 years from the date of signing.

The Economic Affairs Division endorsed the agreement and pointed out that the potential benefits included an interest-free loan, 35% subsidy, 75% cost of feasibility study as grant and transfer of Danish technology to Pakistan.

These benefits outweigh the cost of limiting competition to only Danish suppliers. Moreover, since 2017, there has been no active development cooperation going on between the two countries. Hence, this framework agreement marks the beginning of a new chapter of economic ties and investment.

Therefore, the approval of the cabinet was solicited for signing of the framework agreement. The cabinet considered the summary titled “Approval for Signing of Inter-Governmental Framework Agreement between Governments of Pakistan and Denmark” and approved the proposal.

Published in The Express Tribune, August 18^th, 2022.

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