Pakistan greenlights ‘below par’ UAE seaport deal

KPT handover agreed on same terms that cabinet declined two days ago

ISLAMABAD:

Pakistan approved a commercial agreement on Wednesday to hand over two more seaport terminals to the United Arab Emirates (UAE) for a 25-year period on the same terms that its cabinet committee had described as ‘below par’ two days ago.

“The Cabinet Committee on Inter-Governmental Commercial Transactions (CCoIGCT) recommended the amended commercial agreement to the Federal Cabinet for approval,” according to a late-night announcement by the finance ministry. The cabinet’s approval to give two more terminals to the UAE will be customary after the stamp of approval from its sub-committee, headed by Finance Minister Ishaq Dar.

With the fresh decision, the UAE’s Abu Dhabi (AD) Ports will have exclusive operations and development rights on 85% of the east wharf of the Karachi port.

After the Cabinet committee meeting, Senator Faisal Sabzwari, the Federal Minister for Maritime Affairs, said it is the best deal for Pakistan and the Karachi Port Trust (KPT). While talking to The Express Tribune, he mentioned, “Over a year ago when I took over the KPT’s reserves were Rs22 billion, which after two deals with the UAE and an increase in tariffs would increase to Rs60 billion.”

The minister stated that Pakistan would receive 15% of the gross revenues and roughly 40% of the net revenues from the terminal earnings.

Just two days ago, the same cabinet committee had refused to approve these terms and sent the Price Negotiation Committee (PNC) back with the direction to seek a higher price. However, within 48 hours, nothing changed, and the same committee approved the terms recommended by the PNC.

Pakistan’s PNC had advised the committee against changing an agreed profit-sharing formula. The CCoIGCT had declined on Monday to hand over the Karachi port’s two terminals to AD Ports under a revenue-sharing formula. Under the revenue-sharing formula, Pakistan’s share from the deal had been estimated at $1.2 billion over a 25-year period.

The cabinet committee had directed the PNC to reopen the draft commercial agreement and try to reach a deal under the equity-based profit-sharing model, a cabinet member told The Express Tribune.

The committee met again on Wednesday, and the PNC informed that under the equity-based model, Pakistan would not receive more than $750 million over a 25-year period, according to government sources. The PNC members were of the view that the revenue-sharing model was best suited, which according to them, would give 37.5% higher profits to Pakistan.

Pakistani authorities were in talks with the UAE for the outsourcing of operations of a bulk and a general cargo terminal on the east side of Karachi Port. Instead of adopting the international competitive bidding process, the government preferred a negotiated deal.

The government-to-government Framework Agreement for the Development of Bulk and General Cargo Terminal at East Wharf Karachi Port has already been signed by the minister for Maritime Affairs and the UAE minister of Energy and Infrastructure.

The CColGCT had approved a price discovery mechanism and constituted a Negotiation Committee under the chairmanship of the minister for Maritime Affairs to negotiate the commercial agreement between KPT and AD Ports. The negotiation committee also has representation from the Ministry of Finance.

The negotiation committee had presented its findings before the cabinet committee this Monday, which Ishaq Dar did not endorse. The CColGCT instead directed that the price discovery may be renegotiated with AD Ports on an equity-based model with the provision of a Special Purpose Vehicle (SPV) in which the revenues should be divided based on equity and investment of each party.

The negotiation committee met again on Tuesday and considered the proposal on the equity-based model with the provision of SPV. The committee was of the view that the draft of the commercial agreement had been reviewed clause by clause and prepared in consultation with AD Ports. The draft was also sent for vetting to the legal team of KPT.

The negotiation committee informed that AD Ports would invest $130 million in infrastructure during the first five years of the deal. It would make another investment of $100 million in the 22nd year of the agreement.

The negotiation committee told the cabinet body that at a 15% return on investment (ROI), Pakistan would get $1.2 billion over a 25-year period. The terminals would break even at $520 million earnings based on an 8% ROI. As per the terms of the deal, the net present value of the Karachi Dock Labour Board charges is estimated at $79 million over a 25-year period. Similarly, the net depreciated value of assets at the berths is $225 million.

KPT is of the view that its profitability will be further enhanced on account of royalty and rent if the project is handed over to AD Ports. On the revenue-sharing model with a 12% annual ROI, the value comes to $878 million. The negotiation committee stuck to its stance on Wednesday and urged the cabinet committee to refer the draft commercial agreement to the federal cabinet for final approval, said the sources. The terminal operator will be responsible for the operations, maintenance, and development of the terminal.

Earlier, Pakistan had handed over the operations of five berths (6-10) of the port on the East Wharf. AD Ports had shown fresh interest in the acquisition of 1,833 meters quay length out of the total quay length of 3,124 meters of East Wharf, as shown in the official documents.

AD Ports already acquired 800 quay meters last month under the Karachi Gateway Container Limited (KGCT), and after the new contract, it will control 85% of the quay length of East Wharf.

The finance ministry stated that the cabinet committee approved the recommendations of the negotiating committee, subject to the condition that the concessioner (UAE) will pay $25 million non-refundable and non-adjustable upfront as goodwill. The UAE government-owned firm will pay another $25 million upfront, adjustable against revenue sharing in the next seven years, with $3 million per annum for the first five years and $5 million each in the next two years.

Published in The Express Tribune, August 10^th, 2023.

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