Around $90 million is required for purchasing pipes, $46 million for setting up a compression station, $56 million for construction work, $35 million for land acquisition and $152 million for paying duties, cost of transport and other procurements. PHOTO: FILE
Pakistan has given firm assurance to Iran under the government-to-government cooperation agreement that it will collect $1 billion through gas infrastructure development cess from consumers to finance the construction of gas pipeline at home, which will lead to a reduction of 20 to 25% in tariff after gas imports start in December 2014.
“Following this guarantee, Iran has committed to providing a loan of $500 million for laying Pakistan’s portion of the Iran-Pakistan (IP) pipeline,” disclosed an official of the Ministry of Finance, who was part of negotiations held this week between Pakistan and Iran in Islamabad.
Total cost of the pipeline, to be constructed by Iranian firm Tadbir Energy, has been projected at $1.5 billion.
According to sources, the government immediately needs $379 million to kick off work on the pipeline from the Iranian border. “Immediate cash flow is of paramount importance as it will provide the basis for initiating work,” the official added.
Around $90 million is required for purchasing pipes, $46 million for setting up a compression station, $56 million for construction work, $35 million for land acquisition and $152 million for paying duties, cost of transport and other procurements.
According to the finance ministry official, the cess will be treated as equity in the project and the government of Pakistan will be the owner of the pipeline. This equity is expected to lead to savings of around $360 million in interest charges and reduction of around 20 to 25% in overall tariff after the start of gas flow. The debt part of the project will comprise 30 to 35% of the pipeline cost.
Financing through cess will slash the dollar component of the cost as a substantial percentage of tax will go to local contractors in Pakistani rupee.
Before the start of construction work, Inter State Gas Systems (ISGS) will enter into an engineering, procurement and construction (EPC) contract with Tadbir Energy. The pipeline will be commissioned before January 1, 2015.
The government of Pakistan will provide sovereign guarantees to Iran against the loan of $500 million, which will form the basis for implementation of EPC contract as per government-to-government agreement.
The cabinet, in its meeting on December 30, 2012, had approved the initial cooperation agreement between the governments of Pakistan and Iran for constructing the pipeline against financing facility of $250 million, with possible increase to $500 million.
It also approved issuance of sovereign guarantees for the financing arrangement. The cabinet gave the green signal to allocating the cess for the project.
Published in The Express Tribune, February 17th, 2013.
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@Zain:
I agree that it is a good idea to import gas from a surplus country directly through pipeline. As for your comment on India pulling out, the main reason was the overall cost, security issues on the pipeline going through Pakistan and the lack of trust between Pak and India. Iran, at that time, wanted a very high contract price and Pakistan demanded a big transit fee notwithstanding the fact that India was prepared to finance the project.
I do agree, some day, when there is lasting peace between India and Pakistan, the IPI pipeline would make sense. However, considering the adversarial geopolitical situation, the IPI scheme is not likely to come to fruition in the next two decades. It is not just the gas project, but the huge potential for Pakistan, serving as a trade corridor for Central Asian Republics and India thorough Pakistan, will remain a dream. The biggest economic loser from all this is Pakistan since India can, though a bit more expensive, trade with the CAR's through Iranian port of Chabahar and Afghanistan.
@Zain: Security
To all the Indians comments above, why did your Gov't of India bowed out of this same IP project? Initially it was to be built from Iran, to Pakistan and terminate in India, but under foreign pressure, India exited from the deal. It would have been beneficial for all three parties. But anyway, its still a good deal, and still viable, because Pakistan needs gas supply, and Iran has excess reserves, works out good for both, and Insha-Allah, God Willing the project would succeed.
@cautious: You are thinking far ahead of time. Who cares if gas flows or not or if the pipeline is built. It is an opportunity to levy cess and use it for PM's discretionary spending, same as that has happened to the taxes collected for building dams or even the flood relief funds. Kal Ho Na Ho.
@cautious: "Does it make economic sense? How are you going to pay for it? How are you going to pay for the gas? Is it worth the possible economic sanctions? Basic questions which need to be asked/answered."
India asked the first question and keeping in mind the security situation came to the conclusion that it did not make economic sense given the fees Pakistan was charging and lack of security for Indi's invetsment in building the pipeline. Hence it dropped out of the project. At that time, snctions were not even in question.
But when you can continue to mislead people by dangling the carrot ahead of them while simultaneously use it as a bargaining chip with US for delaying the project endlessly, why should you formally call the project off?
Ofcourse these 'tricks' eventually lead to loss of credibility but no one really seems to be thinking about that or else Reko Diq and Engro fertilisers would not be in the shape they are.
@John B: John, your logic is flawed. Even in US you have tolls on highways which does not give any equity to those who pay the tolls. Nor for that matter do I get any equity in the school system which taxes me though I have no kids and do not use the school system either.
Export to India also and collect cess
Robbing Peter to pay Paul.
Why should public incur the cess only to be paid to the contractors while govt retaining the equity. Cess payers should receive equity stake in the transaction not the govt. The PAK govt might as well come and rob the money in the house, lot easier.
This project has been in the pipeline, so to speak, since the 50s and I am glad that Pakistan is finally breaking ground. We need to diversify our energy sources and Iran is an ideal partner.
Previous IT article indicated that IP deal was going to be inked yesterday - that obviously didn't happen and an article in Dawn today makes it clear that basics including the price of the gas haven't even been agreed on. IP remains an illusion - no real discussion about where you going to come up with the missing Billion needed to compete the pipeline (assuming the $1.5 is an accurate number which is unlikely) nor is there any discussion about where your going to get the funds to buy the gas. It's way past time for an analytic review of the IP rather than the std emotional chest thumping Pakistan is known for. Does it make economic sense? How are you going to pay for it? How are you going to pay for the gas? Is it worth the possible economic sanctions? Basic questions which need to be asked/answered.