The cabinet body has agreed to sell a majority stake in the government-owned company to Britain through an entity it controls by converting a 12-year-old “grant” into equity in a way that is legally questionable and despite stiff opposition from the Ministry of Finance.
The Cabinet Economic Coordination Committee on Thursday agreed to sell a 51% stake in the Pakistan Credit Guarantee Corporation (PCGC) to Karandaaz Pakistan.
The UK Department for International Development and the Bill Gates Melinda Foundation own Karandaaz – an entity set up to provide small loans.
The ECC is also in principle supporting the Rs739 billion Karachi Transformation Plan. The plan does not require an ECC check. The ECC also allowed the Water and Power Development Authority (Wapda) to allocate $ 500 million Eurobond to raise money for the Diamer Bhasha dam.
“The ECC also approved changes in the PCGC shareholding structure,” the Ministry of Finance said in a statement. According to the new structure, the Pakistani government’s shareholding in the company has been reduced to 49% from 70% previously.
The State Bank of Pakistan (SBP) has been managing a 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’s ruling is not only legally questionable but also raises concerns about transparency in the deal, according to the sources.
The UK has provided £ 50 million in grants or Rs2 billion in 2008 to support small and medium-sized companies in Pakistan. The agreement was signed in July 2008 between DFID, the Economic Affairs Division and SBP.
However, by means of an amendment letter signed in January 2015, after program closure, all unused funds will be returned to DFID or given to DFID companies.
“Any clause signed later that contradicts the main agreement in the MoU is ab initio invalid,” said the Ministry of Finance document.
“DFID intends to become a shareholder of PCGC by utilizing the aforementioned grant allocated to the Credit Guarantee Scheme as its own equity in the PCGC, including the markup amount on the grant amount,” the Ministry of Finance’s August 2020 office note said.
“The Finance Division views the MoU between EAD, SBP and DFID as a grant agreement. A grant is a one-way transaction. They may be linked to a particular use but cannot be reversed. Otherwise, it is not a grant, ”read the official document.
However, the ECC continues its plans to convert the grant into foreign country equity. The source said the decision to convert grants into foreign sovereign equity could get the government in trouble.
The UK has awarded Rs2 billion worth of grants and the government agreed to transfer Rs4.1 billion worth of shares to the DFID-sponsored company by not only returning the grant money but also handing over the interest earned on the grant, according to a Ministry of Finance source.
“Given the ownership rights of the Finance Division of the grant and markup money which the Pakistani government has acquired and cannot be used as equity of some other entity,” the Ministry of Finance document said.
The source said, because PCGC is a government-owned company, its shares cannot be released without going through a competitive tender process.
In addition, Karandaaz Pakistan is a Section 42 company, which requires Securities and Exchange Commission of Pakistan (SECP) approval for a change in share ownership.
Even the DFID documents acknowledge that the money is part of a joint federal fund.
“DFID will authorize and make payments to these accounts. Crown Agents Bank will then transfer funds to an account, which is part of a consolidated fund or an equivalent government account for the amount provided to support the general revenue budget ”.
Against the UK’s Rs2 billion grant, SBP has issued a guarantee of Rs4 billion to support the loan.
The decision could also open Pandora’s Box, as other countries such as the United States could also sue to convert its grants into equity and take control of assets created using grant money, said a senior government official who spoke on condition of anonymity.
The Ministry of Finance opposed the decision to turn grants into loans and to remove obstacles, a joint secretary-level official at the Ministry of Finance was also transferred a few months ago.
“The ECC discussed the plan [Karachi Transformation Plan] thoroughly and supported [it]in principle, with directions to get approval from all related parties before submitting it to the cabinet, “said the statement from the Ministry of Finance.
The ECC chairman directs relevant officials to follow all codal formalities with reference to the various components of the Karachi Transformation Plan, he added.
However, the financing framework presented to the ECC appears unrealistic. They are seeking Rs509 billion in funding from the private sector in the mode of public-private partnership and Rs125 billion from the Supreme Court from the Kota Bahria fund.
The Ministry of Finance has refused to provide additional funding and instead asked the Ministry of Planning to meet all additional needs from its own sources, if it does not get financing from two other planned sources, the private sector and the City of Bahria. fund.
Prime Minister Imran Khan announced the Rs1.1 trillion package in the first week of September. But the government was unable to provide the approval needed for its swift implementation.
The proposed mode of financing does not guarantee full implementation of the package within three years, as 87% of funding is proposed to be obtained from the private sector (Rs509 billion) or from the Supreme Court (Rs125 billion).
The center plans to fund the project worth Rs98.2 billion from the budget.
The ECC approved the issuance of $ 500 million Eurobonds, in principle, and directed the relevant authorities to draft modalities in consultation with the Finance Division and SBP.
According to the project’s financing plans for the Diamer Bhasha and Mohmand dams, about $ 2.1 billion must be raised through foreign commercial loans.
“The co-bookrunner’s proposed pricing rationale has shown a spread in the 40 to 60 basis points range over the country curve”.
ECC-approved income tax exemption and license for floating bonds under US regulations.
The Ministry of Marine Affairs presented the amendments in the master plan which was originally formulated in 2001 related to the establishment of five terminals on the basis of build – operate – transfer (BOT).
The ECC approved amendments to the master plan to build five terminals including two LNG terminals, two multipurpose cargo terminals and one integrated container terminal under BOT.