The much-talked about project is a joint venture of the Fatima Group and the Arif Habib Group and remained under discussion at different levels after acquiring extension in completion deadline.
The Economic Co-ordination Committee (ECC) of the Cabinet had constituted a panel, comprising finance, petroleum, water and power and industry secretaries to review the financial close documents and project completion schedule, the sources added.
Giving the background, the ECC in its meeting on August 16 had decided to allow extension in completion date requested by the company subject to its achieving financial close within 90 days.
The ECC defined financial close along the same lines as envisaged in the agreements with IPPs thereby requiring execution and delivery of unconditional financing documents together with equity for full financing of the plant and opening of letter of credit (L/C) in favour of equipment supplier with proof of wire transfer on down payment. The company was also asked to give major implementation milestones for the project to enable monitoring.
The FFCL was conveyed the decision of the ECC, directing the company to achieve financial close within 90 days of the issuance of the said letter. The ECC had also directed the company to provide an irrevocable bank guarantee of $6.666 million from 'A' rated bank within 30 days to ensure financial close in the stipulated period of 90 days.
In the draft performance guarantee, vetted by the finance division, it had been mentioned that the National Bank of Pakistan (NBP) as the agent bank would confirm to the Government of Pakistan the achievement of financial close. The NBP has confirmed that financial close as defined by the ECC has been achieved.
The documents submitted by the NBP were placed before the secretaries committee comprising finance, water and power, petroleum, and industry secretaries from their review.
The secretaries committee in its meeting held on December 5 discussed the issue of financial close and based on examination of the documents and the categorical and unequivocal letters of the agent bank ie NBP, concluded that financial close has been achieved. In pursuance of the decision of the ECC, the sources said the FFCL was also directed to provide major implementation milestones for project monitoring.
This plan envisages completion of the project by August 2008, the secretaries committee while examining the documents, however, noted that in the Common Terms Agreement (signed between the Fatima Fertiliser Company Limited and the financial institutions) the commercial operation date has been set for not later than 42 months from establishment of first letter of credit (issued pursuant to the L/C facility agreement signed on November 25, 2006) ie up to May 2010. The committee was of the view though the FFCL has given in writing that the project shall be completed by August 2008 the possibility of it going beyond that date can not be ruled out.
The secretaries committee recommended that in order to ensure that the project is completed within the time specified by the ECC sufficient guarantees to obtain from the FFCL or a penalty clause be imposed if the project is completed beyond August 2008.
The committee also decided that a summary may be initiated by the Ministry of Industries to ECC for its consideration and decisions before release of guarantees by the company. The bank guarantees has already expired on December 20, 2006. The industries ministry is of the view that if the ECC decides to impose any penalty on the FFCL, following two options may be considered:
(a) The ECC may direct the FFCL to provide sufficient performance guarantees for completion of project by August 2008. The secretaries committee earlier set up by the ECC to decide the guarantee amount for financial close may be tasked to determine the amount of guarantees to be sought.
(b) Penalty clause to trigger in case project completion goes beyond August 2008 as proposed in our earlier summary to the ECC on August 16 may be incorporated in the ECC's decision.
The sources said the penalty clause had proposed: "The penalty clause may stipulate that if the Fatima Fertiliser delays its production beyond August 31, 2008, it shall pay a penalty equal to 1 percent of import subsidy paid by the government on the installed capacity of 240,000 tonnes of urea which was to be produced by the plant, for the first month, 2 percent for the second month and so on up to a maximum of 10 percent."