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Saindak Copper-Gold Project.

According to the Ministry of Petroleum and Natural Resources, the contract was to become effective only when 20 per cent down payment is made which is not possible unless working capital loan becomes available. As per arrangement, the MCC would also be furnishing a positive cash flow statement of the project for financial control during their management term.

Pakistan is blessed with the richest treasures of natural resources. All this hidden wealth has to be expired and exploited for making the best possible use of what Nature has bestowed on us. But, somehow, not many of these natural resources have been fully explored and exploited during the past more than five decades for one reason or the other.

Saindak Copper-Gold Project is the first major venture of its kind in the country in the metal mining sector based on indigenous mineral resources. It has a long history of planning, implementation as well as approval procedures and funding problems spread over two and half decades whereas its own life is not more than 19 years.

It has been through ups and downs and just when it had reached final stages of completion, after successful trial production in January 1996 during which about 1540 tonnes of Blister Copper was produced, the production operation is suspended for almost four years since then for want of working capital of Rs.1.5 billion for chemicals and spares and to keep it going.

Located at Saindak in district Chaghai of Balochistan province, the project envisaged mining, milling and smelting of Copper One for yielding an annual production of 15810 tonnes of Blister Copper, 1.46 tonnes of Gold and 2.76 tonnes of Silver for an estimated period of 19 years. It is a unique project in the sense that "Resources Development Corporation" was established way back in 1974 for the project planning and execution and initial work in terms of planning started in 1978. It has been constructed with technical and financial assistance of Messrs Metallurgical Construction Corporation (MCC) of China.

Only in July this year, it was taken up as "Problematic Project" by the Central Development Working Party in its meeting in Islamabad. Issues which the sponsoring Ministry of Petroleum and Natural Resources raised before the CDWP, adversely reflecting on how development projects are ill-planned, ill-executed and ill-funded, are briefly mentioned below:

* The copper and gold prices are always fluctuating and at present these are at rock bottom. The project operations would not become feasible unless system of support price is introduced i.e. the difference between the international price and the support price is picked up by the government.

* Economic Coordination Committee (ECC) of the Federal Cabinet decisions dated 12.2.1997 and 28.7.1998 regarding arranging a loan of Rs.1500.00 million from a commercial bank's consortium led by National Bank of Pakistan could not be implemented in spite of best efforts of Ministry of Finance and Ministry of Petroleum and Natural Resources.

* Government may provide Rs. 1000.00 million to cover the working capital requirements till a loan from commercial banks is arranged.

* The progress in obtaining working capital loan from China is also not encouraging as the Chinese Government is inclined to provide a loan of US$13.68 million only to meet the management fee of the Chinese Management Company which is being hired to run the project for a period of three years.

The meeting was also appraised on this occasion that the sponsors of the project at the time of approval of PC-I had pointed out that the estimated rate of return of the project would be 6.48 per cent and it would incur losses for 15 years out of its 19 years life.

On the basis of the revised approved cost of Rs. 11922.340 million including foreign exchange component of Rs.7061.310 million the rate of return decreased to 3.93 per cent. In view of the escalation of project cost and the low international metal prices, the rate of return has further reduced and now the sponsors expected that it would just recoup its operating cost and recovery of capital cost can be expected only if metal prices rise internationally.

Under these circumstances, the operation of the project appeared possible only if government decides to pick the losses i.e. subsidise the project. Just when the project was almost halfway through of its much lingered implementation, the financial and economic analysis by the Planning Commission, officials stated:

"The project is neither financially nor economically viable with an IFRR of 3.93 per cent and 6.98 per cent with and without infrastructure and IERR of 6.76 per cent. The capital cost of mobilising one worker for one shift works out to be Rs.9 .57 million.

"The cashflow statement of the project indicates that the project would be in deficit to the extent of US$205.98 million for the first six years of the operation. The sponsors (Saindak Metals (Pvt) Limited/Ministry of Petroleum and Natural Resources) have proposed that this deficit should be met from Pakistan Government's repayment of US$151.95 million and this way net deficit will be reduced to US$54.03 million. This implies that the government equity and investment would be exhausted during the first six years of operation. Furthermore, the accumulated losses from operation would continue for 15 years out of total project life of 19 years".

These views were expressed when the revised version of the project at the estimated cost, mentioned above, was put up for consideration and approval by the Executive Committee of the National Economic Council (ECNEC) in early 1995 and then it was scheduled to be commissioned by February 1996.

The pertinent question of arranging adequate funds for restarting and restructuring the project for ensuring commercial production at the earliest has been engaging the attention of the Ministry of Petroleum and Natural Resources; Ministry of Finance, State Bank of Pakistan and on top of all by the Economic Coordination Committee (ECC) of the Federal Cabinet during the lost couple of years.

But all these efforts have not been quite productive as even after approval of the ECC, requisite funds of Rs. 1.50 billion could not be arranged. The Federal Government through Ministry of Finance entered into negotiations with financial institutions like National Development Finance Corporation (NDFC) and ABN Amro Bank for arranging the working capital. But these negotiations failed to yield any positive results.

The ECC was informed in July 1998 by the Finance Division that due to doubts on the viability of Saindak Project, it has not been possible to arrange working capital loan from the banks or financing institutions.

The relevant portion of the Finance Division Office Memorandum dated June25, 1998 is reproduced below as it makes interesting reading and also reflects rather adversely on the efficacy of the government machinery and apathy towards a mega project.

"As for options regarding the working capital facility of Rs. 1.5 billion, it has to be raised through ABN Amro or through budgetary allocation of the same amount by GoP (Government of Pakistan). Factually, these are not two options again. ABN Amro (who has reportedly backed out already), will never extend a loan of Rs. 1.5 billion to SML (Saindak Metals Limited) without GoP guarantee (and its repayments bound to be a liability of GoP),"unless SML and the Ministry of Petroleum and Natural Resources confirm the viability of the project to the ECC and SML's ability to pay off the loans from its future income".

As regards discharge of previous liabilities towards banks, estimated as Rs.11.12 billion on June 30, 1998, the Finance Division forwarded the advice that since GoP bonds cannot be issued due to limitations imposed by International Monetary Fund (IMF), SML bonds may be issued.

While considering another summary submitted by the Ministry of Petroleum and Natural Resources regarding "Restarting Saindak Copper-Gold Project for Commercial Production", the ECC in its meeting on July 28, 1998 in Islamabad approved measures for arranging Rs. 1.5 billion working capital for Saindak Copper Gold Project so that it could start production by the end of 1998.

The ECC decided that the amount should be arranged through loan from private banks after it was informed that the project in its final stages of completion was facing financial problems for the last couple of years. Earlier on a summary submitted by the Finance Division regarding financial restructuring of the Project, the ECC in its meeting on February 12, 1997 decided that the loan liabilities of the project amounting to Rs.10.470 billion would be retired by the Government through issuance of 6-year bonds for Rs.8.333 billion to the lending banks at the rate of 13 per cent interest and the rest through PSDP (Public Sector Development Programme) and current budget releases.

It was also decided that Saindak Metals Ltd. (SML) may get a loan of its 1500 million from a Banks Consortium led by National Bank of Pakistan against lien on the project cash flow surplus and also supported by Government guarantee. ECC also approved the proposal to hire a management company for three years to run the project.

However, the liabilities to be discharged through bonds on reconciliation between SML and NBP were found to be Rs.9.760 billion as on June 30, 1997 instead of Rs.8.333 billion as approved by ECC. It was pointed out that due to interest capitalisation this loan facility would further increase till the bonds are actually issued. As for the variation in figures, it was stated that the main reason for this variation was that the audited accounts of SML for 1995-96 did not reflect certain payments made by the National Bank of Pakistan to the Chinese company on behalf of Saindak Project.

In pursuance of ECC decision, SML entered into an agreement with Metallurgical Construction Company (MCC) of China on December 17, 1997 to manage the project for next three years at a total cost of US$13.68 million with the responsibility to meet technical and financial targets.

According to the Ministry of Petroleum and Natural Resources, the contract was to become effective only when 20 per cent down payment is made which is not possible unless working capital loan becomes available. As per arrangement, the MCC would also be furnishing a positive cash flow statement of the project for financial control during their management term.

The Ministry in its summary to ECC in July last year also stated inter alia that the Ministry is trying to obtain Iranian loan for use as working capital and a Chinese loan to pay the services charges of the Chinese management company. "Both of these efforts are still at proposal stage although Iranian and Chinese Embassies in Pakistan have both indicated possibilities to provide the requisite loans to Saindak against GoP guarantees", the summary mentioned further.

And the project is still far from being restarted and going into commercial production as working capital required is still not forthcoming from any quarter.

Against last approved cost of Rs.11922.340 million including foreign aid of Rs.7061.310 million, an estimated expenditure of Rs.12881.872 million was reported to have been incurred till June 1998 - Rs.12523.192 million till June 1997 and meagre amount of Rs.358.680 million during financial year 1997-98 against provision of Rs.408.00 million in PSDP 1997-98 and a provision of Rs.638.457 million was made in Public Sector Development Programme of the Federal Government for financial year 1998-99.
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Author:Zahid, Tanvir
Publication:Economic Review
Article Type:Statistical Data Included
Geographic Code:9PAKI
Date:Nov 1, 1999
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