Government hid LNG agreement with Azerbaijan from European Commission

The government went through great effort to hide a critical agreement related to the Electrogas deal from the European Commission, according to leaked emails seen by The Shift.

Correspondence between Electrogas directors and employees show extreme concern over the ‘security of supply agreement’ signed by disgraced former Minister Konrad Mizzi with Azerbaijan’s SOCAR Trading undertaking to buy liquified natural gas (LNG) for the Electrogas power station for 18 years at ridiculously inflated prices.

The Shift has already shown that the secretive nature of these dealings as well their timing were raising bright red flags at Malta’s anti-money laundering authorities when details emerged in a leaked FIAU report that MEP David Casa had presented to a magistrate two years ago.

Now, emails leaked to Daphne Caruana Galizia shortly before her assassination shed light on this agreement and why, in the words of one of Electrogas’s Dubai-based lawyers, it required “discrete handling”.

To date, a copy of this document has neither been published nor tabled in Parliament.

The leaked emails show that this agreement with SOCAR’s subsidiary was kept hidden from the European Commission. The reason was that it may have been construed as unlawful State Aid, which would have meant that the government would have been lumped with picking up the pieces of a €500 million white elephant if the Commission objected.

Leaked email exchanges show that Electrogas’ lenders’ lawyers were concerned that an agreement signed by Konrad Mizzi which they were denied access to for 20 months constituted unlawful State Aid that was hidden from the European Commission.

EU law generally prohibits governments from granting selective financial advantages (called State Aid) to firms that may distort competition, unless an exemption applies or the Commission approves the State Aid under strict conditions.

Breaches of State Aid laws may incur hefty fines and measures including the unwinding of transactions and forced repayment of any unlawful advantage.

In late 2015, after months of trying to argue for an exemption, the Maltese government was sternly informed by the Commission that the State Aid to Electrogas needed prior approval.

Worse, the Commission told the government that any State Aid provided before its final approval, including the controversial State guarantee, would be deemed unlawful.

The Commission finally issued its approval in early 2017, but it now transpires that it was not aware of the LNG Security of Supply agreement that was kept hidden by the Maltese government.

An agreement steeped in secrecy

It was not only the European Commission that was kept in the dark. Even lenders to Electrogas were not permitted to view this agreement, which led to frustration and an ultimatum.

“Our concern, which we have expressed to [Electrogas] on several occasions, is that the LNG  [Security of Supply agreement] may contain elements of State Aid which should have been disclosed to the Commission”, read the umpteenth frustrated email from the London-based Freshfields lawyer for the banks in mid-2016, now practically begging for the agreement.

A lawyer for Electrogas’ lenders was finally allowed to see this agreement after 20 months of secrecy, but he had to travel to SOCAR’s offices in Geneva for a private viewing.

His conclusion, the leaked emails show, was that the unlawful State Aid risks were so great for his clients that the agreement needed to be cancelled before the banks would lend Electrogas further money – a hard and fast condition that was spelt out in the final financing agreements.

The Maltese government and Electrogas had been denying the banks access to this agreement for over a year, citing all manner of excuses, from it being with the Azerbaijani government, to strict confidentiality clauses, to it not being relevant to Electrogas.

Not much was known about this agreement other than the little that Electrogas had told the banks –  under this agreement, the Maltese government was guaranteeing the purchase of LNG from SOCAR.

What was clear, and this is what concerned the senior lawyer the most, is that the Maltese government had concealed this agreement from the Commission and, if it constituted State Aid, this could create a massive risk for Electrogas and, with it, his clients.

Internal emails show that Yorgen Fenech was informed that the Government of Malta did not want to disclose a copy of the agreement to Electrogas’ lenders.

Yorgen Fenech, now accused of masterminding the assassination of journalist Caruana Galizia, was having none of it. Emails show that the agreement signed by Mizzi in early 2015 was not to be shared with anyone, least of all Electrogas’ lenders.

“The government (GOM) said that under no circumstances it is true (sic) that the government would allow the LNG Security of Supply Agreement (SSA) to be divulged to the lenders,” Fenech wrote.

Yet two and half years after the agreement was signed, SOCAR provided the banks with evidence that the secret agreement with the Maltese government had been terminated.

How they got it wrong

As early as March 2015, three months after the government first issued its contentious State Guarantee that would later balloon to €432 million, the government had reached out to the European Commission to determine whether the deal needed State Aid approval.

By December 2015, after nine months of lengthy exchanges between the government and the Commission, the Commission concluded that the government had no other option but to apply for approval. Further, the Commission noted, any prior advantages, including the controversial State guarantee, were looking a lot like “unlawful aid”.

The government needed the Commission’s approval or the Electrogas project, a Labour electoral promise which was already running well behind schedule, would hit a massive stumbling block.

As the Maltese government pressed ahead urgently with a formal submission for State Aid approval, both Electrogas and the banks became increasingly edgy.

On the one hand, Electrogas’ promoters were scared that the Commission approval process would lead to them getting a worse deal.

Excerpt from the banks’ legal advisors due diligence report into Electrogas spotlighting their concerns over the LNG Security of Supply Agreement.

“It might be that [the Brussels lawyers] convinced the Maltese government that our overall deal is much too sponsors friendly … and the EU commission is only used as an excuse,” an exasperated Gerhard Brenner from Siemens told Fenech upon hearing that the Commission would be focusing on whether there was “overcompensation”.

Fenech, evidently close to the corridors of power, was not convinced. “Gerhard, it’s surely not the case, rest assured I would find out if it were the case,” he replied.

Yet the emails show the banks were equally scared, but for different reasons.

If the government failed to disclose particular details to the Commission, or if the final deal did not match what the Commission had approved, they could be lumped with picking up the pieces. And the government was not being too forthcoming with information on what they were telling the Commission.

One of the issues that pricked their ears was that the government refused to disclose the existence of the LNG Security of Supply Agreement that it had signed a year earlier and which they had not seen.

A flight to Geneva and a termination agreement

By October 2016, the banks had been highlighting for over a year the fact that the LNG Security of Supply Agreement was a material issue that needed to be addressed before further money was advanced.

The secrecy and delays just increased the banks’ lawyers suspicions. Clearly struggling to understand why his previous offer for the document to be shared securely through a protected website (like all other confidential documents) was still not enough, he suggested:

“If… there remains a concern around confidentiality, we would be happy to discuss proposals for some sort of limited access to the document.”

Excerpt from a legal opinion issued by SOCAR’s lawyers as evidence to the banks that the LNG Security of Supply Agreement had been terminated in November 2017. Termination of this agreement became critical since the banks refused to lend further money due to the unlawful State Aid risks it created.

In the end, the government and SOCAR appear to have caved in. The banks’ lawyers would be allowed to see a copy of the agreement but only by travelling to Geneva, Switzerland, for a private viewing with each of government and SOCAR representatives present.

Two State Aid experts from the law firm travelled to Geneva at a total cost of over €10,000 (eventually charged to Electrogas) to review this agreement. On the way back from the meeting they called their colleague. Their conclusions were obvious, the agreement needed to be cancelled before the banks would put up any further money.

Two days later, the government and SOCAR also agreed that the agreement would be terminated before the final lending agreements (called “financial close”) became effective.

The European Commission would go on to approve the State Aid granted to Electrogas, without ever being made aware of this hidden agreement signed by Mizzi.

All persons involved deny any wrongdoing.

                           
                               

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