ISLAMABAD: The Competition Commission of Pakistan (CCP) has cleared Shanghai Electric Power (SEP) of China to take over a majority stake in Karachi-based integrated power utility K-Electric from Dubai-based Abraaj Group.

The CCP has “completed a competition assessment and given a clearance to Shanghai Electric” for the proposed acquisition, confirmed an official after office hours on Monday requesting anonymity because he was not authorised to speak on the matter.

Sources said the CCP assessment cleared the transaction because SEP did not have any significant presence in the Pakistani market and there was no possible threat of monopoly to the consumer’s disadvantage.

Matters relating to electricity sale, laws and tariff pertained to power sector regulator National Electric Power Regulatory Authority (Nepra).

Abraaj Group announced in the last week of October that one of its companies, KES Power, would divest its 66.4 per cent shares in K-Electric, the country’s largest and only vertically integrated power utility, at $1.77 billion to SEP.

SEP has been holding behind-the-scenes talks with the government and its various institutions since then for commercial and regulatory approvals. There have been indications that besides a $1.77bn deal with Abraaj, the Chinese firm would be investing more than $1.5bn for the system upgrade, greater generation and better distribution and improved revenue recovery.

The sources said SEP would be sharing this week its 10-year business plan with the Ministry of Water and Power and then seek its regulatory approval through a multi-year tariff from Nepra.

They said the Chinese firm wanted the government’s commitment to retaining its 24pc shares to provide a comfort level or SEP’s first right of refusal in the case of divestment.

Considering it against the sovereign right, the government has no intension to oblige. Learning a lesson from amended agreements with Abraaj during the PPP government in 2009, the government would ensure payment of dues payable to it or its fuel suppliers through standby letters of credit and delays will attract market-based interest rates.

The sources said the government would like to enter into a power purchase agreement with the new buyer for three years with the first term to expire on December 31, 2019. The current power supply of 650MW from the national grid would continue but on a “take or pay” basis and marginal cost ie the cost of power supply plus return instead of the existing pattern of the Disco tariff.

The current owner would be required to settle Rs51bn payment, including markup, before the formal exit for a smooth transfer of stakes and management to the new buyer.

A state-owned enterprise, SEP is controlled by China’s State Power Investment Corporation, a Fortune 500 company. Listed on the Shanghai Stock Exchange, it is mainly responsible for Shanghai’s power supply, with a generation of 35.23TWh (terawatt hours) last year.

The deal will end an engagement that Abraaj began in 2009 when it acquired the controlling stake with management control in the midst of a severe crisis in the utility. According to people familiar with the original acquisition, Abraaj intended to implement its turnaround plan and exit the investment in five years, which could not materialise in time.

Along the way, the new management clashed often with the Ministry of Water and Power, labour unions and the state-owned gas supply company responsible for providing fuel for its power plants. It saw three CEOs come and go and faced an embarrassing overbilling scandal along the way.

KE received criticism from the government and the regulator for failing to meet quality standards and for the last year’s power shutdown that led to the loss of a number of human lives.

In addition, it also received criticism for non-payment of dues, over-billing and less-than-committed investment plans. Yet its management succeeded in posting Rs22.8bn profit last year.

The KE management has been claiming to have invested over $1bn for capacity additions.

Published in Dawn, December 6th, 2016