KARACHI: In a long anticipated announcement, the Abraaj Group said on Sunday evening that one of its companies, KES Power, had reached an agreement to divest its stake in K-Electric, the country’s largest and only vertically integrated power utility.

Abraaj owns 66.4 per cent of K-Electric’s total shares, along with management control. The deal, when closed, will be worth $1.77 billion.

The deal was finalised a week ago in China, but the announcement has only just been made.

The buyer is Shanghai Electric Power (SEP), a state-owned enterprise 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. (Major energy production or consumption is often expressed as terawatt hours for a given period, which is often a calendar year or financial year. One terawatt hour is equal to a sustained power of approximately 114 megawatts for one year).

It is not known whether any of the money involved in the deal will actually pass through Pakistan. Neither of the parties involved in the deal commented on the details.

The deal will end a stormy, but ultimately fruitful, 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, but the exit was delayed due to regulatory hurdles in unbundling the utility, as well as difficulties in locating buyers.

Along the way, the new management clashed often with the ministry of water and power, with labour unions, and with 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.

By all accounts, the exit is a hard-earned one.

“Abraaj fully recognised the outstanding growth opportunity that K-Electric represented for the power sector in Pakistan when we made our investment in 2009. Over the past seven years, we have worked very closely with the management and staff at K-Electric to catalyse that potential and achieve real and tangible value for the business, its consumers, and the city of Karachi at large,” said Arif Naqvi, founder and Abraaj group’s Chief Executive.

The Dubai-based private equity fund claims it has achieved “a landmark turnaround” and transformed “an under-utilised strategic asset into a leading Asian energy player”. It claims to have added 1,000MW to KE’s power generation, improved “overall efficiency levels” from 30.4pc in 2009 to 37.4pc this year, and reduced transmission and distribution losses by 12 percentage points.

The company recorded its first net profit in 2012 after languishing in loss for over a decade. Its last reported net profit, for the nine-month period ending in March this year, surged 40pc year-on-year to touch Rs22.8 billion.

In official communications, the KE management has taken pains to underline that it has invested more than $1bn into the utility, but the press release from Abraaj makes no mention of any investments made in the company.

In August, when the company notified the stock exchange that “Abraaj is evaluating the possibility of divesting” its stake, it also disclosed a $2.2bn investment plan for the next decade

Director's concern

Zubair Motiwala, one of the two government-appointed directors on the company’s board, is concerned about the lack of transparency surrounding the deal. “No board meeting has been held to brief the directors” about the deal, he says. “Nothing is clear about this. As a board member, I still don’t know how this transfer is going to take place.”

He wonders about the fate of various incentives, like the subsidy on tariff, worried whether this will continue or not.

According to some KE insiders, the deal will only go through once the multi-year tariff that the company applied for has been approved by Nepra, the regulator. Hearings on that application have already been held and a final decision is awaited.

SEP Chairman, Wang Yudan, said the deal marked the beginning of SEP’s cooperation with Abraaj. “SEP is confident about working together with Abraaj in the future to transform K-Electric into one of the best companies in Pakistan.”

The statement implies a continuing role for Abraaj in KE management after the divestment, but no further clarity is available at the moment. Arif Naqvi, the Abraaj CEO, would only say that the company was divesting its stake “to a strategic buyer who is fully committed to continuing this success story into the future”.

Abraaj’s communications director, Mitali Atal, did not return calls seeking comment on the development.

Published in Dawn, October 31st, 2016

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