ANALYSIS: For K-Electric, fault lines and an elusive deal

Published April 25, 2021
Sixteen years after the privatisation, no political government is able to privatise any of the other distribution companies in the country while the KE is set to change hands again in the same period. — KE website/File
Sixteen years after the privatisation, no political government is able to privatise any of the other distribution companies in the country while the KE is set to change hands again in the same period. — KE website/File

THE initial years of the erstwhile Karachi Electric Supply Corpor­ation’s (KESC) privatisation did not go well for the foreign group that had bought controlling stakes in the power utility in the first of its kind transaction in the country’s power sector in 2005.

The owners, Aljomaih Group of Saudi Arabia, appointed a German chief executive officer, Frank Scherschmidt, and then entered into an operation-and-management (O&M) agreement with Siemens Pakistan.

This did not work as Mr Scherschmidt was replaced in less than two years and the O&M contract that was supposed to last six years was also terminated before the stipulated time in November 2007.

The Aljomaih group, which had bought the KESC via an offshore company known as KES Power Ltd, was looking for a way out because the entity they bought continued to incur hefty losses.

The group finally made a deal with Dubai-based private equity firm Abraaj Capital that in October 2008 had announced buying new shares in the KES Power, acquired 50pc stake and the KESC’s management control.

The new Abraaj-led KESC management, then headed by Tabish Gauhar who is now the Special Assistant to Prime Minister on Power and Petroleum, pumped much-needed capital, introduced reforms that include rightsizing/downsizing, adopted a ruthless policy to carry out prolonged loadshedding multiple times on a daily basis in what it described as “high-loss areas” and used cheaper gas, instead of expensive furnace oil, to run its power plants.

The company managed to overcome its losses and posted profit for the first time in around two decades during Mr Gauhar’s tenure as the chief of KESC, which was renamed as K-Electric Ltd (KE) in 2014.

Potential sell-off deal

By 2016, the Abraaj Group was ready to offload its stake in the KE and later the same year it announced that it was going to sell KE to China’s state-backed Shanghai Electric Power for $1.77 billion.

The deal did not materialise because of the country’s tumultuous situation.

In 2018, the Abraaj Group entered into liquidation after its founder Arif Naqvi became embroiled in a financial scandal pertaining to the misuse of funds.

Despite the exit of the Abraaj Group, Shanghai Electric is still planning to acquire KE, but apparently not on the same conditions, and price, that the Abraaj had disclosed in 2016 due to a host of reasons.

The agreement, if any, between the Abraaj and Aljomaih groups over their share in the potential sell-off is also shrouded in mystery, primarily because the KES Power is an offshore company.

“Shanghai Electric is a strategic investor who, despite a lapse of around four-and-a-half years since the signing of a Definitive Agreement for acquisition of up to 66.4 per cent stake in KE in October 2016, has shown a keen interest,” says senior KE official Imran Rana.

When asked about hurdles in the way of the deal, he cited the issue of payables and receivables between the KE and various government organisations and said it’s affecting the utility’s viability and sustainability.

“Despite having net receivables of approximately Rs80bn from GoP entities, the pressure resulting from making timely payments to all fuel suppliers and power producers has forced KE to increase its borrowings from financial institutions. The power utility’s borrowings for working capital alone have already reached an alarming level of Rs111bn, which cannot be sustained further,” he said.

“Further, regulatory certainty and pending approvals including KE’s multi-year tariff (MYT) mid-term review and tariff variations are also critical to KE’s long-term sustainability,” he said, maintaining that the company had been working with all stakeholders concerned for an expedient resolution to these issues.

M. Awais Ashraf, the research head of Foundation Securities, says the execution of the deal with Shanghai Electric would enhance the investment climate of energy sector especially for distribution companies and helped the government in finding strategic partners, or investors, for poorly performing distribution companies (Discos).

NO GSA yet

The issue of KE’s receivables and payables is a contentious one.

In the absence of a valid Gas Supply Agreement (GSA), the power utility and Sui Southern Gas Company (SSGC) have often been seen trading allegations against each other over non-payment of accumulated dues and sometimes blaming each other for worsening hours-long loadshedding that Karachiites endured in peak summer every year amid heat waves.

While the SSGC claims that the dues outstanding against the KE crossed Rs122bn, the utility insists that the actual amount was not more than Rs14bn.

The senior KE official Rana recalled that in October 2020, the federal government had directed the power utility and SSGC to execute the GSA by “ring-fencing the issues around historic dues” for resolution at the government level.

He said KE was willing to enter into a long-term GSA with SSGC for firm quantity and pressure for supply of gas.

About historic dues, he said discussions around resolution of the issue via arbitration facilitated by the Privatisation Commission were in advanced stages. “The terms of reference for the process of arbitration have been agreed between the parties after several rounds of discussion with inter-ministerial committee and will be executed after approval from the cabinet.”

Claw-back profit

Under a claw-back mechanism, the KE is bound to pass on a portion of relief to consumers after earning a specified level of profit. When the National Electric Power Regulatory Authority (Nepra) had determined that approximately Rs43.6bn should be returned to the consumers under the head of claw-back of excess profit, the KE approached the Sindh High Court and got a stay order, which is still in the field.

“KE has a difference of opinion with Nepra on the methodology and formula used to calculate the claw-back amounts, and the matter is currently sub-judice,” said the senior official, adding: “As per Nepra, the total amount of claw-back is Rs43bn, which is much higher than even KE’s total profit-before-tax of around Rs19bn for the period 2009 to 2016.”

Sixteen years after the privatisation, no political government is able to privatise any of the other distribution companies in the country while the KE is set to change hands again in the same period.

Analyst Awais Ashraf hopes that a takeover by Shanghai Electric would help enhance system efficiency and reliability and also provide an opportunity for Pakistan to replicate the same model in other Discos.

Published in Dawn, April 25th, 2021

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