KARACHI, a city of around 16 million, is the commercial and industrial hub of Pakistan. It has consistently remained the highest taxpaying city of Pakistan.
Electricity is the lifeline of any modern city. K-Electric has a monopoly over Karachi’s electricity generation, transmission and distribution. Considering Karachi’s size and commercial importance, it is difficult to overstate the significance of KE to Karachi and Pakistan’s economy.
KE is generally viewed as an inefficient electric utility. During the summers especially, when the demand of electricity increases, KE’s performance comes under severe criticism — the government promises severe action, courts take notice, but nothing actually changes at KE.
In Pakistan, every other issue becomes a national security concern — excluding some which actually carry national security implications. This list of exclusions, though small, includes KE. Pakistan has not bothered to seriously investigate who has effective control over KE and the legal consequences that flow from loss of control at KE. Irrefutable evidence is available in the public domain to confirm that as early as 2018, the control of KE was lost by the Abraaj Group which, as a consequence, obligated Pakistan to either take over KE or to appoint an administrator — astonishingly Pakistan remained passive.
The authorities have not bothered to seriously investigate who has effective control over K-Electric.
KE was privatised in 2005, when KES Power, a company registered in the Cayman Islands, acquired a 66.4 per cent stake in the company. The initial investors in KES Power were Al Jomaih Group of Saudi Arabia and Hassan Associates from Pakistan. Neither possessed notable experience in running electric utilities, let alone a vertically integrated electric utility of KE’s size and complexity; hence, this privatisation was doomed from the start.
In 2009, certain private equity funds belonging to the Abraaj Group acquired control of KES Power. Although, KE is a listed Pakistani company, and listing signifies full disclosure, to date, no information on the actual ownership structure of KES Power is available in the public domain. All we know is that various funds from the Abraaj Group have a majority stake in KES Power — we do not know the names of those funds and whether or not there are any other investors in KES Power.
The name Abraaj Group was informally used for certain private equity funds and other companies set up by Mr Arif Naqvi, who is of Pakistani origin. Abraaj Holdings, registered in the Cayman Islands in 2002, was the top-level holding company of the Abraaj Group, and Mr Naqvi was its biggest shareholder and CEO. Abraaj Holdings solely owned Abraaj Investment Management, which was also registered in the Cayman Islands. Abraaj Group organised various private equity funds to which Abraaj Investment Management and Mr. Naqvi provided investment advice.
Abraaj Group attracted large investments for its private equity funds from several high-profile entities including the Bill and Melinda Gates Foundation, the US government’s Overseas Private Investment Corporation and the World Bank Group. To outsiders Abraaj Group was a resounding success — in 2018, it was managing funds in excess of $13 billion.
The reality was, however, quite different. According to the US Securities and Exchange Commission (SEC), by 2015, and continuing thereafter, Abraaj Holdings and Abraaj Investment Management, “were insolvent, lacking the legitimate income to cover basic business expenses such as employee salaries and other operating costs”.
Also read: The fall of Abraaj
According to the SEC, during this period, these entities “used hundreds of millions of dollars of investor money” to avert defaults. SEC claims that despite its precarious financial condition, in 2015, the Abraaj Group paid to Mr Naqvi $53.75 million and in 2016, $19.5m as salary and bonus!
In early 2018, the Abraaj Group finally defaulted on its loans, which compelled two of its creditors to force its court-supervised restructuring. In June 2018, Abraaj Holdings and Abraaj Investment Management voluntarily declared bankruptcy and entered liquidation proceedings in the Grand Court of the Cayman Islands. PriceWaterhouseCoopers (PWC) were appointed the joint provisional liquidators of Abraaj Holdings, and Deloitte were appointed Abraaj Investment Management’s joint provisional liquidator by the Grand Court of the Cayman Islands. New managers have taken control of some of Abraaj Group’s funds. PWC and Deloitte were appointed to evaluate bids received for other Abraaj Group’s funds.
Mr Naqvi is currently under house arrest in London pending his extradition to the US. In 2019, the Dubai Financial Services Authority fined two of the Abraaj Group’s companies $315m, and a UAE court in absentia sentenced Mr Naqvi to three years in prison.
These developments had serious legal consequences for KE. In 2009, Pakistan transferred the control of KE specifically to the Abraaj Group, which was lost in 2018, when Abraaj Group lost its control over KES Power. Now, KES Power is presumably controlled by provisional liquidators or new managers of Abraaj Group’s funds. Since KES Power appoints the majority of KE’s directors, a change of control of KE had clearly occurred way back in June 2018, which Pakistan unwisely ignored. Since 2018, KE is a rudderless ship, which explains it’s incredibly poor performance.
All governments jealously guard the ownership and control of companies involved in sensitive businesses. America has banned several Chinese communication companies citing national security concerns. In 2006, DP World, owned by the Dubai government, relinquished control over five US port terminal facilities when Americans opposed it on national security grounds. The question is why Pakistan allowed the control of KE to slip to liquidators? Nepra has the legal authority to suspend or revoke the licence of a licensee or to appoint an administrator if the licensee loses or relinquishes control — why was this power not exercised?
To prevent unauthorised change of control, there is always a clause in a contract which designates the bankruptcy, restructuring or change of control of the investor an event of default which allows the government to immediately take-over the company, appoint an administrator or to terminate the main acquisition agreement. This has remained a standard stipulation in other Pakistani privatisations and there is no reason why this clause would not be present in KE’s privatisation agreements. The burden is on the state to explain why it allowed KE to play havoc with Karachi although it had the power to prevent it?
The writer is an advocate of the Supreme Court of Pakistan.
Published in Dawn, July 16th, 2021