A GOVERNMENT official who has been criticised for stalling the sale of K-Electric (KE) Ltd to Shanghai Electric Power Company in 2018 said he was protecting the “national interest” after his requests to see the terms of the transaction were refused.
Irfan Ali, privatisation secretary from 2017 to 2018, said he wasn’t opposed to the sale of Karachi’s electricity utility to the Chinese company. He said he was required to see the share purchase agreement, which contained the terms of the deal, before he could recommend a national security clearance certificate for it to proceed.
Abraaj, the private equity firm that wanted to sell its controlling stake in KE to Shanghai Electric for $1.77 billion, declined to show him this document, Mr Ali claimed.
“They were not prepared to share that,” he said when contacted at his home in Lahore. “It’s a question about the transparency of a transaction which I demanded and still demand. Any country going for such a huge transaction should be very careful because we have to protect our national interest.”
Mr Ali explained his actions after Shahid Khaqan Abbasi, Pakistan’s prime minister until May 2018, said in an interview that the former privatisation secretary effectively stalled the KE sale, which hasn’t been completed. Shanghai Electric still wants to complete the takeover, according to a stock exchange filing in Dec 2021.
Abraaj’s refusal to give its share purchase agreement with Shanghai Electric to the official obstructed the transaction
The future of KE has been shrouded in uncertainty since 2018 when Abraaj, for years its controlling investor, filed for bankruptcy. Abraaj bought control of KES Power Ltd, which owns 66.4 per cent of KE, in 2009.
Abraaj’s founder, Arif Naqvi, tried hard to complete the KE sale. Mr Abbasi said he met him and discussed issues relating to KE.
Before Abraaj collapsed, it managed about $14bn for investors, including the Bill & Melinda Gates Foundation and the US and UK governments. Insolvency experts now oversee Abraaj.
Mr Ali said he finally saw the share purchase agreement for the first time in late 2018, when he was appointed secretary of the power division in the energy ministry by the incoming government of Prime Minister Imran Khan.
“There were several clauses in the agreement that Abraaj, as a private company, could not have agreed to on behalf of the government of Pakistan,” the retired civil servant said.
Abraaj agreed to so-called ‘conditions precedent’, according to a copy of the share purchase agreement seen by Dawn. The conditions included gaining approval for KE “to be owned by a foreign government,” according to the document. This wording was too broad, Mr Ali said.
Abraaj also committed to securing a “new acceptable” tariff at which the electricity regulator would allow K-Electric to sell power and an agreement that the government of Sindh would guarantee the payment of the Karachi water authority’s electricity bill, according to the share purchase agreement. A so-called letter of comfort that the government-controlled Sui Southern Gas Company Ltd would continue to supply K-Electric with “adequate gas supply” was also pledged.
Mr Abbasi, the former prime minister, said the terms of the share purchase agreement between Abraaj and Shanghai Electric were commercially confidential so it was not legally possible for it to be shared with the government. He said there were “enough indemnities” to protect the government’s interests before granting the national security clearance certificate.
“Looking back, the secretary was stonewalling. But with hindsight, there was much more to it,” Mr Abbasi said in the interview. “This transaction would only have had a great, positive impact on the government and the people in the country.”
Daniyal Aziz, the privatisation minister until May 2018, didn’t agree with Mr Ali about the need to see the share purchase agreement.
“According to the law, the government could not withhold the national security clearance certificate for the KE sale on the pretext of seeing the share purchase agreement beforehand,” Mr Aziz said in an interview. “The share purchase agreement would be presented in any case, under the law, before the transaction could take place.”
Mr Ali said he was required to ask for the share agreement because it was the “constituent document” of the transaction which he had to see before recommending security clearance. He said he consulted legal advisers and other officials, who agreed with him. The risk of granting security clearance without first seeing the share agreement was that it might imply the government had approved terms which it wasn’t aware of, Mr Ali said.
He retired in February 2021, after 38 years in the civil service.
One of Mr Ali’s main concerns about the deal was the need to agree upon a way to settle outstanding payments and receivables between KE and state-controlled companies before the sale. Other government officials also wanted this matter settled, according to Mr Ali and people involved in the sale process, including current and former government officials.
In 2019, Mr Naqvi of Abraaj was arrested in London on US criminal charges of fraud and theft relating to his management of the private equity firm. Mr Naqvi maintains his innocence. His lawyer did not respond to requests for comment.
In February 2021, Mr Abbasi told Dawn that he believed the failure of the KE sale was hard to understand. He said Mr Naqvi would probably be free if the sale had been completed as the proceeds could have funded liquidity issues and resolved market confidence problems Abraaj was facing.
“A man who had deep contacts with the most powerful people in the country was unable to resolve administrative hurdles in the sale of his shares,” Mr Abbasi said in a Dawn article published on Feb 1, 2021. “There is more here than meets the eye. How and why?”
When he was asked to explain the reasons for his concern about the KE sale in interviews after the article was published, the former prime minister questioned whether there were “external influences” on officials like Mr Ali to oppose the sale of the utility to a Chinese company.
“Not at all. It was my decision,” Mr Ali said when asked for a response. “Investments in our economy are good, and the Chinese are no doubt our friends, but all transactions have to be transparent so we can agree upon the terms. If there is no transparency and tomorrow, a company from a friendly country comes in and then a dispute emerges between our government and that country, is that good? I don’t think so. I believe we were doing our duty by asking for the share purchase agreement and a resolution of the liabilities.”
Mr Abbasi said the stalled KE sale had made it harder to attract foreign investment to Pakistan.
“K-Electric is in a mess,” he said. “If a world-class utility like Shanghai Electric had come in, other utilities around the world would have looked at Pakistan and invested in its other utilities.”
Tabish Gauhar, a former executive at Abraaj and KE who left both companies before the KE sale was agreed, said Abraaj had prioritised discussions with senior Pakistani politicians during the sale process. But government officials involved in vetting the transaction were also important, he said.
“The reality is people like Irfan Ali are very relevant as well,” Mr Gauhar said in an interview.
A KE spokesperson said the company and its shareholders are talking to the government about securing national security clearance for the Shanghai Electric deal, the electricity tariff and an arbitration agreement about receivables and payables between the company and the government.
Published in Dawn, March 2nd, 2022