With the change of government, a group of influential and leading Saudi and Kuwaiti investors who had originally purchased Karachi Electric Supply Corporation (KESC) in 2005 has swung back in action again to lead the transfer of renamed K-Electric (KE) to Shanghai Electric Limited (SEL) of China.
The transaction between KE and SEL has been hanging in balance for more than six years for a series of legal and financial complications but the group of foreign investors became more active after the downfall of Abraaj Capital chief Arif Naqvi, who despite his close links with Imran Khan and Sharif family could not conclude an exit deal.
The non-settlement of financial claims by the government-owned electricity and fuel suppliers and vice versa has been hampering the transfer of troubled private power utility to Shanghai Electric of China which reached a deal with KE’s majority shareholders in 2016 to buy over 66 per cent shares at $1.77 billion.
The transaction was twice stalled, first in the PML-N government, when then secretary privatisation Irfan Ali declined to proceed with national security clearance for SEL takeover after Abraaj did not show him the share purchase agreement. The PML-N leaders, including former premier Shahid Khaqan Abbasi, did not find such a reason justified to forestall KE’s transfer from Abraaj to SEL.
The victims of the power company’s checkered history are the Karachiites
Mr Ali, however, believed it was very important in the national interest to know under what conditions the company could be transferred to a foreign government entity.
But many other government officials including secretaries of petroleum and managements of Sui Southern Gas Company Limited and the Central Power Purchasing Agency (CPPA)were not ready to burn their hands signing files involving legal and financial implications.
Interestingly, Prime Minister Shehbaz Sharif has again given the responsibility to Mr Abbasi, who now heads a task force on energy, to find a solution to the KE issue within three months.
The deal was held up, for the second time during the PTI government, which originally moved swiftly to ring-fence old disputes for arbitration and set future relationship with KE on additional power supply with timely bill payments. While CPPA’s power supply to KE increased from 650MW to about 1,400MW during this period, ex-prime minister Imran Khan’s special assistant on power (SAPM) Mr Tabish Gauhar raised fresh objections.
Saudi investor Abdulaziz H. Aljomaiah publicly blamed Mr Gauhar, a former CEO of KE, for conflict of interest while the then SAPM said he could not allow attempts to fleece the state and Karachi-based power consumers and was “duty-bound to defend the state, national interest and the consumers without any bias, favour or fear”.
Mr Gauhar believed that there must be a clear roadmap for settlement of past dues before the entity could be handed over to a new buyer and no commitment could be made by a seller with the purchaser on behalf of the government of Pakistan.
“The fact that the Shanghai Power transaction was stalled since October 2016 clearly implied that something fundamental was wrong with the proposed terms and conditions that two successive governments and several bureaucracies had struggled to accept,” he argued.
Besides the legal challenges, at the heart of the problem are huge amounts of receivables and payables. For example, KE’s outstanding payables towards the state-owned CPPA have reached Rs425bn as of May 2022 and are projected to conclude the current fiscal year ending June 30, 2022, at Rs440bn.
SSGCL, another state-run entity, has claims of Rs135bn against KE, thus increasing its total liability to Rs575bn.
On the other hand, as of May 2022, KE officially claims a receivable of Rs50bn against the public sector “on the net principal basis from various entities”. It says its total receivable amount stands at Rs404bn, of which Rs352bn is owed on account of Tariff Differential Subsidy (TDS) against the government.
Of this, the government has cleared for payment Rs37bn, thus reducing the TDS claims to Rs315bn. Karachi Water & Sewerage Board is the second-largest contributor with Rs28bn, while other federal and provincial government entities make up the remainder of the total amount.
The Karachi-based power utility claims that for the same period its payables to the government sector stand at Rs353bn including Rs322bn on account of energy purchased from National Grid, according to a KE spokesperson. Further payments to various other entities make up the remainder of Rs31bn.
As if that was not enough, the base tariff adjustments for KE consumers involving more than Rs6 per unit had become a daunting challenge for all the stakeholders — the government, the power regulator, the KE and its consumers. While the PTI government could not decide on how to pass on or subsidise the increase of the past 11 quarters (July 2016 to March 2019), more liabilities piled up.
Amid this indecisiveness on part of the government and the power regulator, the Karachiites are at the risk of an unpredictable increase in tariff for electricity they may not have consumed three years ago. And if consumed and used for production, those products have already been sold. The amounts involved are estimated to be well over Rs88bn.
The PTI hesitated to decide between its quest to win over political support in the largest metropolitan area even though its economic ministers mumbled leaving huge amounts unrecovered when consumers of other distribution companies had already paid similar tariff adjustments under the uniform tariff policy in vogue across the country. The non-recovery meant the fiscal gap fell on the government kitty.
The PML-N led government also faced a similar situation last week when the power division reported to the Economic Coordination Committee (ECC) of the Cabinet that July 2016 to March 2020 pending tariff adjustment impact stood at Rs113bn and suggested that Rs1.45 per unit surcharge be imposed on KE consumers for 12 months to recover about Rs24bn and the remaining Rs89bn be taken over as TDS in the federal budget. The matter still remains pending a final decision even though ECC has cleared payment of Rs37bn to KE as TDS.
In this background, a delegation of KE’s majority shareholders representing Saudi Arabia’s Aljomaih Holding Company, Kuwait’s National Industries Group (NIG) and Infrastructure Growth and Capital Fund (IGCF) last week met Prime Minister Sharif and many of his cabinet colleagues including minister for finance, power and Mr Abbasi as well to end a long impasse.
Published in Dawn, The Business and Finance Weekly, June 27th, 2022