ISLAMABAD: As the issue of sale of a majority stake in K-Electric to a Chinese company cropped up again, the Economic Coordination Committee (ECC) directs set broader principles for resolving the dispute that had kept the $1.77-billion transaction pending for the last two years.
Headed by Finance Minister Asad Umar, the ECC of the cabinet asked the Privatisation Commission to settle the K-Electric sale dispute in light of the original share purchase agreement (SPA) signed with KES Power – an offshore entity holding 66.4% stake in K-Electric. The original agreement had been signed in November 2005.
The ECC also desired that the Privatisation Commission should separately deal with shareholders about the company’s obligations – which is also the stance of the Abraaj Group that owns the majority stake in K-Electric, along with two other partners, through KES Power.
The ECC did not take final decision and referred the matter to the Cabinet Committee on Privatisation (CCOP). It urged all the stakeholders to find a solution within two weeks and then take the matter to the CCOP for approval. The CCOP is expected to be constituted this month.
An official of the Federal Board of Revenue (FBR) raised the issue of capital gains tax to be charged on the $1.77-billion transaction.
In 2016, Shanghai Electric Power had announced its intention to acquire the entire 66.4% stake held by the Abraaj Group through KES Power in K-Electric. KES Power is incorporated under the laws of Cayman Islands.
The transaction could not be completed due to legal interpretations and delay in settlement of financial liabilities.
Former privatisation secretary Irfan Ali, who is now the Power Division secretary, made a detailed presentation before the ECC.
The committee was informed that one of the key hindrances was the non-payment of about Rs160 billion in dues by K-Electric to the National Transmission and Despatch Company (NTDC) and Sui Southern Gas Company (SSGC).
However, K-Electric disputes the liabilities as it does not acknowledge about Rs32 billion in interest payments to NTDC and late payment surcharge to SSGC.
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However, these liabilities have not been fully reflected in balance sheets of the NTDC, SSGC and even K-Electric. Most of these liabilities are shown as off-budget contingent obligations.
In its letter in May this year, SSGC “expressed serious concern stating that K-Electric is not recognising SSGC’s entire overdue amount as liability in its books of accounts”.
The public gas utility was of the view that this could exclude Rs80 billion in liabilities from the deed of undertaking and Shanghai Electric Power may not be willing to accept them. K-Electric’s audited financial accounts have also remained pending. K-Electric’s actual value can only be determined once these liabilities are booked in the accounts, according to officials.
Ali informed the ECC that several attempts were made in the past to resolve the matter in order to issue the National Security Certificate for concluding the deal. In March this year, the CCOP allowed the issuance of the security certificate to Shanghai Electric Power for purchasing the majority stake in K-Electric.
However, the CCOP directed that Shanghai Electric Power must give an undertaking to ensure uninterrupted electricity supply to armed forces and must step into the shoes of KES Power and give an undertaking that all existing financial liabilities of K-Electric will be owned by Shanghai Electric Power.
Subsequently, the federal cabinet in April this year also decided that Shanghai Electric Power would be the legal successor of KES Power. However, Shanghai Electric Power did not agree to become the “successor-in-interest”, which again delayed the matter, the ECC was informed.
The key issue was implementation of the original 2005 share purchase agreement in letter and spirit. This requires that in future whenever the new buyer transfers its shares in K-Electric to affiliates, it will again seek security clearance from Pakistan.
The prime minister’s adviser on textile and industry also backed the Privatisation Commission’s stance on implementation of the original share purchase agreement.
Shanghai Electric Power initially wanted to acquire the stake through a special purpose vehicle (SPV). But the original agreement did not have a provision to acquire the stake through the SPV.
The ECC was informed that the Chinese company wanted to acquire the stake through a Dubai-based company. The Privatisation Commission has taken a position that the acquisition of shares through the Dubai-based company will require separate due diligence.
The planning minister raised the issue of a fresh determination of K-Electric’s tariff by the National Electric Power Regulatory Authority (Nepra). But the finance minister was of the view that the ECC could not give investor-specific instructions to Nepra.
(This news/article originally appeared in The Express Tribune on September 4th, 2018)