KE threatens to move international court if its exclusivity gets eroded

ISLAMABAD: The top management of K. Electric has threatened in plain words to move international arbitration if Nepra erodes its exclusivity in Karachi which is due to remain till 2023.

And the Nepra impending action will jeopardise Shanghai Electric Power’s acquisition, denying Karachi the benefit of a multi-billion-dollar investment programme and a better quality of living for its citizens. Any action that unfairly and unreasonably results in a premature termination of KE’s exclusivity will likely deter foreign investors from considering Pakistan as an investment destination in the future.

This has been stated in a letter written on September 18, 2020 by Director of KE Board Shan Ashary addressed to Federal Minister for Privatisation Minister Mohammedmian Soomro copied to Prime Minister Imran Khan, Dr Abdul Hafeez Sheikh, Adviser to the Prime Minister on Finance and Revenue Affairs, Asad Umar, Minister for Planning, Development & Special Initiatives, Omar Ayub Khan, Minister for Energy, Nadeem Babar, Special Advisor to the Prime Minister on Petroleum, Shahzad Qasim, Special Advisor to the Prime Minister on Power, Attorney General of Pakistan, Chairman Board of Investment and Registrar, Nepra.

The letter goes on to say that the current Nepra hearings on KE’s properly granted power distribution exclusivity in Karachi are of great concern. The K. Electric asks the federal government to take the necessary measures to address these concerns and ensure that KE and its shareholders’ rights as a critical constituent are respected. In 2005, KES Power Limited acquired a majority stake and operational control of KE; one of its main objectives was to lower the cost to the Pakistani government, and contribute to the improvement of energy supply in Pakistan. This investment was based on the GoP’s enabling policy for the power sector (including long term licenses and tariff structures) and an investor-friendly environment to spur growth and improvement of the power sector in Pakistan.

KE management disclosed in the letter, saying it is informed that, upon the invitation of the Chief Justice of the Supreme Court, in suo moto proceedings, Nepra is considering prematurely terminating our distribution exclusivity in Karachi, which was due to remain in place until 2023.

This development is extremely concerning as Nepra’s intended early termination of KE’s Distribution License would have disastrous implications. Indeed, it would seriously damage KE’s operational performance and ensure that electricity in poorer segments of the city will be adversely impacted. “It will also severely compromise the value of our investment in Pakistan, which deserves better support in light of the GoP’s stated investment objectives. In addition, please note that Nepra’s anticipated action may have already had a negative impact on KE’s ongoing capex initiatives, including a critical 900MW power project. If the financial close on this project is delayed because of Nepra’s action, we expect a disastrous power situation with severe generation shortfall in Karachi next summer.”

The KESP (KES Power Limited) has so far invested over $700 million in KE which constitutes the single largest Foreign Direct Investment in Pakistan from a private entity. In addition, the KES has reinvested all profits (all efficiency gains) made since 2005, without a single dividend declared. As a result, KE has been able to invest CAPEX of approximately $3.3 billion over the last 15 years, focused singularly on the improvement of Karachi’s generation, transmission, and distribution infrastructure.

The letter mentions that KES Power Limited (KESP) is the majority shareholder (66.4%) in K-Electric Limited (KE). There are a number of serious misgivings and concerns pertaining to recent events in relation to KE. “We have pointed out respectfully and repeatedly to the GoP that KE needs the support of all stakeholders: gas and furnace oil procurement (for the delivery and requisite technical values, in which we are reliant on entities under the control of the Federal Government), the Ministry of Power, NTDC, Ministry of Finance and Nepra. We believe that the Government of Pakistan and KE both have a shared responsibility to deliver electricity to the end-user, unless we work together with common objective this important responsibility will be compromised,” says the letter.

Unfortunately, the letter says that in the four years since the execution of the agreement with SEP, there has been limited progress with the GoP, and Nepra, on these matters and currently there is no visibility on completion of these important matters.

While SEP has to date patiently waited for bottlenecks to be resolved, we believe that the current press reports on the debate on KE’s future is adding to their uncertainty and testing their resolve. “Their position and ours is to achieve a fair and equitable resolution of the remaining issues that results in a win-win for all parties but most especially the consumers of power in Karachi. Management says that it stands ready to complete the discussion on the remaining points as soon as possible, because KE needs the infusion of capital, direction and stability that a closure to the transaction will bring.”