Sale of 66.4pc stake to SEP: PC to send 3 options to help remove hurdles in NSC issuance

ISLAMABAD: Privatisation Commission (PC) is set to put forward three options to the Federal Cabinet aimed at removing hurdles in issuance of National Security Certificate (NSC), mandatory for sale of 66.4 percent stake of M/s Abraaj in Karachi Electric (KE) to the Chinese company, Shanghai Electric Power(SEP), sources close to privatization minister told Business Recorder.

On Sep 16, Prime Minister Imran Khan had directed the Privatization Commission to move a summary on issuance of NSC for KE transaction and way forward on disputes, the sources added.

The sources said as required under clause 5.3 (b) of the Share Purchase Agreement of November 14, 2005, the application for grant of NSC regarding transfer of its 66.4 percent shares in KE to SEP was submitted by KES Power in Nov 2016 . On receipt of the application, a draft - Deed of Extinguishment (DoE) was agreed by the KES Power that all obligations of KES Power shall be fully enforceable by GoP and it will not agitate any claim against GoP being the earlier purchaser of KE majority shares and comments from the concerned Ministries/entities were also sought. Some Ministries responded that the requisite NSC may be issued subject to clearance of liabilities of KE.

The sources said the matter was finally submitted to the Cabinet and it was decided by the Cabinet on April 12, 2018 that SEP will be the legal successor-in-interest of KES Power Lid; and all existing financial liabilities of KE shall be the responsibility of SEP but SEP did not agree.

The Economic Coordination Committee (ECC) in its meeting on Oct 2, 2018 constituted a Committee under chairmanship of Advisor to Prime Minister on Commerce to resolve this issue. On Oct 26, 2018, the committee directed that a Deed of Undertaking (DoU) may first be agreed with SEP. On Nov 26, 2018, the prime minister constituted an Inter-Ministerial Committee (IMC).

After a series of meetings with SEP and KES Power, draft DoU was agreed with them at the level of Privatisation Division which has been shared with the relevant stakeholders.

On the issue of KE's payables / receivables, arbitration was considered as a viable option in a meeting of representatives of the concerned ministries on Nov 4, 2019. In another meeting of key stakeholders held on Feb 24, it was decided that the Ministry of Privatisation may coordinate with the concerned parties for agreeing on a draft Arbitration Agreement (AA) for settlement of pending liabilities from and to KE. Terms of Reference (ToRs) for the proposed AA was agreed by the concerned parties in the meeting held on June 29 except KE which dissented on the issues of seat of arbitration and reciprocity.

According to sources, a meeting of IMC was summoned after prior circulation of the working paper for deliberation approvals of the proposals, including decision on the contentious points of the proposed Arbitration. The last meeting of the IMC was held on Sep 10, which was also attended by the Minister for Planning and Special Initiatives, Asad Umar on special invitation who stated that the government is well aware of the importance of the matter and its resultant impact at the highest level. He stressed that subsidy should be paid timely which otherwise causes accumulation of overall circular debt.

SAPM on petroleum apprised that the delay due to tariff related matters also caused delay in release of the TDS to K-Electric which had added to the accumulation of circular debt. The Finance Division maintained that post 2018 subsidy related matters stand delegated to Power Division.

According to the Minister for Privatization, progress made by PC included an agreement with SEP China on Draft Deed of Undertaking (DoU) after a series of meetings; the Chinese were properly engaged in keeping their interest alive despite the delay in issuing of NSC. Validity of the offer is regularly being extended on a quarterly basis.

The stock of KE receivables on account of tariff differential from Finance Division stood at Rs 200.7 billion (principal) whereas payables to SSGC are Rs107 billion, of which Rs93.3 billion is markup while Rs 13.7 billion is the principal.

However, according to SAPM on petroleum, Rs 107 billion comprises of Rs 29 billion as base amount and Rs 78 billion mark up on Rs 29 billion base. Approximately Rs 12 billion was adjusted by SSGC earlier as interest while KE argued that it be treated as principal before the court, which implies that the agreed principal amount is Rs 17 billion and agreed interest amount Rs 78 billion. KE agreed that payment of Rs 12 billion was made but the dispute is on how that was to be treated. KWSB payables are Rs 28.3 billion without markup (principal) from 2005 to 2016 and from March to August 2020.

KE's payables to NTDC are Rs 198.8 billion of which Rs 143.8 billion is principle whereas Rs 55 billion mark-up.

The KE's total receivable stood at Rs 229.03 billion (principal) while its payables are Rs 305.8 billon with mark-up.

KE argues that due to the compounded markup, liabilities of SSGC have increased to about Rs 116 billion which includes Rs 94 billion markup. On the other hand, KWSB has not made payment of Rs 28.9 billion to KE since long, besides delayed payments by the government. As on August 31, 2020, TDS claim amounting to Rs 205.100 billion is outstanding against GoP.

KE highlighted that the earlier delays in the notification of KE Multi-Year Tariff (MYT) and the Mid-Term Review of KE tariff is still pending adding onto the accumulated receivables. Resultantly, KE is on the verge of bankruptcy and its deal for selling 66.4 percent share to M/s SEP is not likely to mature in these circumstances.

SAPM on Petroleum Nadeem Babar indicated that to the extent GoP decides to waive interest by all sides, then as for SSGC the full amount of interest may not be waived since SSGC borrowed from banks - a paid listed company with private shareholders.

While discussing possible options to move forward, Privatisation Commission noted that issuance of NSC is pending due to unresolved claims of receivables and payables from and to KE despite the fact these matters are related to entities which are still going concerns with perpetual existence. There was discussion on issuance of NSC irrespective of payables/ receivables but no decision was taken in this regard.

Finance Division highlighted that the principal amount along with interest accrued by all entities involved in all these cases is not backed by formal commercial agreements as most of these agreements had expired without renewal. It was accordingly decided that the matter be reviewed by Law and Justice Division, particularly in the context of the remarks made by Chief Justice of Pakistan during the hearing on KE recently.

Minister for Planning, Development and Special Initiatives proposed that the following options be presented to the Prime Minister: (i) ECC/ Cabinet to approve write-off of the interests accrued on the principal amounts for which a summary would be moved by the Power Division; (ii) arbitration agreement to be agreed between stakeholders for settlement of the payables/ receivables (to be coordinated by the PC); (iii) invoking of legal action as per applicable regulatory framework will be the responsibility of Law Division, Power Division and Nepra; and (iv) Finance Division and Power Division will identify the cost of this long outstanding issue and its impact on the overall economy, on accumulating circular debt and consumers of KE.

The sources said, four options were presented to the Prime Minister, However regarding write off of the mark-up to SSGC SAPM on Petroleum did not agree to the proposal as it is a listed Company. On Sep 16, prime minister directed the Privatisation Division to move a summary to the Cabinet on issuance of NSC for KE transaction. The sources maintained that Privatization Commission will submit following proposals for approval/consideration of the Cabinet: (i) option of arbitration may be approved to resolve the issue of payables/ receivables of KE and in such a case the difference of the parties on seat of arbitration and reciprocity may also be decided or (ii) Cabinet may like to consider any option proposed by the IMC to resolve the issue of KE's payables/receivables; and (iii) Issuance of NSC may be approved subject to approval of any proposal and signing of DoU and DoE respectively with SEP and KES Power.

Copyright Business Recorder, 2020