Govt decides to hold ‘final’ round: K-Electric faces prospect of re-privatisation?

ISLAMABAD: The Federal Government has reportedly decided to hold "final" round of talks with the KE's top brass to resolve disputes, failing which the State will take over power utility to clear books and re-privatise it, well-informed sources told Business Recorder.

This understanding evolved at a meeting on Friday (January 22, 2021) presided over by Prime Minister, Imran Khan.

“The Prime Minister is of the view that current situation is unacceptable for the government. He has directed Power Division to make the last ditch effort to sort it out in 7 to 10 days, and if this attempt fails, then the government will have to opt for Plan B," the sources added.

Plan B means that the government appoints an administrator or take over the power utility temporarily as per the NEPRA Act, 1997 and clean its books, sign Gas Supply Agreement (GSA) and Power Purchase Agreement (PPA), re-privatise it and pay due share to M/s Abraaj.

As a follow-up a high-level meeting, Power Division, has summoned the top brass of KE on Monday (tomorrow) to convey Prime Minister's final instructions, the sources added. The KE management, sources said, will be asked to proceed towards arbitration to resolve outstanding amounts of SSGC, CPPA-G and KE; however, KE maintains that a clause should be included in the terms of reference in advance, which should state that there would be reciprocity. “If reciprocity is made part of the ToRs of arbitration, then the case of receivables will no longer exist. Actually, the real dispute is the reciprocity," the sources added.

Chief Justice of Pakistan has already declined to play any role in resolution of dispute on receivables and payables. A ministers' team led by Minister for Planning, Development and Special Initiatives, Asad Umar was asked to sort the issue out at the Cabinet level.

“If KE continues to stick to the clause of reciprocity we will be back to square one,"

the sources maintained.

KE, sources said, is unwilling to sign PPA with the CPPA-G until reciprocity clause is made part of the agreement, adding that due to this dispute, receivables of Rs 212 billion have piled, which are now part of the circular debt.

“NTDC [National Transmission and Dispatch Company) is not ready to accept the KE condition, saying that it is akin to treating it like lenders and paying from the Master Collection Account," the sources continued.

The amount of subsidy is to be paid by the Ministry of Finance and Power Division or its companies have nothing to do with extending subsidies. KE should get the amount of subsidy from the Finance Ministry, the sources further added.

“Status quo is not in favour of anybody. KE's power plant will not be established until SSGC signs the GSA. SSGC has made it clear that it would not sign the GSA until receivables’ issue is sorted out first. Shanghai Electric Power [SEP] is also refusing to enter the picture until inter-companies disputes are resolved," the sources said.

A recent meeting co-chaired by the Minister for Privatisation and Minister for Energy held to deliberate and agree on a way forward on all pending issues relating to the issuance of National Security Certificate (NSC) for transfer of KE shares and to engage SEP in this endeavour. The Federal Minister for Energy noted that an earliest resolution of matters pertaining to K-Electric is being explored; meanwhile, SEP may also indicate its readiness to acquire KE’s shares and to chalk out a comprehensive business plan for improvement of KE.

The meeting was apprised that draft Deed of Extinguishment (DoE) and Deed of Undertaking (DOU) have been agreed at administrative level with KES Power Limited and Shanghai Electric Power, respectively. The SAPM on Power Tabish Gauhar stated that Government of Pakistan is making sincere efforts to holistically address the operational constraints of KE by ensuring availability of required gas to run KE's thermal plants and by providing additional electricity from national grid to meet the requirements of KE. He also stated that it is important to understand the Investment Plan of SEP post-acquisition of KE shares.

Shi Mingwei, representing Shanghai Electric Power (SEP), appreciated the Minister for Privatisation for providing an opportunity to discuss and share their views. He stated that SEP is aware of discussions being held to address the previous receivables / payables of KE and hoped that all matters will be resolved amicably. He also stated that for future, they expect a clear arrangement about the principle of reciprocity on receivables/payables of KE.

On the issue of Business Plan, Shi Mingwei stated that since 2016 further issues have surfaced due to which the Business Plan shared earlier with Government of Pakistan (GoP) needs to be updated. He also stated that issues of mid-term review of multi-year tariff and write-offs are still pending with NEPRA. Likewise, the issues of KE exclusivity and uncertainty on new multi-year tariff structure have implications for development of a new business plan. He further noted that in 2016, when they first expressed their willingness to acquire shares in KE, it was a profit-making entity, whereas as per the latest financial results it is a loss-making entity and thus a future business plan outlay will depend on the outcome of the resolution of all identified matters.

The meeting discussed at length the implications of appointing an Administrator for KE as per the NEPRA Act, 1997. The Director of KES Power stated that this matter needs to be taken up with the existing shareholders and should not be taken up with SEP at this stage. SEP supported KES Power's views on this aspect.

The SAPM on Petroleum Nadeem Babar enquired about the expected timelines for SEP to close the transaction with existing shareholders and to take control of KE affairs. The representative of SEP responded that it is dependent on the following four core issues: (i) resolution of past receivables/payables of KE; (ii) decisions from NEPRA on long pending issues of midterm review of Multiyear Tariff and write-offs claim; (iii) certainty on exclusivity till the validity of existing license of KE (till 2023); and (iv) Certainty on configuration of future commercial agreements and tariff for KE.

The representative of SEP noted that once they have clarity on the above four matters, they will take approximately two months to draft a latest Business Plan and agree on share price with KES Power Limited. Once it is done, it will take them approximately four additional months to complete all regulatory and administrative approvals.

The representative of KES Power / Chairman KE Board stated that they are in close touch with SEP based on the periodic engagements with Government of Pakistan. He further noted that a strategic investor like SEP can run KE but a required level of certainty is desired in any such transaction.

The resolution of issues highlighted by SEP will be critical to any potential investor for an entity like KE. He also stated that as observed by Supreme Court, they are also committed to working along with government to find out an amicable resolution of all issues surrounding the KE transaction.

The CEO KE highlighted that besides addressing issues of receivables/ payables, the resolution of operational aspects including commercial agreements with SSGCL and CPPA are imperative to avoid recurrence of problems countered by KE. He also stated that it is not easy to sustain smooth operations if there are extended delays in receipt of dues including subsidy amounts. He stressed that pursuant to NEPRA's legal framework, they expect regulatory predictability as well when planning for further investments in the KE's infrastructure.

The Minister for Privatisation in his closing remarks stated that the meeting has been very beneficial and all stakeholders would have to move ahead with an open mind, ensuring sustainability and effective operation of KE which is in the best interest of all concerned.

Copyright Business Recorder, 2021