Delays in resolution of power sector issues - bad signals for future investment

Delays in the resolution of the lingering deadlock between K-Electric and the Federal Government over the company’s receivables and payables is jeopardizing future investment in the company’s infrastructure in addition to hurting foreign direct investment (FDI).

This was the clear message communicated by Saudi investor Sheikh Abdulaziz Hamad Aljomaih, the Managing Director of international investment at Aljomaih Holdings, during his recent visit to Pakistan which I followed closely. Aljomaih, a major Saudi industrial and commercial conglomerate, is the largest investor in the consortium of companies led by KES Power that acquired a 73% stake in K-Electric in 2005. At the time, this was among the largest foreign direct investments in the country, and has been pivotal in reshaping the energy landscape of Pakistan’s largest city.

Since privatization, the consortium has invested over $3.5 billion into Karachi’s power infrastructure. Currently, a $650 million investment is underway to establish a 900 MW RLNG-based plant titled BQPS-III, as well as transmission upgrades to evacuate additional power supply from the national grid. All surpluses gained from operational efficiencies have been reinvested into the company. However after 15 years of continuous investment, it is now critical to resolve the pending receivables of the company to actualize future projects in a timely manner.

According to K-Electric, the government owes to it PKR 284.2 billion on account of tariff differential claims, and unpaid bills of KWSB, Sindh, Balochistan, and Federal Government to the company. On the other hand, Government entities like NTDC, CPPA, and SSGC have raised claims of PKR 375 billion (including interest of PKR 167.7 billion) against it. This issue has snowballed since 2012 when Tabish Gauhar – now SAPM to PM on Energy – was still CEO of K-Electric, and remained unresolved in 2015 upon Gauhar’s abrupt exit from KE. Today, this same issue is a major roadblock in Shanghai Electric’s intent to buy KES Power’s majority stake of 66.4% shares, as disclosed by a source close to the situation.

To its end, K-Electric is eager to settle its receivables and payables on the basis of principal payments only, and expects a net payment of PKR 76.9 billion from government and its entities. The firm’s argument is based on the principle of fairness and equality, since it cannot charge interest on its dues under the agreement.

On his recent visit, Aljomaih met with President Arif Alvi and Prime Minister Imran Khan, as well as senior ministers from the Federal Government to discuss a way forward. Reports indicate the meetings were positive with the government agreeing to an independent arbitration under the Privatization Commission to resolve the dispute. Experts agree that letting the matter linger will be detrimental to Karachi’s energy supply chain. Additionally, it will send a negative signal to foreign investors, preventing the inflows of direly needed Foreign Direct Investment into the country. This is important in the context of recent deliberations in government circles to privatize 5 more DISCOS in the country’s power sector.

However, this news was soon followed by an unusual letter written to the Privatisation Commission by SAPM Power and former K-Electric Chairman and CEO, Tabish Gauhar, opposing the agreed terms of arbitration and causing anxiety among the investors.

The intervention is surprising as the SAPM is expected to stay away from K-Electric matters to avoid conflicts of interest, and the stance opposes the promises made by the PM himself to facilitate a resolution. It also turns a blind eye to the origins of the issue during his own tenure at the helm of the company. KE’s dispute with SSGC arose shortly after Gauhar took over and remained unresolved at his exit; today, SSGC demands over PKR 106 billion in interest payments on a principal of PKR 13.7 billion.

Shanghai Electric’s (SEP’s) intent to purchase K-Electric is the most significant development in the energy sector since the company’s privatization in 2005, and SEP has been waiting for more than 4 years for the necessary regulatory and government approvals to proceed further. SEP intends to invest $9 billion in its infrastructure over 4.5 years. Inordinate delays have forced K-Electric to accrue a loss of PKR 2.9 billion last year due to loans borrowed due to non-payment of its bills. It made a profit of PKR 17.1 billion, which was totally eroded by financial cost of PKR 16.7 billion. This is further exacerbated by the unwillingness indicated by SSGC and CPPA-G/NTDC to sign Gas Supply Agreements (GSA) and Power Purchase Agreements (PPA), respectively.

Experts warn that Pakistan’s reputation has already suffered from bad decisions against international investors in the case of Reko Diq and Karkey, and the country is not considered a choice destination in emerging markets today. At such a time, the entire Government must come together under the Prime Minister’s vision to work proactively and impartially in addressing long-standing problems across the industry for the ultimate benefit of the country and its regional and international perception as a ready market for investment.

(The writer is a consultant based in the UK. He can be reached at [email protected])

Copyright Business Recorder, 2021