A press release issued by Abraaj Group confirmed a Business Recorder report published earlier, that it has reached an agreement to divest its 66.4 percent total stake as well as management control in K-Electric (K-E) for 1.77 billion dollars to a Chinese company - Shanghai Electric Power (SEP), a state-owned enterprise controlled by China's State Power Investment Corporation that is listed on the Shanghai Stock Exchange. K-Electric is the only vertically integrated power utility in the country, while SEP has been mainly engaged in power supply. Abraaj is a private equity firm engaged, like other equity firms, in purchasing a stake with management control in companies around the world that are poor performers or those that have failed to achieve their full potential with the objective of turning the company around through injecting efficiency and/or additional investment. Once the turnaround has been achieved the equity firm then divests its stake at a profit. This pattern was at play in Abraaj's management of K-Electric and received a substantial boost on 26th January 2010 when the Abraaj Group successfully convinced the Zardari-led government to supply 650MW from the national grid to K-Electric for a period of five years. This contract was not expected to be renewed in January 2015 as the PML-N Water and Power Minister Khawaja Asif accused K-Electric on the floor of the House of underutilizing its estimated capacity of 2400MW and maintaining that it would not need the 650MW from the national grid if it operated idle plant capacity of 800-900MW. However, nearly 22 months later, K-Electric is still receiving the 650MW of 'cheap electricity' from the national grid on an expired contract.
Nepra, on 5th August 2016, in its decision refusing to pass on the Fuel Charges Adjustment of minus Ps. 3.185 kWh for May 2016 as requested by K-Electric noted the following contention of the lawyers of the federal Ministry of Water and Power: "K-Electric exhibited a non-prudent behaviour by underutilizing its own generation from BQPS-1 and external power purchase source, ie, Gul Ahmed Energy Limited (Gul Ahmed) and instead preferred to draw 650MW power from CPPA-G which resulted in an operation of expensive power plants". In this context for Abraaj to maintain in its press statement that it raised generation by 1000MW and improved overall efficiency from 30.4 percent in 2009, when it took over management of the company, to 37.4 percent may almost certainly be challenged by the federal Water and Power Ministry.
Equally disturbingly, a member of the Board of Directors of K-Electric has publicly lamented that the deal was not brought before the board for information. Though the press release does mention some elements of the deal, key details are sorely lacking. To compound the perception of a lack of transparency, the press release also does not clarify whether any of the money involved in the deal would pass through Pakistan or, in other words, it's an offshore deal and if so then there would be no tax implications which should be a source of dysphoria to the Ministry of Finance. And finally, K-Electric privatisation is a classic example of the success of the privatisation policy to stem the losses and turning around of loss-making public sector enterprises. Be that as it may, one can conclude from the foregoing that the government must encourage private equity firms to actively participate in privatisation of the massive loss-making public sector entities and Business Recorder would urge the Privatisation Commission to proactively engage with such firms in its road shows.
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