The prospect of Kot Addu Power Company (Kapco) privatisation faces delay as issues of required comfort letter for the extension of power purchase agreement (PPA) and others remain unsettled. Sources said the matter was discussed in detail during the Cabinet Committee on Privatisation (CCOP), chaired by Finance Minister Ishaq Dar.
The meeting discussed the issues pointed out by the Financial Advisor (FA) to ensure successful transaction remained unresolved, despite a number of meetings were held between Ministry of Water and Power and Privatisation Commission (PC).
They added that the FA appointed to carry out the process has presented the transaction structure with resolution of some issues relating to the Kapco. He suggested that the government should provide comfort on the renewal of major agreements, including PPA, Generation Licence, Gas Supply Agreement, Fuel Supply Agreement and Facilitation Agreement, after expiry in 2021. Additionally, he proposed that the government needs to provide comfort on the fate/resolution of Liquidated Damages (Rs 27 billion) that are appearing on the financial statements of KAPCO and request for incoming investor to have greater involvement in key decisions in relation to the 600MW coal expansion project envisaged by the Kapco.
After considering the issues, the CCoP while approving the transaction structure for the divestment of residual shareholding in Kapco, directed the Ministry of Water and Power to provide a comfort letter to Privatisation Commission (PC) that the Kapco power plant will remain operational beyond 2021 and till the operational life of the plant, its generation licence and PPA will be renewed.
The Privatisation Commission carried out domestic as well as international road shows in Dubai and Istanbul during September 2016 to attract the investors. Based on the input from investors, a number of meetings were said be held between the Ministry of Water and Power and Privatisation Commission to resolve these issues. The PC informed the CCoP that non-resolution of the above stated issues led to a poor response from the investors as only four (4) interested parties had requested for expression of interests (EOIs) by then and none of the four parties had submitted the statement of qualification (SOQ) document by then ie, October 13, 2016, (the deadline to submit the SOQ was October 20, 2016). The FA for the transaction had conveyed that in the absence of such guarantees, the government may have to significantly compromise on the value of the transaction. After having detailed deliberations on all the issues, the Finance Minister directed the PC to explore other possible options also for the transaction.
Subsequently, the matter of divestment of government residual shareholding in Kapco was considered by the PC Board in its meeting held on November 14, 2016; however, the PC Board was unanimous that without resolution of issues such as provision of adequate comfort to the investors, the bidding price for the Kapco transaction may be significantly impacted as the investors were likely to bid after heavily discounting for the risks associated with the transaction.
Additionally, the PC Board said that this will be the case whether the government decides to go for strategic sale of Kapco''s 40.25 per cent shareholding or its divestment through the capital market. Accordingly, it was proposed that either the transaction be scrapped or the issues be resolved.
When the recommendations of the PC Board were taken up with the Finance Minister on January 03, 2017, the PC was directed to bring the issues of the KAPCO transaction before the CCoP, with clear recommendations on way forward for the transaction.
Since November 14, 2016, several discussions have taken place among the Finance Division, MoWP and PC in this regard. The general view emerging from these discussions has been if the issue of providing comfort to the potential investors regarding the matter of PPA is resolved, it may still be feasible to go forward with the transaction through initially envisaged strategic sale of government''s shareholding in Kapco. Four interested parties have also requested for an extension in the EOI deadline.
The CCoP was requested to consider the proposal to implement its previous decision, dated July 14, 2016, by reinitiating the Kapco transaction, subject to the Ministry of Water and Power provides the requisite comfort letter for extension of PPA and allows extension in the deadline for the EOI from investors to participate in the transaction contingent to comfort letter from the ministry to the PC. However, the CCoP, sources said, reportedly deferred the proposal of Privatisation Commission.
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