Military, installations: China''s company asked to submit undertaking on power supply

The Cabinet Committee on Privatisation (CCoP) has sought an undertaking from M/s Shanghai Electric Power Company(SEP), the new "cleared" buyer, that the company will ensure uninterrupted electricity supply to military and its installations during war and peace, well-informed sources in federal government told Business Recorder.
The committee headed by Prime Minister Shahid Khaqan Abbasi set this condition for issuance of National Security Certificate (NSC) to the Chinese firm, which resisted sharing its Sale Purchase Agreement (SPA) that was agreed between two offshore companies with the government.
The CCoP further directed the Privatisation Division that protection of labour rights of existing KE employees should be ensured by the new buyer and for this purpose a suitable clause should be incorporated in the agreement.
Secretary, Privatization Division Irfan Ali revealed that KES Power Limited currently holds 66.40% shareholding in K-Electric Limited (KE), and entered into a Sale and Purchase Agreement (SPA) on October 28, 2016 with Shanghai Electric Power Company Ltd (SEP). In terms of the SPA, KES Power Limited has agreed to sell its entire 66.40% shareholding in KE (Sale Shares) to SEP (Proposed Purchaser). The progression of the above transaction is, however, subject to issuance of National Security Certificate (NSC) from the Government of Pakistan (GOP) represented through the Privatisation Commission (PC) in accordance with the Clause 5.3(b) of Original SPA signed on November 14, 2005. The extract of the said Clause is reproduced: "The Purchaser may directly or indirectly sell, transfer, encumber or otherwise dispose in any form or manner any of its legal or beneficial interest in all or any part of its Strategic Equity Stake after the expiration of 3rd (third) anniversary of the Closing Date provided that prior (emphasis added) to such transfer/transaction, the Purchaser shall have obtained the Seller''s certification stating that the proposed transfer/transaction does not affect the national security interests of Pakistan, which certification shall not be unreasonably withheld..."
Secretary, Privatization Division further stated that KES Power has requested Privatization Commission (PC) for grant of National Security Certificate of the GOP for sale of all its 66.4% shareholdings in K-Electric. The PC, as due diligence process, requested the concerned Ministries / Regulatory Bodies for comments to issue NOC regarding National Security Certificate. In response, the Competition Commission of Pakistan, State Bank of Pakistan, Board of Investment, Law & Justice Division, Finance Division, Ministry of Power, Revenue Division and NEPRA have issued NOCs for the purpose. However, Petroleum Division did not provide its NOC due to issue of outstanding liabilities of SSGC against K-Electric. The Ministry of Interior and Ministry of Defence stated that they required a copy of SPA dated October 28, 2016 between KES power and SECP. However, the same is still awaited. They further revealed that they would provide No Objection from security point of view, subject to following conditions: (i) KEL (Arab Group) will remain liable for its all liabilities/obligations including outstanding dues of SSGC and issues related to overbilling; (ii) KEL to submit written guarantee from buyer M/s Shanghai Electric Power Company Ltd that it will abide by all obligations as of KEL; and (iii) currently out of 13 Directors, 9 belong to KEL. The buyer (Shanghai Electric Power Company Ltd.) may be bound to have at least 3 Pakistani nationals as directors.
A special clause must be incorporated in the sale agreement imposing obligation on the SEPC for ensuring provision of uninterrupted electricity supply to all Armed Forces/Military installations/infrastructure at Karachi, especially during emergencies/ war and training/operational periods in/outside cantonments.
He apprised that clause 5.3 (b) of the original SPA makes it incumbent upon the KES Power (the then purchaser) to obtain the seller''s ie Privatization Commission (PC) certification that the proposed transfer/transaction does not affect the national security interest of Pakistan and that the said SPA signed between KES Power and SEP on October 28, 2016 was a main constituent document of the proposed transfer/transaction. The said transaction was of national importance and may have a direct bearing on issues related to Karachi. The covenants signed between KES Power and SEP need to be examined before the said transaction was legally said to have been considered. The PC may not issue the NSC without actually having seen the constituent document of the proposed transaction. He stated that Section 36 of the PC Ordinance, 2000 empowers the PC to ask for this information/document. In response to PC''s request KES Power has stated that issuance of the National Security Certificate has no relationship to KE''s current operational situation and the outstanding liabilities and that KE will remain a going concern and post transaction completion will not extinguish responsibility for any of its liabilities. They further argued that the SPA is a private bilateral agreement between the KES Power and the SEP (together the Parties) governing rights and obligations of the Parties and terms therein are in relation to the sale and purchase of the shares between two offshore entities. They assert that this is an agreement between two offshore companies and neither the Company (K-Electric), nor its management are party to the SPA. Admittedly, SEP China has high technical, operational and financial capabilities with its sister organizations. Chinese firms are also working in Pakistan in other business and strategic ventures. However, it is necessary that the GOP stakeholders should resolve the issue before issuance of National Security Certificate.
Secretary, Privatization Division proposed that before issuance of National Security Certificate the following issues related to this transaction may be resolved/settled by the respective Ministries/departments under their legal and regulatory framework: (i) KES Power may provide the Sales Purchase Agreement to the PC; (ii) issues related to liabilities raised by MOD, MOI, BOI and Petroleum Division may be resolved between the respective stakeholders and KES Power and communicated to PC; and (iii) before issuance of National Security Certificate, the matter may be discussed at the relevant Cabinet forum.
Minister for Privatization, Daniyal Aziz while expressing his views in the summary separately, stated that the PC following due diligence process has sought NoC from all relevant Ministries/Regulatory bodies for issuance of NSC. Regarding the PC''s request to KES Power for provision of SPA between KES and SEP signed on October 28, 2016, he stated that such requests were also made to them by the Ministry of Defence and Nepra. However, they have given their consent for issuance of NSC. He stated that the SPA was rightly "awaited" by Ministry of Defence (MoD) as the original SPA 5.3(b) requires NSC prior to SPA. The PC has received agreements in the shape of Extinguishment Deed and Deed of Undertaking, drafts of which have been agreed between the PC, KES Power and the proposed purchaser SEP, signing of which would extend the provisions of the Original SPA to the current purchaser as well. He further stated that Pakistani law with regards to submission of any SPA was regulated by the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2017. The Schedule VIII of said Regulation stipulates the submission of SPA for listed companies. As per Clause 5.3(b) of the original SPA, the National Security Certificate must be available prior to the requirement for submitting SPA, as the SPA is not valid without National Security Certificate. The K-Electric was a listed company with PSX and any SPA would be governed by the said Act. He stated that the Companies Act, 2017 separately provides for National Security Protection. Under section 461 of the said Act (as reproduced below), the security clearance may be invoked at any time:
"The Commission may require the security clearance of any shareholder or director or other office bearer of a company or class of companies as may be notified by the concerned Minister-in-charge of the Federal Government".
Minister for Privatization pointed out that SEP is regarded as a Chinese Company with high standing which is already working in Pakistan in other important projects. He stated that requisite National Security Certificate may be issued in view of: firstly, the above continuing legal safeguards; secondly, the law relating to governing SPA submission; thirdly, the entity''s previous involvement in Pakistan is of strategic nature; fourthly, its preparedness to provide a highly significant investment in electricity sector & economic hub of Pakistan; fifthly, to preserve Pakistan''s international reputation ensuring no departure from policy; sixthly, as the agreement states that it would not be unreasonably withheld, while it has been pending since over one year; and seventhly, all the departments have given their consent.
He requested the CCoP to approve signing the Extinguishment Deed and Deed of Undertaking and allow Privatization Commission to issue the National Security Certificate.
During ensuing discussion, the Secretary, Power Division clarified that they did not issue NoC for grant of National Security Certificate (NSC) to KES Power Limited as there are outstanding liabilities of Rs 27 billion against them on account of energy supply. However, K-Electric claimed that their outstanding liabilities stood at Rs 2.0 billion only. Since, the settlement/reconciliation has not achieved any conclusive agreement on their outstanding liabilities, therefore, Board of Directors of Central Power Purchasing Agency Guarantee Limited (CPPA-G), has agreed to file recovery suit against K-Electric liabilities. He further stated that Power Division does not want to sell its 24% share to SEP.
Secretary, Petroleum Division stated that there are also pending liabilities of M/s SSGC against K-Electric on account of supply of gas which were required to be settled before grant of NSC. The Chairman, Federal Board of Revenue stated that as per Section 202 of the Customs Act, 1969, all outstanding liabilities of M/s K-Electric shall stand transferred to and shall be payable by the successor company M/s Shanghai Electric Power Company Limited consequent to the sale/transfer of the entity. Moreover, the successor company shall also be bound to pay any other past or future liability of duties, taxes or any other charges which may accrue against M/s K-Electric on account of short levy, erroneous refund, mis-declaration/evasion etc., of duty and taxes thereon. He stated that a suitable clause to this effect may also be incorporated in SPA.
Secretary, Ministry of Defence stated that they have no objection to grant of NSC. However, a special clause be incorporated in the sale agreement imposing obligation on the M/s Shanghai Electric Power Company Limited for ensuring provision of uninterrupted electricity supply to and Armed Forces/Military installations/infrastructure at Karachi, especially during emergencies/war and training/operational periods in outside cantonments.
Additional Secretary, Ministry of Interior endorsed the views of Secretary, Ministry of Defence. He added that the M/s Shanghai Electric Power Company Limited may also be bound to have at least 3 Pakistani National Directors in the company. Adviser on Revenue stated that Abraj Group is in turmoil and the CEO has stepped down. Therefore, its issues must be carefully evaluated.
The Prime Minister observed that as per the original SPA it is legally permissible for KES Power Limited to sell its shares of K-Electric to Shanghai Electric Power Company Limited which is one of the largest electric distribution companies in the world and have shown their interest towards investment in power sector in Pakistan, which would be of great benefit to the country. Therefore, issuance of the National Security Certificate to KES Power Limited to proceed further for the proposed transaction/deal may be allowed. The Prime Minister further observed that it is not mentioned anywhere that the provision of copies of the Sale Purchase Agreement (SPA) to Ministries/departments would be a prerequisite for issuance of National Security Certificate. He stated that SPA is a confidential document between KES Power Limited and Shanghai Electric Power Company Limited, therefore, if it is shared/disclosed, it might affect sanctity of the agreement between two offshore parties and it may also reduce share value of K-Electric in the stock market in case of leakage of such information and may expose the Government of Pakistan to litigation and ensuing liabilities. It was, however, mentioned that the SPA may be seen by the SECP when it is signed.
The Prime Minister regretted that SPA was dated October 28, 2016 and despite a lapse of one and half years, no further progress in the transaction had been made from Pakistan side due to non-issuance of NSC. He stated that outstanding liabilities of departments against K-Electric would not be affected in any way by the sale of share to Shanghai Electric Power Company Limited. He further stated that issuance of NSC is z requirement under original SPA, which cannot be unreasonably withheld.
Secretary, Overseas Pakistanis Division stated that protection of labour rights of the K-Electric employees should be ensured with new buyer and for this purpose a suitable clause should be incorporated in the agreement.
Secretary, Privatization Division agreed that on receipt of ratification of Federal Cabinet to the decision of CCoP regarding approval of the proposal, the National Security Certificate (NSC) will be issued without any further delay.
After a detailed discussion, the CCoP approved the request of Privatization Division regarding the request for grant of National Security Certificate to KES Power Limited for sale of all its 66.4% Shareholding in K-Electric Limited (KE) with the following conditions: (i) the National Security Certificate will be issued. The Privatisation Commission will issue the certificate without any delay after ratification by the federal cabinet; (ii) M/s Shanghai Electric Power Company will give an understanding to ensure uninterrupted electric supply to all armed forces/military installations/infrastructure at Karachi, especially during emergencies/war and training/operational period in and outside cantonments and; (iii) M/s Shanghai Electric Power Company Limited will step into the shoes of KES Power Limited and, hence, will give an understanding that all existing financial liabilities of K-Electric Limited will be owned by M/s SEP. And SEP will continue to be responsible to pursue all existing cases of KE and abide by all legal national and international requirements as per law.