Shanghai Electric committed to KE deal

Financial disputes of billions of rupees impede sale of private power utility

LAHORE:

China’s state-owned Shanghai Electric Power (SEP) has renewed its commitment to acquire K-Electric (KE) from the Middle Eastern investors, as pending financial disputes of billions of rupees on KE books delayed the execution of a sale-purchase agreement for over half a decade.

Around six years ago in October 2016, SEP agreed to acquire 66.40% shares in the Karachi-based power company for $1.77 billion.

“K-Electric has received a fresh public announcement of intention (PAI) from Shanghai Electric Power Company Limited to acquire up to 66.40% voting shares of K-Electric Limited, subject to receipt of regulatory and other approvals,” KE Chief Risk Officer and Company Secretary Rizwan Pesnani said in a communication to the Pakistan Stock Exchange (PSX) on Wednesday.

“On behalf of the acquirer, we wish to reiterate that the acquirer continues to be fully committed to consummating the transaction pending receipt of regulatory and other approvals,” Arif Habib Limited, the manager to the offer, said in the notification.

A source having knowledge of the business deal told The Express Tribune that “the sale-purchase agreement reached in 2016 has lapsed. The acquisition requires a fresh valuation by Chinese investors to offer a new price to existing investors.”

A lot has changed between 2016 and now. Both KE’s worth and dollar value have changed significantly over the past six years. “The previously offered price of $1.77 billion stands null and void. SEP would do a fresh valuation of KE and offer a new price to the existing investors.”

Officials with knowledge of the business deal said the financial disputes on KE books were not letting the deal progress and to be executed. “Disputed receivables and payables on KE books are the biggest hurdle in the way of execution of the deal,” one of them said.

Prime Minister Shehbaz Sharif formed a task force in June 2022 and tasked former premier Shahid Khaqan Abbasi, who was heading the task force, with resolving all the pending issues standing in the way of KE business deal within three months.

“As of August 2022, KE’s receivables on a net principle basis stood at approximately Rs62 billion. The company stands to receive a total of Rs452.6 billion out of which Rs385.8 billion is against tariff differential claims while the remaining is receivable from various federal and provincial government entities,” a KE spokesperson said.

“The company’s payables stood at approximately Rs390 billion which includes payments to fuel suppliers. Timely release of tariff differential subsidy (TDS) claims is critical to the reconciliation of balance of payments and to ensure the sustainability of supply chain.”

Secondly, a source said, the KE power tariff for end-consumers had become unattractive for the new investor after the National Electric Power Regulatory Authority (Nepra) cut the tariff through a change in formula.

Nepra allowed KE a tariff that helped it recover only its cost and the estimated cost of new projects. Earlier, KE was also recovering unknown future investments to meet any untoward investment situation later, it was learnt.

“In its decision (dated March 1, 2022), Nepra has not allowed additional investment request of Rs138 billion aimed at improving power supply, reliability and service levels, disallowed cost of working capital, allowed partial exchange rate variation for return on equity indexation and has not considered other adjustments,” said KE.

About a month ago, Minister for Energy (Power Division) Khurram Dastgir visited the KE head office in Karachi. He is believed to have taken up the pending issues pertaining to KE sell-off with its management.

Earlier, former prime minister Imran Khan gave the task of resolving the outstanding issues impeding the KE sell-off deal to former finance minister Abdul Hafeez Shaikh.

Published in The Express Tribune, September 29^th, 2022.

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