K-Electric acquisition to position Pakistan as investment destination: CEO

LONDON: Chief Executive Officer of K-Electric Moonis Alvi has said the federal government has prioritised the matter of K-Electric sale and has shown keen interest in its progress because it is mindful of the fact that Pakistan cannot afford to lose such an exciting opportunity.

Moonis Alvi said in an interview that that there have been several meetings of K-Electric officials with key representatives of various government ministries to discuss progress. In response to a question regarding what this deal means for Pakistan, Alvi said: “The proposed deal has been recognised as the highest value private transaction in the history of Pakistan’s economy and will set a positive precedent, as it represents a major investment in Pakistan by an international power giant with outstanding technical capabilities and major investment plans. Once completed, this transaction will strengthen Pakistan’s potential as a welcome investment destination.”

Independent economists and experts have also said at various forums that the proposed acquisition of K-Electric is a positive development, given the current geo-political situation and related economic pressures on Pakistan. They agree that SEP’s acquisition and the reported $9 billion investment plan would be highly beneficial for not just Pakistan’s power sector but also for Karachi’s development and will have a direct impact on national GDP.

He said that Pakistan’s economy is precariously placed, to say the least, and the government is juggling a balance of payments crisis on one hand while on the other it has been running from pillar to post to raise investment for key infrastructure projects and keep the country running. He referred to a recent World Bank report which said that electricity shortages are one of South Asia’s most significant barriers to development and that lack of reliable access to electricity is associated with lower income, higher poverty, poorer health and education, and less gender equality. The same report estimated the total economic cost of distortions in the power sector in Pakistan to be $17.69 billion (about 6.53 percent of GDP) in fiscal 2015. The impact of lack of reliable access to electricity imposes the largest cost on the economy, estimated at $12.87 billion (4.75 percent of GDP) a year in fiscal 2015.

In such a scenario, he said, Shanghai Electric Power’s interest in acquiring a 66.4 percent stake in KE and to invest $9 billion in the next years is a positive omen and could be the forerunner to multiple windfall benefits in the years to come and serve as a springboard to other investors.

The SEP is a subsidiary of the State Power Investment Corporation (SPIC), one of China’s largest power enterprises. The SEP currently provides 30,000 megawatts electricity to Shanghai, China’s economic hub, and has proven its technical capabilities within power sector investments in other parts of the world. The SEP is also amongst the few companies, which have been issued a licence to build nuclear power plants in China and its affiliate companies are already working on critical projects in Pakistan.

“The government of Pakistan has expressed confidence in the proposed deal based on the transformational impact it is expected to have on Karachi as well as Pakistan’s overall power sector,” said Alvi.

The SEP and KES Power concluded a transaction for SEP to acquire a 66.4 percent stake in KE in October 2016 and SEP has subsequently renewed its intention to acquire it during the stipulated period under the prevalent rules. While there are several examples of successful long-term acquisition deals in the world of finance, two years is nevertheless a fairly long time and deal fatigue is a real risk.

“The acquisition has taken much longer than it should have. If I were to really sum it up, I would pin it on the red tape in some areas. One of the main bottlenecks was the multi-year tariff determined by the regulator which has taken much longer than anticipated and was not in line with what had been requested to stimulate further investment in transmission and distribution. The deliberations on the security clearance have also been going on for a while,” Alvi said.

He said the security clearance certificate seems to be held up due to an issue of payments that KE owes to other companies, particularly SSGC. The CEO highlighted: “KE is a going concern so the liabilities remain unaffected by any share sale or purchase. More importantly, KE’s receivables from government and government owned entities are in excess of Rs70 billion what we owe to the government or companies owned by the government. Last year, the Cabinet Committee on Energy agreed that KE’s payables to SSGC should not be dealt with in isolation but should be resolved in view of KE’s receivables from other organisations such as KWSB. We are hopeful that the government will take the required steps as soon as possible.”

In case the SEP transaction falls through, Alvi said, it will not only be a huge blow to Karachi's future growth as an industrial and commercial metropolis, but investor confidence in the country could suffer, which may take several years or maybe a decade to repair. Alvi remains convinced that SEP’s continued interest in KE is a testament to the improving investment scenario in Pakistan and must be supported but reiterated that as an independent and strong listed entity, KE will continue to work and develop Karachi’s power needs irrespective of who the owner is likely to be.

Alvi said the government was fully cognisant of the importance Karachi holds in Pakistan’s economic growth and the need to take immediate action to fulfil its current and future power requirements.

However, he also said the government needs to do more to expedite the process and remove all impediments. “A couple of months back the government formed a committee to resolve issues pertaining to KE’s acquisition process. We are confident that they are aware of all the pertinent issues,” he said.

He also said it cannot be ignored that KE is one of Abraaj’s most prominent turnaround success stories. He said installed capacity of KE has been increased by more than 1,050MW - almost doubling - since Abraaj bought into KES Power, the holding company of KE and started the management oversight of the company in 2009 while overall efficiency levels have improved from about 30 percent to over 37 percent and load-shed exemption extended to over 70 percent of Karachi as against 23 percent in 2009.