The Abraaj Group will be unable to conclude the $1.8 billion deal for the sale of its stake in K-Electric to China-based Shanghai Electric Power within the agreed time, which would now require it to seek an extension from the buyer as well as the regulator.
The delay has occurred due to the failure to settle the financial dispute between Pakistani authorities and the Abraaj Group, resulting in withholding of a National Security Clearance Certificate to Shanghai Electric.
The seller and the buyer had agreed to conclude the deal by March 17 of this year – a deadline that is surely to be missed due to disagreement between the Abraaj Group and federal authorities over payments of arrears, according to the Ministry of Water and Power officials and people having knowledge of the deal.
Last year, the Abraaj Group had sold KES Power – the offshore entity that controls 66.4% of total K-Electric shares – to China-based Shanghai Power. The deal is estimated at $1.77 billion and contingent upon settlement of issues between the government and the seller. In addition to seeking an extension from Shanghai Power, the Abraaj Group will also have to seek an extension from the Securities and Exchange Commission of Pakistan (SECP).
The deadline to conclude a deal by Abraaj Group and Shanghai Electric Power would expire by the end of this month, said Bilal Rasul, the spokesman of SECP – the body that regulates the companies and the equity market.
The SECP law makes it binding to conclude the acquisition deal within six months of the buyer showing his intention, said Rasul. He said that the SECP has the authority to give a three-month extension but the parties have not applied for the extension.
Six months ago, the March 17, 2017 deadline seemed a realistic target but the bureaucracy has slowed down the approval process, according to people working on the deal. K-Electric is the country’s largest and only vertically integrated power utility that is responsible to provide electricity to the country’s largest metropolitan and commercial hub.
The Ministry of Water and Power has lately put a condition that Shanghai Power should seek a clearance certificate from the Ministry of Defence and Ministry of Interior, said the sources. Shanghai Power is already running a nuclear plant in Pakistan. The Ministry of Water and Power has also sent a new draft of Power Purchase Agreement (PPA) to K-Electric. The new draft PPA seeks cut in power supplies from the national grid to Karachi by about 40% to around 400 megawatts, said the ministry officials.
The federal government has proposed that the K-Electric first fully utilise its own in-house power generation capacity before drawing electricity from the national grid.
Pakistan has not yet given the National Security Clearance Certificate for the sale of Abraaj Group’s 66.4% stake in K-Electric to Shanghai Electric Power.
The amount in question is $1.24 billion, which the K-Electric owes to two government entities, said officials of Ministry of Water and Power and Sui Southern Gas Company.
The Sui Southern Gas Company (SSGC) and National Transmission and Despatch Company (NTDC) have made about $1.24 billion claims on account of cost of electricity, gas and Late Payment Surcharges (LPS).
The Abraaj Group does not want to pay the interest and sought settlement of payment of principal amount against its receivables.
The Water and Power ministry is reluctant to accept the book adjustment request due to absence of any such mechanism. It had settled Rs32 billion through book adjustments in 2009 when the Jummia Group had sold its stake to Abraaj Group but later on this became a nuisance for the power ministry, said the officials.
The federal authorities are also of the view that the power and the gas purchase agreements were standalone deals and therefore, the book adjustments cannot be made.
The SSGC financial statement showed Rs68 billion in claims against K-Electric and out of that the electricity utility company wanted to pay only Rs14 billion. Similarly, the NTDC’s total outstanding liabilities are about Rs57 billion and the Abraaj Group wanted to pay between Rs30 billion.
The Ministry of Finance has asked the Abraaj Group to seek tax clearance certificate from Federal Board of Revenue (FBR), said the sources. The FBR has not yet given a clean chit to the Abraaj Group, the sources added.
They said that the Abraaj Group may seek one-month extension from the Shanghai Electric to conclude the deal.