KE dispute: Gulf investors launch $2bn arbitration case against Pakistan

ISLAMABAD: Saudi and Kuwaiti investors in K-Electric (KE) have accused the Power Division, including the minister concerned, as well as the National Electric Power Regulatory Authority (NEPRA), of conduct that has adversely affected their financial rights in the power utility.

These allegations form part of a USD 2 billion international arbitration initiated by Abdul Aziz Hamad A. Aljomaih, Combined National Industries Holding Company for Energy K.S.C., and others against the Islamic Republic of Pakistan.

The notice of arbitration was sent by international law firms Steptoe and Omnia to the Attorney General for Pakistan, Mansoor Ali Khan, and Someir Siraj Khan, Head of the International Disputes Unit at the Office of the Attorney General for Pakistan.

Copies were also forwarded to the Prime Minister, Minister for Finance and Revenue, Minister for Energy (Power Division), Minister for Law and Justice, Federal Minister for Privatisation, Secretary of the Special Investment Facilitation Council (SIFC), Governor State Bank of Pakistan, and Rizwan Pesnani, Secretary, K-Electric Limited.

According to the arbitration notice, the Claimants — Al-Jomaih and others — have not brought the arbitration lightly. They issued notices regarding breaches of domestic law at the time those breaches occurred and provided the state with every opportunity to remedy the failings. However, the notice states that the state repeatedly delayed action, reversed course without explanation, or failed to act altogether.

READ MORE: K-Electric: Govt facing arbitration threat from Saudi, Kuwaiti investors

Most recently, the Claimants issued a Notice of Dispute under Article 17 of the OIC Investment Agreement, but despite the passage of nearly three months, the state failed or refused to participate in any form of conciliation.

As a result, Pakistan’s largest foreign private power investment has allegedly been rendered commercially unviable, amounting to a substantial deprivation of the economic use and value of the Claimants’ investments. At the same time, politically favoured actors were permitted to benefit from the state’s inaction. In these circumstances, the Claimants state they had no option but to protect their investment through arbitration.

The notice describes KE as a fully integrated Pakistani power generation and distribution company in which the Claimants have made substantial long-term investments since its privatisation in 2005. Since then, the Claimants say they have consistently worked to promote KE’s growth and commercial success, to the benefit of the company, the people of Pakistan — particularly Karachi — and KE’s other shareholders.

KE, the notice claims, was transformed from a corruption-ridden utility reliant on federal government support into a professionally managed, profitable private-sector enterprise that materially reduced system losses and reinvested earnings to strengthen and expand the business.

This transformation, the Claimants argue, was achieved through disciplined management and sustained capital commitment, including equity contributions and third-party debt financing. Together, these efforts enabled KE to invest more than USD 4.7 billion across the power value chain in Karachi’s power infrastructure between 2005 and 2025.

According to the notice, these investments delivered significant operational efficiencies and generated savings to the Respondent — the Government of Pakistan — exceeding USD 3 billion. Notably, since privatisation, the Claimants have not received any dividends, with 100 percent of profits earned since 2005 retained and reinvested in the business.

In addition to their investments in KE, the Saudi investors also hold investments in Pakistan through a financial interest in the proceeds from the sale of shares in Cnergyico, a transaction in which the sale proceeds were later misappropriated.

READ MORE: Govt devising plan to resolve KE-Nepra tariff dispute

The Saudi investors are not alone in this regard. The notice states that numerous other Middle Eastern investors also have an interest in those same proceeds and in KE, and that the state is required to safeguard those interests as well.

Further, in a letter dated November 12, 2025, the Claimants formally notified the Respondent of their intention to submit a Notice of Arbitration (NoA) in accordance with Article 17 of the OIC Investment Agreement. They stated that the Respondent’s failure to acknowledge or substantively respond to their Notice of Dispute (NoD) demonstrated the parties’ inability to agree on conciliation.

On November 13, 2025, the Respondent informed the Claimants that it was “actively taking the necessary steps and coordinating with the relevant departments, ministries, and stakeholders to obtain comprehensive instructions on the claims and allegations made in the NoD.”

The Respondent further requested the Claimants’ indulgence to provide a substantive response to the NoD and to identify “duly authorised representatives/negotiating team to engage in amicable, without prejudice settlement discussions,” indicating that this would be done by January 14, 2026.

The Claimants maintain that, acting in good faith and relying on the Respondent’s express assurances, they refrained from initiating arbitration and awaited the promised response. Despite these representations, the Respondent failed to provide any substantive response to the NoD, did not identify any duly authorised representatives, and took no discernible steps to engage in settlement discussions or conciliation, as proposed by the Claimants.

As of the date of the Notice of Arbitration, the Respondent had not explain these failures. In these circumstances, the Claimants state it is evident that the Respondent is unwilling to engage meaningfully in negotiations or conciliation, rendering any further attempt at amicable resolution futile.

The Respondent, they argue, has therefore left the Claimants with no alternative but to commence arbitration proceedings to secure resolution of the dispute under the applicable treaty framework.

The Claimants own and control Al Jomaih Power Limited (AJPL) and Denham Investments Limited (Denham). Together, AJPL and Denham own 46.2 percent of KES Power Limited (Cayman Islands) (KESP). KESP, in turn, owns 66.4 percent of KE, making it the majority shareholder.

The arbitration notice further states that for more than eight years, the Respondent’s ministries and regulators failed to act in good faith in granting or processing the required approvals. Government agencies allegedly issued inconsistent instructions, imposed new and extraneous pre-conditions, and refused to issue the final no-objection certificates required for completion.

By way of example, the Government of Pakistan imposed pre-conditions for obtaining National Security Committee (NSC) clearance, including the resolution of outstanding liabilities owed by KE to Sui Southern Gas Company (SSGC) — a state-owned gas utility — and National Transmission and Despatch Company (NTDC) / Central Power Purchasing Agency (Guarantee) Limited (CPPA-G).

While it was not required to do so, KESP assured the government that KE’s liabilities to those entities would be settled in the normal course of business and would not be affected by the proposed sale to Shanghai Electric Power (SEP).

According to the Claimants, these failures prevented completion under the Share Purchase Agreement (SPA) and caused financial harm. Ultimately, SEP terminated the SPA due to the non-fulfillment of the Pakistan-specific conditions, depriving KESP of the ability to realise its investment.

Breach of the Umbrella Clause: The arbitration notice alleges a breach of the Umbrella Clause under Article 8.1 of the OIC Investment Agreement, read together with Article 11 of the Switzerland–Pakistan Bilateral Investment Treaty. Among other things, the Claimants state that the Respondent failed to comply with its obligations under the Mediation Agreement and subsequently backtracked on its express commitments that the issues raised in the 2023 Notice would be resolved to the mutual satisfaction of all parties. The Respondent’s conduct, the Claimants argue, amounted to a repudiation of those commitments.

Dispute regarding Multi-Year Tariffs (MYT): KE was previously awarded a Multi-Year Tariff (MYT) for a period of seven years, from FY 2016-17 to FY 2022-23. This MYT expired on June 30, 2023.

KE filed its petitions for generation, transmission, distribution and supply tariffs on December 1, 2022, prior to the expiry of the FY 2016-17 to FY 2022-23 MYT. However, NEPRA admitted only the generation tariff petition and returned the tariff petitions for transmission, distribution and supply, directing KE to also submit an investment plan for its transmission and distribution segments.

In compliance with NEPRA’s directions, KE submitted the requested investment plan, covering the period FY 2023-24 to FY 2029-30, on January 30, 2023.

Subsequently, on December 27, 2023, after NEPRA approved KE’s investment plan, KE filed separate tariff petitions for the transmission of electric power, distribution of electric power, and supply of electric power for an MYT covering FY 2023-24 to FY 2029-30.

NEPRA admitted the tariff petitions and published them along with a proposed list of issues. A public hearing was scheduled for June 27, 2024. No government entity, nor CPPA-G, participated in the public hearings concerning KE’s tariff petitions.

While the Respondent, through the Power Division, chose not to participate in the tariff determination hearings, it initiated parallel discussions with KE through a Power Sector Task Force, chaired by the Federal Minister for Power, Awais Leghari.

These discussions continued for nearly seven months, during which the Respondent provided assurances to KE that a sustainable MYT for the period FY 2023-24 to FY 2029-30 would be determined. On December 12, 2024, the Respondent, acting through the Power Division, submitted its comments on KE’s tariff petitions.

KE continued its engagement with the Respondent through the Power Sector Task Force and understood that all tariff-related issues had been resolved. NEPRA subsequently confirmed this understanding through its tariff determinations dated May 23 and May 27, 2025.

These determinations addressed all issues raised in the Government of Pakistan’s comments and approved KE’s tariff petitions in a manner consistent with the discussions held at the Power Sector Task Force level. NEPRA then forwarded the tariff determinations to the Respondent for notification, requesting that they be published in the Official Gazette.

However, the Power Division failed to notify the tariff determinations within the prescribed period of 30 days. Around the same time, the Minister for Power made public statements that appeared inconsistent with the spirit and substance of the consultations held with stakeholders, including the Power Division itself, despite his role as head of the Power Sector Task Force that had negotiated the tariff outcomes.

Between May and June 2025, the Claimants wrote to the Special Investment Facilitation Council (SIFC), formally expressing concern over the Respondent’s refusal to notify the tariff determinations and highlighting the inconsistency between the Minister’s public remarks and the results of the regulatory consultations.

READ MORE: KE’s Alvi terms NEPRA’s revised tariff ‘unprecedented’, warns of operational strain

On July 18, 2025, after the Respondent failed to notify the tariff determinations within the mandatory period, NEPRA issued the notifications itself, as permitted under Section 31(7) of the NEPRA Act.

Following NEPRA’s notification of the tariff determinations, the Power Division opted to challenge them through review applications, including applications filed via CPPA-G, an entity wholly owned and controlled by the Respondent. CPPA-G, acting through the Power Division, also filed writ petitions before the Islamabad High Court, seeking the suspension and setting aside of NEPRA’s notifications.

NEPRA fixed the review applications for hearing and proceeded on an expedited basis. However, NEPRA failed to provide KE with copies of all review applications along with the hearing notices, thereby depriving KE of any meaningful opportunity to prepare a comprehensive defence.

This haste persisted despite serious legal defects in the review applications, including the introduction of new and substantive grounds beyond the permissible scope of review, non-payment of mandatory review fees, and the lack of locus standi on the part of certain petitioners.

These deficiencies were expressly brought to NEPRA’s attention by KE and the Claimants, through AJPL, on September 29 and October 4, 2025. KE also challenged the maintainability of the review applications during the hearings.

The demands advanced by the Respondent through the review applications, and subsequently conceded to by NEPRA in its review decision, are described in the notice as unlawful and arbitrary. These demands included, but were not limited to:
(i) NEPRA initially allowed KE a USD-based Return on Equity for its distribution and transmission tariffs. The Power Division, however, demanded that the allowed Return on Equity be converted to a PKR-based return. For the generation tariff, the Power Division further proposed that, in addition to a PKR-based Return on Equity, a portion of the return be linked to plant despatch;
(ii) NEPRA originally approved a distribution loss of 13.9 percent for FY 2024, together with a year-on-year improvement plan under the supply and distribution tariff. Based on the Ministry of Energy’s demands, the allowed distribution loss trajectory was revised to begin at 9 percent in FY 2024; and
(iii) NEPRA originally approved a recovery trajectory under the supply tariff, improving from 93.25 percent in FY 2024 to 96.5 percent in FY 2030. The review decision removed the recovery loss allowance entirely and imposed a 100 percent recovery target, in line with the Power Division’s recommendations.

The Gulf investors argue that the Respondent’s conduct undermines regulatory independence and violates fundamental principles of procedural fairness. They contend that the conduct breaches the OIC Investment Agreement in several respects.

First, the review decisions allegedly deprive the Claimants of the economic value, viability and expected returns of their investment without compensation. Although legal title may formally remain, the cumulative impact of the review decisions is said to effectively neutralise the investment and render it economically worthless. KE has estimated that the annual financial impact of the Respondent’s MYT-related demands would be approximately Rs. 85 billion for FY 2024 alone, which, the Claimants argue, would inevitably result in the economic destruction of KE.

Second, the Claimants assert that the arbitrary reversal of settled regulatory outcomes constitutes a repudiation of their legitimate expectations arising from the MYT framework, the discussions held with the Respondent at the Power Sector Task Force level, and NEPRA’s tariff determinations. They further allege that unlawful pressure was exerted on the regulator.

According to the Claimants, the Respondent’s conduct reflects a lack of transparency, consistency and good faith, undermining the stability of Pakistan’s legal and business environment. They further argue that the conduct highlights NEPRA’s lack of independence and its failure to act in accordance with the NEPRA Act, 1997, and the relevant provisions of the NEPRA Licensing (Distribution) Regulations, 2022.

Third, the Claimants allege that the Respondent improperly interfered with an independent regulatory process, procured the initiation and expedited pursuit of legally deficient review proceedings, and frustrated the final and binding nature of NEPRA’s tariff determinations.

Taken cumulatively, the Claimants argue that these actions deprived them of a functioning, impartial and predictable legal framework for the determination and protection of their rights.

Finally, the Claimants contend that the pressure exerted on NEPRA to uphold the review applications had the purpose or effect of destroying their investment and facilitating an attempt by a domestic investor to obtain control of K-Electric.