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ISLAMABAD: The shareholders of KES Power Limited (KESP) or K-Electric have threatened to knock the doors of London Court of Arbitration (LCA) if National Electric Power Regulatory Authority (Nepra) annuls its distribution exclusivity before its expiry.

This has been conveyed by the KESP's Chairman Board of Directors, Shan Ashary, in a letter to the Minister for Privatisation, Mohammedmian Soomro, copies of which have also been sent to Prime Minister Imran Khan, Minister for Energy, Omar Ayub, Minister for Planning, Development and Special Initiatives, Asad Umar and other concerned authorities including Registrar Nepra. KESP are the majority shareholder (66.4%) in K-Electric Limited (KEL).

The authorities have been informed that there are a number of serious misgivings and concerns pertaining to recent events in relation to KE. The power utility has accepted criticisms in the past weeks in relation to the power situation in Karachi, however in the interest of public good, the power utility needed to ignore media hysteria and focus on continuing to deliver its mission, which is to supply electricity to the citizens of Pakistan's hub of economic activity and continue to build on its partnership with the Government of Pakistan (GoP).

"We have pointed out respectfully and repeatedly to the GoP that KE needs the support of all stakeholders: gas and furnace oil procurement (for the delivery and requisite technical values, in which we are reliant on entities under the control of the Federal Government), the Ministry of Power, NTDC, Ministry of Finance and Nepra. We believe that the Government of Pakistan and KE both have a shared responsibility to deliver electricity to the end-user, unless we work together with common objective this important responsibility will be compromised," said Ashary.

The KESP's shareholders argue that the current Nepra hearings on KE's properly granted power distribution exclusivity in Karachi are of great concern. The shareholders request that the GoP take the necessary measures to address these concerns and ensure that KE and its shareholders' rights as a critical constituent are respected.

The letter says that the criticism and debate recently has sought to paint KE's efforts in a negative light and present a one-sided picture.

"We must make factual statements for the record to highlight the success of the privatisation of KE and the efforts that have been expended in achieving a comprehensive turnaround of the business we inherited at privatization," Chairman KESP Board added.

KE was a utility suffering from severe operational deficiencies, costing the Pakistani government tens of billions of rupees every year. In 2005, KESP acquired a majority stake and operational control of KE; one of its main objectives was to lower the cost to the Pakistani government, and contribute to the improvement of energy supply in Pakistan. This investment was based on the GoP's enabling policy for the power sector (including long term licences and tariff structures) and an investor-friendly environment to spur growth and improvement of the power sector in Pakistan.

"This context led KESP to invest over $ 700 million in KE which, to date, constitutes the single largest Foreign Direct Investment (FDI) in Pakistan from a private entity. In addition, we have reinvested all profits made since 2005, without a single dividend declared. As a result, KE has been able to invest capex of approximately $ 3.3 billion over the last 15 years, focused singularly on the improvement of Karachi's generation, transmission, and distribution over and above what was promised at the time of privatisation," he maintained. For instance, KE's power generation capacity was 2,109 MW which has increased to 3,202 MW, grid stations increased from 52 to 70, in addition to substantial improvement in technical and other infrastructure.

The power utility has claimed that by significantly enhancing Karachi's power infrastructure, it has lowered the cost of electricity for consumers via an efficient generation fleet, significantly reduced electricity theft, improved supply reliability, streamlined the workforce, ultimately resulting in savings of hundreds of billions of rupees for the Pakistani Government. The impact of these initiatives has also been recognized widely outside Pakistan, through institutions such as the Harvard & Wharton Business Schools, who have published case studies on KE, and by multilateral donor agencies, global financial institutions as well as many significant institutional investors that are participating behind our corporate structure from around the world.

"Having effectively performed our role, our responsibility was to find a reputable and long-term strategic investor to take over the reins of KE. This led to Shanghai Electric Power (SEP) agreeing, in October 2016, to not only purchase our stake but commit, as part of the process, to inject several billion dollars into the further development of Karachi's infrastructure, the criticality of which was only emphasized after the strains brought by the recent rains in the city. KE and Karachi's needs will only continue to grow," added Shan Ashary.

For the transaction to have taken place, customary government approvals and Nepra providing certainty on KE's tariff was needed. Unfortunately, in the four years since the execution of the agreement with SEP, there has been limited progress with the GoP, and Nepra, on these matters and currently there is no visibility on completion of these important matters. While SEP has to date patiently waited for bottlenecks to be resolved. "We believe that the current press reports on the debate on KE's future is adding to their uncertainty and testing their resolve. Their position and ours is to achieve a fair and equitable resolution of the remaining issues that results in a win-win for all parties but most especially the consumers of power in Karachi. We stand ready to complete the discussion on the remaining points as soon as possible, because KE needs the infusion of capital, direction and stability that a closure to the transaction will bring," he further added.

According to the letter, to complicate matters further, KEL was recently informed that, upon the invitation of the Chief Justice of the Supreme Court, in suo moto proceedings, Nepra is considering prematurely terminating its distribution exclusivity in Karachi, which was due to remain in place until 2023.

This development is extremely concerning as Nepra's's intended early termination of KE's distribution licence would have disastrous implications. Indeed, it would seriously damage KE's operational performance and ensure that electricity in poorer segments of the city will be adversely impacted. It will also severely compromise the value of its investment in Pakistan, which deserves better support in light of the GoP's stated investment objectives," he said.

The letter says that Nepra's anticipated action may have already had a negative impact on KE's ongoing capex initiatives, including a critical 900 MW power project. If the financial close on this project is delayed because of Nepra's action, the power utility expects a disastrous power situation with severe generation shortfall in Karachi next summer. This action will jeopardize SEP's acquisition, denying Karachi the benefit of a multi-billion-dollar investment program and a better quality of living for its citizens. Any action that unfairly and unreasonably results in a premature termination of KE's exclusivity will likely deter foreign investors from considering Pakistan as an investment destination in the future.

"Obviously, we would also be bound to consider all measures available to protect our investment in the company, including seeking legal recourse in all available dispute resolution forums. This investment is too significant to our shareholders to ignore these developments and I have been instructed to seek your assistance and help to achieve an early, speedy and just resolution. By copy of this letter, we are also requesting the Prime Minister to review the matter," he further added.

Although Nepra is an independent regulator, it needs direction from the GoP to play its role in facilitating the entry of much needed investment into the country and enable a vote of confidence in the GoP's policies to enhance the critical infrastructure needs of the country.

Concluding the three-page letter, Ashary said that the shareholders believe it is crucial to address these issues "with you and draw your attention to Nepra's plans as soon as possible, requesting top authorities' intervention to ensure that the power utility's distribution licence will be complied with until it expires, i.e. in 2023, and prevent the very serious consequences that its early termination would cause to Karachi and its people, our investment and, more generally, to foreign investments in Pakistan."

Copyright Business Recorder, 2020