A case of unaligned interests?
Last year China’s Multinational power company, Shanghai Electric (SE) made a public announcement to buy Karachi’s main power supplier K-Electric (KE) but the deal has not been able to mature as yet. KES Power, the holding company of KE has been unable to secure regulatory approvals from the government in order to sell its controlling stake of 66.4% in the company.
Reports suggest that Shanghai Electric has bowed out of the deal altogether but the written notice to Pakistan Stock Exchange (PSX) by KE clarifies that a fresh public announcement will be made by SE in a few days.
Essentially it is a legal requirement for SE to withdraw and issue a fresh public announcement of intention (POI) – originally filed in August last year – as they failed to make a public announcement of offer (POF) in the time stipulated by SECP. The legality of the matter might be easy to understand but the reasoning behind the unusual delay in the transaction raises questions about the government’s role in the deal.
For starters the government in March gave a huge disincentive to SE when NEPRA announced a multi-year tariff for the period of seven years that reduced KE’s base tariff by Rs3.50 from existing Rs15.57 to Rs12.07 per unit.
This figure was reviewed quarterly and based on a formula that took into account fluctuating input and overhead costs to arrive at a reasonable tariff. By fixing it for seven years the original feasibility that SE would have done makes little sense now.
In addition to this there is the matter of the debt KE has on its books (money owed to SSGC and NTDC) and the receivables from the government. Until the government clears its dues KE cant clear their debt and this irks the Chinese.
One would assume that with the dismal FDI numbers an inflow of a potential $1.77 billion would be welcome by the government and they would lend full support rather than create hurdles in the deal. Maybe they too want their pound of flesh from the 25% stake they have in the company but the Chinese aren’t interested in that so someone has to pay.
