The two key foreign investors’ groups of KE have given one-month deadline to Islamabad for withdrawal of all litigation, clearance of outstanding payments and signing of three long-awaited pacts or face litigation at international forum.
The deadline was given on January 5, 2023 through a legal notice to Attorney General for Pakistan. Copies of notice have also been sent to Prime Minister, Shehbaz Sharif, Minister for Power and Minister for Law and Justice.
The legal notice has been served by Al-Jomaih Power Limited and Denham Investments Limited, upon the Islamic Republic of Pakistan under the Agreement on Promotion, Protection and Guarantee of Investments amongst the Member States of the Organization of the Islamic Conference (OIC Investment Agreement).
‘Non-payment’ of KE’s outstanding amounts: Govt receives legal notice from two global groups
The OIC Investment Treaty was signed on June 5, 1981 and is in force since February 1988. The signatories of the OIC Investment Agreement include, inter alia, Pakistan, Kuwait and the Kingdom of Saudi Arabia, all of whom have also ratified the Agreement.
The Claimant are subsidiaries of Al-Jomaih Group of Saudi Arabia and National Industrial Group (NIG) of Kuwait and are investors in Pakistan within the terms of Article- 1 of the OIC Investment Treaty. Accordingly, the Claimant enjoys and reserves all the rights and privileges accorded to an investor under the OIC Investment Treaty. As per Article 17 of the OIC Investment Treaty, the Claimant has the right to initiate proceedings under the said Treaty if the matters raised through the notice are not addressed.
According to the legal notice, brief facts underlying this Notice are as follows: (i) in November 2005, Karachi Electric Supply Corporation (KESC) was privatised and 73% of its stake was transferred to a consortium led by KES Power. Subsequently in 2014, KESC was renamed as KE; (ii) KE entered into a number of agreements with the Government of Pakistan and entities owned and/ or controlled by the GoP. These include, among others, the following agreements: (a) Implementation Agreement (IA) of November 14, 2005 with the GoP at the time of privatisation which was subsequently amended through the Amendment Agreement. Within the Implementation Agreement subsequently amended through the Amendment Agreement, various commitments and guarantees were made by the GoP including but not limited to energy dues of Karachi Water & Sewerage Board (KWSB) being a strategic customer, timely processing and release of KE’s Tariff Differential Subsidy (TDS) as per stipulated timelines; (b) a Gas Supply Agreement (GSA) of November 9, 1978 with Sui Southern Gas Company (SSGC) for supply of 10 MMCFD each at two of KE’s power generation plants. With the expansion of KE’s generation fleet through addition of new power plants, gas allocation to KE was subsequently increased in a phase-wise manner to 276 MMCFD by the Economic Coordination Committee (ECC) of the Cabinet and the gas supply trend also reaffirms that by way of action of the parties to the GSA, the 1978 GSA was no longer in field. Efforts were made by KE to execute a fresh GSA with SSGC but remained inconclusive; (c) a PPA of January 26 2010 with National Transmission and Dispatch Company (NTDC) (collectively the Concession Agreements).
The legal notice says, agreements and the underlying promises made by the GoP created the legitimate expectations for success of the project. Without these promises and expectations, the Claimant would not have participated in the privatisation process. The GoP has been continuously and consistently in violation of the promises made through and contained in the agreements.
The claimants are of the view that as per the Agreements, the GoP and/ or its entities are required to make certain payments, such as the Tariff Differential Subsidy, energy dues of strategic customers to KE. The payments enable KE to purchase fuel, produce electricity, sell it to consumers and then pay fuel supplying entities and other organizations such as the SSGC and NTDC (the “Receiving Entities” – i.e., the GoP or related entities to whom KE owes money). The GoP and/or its entities have not made complete payments as promised under the agreements, and consequently, as of June 2022, the GoP and/ or its entities owe KE Rs 346 billion.
The claimant has claimed that the delays in and the partial nature of TDS and other payments, in turn, causes delays in payment by KE to the GoP controlled entities. While KE is not allowed to charge any punitive late payment charge for the delayed TDS and other payments, the receiving Entities claim punitive late payment charge from KE.
As of June 2022, the Receiving Entities claim Rs 573 billion of which PKR 246 billion is the late payment charge. “Since privatisation, KES Power has invested over $4 billion in KE and the power value chain in the region serviced by KE. Most regrettably; however, the investment has been frustrated owing to the failure of the GoP to honour its contractual commitments,” said Sheikh Abdulaziz H Al-Jomaih, in the letter notice.
The claimant maintains that KE has been engaged in earnest with the GoP and its entities including the Receiving Entities to find resolution of the matter. Regrettably, the GoP and its entities including the Receiving Entities have acted to only delay settlement of the outstanding issues. As a consequence of the GoP’s actions, the Claimant has not received a single cent in dividend since KE’s privatisation and the investment has been frustrated. GoP’s actions including, among others, failure to honour its contractual commitments amount to expropriation of the investment.
The Claimant approached the courts in Pakistan for redressal of its grievances but the Courts and the judicial system have failed to resolve the issue and/ or to even provide any kind of relief. The consistent failure by the GoP to honour its contractual commitments and persistent denial of justice to the Claimants has made the situation untenable.