Pakistan’s revised multi-year tariff (MYT) scheme “remains impractical”, which might delay the Abraaj Group’s exit from its 66.4 percent stake in K-Electric, according to a research note by Exotix Capital.
Vahaj Ahmed, South Asia equity analyst at Exotix, believes the MYT, which was proposed in March 2017, will once again be challenged by K-Electric, despite recent improvements.
“In theory, the new MYT may have very little impact on our equity value estimate but, in practice, it could impair the ability of K-Electric to carry out, and finance, the capex required to meet regulatory efficiency targets,” he said.
Ahmed noted that, in its latest revision, the regulator refused to change its updated regulated-asset-based definition, which would force K-Electric to share more profits with its customers.
In a worst-case scenario, which Ahmed noted has a very low probability of happening, he observed that “if this new MYT is approved, K-Electric may no longer be able to service its debt, given capex required to meet prescribed efficiency targets”. Eventually, the equity value becomes zero, he added.
In October 2016, emerging market-focused fund manager Abraaj Group agreed to sell its controlling stake to Chinese utility Shanghai Electric Power for $1.77 billion. The transaction is contingent upon certain regulatory approvals.
Once the deal concludes, the Pakistani government will retain a 24.36 percent stake in the utility, alongside minority shareholders the International Finance Corporation and the Asian Development Bank.
Abraaj declined to comment, while Shanghai Electric Power could not be reached for comment.