KARACHI: Experts expressed concern on Thursday over Shanghai Electric Power Company’s (SEPC) decision to terminate its $1.8 billion deal to acquire majority shares in Pakistan’s K-Electric (KE), citing the power utility company’s failure to meet conditions and Pakistan’s changing business environment.

SEPC has been in talks to acquire a stake in KE since 2016, delayed due to regulatory approvals and liquidity constraints as a consequence of mounting circular debt plaguing the country’s power sector. The government of Pakistan owns a 24.4 percent stake in KE, which powers the country’s largest city and commercial hub of Karachi.

As per the agreement, SEPC was to acquire 66.4 percent or 18.3 billion shares in KE, which is Pakistan’s largest private utility company, for $1.77 billion and an additional $27 million incentive payment, depending on KE’s operating performance.

SEPC’s decision to terminate the agreement was taken by its board during its Sept. 9 meeting and was notified to shareholders on the Shanghai Stock Exchange (SSE) the following day. The decision remains subject to review by shareholders.

“The counterparty has consistently failed to meet the closing conditions precedent, and changes in Pakistan’s business environment have resulted in this transaction no longer being aligned with the company’s international development strategy,” the SEPC said in its filing at the SSE.

“After careful research and analysis, and in order to safeguard the interests of the company and all shareholders, the company has decided to terminate this major asset purchase,” it added.

KE spokesperson Imran Rana, meanwhile, refused to comment on the development when approached by Arab News. Zafar Yab Khan, a spokesman at the energy ministry’s Power Division, said only KE could comment on the matter since it was a “privatized entity.”

KE, whose shares were one of the most traded ones on the Pakistan Stock Exchange (PSX) in recent days, declined in price by 3.6 percent to Rs5.54 per share since Sept. 10.

Recalling Pakistan’s changing regulatory landscape, SEPC said KE’s profitability and equity value had been significantly reduced in July 2018 after Pakistan’s National Electric Power Regulatory Authority (NEPRA) announced a “reconsidered” multi-year electricity price mechanism.

 The two parties had to re-evaluate and adjust the transaction price. In 2019, after completing supplementary due diligence on various professional aspects and adjusting the financial model, SEPC submitted an updated non-binding offer to KE, which it did not accept.

“Since 2020, the company has been conducting supplementary technical, financial, and tax due diligence in accordance with project needs and continuously monitoring project progress,” the SEPC said.

‘OPPORTUNITY LOST’

Khaqan Najeeb, Pakistan’s former finance adviser, said the government’s priority should be to strengthen the country’s regulatory frameworks, streamline approvals, and build confidence in dispute resolution.

Improving these fundamentals will matter far more in the long run than any one transaction, he told Arab News.

“Large investment decisions being scrapped naturally raise concerns about a country’s ability to attract and retain foreign investment,” Najeeb said.

Najeeb said that while individual cases might have their own dynamics, they highlight the broader issue that “investors look not just at opportunities, but also at predictability and clarity in local processes.”

Muhammad Saad Ali, an energy analyst at Lucky Investments Ltd., said Chinese investors pulling out from Pakistan was a “negative for FDI (foreign direct investment) as [it] shows the several bottlenecks and red tape foreign direct investors have to bear to acquire an asset in Pakistan.”

Pakistan’s government has been actively trying to secure FDI over the past several months. However, it has only managed to attract $3 billion in the last two decades, according to Pakistan’s central bank.

“(It is a) lost opportunity for Pakistan as it could have learnt a lot from a power behemoth from China,” Ali said.

Ali noted the SEPC decision would also dampen the hopes of KE’s minority shareholders, “who have been hoping for this acquisition to unlock value in the stock.”