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Special Report

The end of HUBCO dispute



Information Technology


Special Report

The Agreement represents hard work, a fair compromise on a complex set of difficult issues

Dec 25 - 31, 2000

When the current economic managers assumed the responsibility, in October 1999, they faced two key economic issues: reviving the economy and avoiding possible default on external debt servicing. They realized that WAPDA-HUBCO dispute was the key factor affecting the negotiations with the international financial institutions who were keen in finding a mutually acceptable and sustainable solution for the dispute. They recognized that the on going tussle had not only adversely affected the inflow of foreign direct investment but also tarnished Pakistan's image. After signing of the Agreement one may say, "All is well that ends well.'

The signing of the Agreement and the stand-by funding agreement with the IMF will enable the country to overcome the above mentioned two issues. Funding from the IMF will help the country to remain current on its external payments, pave way for long term funding arrangement, disbursement of funds by other lenders, i.e. Asian Development Bank, Islamic Development Bank and rescheduling of debt by London and Paris Clubs. All these will improve Pakistan's forex reserves, perceived risk of Pakistan and attract fresh investment in the country. The resolution of HUBCO issue will restore investors' confidence.

Since most of the details about the Agreement have already been published, it is necessary to find out what the various groups have to say. In general, the Agreement is termed an amicable product of extensive discussions in recent weeks between the three parties at the most senior executive level. According to Peter Giller of International Power, "The Agreement represents hard work and a fair compromise on a complex set of difficult issues. International Power controls more than 25 per cent of equity of HUBCO and also has the operation and maintenance (O&M) contract with the Company.

The centerpiece of the Settlement Agreement is a reduction of the power tariff that WAPDA pays to HUBCO. In a typical year, the revised Agreement is expected to generate a cashflow of 10 million Pound Sterling to International Power. In addition, there will be a receivable due to HUBCO reflecting past underpayment for the electricity. One third of the receivable will be paid on March 31, 2001. The balance will be paid in six semi-annual installments, with interest. Peter Giller also gave an indication about dividend payment. He said, "Restoration of a normal revenue stream will enable HUBCO to resume dividend payment to International Power and other investors which has remained suspended since 1998 owing to the tariff dispute.

A key factor which is of prime importance is fate of legal battle between WAPDA and HUBCO. Reportedly, the Agreement contains provisions for the dis-continuance of the existing legal proceedings. According to reports, the GoP would withdraw the cases against HUBCO by requesting the courts that an agreement has been reached and the government would not like to pursue the cases and then the courts may discharge the cases. It is expected that all the cases would not be withdrawn in a go. In total 18 cases have to be withdrawn.

The Agreement is subject to approval by Pakistan's Federal Cabinet, WAPDA Authority, and HUBCO's Board of Directors, shareholders and lenders. It is expected that all the concerned parties will rectify the Agreement without any further delay. There is a reason for the optimism. One should remember what Peter Giller has said after signing of the Agreement. His words were, "The negotiations were successfully concluded because all of the parties were committed to establishing a sustainable commercial relationship for the duration of the contract." This is the spirit, if followed in the future, would also pave way for massive investment in energy sector in Pakistan. The country needs millions of dollars to expand power generation capacity and revamp transmission and distribution network.

According to Aqib Elahi Mehboob of Khadim Ali Shah Bukhari & Co., "Without reading the fine print and analyzing the components of the new tariff structure, if one makes an attempt to work out the benefits it seems that WAPDA will save US$ 63 million per annum or a total of US$ 3 billion over the remaining 27-years life of the project. Also assuming that the levelized tariff is 5.6 cents/kwh and that there is a 75 per cent write-off of the claim against unpaid receivables from WAPDA, the revised IRR works out between 12.5 to 13.5 per cent. If one uses a 21 per cent discount rate (approximately in line with the yield on Pakistan's Eurobond) as the required rate of return by investors particularly foreign investors the fair price value of HUBCO ranges between Rs 20 to 22 in the best case scenario.

According to Muhammad Suhail of Invest Capital & Securities, "Cash dividend of 3.36 pence is expected each year. This translates into Rs 2.90 per share that will grow in line with rupee devaluation till the year 2027. Taking these dividend numbers as proxy with 7.5 per cent annual rupee devaluation in future (as against 10 per cent in last two decades), HUBCO at current levels of Rs 19.40 generates a rupee IRR of 23 per cent. This yield will increase with additional payments through amount (not known for the time being) received from WAPDA."

According to another report from Global Securities Pakistan, "The settlement between HUBCO and the GoP has not only introduced a qualitative change in the stock but helped lift sentiments as well. The market is sustaining a firm bull trend. With the KSE-100 still at relatively low level, investors are willing to inject cash into equities. The general outlook continues to be positive."

According to Global Securities report, "The HUBCO issue appears to be finally behind us after three long years. The stock is likely to remain quiet and experience relatively lower daily trading volume. It will undoubtedly suffer from the fatigue and exhaustion as it has been in the forefront since March 1998. The scrip has been subject to numerous press releases, rumours and disinformation. Once the dividend rumours are materialized or put to rest, a shift in the investors profile for HUBCO is expected, with a more investment driven approach. Speculative activity will be curtailed and the focus of punters will shift on to other stocks perhaps ICI Pakistan or Engro Chemical."

The two foremost obstacles in correcting the country's external imbalance have been overcomed with the resolution of the HUBCO dispute only a few days after the signing of the stand-by funding agreement with the IMF. The single most important issue which had been holding the country hostage was amicably resolved. No one can deny that it is a major achievement of the current economic managers.

Signing of the Agreement is expected to expedite big ticket privatization (sale of remaining shares) of Pakistan Telecommunication Company (PTCL), Muslim Commercial Bank (MCB) and Allied Bank of Pakistan (ABL). It will also pave way for privatization of Karachi Electric Supply Corporation (KESC), Pakistan State Oil Company (PSO) Habib Bank and WAPDA. The Power Wing of WAPDA has been converted into a National Transmission and Despatch Company, three Power Generation Companies and eight Distribution Companies.

The end to Pakistan's bitter fight with its biggest foreign-backed power producer has cleared one major obstacle for investment in the energy sector. But fresh investment flows would also depend on pricing reforms in the power and gas sectors and economic growth. The row also strained Pakistan's relationship with international financial institutions, notably the World Bank which had guaranteed bank loans to the private sector power projects. A key factor must be kept in mind that the country's future power needs will only come from the private sector.

According to a report from Khadim Ali Shah Bukhari & Co., The prospects for year 2001 appears to be shaping up quite nicely. Now, if only the economic reform process speeds up with market liberalization, public sector restructuring and privatization, Pakistan could crossover to new threshold of greater sustainability and a transition to its steady state growth path from the year 2002 onwards. We maintain our cautiously optimistic stance entering the new year. The economic policy direction must remain focused on reform ensuring higher stability."

Civil Cases

1- State Vs. Khurshid Hussain and others before Special Court, Karachi

2- WAPDA Vs HUBCO and others before Senior Civil Judge, Lahore

3- WAPDA Vs HUBCO and others before Lahore High Court, Lahore

4- WAPDA Vs HUBCO and others before Sindh High Court, Karachi

5- WAPDA Vs HUBCO and others before Supreme Court of Pakistan

6- WAPDA Vs HUBCO and others before Supreme Court of Pakistan

7- GoP Vs HUBCO and WAPDA before Sindh High Court, Karachi

8- HUBCO Vs WAPDA and others before Lahore High Court, Lahore

9- HUBCO Vs WAPDA and others before Sindh High Court, Karachi

10- Khurshid Hussain Vs GoP and others before Sindh High Court, Karachi

11- HUBCO Vs GoP, WAPDA and others before Sindh High Court, Karachi

12- HUBCO Vs WAPDA and others before Sindh High Court, Karachi

13- HUBCO Vs WAPDA and others before Supreme Court of Pakistan

14- HUBCO Vs GoP (Manpower) and WAPDA before Sindh High Court, Karachi

15- HUBCO Vs WAPDA and others before Supreme Court of Pakistan (Review Petition)

Arbitration Cases

1- HUBCO and Entergy VS WAPDA before ICC Tribunal, London

2- HUBCO VS WAPDA before ICC Tribunal, London

3- HUBCO VS GoP before ICC Tribunal, London