TUNING OUT POLITICS, ABRAAJ CAPITAL TRIES TO REBUILD KARACHI

C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 000367

SIPDIS

DEPARTMENT FOR S/RAP, NEA AND SCA

E.O. 12958: DECL: 9/3/2019
TAGS: ENRG EFIN ECON PREL PK AE
SUBJECT: TUNING OUT POLITICS, ABRAAJ CAPITAL TRIES TO REBUILD KARACHI
ELECTRICAL SUPPLY COMPANY

REF: ISLAMABAD 02022

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CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)

1. (C) Summary: Abraaj Capital, a UAE-based private equity
firm, is optimistic its investment in Karachi Electric Supply
Company (KESC),which supplies electricity to over 20 million
people, is succeeding in turning around the company. CEO Arif
Naqvi believes that KESC's long term viability would be all but
assured if the Pakistani government were to free up working
capital and tone down its public discussion of
re-nationalization of KESC. Abraaj believes Pakistan has much
riding on the success of this project - namely its future
ability to attract big investors. Naqvi will be in Washington
in mid-September and would welcome further discussions on
Pakistan's energy strategy. End Summary.



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(Ad)venture Capitalism

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2. (C) Abraaj Capital is the largest private equity firm in the
Middle East and South Asia. Its investors, according to
Founder/CEO Arif Naqvi, include most of the governments in the
region and many of the highest net worth investors from
throughout the GCC. Abraaj manages USD 7 billion in investor
funds. Abraaj currently has four major investments in Pakistan
worth USD 700 million, making it the largest foreign investor in
Pakistan he believes.




3. (C) In a September 1 meeting, Consul General applauded
Abraaj's commitment to investment in Pakistan and noted the
USG's interest in near-term improvement and expansion of
electricity supply to Karachi residents as a means to bringing
greater stability to the Karachi metropolitan area. Naqvi
explained that Abraaj had agreed in 2007 to take over management
of the Karachi Electric Supply Company following a negotiation
of several pre-conditions with the Government of Pakistan (GOP).
One of those pre-conditions was a write-off of 32 billion
rupees (which Naqvi lamented has been heavily criticized in the
Pakistani press as a kick-back of sorts). In return, Abraaj
committed to a USD 360 million investment in KESC over a three
year period, of which, Naqvi said, USD 150 million has already
been deployed. Naqvi noted that the GOP has asked Abraaj to
accelerate its delivery schedule; the company is considering the
request now. Abraaj gained a controlling stake in KESC in
September 2008.




4. (C) Naqvi described the KESC investment as "(Ad)venture
capitalism," confiding that this was Abraaj's first foray into
an investment with an overtly political element. Naqvi
complained that Abraaj has increasingly been the target of
"potshots" from the media, public opinion and, of particular
concern, Pakistani national-level leaders who seem to be playing
up to strong anti-privatization forces by calling for a
re-nationalization of KESC (despite, he claims, reassurances to
the contrary behind the scenes). Nonetheless, Naqvi believes
Abraaj has put KESC on the right track. He noted that there had
been no upgrades to the Karachi electrical grid in 20 years and
that it would require at least 36 months to address that issue.
Naqvi also noted that the GOP has not yet followed through on
its contribution of USD 140 million (another one of the
preconditions to Abraaj's initial investment).



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Too Much at Stake to Fail

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5. (C) Naqvi said he met recently with the Pakistani Minister of
Finance to address KESC's future. He conveyed two points: a)
USD 100 million in working capital, allegedly tied up in
receivables, must be released by the GOP; and b) the GOP must
stop fueling the political fire through public calls for KESC's
nationalization (however insincere those calls may be). In the
immediate term, the calls for nationalization are spooking

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commercial banks and making it difficult to attract additional
investors to the project. Looking ahead, Naqvi made a
compelling argument that if Abraaj's KESC investment works,
their high-profile investors will look favorably upon future
investment opportunities in Pakistan. Failure, by a world-class
company nonetheless, would do the opposite. With so much at
stake for Pakistan, he argued, the USG should pressure the GOP
to quiet its rhetoric and give Abraaj the breathing room it
needs to turn KESC around.



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Comment

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6. (C) Arif Naqvi was surprisingly forthcoming in his assessment
of Abraaj's work with KESC. His optimism over the long-term
success of his investment was consistent throughout the
discussion. His frustrations were likewise on display, however.
He is convinced Abraaj has put a management team in place to
turn around KESC and, while clear that additional working
capital of USD 100 million was required in the near term, was
not pre-occupied with funding. He was clearly worried, however,
that investors will flee should talk of nationalization gain
further momentum. He several times asked for the USG's
intervention with the GOP. To that end, he has offered to
discuss with Department officials Pakistan's energy strategy
during a trip to Washington in mid-September.
SIBERELL