Pakistan’s energy sector stands at a crossroads, with investments facing a complex and uncertain trajectory despite government efforts. The recent failure of a 600 MW solar project in Muzaffargarh to attract any bids has sounded alarm bells, highlighting the deep-seated challenges that continue to deter both local and foreign investors. This stark reality underscores a pressing need for Pakistan to re-evaluate its strategies to boost investor confidence and secure the much-needed capital for its energy projects.
The shifting dynamics of Chinese investment, historically the backbone of Pakistan’s energy sector, offer critical insights. Since 2005, China has poured nearly $68 billion into Pakistan’s economy, with a significant portion directed towards energy projects. The China Pakistan Economic Corridor (CPEC), a flagship initiative under President Xi Jinping’s Belt and Road Initiative (BRI), initially focused on coal-fired power plants. However, the landscape is changing. President Xi’s 2021 pledge to halt overseas coal investments presents an opportunity for Pakistan to pivot towards cleaner energy sources. Yet, recent data reveals a troubling trend: Chinese investments in Pakistan’s energy sector have dwindled to a mere $4.86 billion since the Covid-19 pandemic, with a substantial portion allocated to a nuclear power plant in Chashma.
China’s investment patterns are evolving, with a noticeable shift away from Pakistan towards regions like the Middle East, Sub-Saharan Africa, and East Africa. These regions offer regulatory stability and value-added manufacturing policies that attract Chinese capital. For instance, Indonesia’s strategic use of its mineral reserves and industrial policies has successfully drawn Chinese investments in nickel smelting and battery production. In contrast, Pakistan’s attempts to lure investors with tax incentives and special economic zones (SEZs) have been undermined by industrial stagnation, high energy costs, and weak infrastructure.
Security concerns further compound the challenges. Increased militant attacks targeting Chinese nationals have led to calls for enhanced security measures. The National Electricity Power Regulatory Authority (NEPRA) introduced a security surcharge, but this has not been enough to prevent tragic incidents. Additionally, lengthy permitting processes and frequent regulatory changes create a bureaucratic maze that stalls project progress and discourages investment.
Financial arrears plaguing CPEC power plants add another layer of complexity. Outstanding receivables have reached $1.4 billion, with distribution utilities struggling to recover payments. This liquidity crunch impacts the ability of project sponsors to reinvest, particularly affecting fossil-fuel-based power plants. The Sahiwal coal-fired power plant and the Port Qasim Electric Power Company (PQEPC) have repeatedly threatened shutdowns due to non-payment, highlighting the systemic issues within Pakistan’s electricity distribution system.
The China Three Gorges Group, once a significant clean energy investor in Pakistan, has not reinvested since 2016. Instead, it has shifted its focus to Egypt and Jordan, where it has installed substantial solar and wind projects. While upcoming hydropower projects in Pakistan show promise, they face regulatory hurdles and slow progress. The Kohala project, for example, lacks authorization from Sinosure, China’s state-owned export credit insurer, and recent government decisions have excluded these projects from energy generation planning, further dampening investor enthusiasm.
As CPEC enters its second phase, CPEC 2.0, the focus shifts towards industrialization, agriculture, and technology transfer through SEZs. Pakistan could leverage China’s advancements in clean energy and electric mobility, especially as Western markets impose trade restrictions. However, realizing this potential hinges on Pakistan’s ability to address security risks, ensure policy stability, and honor contractual obligations.
The Middle East and Southeast Asia offer valuable lessons. These regions have attracted Chinese investments by providing regulatory predictability and economic stability. Pakistan must work diligently to rebuild investor confidence, perhaps by diverging from energy sector investments temporarily and focusing on de-risking other avenues for new financing.
This news could significantly reshape development in the sector. It serves as a wake-up call for Pakistan to address its structural issues and create a more attractive investment environment. The shift in Chinese investment patterns also highlights the need for Pakistan to diversify its investment sources and explore partnerships with other countries and regions. Moreover, the focus on clean energy presents an opportunity for Pakistan to align with global trends towards sustain
