China scales back power investments amid security woes

November 19, 2024 (MLN): Pakistan’s power sector failed to attract Chinese capital in October, showcasing an unusual trend potentially due to threats to Chinese nationals and adjustments in the country’s power sector.

The CPEC partner has been the primary investor in the country’s power sector, flowing in millions of Dollars every month regardless of its structural weaknesses.

However, the attacks—and perhaps the government's failure to deter them—have suddenly cautioned China to restrict its investment in the country.

Based on MG Research calculations, the rolling 40-month correlation between Chinese direct foreign investment and FDI in the power sector stands at a significant 0.96, indicating a strong directly proportional investment trend.

The link can further be explained by referring to a past trend. Back in January 2024, the CPEC partner made its highest divestment since 2018 worth $243.43m. This move was directly impactful on the electricity sector, which also saw its highest divestment during the same period.

The central bank yesterday reported that the FDI in the energy sector dropped to negative $1.8m, causing it to lose its position as the dominant sector after four consecutive months.

Likewise, China’s net FDI balance stood at $10.46m, the lowest figure since the country’s substantial divestment in January same year.

Now as the connection between the two variables is addressed, one can assess what actually caused this sudden decline in Chinese attractiveness for the power sector.

The core issue in the country and the main topic of discussion is the series of back-to-back attacks on Chinese workers in the South Asian nation.

Hence, the CPEC partner’s anger and disappointment with weak security policies might have prompted it to restrict the flow of investments into the country.

According to certain media reports, China is pushing Pakistan for joint security, allowing its own security staff to provide protection to the numerous Chinese citizens. However, this issue remains largely hidden, with no open discussions or clear indications of any initiatives being taken.

Apart from this potential cause, the government’s step to revamp the power sector by early termination of several key contracts with independent power producers (IPPs) might be another restriction.

The government has terminated several power contracts such as Implementation Agreements, Power Purchase Agreements, Fuel Supply Agreements, and related Guarantee with multiple IPPs.

As per Awais Leghari, Pakistan’s Energy Minister the early termination of these contracts reflects a strategic shift related to power generation, payments, or fuel supply and has helped the country save a substantial amount of Rs411 billion.

Several reports indicated that certain IPPs that certain IPPs were dissatisfied with the pressure during negotiations, and disputes remain over capacity payments and government defaults, which can also be considered as a severe restriction by the dominant foreign investor.

Nonetheless, China held the majority proportion (45.83%) of direct investments in the country during 4MFY25, and investment from the respective country has increased substantially by 100.18% YoY when compared with the figure of $207.06m in 4MFY24.

Meanwhile, sector-wise, the Power sector has ranked first in terms of the highest net FDI of $414.49m, compared to an inflow of $223.1m recorded in 4MFY24.

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