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SAZH-TAF Report on FDI

Industry - Power

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Pakistan’s energy sector is an essential part of its economic productivity. Research shows that the level of energy production is directly linked to the country’s progress. In 1994, the government introduced a Private Power Policy (PPP) that included many generous incentives for private firms interested in the installation of power plants in Pakistan. As a result, Pakistan received foreign investment of US$ 3 billion (World Bank 2001). The FDI received by the power and energy sector was around 35.58 per cent in the 1990s. Thus, contributing substantially to the overall economic growth. However, this soon declined as the country faced international sanctions due to conducting nuclear tests.


In the 1990s, the European or US companies were investing in the Power Sector. However, as per our experts, now there are very few American or European investors because their governments are not lobbying for them. However, as the Chinese government has grown a stronger relationship with the Pakistani government, therefore, their companies are interested. Same applies for Korean investors. Also, the recent China Pakistan Economic Corridor (CPEC) has sifted Pakistan’s focus to coal power generation as China contributed majorly to the FDI


Although, the Business Recorder (2021) states that there has now been a decline coal investment around the world and that there has been a shifting trend towards renewable and alternate energy. “China, a key investor in Pakistan has also halted all its coal investments abroad. Not only that; it is ambitiously transitioning locally; as well as in its global investments toward green future.” As of now, Pakistan has shifted its focus to producing sustainable energy and aims to increase the share of renewable energy to 30% by 2030. Unfortunately, there does not seem to be any substantial changes in the country’s energy portfolio and policies to implement this goal. Hence, to tackle environmental issues like the recent monsoon flood and to increase FDI and attract more investors, it is high time Pakistan prioritizes sustainable energy.


According to our experts, international investors have numerous concerns when it comes to investing in the power sector of Pakistan, such as the short payback period and the high discount rate. “Due to non-financial supports, incomplete working capital requirements, weak consumer service infrastructure, and operating and maintaining equipment, the RE policy always failed due to political issues in Pakistan.” Additionally, Pakistan also has operational issues, like weak implementation, political influences, and unrealistic targets.


Furthermore, climate change has become a key concern over the last 10 years (Alola et al., 2021; Fareed et al., 2021; Adebayo et al., 2022a; Adebayo et al., 2022b) for politicians and economists alike. (Nuvvula et al., 2022; Wen et al., 2022). The future of our economy depends on reliable energy resources (Miao et al., 2022)


When discussing Pakistan, it is clear that the country is in the midst of a severe energy crisis, with the potential to have damaging consequences for the national economy (Tanveer et al.,2021).  In this situation, developing countries, such as Pakistan, need massive energy to support their industry and large populations (Ikram et al., 2019, 2020). This is where the conversation for sustainable and green energy must come in. Majority of investors in the power sector are foreign investors.


Leading professionals in the power sector with over 20 years of experience brought up how the inconsistency of government policies halts progress and development. For example, after signing a contract for 20 years, within 10 years the new government begins to re-negotiate the deal made earlier. This not only creates a bad reputation for Pakistan but destabilizes our Power Sector. It further leads to uncertainty in the life security of the power project, which is normally 25-30 years according to the PPAs (Power Purchase Agreements). This made the Chinese investors in power projects reconsider their investment plans in Pakistan and reduce their investment.


According to one of our experts, who is the Chief Legal Officer at a RLNG Power Plant, to establish a power plant, there is no single organization involved but multiple organizations from the federal down to district level, each with their own requirements and policies, to the biggest such as NEPRA which finalizes the tariff, to a district-level NOC for something pertaining to the construction of the project. Due to the lack of coordination between various such organizations and the lack of a one-window operation, each of these organizations with their opaque, onerous requirements become hurdles in the way of foreign investments. Unfortunately, this information (regarding all the relevant stakeholders, departments, or offices which a project has to engage with and seek documentation or approvals from) is not available nor has been appropriate mapped by any department or organization. This gap in information, which ideally should be publicly circulated and available to investors, leads to various projects learning about these problems on-the-go, adding to their cost, complexity, and frustration.


Another source of frustration was shared by an expert formerly in WAPDA and others expert in the Power industry. It pertains to lack of planning within the decision-making bodies. As well as, using indigenous resources, such as coal in Thar, for instance as opposed to imported coal which would cost the country significantly more in terms of import bill, foreign reserves, and power generation. They informed us of the practical reality that a coal-based power plant was established near Thar, and it had been presumed that it would use the local coal available in Thar. However, for reasons, it was going to use imported coal. Our experts shared that the cost of importing the coal and subsequently shipping that from a port such as Karachi or Gwadar to Thar would be exorbitant, and eventually lead to an exceptionally prohibitive cost of power generation of that particular power plant. In reverse, a power plant was set up near Sindh where imported coal would be cheaper to logistically transport to, however it was designated to use local coal from Thar. They asserted that this did not pertain to the debate of using domestic or imported coal, but how execution of such a decision can be compromised by other decisions. This situation and reality conveyed the bizarre decision-making taking place within the spheres of the power industry, and the lack of transparency in the bureaucratic quagmire, was recognized as the problem in such matters.


Hence, investors in the power sector have to deal with such unnecessary and laborious bureaucratic hurdles. It is a key requirement to map out all the stakeholders and relevant organizations involved in such processes, so as to devise the way forward, as well as create consistency and transparency in the decision-making process.

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