Energy projects encounter financing hurdle

China is reluctant to extend financing to Pakistan for energy projects due to concerns over the country's economic record, security situation and repayment issues.

Sources told The Express Tribune that Pakistani energy companies were seeking financing from China for various energy ventures. However, Sinosure – a state-owned Chinese company that provides insurance cover for loans and debt financing – is reportedly hesitant to offer insurance facility for bank lending to Pakistan's energy projects.

The China Export & Credit Insurance Corporation (Sinosure) is a state-owned policy insurer that plays a crucial role in facilitating Chinese overseas investments. For any Chinese bank extending loans to overseas projects, including those in Pakistan, Sinosure must first issue risk insurance. Without this, Chinese banks refrain from releasing funds.

According to sources, Chinese authorities have raised three key concerns with Pakistani delegations visiting Beijing to secure funding.

A major concern is Pakistan's limited dollar reserves. Chinese firms already operating in Pakistan have faced difficulties in repatriating dividends in US dollars. Chinese officials have reportedly asked Pakistan for assurances on how repayments in dollars will be made.

Secondly, several Chinese engineers working on different projects have faced attacks in Pakistan, triggering fears about the security situation, which was a key point of discussion during financing talks.

Thirdly, Chinese lenders have faced repayment challenges pertaining to loans extended previously for various projects. This experience has made Chinese institutions cautious about further lending.

According to sources, oil refineries are seeking funding from China to start work on plant upgrade projects. The Shehbaz Sharif-led government has approved a new refinery policy in a bid to produce high-quality fuel and expand the existing production capacity.

The lack of policy continuity and consistency on the part of Pakistan is also a cause of worry. Though the government offered some incentives to oil refineries to push them to begin work on plant upgrades, at the same time, it announced sales tax exemption which, the oil industry claims, ate up revenue of Rs34 billion in fiscal year 2024-25.

Later, it compensated for the loss and agreed to impose up to 5% sales tax in the budget for fiscal year 2025-26. However, the issue is yet to be resolved as the tax break has remained in place.

Apart from that, petroleum and carbon levies have been slapped on sale of furnace oil, which has increased its price by 80%. Consequently, according to industry officials, the sale of furnace oil has come to a halt and refineries are looking for export avenues.

"Furnace oil sale in the country is around 2,500 metric tons in July, which is equal to one-day sale according to the past record, when no levies had been imposed," an industry official remarked.

The oil industry argues that no financial institution will extend financing to refineries in such a situation when they are facing multiple challenges with the lack of potential for loan repayment.

Chinese financial institutions are monitoring the situation; therefore, they are least interested in providing loans. Petroleum Minister Ali Pervaiz Malik, when he took charge, did try to resolve the problems being faced by refineries. However, the industry is not very much hopeful as the government has already ignored it in the budget.