Thar Coal, Pakistan

While Beijing struggles to outline its ‘One Belt, One Road’ initiative, there are signs that its influence in overseas infrastructure markets is increasing. The roughly $1.95 billion financing for the Thar Block II coal mining and associated coal-fired power project in Pakistan is the first integrated mining and power project in the China-Pakistan Economic corridor to reach financial close, an important economic heartland in China’s Silk Road. 

The deal is also a rare example of a project financing that has managed to successfully incorporate such a diverse syndicate of lenders into a workable financing structure. The financing comprises both Chinese and Pakistani banks lending across US dollar, Pakistani rupee and Islamic sharia-compliant tranches. The deal potentially offers a template for future Chinese outbound investment into resource and power generation projects in Pakistan.

The new Silk Road 

The ‘One Belt, One Road’ initiative is the name of a development strategy by the Chinese government to revive the land and maritime silk roads dating back to the days of Marco Polo. President Xi Jinping officially launched the new initiative during trips to Kazakhstan and Indonesia in late 2013. Xi has since set up a $40 billion Silk Road infrastructure fund, which is designed to finance infrastructure projects overseas that would benefit Chinese exports. 

The concept of ‘One Belt, One Road’ is far more fluid than this would suggest however. Although initially it was suggested that only 65 countries would be involved, the concept has frequently been invoked by Beijing when discussing investment opportunities in countries beyond China’s traditional trading routes. The newly established Asian Infrastructure Investment Bank (AIIB), while not officially a part of the scheme, is often talked about in conjunction with the new initiative. 

China’s state-owned enterprises and state financial institutions are being encouraged to invest overseas in infrastructure projects because of excess industrial capital at home. Regardless of how the initiative is defined, the concept is beneficial to most of Asia. The Asian Development Bank estimates the infrastructure needs for the region at around $750 billion a year through to 2020 and the new initiative means that China is likely to play an increasing role in bridging this gap. 

Thar coal 

China, which maintains strong diplomatic links with Pakistan, has funded several infrastructure projects in Pakistan already. These are usually funded by soft loans and are rarely of the same size and sophistication as the Thar coal integrated mining project, which comprises a 3.8 million tonnes per year coal mining project as well as a 660MW mine-mouth coal-fired power project. The project is located in Tharparkar, Sindh and is due to come online in 2018. 

The financing comprises a mixture of conventional and Islamic financing from a consortium of local banks and loans from a consortium of Chinese lenders guaranteed by Sinosure. The Pakistani banks are providing Rs52 billion ($496 million) for the mining project and Rs22 billion for the power project, while the Chinese lenders are providing $621 million for the power plant and $220 million for the mine. 

The tenor across all of the facilities is 10 years plus construction, while the deal priced at 170bp over the Karachi Interbank Offered Rate for the local bank facility and 330bp over Libor for the Chinese bank debt. 

China Construction Bank, China Development Bank and Industrial Bank of China are lenders under the foreign bank facility, while Habib Bank, United Bank Limited, Bank Alfalah Bank, Askari Bank, Sindh Bank, the Bank of Punjab, NIB Bank, Habib Metropoliltan Bank, Faysal Bank and Meezan. 

The sponsors are also providing $490 million in equity for the project. The sponsors for the mining project are the government of Sindh, Engro Powergen, Thal Limited, Hub Power Company, Habib Bank and China Machinery Engineering Corporation. The sponsors for the power project are Engro Powergen, Habib Bank, CMEC and Liberty Mills. 

Overseas investment 

China’s ‘One Belt, One Road’ initiative represents the greatest act of economic diplomacy since the US Marshall plan. The country has a strong track record of investing in infrastructure throughout Asia although there are signs in markets such as Indonesia and Vietnam, traditionally dominated by Japanese and Korean interests, that it is starting to edge out its competitors as the country seeks to expand more aggressively into frontier markets in the region. 

Pakistan has always maintained strong ties with China although the country’s investment in the infrastructure sector has usually been limited to providing bilateral loans and investing in small-scale renewable projects. The Thar coal integrated mining and power project proves how far China’s ambitions in the region go and also how its sponsors are able to successfully integrate the funding available from its domestic lenders with local bank financing.


Asset Snapshot

Thar Block 1 Coal Mine

USD 793.00m
Full Details
Transaction Snapshot

Thar Block-II Thar Engro Coal-Fired Power Plant Phase 1 (660MW)

Financial Close:
Engro Powergen Thar (Private) Limited
$1,108.00m USD
Debt/Equity Ratio:
Concession Period:
20.01 years
Full Details