The reason power plants in Pakistan probably require this kind of financing is because Pakistan doesn't have the industrial capability to make the equipment that you need to build a power plant, so, dollars are a requirement.

Power companies in Pakistan also don't have easy access to international money markets, and thus, it makes sense for the government to back those strong currency loans as a subsidy on infrastructure.

This is not exclusive to Pakistan, this is the routine of infrastructure financing on developing countries. J.P. Morgan is not really eager to lend money for PakiPower Incorporated, but it is willing to lend to the government.

It is unfortunate that the government of Pakistan and their investors (China and the IMF) made poor investment decisions. They should feel free to go back to debt holders to renegotiate the debt, or default on it and hand the stranded assets back to creditors. The death spiral is of their own making, and will only accelerate as solar PV and battery cost declines continue. Electricity consumers will simply go off the grid. Such is the risk of unsophisticated investors not understanding the market in which they invest. Capital being at risk is an inherent component of investment.

My condolences and sympathy to the people of Pakistan caught in the mess. The global energy transition will be volatile.

Solar electricity every hour of every day is here and it changes everything - https://ember-energy.org/latest-insights/solar-electricity-e... - June 21st, 2025

Stranded fossil-fuel assets translate to major losses for investors in advanced economies - https://www.nature.com/articles/s41558-022-01356-y | https://doi.org/10.1038/s41558-022-01356-y - May 26th, 2022

Rethinking Energy -- 100% Solar, Wind and Batteries Is Just The Beginning - https://www.youtube.com/watch?v=PM2RxWtF4Ds - January 2021

Who owns the distressed fossil generation collateralized debt? China. Where is Pakistan importing cleantech from? China. There is some IMF debt in there as well, for accuracy.

How Chinese loans trapped Pakistan's economy - https://www.dw.com/en/how-chinese-loans-trapped-pakistans-ec... - August 2nd, 2024

Emeber Energy: China Cleantech Exports Data Explorer - https://ember-energy.org/data/china-cleantech-exports-data-e... (updated monthly)

    > default on it and hand the stranded assets back to creditors

I doubt the debt is secured by the power assets. If anything, maybe China can assume ownership of the entire powerplant if Pakistan cannot pay. They have done that many times in Africa. See: "debt-trap diplomacy". Also, it is terrible advice to tell a country to default on external debt. See: Argentina!

Argentina has defaulted nine times in its history. One or two times is not material, based on historical observations.

https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

> Argentina has defaulted nine times in its history

Argentina doesn’t make a habit of hosting its creditors’ troops [1].

[1] http://eng.mod.gov.cn/xb/News_213114/TopStories/16353167.htm...

So the power plants lend dollars to the state so that they can pay to build the power plant?

Or else I don't see how the power plants are collecting the interest?

Usually there are three parties in these agreements.

1. State of Pakistan

2. Someone with dollars (the investors)

3. Local businessman who are willing run the power plant.

The three parties come to an agreement on what the minimum returns should be on the investment. Say 10% annual. Then the investors give money to the businessman, who then import the power plant equipment and start operating it. The state-run electricity distribution companies buys from the power plant as needed and pays them the unit price set by the State of Pakistan. Part of this is converted into dollars at some pre-agreed rate and transferred to the investors.

In all this, if the total returns to the investor are above 10%, then all is good. However, if the grid demand has fallen, and the distribution company didn't buy a lot of units from the power plant, then the State of Pakistan has to step in and give the investors the difference to make up the 10% returns.

Yes, it is an insane system.

State capitalism like you described totally undermines the price system by replacing profit-and-loss–guided entrepreneurial calculation with political allocation of resources, thereby rendering economic calculation increasingly impossible and eroding the coordinating function of the market process.

Yes, but nobody has found a more effective way to build infrastructure in poor countries. State capitalism as described is how infrastructure development happened in Indonesia, Malaysia, Taiwan, Hong Kong, Korea, Japan, Vietnam, Thailand, etc.

The fact that infrastructure was built under state capitalism does not demonstrate the superiority of central planning, only that capital accumulation occurred despite intervention, often financed by prior scarcity, foreign savings, or coerced transfers; absent market prices and entrepreneurial profit-and-loss, the state cannot know whether the infrastructure created was the most value-productive use of scarce resources, only that concrete and steel were poured.

I think it demonstrates the increased variance of central planning. The Congo Free State was also centrally planned, and so was the Holocaust, the Holodomor, the Armenian Genocide, Suharto's mass murder of suspected PKI sympathizers, etc. But the expected outcome for poor countries is that they stay poor and don't develop into industrialized export giants the way my laundry list of countries did.

Higher variance isn’t a redeeming feature when the mechanism that generates it lacks rational calculation in the first place. Central direction can occasionally coincide with growth in poor countries because initial scarcity leaves many wasteful paths that still raise output, but that doesn’t establish a positive expected value

I have attempted to make sense of your comment several times, but I cannot figure out what the intended meaning is of most of it.

I’m not arguing that centralized or state-capitalist systems “never work” in the sense that nothing gets built, or that output can’t rise. Clearly roads, ports, power plants, and factories were constructed in many of the cases you listed.

The narrower point I’m making is about economic rationality. Without market prices for capital goods generated through profit-and-loss entrepreneurship, there is no way to know whether those projects were the best use of scarce resources, or merely a use that happened to raise output from a very low baseline.

In very poor countries, almost any large capital investment will increase measured output because there are so many unmet needs. That means growth can occur even under badly misallocated investment. The fact that development happened does not tell us whether it happened efficiently, or whether alternative decentralized uses of those same resources would have generated more value.

That’s also why I don’t find higher variance persuasive as a defense. Occasional success doesn’t validate a mechanism that lacks systematic feedback. Without prices and profits, planners can’t distinguish luck from competence, or learning from error. Things such as malinvestment and moral hazard result. You only know concrete and steel were poured, not whether society is richer than it otherwise would have been.

So my claim isn’t state capitalism always fails, nor is it a moral argument about atrocities. It’s that infrastructure success alone doesn’t answer the calculation problem. Growth from scarcity is compatible with irrational allocation, and therefore doesn’t establish a positive expected value for centralized direction as a general development strategy.

They surely were not the best use of scarce resources. However, I don't know if you've ever tried to run a business in a poor country. It turns out that the decentralized economic systems they have are also not economically rational, systematically failing to provide functioning market mechanisms that support long-term investments such as highway systems, reliable electric grids, municipal water treatment, etc., even when those things would be highly efficient uses of scarce resources. Rather, generally speaking, they systematically squander their resources in order to stabilize the existing socioeconomic power structures.

Generally speaking, if you invest your money in a historically kleptocratic country, you can expect your investment to get confiscated if it's profitable, and possibly even if it's not, which is what happened to my retirement savings. Even if you make your investment at a time when the country is governed by non-kleptocrats, you will probably lose it after the next coup or election in which new kleptocrats come to power.

In that environment, where private investment in long-term infrastructure projects is irrational and languishing in poverty for many generations is the normal state of affairs, state capitalism frequently works.

I don't think moral arguments about atrocities are somehow orthogonal here. Power plants and electrical grids are often worthwhile investments, not because building monuments to Westinghouse is a pious sacrifice that pleases the electrical gods, but because they promote human welfare by providing material abundance. That's how we measure whether society is richer, not, as you say, by the amount of concrete poured. If human welfare is your yardstick, the possibility of economic catastrophes like the Holodomor greatly diminishing human welfare must necessarily weigh on the negative side of the balance. The inhabitants of Auschwitz and the Congo Free State were not enjoying even the material abundance they had enjoyed previously.

So we know that central planning carries risks to human welfare that decentralized systems do not. However, it also has opportunities to promote human welfare that decentralized systems do not. The variance is larger. I don't think we know enough to measure the expectation.

Sure, running a business in kleptocratic hellholes is a nightmare. Confiscation risks kill private investment, especially for big infrastructure that needs stable property rights and enforceable contracts to make sense.

But that's not a bug of decentralized markets; it's the poison of political interference and weak institutions, which state capitalism only doubles down on by swapping entrepreneurial discovery for bureaucratic fiat, still without solving the calculation problem or providing systematic feedback beyond "stuff got built."

Look at Hong Kong in your list: it boomed precisely because of its hands-off, free-market approach with top-tier economic freedom rankings, unlike more interventionist tigers that rode credit-fueled waves but crashed in '97 or stagnated like Japan post-bubble.

Atrocities are the dark side of concentrated power touted as enabling opportunities, jacking up variance with no way to gauge if human welfare gains beat the unseen costs of foregone innovations.

Without prices and profits guiding resources, we're left guessing expectations, but history shows freer systems deliver sustainable abundance when institutions let them, not coerced escapes that often loop back to poverty or worse.

This is the right way to think about the problem if you're faced with the problem of what country to start an electric power company in. But it's not very helpful if you're faced with the problem of how to govern Pakistan, which is certainly not a hellhole but does suffer major corruption problems. The political interference, weak institutions, concentrated power, and official corruption are largely givens; you can work to change them incrementally, but you can't just import the government of Hong Kong. Even if you could, you couldn't convince investors that the reforms would stick this time, for real.

Perhaps, if you could obtain political power that you could retain stably for decades, you could make pretty big changes there, but only at the cost of further concentrating power, creating opportunities for even greater corruption profits for whoever can wrest power away from you. Nobody has ever held power for decades in Pakistan's history. Even Nawaz Sharif didn't make it to 10 years in power over his three (non-consecutive!) terms. If you simply liberalize economically without eliminating the confiscation risks that kill private investment, private investment will not magically materialize without the private investors, who are sensibly investing their savings in a 7-11 franchise in Cleveland, Ohio.

So, what can you, hypothetically governing the country, do under these constraints?

A proven strategy is public investment, like Airbus, like the military contracts that sustain Boeing, like the Hoover Dam, like the Rural Electrification Administration, like federally guaranteed student loans, like the interstate highway system, like Volkswagen, like Tupolev, like Rosatom, like Industrias Aeronáuticas y Mecánicas del Estado, like the Apollo Program, like Huawei, like Westinghouse's nuclear power division, like the ARPANet and NSFNet. Certainly the money won't be invested as wisely as if savvy entrepreneurs like Warren Buffett were directing it, and neither Warren Buffett nor Juan Perón is going to do a good job at investing in unforeseen innovations; but, even if most of that investment is wasted like Project Huemul, it can still dramatically augment the economic productivity of the country, under circumstances when private investment is unavailable. Often such productive capacity will eventually make the country more appealing to private investors, but that can take a long time.

In this situation, you aren't faced with the choice between state capitalism and regular capitalism. You're faced with the choice between state capitalism and no capitalism.

Thus, state-guaranteed loans to build power stations.

Catlover76 asks in a [dead]ed comment, "And China, right?" It's a reasonable question. It's debatable whether the infrastructure of the parts of China I didn't mention was built by state capitalism or by a straightforwardly Communist system of production, so I only mentioned the more clear-cut cases.