Raising the forex liability?

The Independent Power Producers (IPPs) were invited to the country for investment to meet the emerging energy shortages and were offered lots of incentives for choosing Pakistan as a preferred destination for investment.
It is but natural that in order to preserve their privileged position, they would not like the local investors to copy-cat their mode of investment and make profits on comparable terms.
According to a recent news report, the IPPs have accused the local investors of converting Pak rupees into hard currencies for investment and, in the process, increase GOP's long-term foreign exchange liability.
At a recent meeting jointly chaired by the President and the Prime Minister, the representatives of the IPPs are reported to have cautioned that "the exchange rate adjustment allowed on foreign exchange of the equity provides incentive to local investors to convert rupees into foreign currency and invest in foreign exchange thereby increasing long-term liability of the GoP". However, the Federal Government has ignored the complaint of the IPPs.
The Private Power Infrastructure Board (PPIB) was of the view that though present policy encourages investment in foreign exchange, apprehensions of recycling local currency into foreign exchange for equity investment appear to be exaggerated. It was, nonetheless, suggested that the issue be decided by the Finance Ministry in consultation with the State Bank.
The IPPs are also reported to have asked for additional incentives. They demanded an increase in Return on Equity (RoE), application of US CPI on fixed and variable O&M, improvement in cost escalation on engineering, procurement and construction in accordance with NEPRA tariff and date of financial close.
It was also suggested that modalities be put in place to extend incentives to plants which would be run on higher efficiency and allow income tax on imported equipment as pass through. On the direction of the President and the Prime Minister, the PPIB was advised to frame a policy to resolve the IPIs' issues.
The whole episode, in our view, deserves close scrutiny. The problem seems to be basically rooted in the discriminatory treatment offered to the foreign and local investors whereby foreign investors are provided a better deal. The RoE, inflation indexation, custom duties and other rules are designed in a way so as to ensure an assured and better rate of return on equity to foreign investors. The recent demands of the IPPs, if met even by half, would further increase their profitability.
The problem is further accentuated when local investors may easily accumulate tax-evaded money due to loopholes in the tax system and corrupt practices, convert this money into foreign exchange easily and show it as foreign investment without any difficulty. All of this has created a situation where foreign investment through any means is encouraged by design or by default and this has obvious implications for long-term foreign exchange liability of the country.
The demand for conversion of rupees into foreign exchange also puts pressure on the rupee parity in the foreign exchange market. We believe such an anomalous situation can only be avoided if the government provides a level playing field to both the foreign and local investors and they are assured the same rate of return so that there are no distortions or room for arbitrage.
Local investors would, of course, continue to get their RoE in rupees but the incentive structure should be so structured as to eliminate, so far as possible, the inequity between the two groups of investors. We would urge the PPIB and other relevant authorities to suggest measures to move in that direction for sustainable development. At this juncture, the country, of course, needs foreign investment desperately but in the ultimate analysis it is the local investment that sustains and propels growth.