No end to fertiliser investment famine?

No end to fertiliser investment famine?
29 Aug, 2007, 0551 hrs IST,KG Narendranath, TNN

NEW DELHI: The new investment policy for the fertiliser sector, reportedly being planned by the government, is apparently based on the notion that tax sops would prop up investor confidence. For new units, it proposes import duty waiver on project imports and an income-tax holiday that would last the first 10 years of commercial production.

Coming as it does after the abject failure of the extant policy (which was unveiled in January 2004) in attracting investment in this crucial sector whose robustness would decisively impact the country’s farm output and income, utmost care ought to be taken to avoid another bad formulation.

The fertiliser industry is none too happy with policy options that have already been proposed. It says investment would rather be attracted through a pricing policy that would appear potentially more remunerative for the manufacturers, than a host of tax sops that are anyway more or less there for new investors. “Insofar as the policy on the cards represents abandoning the cost-plus system for pricing, it is welcome,” said an official of the Fertiliser Association of India (FAI).

At best, tax sops would supplement the pricing policy to attract investments. Understanding the dynamics of the gas economy given the international trends and growing internationalisation of gas prices, industry officials say a strict import-parity pricing would help every stakeholder more than tax sops. This stance, of course, is after reckoning the fact that the government would find it difficult to decontrol the final price (MRP) to the farmer.

Project costs — sum total of capital costs and conversion costs — are significantly lower in India than in gas-rich countries in the Gulf. With gas prices tending to go up and settle at higher levels in medium-to-long term and the tendency among gas producing countries to align gas prices with the prices at which they can export LNG, the Indian advantage is, in fact, getting buttressed.

No longer does the option of setting up joint venture projects abroad with companies in gas rich regions seem something to readily fall on for Indian fertiliser companies. “Omifco, the JV of India’s Iffco and Kribhco with Oman Oil Company, can make urea at low cost because of gas available at 77 cents per mBtu. A new project like this wouldn’t be able to get the feedstock at less than $3-4,” said another FAI official.



An industry official told ET that the government’s objective of making producers’ price largely uniform might not necessarily enthuse potential investors who are concerned about the commercial viability of the fertiliser business. He said the reported proposal of Reliance Industries to set up two big fertiliser units of two-million-tonne capacity each could be contingent on decontrol or at least, a rational pricing policy for the producers.

One of the options under the policymakers’ consideration is to let a new pricing system linked to import parity supplant the present cost-based pricing which places a lot of onus on the industry to justify its price.

Additionally, there would be tax sops to spur investments. Considering that there is a huge difference between the import price and domestic price right now — weighted average price of domestic urea units at the farm gate (dealers’ end) is cheaper than import price by around Rs 4,000/tonne — the industry wouldn’t have faced a problem immediately.

But it is still jittery. “What is being proposed is to allow up to 90% of import price, exclusive of customs duty, but inclusive of ocean freight and port handling charges. This might not remain a very safe option for 10-15 years (usual tenure of purchase contracts which the government enters into with new urea units) given the volatility in global gas market,” said an industry official.

One of the options being evaluated by the chemicals and fertilisers ministry is to introduce the reverse bidding process for the setting up of new fertiliser plants, as in the power sector for mega plants. Keen to rationalise fertiliser subsidy and introduce an element of certainty about its size, the ministry is also considering allowing traders to bid if they can guarantee supply on agreed terms.

Although this would appear a logical way to fix the government’s subsidy burden, it does not take into account the fact that the fertiliser units wouldn’t be equipped with long-term feedstock supply like mega power plants who have captive fuel. Says Kribhco MD BD Sinha: “The new policy must give an explicit assurance regarding the return on capital to make the projects bankable. The assurance could be contingent on optmising the capital cost.”

Although this would sound asking for too much, it brings to the fore the fact that so long as the government controls the final price to the consumer, the options to attract investment in the fertiliser industry are indeed few. And this constraint is despite the fact that India would import about 6 million tones of urea this year and the Planning Commission’s projection is to increase the domestic capacity to 30 mt by the end of the 11th Plan from the present 20 mt.