. .



Fertilizer
The need for additional urea production

Proposed fertilizer policy draft trapped in multiple controversies

By SHABBIR H. KAZMI
May 21 - Jun 03, 2001

The proposed fertilizer policy draft seems to be trapped in multiple controversies. It seems that the Ministry of Petroleum and Central Board of Revenue (CBR) have rejected the proposed incentives by Ministry of Industries and Production to the sector. On top of this there is pressure on the GoP from international lending agencies to end subsidies. As a result a question mark on the proposed fertilizer policy has arisen and the required investment to add about 2.5 million tonnes per annum urea production capacity has been delayed. If this capacity does not come on-line as per desired schedule, the country will be forced to import urea.

Many sector analysts fail to understand the logic of Ministry of Petroleum and CBR. It is unfortunate that the Ministry and CBR not only suffer from myopic vision but also fail to calculate the adverse impact of delay in expanding urea production in the country. These analysts also say that the short-term objective increase in revenue should not be achieved by increasing import bill and making the country dependent on imported urea. As such Pakistan is forced to import a substantial quantity of DAP type fertilizer because its production in the country is not a economically viable proposal.

The sector analysts say that the policy planners must understand three basic points before making the final decision. First, fertilizer manufacturers are not asking the GoP to supply gas (feedstock) at subsidized rate. They want feedstock price in Pakistan to be comparable with the gas price in the Middle East. Even the current feedstock price in Pakistan is three times the price prevailing in the Middle East. Second, Mari gas field supplying feedstock to three urea manufacturing companies is not of 'pipeline' quality and this cannot be used in power plants due to lower BTU value. Third, the area under cultivation in Pakistan suffer from low nutrient contents. If the GoP is serious in increasing yields of various crops, balanced use of fertilizer has to be ensured. This can only be achieved by making fertilizer affordable.

The sector analysts strongly believe that the resistence against supply of low cost feedstock is based on the allegations that fertilizer companies make substantial profit. However, this argument does not carry much weight. Many other industries despite enjoying similar incentives have been failing in posting profit. Fertilizer manufacturers have been able to earn good profit because most of the units work above designed capacity. Since 1985 installed capacity has been increased two-fold due to strong cashflow. Fauji Fertilizer has increased its capacity and Engro has not only expanded capacity but also diversified its business.

These analysts say that subsidies are commonly provided by most of the developed countries. Therefore, lenders are not justified in asking Pakistan to withdraw subsidy, particularly to the agriculture sector.

However, it is imperative for the policy planners to convince the lenders in the best possible manner. The lone convincing argument is that Pakistan's entire economy, large scale manufacturing sector and social fabric is dependent on agriculture. Any attempt to damage this fabric would have the far reaching consequences.

Production of four of Pakistan's major crops wheat, rice sugarcane and cotton is directly dependent on balanced use of fertilizers, adequate supply of water is a must. Since the cultivable area is limited, balanced used of fertilizer is a prudent way to achieve higher yield. Size of these crops also have a direct impact on balance of trade and overall GDP growth rate.

Outlook

Since the country does not have any other alternative, the GoP must announce the feedstock price for the next ten years immediately to ensure expansion in urea production capacity. Pakistan can also earn extra foreign exchange, by exporting surplus urea, to finance DAP import. Feedstock price should be comparable with gas price in the Middle East.

The status of Mari gas field should not be changed and gas supply to urea manufacturing should be enhanced. The expansion in installed capacity at the three units linked with this field would be at the least cost and without any additional load on national gas supply grid.

The policy planners should also realize that the delay in announcing fertilizer policy has hampered privatization of fertilizer manufacturing units.

Last but not the least, the policy planners must convince the lenders about the importance of agri sector and the adverse impact of withdrawal of subsidies on social fabrics. Food self-sufficiency is more important than any other arsenal to protect the boundries of Pakistan.