The need for
additional urea production
Proposed fertilizer policy draft trapped in
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
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
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.
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
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.