FERTILIZER AT AFFORDABLE PRICE

The GoP must withdraw all taxes imposed on imported non-nitrogenous fertilizers to encourage balanced used of fertilizer

By SHABBIR H. KAZMI
May 19 - 25, 2003 

Many fertilizer sector experts are talking about the impact of increase in gas (feedstock) price on earnings of urea manufacturers. However, they are completely ignoring the high rate of duties on imported fertilizer having potassium and phosphate. Since the prices of these two types of imported fertilizers have going up substantially in the domestic market, farmers are using over-doze of relatively low priced urea, in the hope of maintaining/improving the yields of various crops. It is not only a waste of resources but certainly leads to further decline in already low yields.

Lately, the World Bank has asked the GoP to abolish the subsidy being paid on feedstock. On the face value, it is not appropriate, as the GoP has already announced the phased increase in the price of feedstock in its Fertilizer Policy. Any attempt to change this plan can only be termed inconsistent. It is understood that the phased increase was announced in consultation with the international financial institutions. Therefore, their pressure on the GoP to come up with an amended policy can only be termed 'arm twisting'.

There is a common belief, also endorsed by the international financial institutions, that supply of feedstock at subsidized rate is a fiscal distortion. It is totally incorrect because the GoP explicitly discloses this figure in the federal budget. Since the feedstock tariff and its quantity used by the fertilizer manufacturing units are disclosed fully, the figure given in the budget can be verified. As a principal, it has been accepted globally that agriculture sector cannot flourish, even survive, without subsidy. If this principal is accepted in case of developed countries, pressure on Pakistan is neither legitimate nor acceptable on moral grounds. Particularly because Pakistan's economy, manufacturing and exports are heavily dependent on agriculture sector. Agriculture is the main source of income for bulk of the population living in rural areas.

Firstly, it is necessary to reiterate the point that the fertilizer manufacturers do not get the feedstock at subsidized rate. It is sale of low quality gas at discounted price. Secondly, knowing the fact that gas supplied from Mari field is inferior in quality and cannot be used efficiently as fuel by the industries, the GoP has dedicated this field to fertilizer industry. Thirdly, fertilizer plants have the preemptive right on the field because they have made huge investment in pipelines, connecting field with the units. The field operators have hardly made any investment for developing gas supply infrastructure, to the extent that gas is supplied at wellhead pressure. Fourthly, the wellhead pressure has gradually come down necessitating installation of gas compressing units. It is understood that the field operating company is not making even this investment. Fertilizer units have already undertaken installation of compressors at their sites.

The basis for demanding the increase in feedstock price is the belief that gas from Mari field can be used as fuel by the power plants. However, this is also incorrect. Since discovery of field in fifties and commencement of gas supply to its first customer in mid sixties, only one power plant has been linked to this field. Whereas, three large fertilizer manufacturing units get the gas supply from this field. The fact is, over the years Engro Chemical has expanded its installed capacity from 148,000 tonnes to 850,000 tonnes. Fauji Fertilizer has doubled its installed capacity. Pak Saudi Fertilizer Company, now merged with Fauji Fertilizer Company also gets gas from this field. Therefore, it may be right to say that about 85% of total installed urea manufacturing facility in the country gets feedstock from this field. All these units have plans to further increase their capacities for which they require additional supply of gas.

As regard supply of gas from Mari field to power plants, one can only say that it is not practical. At present only one power plant gets gas from this field through a dedicated line. To supply gas from this field to other power plants, either dedicated lines have to be laid down or the gas from this field has to be injected into the existing transmission and distribution network. The first option is not viable economically. If the GoP opts for the second option, it may increase the supply but will also bring down the average heat value of the entire gas supply. On top of this injection of gas from this gas field, containing higher percentage of carbon dioxide, into the national grid will cause higher pollution throughout the country.

After reaching the conclusion that feedstock is not being supplied at subsidized price and that the gas from Mari field is not available for any other use no effort should be made to change the proposed price increase formula. Any attempt to amend the policy is a breach of promise. The donors must also not put pressure on the GoP to change the policy. If the government is serious in bringing down fertilizer prices, withholding tax and GST on imported fertilizer should be withdrawn immediately. The GoP should also fulfil the promise of adjusting withholding tax against corporate tax, a promise made in the Fertilizer Policy.