Time to rectify the past mistakes

May 09 - 15, 2005

The present government takes pride in saying that it is following three-pronged policy of deregulation, liberalization and privatization. And it also expresses willingness to withstand its commitment of pulling itself out from the business of managing business and facilitating the private sector. However, fertilizer sector, despite most of the units owned and operated by the private sector, remains in the shackles of state control. It is evident that the Fertilizer Policy 2001 had failed in paving way for the establishment of new fertilizer plants in the country. The reason being that gas (feedstock) pricing policy is the major tumble bloc it has not been removed in last four years.

One of the key reasons for the gross negligence is over indulgence of a number of ministries, both federal and provincial, in the affairs of the industry. While the involvement should have helped in quick decision making, there seems to be 'beating around the bush'. Almost all the settled issues are talked about in every meeting but decision has come about feedstock pricing the factor on which fresh investment is solely dependent. On top of this a new debate has been initiated, should the power sector be given preference over fertilizer sector, while making gas allocation?

According to some sector analysts, the debate is totally irrelevant. In the Fertilizer Policy 2001, Mari gas field has been reserved for the fertilizer industry. Therefore, the question of supplying gas from this field to power plants does not arise. In fact the supply of gas from this field to WAPDA should have been stopped and diverted to fertilizer plants. At present three urea plants, controlling the largest share of the market are supplied gas from this field. Gas supply to these plants can be increased with the least capital expenditure by Mari Gas Company the operator of the field. In fact over the years fertilizer companies have laid their own pipelines from well-heads to plants.

And following the same practice for the future supplies, Mari Gas Company would not have to make any capital expenditure.

For decades experts have been saying that using gas for power generation is like cooking food by burning the US dollars. However, WAPDA and KESC have been allocated more and more gas for power generation. The state-owned utilities have been pleading that gas is a cheaper fuel and its use can help in containing the cost of generation. However, the fact is that the persistent increase in electricity tariff is not because of higher cost of fuel oil but the transmission and distribution (T&D) losses, which are as high as 40%. If the authorities still have doubts they should compare the cost of fuel per unit incurred by the IPPs and the state-owned utilities. The record will prove that use of gas cannot help in bringing down the tariff. The tariff can only be brought down by bringing down T&D losses to a realistic level of less than 10% compared to the present level of around 40%.

Failure in adding new fertilizer production facilities has led to growing import of urea. And the quantum would continue to rise with the passage of time historically fertilizer demand has been growing around 10% every year. Even if any sponsor decides today to set up a fertilizer plant, it would take five to eight years to commence commercial production.

Having reached the conclusion that the country has to import urea, the government has decided to import it through the Trading Corporation of Pakistan (TCP) yet another move to maintain state control. However, the decision looks outrageous because imported urea has to be sold through fertilizer companies ultimately. The imported quantity is normally allocated to these companies according to their market. Therefore, the prudent approach would have been to allow the fertilizer companies to import the allocated quantity themselves.

Apparently, the decision to import urea through TCP was aimed at calculating the quantum of subsidy because international prices of urea are higher compared to the price of locally produced urea. There is no justification for paying any subsidy because the imported urea would constitute only a small percentage of their total sales. In fact local producers should have been allowed to increase the selling price marginally to compensate for the higher cost of imported urea.

It is necessary to reiterate once gain that gas is not supplied to fertilizer manufacturers at subsidized rate. The gas supplied to fertilizer plants is far inferior to 'pipeline' quality gas. Therefore, it is sale of low quality gas at a discounted price compared to pipeline quality gas. And there should not be any more discussion regarding supply of gas at subsidized rate to fertilizer manufacturing units.

Import of urea could only be a make-shift arrangement but could not be an alternative for locally produced urea. The country needs to add another two million tonnes manufacturing capacity to maintain self-sufficiency. Therefore, the government must come-up with feedstock pricing formula for the new plants without any further delay. Four years have been lost in an uncalled for debate. Why waste more time?