Incentive-linked package & new pricing policy for urea plants

The Centre has cleared a package for long-term investment and pricing policy for greenfield plants and expansion of existing urea units and also for conversion of existing naphtha-based units to natural gas-based units. The incentive-linked package is expected to pave the way for private and cooperative sector investment for setting up state-of-the-art urea units, besides facilitating participation of FIs, after assessment on financial viability and productivity of the new plants.
Spurred by the need to close the estimated four-million tonne shortage of urea by the end of the 11th Plan period (2011-12), The clearance from the Cabinet Committee on Economic Affairs (CCEA) came yesterday on the back of four-mt shortage estimated at the end of the 11th Plan period (2011-12). It was based on recommendations of a group of ministers.
The investment incentive for new units involves retaining the long-range-average-cost principle for a period of five years, with a view to building in a 12% rate of return on equity and international standards of plant efficiency, before the government reviews the concession norms against the prevailing delivered price of imported urea. The clearance of the new units/expansion package is expected to give a fillip to an expansion plan submitted by Kribhco, cooperative sector fertiliser major, to scale up its urea capacity by 10.56 lakh tonne and ammonia by 6.10 lakh tonne.
In conversions, the government would save around Rs 1,000 per tonne in subsidy on account of differential between naphtha and LNG prices. The incentive provided to private and cooperative sector now envisages that the savings will be retained with the plants for a specific period. The duration has not yet been specified but this will mean that for that duration, there will be no additional subsidy.
Industry estimates had pegged the conversion costs from naphtha (naphtha is surplus in the country but, less energy efficient than gas) to LNG for individual units in Rs 25-75 crore range. For new and expansion projects, the fertiliser ministry has based the cost of production on the principle of long range average cost, primarily with a view to providing adequate cash flow for the industry to meet the debt services over the life of the project.

The approach involves projecting, at constant prices, the capital and operational cost of a unit over its lifespan. This is discounted from the weighted average cost of financing the project to arrive at a price that will make running the project viable in the long run.
According to fertiliser minister S S Dhindsa, the policy of long range average cost will be retained for five years from the date of the new/expanding unit starting commercial production. The government will then review the concessional norms in order to weigh the options of long range average cost estimated price and the delivered price of imported urea. The CCEA’s decision on a concession package to encourage quick conversions of naphtha-based urea units to LNG/natural gas-based urea units is aimed at increasing energy efficiency and lowering production costs fast, so that a competitive edge is acquired double time by these units in a liberalised economic scenario. The incentives planned are expected to lure the private and cooperative sector into investing in conversions. A statement from the government said today “The fertiliser department has analysed that the de-bottlenecking, revamping and modernisation of the existing gas-based plants will be the quickest and most efficient mode for supply of additional urea. Such investments contributing to additional capacity have also been given significant incentives under the new dispensation, with retention of energy saving gains and coverage of additional capacity at the existing group-based price of urea.�
The government has already implemented the group-based pricing policy for urea units from April 1, 2003. That is estimated to have encouraged urea units to produce beyond 100% of the installed capacity. With a view to further liberalising the industry and boosting new investment, the government also separately finalised and notified a joint venture policy for installation of units abroad. Earlier this month, it also cleared a two-group subsidy policy for DAP.