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Fertilizer industry and government policy.

Government Policy

In 1992, the government decided not to set up any fertilizer unit in the public sector and leave this highly profitable sector entirely to the private sector. Moreover, it has also been decided to privatise some of the existing fertilizer units operating in the public sector.

The government also decided to deregulate the economy and exploit the potential of private sector in increasing the fertilizers production in the country.

INCENTIVES

To achieve the objective, following concessions and facilities have been allowed to new projects and existing units envisaging expansion as further confirmed by the Ministry of Industries, Government of Pakistan vide their letter No. 6(6)/87. P-III dated August 23, 1995.

i. Assured supply of gas at existing price for the purpose of feed-stock for a period of 10 years from the date of operation of plants.

ii. Duty free import of machinery not manufactured in the country. This exemption will include Iqra surcharge.

iii. Duty free import of phosphate rock. The exemption will include Iqra surcharge.

iv. In the unlikely event of imposition of price control, the ex-factory price will be so fixed that a minimum return of 20% on equity after tax at 90% capacity utilization is assured.

v. The entrepreneurs would be allowed to import second-hand machinery, if they so desire.

vi. The gas used in the reforming furnace for heating will be treated as feed stock.

vii. Assured supply of gas used as fuel at least for 9 months in a year.

viii. All the fertilizer producers domestic and foreign, public and private will be treated equally.

ix. It would be the responsibility of the DFIs to check the economic and financial viability of the projects before providing finance.

x. Expansion would be treated as new plants and be entitled to the same concessions as allowed to new plants.

xi. In order to avoid any ambiguity, imports duties, if any, will be so adjusted that the C&F prices plus the costs of bagging, excluding other incidentals, does not fall below the equivalent of US$250 per ton.

xii. Iqra a surcharge on sulphur specifically imported for the manufacture of fertilizers is waived.

In fact, Pakistan badly lagged behind in the manufacture of phosphatic fertilizer, which is imported in large quantities to meet the rising domestic demand. The slow progress in the development of phosphatic fertilizer manufacturing capacity, commensurate with the rising demand, is explained by the absence of adequate rock phosphate deposits in the country. A relatively limited quantity of deposits in Hazara district is reported to have been developed by the Sarhad Development Authority by establishing a purification plant to upgrade the quality of the available rock phosphate.

Pakistan has been importing rock phosphate from Jordan and other sources to feed the existing phosphatic fertilizers manufacturing plants which have a combined capacity of about 203,000 tonnes per annum while the demand is more than thrice as much which is met through imports.

Two plants are now being set up for phosphatic fertilizers that will make Pakistan self-sufficient in this kind of fertilizers. The production capacity of these two plants is 835,000 tonnes.

Until 1993, the government had fixed the price of fuel gas. In 1993 the government changed this policy and is now imposing an import price parity formula whereby the "gas" used as fuel for power generation would be charged at prices equal to the domestic price of "fuel oil" on energy content basis. As a result, during 1993 prices were raised by about 40 per cent. Industry responded by raising prices to recover part of the fuel gas cost increase. Further increase in gas prices are expected, but prices of urea will rise accordingly. It should be noted that in the overall cost structure, gas accounts for 33 per cent of total cost, and gas for fuel purpose accounts for only one-third of total gas consumption while feed gas (prices of which are fixed for the next 10 years and are currently 18 per cent of market prices) is the remaining two-thirds.

In January and February of 1995, gas supply was reduced. Fauji and Engro managed to continue production. Their ability to operate at above design capacity meant that the disruption brought production levels to only marginally below capacity. Therefore, they suffered no operational problems. Pak-Saudi, however, had to shut down. Although, the government has intimated that there would be no further disruptions this year, this action has set a precedent. Industry sources feel that this will become a trend as long as the energy shortfall continues.

If natural gas supplies are given to the manufacturers as per their requirements, then the quantity of urea to be imported in 1996 will be at above the same level as in 1995. It is expected that by early 1998, when the FFC Jordan Fertilizer Company urea/DAP facility at Port Qasim begins to operate, urea could become surplus in the country. However, in view of the increasing demand, the surplus situation is expected to be of a short duration. Since the urea to be produced at Port Qasim will be granular, there should be a good export market at a premium price for this urea. The DAP/TSP requirements will continue to be met by imports till the FIFC facility starts operating meeting about fifty per cent of the demand.

Effect of Budget 1996-97

In Budget 1996-97 the sales exemption on natural gas will remain, a 5% sales tax will be imposed on raw material for fertilizers, and corporate tax will be 36% as against 33% in the current year. The budget remains as neutral for the fertilizer industry and it is not expected that the strong growth in this sector will be deterred. Urea manufacturers, Fauji Fertilizer and Engro Chemical will remain unaffected as the exemption on natural gas, the main input, remains in place. However, phosphoric acid, which is the main raw material for the manufacture of DAP will be taxed at the rate of 5 per cent; this will affect the earnings of Fauji Jordan Fertilizer since the total project cost will be higher and depreciation expenses will rise.

This project is expected to come on line in 1998, and with this and other factors causing an increase in gas prices, there might be some pressure to increase DAP prices as well. The increase in corporate tax will not affect FJFC which has an eight year tax holiday.

Privatisation of Pak-China Fertilizer Limited

The Government has privatised Pak-China Fertilizer Limited, Haripur, a unit of National Fertilisers Corporation Limited in 1992. After privatisation of this unit the government has now announced to privatise the following fertilizer units.

i. Hazara Phosphate Fertilizer Limited (Hazara)

ii. Lyallpur Chemical and Fertilizer Limited (Faisalabad)

iii. Pak-Arab Fertilizers (Pvt.) Limited (Multan)

iv. Pak-Saudi Fertilizers Limited (Mirpur Mathelo)

v. Pak-American Fertilizers Limited (Daudkhel)

The privatisation of Pak-China was criticised at several levels. The NFC Officers Welfare Association in an open letter to the President Farooq Ahmad Leghari has said that the Privatization of Pak-China Fertilizers Limited did not produce positive results.

It was said in the letter that the unit was privatised in May 1992 and was handed over to Schon Group. This unit is designed to produce 100,000 tonnes of urea/annum and employed 688 people including 127 officers when the unit was privatised.

It was further said in the letter that Schon Group did not even honour the contracted commitments with the Privatisation Commission, Government of Pakistan. This resulted in litigation between privatisation Commission and the Schon Management. Government could not gain anything by selling this valuable project.

The Association said that Schon Group manipulated to export Urea to India at a crucial time when there was shortage in the country. This resulted in Urea imports involving huge foreign exchange. Now when there is no export order the Schon Management is not interested in producing Urea for the country. The plant has been closed down and a large number of employees have been rendered jobless.

It is also alleged that Schon Group has never paid even its 2 per cent price. The Group is defaulter for the remaining instalments. It has also pocketed Rs. 10 million from the government on behalf of Pak-China Fertilizers and have further pledged the housing colony of Pak-China for Rs. 400 million.

It is said that privatisation of Fertilizer Industry is abound with serious pitfalls. It can ruin the agricultural economy. The Association requested the President that to save Pak-China Fertilizers Limited, the only Urea plant in NWFP from liquidation, its management should immediately be reverted to National Fertilizer Corporation. The accounts could be settled in due course, but there should be no delay in starting the operations of this plant.

Privatisation of Pak-Saudi Fertilizer Limited

In April 1996 an attempt was made to privatise this unit through sale of 80 per cent shares along with management control by an open public auction. The notable aspect of the privatization of this fertilizer manufacturing plant, was the participation by the leading names in the fertilizer industry namely Engro Chemicals and Dawood Hercules in addition to Dewan Group which has an outstanding record as industrialists in Pakistan. Engro Chemicals reportedly offered Rs. 105.00 per share while Dawood Hercules group went up to Rs. 107.00 per share. The auction reportedly started with beginning bid price of Rs. 50.00 per share which was offered by the company's employees group. The successful bidder, with the highest bid price of Rs. 109.00 per share, reportedly belonged to Schon Group of Pakistan who participated under the name and style of Emirates Investment Group of United Arab Emirates, with whom it seems, are associated some UAE investors and businessmen.

The successful bidder would be paying for 80 per cent shares of the company partly in the form of down payments and partly through deferred payments as usually followed in the privatization of state enterprises. It is not clear whether the highest bidder, known as Emirates Group, would pay the bid price in foreign exchange in case the group is based in UAE. Payment in foreign exchange would be an additional benefit to the government to be accrued from the privatisation of the Pak-Saudi Fertilizer Company.

Of the 20 per cent shares left out of the scope of privatisation, 10 per cent shares are reported to have been earmarked for the employees to subscribe while 10 per cent of the shares would include in the Mutual Fund which is being launched by the Privatisation Commission.

The sale of Pak-Saudi Fertilizer was challenged by the employees group for not allowing it to offer a matching bid price for the buy-out of the said company. Pak-Saudi's name again appears in the list of units that are going to be privatised. This shows that the deal with the Emirates Investment Group could not go through.

The consultant to National Fertilizer Corporation (NFC), Mohammad Ali Bucha, has suggested to the government not to privatise the unit in the larger interest of farmers. In a letter to the Prime Minister. Bucha said that, if sold to private sector, the NFC would supply its product at exorbitant rates. Moreover, the fertilizer would also be short in weight and poor in quality, the consultant said. He said that there was no justification for the disposal of the unit which has been earning profit. The NFC in Sindh produces 600,000 tonnes of urea annually. It meets 20 per cent of the overall urea fertilizer requirement of the country. This has made it highly profitable as it earns Rs. 1.25 billion profit per annum.

Being the most profitable, NFC provides subsidy to loss making units, such as super phosphate and ammonium sulphate fertilizers producing units. In fact, being in the public sector, Pak-Saudi acts as balancing arm for controlling urea prices. With the privatization, the private sector will have monopoly. This would hurt the farmers and the agriculturists and the agriculture sector, Pak-Saudi also supports fertilizer research and development institute the only institute of its kind to undertake research and development in fertilizers under the aegis of NFC. This activity would stop with privatisation of Pak-Saudi. Several thousand families would lose their bread and butter, particularly those affiliated with National Fertilizer Marketing Limited, he said. He said that Pak-Saudi was 'being purchased by Schon Group' who previously bought Pak-China fertilizers of NFC and proved a defaulter. Pak-Saudi contribution to national exchequer estimated about Rs. 1.7 billion annually in the shape of taxes, duties, dividend and net profit. Thus PSFL is a bumper profit earning unit and its sale shall deprive the government of a permanent source of revenue.
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Title Annotation:Pakistan
Publication:Economic Review
Article Type:Industry Overview
Date:Jul 1, 1996
Words:2112
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