The Hindu Business Line : Urea producers seek more clarity in pricing policy

THE Union Government has given an opportunity to old, non-gas-based urea units to modernise themselves by formulating a policy in tune with the process of decontrol of the industry.

The new policy, announced by the Government on January 29, 2004, has three components. The first is for switchover of the existing non-gas-based urea plants to natural gas (NG) or liquefied natural gas (LNG)-based plants, the second is for de-bottlenecking and modernisation of the existing urea units, and the third is a pricing policy for investments made in new and expansion projects of urea.

Industry sources said that the urea producers are satisfied with the new policy but want more clarity with regard to the pricing policy.

On the other hand, the producers are happy with the Government's decision not to `mop up' the operational efficiency, including energy efficiency arising from the conversion of naphtha-based plants to NG/LNG for a period of five years and for a period of 10 years in respect of conversion of fuel oil-based urea units to NG/LNG.

These units will continue to get their group-based concession rate as before.

The general feeling among the urea producers is that they will be able to recover their investments made for the conversion during the time stipulated by the Government. Even in the case of de-bottlenecking and modernisation of the existing urea units, the Government policy stated that the units would be allowed to retain any energy efficiency gains arrived out of such measures and "it will not be mopped up for any revision in the pre-set energy norms" already notified under the New Pricing Policy.

The Government pricing policy for investments made in new and expansion projects of urea stated that the projects would be given concession on the principle of (long-run average cost) LRAC determined on the project life of 15 years.

The concession based on LRAC price so determined would be available for a period of five years from the date of commercial production. In the event of decontrol of urea pricing before the five-year period, the concession to be given to new and expansion projects would be reviewed separately by the Department of Fertilisers.

The LRAC of the new and expansion projects, as per the Government policy, will be determined on the basis of debt-equity ratio, capital cost, applicable depreciation, 12 per cent post-tax return on equity, interest on borrowings, repayment period of the loans, working capital norms as applicable and discount factor calculated on the basis of weighted average cost of equity and loans.