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Uttam Gupta

The Kribhco ammonia-urea fertiliser complex at Hazira: The implementation of the changes in policy parameters will pose a serious threat to the viability of a large number of fertiliser units and may even put at risk the very `existence' of some of them.

THE finalisation of the policy parameters under the seventh pricing period — July 1, 1997 to March 31, 2000 — and the eighth pricing period — April 1, 2000 to March 31, 2003 — has been hanging fire for almost five years now. In its meeting held on May 16, 2002, the Cabinet Committee on Economic Affairs (CCEA) has approved, in full, the policy package recommended by the Group of Ministers (GoM ) — under the Chairmanship of Mr K. C. Pant, Deputy Chairman, Planning Commission — in its meeting held earlier on April 17, 2002.

The changes in the policy parameters approved by GoM/CCEA include:

(i) Fixation of the norms for consumption of raw materials, utilities and other inputs on the basis of `actual' levels achieved during 1997-98 for the seventh pricing period and 1999-2000 during the eighth pricing period;

(ii) Withdrawal of the vintage allowance currently available at 5 per cent in respect of both the capacity utilisation and consumption of raw materials for plants more than 10 years old;

(iii) Reassessment of the capacity of the plants based on the recommendations of the Dr Alag Committee; reassessment has also been proposed for plants for which the Dr Alag Committee did not make any recommendation for reassessment;

(iv) Increase in the capacity utilisation norm for gas-based plants from the existing 90 per cent to 95 per cent and for plants based on naphtha and fuel oil from existing 85 per cent to 90 per cent, with effect from April 1, 2002;

(v) Bringing up the various items of cost — capital additions, conversion cost, working capital, marketing and selling expenses etc to the level of the costed year — 1997-98 for the seventh pricing period and 1999-2000 for the eighth pricing period.

At the outset, it is important to take note of the fact that vide a notification dated November 5, 2001, the retention prices of `13' units were revised downwards with effect from April 1, 2000 to reflect the revision in consumption norm on an `interim' basis using the actual level achieved during 1999-2000 as the benchmark. This resulted in recovery of about Rs 970 crore for the 19-month period — April 1, 2000 to October 31, 2001. On a pro rata basis, the impact for the three years of the eighth pricing period works out to about Rs 1,838 crore.

Prior to that, vide another notification dated May 23, 2000, the Government had `provisionally' reassessed the capacity of some `20' units with effect from April 1, 2000 and reduced their retention prices to reflect the consequential reduction in the capital related charges (CRC). The financial impact of this worked out to about Rs 450 crore per annum. On a pro rata basis, the impact for the three years of the eighth pricing period will be about Rs 1,350 crore.

The policy package approved by the CCEA has confirmed the above-mentioned reduction in retention prices on an `interim'/`provisional' basis. In view of this and since payments being made to the units already subsume the impact of capacity reassessment and revision in consumption norms for the eighth pricing period, it can be safely surmised that this would not be a part of the overall impact assessment by DoF as reported in the newspapers.

The Secretary, Department of Fertilisers, is reported to have said that the impact assessment exercise does not take cognisance of the recovery of Rs 1,374 crore already made from the industry. To which period does this recovery amount relate to? Surely, this cannot be for all the three years of the eighth pricing period! To get a `true' picture of the impact on the industry, we need to consider the whole impact, that is, Rs 3,188 crore (1,838 plus 1,350) of these two notifications.

Reportedly, the loss to the industry on account of adverse changes such as withdrawal of vintage allowance, tightening of consumption norms for the seventh pricing period, increase in the capacity utilisation norm, capacity reassessment for plants not covered by the Dr Alagh Committee recommendations, and so on, is Rs 1,833 crore. Against this, the gain primarily due to capital addition, increase in conversion cost, marketing and selling expenses is Rs 2,145 crore. The net impact works out to Rs 312 crore.

Now, juxtapose this with the whopping loss of Rs 3,188 crore on account of the capacity reassessment and revision in consumption norms for the period April 1, 2000 to March 31, 2003, the overall loss to the industry consequent to the policy changes under the seventh and the eighth pricing period will be Rs 2,876 crore (3,188 minus 312). The reported figure of Rs 1,062 crore understates this by Rs 1,814 crore!

The implementation of the changes in policy parameters will pose a serious threat to the viability of a large number of units and may even put at risk the very `existence' of some of them. Several units will be pushed into a state of perpetual loss. Already, a number of units are facing an unprecedented cash crunch as a result of the recoveries under the November 5, 2001 notification. While the finalisation of the policy may bring relief to some units, a majority of the plants will face liquidity crisis. The possibility of `immediate' closure of some plants cannot be ruled out.

Under the resolution issued on November 11, 1977 regarding introduction of the retention pricing scheme (RPS), the Government had promised to a urea manufacturing unit a 12 per cent post-tax return on the net-worth at normative utilisation of the capacity. Over a fairly long period, majority of the units have not been able to achieve this level of return. Only some of them could reach this level by operating the plant at high capacity utilisation. This indeed, has been a major reason for the substantial slow down in the pace of investment in this sector in the 1990s.

No new grassroot project was contemplated in the 1990s (a few projects commissioned in this decade were actually conceived and planned in the 1980s). There has been no foreign direct investment (FDI ) in this industry in the 1990s. Disillusioned with the woefully low returns, some of the existing operators have diversified into areas where returns are `attractive' and `stable'. The domestic financial institutions, banks and the shareholders are unwilling to take exposures. These disturbing trends will be aggravated under the policy package. Why have the units not been getting the promised return of 12 per cent post-tax? And, why will the changes in parameters make the situation worse? The answer to the first question is that there are substantial disallowances under various cost heads — project cost, capital additions, conversion cost and so on. By doing better than the norms fixed for energy consumption, capacity utilisation, and so on, under the existing dispensation, the units have been able to compensate for these under-recoveries and somehow managed to salvage the situation.

This brings us to the second question. Under the policy for the seventh and eighth pricing periods, the `actual' performance of the unit during an extraordinary year — 1997-98/1999-2000 — has been taken as the norm. As regards the normative production, apart from capacity reassessment, even the capacity utilisation norm has been raised by 5 per cent. For old units having low net-worth, the vintage allowance provided succour enabling them to generate the money needed for essential replacement and modernisation. This is being withdrawn.

The policy changes approved by the CCEA have taken away all these supports, even as the disallowances/under-recoveries persist. The Government has promised to look into the latter. How much relief will come as a result of this exercise cannot be said now. But the debilitating effect of the withdrawal of the incentives/supports will be felt `instantaneously'.

The unprecedented fallout of the `retrospective' application of these changes not only for the companies, but also, other stakeholders — exchequer, shareholders, workers apart from the financial institutions/banks, cannot be wished away. Imagine the nightmare associated with the re-computation of profits, taxes, dividends, compensation for the employees/workers, as per the relevant statutory provisions for the last `five' years!

(The author is Additional Director (Economics), Fertiliser Association of India, New Delhi. The views expressed are personal.)

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