In a marked departure,the government would guarantee subsidy to new and expanded urea plants for eight years from the start of production provided the additional capacities are added within five years of the announcement of the New Investment Policy (NIP) 2012.
Only those units which start production within five years from the date of the notification of the NIP 2012 would be covered under the policy. The (pricing) dispensation will be available for eight years from the start of production, says the agenda note for the Group of Ministers which meets on Friday.
Thereafter,it will be governed by the urea pricing policy prevalent at that time, the note prepared by the Fertilisers Ministry says. It claims that the country would save Rs 4,764 crore per annum if the new incentives add 7.62 million tonnes of capacity,enough to make the nation self-sufficient for the next 10 years. At present,domestic urea output stands at 22 million tonnes while consumption is pegged at 29 million. The NIP for urea sector,first launched in 2008,was also open for investment within five years but was non-committal on price support. Once production under various projects start within the given time period (of five years),pricing dispensation will be available till the continuance of the fertiliser subsidy regime and sale of urea under the same, it had said.
That uncertainty failed to lure investments other than in revamp of a few existing plants that added 2 million tonnes to annual domestic capacity. Investors want adequate protection either through fixed natural gas price or through assured return on equity (RoE) before pledging their money in new plants or expanding existing ones. The cost of production even at current gas prices is much more than notified retail price,hence the viability of the investments are dependent on government policy relating to subsidy The floor price has been determined at an RoE of 12 percent and the ceiling price at RoE of 20 percent, says the proposal.
The NIP 2012 therefore fixes a higher floor and ceiling price band while introducing the option of varying the floors and the ceilings depending on the gas price.