How beneficial is the urea fertilizer industry?

One (who was associated in the planning of fertilizer plants for over 30 years) is prompted to write on the subject seeing the dismal condition prevailing in the country as regards fertilizer -- its crisis, TATA's and KAFCO's interest in setting up new urea plants and surprisingly BCIC's no initiative in any new urea plants as the situation warrants. It is painful to see how a thriving and financially and economically most viable industry like "urea fertilizer plants in public sector" is being neglected and kept aside. It is a fact that for meeting domestic demand of urea, it is the public sector urea plant that serves the interest of the country most vis-a-vis foreign private sector/joint venture export-oriented urea plant. For public sector plant, negotiation of gas price is not required. Ex-factory price of urea may be fixed by the government as equivalent to the total production cost, if no profit is intended.

The next best solution may be setting up urea plant with completely local public shares. In such case government may allow a guaranteed return on equity (it was 12 per cent in India around the year 2000 under their "Retention Pricing Scheme") while fixing the ex-factory price. Such plants may also be set up by BCIC even with suppliers' credit. In India both public and private sector urea plants are given a 12 per cent return on equity while their products are taken along with imported urea by the government in a central pool for delivery to farmers at a subsidised price.

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The least desirable (should be undesirable) option from the viewpoint of national interest is to let foreign investment in urea plants and 'import' urea from such plants at international price to meet domestic demand.

In the eighties and nineties BCIC received a good number of such foreign investment joint venture proposals for urea plants particularly when urea price in international market went high. Those who handled such proposals knew it well that it was the gas price which was number one issue in such proposals which makes or breaks the project. As both sides knew it, valuable time was not wasted on peripheral matters once a mutually agreed gas price could not be reached at the outset. BCIC in those days even tried to dissuade the then government from going ahead with KAFCO. There is a misconception about KAFCO being a BCIC promoted project. Many of us do not know that KAFCO is completely a government (Ministry of Industries) promoted and negotiated project which was thrust upon BCIC at its final stage alongwith its unique and unheard of gas contracts involving BCIC, BGSL and KAFCO. An ingenious lopsided gas price formula linked with international urea price has been introduced which is extremely favourable to the producer (investor). For example when urea price is $ 140/ton, KAFCO pays a gas price of $1/MCF (1000 cft) and when urea price goes to $ 230/ton (as it is now), they pay @ $ 2.34/MCF. Natural gas required per ton of urea is about 25 MCF. In such circumstances, other cost elements which remain fairly stable, give the producer of 6.68 lac -- ton urea a land-slide profit of about $38.7 million. [Addl revenue 6.85 (230-140) lac-addl gas price 6.85x25(2.34-1) lac -- $ 61.65m-$ 22.95m= $38.7m]

It is unfortunate that in the long history of urea fertilizer industry in the country, no proper evaluation has so far been made by economic experts as regards the benefits (financial & economic) derived by the country from urea plants set up under different modes of implementation in public sector, private sector with local investors only, joint venture or foreign investors only.

Foreign Direct Investment (FDI) is desirable for the country provided it brings some benefit. It has been observed in the past also that when international price of urea goes up, proposals of foreign investment in urea plants start pouring in. Around the year 1997, when international urea price was about $100/ton and crude oil price was possibly around $15/barrel, natural gas price for urea production was $2.10-3.20 in China and $1.60-2.40 per MCF in India (IFDC).

China and India are two large importers of urea in the world and Bangladesh has also become an importer of urea due to its cold policy towards its public sector urea plants. In these days of high energy price ($65/barrel crude oil) and when Bangladesh has become an importer of urea, the country can ill-afford to have the luxury of another export-oriented urea plant under FDI.

The painful birth of KAFCO is not unknown to our two major political parties. During the tenure of both these parties, bitter pills had to be swallowed before conceding to give go-ahead signal. It was thought that at least KAFCO had taught us a good lesson. But from the handling of a recent KAFCO-like urea project proposal, it seems that the lesson has not yet been completed.

In recent years government had to order short-supply of natural gas to or shut-down of BCIC's urea plants for uninterrupted gas supply to KAFCO! Result was lower urea production in BCIC plants and higher import from KAFCO and abroad at international price. Any expansion of KAFCO itself and/or more export-oriented urea plant will guarantee complete shut-down of the BCIC urea plants in near future in order to meet committed gas supply to those export-oriented plants.

It is therefore, suggested that i) Government may immediately assign an Expert Committee (with Bangladeshi renowned economists) to carry out an evaluation of the present urea project proposals in private sector vis-a-vis a new public sector urea plant keeping in view the long term national benefit.

ii) Simultaneously an analysis of all the benefits to the country accrued from BCIC urea plants and KAFCO plants will be helpful for the government to chart the future course of action and in committing scarce and highly valuable natural gas for so-called export-oriented urea and ammonia projects.

The study as suggested above will clear up the foggy conception that all FDI particularly export-oriented ammonia/urea plants will bring milk and honey for the country. The study will embolden the government (i) to order for immediate implementation of a new urea plant under BCIC in the face of anticipated objection from some development partners and (2) to say clearly what it wants to say on export-oriented foreign urea project proposals.

In mid-eighties possibly, in a UNDP sponsored Investors Forum held in Amman, Jordan, the brother of late king addressed the audience with a joint-venture story. The story is -- pig and hen agreed to set up a joint-venture to produce egg and ham. The pig was delighted to see the profit projections and was sleeping happily till the production started. He saw to his horror that while the hen was playing happily after laying its daily morning egg, his case was different -- he has committed totally. Our commitment should not be like this. We should be able to say a clear and loud 'No' when it is required, otherwise may land in deep trouble like the young girl who was in trouble every year because she could not say no to anyone who approached her.

Zahirul Huq is retired Senior General Manager (Planning), BCIC.