Planning Commission member Saumitra Chaudhuri says the new urea investment policy will allow investment of six million tonne in urea. He says the policy assures of floor and ceiling prices.
"The policy will see investments flow in," Chaudhuri adds. Shares of fertiliser companies had staged a rally in the special trading session on Saturday, on reports that the Government will soon unveil a new investment policy for the urea sector. No new capacity addition in urea has taken place in the past 13 years due to the absence of an appropriate policy framework. This has widened the demand supply-gap over the past decade. Chaudhuri says things are nearly in place for new policy. A Group of Ministers will examine the policy before being sent for Cabinet approval. "The price ranges are different for brownfield and greenfield investments," he told CNBC-TV18. Meanwhile, he expects IIP to improve for November-December. Below is the edited transcript of Chaudhuri's interview with CNBC-TV18. Also watch the accompanying videos. Q: We understand that a new urea investment policy document prepared by a committee chaired by you is ready. Can you take us through the main contours of this document? A: There was an old investment policy which was 2008 chaired by Abhijeet Sen. We decided to have a new committee to look at a new policy which is chaired by me. When the old policy was drafted, there were certain expectations regarding domestic gas availability and they were built into the policy in a sense. Since domestic gas availability has not been to the extent that was envisaged at that time, we didn't get the investments happening because gas simply was not available. So, we had to work out a different kind of a framework within which brownfield capacity - that is substantial addition existing plants could take place. The extension beyond what is called a technical cut off, revamp that is you invest something, de-bottleneck and get more production - that part of it as envisaged in the 2008 policy actually worked. But the Brownfield didn't happen because domestic gas availability was not there. We had to work out an alternative framework which would enable investments to materialise in brownfield projects, make it worth the while of the investors who are going to put money into that. We have to secure both ends. The marginal cost of production from a Brownfield is much more than the selling price of urea. Selling price of urea even if it's a modest increase, this would be only a fraction of the cost of production. Some assurances regarding floor price and ceiling price had to be provided. The new investment policy provides some assurance of floor and ceiling price. The idea is that floor price protects investor and the ceiling price protects the government from paying out excessively large subsidies while making the project financially a viable proposition. We think we have under those constraints developed a framework which will permit investments of about 6 million tonne to materialise. We are importing about 6.5-7 million tonne of urea. There is scope for investment and that investment will materialise. Also, Greenfield projects may also take off. We have put the Greenfield projects in the same floor-ceiling price mechanism so that the investors are protected; simultaneously the government is also protected from putting out too much subsidy if oil prices rise too much. Q: Are the floor and the ceiling prices you were talking about different for Brownfield and Greenfield plants? A: Marginally different. They are not very different but there is a separate price range. The idea is that we link it to the import parity price, but there is a floor price and there is a ceiling price. If the port parity price is between the floor-ceiling, it will be the parity price that will determine at what cost it will be reimbursed because selling price will not be equal to the cost of production. But if the oil prices were to rise beyond ceiling price, the ceiling will become operative. If for some reason oil prices were to drop below the floor price, the floor price would be operative. Q: Can you share with us what the ceiling and floor price is at that the committee is proposing? A: The point is that it is a sliding scale. The floor and ceiling operate within a sliding scale. There is a floor and ceiling fixed at USD 6.5 per million BTU. So at USD 6.5 per million BTU the average gas price, there is a floor and ceiling. As the gas prices increase from USD 6.5, the floor and ceiling would also slide forward up to a maximum of USD 14 per million BTU. We have a gas price pass through within a floor and ceiling structure. It may look a bit cumbersome but effectively it is pretty straight forward. We have to do it because we cannot envisage a situation where fertilizer will be sold at or near its cost of production so there is a subsidy outgo. There are many different kinds of situation we have to protect against. The gas price through is there and that operates through this USD 6.5-14 range. Corresponding to each point in this scale of USD 6.5-14, the floor and ceiling adjust for by about some USD 0.1 per million BTU leads to USD 2 shift and so on. It is worked out like that. Q: Where does the document go from here? WhatDiscover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
