Price norms issued for urea subsidy

The government has unveiled its pricing policy for investments in projects aimed at boosting urea production in the country through the creation of new capacity and expansion of existing ones.

The prices of natural gas and liquefied natural gas (LNG), which are used as feedstock in the production of the fertiliser, have been capped at $3 per million British thermal unit (mmbtu) and $3.5 per mmbtu, respectively. These prices have been calculated on the basis of the net calorific value, excluding sales tax and levies.

According to a note issued by the department of fertilisers, if the delivered price of gas exceeds these limits, the amount of subsidy for the project will be based on the price determined by the escalated long run average cost (LRAC) or the prevailing import parity price of urea, whichever is lower.

The note says for the grant of subsidy to new and expansion projects for urea, the LRAC will be determined on a project life of 15 years. The concession, based on the LRAC price so determined, will be available for five years from the date of commercial production.

This will be reviewed after five years to evaluate the option between the LRAC-based price and the import parity price of urea, exclusive of freight and dealers' margin. The import parity price of urea will be notified by the department of fertilisers on a quarterly basis.

"In the event of decontrol of urea pricing before this five-year period, the concession to be given to new and expansion projects will be reviewed separately by the department," the note says.

The LRAC of the new and expansion projects will be determined, inter alia, on the basis of the debt-equity ratio, subject to financing institutions' guidance, 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 the weighted average cost of equity and loans.

The department says there will be no re-determination of the LRAC if the project cost goes up during its implementation. However, any downward revision in the project cost during implementation will be reckoned for the calculation of the LRAC. The cost of facilities shared with the original plant will be discounted while assessing the capital cost of an expansion project.

The additional urea capacity, created by new and expansion projects, will be sold for agricultural purposes within the country. The units may also export or sell urea to complex manufacturers or for any other industrial use with the prior permission of the department.