The Competition Commission of Pakistan (CCP) has issued a Policy Note to the Government of Pakistan recommending equal levy of Gas Infrastructure Development Cess (GIDC) on all fertilizer plants to create a level -playing field in the urea market. CCP has proposed that the levy of GIDC on feed stock for pre-2001 fertilizer plants be withdrawn and that the Second Schedule of the GIDC Act may be amended to rationalize the GIDC on fuel gas used by fertilizer plants, thereby eliminating the cost disadvantage to pre-2001 fertilizer plants. CCP took notice of concerns raised by fertilizer companies against the discriminatory levy of the Gas Infrastructure Development Cess (GIDC) that discriminates against the fertilizer plants installed prior to the Fertilizer Policy 2001 vis-à-vis the plants that were commissioned and became operative after the Fertilizer Policy 2001, by placing the pre-2001 plants at a cost disadvantage, thereby distorting the competition in the urea market. The Government of Pakistan issued the Fertilizer Policy in 2001which had the objective to provide investors in new fertilizer plants in Pakistan a gas price that enables them to compete in the domestic market. The Fertilizer Policy 2001 ensured equal treatment for all market-players by stipulating that all the fertilizer producers, domestic and foreign, public and private will be treated equally in commercial, fiscal, corporate and contractual matter. The Fertilizer Policy 2001 granted a certain lower price for gas feed stock to all post-2001 plants. It appears that the rationale behind setting a lower rate of gas price for post-2001 fertilizer plants was to compensate these companies for their project financing, and the ten year period of discount corresponded to the debt repayment period. With the controlled rate of feed gas, the price differential of feed gas between pre-2001 and post-2001 fertilizer plants rose to approximately Rs. 41/MMBTU, with the pre-2001 plants paying the higher rate. Thereafter, GIDC was levied only on pre 2001 fertilizer plants at the rate of Rs.197/ MMBTU under the GIDC Act, 2011. The GIDC Act was amended in December 2013, enhancing the GIDC levy to Rs. 300/MMBTU from the previous rate of Rs. 197/MMBTU. However, GIDC was also levied on fertilizer fuel stock on all plants without discrimination of pre or post 2001 plants. Schedule II of the GIDC Act amended in 2013 is reproduced below. CCP also held a public hearing on 29 April, 2014 in the matter which was attended by Ministry of Petroleum and representatives of all the fertilizer manufacturers. CCP observes in the Policy Note that feed gas is a major (80%) raw material used in the production of urea fertilizer. Lower rate of feed gas coupled with exemption of GIDC for post-2001 fertilizer plants results in a price difference of RKR 355/MMBTU for feed gas between the pre-2001 and post-2001 plants. This cost disadvantage makes it difficult for pre-2001 plants to compete with the post-2001 plants. Based on the data collected from fertilizer plants, CCP noted that, the price of urea based on the cost of feed gas alone, should have tilted towards the price of post-2001 plants, i.e., feed gas without GIDC. Revenues would have been somewhere close to PKR 7.5 billion for the year 2013. However, the fact is that post-2001 plants sold the urea at the same price as that sold by pre-2001 plants; the price of urea based on the cost of feed gas alone, tilted towards the price of pre-2001 plants, i.e., feed gas with GIDC. Thus, the total urea produced was sold as if all plants paid GIDC. This resulted in Consumer Loss of PKR 28.1 billion and supra-natural profits for the post-2001 plants to the tune of PKR 11.2 billion, equal to 31% of the production cost based on feed gas. Whereas the GIDC accrued for the national exchequer was 13.1 billion. Further, after the amendments in GIDC Act in December 2013, cost differential of feed gas has magnified and currently stands at Rs.355 per MMBTU, resulting in supra-normal profits of PKR 4 billion only in the first quarter of 2014 in respect of feed gas cost saving for post-2001 fertilizer plants. The supra-normal profit for post-2001 plants rose from 31% of the production cost based on feed gas in 2013 to 39% in the first quarter of 2014. Whereas the total GIDC accrued to the national exchequer was 4.25 billion, less than the supra-normal profits. The Policy Notes observes that the selective imposition has placed the fertilizer sector in a catch-22 situation. If the post-2001plants sell urea at a price based on their own cost of feed gas, they will certainly sell at a much lower price than that of pre-2001 plants, and therefore will drive the pre-2001 plants out of the market. This will completely be the antithesis of the Fertilizer Policy 2001: the investment will be driven out of the market, and domestic production will be reduced. On the other hand, if the post-2001 plants will sell urea at a price based on the cost of the feed gas to pre-2001 plants, the price will certainly not be the competitive price, and the farmer will end up pay much higher prices. This will again be the antithesis of the Fertilizer Policy 2001: assuring reasonable prices of fertilizers to farmers below the import-price. In nutshell the selective imposition of GIDC has the following impact : i. Distorting market conditions resulting in exorbitant huge prices for farmers. ii. Windfall for selective players (of more than PKR 4 billion in just one quarter of 2014). iii. Multiplier effect – high prices of urea result in high prices for crops (staple food). a. High cost impact on population living on poverty line. b. Cascading effect on every industry connected with agricultural produce. iv. Catch 22 situation for the fertilizer sector. Section 29 of the Competition Act, 2010 empowers CCP to promote competition by reviewing policy frameworks and making suitable recommendations to the Federal and Provincial governments to amend any law that affects competition within Pakistan.
The Competition Commission of Pakistan (CCP) has issued a Policy Note to the Government of Pakistan recommending equal levy of Gas Infrastructure Development Cess (GIDC) on all fertilizer plants to create a level -playing field in the urea market. CCP has proposed that the levy of GIDC on feed stock for pre-2001 fertilizer plants be withdrawn and that the Second Schedule of the GIDC Act may be amended to rationalize the GIDC on fuel gas used by fertilizer plants, thereby eliminating the cost disadvantage to pre-2001 fertilizer plants. CCP took notice of concerns raised by fertilizer companies against the discriminatory levy of the Gas Infrastructure Development Cess (GIDC) that discriminates against the fertilizer plants installed prior to the Fertilizer Policy 2001 vis-à-vis the plants that were commissioned and became operative after the Fertilizer Policy 2001, by placing the pre-2001 plants at a cost disadvantage, thereby distorting the competition in the urea market.
The Government of Pakistan issued the Fertilizer Policy in 2001which had the objective to provide investors in new fertilizer plants in Pakistan a gas price that enables them to compete in the domestic market. The Fertilizer Policy 2001 ensured equal treatment for all market-players by stipulating that all the fertilizer producers, domestic and foreign, public and private will be treated equally in commercial, fiscal, corporate and contractual matter. The Fertilizer Policy 2001 granted a certain lower price for gas feed stock to all post-2001 plants. It appears that the rationale behind setting a lower rate of gas price for post-2001 fertilizer plants was to compensate these companies for their project financing, and the ten year period of discount corresponded to the debt repayment period.
With the controlled rate of feed gas, the price differential of feed gas between pre-2001 and post-2001 fertilizer plants rose to approximately Rs. 41/MMBTU, with the pre-2001 plants paying the higher rate. Thereafter, GIDC was levied only on pre 2001 fertilizer plants at the rate of Rs.197/ MMBTU under the GIDC Act, 2011. The GIDC Act was amended in December 2013, enhancing the GIDC levy to Rs. 300/MMBTU from the previous rate of Rs. 197/MMBTU. However, GIDC was also levied on fertilizer fuel stock on all plants without discrimination of pre or post 2001 plants. Schedule II of the GIDC Act amended in 2013 is reproduced below.
CCP also held a public hearing on 29 April, 2014 in the matter which was attended by Ministry of Petroleum and representatives of all the fertilizer manufacturers. CCP observes in the Policy Note that feed gas is a major (80%) raw material used in the production of urea fertilizer. Lower rate of feed gas coupled with exemption of GIDC for post-2001 fertilizer plants results in a price difference of RKR 355/MMBTU for feed gas between the pre-2001 and post-2001 plants. This cost disadvantage makes it difficult for pre-2001 plants to compete with the post-2001 plants.
Based on the data collected from fertilizer plants, CCP noted that, the price of urea based on the cost of feed gas alone, should have tilted towards the price of post-2001 plants, i.e., feed gas without GIDC. Revenues would have been somewhere close to PKR 7.5 billion for the year 2013.
However, the fact is that post-2001 plants sold the urea at the same price as that sold by pre-2001 plants; the price of urea based on the cost of feed gas alone, tilted towards the price of pre-2001 plants, i.e., feed gas with GIDC. Thus, the total urea produced was sold as if all plants paid GIDC. This resulted in Consumer Loss of PKR 28.1 billion and supra-natural profits for the post-2001 plants to the tune of PKR 11.2 billion, equal to 31% of the production cost based on feed gas. Whereas the GIDC accrued for the national exchequer was 13.1 billion.
Further, after the amendments in GIDC Act in December 2013, cost differential of feed gas has magnified and currently stands at Rs.355 per MMBTU, resulting in supra-normal profits of PKR 4 billion only in the first quarter of 2014 in respect of feed gas cost saving for post-2001 fertilizer plants. The supra-normal profit for post-2001 plants rose from 31% of the production cost based on feed gas in 2013 to 39% in the first quarter of 2014. Whereas the total GIDC accrued to the national exchequer was 4.25 billion, less than the supra-normal profits.
The Policy Notes observes that the selective imposition has placed the fertilizer sector in a catch-22 situation. If the post-2001plants sell urea at a price based on their own cost of feed gas, they will certainly sell at a much lower price than that of pre-2001 plants, and therefore will drive the pre-2001 plants out of the market. This will completely be the antithesis of the Fertilizer Policy 2001: the investment will be driven out of the market, and domestic production will be reduced. On the other hand, if the post-2001 plants will sell urea at a price based on the cost of the feed gas to pre-2001 plants, the price will certainly not be the competitive price, and the farmer will end up pay much higher prices. This will again be the antithesis of the Fertilizer Policy 2001: assuring reasonable prices of fertilizers to farmers below the import-price.
In nutshell the selective imposition of GIDC has the following impact : i. Distorting market conditions resulting in exorbitant huge prices for farmers. ii. Windfall for selective players (of more than PKR 4 billion in just one quarter of 2014). iii. Multiplier effect – high prices of urea result in high prices for crops (staple food). a. High cost impact on population living on poverty line. b. Cascading effect on every industry connected with agricultural produce. iv. Catch 22 situation for the fertilizer sector. Section 29 of the Competition Act, 2010 empowers CCP to promote competition by reviewing policy frameworks and making suitable recommendations to the Federal and Provincial governments to amend any law that affects competition within Pakistan.
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