May 23, 2006	Tuesday	Rabi-us-Sani 24, 1427

LAHORE, May 22: The domestic industry and exporters of value-added products, including textiles, have expressed concern over 7.2 per cent (Rs18.24/mmbtu) increase in the industrial gas price proposed by the Oil and Gas Regulatory Authority (Ogra) on the request of the two public sector suppliers and said that it would substantially raise their cost and make them uncompetitive in the international markets.

“Instead of raising the gas price, it would have been far better if the Ogra had recommended withdrawal of or substantial reduction in subsidy allowed to the fertiliser companies at the expense of the general industry and exports. Should the government take such a step, it would not have to resort to increasing the industrial gas tariff,” a knitwear exporter said while talking to Dawn on Monday.

Industrialists and exporters estimate that the government is subsidising supply of gas used by the fertilizer companies to the tune of Rs14-15 billion a year. The maximum gas tariff proposed by the Ogra for fertiliser companies is just slightly over Rs95/mmbtu as compared to Rs258.24/mmbtu recommended for the general industry.

Currently, different fertiliser manufacturers are getting gas for Rs36/mmbtu to Rs83/mmbtu. This is in sharp contrast to the present tariff of Rs240/mmbtu for the general industry, which largely uses gas as fuel to fire their captive power plants (CPPs) for producing electricity. The extremely low fertiliser gas rates also compare with the projected cost of Rs200/mmbtu of the two gas suppliers for the 2006.

The government’s objective of subsidy on gas to the fertiliser industry is to ensure availability of cheaper fertiliser to farmers. However, this objective is totally defeated because the fertiliser manufacturers do not pass on the full benefit of this subsidy to the growers as is indicated in a report prepared by Merrill Lynch in collaboration with a local brokerage house on the fertiliser sector for 1Q06 for stock market investors.

The report says the urea manufacturers passed on, more than the impact of their increased costs because of higher gas prices, to farmers in 1Q06, enhancing the consumer rates by Rs26 per bag.

The fertiliser companies raised their prices by Rs16 per bag in January, with a further increase of Rs10 per bag in April in “anticipation” of the expected upward revision of gas tariffs in July, says the report released a few weeks back. In fact, the urea rates have increased by 59 per cent in last five years.

“The fertiliser companies’ practice of passing on even the slightest increase in gas rates to the farmers by raising the prices of fertiliser utterly defeats the objective of allowing them huge subsidy,” the industry sources argue. An exporter claims that the World Bank has recently pointed out that the benefit of the subsidy was not totally passed on to the poor farmers and is largely accrued by the fertiliser industry whose return on paid up capital is almost 80-100 per cent per annum.

Compared to the fertiliser companies, the general export-oriented industry gets natural gas at thrice the price of urea producers, say the exporters. The urea manufacturers, they say, are getting this concession at the cost of the export industry in spite of the fact that the country is running short of gas and considering its import from Iran and other sources.

As urea off-take is reported to be increasing (according to the Merrill Lynch report the off-take surged by 16 per cent in 1Q06 on a YoY basis), few new urea manufacturing units are being planned. Similarly, the existing units are said to be in the process of expansion to meet the growing demand for the fertiliser on the back of improving income of farmers and better crops.

“In view of the gas shortage and its extremely high price for the industry, the industry strongly feels that there is no justification for the establishment of new urea plants. Besides, the existing urea units should also be stopped from expanding production. Their expansion will not only further burden the general industry, which will be forced to cross subsidise the new and expanded plants, but will also cause further gas shortage in the country,” they said.

The fertiliser industry is heavily capital intensive in nature while the same scarce resources could be better diverted to other industries like garments and knitwear, which provide more employment. It is better for the country to import urea instead of converting the imported costly gas into urea,” they say.

A textile miller says the value-added textile sector, which according to Small and Medium Enterprise Development Authority (Smeda), is one of the cheapest source of creating jobs, is already closing down owing to high gas rates caused by the fertiliser subsidy. “The gas should rather be used by the exporting industries to earn more foreign exchange for the country. It makes no difference to the government whether it provides subsidy to fertiliser industry in the shape of low gas tariff or whether it subsidises urea import.

Our Staff Reporter adds from Karachi: The Pakistan Tanners Association (PTA) chairman Khawaja Yousuf in a statement has expressed concern over the increase in the prices of gas allowed by the Oil and Gas Regulatory Authority (Ogra) from July 1, 2006.

The PTA chief criticised the decision of increasing domestic gas tariff by 7.2 per cent and for industrial and commercial consumers by 16 per cent.

The tariff hike, he said, would badly affect the business community, particularly the exporters, who were already under stress and facing difficulty to compete in the world market.