Fertiliser Policy 2001 was designed to encourage investment in the sector to meet the growing domestic demand of urea and other fertilisers.

The estimated demand-supply gap established the economic viability of two new fertiliser units, within the 10-year validity of the policy, or major expansion of existing plants to almost the same capacity size.

Consequently, a number of incentives were offered to the investors, including allocation of feedstock gas on priority and sales of gas at concessionary rates. Earliest timeframe for completion of these projects is the core of the policy, since the government continues to grant huge subsidies on its imports year after year. The prospective investors were therefore required to sign the Gas Sales Agreement (GSA) latest by June 30, 2005 as per the announced policy.

Under this policy, the Fatima Group of Multan proposed to establish a fertiliser project at Sanjarpur, Sadiqabad, district Rahimyar Khan. This was accepted by the government on the principle of the first-come first-served.

Subsequently, the Economic Coordination Committee (ECC) of the Cabinet on August 24, 2004, approved allocation of 75 million cubic feet per day (mmcfd) natural gas to the project to produce 1.5 million tons of nitrogenous and phosphate fertilisers annually. This approval however was granted with the condition that the project should come on stream within two years from the date of approval of gas allocation, which was committed earlier by the sponsors.

In fact, the government had dedicated Mari gas field the second largest national gas resource, for fertiliser industry to ensure a steady and reliable gas supply. Shallow reservoir of Mari gas has low thermal, or BTU (British Thermal Unit), value and is considered most suitable as feedstock for urea production. Mari gas field has total recoverable reserves of nearly eight trillion cubic feet (tcf) of natural gas and has produced about three tcf gas until June 2006.

The gas allocation of 75 mmcfd to Fatima Fertilisers, both as feedstock and as fuel, has been made through this resource. The project sponsors have signed the GSA with Mari Gas Company Ltd for sale/purchase of gas at the field-gate, on July 12, 2005.

It was only in November 2006 - more than a year after concluding the GSA - that the sponsors signed an agreement with Sui Northern Gas Pipelines Ltd (SNGPL) for the laying of pipeline from Mari gas-field to the fertiliser complex. The 47-km long high-pressure gas transmission pipeline, costing Rs250 million, is expected to be completed within 15 months.

The long delay in kicking-off the time-bound project of great national importance is not understandable when the foreign contractors were employed for construction of the fertiliser complex much earlier. Sometime in August 2005, the sponsors had announced that the project was being set up, at a cost of $300 million, in collaboration with China National Chemical Engineering Corporation. The contract was thus concluded between sponsors and the Chinese company, based on an earlier memorandum of understanding (MOU) that was signed on January 7, 2005.

The project cost however was revised to $336 million in December 2005. On these premises, Prime Minister Shaukat Aziz performed, on April 28, 2006, the groundbreaking ceremony of the project, which will be constructed on an area of 400 acres.

On the occasion, the investors indicated yet another inflated cost of the project - $475 million - without disclosing further details whatsoever. Nonetheless, there was no further progress on achieving the project implementation milestones as agreed and the project failed to take-off as scheduled.

The consortium of Fatima Group (in the name of Reliance Export) and Arif Habib Group were meanwhile declared, in May 2005, the highest bidder for purchase of state-owned Pak-Arab Fertilisers Pvt) Ltd (PFL) located at Multan. The consortium's bid of Rs14.125 billion for 52 per cent government shares of the large fertiliser complex was made in competition with industrial giants like Dawood Group, Nishat Group and Al-Ghurair of the UAE.

Nevertheless, the time limit given by the ECC for completion of Fatima Fertilizer project's completion lapsed, sometime in August 2006. Instead of revoking the gas allocation however, as recommended by the ministry of industries, production and special initiatives, it was decided by the ECC of the Cabinet, in its meeting held on August 23, 2006, to extend the deadline, without imposing any penalties on sponsors as prescribed. This time the ECC allowed the investors three months to achieve financial close and two years for project completion i.e. by August 2008.

Finally, the project has achieved financial close within the revised time-frame, having finalised the security documents package, as the ECC of the Cabinet was informed on December 27, 2006. A consortium of major local and foreign banks in Pakistan has agreed to provide Rs23 billion for the project.

Once again, the sponsors have escalated total cost of the project, revised to $587 million, which works out to be Rs35 billion in local currency. Equity for the project is Rs12 billion. The financial structure of the company has been changed recently. Fatima Fertilizers Company will now be owned 70 per cent by PFL, 15 per cent by Fatima Group and 15 per cent through public issue underwritten by PFL.

The product range of the proposed plant and the respective capacities include ammonia 1,500 tons per day (tpd), nitric acid 1,500 tpd, urea 1,500 tpd, nitrogen phosphate (NP) 1,000 tpd, nitrogenous phosphoric potassium (NPK) 1,000 tpd and calcium ammonium nitrate (CAN) 1,400 tpd.

It is claimed that project's first phase of achieving 1.1 million tons production annually will be completed by March 2008, whereas the plant will be fully operational to the designed capacity by August 2008, as required under the latest government directive.

The target however is far from being realistic to achieve. It has been reported that second-hand machinery has been imported for the production of CAN and NPK fertilisers, which is being reconditioned, sand blasted and painted before re-assembly and erection at site. Interestingly, the Policy allows relocation of second hand plant machinery with the same concessions and exemptions as applicable to the new fertiliser plants.

On August 10, 2006, Sojitz Corporation and Kawasaki Plant Systems Ltd have jointly confirmed receiving an order, valuing $110 million, from Fatima Fertilisers to put up a 1,500 tons daily urea production facility. Kawasaki of Japan will supply plant machinery based on state-of-the-art urea technology from Stamicarbon of Holland. Commercial operation date (COD) has been agreed between the investor and plant supplier as 42 months from the date of letter of credit.

The urea production plant will thus be operational by May-June 2010 against investors' commitment, and the government's deadline, of August 2008. In any case, the project of this magnitude and financial outlay is likely to be behind schedule due to local conditions and problems in test and trial runs - in this case Stamicarbon's advanced urea technology being introduced in Pakistan for the first time.

Given the current prices of plant machinery in international market and the fact that part machinery procured for the project is second-hand, the latest project cost seems very high.

The fertiliser industry is well established and based on advanced technology, with an investment of Rs87 billion. There are ten production units in operation, nine in private sector including those privatised recently and only one in public sector that too is in advanced stage of divestment by the government. The sector has an annual installed capacity of 5,989,000 tons of a wide variety of fertilisers.

The production of fertilisers during July 2005-May 2006 period, showed 95 per cent capacity utilisation compared to 10 per cent in previous years. And the natural gas consumed by the fertiliser industry has declined from 190,412 million cubic feet (mmcft) in 2004-05 to 148,470 mmcft in 2005-06.

The widening demand-supply gap is being met through imports of fertilisers, which were to the level of 1.7 million tons during July 2005-March 2006, which is about 50 per cent higher than that of the corresponding period of last year.

Once Fatima Fertilizers becomes operational, the Fatima Group-Arif Habib Group will emerge as one of the key players in the fertiliser industry, only second to Fauji Foundation. With a combined installed annual capacity of 2.3 million tons of fertilisers, the two joint venture companies will contribute substantially to meet total domestic demand in future.

It is imperative that the sanctity of the ECC decision is upheld this time, ensuring completion of the project on time. Further delay in commencement of production at the new plant will cost the national exchequer billions of rupees annually in terms of import subsidies only, besides resulting in project cost over-runs and belated socio-economic benefits to the nation.