Fertilizer firms need not be pampered

It seems that realization has finally set in the government ranks, as reports are now emerging about the restoration of full gas supply to fertilizer plants from the Mari gas field.
It is not as if gas demand from power sector has suddenly decreased; it is just that somebody has made the government understand that gas from Mari field can best be used as feedstock, than for any other purpose.
The good news is that Pakistan would need to import 0.15 million tons lesser urea instead of 0.4 million tons earlier feared, when gas curtailment was initially announced. But, in a rare show of equality the Ministry of Industries & Production has proposed to compensate the underprivileged.
The proposal is to supply feedstock gas at lower rates to fertilizer manufacturers other than FFC and Engro who have connection from Mari gas field. This is to cover the opportunity lost by fertilizer companies linked to Sui field such as FFBL, which would reportedly result in the disbursement of Rs1.6 billion to compensate for the added production that Engro and FFC will have.
Another option on cards is that of price fixing. Yes, you heard right. The idea is to raise the urea price by a fixed amount of Rs48/bag, a certain amount of which is to be disbursed to the affected companies such as FFBL, so that these firms do not suffer from the production loss resulting from the curtailment of feedstock gas.
There is also a fear that unaffected firms might reduce the product price once feedstock gas supply is fully restored, which would leave the affected ones with no option but to follow the market leaders. This presumption, however, is a weak argument as there are next to nil chances that urea prices would go down.
In its Budget Strategy Paper, the government has hinted at abolishing fertilizer subsidies, which would result in massive price increase in urea prices across the country.
This again highlights the same old issue of disharmony between the planning wings of the government. With no subsidy on fertilizers, how could a situation ever arise where Engro and FFC would reduce their urea price? It certainly won .
Above all, the very argument of protecting and compensating a particular company on the premise that it is facing a business risk is beyond logic. Businesses are supposed to bear with and tackle the risks in the system where they operate.
There is no justification whatsoever, to use the national exchequer to compensate losses resulting from producing less than peers who are privileged by virtue of geographical proximity. And it is not that FFBL would start running into loses if it is not compensated; for the company earns typically three fourths of its revenues from DAP business.
Even worse is the idea of price fixing, which would only keep the CCP guys busy. Mind you, fertilizer firms have in the past been accused of cartelization by the CCP - and any such move of price fixing in collusion would invite trouble.
It is time for direct targeted subsidy to the farmers instead of subsidizing manufacturers. The hint towards elimination of fertilizer subsidy seems a step forward towards direct targeted subsidy, which, if implemented transparently, could bear fruits for the economy.

Fertilizer firms need not be pampered
It seems that realization has finally set in the government ranks, as reports are now emerging about the restoration of full gas supply to fertilizer plants from the Mari gas field.
It is not as if gas demand from power sector has suddenly decreased; it is just that somebody has made the government understand that gas from Mari field can best be used as feedstock, than for any other purpose.
The good news is that Pakistan would need to import 0.15 million tons lesser urea instead of 0.4 million tons earlier feared, when gas curtailment was initially announced. But, in a rare show of equality the Ministry of Industries & Production has proposed to compensate the underprivileged.
The proposal is to supply feedstock gas at lower rates to fertilizer manufacturers other than FFC and Engro who have connection from Mari gas field. This is to cover the opportunity lost by fertilizer companies linked to Sui field such as FFBL, which would reportedly result in the disbursement of Rs1.6 billion to compensate for the added production that Engro and FFC will have.
Another option on cards is that of price fixing. Yes, you heard right. The idea is to raise the urea price by a fixed amount of Rs48/bag, a certain amount of which is to be disbursed to the affected companies such as FFBL, so that these firms do not suffer from the production loss resulting from the curtailment of feedstock gas.
There is also a fear that unaffected firms might reduce the product price once feedstock gas supply is fully restored, which would leave the affected ones with no option but to follow the market leaders. This presumption, however, is a weak argument as there are next to nil chances that urea prices would go down.
In its Budget Strategy Paper, the government has hinted at abolishing fertilizer subsidies, which would result in massive price increase in urea prices across the country.
This again highlights the same old issue of disharmony between the planning wings of the government. With no subsidy on fertilizers, how could a situation ever arise where Engro and FFC would reduce their urea price? It certainly won .
Above all, the very argument of protecting and compensating a particular company on the premise that it is facing a business risk is beyond logic. Businesses are supposed to bear with and tackle the risks in the system where they operate.
There is no justification whatsoever, to use the national exchequer to compensate losses resulting from producing less than peers who are privileged by virtue of geographical proximity. And it is not that FFBL would start running into loses if it is not compensated; for the company earns typically three fourths of its revenues from DAP business.
Even worse is the idea of price fixing, which would only keep the CCP guys busy. Mind you, fertilizer firms have in the past been accused of cartelization by the CCP - and any such move of price fixing in collusion would invite trouble.
It is time for direct targeted subsidy to the farmers instead of subsidizing manufacturers. The hint towards elimination of fertilizer subsidy seems a step forward towards direct targeted subsidy, which, if implemented transparently, could bear fruits for the economy.