NIP – 2012 – Contents of Discussion

1. NIP – 2012 – Contents of Discussion - Why NIP for urea. - Population Boom In India. - Foodgrain Production In India. - Area Under Foodgrain Production. - Yield of Foodgrain Per Ha In India. - Per Capita Foodgrain Availability In India. - Production of Urea In India Since 1960-61. - The target for urea production in 2017. - Investment Policy 2004.

2. Contents of Discussion (Cont’d) • Policy to Incentivize Production in NPS III. • New Investment Policy 2008. • New Investment/New Capacities through : - Revamp - Brownfield Expansion. - Revival of closed plants. -Greenfield (New Plant at new Location). - JVs Abroad.

3. Contents of Discussion (Cont’d) • Concept of Cutoff quantity. • Failure of New Investment Policy 2008. • New Investment Policy 2012 introduced in January 2013 covering the policy for : - Revamp. - Expansion. - Revival of Old Plants. - Greenfield Plants (New Plants at New Location). - JVs Abroad. - Gainers of New Investment Policy

4. Population Boom • World Population has crossed 715 Crore. • Population of India which was 24 cr in 1901, was 34 Cr in 1947, increased to 103 cr in 2001, has crossed 124 crore. • China has 19% of the world population and India has 17%. • USA is at No. 3 with 4% of the world population. • Just 3 countries have 40% of the world population. • Add to it Indonesia, Brazil, Pakistan, Nigeria, Bangladesh, Russia and Japan. These 10 countries have 58% of the world population. Rest of the 185 countries have 42% population. • Conclusion : India is a very populous country. It grows @ 1.7 crore per annum and is all set to cross China by the year 2030. In a span of 45 years the population has gone up by 2.5 times. • The task to ensure food security is very gigantic and timely steps need to be taken to ensure food supply for all.

5. Foodgrain Production • Foodgrain production which was 95 Million Tonne in 1967-68, was 130 MT in 1980-81. • It crossed 176 Million Tonne in 1990-91. • It went up to 197 Million Tonne in 2000-01. • In 2012-13 it is estimated to touch 250 Million Tonne mark. • In a span of 45 years the foodgrain production has gone up 2.6 times.

6. Area Under Foodgrain Production • Area under foodgrain production which was 121 Million Ha in 1967-68, was 127 Million Ha in 1980-81. • It marginally crossed 128 Million Ha in 1990-91. • It declined to 121 Million Ha in 2000-01. • In 2012-13 it is estimated to be at 127 Million Ha mark. • In a span of 45 years the area under foodgrain production has gone up hardly by 5%.

7. Yield Per Hectare In India • Where the area under foodgrain production went up from 121 Million Ha in 1967-68 to 127 Million Ha in 2012-13 i.e. by 5%, the foodgrain production went up from 95 Million Tonne to 250 Million Tonne, i.e. by 2.6 times or by 163%. • As a result the yield per Ha which was hardly 783 KGs in 1967-68, went up to 1023 KGs in 1980-81, 1380 KGs in 1990-91, 1734 KGs in 2000-01 and finally 1931 KGs as on date.

8. Per Capita Foodgrain Availability

9. Production of Urea In India and The Targets • Urea production which commenced with hardly 12 Thousand MT during 1960-61, was 11 LMT during 1970-71. • It Increased to 34 LMT during 1980-81 and went up to 128 LMT during 1990-91. • During 2011-12 it was 220 LMT and is likely to be 226 LMT during 2012-13. • The target for 2013-14 has been fixed for 230 LMT. • Keeping in view the increasing population, the target for the end of 12th FYP (2012-17) the requirement is projected to be 360 LMT. • Overall it is estimated that an additional capacity of 100 LMT would be required for the country

10. Trends in Production,Consumption and Imports of Urea

11. Investment Policy 2004 • In January 2004 a New Investment Policy was announced that covered only the increase in capacity under Revamp, Expansion and Greenfield projects. The policy was very brief. • Revamp • To be eligible, a unit was required to increase the existing capacity by at least 10%. • Units were to be allowed to retain energy efficiency gains there-from and no mopping up was to be carried out from the preset energy norm of the unit. • Considering heavy investment required, savings in energy was found to be meager as such the returns were not found to be sufficient.

12. Investment Policy 2004 (Cont’d) • New and Expansion Projects • This policy was exclusively based on NG/LNG based new projects. No other feed stock was allowed. • Concession was to be based on the principal of Long Range Average Cost (LRAC) on 15 years basis. • The concession so determined was to be available to the units for 5 years only. • Cost of gas was considered at $3 per MMBTU for domestic gas and $3.5 per MMBTU for LNG. The escalation clause was present in case of increase in cost of gas beyond these prices. • After 5 years Govt would evaluate the option between LRAC and IPP. (IPP would apply in case it is found to be lower after 5 years). • Normative Debt-Equity ratio of 2.5:1, 12% post tax on equity (and not networth). • No redetermination of of LRAC in case of increase in Project cost. • No Revamp or Expansion or New Urea Project materialised under this policy.

13. NPS Stage III – Policy to Incentivize Additional Urea Production • NPS stage III announced on 08.03.2007 introduced incentives for additional urea production. • All Productions between 100% and 110% of the existing reassessed capacity to be incentivized on existing gain sharing formula between Govt and Unit @ 65:35 subject to unit’s concession rate. (Basically IPP based but maximum price would be existing CR). • Beyond 110% was to be compensated @ concession rate subject to overall cap of IPP.(IPP would apply if it is lower than CR). • It had a clause that to the extent the Govt does not require any quantity of additional production, the units were free to export or to sell it to the complex manufacturers at any price, but with the consent of DoF. • This policy also mentioned that the additional production, if not required by Govt for agricultural production, would not be subsidised by Govt.

14. New Urea Investment Policy – Sept, 2008 • New Investment Policy 2004 and the policy to incentivize additional urea production from existing plants as per policy dated 8th March, 2007 failed to give desired results. • Poor returns was the basic reason. • A new policy was required that would give fairly good returns high enough to bring in more investment in highly capital intensive urea plants.

15. New Urea Investment Policy – Sept, 2008 (Cont’d) • The New Investment Policy 2008 superceeded the Investment policy announced in 2004. • This Policy came up with a bright idea of reimbursing the additional urea produced on the basis of Import Parity Price (IPP) prevailing in the International Market. • This Policy was totally delinked with the cost of production Urea. • A very rational basis had been adopted to consider the FOB Arabian Gulf during preceding three months published in three magazines vizFertiliser market Bulletin, UK, Fertiliser Weekly, UK and Fertecon Weekly, UK. • The exchange rate for a month is the average of preceding three months as per RBI.

16. New Urea Investment Policy – Sept, 2008 (Cont’d) • The Floor Urea Price (Minimum Price) is kept at $250 and the Ceiling Urea Price (Maximum Price is kept at $425. • This was based at the feedstock price of $4.88 per MMBTU as fixed for RIL gas fixed for five years. • It was clearly mentioned in the policy that in case of sharp increase in price of feedstock, the floor and ceiling price would be adjusted to take care of the increase in cost of production. • On the basis of these parameters, DoF come up with 5 different types of alternatives to boost the urea production.

17. New Urea Investment Policy – Sept, 2008 (Cont’d) • Revamp – Improvement in capacity of existing plants involving Investment up to Rs 1000 Cr. Additional qty to be priced at 85% of IPP subject to $250-$425. • Expansion – A New Ammonia-Urea train in the existing premises. Minimum Investment Rs 3000 Cr. Additional Qty to be priced at 90% of IPP subject to $250-$425. • Revival – Applicable to HFC and FCI. Entire qty to be priced at 95% of IPP Subject to $250-$425. • Greenfield– Through Bidding route subject to $250-$425. Bidder to indicate the price as a percentage discount below prevailing IPP.

18. New Urea Investment Policy – Sept, 2008 (Cont’d) JVs Abroad • To encourage urea production in gas rich countries through firm off-take contracts. • Price as per principle applicable to green-field projects or 95% of IPP as applicable to brown-field projects. • To be priced in the range of $225-$405. • To be limited to Max of 50 LMT.

19. Cut Off Qty – A New Concept for Existing Plants – NIP 2008 • Instead of “upto 100%”, “100%-110%” and “Beyond 110%”, a new concept of Cut off quantity was introduced vide NIP 2008. • Reassessed capacity or maximum achieved during 4 years (2003-07) for 330 days, which ever is higher. • Eligible only if total production crosses 105% of the cutoff qty or 110% of the reassessed capacity whichever is higher. • Units to be eligible for IPP based prices beyond cut off qty only after achieving the eligible quantity.

20. Cost of Gas • Cost of Gas for the quantity Upto Cut off Point and for the quantity beyond cut off point is not the same. • Where the cost of gas upto the cutoff point includes all the gases whether Cheap gases like APM and PMT gases ; • The cost of gas for the quantity beyond cutoff point does NOT included cheap gases like APM/PMT gases. • As a result the cost of gas for Quantity beyond cut off quantity is bound to be higher than the cost of gas for the quantity upto cut off point by about 10-15%.

21. Failure of NIP 2008 • NIP 2008 was successful only to add capacities through revamp only. • No new investment was attracted through Expansion, Greenfield Projects, Revival Projects or Joint Ventures abroad. • The failure to attract new investments was attributed to the fact that there was no provision for increase in price of feedstock/fuel which accounted for as much as 70% of the total cost of production. • In order to safeguard the interest of the investor NIP 2012 has now been introduced which provides cushion to the investor against sharp increase in price of Feedstock/Fuel in the form of Natural Gas.

22. New Investment Policy 2012 • The demand of urea at the end of the 12th FYP (2012-17) is expected to be 360 LMT. • Present capacity is about 220 LMT and another 20 LMT urea comes from OMIFCO. • This NIP 2012 is expected to add 100 LMT by the end of 12th FYP with an investment of Rs 35000 Crores. • This is expected to make the country self reliant in Urea by the end of 12th FYP.

23. New Investment Policy – 2012 (Cont’d) • NIP Policy 2012 proposes to increase the capacity of production of urea in the country by various means e.g. Revamp, Expansion, Revival of closed plants, Greenfield projects and Joint Ventures abroad. • The attractive point in NIP 2012 is that it takes care of possible increase in price of Feedstock/Fuel which is the main cause of worry for the investors as there is no control over price of such inputs.

24. Revamp Projects • It means incremental increase in capacity of existing plants by way of small investment. • Urea will be recognized @ 85% of IPP subject to the range is $245-$255 Per MT Urea for the output above cutoff level. • Includes delivered price of gas @ $7.5 per MMBTU. • Rate of $ has no floor or ceiling. • Say @ Rs 54 per $, the Minimum revenue is Rs 13,230 PMT with cost of gas at Rs 8910 PMT (7.5X4X54*5.5), so the rate for fixed cost including bags works out to Rs 4320 PMT. • In case cost of gas increase by $0.10 per MMBTU, i.e. by Rs 119 per MT, DoF will reimburse an additional $2.2 per MT, i.e. Rs 119 Per MT.(as long as the price of gas is upto $14 Per MMBTU).

25. Revamp Projects (Cont’d) • The units which have undertaken revamp under the NIP 2008 will remain under the same policy. • In case a unit under NIP 2008 undertakes further revamp and the additional quantity is more than 10% of the present production, such unit has an option of dispensation under NIP 2012 for the entire revamp quantity i.e. existing and new combined. • The option of whether to remain under the old NIP 2008 or to switch over to NIP 2012 will have to be exercised within 3 months of the start of the new increased production.

26. Expansion Projects • It means setting up of new ammonia-urea train involving a minimum investment of Rs 3000 Cr. • Urea will be recognized @ 90% of IPP subject to the range is $285-$310 Per MT Urea. • Includes delivered price of gas @ $6.5 per MMBTU. • Rate of $ has no floor or ceiling. • Say @ Rs 54 per $, the Minimum revenue is Rs 15,390 PMT with cost of gas at Rs 7020 PMT (6.5X4X54*5.0), so the rate for fixed cost including bags works out to Rs 8370 PMT. • Higher reimbursement of Fixed cost has been envisaged due to minimum investment of Rs 3000 Cr. • In case cost of gas increase by $0.10 per MMBTU, i.e. by Rs 108 per MT, DoF will reimburse an additional $2.0 per MT, i.e. Rs 108 Per MT.(as long as the price of gas is up to $14 Per MMBTU).

27. Greenfield/Revival Projects • NIP 2008 provided for bidding route for Greenfield projects. 95% of IPP within $250-$425 without any provision for escalation of price if Feedstock/Fuel. • NIP 2012 recognises urea @ 95% of IPP subject to the range is $305-$335 Per MT Urea for Greenfield and Revival Projects. • Includes delivered price of gas @ $6.5 per MMBTU. • Rate of $ has no floor or ceiling. • Say @ Rs 54 per $, the Minimum revenue is Rs 16,470 PMT with cost of gas at Rs 7020 PMT (6.5X4X54*5.0), so the rate for fixed cost including bags works out to Rs 9450 PMT. • Higher reimbursement of Fixed cost has been envisaged due to minimum investment of Rs 5500 Cr for Greenfield/Revival projects. • In case cost of gas increase by $0.10 per MMBTU, i.e. by Rs 108 per MT, DoF will reimburse an additional $2.0 per MT, i.e. Rs 108 Per MT.(as long as the price of gas is up to $14 Per MMBTU).

28. Joint Ventures Abroad • Decision will be taken on case to case basis based on many factors like prevailing IPP, price of gas, availability of gas, cost of gas offered to the JV, demand and supply gap in the country etc. • The guiding factor would be the floor price of green-field project with gas cost of $6.5 per MMBTU. • Higher return is considered by DoF keeping in view risks involved in foreign land, likely time overrun, likely cost overrun etc. • Normally gas is available in Gulf countries @ $1 per MMBTU.

29. Calculation of Monthly Quantity Eligible for IPP

30. NIP 2012 Vs Retention Price • Under Retention Price Scheme which started in 1977 the returns were based on actual cost incurred by the units and add to it a fair return on the capital invested @ 12 post tax on net worth. This concept never made the units cost conscious as most of the costs were reimbursed along with assured returns. • Under NIP 2012, returns are fixed. This will compel the investor to be more cost conscious leading to avoidance of wastages of company’s resources. • The New Policy will require more farsightedness, experience, expertise, professional approach before any of the scheme announced is undertaken by an investor.

31. Gain To The Country

32. Gain To the Companies

33. Gain To Employees

34. Gain To Investors

35. Gain To Local Community

36. Gain to the Farmers

37. Interesting Quotes from Corporate Chanakya by RadhakrishnanPillai • All of us have to rise from CSR to PSR i.e. from Corporate Social Responsibility to Personal Social Responsibility. • No matter which position we hold, we must personally commit to make our little contribution to the growth and development of Urea/Fertilizer Industry in particular and Indian Economy in General.

38. Interesting Quotes from Corporate Chanakya (Cont’d) • The role of a king is to create wealth for all the stakeholders. A king should not be satisfied with what he has got. He should constantly think about expansion and growth. • This applies to Urea/Fertilizer Industry also. The Captains and the leaders of the industry must constantly endeavor to expand the capacities especially when we need the same for import substitution.

39. Bibliography • Notifications issued by DoF. • Fertilizer Statistics.

40. A Big Thank You • ShriRakeshBhalla, Chairman, NIRC of ICAI. • ShriSourabhSrivastava, Vice Chairman, NIRC of ICAI. • ShriArvind Kumar, Secretary, NIRC of ICAI. • Shri SK Bhatt, Treasurer, NIRC of ICAI. • A very Special and Very Big THANK YOU TO ShriRavi sahni, Regional Council Member and Chairman of CEP Committeefor giving me an opportunity to give a presentation to such an August audience. • ShriVijender Sharma, RCM, NIRC of ICAI. • And all the listeners for a patient hearing.