Industry perspective on GIDC utility and reality
It is unfortunate to note that the debate on recently promulgated GIDC Ordinance 2019 in the national media is totally devoid of understanding of the issue of GIDC and is unnecessarily criticizing the Government as well as industry. Notwithstanding Government decision to withdraw the Ordinance, it is considered important to put the issue of GIDC in correct perspective
The Fertilizer industry being a strategic sector plays an irreplaceable role in ensuring national food security and agriculture development. Pakistan is self-sufficient in Urea as the fertilizer industry has collectively made multi-billion dollar investments, which garner a mere 10% return on assets; far lower than other capital intensive sectors in the country.
However at a national level, we save over $2 Billion per year on foreign exchange by import avoidance and urea has delivered to farmers at around Rs1800/bag vs. international prices of around Rs 2800/bag.
Over the past 9 years the fertilizer industry has received Rs 132 B in gas subsidy but it has delivered 4 times the benefit i.e. Rs 527B in direct benefit to our farmers by selling urea, on average 20-25% lower than international market prices.
At the same time the fertilizer industry uniquely delivers an amount almost equal to their entire profit to national exchequer in the form of taxes and levies while generating tens of thousands of jobs.
On 01 Jan 2012 PPP Government, imposed GIDC through GIDC Act 2011 and subsequent Acts/Ordinances jacked up the cost of production considerably, as fertilizer sector was levied GIDC at much higher rates (Rs. 300 per MMBTU), triple that of power sector (Rs. 100 per MMBTU) and double the rest of industrial sector (Rs. 150 per MMBTU).
In spite of clear discrimination, fertilizer was probably the only sector that paid a significant amount of Rs. 129 Billion as GIDC to the exchequer.
The GIDC legislations were challenged in different courts of law on various occasions and grounds, especially for being unconstitutional, unreasonable and discriminatory. The payment against GIDC is not being made as cases are still pending with valid stay orders.
Taking a lead from the settlement of GIDC for CNG Sector, PML (N) Government entered into negotiations with fertilizer industry as well to settle the issue on the similar lines.
However, the matter could not be finalized as the tenure of the Government was coming to close.
Thereafter, PTI government finance team, also expressed the desire to settle the issues so that Government starts receiving GIDC to bridge the widening fiscal deficit of the Country. Thus in January 2019, it was decided that GIDC chargeable to the industry to be broadly reduced to half, retrospectively as well as prospectively.
It is worth noting that Urea was selling at Rs. 1580 per bag before GIDC was imposed initially in January 2012. Thereafter, the twice increased gas price led to an impact of Rs. 168 and another Rs. 210 on 01 July 2019, which would sum up to price of Rs. 1958 per bag. If GIDC impact of Rs. 405 per bag was fully passed on, Urea should have been selling today at Rs. 2363 per bag, the impact of change in sales tax and inflation notwithstanding. The mere fact that Urea is presently selling at Rs. 1840 per bag is reflective of inability of the fertilizer industry to pass through the full impact of GIDC.
The gas prices were significantly increased on 01 July 2019 that led to rise in cost of urea by Rs. 210 per bag. Advisor Industries, Mr. Razzaq Dawood persuaded the manufacturers to absorb the adverse impact of increase in gas price in anticipation of GIDC settlement.
However, the recently promulgated GIDC (Amendment) Ordinance 2019 was much to the dismay of fertilizer industry, being highly unfair and discriminatory to fertilizer industry that had paid more in the past compared to other industries.
The GIDC (Amendment) Ordinance 2019 carried multiple technical flaws and ambiguities and did not address the concerns of the industry players that had been repeatedly raised.
With the decision of the Honorable Prime Minister to withdraw the said Ordinance, the Fertilizer sector is the only sector that would end up bearing a huge loss of Rs 4 Billion, as the impact of gas price increase has not been passed on since July 2019 in anticipation of a GIDC settlement. Industry is now left with no other option but to adjust the prices of urea to pass on the impact of increase in gas prices on cost of production.
Even with this adjustment, the industry would continue to deliver on its commitment to support the farmers by providing locally produced urea at a substantial discount of 30%, amounting to Rs 800 per bag, against the imported urea.
The industry would also engage with the Advisor Industries to firm up a mechanism to recoup the heavy loss incurred during this interim period.
The industry would urge the Government to urgently finalize a mechanism to address the long outstanding issues of subsidy and sales tax recoveries to support the industry in ensuring availability of fertilizer at affordable prices for the farmers.