Government may introduce bidding process for urea unit investments2 min read . Updated: 29 Mar 2013, 10:02 PM IST
The reasoning behind the proposal is that bidding will eventually ensure that the subsidy outgo on urea comes down
New Delhi: The government may ask companies looking to set up new urea factories to bid for them instead of clearing investment proposals on a first-cum-first-served basis, although the minister who made the proposal has since left office.
Former fertilizer minister M.K. Alagiri had, in a 20 March internal note, written to fertilizer secretary Sudhir Mittal that “an open and transparent bidding process" should be put in place to clear investment proposals. Mint has seen a copy of the note.
Alagiri had asked Mittal to ensure that a mechanism on bidding be put up before the cabinet within a month.
Interestingly, Alagiri sent this letter shortly before he resigned from the cabinet, after his party, the Dravida Munnetra Kazhagam, withdrew support to the Congress-led United Progressive Alliance government at the centre.
Junior minister Srikant Kumar Jena took charge of the ministry after Alagiri’s departure.
In his letter, Alagiri said that after the government announced a new investment policy in January this year, four proposals to set up new urea manufacturing units and eight for capacity expansion in existing units had been received. These proposals are in addition to at least three expansion projects that are already underway.
A previous policy, announced in 2008, had failed to attract any investment in the sector.
India produces a little over 20 million tonnes (mt) of urea every year against annual demand of 28-29 mt. The deficit is made good by imports. Industry estimates indicate that in the next five years the annual demand for urea could go up to 34 mt.
A typical urea unit with an annual capacity of 1.2 mt costs ₹ 4,000-4,500 crore to set up and takes about four-five years to begin production after all regulatory clearances have been obtained.
“It would be desirable that the department evolves selection criteria at higher level for investors based on broad parameters of demand and supply, price competitiveness etc. both in India as well as international countries," the former minister said in his note.
The reasoning behind the proposal is that bidding will eventually ensure that the subsidy outgo on urea comes down.
To be sure, since the policy has already been notified, it will require to be re-notified if any changes are made.
The new investment policy assures producers post-equity returns in the range of 12-20%, both for setting up new units and expanding existing ones. Alagiri said in his note that a bidding process would help the government get a fix on “serious committed investors."
There is no mention of a bidding mechanism in the policy currently. Moreover, there is no ceiling on the number of plants that can be set up.
An executive of the Fertilizer Association of India, the principal industry lobby group, said that if the government decides to take the bidding route, “no investment will come".
“If this happens, even the existing proposals would be pulled back. But since Alagiri is no longer in government, we are hopeful that the government will make no changes in the policy," he said.
This executive added that “at least 10 mt capacity could be added, which would mean an investment of ₹ 40,000-45,000 crore".