Mumbai: The government on Friday announced a new pricing policy aimed at encouraging investment in urea production to help increase domestic availability of crop nutrients and reduce the country's dependence on imports.

Under the new urea investment policy, the international price-parity formula for the domestic urea manufacturers would be adopted for calculation of subsidy and cost of production.

Import price parity (IPP) for the revamp of existing units would be recognised at 85 per cent  in a price band of $250-425 a tonne, while the same for expansion of capacity would be 90 per cent. The urea from the revised units of HFCL and FCIL will be recognised at 95 per cent of IPP.

The new investment policy, based on the recommendations of the Sen Committee, aims at attracting investments in urea sector for addition of production capacities through revamp and expansion of existing units, including revival of eight closed units of Fertiliser Corporation of India Ltd (FCIL) and Hindustan Fertiliser Corporation Ltd (HFCL), as also greenfield projects.

The policy provides for an import parity price (IPP) benchmark with floor and ceiling price of $250 per tonne and $425 per tonne respectively, for pricing of urea from new investments in this sector.

The production from revamped projects is proposed to be provided with 85 per cent of IPP subject to the same floor and ceiling price. Similarly, the production from expansion of these units will receive 90 per cent of IPP subject to the floor and ceiling prices. Further, revival of closed units in public sector will get urea price equivalent to 95 per cent of IPP, with the same floor and ceiling prices. The pricing of greenfield projects will be decided based on a bidding process which will be for a discount over IPP, after firming up of the locations (states) of the proposed new plants. The floor and ceiling price will be decided at the time of bidding.

Under the new policy, only non-APM gas will be considered for the new investments in urea sector. Further, gas transportation charges will be paid to units undertaking expansion and revival on the basis of actuals (up to 5.2 Gcal per tonne of urea) as decided by the regulator (Gas) subject to a maximum ceiling of $25 per tonne of urea. The cap will be subject to indexing as applied in case of inland transportation cost of urea.

The coal gasification based urea projects will also be treated on par with a revival or a greenfield project as the case may be. In addition, any other incentives or tax benefits as provided by government for encouraging coal gasification technology will also be extended to these projects.

The joint venture projects abroad in gas rich countries are also proposed to be encouraged through firm off take contracts with pricing decided on the basis of prevailing market conditions and in mutual consultation with the joint venture company. However, the principle for deciding upon the maximum price will be the price achieved under greenfield projects or 95 per cent of IPP as proposed for revival projects (in absence of any Greenfield project) with a cap of $405 cif India per tonne and a floor of $225 cif India per tonne (inclusive of handling and bagging costs).

The new investment policy is a departure from the existing policies which are based on cost plus approach with a 12 per cent post-tax return to the manufacturers. It is expected that the pricing policy based on market parameters will encourage investments in the sector and also substantial improvement in efficiencies.

Nitrogen (urea) is the only fertiliser where the country cannot be self-sufficient, based on the available and projected hydrocarbon (natural gas) resources in the country. However, the import dependence in this sector has increased in last four years. The demand-production gap is rising every year and may reach up to 19 million tonnes by 2011-12. In order to reduce this rising gap, there was a need to increase investments in urea sector, as there has been no significant investment in last 10 years, in this sector, the government said in a press release.