Fertiliser manufacturers accused of overcharging Rs 77 billion in one year: TI-Pakistan concerned over SECP's silence

The mysterious silence of Security and Exchange Commission of Pakistan (SECP) in the case of overcharging by the fertiliser manufacturers in the price of urea to the extent of Rs 77 billion in one year, as per the calculation of Competition Commission of Pakistan (CCP) is appalling indeed.
The ever vigilant Transparency International Pakistan (TI-Pakistan) without loss of time has taken up the matter with the SECP, reminding them of the complaint forwarded to the Commission on June 24, 2012 on the fictitious loading of production cost by power producers and fertiliser manufactures, with a request to SECP to conduct audit of the accounts of all power producers and fertiliser manufactures, so that the additional costs charged by these firms if any, are determined, and the nation gets the relief by depositing in the national exchequer all such overpayments claimed from public, and all those found involved in this malpractice are taken to task under the laws of land.
Advisor, TI-Pakistan, Syed Adil Gilani in a letter sent to SECP Chairman Muhammad Ali on December 26 reminded him that on September 24, 2012, SECP had sent to TI-Pakistan an inquiry report, which had confirmed that private power producers were guilty of allegations and were found involved in fictions loading of cost in their accounts, however, SECP in the same report had also informed Transparency International Pakistan that all the IPPs have gone to High Courts and taken a stay order against SECP.
On October 11, 2012 TI-Pakistan approached the Supreme Court of Pakistan with a request for indulgence in this matter, as this was a question of loss of over Rs 1,000 billon, caused to the exchequer by IPPs, and the very fact the IPPs have approached the High Court to stop the mandatory function of SECP confirmed that they are guilty, and do not want the misdeeds to be exposed.
But on the second issue of fertiliser manufactures there was no response received from the SECP since last six months on any action taken to audit the accounts of fertiliser manufactures. However, Adil Gilani said that taking notice of such complaints, CCP took notice, and according to reports a two-member committee of the Competition Commission of Pakistan has come up with evidence on how the urea market has been rigged by a few players.
As per TI-Pakistan's letter following allegations have been reported:
1. That there is unprecedented 86 percent price hike (from Rs 850 to Rs 1,580 per bag) by all the manufacturers, citing gas shortage in 2011 and its impact on the industry.
2. That according to the report, gas curtailment had impacted only 27 percent of the total urea manufacturing capacity in the country during that period. The rest 73 percent was un-affected and provided no apparent justification for such an unreasonable increase in price. But still, they followed, what they called 'market trend', and increased the price to a level that had no earlier parallel.
3. That the report noted that the manufacturers not only increased price at will but also refused to pass on the benefit of government subsidies to the farmers.
4. That on the basis of this increase, as proven by the profitability analysis of the report, the profits of manufactures went significantly higher as compared not only to their own profits in previous years but also compared with average in other industries.
5. That in particular, both plants of Fauji Fertilisers, which were not significantly impacted by gas curtailment, registered profits before tax of over Rs 49 billion in 2011 (Rs 33 billion for FFC and Rs 16 billion for FFBL). This amounted to twice the profits for these undertaking in the preceding year.
6. That despite the fact that Engro's old plant was a beneficiary of price hike due to insignificant effect of gas curtailment, its new plant was impacted, the profit before tax for 2011 was Rs 6.9 billion as against Rs 5.2 billion of 2010 notwithstanding the fact that financial costs and depreciation charges for new plant amounted to over Rs 10 billion in 2011 as against rupee two billion in 2010.
7. That the benefits of subsidies were not passed on to the growers. The federal government had given subsidies of more than Rs 77 billion to urea manufacturers in the last three years (2008-11) in the form of reduced price of feed stock gas as against the price of fuel gas. While this concession was meant for urea to be made available to growers at cheaper rates, there was no sign of growers benefiting from regular high price hikes.
8. That the urea producers reported that the amount of subsidy on feed stock gas per bag of 50kg is Rs 325. However, as per the finding of the enquiry committee if feed gas is considered at the rate at which fuel gas is provided to the fertiliser industry, the subsidy works out to be Rs 424 per bag of 50kg.
9. That if subsidy is calculated considering the rate at which gas is supplied to other customers, the subsidy per bag would be over Rs 500 per bag of 50kg. With the amount of profits being made by the fertiliser manufactures, the subsidy, if at all, has to be offered, it should rather be offered directly and in targeted manner.
10. That taking all the above factors into account, it appears that the abnormal price increase by all the manufacturers at the same time was unjustified. Where factors such as economies of scale, operation efficiency, innovation and impact of gas curtailment varied from one urea producer to the other, the manufacturers increased prices at the same time.
11. That this increase is unmatched in any other period of industry's history.
Adil Gilani said, according to CCP report, fertiliser companies in 2011 year alone have raised price of fertiliser by Rs 730 per bag, and on 4.4 million tons produced locally, on 82 million bags, additional profit of Rs 61 billion has been made by the fertiliser manufacturers.
If it is true, that farmers have been overcharged, which has directly resulted in increase of support prices given to farmers by the government, all this manipulation in prices was being done and SECP kept silent, though Transparency International Pakistan had warned SECP in June 2012. The main input in urea is gas and there was no increase in cost of gas, and therefore the Rs 730 per bag is outright cheating, and that too at the cost of exchequers as these manufacturers have been supplied gas at Rs 25 billion subsidised cost.
Transparency International Pakistan requested SECP Chairman to inquire about the reasons of the discriminatory behaviour of management between IPPs & fertiliser manufacturers, as to why when on Transparency International Pakistan's request, audit of power producers was carried out by SECP in August 2012 and the compliant was found correct, audit of the fertiliser manufacturers, was not initiated.
In view of the findings of CCP, the SECP Chairman is again requested to take appropriate action under the provisions of Companies Ordinance 1980 and SECP Act 1997, so that the loss incurred due to 86 percent hike in urea price is recovered from the companies and deposited with the exchequer, which has given Rs 77 billion subsidy to these companies in last three years, and also for the purpose of warning every one that such malpractices would not be tolerated by the SECP, he said.
Copies of the letter have been forwarded for the information and necessary action as per law to: Chairman, Public Accounts Committee, Islamabad; Chairman, NAB, Islamabad; Minister of Finance, Islamabad; Registrar, Supreme Court, Islamabad, and Chairperson, CCP, Islamabad.