Once again, the much-talked-about project of Fatima Fertiliser Company Limited, which is a joint venture of Fatima Group and Arif Habib Group, has made headlines. The commissioning of the new green-field fertiliser project, ventured in the country after almost a decade, has been further delayed, costing the national exchequer an estimated three billion rupees annually, according to a recent report in "Business Recorder", in terms of import subsidies only.
This is besides the resultant project cost over-runs and belated socio-economic benefits to accrue to the nation. Even the allocated natural gas could have been gainfully utilised for power generation during the past few years.
Earlier, the project had been in the spotlight for the government granting it special favours - from the non-transparent manner in which sanction was accorded to the subsequent waivers of applicable penalties on the sponsors for long delays in achieving various milestones set by the Economic Co-ordination Committee (ECC) of the Cabinet.
Initially, the target was set for the project to come into production by August 2004, which, on expiry of deadline, was revised to end August 2006. Again the sponsors defaulted but were allowed then to put the project in operation by 31st August 2008. The targets missed again and lastly, the government quietly allowed project now to commence commercial operations in August 2009. Until today, physical progress on the project is dismally low.
Fertiliser Policy 2001 was framed to encourage investment, specifically foreign investment, in fertiliser sector, aiming to meet the rapidly growing domestic demand of urea and other fertilisers. It was envisaged that the demand-supply forecast confirms the economic viability of setting up two new fertiliser units, within the 10-year validity of the Policy, or undertaking major expansion of existing plants to almost the same capacity size.
Consequently, a number of incentives were offered to the investors, including allocation of feedstock gas on priority and sales of gas at concessionary rates. Earliest timeframe for completion of these projects was the core of the Policy, since the government continues to grant huge subsidies on fertiliser imports year over year. The prospective investors were therefore required to sign the Gas Sales Agreement (GSA) latest by June 30, 2005 as per the Policy.
In response to this Policy it was proposed by Fatima Group of Multan to establish a fertiliser project at Sanjarpur, Sadiqabad, district Rahimyar Khan. The proposal was considered acceptable by the government, without seeking any competition, despite the fact that the sponsors had no previous experience in the field and could have not qualified on technical and financial strengths.
Subsequently, the ECC of the Cabinet, in its meeting held on August 24, 2004, approved allocation of 75 million cubic feet per day (mmcfd) natural gas to Fatima Fertiliser project to produce 1.5 million tons of nitrogenous and phosphate fertilisers annually.
This approval, however, was granted with the condition that project should come on stream within two years from the date of approval of gas allocation, which was committed earlier by the sponsors. In fact, the government has dedicated Mari gas-fields, one of the largest national gas resources, for fertiliser industry to ensure a steady and reliable gas supply.
Shallow reservoir of Mari Gas has low thermal, or BTU (British Thermal Unit), value and is considered most suitable as feedstock for urea production. Mari gas-fields, discovered in 1956, currently covers a total area of about 1,200 square kilometers under lease. It has total recoverable reserves of nearly 8 trillion cubic feet (tcf) of natural gas and has produced about 3tcf gas until June 2006.
The five phases of the development of Mari gas-fields have resulted in gas deliveries to the volume of 446mmcfd at present. Out of this, about 130mmcfd is allocated to Engro Chemicals' fertiliser unit at Dharki, 80mmcfd to Pak-Saudi Fertilisers at Mirpur Mathelo now owned by Fauji Fertilisers, and 130mmcfd to Fauji Fertilisers' plant at Machhi Goth.
Remaining gas production is being provided to WAPDA's Guddu thermal power station for power generation. The latest phase of Mari gas-fields, known as Phase VI, was completed in 2003 that adds another 500mmcfd gas to the resource. The gas allocation of 75mmcfd to Fatima Fertiliser, both as feedstock and as fuel, has been made through this resource.
The project sponsors have signed the GSA with Mari Gas Company Ltd for sale/purchase of gas at the field-gate, on July 12, 2005. Though the GSA was not much behind the schedule, it was only in November 2006 - more than a year after concluding the GSA - that the sponsors signed an agreement with Sui Northern Gas Pipelines Ltd (SNGPL) for the laying of pipeline from Mari gas-field to the fertiliser complex. The 47-km long high-pressure gas transmission pipeline, costing Rs 250 million, is under construction.
Mystery still shrouds the circumstances that led to long delays in kicking-off the time-bound project of great national importance, though the foreign contractors were employed for construction of the fertiliser complex much earlier.
Sometime in August 2005, the sponsors had announced that the project was being set up, at a cost of US $300 million, in collaboration with China National Chemical Engineering Corporation (CNCEC) of the People's Republic of China. The contract was thus concluded between sponsors and the Chinese company, based on an earlier Memorandum of Understanding (MOU) that was signed on January 7, 2005. The project cost, however, was revised to US $336 million in December 2005.
On the premise that sources of technology and machinery were lined up, Prime Minister Shaukat Aziz performed, on April 28, 2006, the groundbreaking ceremony of the project, which was to be constructed on an area of 400 acres. On the occasion, the investors indicated yet another inflated cost of the project - US $475 million - without disclosing further details whatsoever. Nonetheless, there was no further progress on achieving the project implementation milestones as agreed and the project failed to take-off as scheduled.
It seems, the contract with the Chinese company, was not seriously intended to be implemented, instead it was a strategic decision on the part of the investors to delay the commencement of the project for other reasons. Maybe the plans were to relocate old fertiliser plant from Europe, instead of procuring new technology and plant machinery for the project.
Secondly, the consortium of Fatima Group (in the name of Reliance Export) and Arif Habib Group were meanwhile declared, in May 2005, the highest bidder for purchase of state-owned Pak-Arab Fertilisers (Pvt) Ltd (PFL) located at Multan. The consortium's bid of Rs 14.125 billion for 52% government shares of the large fertiliser complex was made in competition with industrial giants like Dawood Group, Nishat Group and Al-Ghurair of the UAE.
Did the project investors plan to take optimum advantage of their anticipated investment in the PFL, as reflected in the development of later events? Or, was the sanction of fertiliser project exploited for seeking the requisite pre-qualification for participating in take-over of the PFL management that was called afresh by the Privatisation Commission in July 2005? Perhaps only the project sponsors know the answer.
This, however, is a fact that valuable human resources of PFL have been made available to the sponsors, simply as a bonus, to undertake implementation of the Fatima Fertiliser project. Nevertheless, the time limit given by the ECC for the project's completion lapsed, sometime in August 2006.
Instead of revoking the gas allocation, however, as recommended by the Ministry of Industries, Production and Special Initiatives, it was decided by the ECC, in its meeting held on August 23, 2006, to further extend the deadline, without imposing any penalties on sponsors as prescribed. This time the ECC allowed the investors three months to achieve financial close and two years for project completion ie by August 2008.
Finally, the project achieved financial close within the revised timeframe, having finalised the security documents package, as the ECC was informed on December 27, 2006. A consortium of major local and foreign banks in Pakistan had meanwhile agreed to provide Rs 23 billion for the project that has equity of Rs 12 billion.
Once again, the sponsors escalated total cost of the project, revised to US $587 million, which worked out to be Rs 35 billion in local currency at that time. Now the project is said to cover an area of 800 acres - double of the original plan. Intriguingly, the financial structure of the company has been changed recently. Fatima Fertiliser Company will now be owned 70% by PFL, 15% by Fatima Group and 15% through public issue underwritten by PFL.
The integrated fertiliser complex is planned to produce intermediary products; ammonia 1,500 tons per day (tpd) and nitric acid 1,500 tpd. The plant machinery for both the units is old and second-hand. Ammonia plant has been dismantled from Holland, while nitric acid plant from the UK, and shipped to Pakistan.
The final products and respective capacities will be urea 1,500 tpd, nitrogen phosphate (NP) 1,200 tpd, nitrogenous phosphoric potassium (NPK) 1,000 tpd and calcium ammonium nitrate (CAN) 1,400 tpd. Again, second-hand machinery has been imported for the production of CAN and NPK fertilisers, both from Ireland. The machinery is being reconditioned, sand blasted and painted before re-assembly and erection at site.
Production unit for NP fertiliser is being supplied by CNCEC of China and urea plant by Kawasaki of Japan. It was only on August 10, 2006 that Sojitz Corporation and Kawasaki Plant Systems Ltd jointly confirmed receiving an order, valuing US $110 million, from Fatima Fertiliser to put up a 1,500 tons daily urea production facility.
Kawasaki of Japan will supply plant machinery based on state-of-the-art urea technology. Commercial operation date (COD) has been agreed between the investor and plant supplier as 42 months from the date of letter of credit. The urea production plant will thus be operational earliest by May-June 2010 against investors' commitment and the government's last deadline of August 2009. Obviously, it will not be possible to achieve the revised target either.
Pakistan's fertiliser industry is well established and based on advanced technology, with an investment of Rs 87 billion. There are ten production units in operation, nine in private sector including those privatised recently and only one in public sector that too is in advanced stage of divestment by the government. The sector has an annual installed capacity of 5,989,000 tons of a wide variety of fertilisers.
These include urea, nitrogenous phosphoric potassium (NPK), single super phosphate (SSP), triple super phosphate (TSP), nitrogen phosphate (NP), calcium ammonium nitrate (CAN), di-ammonium phosphate (DAP) and others. Lately, the industry has witnessed slowdown due to capacity constraints and privatisation of the public sector units. Currently, there is large shortage of fertilisers in the market. The widening demand-supply gap is being met through imports of fertilisers.
Once Fatima Fertiliser becomes operational, the Fatima Group - Arif Habib Group will emerge as one of the key players in the fertiliser industry, only second to Fauji Foundation. With a combined installed annual capacity of 2.3 million tons of fertilisers, the two joint venture companies will contribute largely to meet total domestic demand in future.
It is, therefore, imperative that the sanctity of the decision of the ECC shall be upheld this time, ensuring completion of Fatima Fertiliser project in time, else imposing strictly the penalties, as per the conditions, and performance guarantees be obtained from the investors for the purpose.