Senior ministry officials told The Financial Express that the objective of the new scheme was to remove `various aberrations' present in the existing RPS.

As urea pricing is a highly sensitive issue, the proposed scheme went through several months of detailed scrutiny by various ministries including finance. After finally getting the approval from all quarters concerned, the pricing policy now awaits a nod from the committee of secretaries subsequent to which it will be placed before the Cabinet.

Under the new scheme, the unit specific compensation being given to urea units will be discontinued. Instead, the long-range marginal cost of operation of urea units will be worked out based on the type of feedstock being used.

So, instead of reimbursing urea units individually on the basis of the accounts of costs submitted by them, the government will work out separate packages for units running on naphtha, gas and fuel oil. Under the new group retention price scheme, all urea units using the same feedstock will be paid uniform compensation.

According to sources, the scheme has been based on the recommendations of the high-powered committee on fertilisers, but necessary changes have been made keeping in mind the objections raised by the industry. "The HPC had recommended that normative cost for gas-based units should be based on 85 per cent of conversion costs. The industry had objected to it and we have taken note of that.

Officials said that the new scheme will help infuse a spirit of competition among the units. "At present, since units are compensated for all costs they incur, there is no incentive to cut costs. As the new scheme will not take into account the peculiarities of individual units, they will be forced to check their costs."

Moreover, the ministry feels that the new pricing scheme will put an end to the much criticised `gold plating' problem. As compensation will not be based on capacity utilisation, the issue of units over-stating their capacities will be redundant.

The uniform compensation scheme may adversely affect a considerable section of urea producers whose operating costs are relatively more due to various reasons including high transportation cost, high selling cost and in case of new plants due to higher provisions required for depreciation charges.

The long-range marginal cost will be calculated for a period of 15 years. Sources said that it may be revised from time to time if costs for a particular feedstock increases in excess of 5 per cent.