GEARING-UP FOR COMPETITION

As shell prepares to relinquish their monopoly status in December this year; would-be players are actively reviewing the potential in the industry

The Liquid Propane Gas (LPG) market was privatized in 1995 when Shell Gas Lanka bought a 51% stake in the industry and were given monopolistic rights on the domestic market. This situation will end in December 2000 when the agreement between Shell and the Sri Lankan government expires and the market is opened up to new entrants. The two parties who have shown interest in entering the market are Caltex and the Hong Kong based company Mundo Gas. For the purpose of this article we were unable to get any comment from the latter party, though Shell and Caltex readily agreed to share their views.

Mano Tittawella, director general PERC briefly outlines the situation that existed at the time. 'We had a decision to make when we privatized in 1995,' he states, 'as is now we were some 120% below market because Shell is being subsidized, gas like diesel was being subsidized. A lot of people conveniently forget that. We were paying half the price we should have paid for a gas cylinder, like we are paying half the price we should be paying for diesel. There is no difference between petrol and diesel in the world. So we had problems when we privatized this company. It was completely outdated, there was a shortage of cylinders in the market, they were not producing or expanding, their storage facilities were archaic, they were getting gas through the port which is highly dangerous So we needed investment, we needed serious players to come in and we selected Shell'

For Idris Jala, country chairman and managing director Shell Gas Lanka, their five years of operation here have been eventful 'We have really increased the penetration of LPG into the market, a lot more customers are using it At that time we had something like 500,000 households using LPG, now we are talking about a million Lots of improvements have been made in terms of making it available to customers. We've opened up the distributor outlets. We now have 6 distributor points - there was a time when we only had one. Much of it is in the South and Western areas of the country. We have a filling plant in Kandy and we send cylinders up to Trinco'

The last 5 years have been a success story for Shell in term of opening up the market but in terms of profitability, it has been a difficult time 'As part of the monopoly,' explains Jala, 'we have been working under a highly price regulated market. The price was actually kept extremely low for the benefit of the customer and that was why we found it quite difficult to get; effective returns in investment to the share-holder, which is Shell as well as the government. To date we have spent US$1 million in Sri Lanka. We have just finished commissioning the new terminal. We spent US$82 million on that one and it will open the market more. It increases the storage capacity by four times! There's plenty of gas in the market.'

In the past five years Shell has been able to consolidate their brand presence here as well as establish an extensive distribution channel. 'We have a large nwork of 700 dealers and 36 distributors across the country. So that is what has been good. Our presence is clearly the in the market. So when free competition comes I think our channels will be solid and robust. What we are now doing with that channel is trying to encourage them to be a lot more responsive to customer improving service, because the name of game in real competition is about service.'
Indeed there is no shortage of gas an present but price is definitely a problem from the consumer's point of view It may be hard for the average consumer to comprehend but the fact remains that local prices are affected by world trends, Say Jala, 'if you look very closely at the import price, in March last year the import price was US$129 per ton. Today it stands at US$325 per ton. In one year it has gone up by 152%. We've only increased the price by 22%. So at today's price, even after increasing, we still make a loss.
The more we sell the more we lose! In January we subsidized our customers here to the tune of Rs. 97 million, in February it was Rs.80 million, in March we will end up subsidizing the customers Rs147 million.'

According to Jala the current price for a 13 kg domestic cylinder is pegged at Rs. 265 though if one looks at the economics of the business, the true price should be Rs518, in order for Shell to break even, 'At this point I am asking customers to conserve, ration the use of LPG, because we also can't afford to keep on losing this amount of money. If you keep the price low somebody has got to subsidize it, either the government or the oil companies. In the e case of, Sri Lanka from January up to now we have been subsidizing it and that is the current situation, It is extremely difficult. But because we have a monopoly, we continue to sell,'

Shell Gas has been conducting independent customer research on the usage of LPG in order to gather feedback on pricing, availability, health, safety, environmental standards and customer service. Based on results of this survey the average Sri Lankan consumer has indicated the price threshold at Rs500 per domestic cylinder. Any sum above this might force householders to revert back to other energy sources such as kerosene, firewood and electricity. However Shell statistics point out that LPG is 97% cheaper than electricity and only 27% more expensive than kerosene. Firewood is significantly cheaper than LPG but not easily available in urban areas in addition to being inefficient and messy.

In Jala's view however, import crude prices have to come down from their present incredibly high level. 'It will come down hopefully next year,' he speculates. 'A few years ago crude prices were extremely low and at those prices it was quite punitive for the producing country - US$8 per barrel that's too low, I grant that. Now it's about US$28-30 per barrel and that is too difficult for consuming countries. So somewhere in the middle is where it is likely to settle, I think around US$20 per barrel.'

Another issue that has angered consumers was the question of the quantity reduction in the cylinders. At the end of January Shell informed the public through all daily newspapers in all three languages that 'in line with international safety standards of LPG a 13kg cylinder contains 12.5kg of LPG and a 40 kg cylinder contains 37.5 kg of LPG.' This space is to allow for the expansion of gas inside the cylinder, due to increases in temperature. The lack of a space allowance could increase the pressure inside the cylinder thereby increasing the risk of leakage and associated safety hazards. Shell explains that 'by reducing the quantity and maintaining the price at the prevailing level, this equates to a Rs13 increase in price for a domestic cylinder. This has been fully discussed and agreed between Shell Gas Lanka and the Government in the management of LPG pricing in Sri Lanka.'

Being the sole player in a market supplying an essential consumer product is not easy. One is always the target of the consumer's wrath. So Shell welcomes competition coming into Sri Lanka. 'There has been talk that there are two competitors coming in. When I see the current price it's difficult to imagine they'll come, because anybody wanting to come in by January 2001 should start building their facilities now. If you don't build now you won't be ready, because it takes a long time. I hope they do come because I believe in having competition and then we will not take too much flak as well for price. Everybody shares as in other countries.'

"In our discussions with the government, when the monopoly opens up, prices should be brought to market. We are really encouraging the competition to come in, telling them it's a good market to come into. I'd like to see some competition then we have more transparency and the customers feel they have a fair deal and a choice.'

Jala's personal view is that monopolies should be a thing of the past. Nevertheless he underlines the fact that Shell signed an agreement when they came into this market, paying a large sum of money to the tune of US$30 million for entry alone at that time and for the monopoly rights that were granted. That he says is a lot of goodwill to invest in Sri Lanka. Shell is a long term player and Jala constantly stresses the fact that they are here for the long haul. 'That's why we put that money in the terminal, it's a 40 year investment. We are very positive that things will improve in this country in terms of the opening up of the northern and eastern corridor for the market. Over the 40 year period something has to improve! And then fair play wi\1 come in there'll be other people in the market. I feel confident about it. That is why we have decided to entrench ourselves in Sri Lanka by going into solar, lubricants and so on.'

CALTEX

Though there has been talk and speculation that Caltex will penetrate the LPG market, for the moment Shahid Ahmed, managing director Caltex Lubricants Lanka Limited will only commit himself to saying, 'we are actively reviewing it, looking at the opportunities and evaluating the potential in that business; We still have to make a decision moving forward but we are very much in the picture.'

In terms of the various lines of business of Caltex world wide, LPG falls into the gas and power sector. It is a strong point in key countries like Korea, China and India where there is a substantial activity in bottling and domestic piped LPG. In the case of Sri Lanka Ahmed indicates there would be various ways of establishing their presence. 'It doesn't necessarily have to be a r6tal investment by ourselves, we can certainly work with Shell, who are the only players here They've made a substantial investment in the country There are various ways to structure it if you look at any operation there's a supply/manufacture/distribution side and there's a marketing side We have to find where our strength lies, where we can gain the better advantage and then go for that. As I said we are still going through the analytical, feasibility reviews.'

Whatever form their operations here may be on a scale incomparable with India and China Says Ahmed, 'if you look at where we sit versus the flow of products, what it allows Caltex to do as a global company is put some weight behind its purchasing. So basically if I talk about the acquisition of LPG, if you are a large player you have the ability to influence the market So although we ourselves might be a small player' think we are going to benefit a lot from our larger subsidiaries in India and China. There's also the best practice aspect of it, they've been in business for some time so we've got all the things that we have learnt all packaged, so it's just a matter of bringing it down here and getting going'

With regard to the pricing aspect of LPG in Sri Lanka as compared to the rest of the world, this country enjoys one of the highest degrees of subsidy. As Ahmed, points out, 'the acquisition price for LPG has been moving up and down and the variability has been huge so there is certainly an unnatural situation when it comes to prices. There's not only pressure from companies to deregulate that part, there's also pressure from the World Bank, the IMF, because the expectation is that you have to be competitive on a world wide basis so your costing of raw material should also be competitive. So there drive to do that and there will be pressure on the customers in the short run but I think it's a cycle that countries go through and I think Sri Lanka as a whole has to decide when they want to take that step.'

Issues such as policies on pricing are upper most on the agenda that Caltex will have to discuss, negotiate and settle on before making a final decision in Sri Lanka. 'There are clarifications and confirmation required both internally from the Caltex aspect and obviously externally from the government, so we are engaged in that dialogue and I think we'll be able to come to some decision in the next three months. We are looking to reinvest in the country and actively looking at any opportunities. We are very encouraged by all the a activities PERC is undertaking in terms of liberalization of various markets and wherever there are opportunities which are in line with our core businesses, we'll be at them.'
