Deregulation Successes in LPG Market: Lessons from Brazil

1. World LP Gas Forum – Rio de Janeiro – Oct 2009 Deregulation program: successes and lessons Bolívar Moura Rocha

2. Historically (and until mid-1990s): pervasive controls – prices, quotas, market entry stable institutional framework: Petrobras + National Oil Council (Rule 843 of 1990) public policy goal/concern: prices (inflation) + safety Deregulation in a nutshell

3. Drives for change: 1994 Real Price Stabilization Program deleterious effects of protracted price controls: negative margins, poor services - pressure for price liberalization shift in public policy goals: deregulation aimed at competitive markets - power (1995), telecom and oil & gas (1997) Deregulation in a nutshell

4. Steps in deregulation process gradual price liberalization – conditional upon (i) Quality Program and (ii) adequate price behaviour from quotas to bilateral supply agreements elimination of price subsidies competition throughout the industry: plurality of supply sources (Oil & Gas Act 1997), multiflag resellers Deregulation in a nutshell

5. Brazilian Quality Program Cylinder population (100 Million 13kg) • new • 33,2 Million = R$ 3,0 Billion • requalified • 73,9 Million = R$ 1,0 Billion • scrapped • 14,2 Million • swapped • 1,1 Billion = R$ 0,4 Billion • US$2,5 billion invested, supported by “own brand filling” • more than 90% of • Brazilian cylinders renewed

6. Customers improved safety and quality at relatively modest price increases lowest income customers: access via special (subsidized) program LPG Industry opportunity to compete in new products/services Quality Program: successes

7. Public policy entrance of new players, free market job generation: new markets for filling equipments, cylinder and truck manufactures, service providers increased tax revenues recognition from society at large: successul program, alligned with international best practices, in sensitive area Quality Program: successes

8. Partial success only supply: de facto monopoly as a result of pricing policies bilateral supply agreements silent abandonment of public policy goal of competition throughout the industry unlikely that will change - reflects preference across the political spectrum Deregulation process: assessment

9. Multiflag sales point instituted in 2003 in order to foster competition (“intensifies competition in the marketplace and increases consumers`purchase options”) dealers can register directly with ANP without previous authorization from brand owner underlying belief that marketing companies held undesired market power that had to be checked (2002/2003 context) Importance/magnitude of issue cannot be overstressed more than 95% of 13kg cylinder deliveries to end-user through dealer network and their sales points approx 250,000 sales points in Brazil Deregulation process: assessment

10. Regulatory change backfired: informality; large proportion of sales point below legal/regulatory requirements - including safety; poor enforcement tools/human resources As a result… customer’s difficulty to identify different value propositions; gains of cylinder brand protection undermined discouragement to investment in innovation (given non branded network) uncertainty in respect of liability for accidents inducement to free-riding behaviour and illegal sales points; decrease of interbrand competition Deregulation process: assessment

11. Public policy concerns revisited - empirical observation (Tavares 2009) shows… real price decreases over 5-year period with supply prices below international benchmark = intense competition between marketing companies price peaks (2002-2003) due to commodity prices/exchange rate/elimination of subsidies – not to market power of marketing companies lowest prices where highest market concentration in marketing: market contestability as major deterrent to price increases highest margins in reselling where multiflag most widespread Deregulation process: assessment

12. extend quality program “outside the gate” – in distribution network services international experience shows exclusivity can be pro-competition - strong interbrand competition matters most under exclusive dealership, marketing companies are most effective enforcers of laws and regulations particularly relevant in Brazilian environment: 150 ANP officers in charge of 250’000 sales points stronger partnership between brand owners and dealers: key to provide better service to customers targetting in retailing: additional opportunities in the value chain and service differentiation Challenges Ahead

13. Recommended changes • require previous approval from companies to have their brands linked to a specific sales point • each sales point must be associated to one, and only one, brand

14. Contact: Bolívar Moura Rocha 55 61 2109 6090 bmoura@levysalomao.com.br