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Ideas & Debate

New rules will bring sanity in LPG market

LPG business
LPG business is capital intensive and usually with high unit operating costs. FILE PHOTO | NMG 

Currently there are over 30 liquefied petroleum gas(LPG) retail brands with as many brand colours as can be extracted from a rainbow spectrum. This is a reflection of well acknowledged Kenyan enterprise where lucrative business opportunities are quickly seized and “creatively” expanded. These brands exist in a market which currently stands at about 270,000 tonnes of cooking gas a year and which can quickly expand to 500,000 tonnes if supply chain pinch-points are eased.

It has been a rather chaotic LPG market growth with a lot of abuse and compromises on safety. This makes the new LPG regulations issued by Energy and Petroleum Regulatory Authority (EPRA) timely as these will systematically reinstate market order, safety assurances, and fair competition while guiding the LPG market to a sustainable volume growth.

Previous LPG rules allowed marketers to receive empty cylinders belonging to competition, exchange them with their branded filled cylinders, and return received empties to their owners. While this was convenient for consumers, unscrupulous marketers filled the returned cylinders with own gas, which is tantamount to using others investment for own business sales.

With significant brand counterfeiting, it became difficult for some marketers to take full responsibility for the safety of their branded cylinders, and this discouraged investor from committing more money in LPG business.

The new regulations will now put the onus on marketers, large and small, to individually or collectively take full responsibility for their branded cylinders. Those who wish to “co-operate” in cylinder exchange arrangements are now required to register mutual groups with the regulator. There will of course be those with sufficient LPG supply and distribution capacity who will opt to go it alone.

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To the consumers, the LPG regulatory transition will definitely be confusing and inconvenient, and this is why EPRA should put in place significant capacity to inform and educate consumers.

It is a significant step that thirty-plus smaller LPG marketers have organised themselves into the Energy Dealers Association (EDA). This association will enable the group to self-regulate themselves, form mutual cylinder exchange pools, and where necessary co-operate in the LPG supply chain to achieve economies of scale to reduce unit costs. Further, the EDA will provide the smaller market players with a combined voice and influence to collectively discuss their agenda with the authorities and regulators.

The larger marketers should definitely not take EDA for granted. The smaller players have the flexibility to outreach the remotest (peri-urban and rural) LPG demands potential, which the bigger marketers would not ordinarily access. Incremental LPG growth will essentially be driven by distribution and outreach strategies using whatever channels of dispatch that easily reaches the ultimate households. And every step in the distribution chain means new enterprises and jobs, making EDA a major grassroots employer.

LPG business is capital intensive (cylinders, filling plants, distribution vehicles) and usually with high unit operating costs. This is why a critical mass of business volume turnover helps. With time, a market rationalisation will definitely take place with the number of market players distilling down to about half, as the impact of the new regulations takes effect, and the reality of heavy investment requirements sinks in. It is a market game guided by economical market shares and units costs.

It is possible to reduce current retail LPG prices by as much as 30percent if critical actions are taken by the authorities. LPG should be imported jointly through the open tender system to allow all marketers, large and small, to have equal chance of access to LPG supplies at costs which have benefitted from economies of scale. This way, there will be no need whatsoever to import LPG through Tanzania...

However, common user LPG import facilities are required to facilitate bulk joint imports. Unfortunately this is a project which has always been “postponed” for whatever excuses by various past governments. It is what is preventing LPG demands from jumping to immediate potential of over half a million tons, while impeding actualization of the LPG-driven policies on environment and health.

Finally the new regulations are welcome as a significant LPG investment and market enabler, but should be enforced wisely to minimise market disruptions.

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