Liquefied Petroleum Gas (LPG) Market Inquiry outcomes: Competition Commission briefing

Economic Development

30 May 2017
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Competition Commission submitted its market inquiry outcomes on the liquefied petroleum gas (LPG) industry in South Africa, and pointed out that the industry was controlled by five large companies -- NATREF, Sasol, PetroSA, ENREF and CHEVREF -- which supplied 80% of their production to the four major wholesalers -- Easigas, Afrox, Total Gaz and Oryx -- which accounted for more than 90% of the market. These four companies supplied 85% of the gas to bulk suppliers, and only 15% to households. They all had foreign origins but somehow had black economic empowerment (BEE) participation. Based on these findings, the Commission had announced the initiation of a market inquiry into the industry in August 2014.

The Commission had made the following findings:

  • The market conditions were highly concentrated and vertically integrated;
  • Imports were expensive, but there were limited import and storage facilities for LPG in the industry;
  • The National Energy Regulator of South Africa’s (NERSA's) infrastructure licences were valid for 25 years;
  • Regulatory clearance took about three to four years;
  • There was an anti-competitive market due to long term supply agreements (unlimited renewal clauses and 25-year leases with the same wholesalers);
  • In the cylinder exchange market, the agreements created entry barriers, and allowed for illegal activities;
  • The supply agreements prevented end-users from easily switching suppliers at the end of a contract.

The Commission had made the following recommendations:

  • There was a need for import efficiency and optimisation for sourcing LPG at a lower cost;
  • NERSA must issue and monitor wholesale licences;
  • There must be fewer regulatory bodies in the industry;
  • NERSA and the Transnet National Ports Authority’s (TNPA’s) processes should be aligned, using the existing memorandums of understanding (MOUs);
  • Agreements must be capped at ten years, and unlimited renewal clauses must be done away with;
  • Refineries must allocate at least 10% of LPG production to small wholesalers for at least two-year supply agreements.

Members asked about the actions that the Commission had in place or had embarked on to monitor collusive behaviour in the industry; whether NERSA had the capacity to do everything that the Commission had recommended it to do; how the Commission could go about facilitating the infrastructure for LPG storage in order to scale it up, and whether was there anything that the Department of Energy could do to help facilitate that, especially through the Presidential Infrastructure Coordinating Council (PICC); why there was limited use of LPG in households; whether the Commission had spoken to other Competition Commissions in other jurisdictions to ascertain whether they were also facing similar problems to those faced by South Africa; whether the multiplicity of regulatory bodies in the industry actually did the industry justice, and whether the Commission would rather prefer fewer regulatory bodies in the industry; and whether the Commission had considered the 10% set aside for small players in the industry as a limitation for growth. 

Meeting report

Competition Commission: LPG market inquiry outcomes

Mr Tembinkosi Bonakele, Commissioner: Competition Commission, said that in 2013, the Competition Act was amended to confer broad powers on the Commission to conduct market Inquiries, which entailed an analysis of the state of competition in a particular market, rather than focusing on the conduct of individual firms. Previously, the Commission could investigate and prosecute only identified firms for infringements of the Competition Act, such as those involving cartels and abuses of a monopoly position. A market inquiry was one instrument in the Commission’s investigative tool box which was designed to ensure that markets operated in accordance with the objectives of the Competition Act. In order to initiate a market inquiry, two jurisdictional facts must hold -- the Commission to have a reason to believe that any feature or combination of features of a market results in the prevention, restriction or distortion of competition, and then the Commission must conduct a market inquiry to achieve the purposes of the Competition Act. Upon the completion of the inquiry the outcomes may vary from a firm being referred to the Competition Tribunal for adjudication, to policy, legislation and interventions by government. When the Commission has completed its inquiry, it must then submit a report to the Minister with or without recommendations, and that report must be submitted to the National Assembly within ten business days.

On 15 August 2014, the Commission officially announced the initiation of the LPG market inquiry, as the following features of the market had been identified as a cause for concern:

  • Structural features of the market;
  • High switching costs;
  • The regulatory environment and its impact on competition; and
  • The limited usage of LPG at the household level.

After the Commission announced the market inquiry, it had proceeded to undertake the process of gathering evidence through the submission calls, site visits and information requests. A range of methodologies were applied, both qualitative and quantitative, in order to draw conclusions and improve evidential rigour.

There were five refineries in South Africa with limited capacity, and the price regulation at the refinery gate and retail level was determined by the Department of Energy. Four of the refineries accounted for over 90% of the market at the wholesale level, and all four wholesalers had foreign origins with some level of black economic empowerment (BEE) participation.

Findings and recommendations

With regards to pricing in the regulatory environment, the prices were determined by the Department of Energy to be sold at a maximum level for both households and wholesale level. The market inquiry findings reported that the Maximum Refinery Gate Price (MRGP) did not incentivise refineries to prioritise the production of LPG over other petroleum products, which results in a negative impact on security of supply. For smaller volumes of LPG, the MRGP was lower than the landed import price, so there were high costs of logistics, as South Africa had limited import and storage facilities for LPG. The MRGP and MRP (Maximum Retail Price) had not been reviewed by the Department of Energy (DoE) since 2012, and it had not monitored the price due to its limited resources. The DoE had only nine inspectors responsible for over 5 000 service stations, and this resulted in pricing abuse by some of the market participants, and sanctions that protected against over-pricing were ineffective, as the DoE did not have prosecutorial powers.

Based on these findings, the Commission recommended that the price-monitoring for both MRGP and MRP in South Africa be undertaken by the National Energy Regulator of South Africa (NERSA), because this was within the context of its mandate to attract investment, stimulate production and ensure regulatory certainty. Secondly, there should be price de-regulation in the long-term, but only once supply constraints have been resolved and the DoE must undertake a study on how price de-regulation can be achieved.

With regards to findings on the non-price regulatory environment, the LPG sector had a myriad of regulations and licensing requirements at various levels of the value chain. The regulatory environment raised a concern due to perceived overlaps and misalignment amongst various regulators due to infrastructure licensing requirements and wholesale licensing requirements. For instance, with infrastructure licensing requirements, overlapping jurisdiction leads to projects being stalled because regulatory clearance for a refinery takes up to four years, whilst clearance for wholesalers with storage facilities takes up to three years. The Commission then recommended that NERSA should be responsible for wholesale licensing activities and monitoring, and NERSA and the Transnet National Ports Authority (TNPA) adjudication processes should be aligned.

Production of LPG in South Africa was limited, and imports were used to fill in the gaps in domestic supply. Current import infrastructure was inadequate and had stifled the uptake of LPG, so a number of import facility construction licences have been granted. If these facilities were constructed, the supply bottlenecks currently faced by the country would be addressed. The Commission recommended a review of the regulatory frameworks applicable to the construction of LPG import and storage facilities as outlined in the applicable legislation, including the National Ports Act and the Petroleum Pipelines Act.

In terms of long-term supply agreements, market inquiry findings indicated that LPG was allocated to wholesalers on a contractual and/or spot basis, and producers preferred long-term contracts. Major refineries allocated LPG mostly for internal consumption, followed by contractual obligations and a small portion for spot sales. The challenges in securing supply from refineries posed a significant barrier to entry, as wholesaler competitiveness was dependent on being able to obtain a sufficient and consistent supply of LPG. Furthermore, major wholesalers were favoured and given long-term contracts of up to 25 years for renewal of evergreen contracts -- basically unlimited renewal. The Commission also found that 10% MRGP discounts were available only to large businesses, because these discounts were not available to smaller players. Small wholesalers had to price competitively against large wholesalers, despite declining volumes in the spot market and without any discount benefit. The effect of long-term supply agreements gave large wholesalers a degree of competitive advantage, and these agreements were offered on a preferential basis which consequently made market entry less possible. It was important to note that reform to a more competitive market entailed enabling small wholesalers to secure sufficient volumes of LPG on a consistent basis.

The Commission recommended that supply agreements to be capped at a ten-year duration because this would provide sufficient opportunity for wholesalers to recoup their investments in storage and provide them with predictability of demand. Automatic renewal clauses in supply agreements must be removed, to prevent supply agreements evolving to evergreen contracts. Refineries must allocate a minimum of 10% of LPG production (excluding internal consumption) to small wholesalers, and not more than 90% should be allocated to long-term wholesalers. The 10% allocation should be made through a supply agreement of at least two years, and if small wholesalers were unable to purchase the entire 10%, the remaining LPG could be sold on the spot market.

Cylinder exchange was a practice amongst wholesalers and distributors, where empty cylinders were exchanged between, or returned to, owners. The Commission found some distortions in this practice, including the fact that the exchange practice was governed through bilateral agreements and new entrants struggled to participate, and this posed a barrier to market entry for new entrants. The access to these cylinders by end-users was encompassed by a deposit fee, where the DoE had set the limit to a maximum of 45% of the landed price of cylinder. However, the DoE had not reviewed this deposit fee since 2010, and there was evidence of collusion amongst wholesalers to increase deposit fees.

Another challenge with the deposit fee was that the uniform deposit rate across different sizes of the cylinders was not justified, because domestic end-users who use cylinders below 9kg, were paying the same deposit as commercial customers, who use cylinders 19kg and above. The cylinder exchange was also coupled with a practice called cross-filling, which was when an industry player refilled a cylinder belonging to another wholesaler. The implications of this practice included safety concerns, and it was unlawful in the absence of an agreement. The Commission found, amongst other findings, that this was a prevailing practice in the industry.

It therefore recommended that any licensed wholesaler should not be unreasonably refused participation in the cylinder exchange programme, and the current hybrid method should continue. For 9kg cylinders and below, customers could either lease or purchase a cylinder from a wholesaler or retailer. With a leased cylinder, a customer may only refill it at the respective wholesaler or designated distributor, or may exchange the cylinder at an accredited exchange site. With a purchased cylinder, a customer may fill it at any accredited filling site.

The Commission recommended that the cylinder deposit fees should be linked to the landed cost of importing cylinders. NERSA should perform the review of the cylinder deposit rate, and the Commission would continue with its ongoing cartel investigations separate from the market inquiry process, particularly with regard to the deposit fees. Because cross-filling this could be done legally and illegally, the Commission recommended that it should occur within the confines of the law.


Dr M Cardo (DA) asked about the actions that the Commission had in place or had embarked on to monitor collusive behaviour in the industry. Did NERSA have the capacity to do everything that the Commission had recommended it should do? How did the Commission go about facilitating infrastructure for LPG storage in order to scale it up, and was there anything that the Department could do to help facilitate that, especially through the Presidential Infrastructure Coordinating Commission (PICC)? Lastly, why was there limited use of LPG in households – was it perhaps because of safety concerns, or something else?

Mr M Mbatha (EFF) said that in many Southern African Development Community (SADC) countries, LPG was big business and one would find that it was also conducted in small scale markets, as was the case historically in South Africa, but somehow that market had been pushed or fizzled out. When had this unbundling happened – did it have to do with the closing up of markets for small businesses, and those that had potential in the townships, because at some point this sort of business was booming in the townships? Lastly, in Durban there was a refinery called SAPREF, a joint venture between BP Southern Africa and Shell South Africa, and when they founded SAPREF those two companies might have collapsed previous relationships that existed before SAPREF absorbed them. Did the Commission know of any sub-division companies that served as the middle-man that the refinery was in business with around the KwaZulu-Natal area, as well as any companies that had lost business as a result of that merger?

Mr P Atkinson (DA) asked whether the Commission had spoken to other competition commissions in other countries to ascertain whether they were also facing problems similar to those faced by South Africa.

Mr S Tleane (ANC) asked about the multiplicity of regulatory bodies and whether it assisted the industry in the view of the Commission, or whether the Commission would ideally prefer that the industry regulatory bodies were fewer. The presentation had informed the Members that the industry was dominated by big companies, but nothing had been mentioned about mergers to try and break down this dominance to allow new players to come into the market in a big way – there was no clear proposal that would enable a strong entry of those who had not been participating in the industry previously.

The Chairperson stated that with the classification of smaller wholesalers and large wholesalers, and the limitations set, there was still uncertainty whether these limitations would assist the smaller players to surge into the industry and grow. For instance, the supply limit had been set at 10% for small wholesalers and not more than 90% for larger wholesalers. It appeared that these limitations were an inhibiting factor for small players to grow, so had the Commission looked into this? The cylinder exchange practice was very unfair. People would have new cylinders in their homes and when they purchased the gas and had their cylinder exchanged with an old cylinder, one could possibly expose the households to danger and a compromise on safety. It had been said that there were only nine monitors for the inspection of service stations and they were responsible for monitoring over 5 000 stations, so if they were only nine monitors/inspectors, how many did they even managed to cover in a specified period? The regulations should be crafted in a way that it allowed some kind of reporting by stations that would allow the stations to not go without being noticed when they were flouting the regulations.

Mr Atkinson asked the Commissioner whether there was already a list of regulations that were relevant to the industry and the blockages which could to be looked at again and updated to ensure that the market was fair.

The Commissioner said the Commission planned to monitor collusion through focusing its attention on the sector and conducting random raids at the premises of the firms, but he thought that was the tip of the iceberg. In all sectors, there was a need for government and businesses to work together to influence regulation and address issues such as the cylinder exchange practice and the safety concerns. In situations like these, there was always the risk that people would go beyond what had been agreed by both government and business, so the Commission had a permanent team in place that was looking at monitoring. When the Commission raided the industry, it also raided the South African Petroleum Industry Association (SAPIA), the regulatory body for LPG, so the role of that regulatory body committee had been a huge problem in terms of the amount of influence it had over government regulation. There was a need to ensure that such platforms were not abused for self-serving purposes or to exploit the government or consumers.

He was uncertain whether there were sufficient monitoring mechanisms in the industry as it currently stood. The Commission had in the past refused to sit in industry meetings, because people knew the laws and could have lawyers that could help them with compliance issues. The Commission could not sit in those meetings and then turn around to influence legislation that would be fair across the industry for all players, and so could not be part of the engagements because the Commission would not be able to launch investigations when it had participated in those meetings.

NERSA did not have the capacity to implement its recommendations, but the capacity would have to be built to ensure that these recommendations came to light. More stations needed to be opened, because gas could not be sold in stations that sold fuel, so perhaps the opening of small operators needed to be considered because gas required monitoring with regard to both price and safety, so capacity would need to be increased significantly. Cylinder exchange was not monitored by any regulator, as it was operating through bilateral agreements, so the exchange was basically leasing through all the wholesalers who had these bilateral agreements. One would keep getting the different cylinders belonging to different wholesalers and filled by different wholesalers, as per their exchange agreements. The agreements reflected that the wholesalers were responsible for the safety of their cylinders when the end-user was holding that cylinder, and that was the form of exchange that they had when they helped each other with distribution. The alternative practice was where one bought an unlabelled cylinder and filled it up at an accredited filling station, and if it became old the owner could throw it away and get a new one. Frankly, the Commission did not choose either practice, but there had been a lot of lobbying that the Commission had chosen the current hybrid because the second choice was too costly. In countries which allowed an exchange model – where one could go and fill the cylinder with anybody -- largely in developing countries like Zimbabwe and Nigeria --there was a lot of competition in their markets, which meant it was something beneficial for new entrants in the market. However, the problem with this model was that when it was tested for safety, it was not ideal.

Further negotiations with the suppliers and customers would have to be undertaken to ascertain at what point small players no longer qualified as such, but this would also need some sort of a charter with the industry to be established. The industry needed to be monitored closely with regard to small, medium and micro enterprises (SMMEs). In the past, mergers were allowed to occur because of capacity, but now the Commission would have to refuse mergers that were happening only due to the fact that the smaller players wanted to sell because they could not grow as a result of market conditions that were not favourable. They needed to be given a path for growth, and disallow the transactions completely going forward.

There was progress with infrastructure but it was slow. One of the case studies before the Commission was a company in the Western Cape. They had imported infrastructure and would be selling to everybody on similar and non-discriminatory terms, and this would address a lot of bottlenecks. The Department of Economic Development (EDD) had brought this up with the Presidential Infrastructure Coordinating Council (PICC). There would likely to be some increase in imports and the Commission had emphasised to the EDD that the importers did not just play at the wholesale level, but had to supply to everybody and get the refineries to think about how they would respond to the import capacity.

The Commission definitely favoured fewer agencies or regulatory bodies in the industry to deal with licensing, and it was proposing strongly that NERSA should be the only regulatory body to deal with the matter, but with environmental issues the Department of Energy would need to be involved. The Commission had therefore proposed a memorandum of understanding (MOU) that would get every player to sit around the table and entertain the applications.

Currently there was no report on how the Commission could break the monopolistic behaviour, but it could deal with behaviour only in terms of supply contracts or agreements between and amongst industry players. There was no legal mechanism to dismantle the structure right now.

There was a host of regulations that could be looked at and reviewed, but the main one was a new piece of legislation that would empower NERSA to carry the recommendations proposed by the Commission and to be sponsored by the DoE. Part of the problem was that these regulations were scattered in many other legislations, so a consolidation needed to be done, and it had to be made clear who had the powers when formulating new legislation or amending the existing ones.

Dr Liberty Mncube, Head: Policy and Research at the Commission, said that the unbundling had occurred over time, and there was no specific point in time at which it could be identified. As for relationships, there was Shell and EasiGas, BP and Oryx, and SAPREF (Shell and BP). The Commission had taken an arbitrary number that defined a small player in the industry, and that was 10 000 tons per year of gas produced. That was basically the definition of a small player in the industry.

Mr Mbatha said that Easigas used to be owned by government, and asked what had happened to that relationship.

Th Chairperson advised that if the delegation did not have the answer to this question, it could always come up with the answer at a later stage.

Mr Mbatha said that when one entertained these kinds of inquiries and one’s objective was both competition and transformation, there tended to be a growing assumption that the responses like the Commission gave to existing players was actually one of the reasons that consolidated unfairness. This was because they gave so much credence to the idea of disruption, with the aim of re-aligning and re-arranging the lower levels to fast-track the small and family businesses, instead of protecting the smaller players. These associations across departments were “extraordinary monsters” that recommended certain officials to be technical assistants in government commissions and inquiries, and this fed into a system that drove itself for the preference of certain people and businesses. If one transformed and disrupted, the objective was automatically defeated.

The Chairperson said that although there was a doubling from 5% to 10%, it did not address the problem. It was not enough and it ended there, because it did not even talk of the middle businesses, but only to the small and large businesses. The market inquiry needed to be opened up for the previously disadvantaged, and although they might not have the financial muscle, the capacity in other aspects may be there. While attempts were being made to transform, one must not limit the growth of smaller players through percentage thresholds, and neglect the medium-sized businesses.

The Commissioner said that he agreed with the comments and arguments brought forward by the Members, and conceded that the report did not say much about the issue of transformation, and this was something that had been highlighted in the industry. The industry was highly foreign-owned, which had been mentioned to the Minister, who was aware that the industry was controlled by French and German companies. When there are mergers with entrepreneurs, the Commission debates with them on these issues. Reatile, for instance, a South African black-owned medium-sized company, wanted to merge with Easigas but the Commission had firmly communicated that the merger would not be allowed under the conditions that were initially drawn up, which had been 26% ownership of Easigas by Reatile, so there had been further negotiations and the second set of terms and conditions had proposed a 40% ownership, and only on the new terms had the Commission allowed the merger to go through. The Commission had, however, made it clear that a consideration to increase the 40% to 51% should be later introduced, but due to financial implications that transaction would not have been possible. So the Commission was not complacent in its responsibility to ensure that transformation became prevalent.

The Chairperson welcomed the input from the Commissioner, and Members indicated they were satisfied with the engagements thus far. She advised that perhaps further engagements with the Commission needed to take place around petroleum, because it was another air-tight industry.

The meeting was adjourned.


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