The Committee considered the Liquefied Petroleum Gas Market Inquiry outcomes prepared by the Committee’s Researcher as a summary to recap on the findings and recommendations made by the Competition Commission on the report. The Researcher shared the findings and the recommendations as well as the role of Parliament through the Committee going forward.
The market is highly concentrated and largely controlled by five refineries producing over 80% of Liquefied Petroleum Gas in the entire country. The refineries included, Engen; Chevron; Sasol; PetroSA and Sapref. Whilst this has been the case on the commercial side, the four largest wholesalers have 90% market share in the industry, all of them with foreign origins with only one South African based company Reatile which controls 40% of Easigas.
The Commission’s findings included, amongst others, that the market conditions are highly concentrated and vertically integrated, with expensive imports, and limited import and storage facilities for Liquefied Petroleum Gas in the country. There are regulatory overlaps, contradictions and inefficiency in the market in terms of the National Ports Act, and Transnet is allowed to grant 20-year concession agreements to developers within port precincts while the National Energy Regulator SA's infrastructure licences are valid for 25 years. The most concerning for some of the members in the previous engagement with the Commission on the report was the cylinder exchange practice, which the Commission found that the exchange agreements create entry barriers, and purports illegal activity. The fact that the market is anti-competitive and poses significant barriers to entry was also a substantive concern.
The Researcher also reported on the findings that were made by the Commission including the fact that the National Energy Regulator SA must issue and monitor wholesale licences, and supply agreements must be capped at ten years, and unlimited renewal clauses must be done away with so that other upcoming and growing suppliers can be given the opportunity to play a role in the supply side of the market. Refineries must allocate at least ten 10% of Liquefied Petroleum Gas production to small wholesalers for two-year supply agreements. In the previous engagements, the Members of the Committee felt this was a limiting factor because if they are just allocated 10%, how will they grow, and the allocation leaves out the medium-sized businesses capable of supply beyond the 10% threshold.
Parliament’s role through the Committee was to facilitate a joint meeting with the relevant Committees to discuss the Commission’s report, and present a way forward, as well as engaging with the Department of Energy and National Energy Regulator SA to report on future plans and response to the Commission’s recommendations; and recommend that the relevant departments draw up a strategy for the implementation and monitoring of the Commission’s recommendations.
Members expressed their inputs around the invitation of a legal team to give legal opinion on the matrix involved in the process before it can take a step further so that it can be informed on which wars to fight and obtain a clear direction on a way forward. However, Members were not very specific on the legal aspects that the legal teams would be engaged on.
The Chairperson welcomed the Members and submitted that the Committee’s Researcher would be taking the Committee through the LPG Market Inquiry outcomes, the summary of the report. This will also provide the Members the opportunity to decide on the way forward regarding taking the matter forward.
LPG Market Inquiry outcomes’ report – summary
Ms Nwabisa Mbelekane, Committee Researcher, noted that the market Inquiry provisions in Chapter 4A of the amended Act came into effect on 1 April 2013, and the Commission gave notice in the Government Gazette on 15 August 2014 – of its market inquiry on the LPG market. This was empowered by the amendments that came into effect in 2009 in the Competition Act to empower the Commission, amongst others to conduct market inquiries.
The LPG market in South Africa is largely controlled by five refineries, namely; ENREF (now Engen), SAPREF (BP Southern Africa and Shell SA), CHEVREF (Chevron), Sasol and PetroSA. These refineries combined produce over 80% of LPG in the South Africa. Four large wholesalers are controlling 90% of the market share, and those include AFROX which is the largest and is a subsidiary of the German based The Linde Group; Easigas which is subsidiary of Rubis Energie based in France – Rubis Energie owns 60% of Easigas and Reatile Gaz (South Africa) owns 40% of Easigas; Oryx which is owned by the Oryx Group; and Totalgaz owned by the French based Total Outre-Mer. This is an indication of how concentrated the market is, and the majority of the market is controlled by foreign companies.
Findings of the Commission on the market included the following:
- The market conditions are highly concentrated and vertically integrated
- Imports are expensive, and there are limited import and storage facilities for LPG in the country
- There are regulatory overlaps, contradictions & inefficiency in the market in terms of the National Ports Act, and the Transnet is allowed to grant 20-year concession agreements to developers within port precincts while NERSA's infrastructure licences are valid for 25 years
- Regulatory clearance takes about three to four years
- The market is anti-competitive with long term supply agreements (unlimited renewal /25 year leases with the same wholesaler)
- The cylinder exchange market agreements create entry barriers, and purports illegal activity
- There is limited disclosure: Supply agreements that prevent end-users from easily switching suppliers at the end of a contractual agreement
The Commission’s recommendations were as follows:
- Import efficiency and optimisation for sourcing LPG must be at lower costs
- NERSA must issue and monitor wholesale licences
- NERSA and the TNPA’s processes should be aligned using the existing MOU
- Agreements must be capped at ten years, and unlimited renewal clauses must be done away with
- Refineries must allocate at least ten 10% of LPG production to small wholesalers for two-year supply agreements.
- Cylinder exchanges must be made more inclusive
- NERSA must determine the rate of the cylinder deposit fees and must review it on an annual basis, so that they are aligned with changes in market conditions
- Maintain the current hybrid cylinder ownership model. The cross filling of cylinders must continue but in a legal manner
- Separate the LPG supply agreement from the LPG equipment agreement, or it must be stated clearly that the equipment is subject to a rental agreement
- Customers must be given clear information on switching contracts
The role of Parliament through the Committee could be to call a joint meeting with the relevant Committees to discuss the Commission’s report and craft in a way forward collectively, and call on the Department of Energy and NERSA to report on future plans and response to the Commission’s recommendations; and, recommend that the relevant departments draw up a strategy for the implementation and monitoring of the Commission’s recommendations. Then the Committee could organise joint meetings to follow up on progress made within agreed upon time frames, and hold joint public hearings to engage different players in the sector. In conclusion, the committee could also request ITAC to report on the status quo from an import licensing perspective to share some light on this.
Mr S Tleane (ANC) stated that before the role of Parliament takes effect the Committee needed to emphasise that the recommendation made by the Competition Commission that at least ten percent of the supply agreements to SMMEs was said and agreed by the Committee to be an inadequate allocation – as it leaves an impression that those SMMEs will be hindered to grow. The Committee agreed that must be changed. So, this needs to be reflected.
The Chairperson asked the Researcher what steps can be taken to lift up this inquiry to be a formal investigation – processes and procedures can be taken to lead it there.
The Researcher stated that in terms of the Competition Commission, a formal investigation will take place if there is a suspicion for illegal behaviour or collusion, so the inquiry is to ensure that evidence and more data or information is gathered during the inquiry as a prerequisite for further steps to be taken, if there will be any steps that will need to be taken. So, through their own processes – there are processes of conducting an investigation due to collusion, but the market inquiry is more like a study of the market to understand how it operates and identify the key players in the market and their influence in the market in terms of price, control over supply and demand. She noted that it possible for the inquiry to be elevated to the level of investigation.
The Chairperson asked if Parliament would conduct a public hearing on the market whilst the Commission is undertaking its investigation concurrently or whether that would be a parallel process that could possibly jeopardise the whole process, particularly the work of the Commission.
The Researcher advised that the Committee can call up the Commission and ask the question, directly as it would have much more precise and broad answer in terms of the entirety of the implications that would arise from a parallel process, and how it would affect the effectiveness and efficiency of the Commission’s work. if Parliament conducts public hearings it could be creating an unfavourable environment and possibly jeopardise the Commission’s investigation. She advised that perhaps Parliament could call on small players instead of the big companies in order to gather information from them regarding the market in which they operate in and what Parliament can do to strengthen the legislation to create a favourable environment for them to grow.
The Chairperson outlined the issues around licensing which still need to be clarified with the regulatory bodies, as well as the time lines involved in such processes.
Mr S Mbatha (EFF) advised that the point is to try and establish the fairness of some of the proposals in so far as the responsibility of Parliament – the Committee is the only committee that could detect the immediate needs of transformation in the sector. The way the industry has built itself up it seems that it will take a while for anyone to come into the industry given the current conditions. To fast-track transformation, the growth of these companies (big players) must be interfered with in order to re-organise the small players. The reality is that over time businesses see the light of day and they adjust to market conditions set up by government. Less than 24 years ago this industry had the potential of spreading across the ground levels and ownership growth as well as increasing the manner in which the communities may have seen it as a market, but now as it stands, all those potential businesses have been push out of the market because of unfavourable market conditions for the sustainability of small players in the market.
The combination of Reatile and Easigas and how the Commission dealt with the merger is questionable because it appears that after the merger took place the sector became even more concentrated. If the merger had not taken place, it would be a probable speculation that the former company would have grown even further. In Malaysia, when a foreign company comes into their local market, the local players, in a situation of a possible merger, would have the majority shareholding.
The Chairperson suggested that there is urgency to call the sister committees on this matter to share their own experiences and perhaps knowledge in terms of what can be done moving forward.
Mr Tleane suggested that even before the Committee begins to speak to other committees, the Committee should engage with the legal team to ascertain the steps to be taken forward and this will ensure that when the time comes to meet with other committees the Committee will be fully prepared and understanding the problem in its variety. Then the Committee can have meaningful engagement with those committees. This system was put together over a long period and in that period, there were a variety of laws that were incorporated, all these laws individually and collectively protect the status-quo of the industry. So basically, the Committee needs to look beyond the legislation piece that governs NERSA, and explore other legal prescripts might have a bearing on the industry. The entire industry and its status-quo needs to change and this will be done correctly and successfully through legislation.
The Researcher suggested that the committee could also call upon academics and sector experts to share more light on this and perhaps ask the Department of Economic Development to share any information it may have on the sector, as well as ITAC.
The Chairperson advised that if the Committee is going to call upon the legal teams it must be very clear about what legal implications it wishes to engage on. It needs to be very specific on the issues and legal prescripts it wishes on engage on.
The Researcher advised that perhaps the Committee should call upon the Commission to share some light instead, because Parliament is allowed according to its rules to conduct public hearings. However, that will only be hindered by the fact that if the Commission is undertaking an investigation concurrently, there is a Parliamentary rule that will obliterate the Committee from proceeding with the public hearings. This can only be done when the Commission has completed its investigation in the market.
The Chairperson agreed with the Researcher.
Mr I Pikinini (ANC) stated that the stakeholders such as PetroSA and Sasol were government owned, but it is very unclear what happened and so they need to be engaged retrospectively on their stance in the LPG market. In addition, the regulators need to be called to engage with the Committee so that it can understand how they (regulators) determine the rates of cylinders as they do annually, what processes, measures and evaluation methods are applied in order for the Committee to get a comprehensive understanding on this.
Ms C Matsimbi (ANC) suggested that the Committee needs to engage with the International Trade Administration Commission (ITAC) to get the sense of the status-quo of the industry in its perspective and obtain some clarity on the 25-year import licensing because it seems that is where the majority of the frustration stems from.
Mr Mbatha asked whether it would be possible to bring in the Department of Energy and NERSA, and legal consultation would also be a necessity in order to understand the legal matrix and which wars to fight. This will help steer the Committee in the right direction in terms of how it can approach its next step. He suggested that the Committee should not call on the Commission as yet until it has engaged the other relevant stakeholders because the Committee has an idea of what steps the Commission intends to take going forward.
The meeting was adjourned.
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