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THE BRAZILIAN SUCCESS STORY – MAKING ILLEGAL REFILLING; A THING OF THE PAST

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28 years is a long time to have been in the same industry and it is no wonder why Jonathan Benchimol, MD of Fogas and President of the AIGLP, says that it is not a question of where his passion comes from but how can it be that someone not have passion when working in the LPG industry? It is also clear that his passion is shared by many seeing that AIGLP (Ibero American LPG Association) was formed 29 years ago with some 20 Latin American Companies being a part of the association since its inception right up till today.

He says that this shared passion is due to the difference that LPG makes to the lives of the country’s populace. He went on to explain that there are close to 2.5 billion people on the planet  that are still cooking with either solid fuels or kerosene and that the shift away from these fuels to LPG will represent a drastic improvement in the living standards of the people.

“How can a worker not feel motivated working in the LPG industry? It’s about the quality of life – It’s about making a difference in the world. LPG is a superior product when compared with solid fuels,” he remarks.   

Adding to this, he goes on to say that the use of LPG improves air quality by reducing emissions which improves population health and makes people’s lives easier by reducing their workload and preparation time – not to mention that more often than not, collecting of firewood is carried out by children. He points out that this effectively reduces deforestation and makes it possible for children who would be collecting wood, to now have time to attend school and make a better future for themselves.

One for the History Books

Brazil has been extremely successful in the development of its LPG industry and serves as a brilliant example for other nations to try to emulate. There are significant differences from country to country but Brazil is a prime example of how things can turn out when done properly. A 78 year old industry in its own right, it is not a case of overnight success, and Jonathan says that his 28 years of experience have only given him a window into a small portion of the evolution of the industry. He attributes the country’s success to extremely  competent people who put in the time and effort to shape the industry to become what it is today.

“I believe that there is no single factor for a success story, it is a combination of factors which involves hard work, commitment, good government policies, intelligent industry players and of course, the key element of luck for true success,” he says.

Looking more closely at the issue though, Jonathan did say that if he were to mention a few key points, there were some possible things that he could single out. First being entrepreneurship talent – the first industry players saw LPG as the future in a world in transformation and it was important enough to work very hard to make the supply available even though there was no local supply. Second being a ‘customer oriented focus’ – meaning that the industry would be focused on fulfilling the needs of the customer. Third being government political desire and commitment – to see through a few decades to make LPG the fuel of choice for the household sector through public policy on product price subsidy. Fourth being the visionary mind of the industry – understanding that due to customer disposable income limitations, cylinders and other appliances needed to be sold in instalments so that they could generate LPG demand which would substitute solid fuels. And lastly, a capable industry workforce.

Effective Policies

Policy makers have a huge part to play in the planning and implementation stages of a developing industry and in Brazil it was no different. Just how effective was the government in performing these roles?

Jonathan says he believed the government was very effective in its decision making process, and that government always plays a key role in turning any industry into a successful one.

He states that “Every industry needs regulation to turn the game on an even level playing field. Regulation however, needs to be modern, customer oriented, dynamic and stimulate competition – this does not mean excess regulation or bureaucracy though.”

SAM_0636Jonathan adds, “Besides regulation, standards are also important (cylinder manufacturing, LPG dealers, bottling stations, recertification of cylinders, etc.) but more than just creating regulation, it is the way regulation is made. All regulation during the decision making process should be made transparent and democratic to the society – any person should be entitled to express an opinion regarding regulation and that by making this transparent, the government can search for the best solution that meets the needs of the society.”

As an important part of this implementation process involves the issue of  market penetration, especially since there were many types of solid fuels that were already being used in homes across the country, we asked Jonathan exactly how the government went about tackling this issue.

“In Brazil, LPG market penetration (introduction and early growth stage of product life cycle concept) was very limited because there was a limitation on supply of LPG, infrastructure, cylinders, filling stations and availability of credit among other things,” he says.

He mentioned that the sociology of fuel substitution was a key restraint. Customers used other fuels for cooking and there it was the common consumer perception that the current product (solid fuels) was ‘sufficient for my needs’. This therefore led to LPG distributors working very hard, house by house, customer by customer, explaining the benefits  over solid fuels.

“I believe that a game changer and a key turning point was when companies offered a free test period to customers,” he asserts.

He explains to us that the LPG distributors made stoves, cylinders and other equipment which were then loaned out at no cost for the customer for 3 days while at the same time also installing  and teaching them how to use the full LPG set. At the end of the 3 days, they would return to collect the stove and the cylinder if the customer did not want the new product. He remarks that what was not entirely surprising was that when the distributors returned to collect the equipment, the majority of customers said that they did not want to give it back and that they were more than happy to use LPG instead.

“A second game changer was that when the companies returned to the household, most customers wanted LPG, however, they had a disposable income limitation,” he says.

This resulted in the distribution companies coming up with the solution to supply ‘credit’ to customers by selling the LPG set to them in instalments. Jonathan says that he believed that in the introduction and early growth stages, this was truly a game changing solution of  top quality entrepreneurship skills.

“The third game changer was when the government understood that LP Gas “the fuel of choice” was in the best interest of society,” he says.

The government then introduced a product price subsidy to make LP Gas affordable to all. This made the substitution process faster and LPG became the fuel of choice for the household sector rapidly reaching 95% market penetration.

We ask Jonathan if he feels that should  the Brazilian government start over, what could the government do better this time? He responds somewhat matter-of-factly, saying that “In a decision making process it is an unknown factor and to say which decisions not taken – what would have been the actual impacts and results, is unclear.” He does comment, however, saying that looking back at the industry he believes the product price subsidy on LPG should have been taken out earlier compared to when they did. He cautions however that this is subjective matter and this is just his opinion on it.

The problem with subsidies is that they can eventually become a burden; Brazil has managed to repackage their subsidy plan as a family/household reimbursement plan. We  were curious as to why this was done and what exactly were the advantages of doing this over a subsidy plan. So once again, we asked him.

He replies saying that “Every decision has a benefit and a cost. It is in the best interest of society when the  decision making process generates more benefits than costs. In the case of the product price subsidy it clearly represented a benefit to society but also a burden to society. It is very hard to carry out the fine tuning to a point where the benefits outweigh the costs. I believe that if a subsidy is created, the key factor should be to establish targets and objectives. When those targets and objectives are reached, it is necessary to then phase out the subsidy because objectives have been achieved. It is also important to make the subsidies transparent and known to society and also to be sure the subsidy is accountable.”

Jonathan continues to explain saying that in the case of Brazil he believes that the  target and objectives on market penetration were reached in the early 80’s, however the subsidies were only phased out in the early 90’s. He says that it is a very tough political decision to phase out subsidies. However, when the cost outweighs the benefits it should be done even though it may represent a political burden for politicians and government authorities. “It is important that the decision making should represent society desire and in the best interest of society. Maintaining the subsidy after the objectives have been reached will benefit a portion of the population that do not need a subsidy and it may lead to incorrect allocation of scarce resources,” he stresses.

“In Brazil the industry was able to explain the concept to government authorities and the solution  implemented by government was to withdraw the product price subsidy, however, doing this through a cash transfer policy to low income households based on a government database. Therefore, the economic and financial impact was partially offset. The Brazilian cash transfer project deposits a certain amount of money into a bank account and the person can go to the bank and withdraw the cash. The person must be in the low income household government database to be entitled to the benefit. The Brazilian model has no guarantee that the money received by the low income household will be used to purchase LPG. Some argue that this is a drawback of the project and others argue that this gives the customer the entitlement to make a rational choice of where to allocate the money received. Therefore, it requires a value judgement that is left to each individual reader to make his or her own value judgment,” he says.

Property Rights

One point that  Jonathan reiterates time and time again is that the most important factor of any LPG industry is property rights and he also says that it is not only the most important factor for the LPG industries alone but also for any other industry as well. This representation of property rights is what is referred to as the ‘brand’.

Looking more closely at this concept of brand and who are the actual beneficiaries of this representation of property rights Jonathan goes on to say, “I believe that the more complex the purchase process is and the greater the complexity of the purchase, the greater the benefit of brand.”

Why, you ask?

Jonathan says that we need to take a closer look at the LPG industry. It’s a fact that the average customer purchasing a cylinder has limited knowledge  on its chemical properties, physical characteristics, metallurgical  properties (thickness of steel, strength, cylinder testing, etc…), and on metrological matters. This therefore makes an LPG purchase a complex decision making process much like when making the decision to buy a car, refrigerator or an apartment. So how does the customer solve this equation? Does he spend hundreds of hours trying to understand the chemical properties of LPG – Jonathan does not think so. His conclusion is that the customer will make his decision based on the brand.

He feels that the customer will trust a specific brand because he knows that the company he decides on has made all the complicated decisions for him and also that, should anything go wrong, under his expectations, he has a  guarantee. This makes the customer the greatest beneficiary of the brand because it makes his whole decision making process that much easier – he only needs to research the brand. It also entitles the customer to be able to switch brand should anything go wrong with the brand that he has chosen.

“Simply put, the brand empowers the customer.”

Jonathan goes on to explain that the other economic agent that benefits from branding is the government and the authorities. He says that brand gives the government the power to access responsibility and makes economic agents accountable for their actions.

“Brand makes the government’s job easier,” he says.

“In an unbranded market, where does the customer find a solution for his problem? How can the government access responsibility for a product or for a service problem? Who is to blame?” he asks.

Last but not least, Jonathan adds, “Brand is in the benefit of economic agents because competition will be fierce in product, service, quality, market, cylinder, etc. Brands also turn the market into an even playing field, provided that there is enforcement of the law, as well as stimulating innovation and product R & D. Brand also stimulates efficiency because companies will search for best business practices and it will also stimulate investment. Operators will learn to focus on customer satisfaction – a branded market (with enforcement) reduces the free rider concept.”

SAM_0669Upon slowly realising the dire importance of property rights, we begin to wonder, is branding a one-fits-all solution for any market? We asked Jonathan what he felt would be the best course of action to implement branding in an unbranded LPG market in the growth stage such as Nigeria and Zimbabwe.

“Let me explain that every country should reach a solution that best meets the desire of the society. There is no silver bullet solution. And I do not wish to make value judgments on any country model,” Jonathan responds.

“I believe that in the long run an unbranded market will face severe limitations because of the free rider concept – Why should the economic agents invest in new cylinders if other companies will fill the new cylinders? Why will a company carry out maintenance on a cylinder if others are going to use it for free? Why do cylinder recertification if others filling companies will fill the new cylinders?” he questions again.

“Branding is a choice – countries that operated in an unbranded market like Colombia and Uruguay migrated to a branded market after understanding the benefits,” he says.

As to whether or not it is possible to switch from an unbranded market to a branded market, Jonathan replies with stoic confidence, “Yes it can. The first and greatest misconception that I hear is that a country that started in an unbranded market cannot change to a branded market. This is an incorrect principle. It most certainly can! It’s just that it requires political will and the desire of society. There are countries that have made that switch. It is important to point out that it is not a trouble free migration, there are problems but they are manageable.”

Jonathan goes on to explain that if a country, through a democratic and open political process chooses to change its model from unbranded to a branded market, it is his recommendation that a group of industry leaders is created through a negotiated process to reach a ‘win – win solution’ and come up with monthly and yearly cylinder phase out processes.

He says it is also necessary to create a cylinder standard and that every new cylinder injected into the market be branded. There will be problems during the  implementation process but it can certainly be done – this has been done not only in shifting model. Some countries have even decided to change every valve in every cylinder in order to stimulate competition from industry agents and this was done in a successful way through a negotiated process.

“Anything can be done. It just requires that the industry players take out of their ‘mind model’ that it is impossible.”

Law Enforcement

Illegal refilling has a direct correlation to the number of safety related accidents. This has been corroborated by numerous countries that have the statistics to show for it. Upon moving from an unbranded market to a branded market – there is a visible reduction in the events of accidents and death. It is another reason why eradicating illegal refilling is so very important to the industry. An important part of trying to lower incidences of illegal refilling and associated accidents is enforcement. It is good for a country to develop appropriate laws to tackle illegal refilling but if these laws are not enforced – the objective is lost.

Just how important is enforcement?

Jonathan says, “Some countries have branding regulation but lack enforcement of the property rights. Brand is a necessary condition but not a sufficient condition for success. Without enforcement some agents will understand that the benefit of acting as a free rider outweighs the cost. Therefore, cross filling and illegal filling will occur. Without enforcement of brand, the market is not an even playing field and competition will not maximize customer satisfaction.”

Jonathan then goes on to speak of the philosophical side of things to try to explain why enforcement is absolutely essential in this case to act as a deterrent. He speaks on the musings of Sir Edwin Chadwick, a prominent English social reformer of the 19th century. He makes use of the words of Chadwick in his paper – Economies of Crime, to further elaborate in the answer.

“According to Chadwick, the criminal agent acts as a rational agent. It perceives the crime as a source of income and believes that the benefits outweigh the cost of the crime, which is why they commit the crime in the first place. Chadwick goes on to say that before a criminal commits a crime he makes a value judgment based on the following 3 issues:

What is the probability of being caught?

What is the probability of being prosecuted for the crime caught?

What is the probability of facing punishment for the crime?

“Therefore if there is no enforcement of the law and regulation, some agents may perceive that crime does actually pay for the simple reason being that they would get away with the crime if they did it – there was no consequence for wrong doing.”

In Brazil, Jonathan says there is proper enforcement of the law. Several government agencies are tasked to carry out regular inspections on companies. Brazil takes a very hard stand on illegal refilling – In Brazil, illegal filling generates a punishment in a civil court; not only a monetary penalty but also the companies are prosecuted for violating government rules and regulation. If the problem occurs continuously the government can shut down the company after the due legal process is concluded.

Jonathan says that even once the company is closed, company partners are not permitted to engage in this industry for a few years following its foreclosure. We ask Jonathan if he feels this stance is applicable to emerging LPG markets in other countries, considering that enforcing such harsh punishments could scare away potential gas suppliers. He replies saying simply, “Once the cost of an illegal activity outweighs the benefit, no economic agents will see the benefit as being a free-rider on the market.”

Cylinder Rehabilitation

Brazil has the largest LPG cylinder rehabilitation program in the world; everything is very advanced at their refilling centers – much of the processes is automated and some filling stations process what looks like thousands of cylinders each day. The operations are carefully monitored by trained staff who oversee each step in the refilling and rehabilitation process before the cylinders are loaded onto trucks to be delivered back to homes all across the country. Every cylinder is inspected during the filling process. A cylinder can be rejected from the filling line based on a visual standard based on NBR  8866 and NBR 8865 (Brazilian standards) and also based on the cylinder age.

Jonathan tells us that “The standard for age (in a new cylinder) is the first recertification cycle which is fifteen years and once the cylinder has been recertified the first time, an additional recertification is done every ten years thereafter. This is the current Brazilian standard.”

He goes on to add that he believes cylinder recertification is a successful program because there is a respect for property rights. He says companies know that the investment on the cylinder will generate safety and customer satisfaction and also that no other agent will use the recertified cylinder, this makes companies feel accountable for their cylinders.

“I believe in a model of an unbranded market that a recertification of cylinders will not reach full success because agents have no assurance that the investment made in cylinders will generate customer satisfaction for the company after the first transaction because other agents may use that recertified cylinders.”

The Future

As we bring the interview to a close, we ask Jonathan what he feels the future holds for LPG in Brazil?

He responds saying that “Unfortunately Brazil has a legal limitation on LPG use and its applications. It is also a mature market and has had full market penetration on the household market. The future and growth lies in the government deregulating the market and letting LPG compete with other fuels on an even playing field and letting the customers purchase the fuel that best meets this value proposition.”

There is much that can be learned from Brazil’s success and with the knowledge and passion of people like Jonathan, perhaps more nations will be able to drive and develop their LPG industry in a similar manner and more people can benefit from the wondrous properties of this clean and environmentally friendly fuel.

(LPG Business Review)


JonathanBenchimol

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