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

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

3. Drives for change:Drives for change: 1994 Real Price Stabilization Program1994 Real Price Stabilization Program deleterious effects of protracted price controls: negative margins, poor services - pressure for price liberalizationdeleterious 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)shift in public policy goals: deregulation aimed at competitive markets - power (1995), telecom and oil & gas (1997)

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

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

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

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

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

9. Deregulation process: assessment Multiflag sales pointMultiflag sales point instituted in 2003 in order to foster competition ( “ intensifies competition in the marketplace and increases consumers`purchase options ” )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 ownerdealers 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)underlying belief that marketing companies held undesired market power that had to be checked (2002/2003 context) Importance/magnitude of issue cannot be overstressedImportance/magnitude of issue cannot be overstressed more than 95% of 13kg cylinder deliveries to end-user through dealer network andmore than 95% of 13kg cylinder deliveries to end-user through dealer network and their sales points approx 250,000 sales points in Brazilapprox 250,000 sales points in Brazil

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

11. Deregulation process: assessment 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 companiesreal 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 companiesprice 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 increaseslowest prices where highest market concentration in marketing: market contestability as major deterrent to price increases highest margins in reselling where multiflag most widespreadhighest margins in reselling where multiflag most widespread

12. Challenges Ahead extend quality program “outside the gate” – in distribution network servicesextend quality program “outside the gate” – in distribution network services international experience shows exclusivity can be pro-competition - strong interbrand competition matters mostinternational experience shows exclusivity can be pro-competition - strong interbrand competition matters most under exclusive dealership, marketing companies are most effective enforcers of laws and regulationsunder 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 pointsparticularly 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 customersstronger partnership between brand owners and dealers: key to provide better service to customers targetting in retailing: additional opportunities in the value chain and service differentiationtargetting in retailing: additional opportunities in the value chain and service differentiation

13. Recommended changes require previous approval from companies to have their brands linked to a specific sales point 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 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