"Not the pricing, but service is the key factor"

He is the Bill Gates of the liquefied petroleum gas (LPG) distribution business. And he's as passionate about the LPG business as Gates would be about his new .net strategy. He is Gisbert J.J. Van Den Brink, 51, a member of the Executive Board of Directors of SHV Holdings NV, the $9.8-billion Fortune-500 listed flagship company of The Netherlands-based SHV Group. SHV Gas, the group's LPG business, is the largest player in downstream distribution of LPG with its presence in 23 countries, and has invested Rs 500-crore in India. Earlier this month, Brink visited India to take stock of the group's LPG business in India-SHV's SuperGas has already clocked a turnover of Rs 200 crore-and promote the use of autogas in India. In an interview with BT's Ranju Sarkar, Brink explains the dynamics of the LPG business and how India can adopt the right pricing policies for autogas: 

Q. What do you think are the problems associated with the private LPG business in India? 

A. One main problem is that the playing field is not level for the domestic segment. And, as I understand, politically, people think that the poor people should be subsidised for their LPG purchases that is one of their staple purchases of their daily needs.

You can do two things. Either you move away from an object subsidy (where you subsidise the product itself, which, in this case, is LPG) to a subject subsidy. The disadvantage of object subsidy is that experiences abroad have shown that a lot of subsidy enter into the wrong pockets; it ends up with people who can afford to pay the full price. The subject subsidy can be very targeted, very precise. You identify the target group, identify the poor people, and you give them extra money. Then, there's no need to subsidise LPG and you can unleash the forces of competition.

What did the minister say about subsidy today? And offering a level playing field for you?

I am afraid he did not offer a level playing field before the target date of deregulation (April 1, 2002). From the date of deregulation, a 15 per cent subsidy may continue but the same-there he was more forthcoming-would be possibly be given in a different way. Maybe it would be subject subsidy than object subsidy. And even if it's object subsidy, it could be given to all the players including parallel marketers.

Apart from the subsidy issue, are their any other problems that parallel marketers face?

While the customs and excise duty structure are the same, we would prefer to do more infrastructure sharing, product sharing, and product swaps with PSUs as soon as possible. As long as the Administered Price Mechanism (APM) and the Oil Coordination Committee (OCC) are in place, it looks difficult. But everybody can benefit from this. If we have under-utilised assets, there's no point for another company to build new assets when assets can be shared in a more efficient way.

We have been lobbying with the government for abolition of the transport subsidy-which allowed that the LPG is priced at the same rate through out the country. It was abolished in April this year and has been a great help in providing us a much more level-playing field in the industrial and commercial segment.

What has been your experience in other markets, which have been privatised? How has been the transition? How have they tackled issues like subsidies?

A good example is Brazil, where we have a large presence. At present there, our two companies have a combined marketshare of 24 per cent. The market we entered in the mid-1990s was a very chaotic one. What you need for a market to function is two things. You need good regulation (good technical and safety standards/ procedures that are enforced). Commercially, you need complete deregulation so that investors can make sure that they get gross margins to pay for the higher cost of building a business if you do it very safely and professionally. On the other hand, if the market is deregulated, the forces of competition would make sure that the margins would remain within acceptable limits.

If you look at Brazil. There were hardly any technical, safety regulations, procedures. For instance, if there are no strict rules and regulations enforced, which forbid cross-filling (say, an Indane cylinder being filled at a BharatGas bottling plant), then nobody has any incentive to invest in any metal (cylinders) anymore. Why would you maintain a cylinder when you can grab any cylinder from the market, fill it and sell it? That was quite a disincentive for new entrants. Commercially, the market was regulated; there were also transport subsidies-it's a big country, even bigger than India-and lot of transportation takes place. All those subsidies had to be administered, and there was rampant abuse.

The industry got together and formulated the policies, which eventually the government accepted, and it was called the 'Freedom With Responsibility Programme'. This programme was an agreement where the industry said that if we have the proper rules and regulations, if you forbid cross-filling, if you allow us higher margins, then we pledge to invest in hundreds of million dollars in cylinders, in refurbishing old cylinders, in scraping very old cylinders. The programme was a big success. People made huge investments. There's hardly any cross-filling today, cylinders are being swapped in swap centres.

Have you come across markets where you had subsidies at the retail level as in India, and the problems that were encountered in doing away with the same? 

There are very few countries in which you have subsidies like those in India. There were subsidies in Brazil. But there, the cost of LPG is subsidised because there's only one supplier, the Petrobras, Brazil's national oil company. It supplies the gas at the price to everybody without any discrimination.

Subsidy exists in markets like Turkey and Morocco. What makes it so distortive in India is that there's discrimination between companies. Same happened in Pakistan. People who have access to locally-available gas can afford to give it cheaper. The situation has improved under the present regime. In Pakistan, if you did not have access to cheap indigenous gas, you had to import it from abroad. But that would leave you sick as the regulatory structure did not allow companies to recover the cost of importing the LPG.

You claim to be among the biggest player in LPG business....Who are your close competitors? Is your LPG business bigger than that of the global majors like Shell, Exxon, or BP?

With seven million tonnes a year, we are the biggest in downstream distribution of LPG. This excludes trading and stuff like that. Size by itself is not the criteria. Customer satisfaction is more crucial.

The other major players in this business include major international companie