Malaysian investor almost quit

A Malaysian investor, confronted with rising costs and a deteriorating security situation, was on the verge of pulling out from Sri Lanka until a rethink and re-structure of the investment changed his decision.

“With the uncertain situation in the country, we had to make some serious decisions on our future here. We were forced to rethink our strategy and (thankfully) we have decided to stay and adjust,” noted Azlan Shah Mohamed Shah, CEO of E-Gas Ltd in an interview with The Sunday Times FT.

The Malaysian-based investor, though relatively unknown, is the third player in the LPG industry after Shell and Laugfs, and is using a former Mundo refilling facility at Warakapola.

Shah says, despite the problems the company is here to stay and re-investing in infrastructure and other assets in a shift in strategy. It is also once again looking at a local partner in a joint venture, similarly to when the company first launched in 2003-4.

The company has been in Sri Lanka for the past three years initially with Expolanka as the partner but has been low profile unlike other bigger players and servicing smaller markets through a combination of local marketing techniques and word-of-mouth sans mainstream advertising. E-Gas took a major hit when the A-9 Vavuniya-Jaffna road closed due to the unrest, losing 4,000 cylinders in sales, about 40 percent (9-10,000 cylinders a month) of business.

Shah says the new game-plan after the company initially invested Rs 80 million was raising it to Rs 140 million with plans afoot to spend another Rs 79 million.

Essentially the investment is in a new bottling plant at Makandura, increasing the fuel storage capacity for internal transportation and having the company’s own haulage system instead of depending on third parties transporters.
“We decided to invest in infrastructure to reduce costs. Rather than use a third party supplier for transport – remember diesel went up sharply – we are setting up our own transportation chain,” said Shah acknowledging that the company went through trying times this year.

“For some time we were on the fence because of the serious situation in the past 10 month. We had to decide – either go for it or don’t. Quit or get off the fence. There was this period when we didn’t know what to do as there was this chain of events that was negative for business.

We then made a decision that sitting on the fence was not going to work,” he said adding that the decision was to stay on and improve the efficiency of the operation through reducing costs.

He referred to four serious incidents this year that were detrimental to business – the port strike, the customs strike, the petroleum strike and devaluation of rupee which has ruined the cost structure as LPG gas prices are controlled by the Consumer Affairs Authority.

The company, whose cylinders have a distinctive yellow colour, said the impact of the port strike coupled with the security situation is still being felt and adverse to the country. “Some ships are bypassing Colombo. Some ships are avoiding this route and going to Dubai or Mumbai while due to the security risk in Colombo freight rates have gone up,” he said.

He disagreed with government responses to the violence in the country, particularly the attack on the navy camp at the Galle port that the foreign media was exaggerating the situation. “Perhaps to somebody living here like me we don’t realize the risk. But for example others reading it in a far away land about the Galle port being attacked in a small country it’s a big issue. One should be rationale and also look at it from an outside perspective,” he said adding that the rising cost of living was also hurting the business.

He said if one looks at the depreciation of the rupee against the dollar, the general population’s buying power has reduced by at least six percent, making them six percent poorer.

“The buying power is going down. People will rebel for more salaries which mean the cost of business goes up. We have to think on all of these lines since our business is related to the cost of living. The constant worry is also in the change of governments and security issues.” Shan said the Makandura plant will be ready by next January. The company works closely with Malaysia’s oil supplier Petronas and the Malaysian Internation Shipping Corporation for freighting.

He said one of the problems of the LPG industry here is that transfer pricing doesn’t occur and companies – due to the CAA – have to take the hit when world market prices rise.

“We did an analysis of price per cylinder within our control and found we have only 6.6 pct within our control. It’s all controlled by the world, the government or a third party.”

E-Gas has suggested to the CAA a more reasonable transfer pricing mechanism that would benefit all – companies and the consumer – and is awaiting a response.