Development of a Bulk LPG

Import and Distribution

Business in Puntland and
Somaliland

Ministry of Environment,
Wildlife and Tourism
DISCLAIMER
This report has been produced with the assistance of the European Union. The contents of this publication
are the sole responsibility of Channoil Consulting and can in no way be taken to reflect the views of the
European Union or Adeso.

INDEX
SECTION 1: MILESTONE 1 REPORT..................................................................5

SECTION 2: MARKET SURVEY REPORT...........................................................15

SECTION 3: FINANCIAL EVALUATION/ MARKET DEVELOPMENT REPORT......53

SECTION 4: ENGINEERING, TECHNICAL & OPERATIONS REPORT...................79

SECTION 5: MILESTONE IV REPORT - PROJECT REVIEW, REGULATORY

REQUIREMENTS & JOINT VENTURE PRINCIPLES........................85
 SECTION 1

Milestone 1 Report

Summary of Approach to Establishing/

Enhancing LPG Business PPP in
Puntland, Somalia
 TABLE OF CONTENTS 1. Introduction
A very large proportion of the population in
1. Introduction ....... .........................................................................................................7
developing countries across the world, including
2. Objectives of the PPP .........................................................................................7 those in the Horn of Africa, are highly dependent on
3. Approach and Methodology .............................................................................. 8 bio-mass fuels for cooking and kerosene for cooking
Market Study Process .................................................................................................................9 and lighting.
Market Study - Key Data and Information ................................................................................9
Bio-mass fuels consist of dried animal waste, wood
4. Anticipated Constraints ....................................................................................... 12 and charcoal, which are often burned inefficiently
4.1 Security ......... ...................................................................................................................... 12 in ‘open’ fires. In cases where primitive stoves
4.2 Affordability and Economic Viability .............................................................................. 12 are used, which of course require a cash outlay,
4.3 Duties and Taxes ............................................................................................................... 12 efficiency is improved but is still very low compared
5. Target Stakeholders ................................................................................................ 13 to alternatives.
6. Intended Results ....................................................................................................... 13 The main alternative fuel in many countries is
kerosene, which is used with reasonable efficiency
in cooking stoves and lamps. This fuel can be
distributed and used efficiently and safely. Its
cost is driven by the price of jet fuel – essentially
an identical product – in international markets.
In general, import and distribution of jet fuel and
domestic kerosene through segregated logistics
systems cannot be justified on economic grounds;
therefore, in the interests of efficiency, product
meeting international jet fuel specification
(relatively high volume) is typically delivered into
markets as domestic kerosene (relatively low
volume). In many countries, the domestic market
price of kerosene is subsidized to encourage its use
instead of wood/ charcoal.
LPG is used widely for domestic and industrial
applications in developed countries; the price may
or may not be subsidized depending on supply
economics, costs and Government policies. LPG is
also widely used as feedstock in major petrochemical
manufacturing facilities and (Butane) as a gasoline
blending component. International trade in LPG is
substantial, often involving shipments of cargoes
+/- 50,000 DWT. The cost of supplies to be imported
into Puntland (and Somaliland) will be set in relation
to international market prices for this commodity
and will reflect the relatively small cargo sizes.
In the ‘pecking order’ of domestic fuels, LPG can
be a relatively expensive option. The key objective
of this study is to determine the feasibility of
establishing a viable LPG import supply and
distribution business for Puntland/ Somaliland and
to set out the financial structures and incentives (if
6 7
any) required to support the required investment in
terminal facilities/ distribution modalities and the
creation of a workable Public Private Partnership
(PPP).
2. Objectives of the PPP
The primary objective of a PPP is to bring together
into a single commercial enterprise the financial
resources and functional experience and skills
of public (state) and private entities to provide
infrastructure/ services to meet essential needs, in
this case sustainable and cost-effective LPG supplies
to the population at large for use as a substitute
for environmentally damaging alternative fuels,
namely biomass fuels.
The general requirements of a prospective PPP
are set out in the ‘Guide to PPPs in Puntland State
of Somalia’ published in January 2011 under the
auspices of the International Labour Organisation
and the United Nations, the contents of which
we would generally endorse. Rather than try to
summarize this document, we attach a copy hereto.
LPG supply and distribution are complex activities,
the product itself is highly volatile and hazardous
and any enterprise established to enter this business
must have ready access to the following skill sets:
• LPG cargo supply and trading in the international
markets, commercial and operational.
• LPG terminal management and operations
experience, including specialist knowledge to
international standards of LPG handling in terms
of efficiency, safety, health and protection of
the environment.
• LPG marketing, distribution and effective
communication to the public with regard to safe
storage and usage.
Unless such skill sets are accessible within Puntland/
Somaliland or Somalia as a whole, it would seem
that a key success factor for this project will be
the involvement in the PPP as a partner/ manager
of an established, experienced and reputable
international LPG supplier and marketer, i.e. an
existing industry player. To attract such a PPP
participant or any other investor(s) will necessitate
establishing a viable and sustainable regulatory and
commercial framework that affords the creation
of an acceptable financial return to investors
commensurate with the business and security risk
to which the investment will be exposed.
The main parties contributing to the creation and
operation of a successful LPG supply and marketing
PPP business are:
• Government – national, regional, municipal.
• Private Sector Financial Investors1 – internal and
international (including Government).
• Private Sector Business Enterprise investors
(industry players) – internal and international
(present involvement in the LPG supply and
marketing business.
In this case, involving establishment of an LPG supply
and distribution business, the main contributions to
the PPP venture from these different entities would
typically be provided as described in the following
chart.
Although four groups are identified, two could be
the same, e.g. the industry player could be the
private investor.
1
Private sector investors could include existing stakeholders
in n the energy sector such as LPG traders, suppliers and
charcoal producers/ distributors
8 9
3. Approach and Methodology
The project has been broken down into several
tasks as described below.
Task 1 - Market Study
Background to Market Study
In newly developing countries such as Somalia,
market demand will be largely driven by availability
and affordability, in both cases relative to
alternative energy sources such as wood, charcoal
and kerosene.
Based on our experience in the region, we believe
the domestic consumer and bulk wholesale market
can probably be segmented as follows:
Category 1
• Captive high income salaried and business
people residing mostly in urban areas who will
purchase LPG (for cooking) as long it is available.
These customers are likely to be already using
LPG for cooking and electricity for lighting.
• Institutions such as hotels, hospitals, universities,
schools, military bases and light industries
• Biomass (wood/ charcoal) are likely to be used
only for emergencies.
• As the economy grows, particularly in the
cities and main towns, and as LPG availability
improves and costs generally reduce, demand
will increase substantially.
• This category may not necessarily require
government subsidies to grow demand
Category 2
• Middle/ lower income persons (rural and semi-
urban) with regular incomes, who are already
using charcoal and kerosene.
• With good availability and competitive pricing,
demand from this category of customers could
grow substantially, particularly if usage is
promoted through subsidies.
Category 3
• Low/ subsistence income levels (mostly in
rural areas), for whom LPG will remain mostly
inaccessible unless heavily subsidized.
The price of kerosene is often subsidised and is
widely used for domestic cooking and lighting.
Its use is also widely criticized due to harmful
emissions from stoves and lamps. Users of kerosene
for cooking are potential candidates for conversion
to LPG if availability and price/ hardware cost issues
are addressed.
One of the main aims of the market study will be
to establish at what price and, if appropriate, what
level and form of subsidy it will be possible to
substantially grow the Category 2 and Category 3
market segments. The challenge will be to propose,
if appropriate, a subsidy system that targets
Categories 2 and 3.
Market Study Process
We will review any existing reports and other sources
where available and gather market information
on the ground using regionally resourced market
researchers. The researchers will conduct a survey
using pre-prepared questionnaires.
Our market survey will cover the selected major
towns shown in the following table.
Puntland Somaliland
Bosaso Hargeisa
Galkayo Burao
Garowe Berbera
Badhan Borama
Bocame Erigavo
Buhotle
The questionnaire will address the following:
• Existing energy demand patterns among the
three main demand categories listed above.
• The current cost of fuel alternatives.
• As appropriate, the relative conversion costs
from current fuel to LPG.
• Capacity (affordability) to convert to LPG.
• The level of conversion to LPG that would impact
on biomass conservation.
• Optimized supply/ distribution facilities (and
costs) to meet unrestricted2 projected demand.
• The level of government subsidy required to
meet projected demand:
- On import/distribution facilities capital/
operating costs
- On appliances
- On product cost.
• The economic capacity of the country:
- To grow unrestricted LPG demand (population
, GDPs)
- To afford subsidies.
Market Study - Key Data and Information
Market Dynamics
a. Market Volumes: Medium term market
potential for LPG (cylinder and bulk).
We will assess:
• Historical data for sales packed and bulk – 2011,
2012, 2013 (subject to availability of data).
• Future projections for sale by cylinder and bulk
– 2014 to 2020.
• For Puntland, we will focus on the Port of Bosaso
supply envelope consisting of Bosaso itself and
the nominated towns.
b. Buying power of the Population:
We will assess:
• The purchasing power and the macro-economic
conditions of the market categories.
• Given the high inverse correlation between
sales volumes and prices, broadly assess market
potential under alternative price scenarios.
c. Retail & wholesale market channels:
We will assess and recommend:
• Cylinder sizes and type.
• Channels of trade with approximation of volume
2
Unrestricted in terms of price and hardware economics
 split between retail cylinder and wholesale bulk.
Pricing and Margins
• Price build-up along the value chain (from
import to end user). [Based on import parity
into Bosaso, including import duties and taxes
(as appropriate)]
• Assess medium-term sustainable selling price
and gross margin taking into consideration
present and likely future competition from
other non-conventional products.
Threat from Substitutes
a. Competing fuels (charcoal, kerosene) with
their prices and comparative analysis of user
economics for LPG compared with these fuels.
b. High level assessment of pros/ cons of LPG vs.
charcoal covering:
• Costs/ user economics
• Ease of use
• Safety.
Growth Prospects
a. Major infrastructure investments projected in
the area which could affect the demand supply
balance in future.
b. Competitive developments/ market intelligence
information about other companies looking to
set up bottling plant/ storage infrastructure in
the regional market/ wider Somalia market.
c. Potential future competition including upside
potential of new presence and/ or entry.
Task 2 - Logistics, Supply & Distribution
As part of our assessment of the market, we will
review existing supply systems and related issues.
The work will focus on:
Existing logistics Review
a. Current supply sources and capabilities (scope
for handling future increased demand).
b. Logistics-distribution and retail infrastructure
currently utilised.
10
c. Details of existing LPG storage or distribution
terminals – location, capacity, ownership.
d. Details of existing LPG bottling plants –
location, capacity, ownership.
e. High level assessment of standards of Health,
Safety and Environment.
Future Logistics Projections
• Assuming importation through Bosaso, any
constraints such as constraints on shipping i.e.
vessel draft/ LOA, access roads, bridges.
• Details of planned new bulk facilities, bottling
plants in Puntland – location, capacity,
ownership and planned start-up date.
Task 3 - Terminal Design/ Costing
Based on demand forecasts for bottled and bulk
product derived from the market analysis, we will
produce/ develop:
• A design basis incorporating process volumes,
capacities, flow rates.
• A Process and Instrumentation Diagram – this
will be issued for comment prior to embarking
on further deliverables.
• Site layout drawings with general
arrangements of individual specific areas
including features such as pipe runs.
• Cost estimates will to an accuracy of +/- 20%.
Task 4 - Financial Modelling/ Economics
We will develop a Discounted Cash Flow model
suitable for determining the economics/
commercial feasibility of the project and using data
from previous tasks establish the Net Present Value
and Internal Rate of Return for the project under a
range of volume and price/ margin scenarios.
From the outputs of this analysis we will determine,
if appropriate, the level and forms of subsidy
required to sustain the project economics at
acceptable levels.
Task 5 – Regulation
We will divide our study of the regulatory
environment for LPG into 4 key areas as follows:
LPG Promotion
a. Any Government backed strategy/ plan for the
development, promotion and support of the LPG
infrastructure and for spreading awareness about
the efficiency of LPG in the wider population.
b. Possible grants for concessionaires who offer to
build the terminal.
Barriers to Entry for other competitors
a. What are the main barriers to entry that exist in
the target areas for a new market entrant wishing
to supply and market LPG?
Stimulation of a free or open LPG market
a. What are the key aspects of the regulatory system
that need to be changed to facilitate a free and
open system for the importation and marketing
of LPG to the regions?
Lessons to be learned
a. What lessons can be learned from other countries
within Africa which have succeeded in growing
the use of LPG as a fuel versus other traditional
sources such as biomass and kerosene. Such a
review could include: South Africa, Kenya and
Botswana and possibly Senegal in West Africa.
Task 6 – Market Entry Plan; Public Private inland distribution
Partnership
Our proposal for the market entry plan will be
developed in conjunction with the client to better
understand the specific aims and objectives.
Without the benefit of this insight, at present we
plan to address this matter in 3 areas as follows:
Veracity and reliability of data and forecasts
a. We will provide an opinion of the levels of
uncertainty that may exist in the various data that
we have gathered from our field and other work.
b. We will also identify where our work has
highlighted any areas where we believe there is
a need for additional, specialised, research that
was not included in the original scope of the
contracted work.
What are the hurdles that a new entrant into
the LPG market will face?
a. Hurdles to an new entrant to the LPG market
such as:
• Regulatory and licensing
• Supply logistics
• Distribution logistics
• Cylinders & filling systems
• Penetrating markets held by existing dealers/
vested interests
• Conversion of potential consumers from
traditional energy sources such as biomass or
kerosene.
A high-level market entry plan
a. Our market entry plan will be at a high-level
and will address the following aspects to
allow ADESO to consider the implications
of establishing a market presence for LPG in
Puntland.
b. This high-level entry plan will include the
following aspects:
• Investment in facilities for storage, filling and
• Securing of cylinders
• Product supply channels
• Geographic locations of sales areas
• Sales forecast
• Securing of market share for a new entrant,
including promotions and loss-leaders
• View on pricing and margins
• Securing and training of staff
• Branding of product
• Safety standards
11
 • Communications plan for the entry.
In offering this market entry plan we will be
drawing upon our experiences from the recent
Kaygas project in Cape Town.
c. We will also set out a broad time table for such
a market entry.
Public Private Initiative
• We will develop a framework for a detailed
PPP Agreement.
• We will propose key clauses that will need to
be covered in the agreements.
• We will advise on the optimum method of
attracting private partners.
Ideally the PPP venture should involve a company
with a proven track record and experience in the
developed world of establishing and operating new
LPG supply and distribution businesses, but for
them the attraction of the venture will depend on
the risks that they would be expected to carry. This
in turn will be a function of the degree to which
such risks are mitigated and/ or underwritten by
governmental bodies through policy and regulatory
legislation and support in relation to the risk and
commercial/ financial issues raised elsewhere in
this report.
We therefore believe that it is premature at this
time to try and define the precise form of the PPP
to be developed.
Task 7 – Reporting/ Presentation
We plan to deliver in electronic format an Interim
Report and a Final Report to ADESO that will set
out our findings relating to the Tasks defined above.
We will also support the proposed ‘Government
Stakeholders Awareness Seminar’ as required,
location to be agreed.
4. Anticipated Constraints
It will be observed from the foregoing sections
of this report that the potential constraints are
varied and many-fold. Assuming the all the issues
raised are satisfactorily addressed, there should be
no constraints and the venture should be moved
forward to a successful conclusion. However, it is
12
appropriate here to highlight what could be viewed
as key potential constraints as follows:
4.1 Security
We have indicated that security could be an issue,
certainly for foreign investors, both in respect of
their investment (the hardware) and any assigned
professional and experienced staff.
This matter can only be addressed by National and
Regional Government entities. With a growing
economy and an improvement in the economic
situation of the population at large, it is to be hoped
that security will improve, but without this investors
will doubtless seek substantive assurances from the
appropriate authorities.
Security impacts on access to insurance, covering
assets and personnel, without which PPP partners
from the private sectors will not be enthusiastic
potential participants in the prospective venture.
4.2 Affordability and Economic Viability
Without wishing to pre-judge the economic situation
in Puntland/ Somaliland, based on experience
elsewhere, it is conceivable that expansion of the
LPG market to the extent necessary to justify the
investment in the new bulk import and distribution
facilities may require subsidies both in terms of
product pricing and for purchasing of the hardware
(e.g. cylinders and mini -stoves for cooking).
It cannot be expected that investors from the private
sector will be ready, willing and able to provide
such subsidies at the expense of their margins and
profitability. Therefore, it would seem that it will be
beholden on the ‘government’ whether national or
regional to bear the cost of these subsidies.
The extent to which they will be necessary will
become clearer once our work and analyses have
been progressed. In all probability, investors will
expect subsidy arrangements, is applicable, to be
structured and written into law.
4.3 Duties and Taxes
The project economics will clearly be dependent
on costs. We have assumed in our analyses that
equipment will be imported duty-free and revenues
will be generated un-taxed.
Assurances will be required from ‘governmental’
bodies confirming the correctness of these be used to support the planned ‘Government
assumptions or otherwise as the case may be. Stakeholders Awareness Seminar’ (PPP concept
to be introduced to the relevant Government
5. Target Stakeholders Ministries and other local authorities).
As indicated previously in this report, ideally a
partner will be attracted to this venture having
international LPG supply and distribution business
experience, thereby contributing the necessary
operations and HSE experience.
Investors from the local community could also be
attracted to the prospect and particular attention
should be given to those already having a stake in
the LPG and general energy supply businesses. In
the event they see the development of the venture
as a threat to their own business interests, it would
be preferable to have the most influential involved in
the project instead of being excluded and lobbying
against it.
6. Intended Results
It is intended that the work as described above will
provide:
1. An analysis of the existing and potential LPG
market targeted at the main domestic and bulk
consumer sectors described above.
2. Based on projections of market demand, an
outline design and capital/ operating cost
estimates for new LPG import terminal to be
established in the port of Bosaso, Puntland.
3. An analysis of the economics and financial case
for provision of and investment in said bulk
import facility at Bosaso.
4. Advice on policy and regulatory framework
requirements to support and make the
investment attractive to public and private
entities, both local and international.
5. Recommendations on the preferred structure of
the PPP to be formed for operation of the new
bulk LPG import facilities and the supply and
distribution of LPG in Puntland (and as necessary
Somaliland), including proposals for the most
effective and efficient relationships between
private entities and the relevant Government
Ministries/ local authorities as required.
6. A report/ presentation setting out the above to
13
 SECTION 2

Market Survey Report

 TABLE OF CONTENTS TABLES
Executive Summary ................................................................................................18 TABLE 1: PFYDP-2 ECONOMIC GROWTH PROJECTIONS ............................................... 20
1. Introduction ...... .......................................................................................................19 TABLE 2: EVALUATION & MONITORING PLAN FOR LPG (AND KEROSENE) .................... 21
2. Situational Review for LPG in Puntland ....................................................................19 TABLE 3: SUMMARY OF HOUSEHOLD FUEL SURVEY - PUNTLAND .............................22
2.1 Overview ...... ...................................................................................................................... 19 TABLE 4: SUMMARY OF HOUSEHOLD FUEL SURVEY – SOMALILAND ....................22
2.2 The Second Puntland Five-Year Development Plan 2014-2018 (PFYDP-2) ....................... 19 TABLE 5: LGP IMPORT COST BUILD-UP - PUNTLAND ............................................... 24
2.2 Regulatory and Institutional Framework for Energy ........................................................ 21
TABLE 6: SOMGAS COMPANY - SOMALILAND ..........................................................25
3. Market Survey/ Community Workshops .......................................................... 21 TABLE 7: LPG MARKET SWOT ANALYSIS PUNTLAND ................................................35
4. Results of Market Survey and Key Findings ..........................................................23 TABLE 8: LPG DEMAND ESTIMATES ............................................................................ 36
4.1 LPG Survey and Recording of Results .............................................................................. 23
4.2 Existing Market and Structure - Puntland and Somaliland ............................................. 23 TABLE 9: LPG PROMOTION – STRATEGY/ PLAN SUMMARY ...................................... 38
5. Historical Market Demand ...................................................................................... 36 TABLE 10: VOLUME FORECASTS PUNTLAND ......................................................... 39
6. Supply Economics/ Value Chain Analysis ......................................................... 36
7.1 LPG Market Penetration of 25% in the National Development Plan .......................36
7.2 Unrestricted LPG Supply Chain ......................................................................................... 37 CHARTS
7.3 Optimisation of Cylinder Sizes ......................................................................................... 37 CHART 1: HOUSEHOLD MONTHLY INCOME – CHARCOAL CONSUMERS PUNTLAND .27
7.4 Lower Barriers to Market Entry ......................................................................................... 37 CHART 2: HOUSEHOLD MONTHLY INCOME – CHARCOAL CONSUMERS SOMALILAND .27
7.5 Government Interventions/Facilitation .............................................................................. 37
CHART 3: AVERAGE MONTHLY HOUSEHOLD SPEND ON CHARCOAL PUNTLAND ..........28
7.6 LPG Demand Promotion - Strategy & Action Plan ........................................................ 37
7.7 LPG Demand Forecast (Provisional) ..............................................................................38 CHART 4: AVERAGE MONTHLY SPEND ON LPG PUNTLAND .......................................28
8. Main Conclusions ............................................................................................... 40 CHART 5: AVERAGE MONTHLY HOUSEHOLD SPEND ON CHARCOAL SOMALILAND 29
APPENDIX 1: QUESTIONNAIRES USED AS BASIS FOR MARKET SURVEY ....................41 CHART 6: AVERAGE MONTHLY SPEND ON LPG SOMALILAND ...................................... 30
APPENDIX 2: COMMUNITY WORKSHOP PUNTLAND ............................................... 47 CHART 7: MONTHLY FUELS SPEND SAMPLED HOUSEHOLDS PUNTLAND ................... 30
APPENDIX 3: COMMUNITY WORKSHOP SOMALILAND ............................................... 50 CHART 8: MONTHLY FUELS SPEND SAMPLED HOUSEHOLDS SOMALILAND .......... 31
CHART 9: UNIT PRICES OF CHARCOAL AND LPG PUNTLAND ....................................... 31
CHART 10: UNIT PRICES OF CHARCOAL AND LPG SOMALILAND .............................32
CHART 11: BARRIERS TO SWITCHING FROM CHARCOAL TO LPG PUNTLAND ..........33
CHART 12: BARRIERS TO SWITCHING FROM CHARCOAL TO LPG SOMALILAND ......... 34

16 17
Executive Summary
The 5-Year Development Plan 2014-18 of the
Government of Puntland puts great emphasis
on its determination to address the catastrophic
environmental impact of widespread use of
charcoal as a domestic fuel. It has set a target of
25% of households using LPG instead of charcoal
within the plan period up to 2018.
Channoil sub-contracted a Nairobi based consultant
having regional experience to lead the market survey
work in Puntland and Somaliland, and a Garowe
based consultant to conduct the field survey work
and to organise Community Workshops key towns
in Puntland and Somaliland. The sub-contractors
worked under the direction of Channoil Consulting.
The survey focussed predominantly on households,
recognised as the main target for making the switch
from charcoal to LPG. 1,258 households were
surveyed in Puntland, of which 83% were charcoal
users. 968 households were surveyed in Somaliland,
of which 85% were charcoal users. Kerosene hardly
featured as a domestic fuel. The very extensive
survey results have been logged and are available
in electronic format.
Charcoal use is very extensive. It is sold in sacks/
packages having an average content of 36 KG.
Prices vary widely and in Bosaso average 40$ per
sack. LPG is imported into both regions both in
cylinders and ISO Containers for filling cylinders
in-country. Existing LPG prices are high and range
across Puntland from 2-7 $/Kg. Usage is therefore
confined to high income families and prepared food
outlets.
The main barriers to growing the LPG market have
been identified as:
• High cost of LPG refills
• Unreliability of supply
• Low public awareness of benefits of using LPG
and fears concerning safety in the home
The high levels of household expenditure on charcoal
and the current relative prices of charcoal and LPG
suggest that if LPG could be imported at lower costs
and were to be priced competitively with charcoal
in energy equivalent terms, the potential to switch
18
from charcoal to LPG is massive.
Historical LPG demand data is unreliable and does
not lend itself to form a basis for estimating future
demand. We estimate current annual demand as
400 tonnes per annum but believe this figure is
conservative.
Our demand forecasts for Puntland are therefore
based on there being an upward step-change in
demand driven by Government policies and support
designed to remove the main barriers to growth.
We have developed three LPG demand scenarios
based on different assumed levels of Government
intervention and support. Our Base case assumes
achieving a market demand of 10,000 tonnes per
annum by year 3 of the new programme and 10%
per annum growth thereafter.
LPG demand growth will be assured through:
• Reduced import costs arising from investment
in a bulk import terminal and more competitive
pricing
• Introduction of smaller cylinders and financial
support to cover up-front costs of cylinders and
burners
• No taxes on LPG or equipment allied if necessary
to appropriate taxation of charcoal
• Improving public awareness of the benefits
of LPG and allying concerns with regard to
domestic use
1. Introduction
The first phase of this assignment has required us
to undertake a market study with the objectives of:
• Reporting on the present supply and distribution
channels for LPG into Puntland and Somaliland.
• Developing an understanding of current users,
supply economics and market pricing.
• Identifying the opportunity for expanding the
LPG market to reduce consumption of wood/
charcoal, to reduce the impact of deforestation
on the environment, and to displace the use of
kerosene, a fuel that, along with wood/ charcoal
can present health hazards.
• Assessing market pricing strategies and their
impact on future demand expectations.
• Gaining an understanding of the attitudes of
the key energy market participants and other
stakeholders to the prospect of a significant
expansion of the LPG market.
Petroleum Focus Consultants (PFC)1 of Nairobi were
engaged as sub-consultants to lead the market
survey work in Puntland and Somaliland. They
designed the questionnaires targeted at different
sectors of the market, which were used by Sahan
Group (SG)2 of Garowe, Puntland, a second sub-
contractor, engaged to conduct the field survey
work. SG also organised the Community workshops
conducted in key towns, 3 in Puntland and 2 in
Somaliland. The sub-contractors worked under the
direction of Channoil Consulting.
The findings of this market analysis will be used:
• To develop forward demand estimates
• For designing and costing a bulk import terminal
and an allied LPG bulk supply/ bottle filling plant
• For conducting a financial evaluation of the
proposed investment
1
PFC are highly qualified and experienced in LPG market study
assignments in the region, having good knowledge of the Kenyan
market, which in some respects could provide model solutions for
Puntland/ Somaliland, and including market survey works and results
analysis.
2
Sahan Group is a highly qualified and experienced local consultancy
having the experience and resources to conduct the field survey work.
The approach and methodology followed and
the detailed analysis underlying the charts and
other data provided herein are set out in a
Supplementary Report, which may be viewed along
with survey results in the Market Survey Puntland
and Somaliland Dropbox Folder (access information
to be advised).
2. Situational Review for LPG in
Puntland
2.1 Overview
The consultants conducting this study have carried
out a documentation review to gather information
of a general socio-economic nature and, where
available, that relating to LPG. Outside the UNDP
sponsored studies of 20073 and 20104, overall,
information is quite limited but we have been able
to refer to the recently published Second Puntland
Five Year Development Plan (2014-2018), which
has proved to be useful reference for the current
situation and future plans.
2.2 The Second Puntland Five-Year
Development Plan 2014-2018 (PFYDP-2)
This document represents the most comprehensive
and up to date source of socio-economic planning
information for various sectors, including energy.
Throughout the plan there is an expression of
urgency to address the environmental challenge
caused by over-reliance on biomass for both
domestic and institutional fuels and it emphasises
the need to support increased use of alternative
energy sources (LPG and kerosene) to redress
and reverse environmental degradation. The plan
commits preparedness by the State to participate in
PPP projects and other fiscal measures to promote
the use of these alternative energy sources.
The following summarises the areas of PFYDP-2
relevant to this study.
3
Prepared for UNDP Somalia by ESD Africa 10th July 2007
4
Reference not available
19
• Economic Performance
Table 1 below is a projection of GDPs, which
indicates a 5.0% growth rate through the PFYDP-2
period. Per capita GDP projections are based on a
population of 3.9 million. The GDP composition has
a very high household expenditure component that
dwarfs investments and government spending. The
key revenue generators are livestock and agriculture
exports, plus inflows from Diaspora remittances.
Remittances from the Diaspora contribute
significantly to household incomes and provide
substantial funding for small businesses and basic
service provision. It is estimated that 1-5% of rural
households receive remittances, while this figure
could be as high as 20% in some towns.
TABLE 1: PFYDP-2 ECONOMIC GROWTH
PROJECTIONS
GDP (US$) Per Capita GDP
(US$)
2014 2,027,938,434 519.98
2015 2,129,335,355 545.98
2016 2,235,802,123 573.28
2017 2,347,592,229 601.95
2018 2,464,971,841 632.04
• Financial Performance
According to the PFYDP-2, tax collections are low,
resulting in budget deficits and limited capacity by
the state to finance development projects. Raising
development funds from multilateral agencies is
mostly restricted by Puntland state status within the
federal government.
Financial resources that the government manages
are very limited and cover only the recurrent
budget, while the allocation for development is very
insignificant due to lack of direct budgetary support
from the international community to the Puntland
Annual Budget.
• Environmental Dilemma
The PFYDP-2 confirms that charcoal production is the
main environmental challenge currently confronting
Puntland. Burning of rangelands and forests are a
major cause of deforestation and environmental
20
degradation. More than 97% of families rely on
charcoal as a source of energy for cooking. Charcoal
demand is very high and prices are rising.
The PFYDP-2 plan calls for increased environmental
public awareness, while at the same time
undertaking a program to introduce alternative
sources of energy to replace charcoal.
• Energy Plans
Charcoal and firewood are mostly used for household
and institutional heating in both urban and rural
areas. Petroleum products are the second in terms
of total energy use, while electricity (generated
from diesel) ranks third in the total energy use. The
PFYDP-2 specifically addresses energy and LPG as
follows:-
• To address the environmental challenge related
to deforestation, the plan specifically proposes
promotion of alternative energy (LPG, kerosene,
solar and wind energy).
• The PFYDP-2 specifically proposes lowering of
taxes on LPG to promote conversion away from
biomass. The plan also assumes participation of
Puntland State in PPP LPG projects.
• The plan also commits government participation
in raising public awareness on the adverse
impacts of increased charcoal use.
• The PFYDP-2 has specifically targeted a 25%
penetration of LPG in households within the
development plan period (2014-18).
• The PFYDP-2 allocates US$17,750,000 for the
alternative energy (LPG and Kerosene) programs
and projects over the plan period 2014-2018.
Table 2 below is an Evaluation and Monitoring
matrix detailed in the PFYDP-2 to specifically
address performance in the promotion of LPG (and
kerosene ) over the plan period.
TABLE 2: EVALUATION & MONITORING PLAN FOR
LPG (AND KEROSENE)
Evaluation & Monitoring Matrix (Alternative Energy)
LPG & Expected Indicator Baseline Targets Means of Verification Assumptions
Kerosene outcome
Public and 25% of Limited number Affordable and Conduct yearly survey Taxes on LPG are
private sector households of households easily available on the percentage lowered.
partnership using LPG for now use LPG LPG and increase or decrease
improved cooking for domestic kerosene of LPG and kerosene Public awareness
cooking in use in Puntland of consequences
of charcoal use is
major cities and
towns increased.
import facilities in Bosaso
The above table reflects what is in the Government’s
Development Plan and makes reference to kerosene. • Ministry of Finance
The market survey work shows that kerosene is
hardly used and it is well understood that its use is » Define fiscal incentives for LPG investments
not to be encouraged because of health and safety and trade
reasons. However, the focus of this study is on
» Define PPP financing structure
LPG and developing the supply infrastructure and
market so as to bring about a sea-change away from • Ministry of Commerce and Industry
the use of charcoal.
» Promote and license LPG distribution and
Achievement of the 25% LPG market penetration retail trade
target, a worthy and feasible one, is very much in
the hands of the Government. This issue and the To the best of our knowledge, there are currently
project feasibility from a financial perspective are no plans to formulate new laws to regulate energy
covered in a subsequent report entitled ‘Financial trade, Health Safety and Environmental standards,
Evaluation & Market Development’. and licensing, generally or specifically LPG.
3. Market Survey/ Community
2.2 Regulatory and Institutional
Framework for Energy Workshops
In less developed countries such as Somalia, market
As a sector, energy is neither sufficiently organized
demand will be largely driven by availability and
nor regulated. It was recently announced that
affordability, in both cases relative to alternative
the Puntland State Agency for Water, Energy &
energy sources such as wood, charcoal and
Natural Resources (PSAWEN) shall have inter alia
kerosene.
the principal responsibility for energy affairs. The
following ministries and agencies are expected to A market survey was commissioned based on
be actively involved in the promotion of LPG usage questionnaires designed by Petroleum Focus
and trade:- Consultants (PFC), Nairobi, an associated consulting
company of Channoil Consulting and having
• Ministry of Environment
extensive regional experience of conducting LPG
» Lead Initiator of project market studies. The on the ground market survey
work was undertaken by Sahan Group Company
• Ministry of Maritime Transport, Ports and (SGC), based in Garowe, Puntland.
Counter Piracy
Although a more advanced form of questionnaires
» Provide support for development of LPG was developed, in SGC’s opinion based on their
21
understanding of the local environment and The following table summarises the questionnaire The data for both regions shows that the objective b. The most commonly used charcoal stove is
social structures, to encourage openness by the responses obtained from the households surveyed of focussing our survey work on households in called a ‘Birjico’.
respondents the simpler and shorter questionnaires in each of the towns: which charcoal is the most predominant fuel for
were used. These are attached as Appendix 1 for cooking was achieved. Sahan Group, who we sub- c. LPG use has the highest concentration in
ease of reference. TABLE 3: SUMMARY OF HOUSEHOLD FUEL SURVEY contracted to conduct the market survey work, were Bosaso, the main import centre.
- PUNTLAND successful in covering the target potential market
The overall aim was to target urban users of d. Kerosene does not feature prominently as an
PUNT- # OF HOUSEHOLDS TOTAL of households currently using charcoal. It is this alternative household fuel.
charcoal, i.e. non-users of LPG, to establish the # OF section of the community that have the financial
LAND
economics of their use of charcoal and to determine HOUSE
capability, subject to the right conditions in terms e. Electricity is the most widespread source of
HOLDS
their objections to switching to LPG. of availability and pricing, to switch from charcoal lighting across all household income groups,
CITY CHAR- LPG ELEC- KERO- FIRE- OTHER

In addition, Community Workshops were conducted

COAL TRICITY SENE WOOD
to LPG. The issues and proposed resolutions are pointing to a high level of domestic electricity
Badhan 205 17 188 2 24 16 222 connectivity.
by SGC in key towns, the results of which are set covered in our later report, ‘Financial Evaluation &
Bocamo 150 0 143 3 18 7 150 Market Development’.
out in Appendices 2 (Puntland) and 3 (Somaliland) f. The average size of urban households ranges
Bosaso 188 41 165 3 23 20 229
attached. Sampled households represented 0.09% and 0.06% from 3 to 8 persons, while incomes range from
Buhodle 175 11 161 1 20 11 186
In our view, SGC met the essence and objectives respectively of the total populations of the towns in US$50 to US$2,500 per month.
Galkayo 272 11 203 1 77 68 283
of the market review by the combination of survey Garowe 261 11 231 2 42 29 272
Puntland and Somaliland. In both cases a very large g. LPG cylinder sizes vary from distributor to
questionnaires and the Community Workshops. proportion of households use electricity for lighting, distributor and include 11 kg, 12 kg, 13 kg, 15 kg,
Overall 1251 91 1091 12 204 151 1342
firewood is the main alternative for charcoal and 20 kg, 40 kg, and 50 kg. There is a wide disparity
The initial intention was to target the questionnaires % of HH 83% 7% 85% 1% 16% 12%
that kerosene is an insignificant source of energy. between the initial costs of LPG cylinders, even
at the three main categories of respondent as TABLE 4: SUMMARY OF HOUSEHOLD FUEL SURVEY of the same size.
described in our First Report dated 26 May 20145. – SOMALILAND 4. Results of Market Survey and Key
However, in practice in the field this proved Findings h. Prices for stoves and cookers vary, averaging
impracticable and interviewees were re-categorised
SOMALI # OF HOUSEHOLDS TOTAL US$45 for two-burner, over US$100 for a gas
# OF
LAND HOUSE cooker.
into simpler groupings6. HOLDS 4.1 LPG Survey and Recording of Results
CITY CHAR- LPG ELEC- KERO- FIRE- OTHER i. Refill costs vary widely, from US$2.0/kg (in
5
Category 1 COAL TRICITY SENE WOOD The market survey was designed to capture
Bosaso) to as high as US$7.0/kg in other towns
Berbera 140 16 137 3 16 7 156 information from urban households having a higher
Captive high income salaried and business people residing mostly (Note: The July 2014 refill price in Nairobi is
Borama 145 138 12 7 145 potential to convert from charcoal to LPG usage as
in urban areas who will purchase LPG (for cooking) as long it is US$2.5 per kg).
available. These customers are likely to be already using LPG for compared with rural households. Since the market
Burao 169 5 161 2 19 11 174
cooking and electricity for lighting. survey provided a snapshot assessment at the time, j. Nearly all the non-domestic LPG consumer
Erigavo 155 15 143 2 17 12 170
Institutions such as hotels, hospitals, universities, schools, military time-based trend analysis is not practicable. respondents were in the catering sector
Hargeisa 356 31 329 8 65 30 387
bases and light industries (cafeteria, restaurants, and hotels).
Overall 965 67 908 15 125 67 1032 The results have been logged on Excel spreadsheets
Biomass (wood/ charcoal) are likely to be used only for emergencies. to ease review and analysis. Given the very large
% of HH 85% 7% 94% 2% 13% 7% k. The main factors quoted as discouraging LPG
As the economy grows, particularly in the cities and main towns, and volume of data, results/ survey sheet summaries use include;
as LPG availability improves and costs generally reduce, demand will N.B. Community Workshops were conducted at those towns have been made available electronically.
increase substantially. coloured in red. • High initial costs (cylinder and stove)
This category may not necessarily require government subsidies to 4.2 Existing Market and Structure -
Data collection was performed through face to • High cylinder refill prices
grow demand. Puntland and Somaliland
face interviews with respondents during which the
Category 2 • Limited distribution network and availability
enumerators entered responses directly into the 4.2.1 Charcoal and LPG Consumers7
Middle/ lower income persons (rural and semi-urban) with regular survey questionnaires.
incomes, who are already using charcoal and kerosene. The following is a summarized account of the 7
The survey focussed on domestic users, the target for LPG market
general findings from the market survey: expansion. Existing non-domestic LPG users (cafeterias, hotels, food
With good availability and competitive pricing, demand from this outlets and others) already know the advantages of using LPG.
category of customers could grow substantially, particularly if usage
a. The predominant fuel is charcoal. It is sold Consumers of LPG, both domestic and non-domestic, are eager to
is promoted through subsidies. 6
Category 1 Charcoal Consumers - All Towns support measures to reduce LPG supply costs/ prices.
mainly in 50 kg sacks/ packages. The price
Category 3 Category 2 LPG Domestic Consumers - Where Applicable varies from location to location. The average In practice the sacks are recycled from commodities previously
cost in Bosaso is around US $40 per sack. imported. The actual weight of charcoal is reportedly ‘variable’ but it
Low/ subsistence income levels (mostly in rural areas), for whom LPG Category 3 Institutional and Commercial Consumers - Where is understood that we should assume an average weight of charcoal
will remain mostly inaccessible unless heavily subsidised. Applicable of 36 Kg.

22 23
• Perception of LPG as unsafe. that that there is cylinder filling taking place at 4.2.3 LPG Importers – Somaliland In addition, in support of this study the ADESO
Bosaso. Project Director, Abdi Mohamed Dahir and Fatima
4.2.2 LPG Importers – Puntland It was not possible to obtain information to the
Jibrell (founder and a Senior Adviser to Adeso) have
3. Importation and distribution functions are same level of detail for Somaliland as for Puntland.
The following information was obtained from obtained the following information from Somgas
integrated. However, we understand that the same sources
importers/distributors surveys. Company, the main LPG distributor in Somaliland,
and modes of delivery are employed so the costs
4. Import landed costs from three importers is concerning their business operation.
1. Imports are currently land at Bosaso and for Somaliland will be very similar to those for
summarized in the Table 5 below. Puntland.
sourced from several countries, including the
UAE and Yemen.
TABLE 6: SOMGAS COMPANY - SOMALILAND
2. Product is imported in cylinders and ISO9
Containers. Importing in ISO Containers implies Question Response
TABLE 5: LGP IMPORT COST BUILD-UP - PUNTLAND Company established January 2009
SAHAL GAS MUMTAZ GAS PUNT GAS Shareholders 60
SOURCE OF IMPORT UAE YEMEN UAE Corporate structure Conventional Board of Directors headed by Chairman
LOAD PORT SHARJAH Number of staff 40
IMPORT ORIENTATION ISO CONTAINERS CYLINDERS ISO CONTAINERS LPG companies operating 2
Prior to start-up: Positive response to all with reference to UNDP
FREE ON BOARD – SOURCE NOT 980.00 – 1,350.00 1,250.00 study in 2007
PROVIDED • Feasibility Study
• Business Plan
FREIGHT 1,600 500.00 3,500.00
PREMIUM 0.00 0.00 0.00 • Development Plan for Establishing PPP to scale-
COST AND FREIGHT (C N F) (USD/ 2,580.00 – 2,950.00 1,750.00 up LPG Gas
MTON). Shore terminal in Berbera Shore tanks and tanker discharge line
MARINE INSURANCE 100.00 0.00 0.00 Storage capacity Berbera 1,000 tonnes
(1.003*CNF*0.0770%)
LPG distribution centres 24
WAR RISK INSURANCE 0.00 0.00 0.00
(1.003*CNF*0.0275%) Distribution mode Trucks – by road
Number of depots 2
COST INSURANCE AND FREIGHT 2,680.00 – 3,050.00 1,750.00 LPG Sources Yemen, UAE, Saudi Arabia
(CIF) Supply chain summary Tanker, ISO Container, shore terminal, filling stations,
PORT CHARGES 100.00 100.00 140.00 distribution points, customer
CIFLW – COST INSURANCE FREIGHT 2,780.00 – 3,150.00 1,850.00
Retail or wholesale Both
LANDED WHARFAGE
Cylinder sizes 2Kg, 4Kg, 11Kg and 22Kg
TAXES – ASSUMPTION 1 MONTH 100.00 11.00 120.00 Categories of customer Higher/ middle income households, commercial
STORAGE e.g. restaurants, factories, other industries, public
WAREHOUSING – ASSUMPTION 2 700.00 600.00 140.00 institutions e.g. hospitals, schools
MONTHS STORAGE Urban versus rural Mainly urban
Government subsidy Not direct, but tax exemption granted
TOTAL PRODUCT COST – US$/MT 3,580.00 – 3,950.00 2,461.00
Estimated % of households using LPG 2%
UNIT PRODUCT COST 3.58 – 3.95 2.46
Percentage profit in LPG business Break-even

N.B. Where gaps exist in the table, information was withheld by respondents for ‘confidentiality’ reasons.

9
ISO - International Standards Organisation

24 25
4.2.4 Community Workshops
Community Workshops were conducted as follows:
Puntland:
Bosaso, Garowe and Galkayo
Somaliland:
Berbera and Hargeisa
The responses are summarized in Appendices 2 and
3 respectively.
The key outputs from the workshops are:-
Consumers & Other Interests
• LPG price fluctuations are a concern.
• Complaints of inaccurate and unreliable weight
of filled cylinders.
• Both household and non-domestic consumers
are eager to support measures to reduce their
expenditure on LPG.
• Perception of LPG as unsafe fuel is a key
deterrent to acceptance of LPG.
• Increasing cost of charcoal while LPG prices are
unacceptable is unfair.
• Expect pushback on LPG promotion from NGOs
and local companies dealing in alternative
energy (wind, solar, electricity).
• Small time LPG traders welcome increased
revenues from increased LPG sales.
• The cost of LPG needs to decrease.
• The initial cost to purchase cylinders and
burners is high.
• Make arrangements for instalment payments
for cylinders and burners.
• Charcoal business interests are fearful of losing
their business.
Business Community/PPP
• Local LPG importers are ready to work with
international and local participants to develop
LPG business.
26
• Potential PPP participants include local and expensive. This has increased household • Target both the Husband and wife in the
Middle East investors. expenditure on fuels. household to give assurances on family safety
against LPG hazards.
• Unstable supply and source of LPG are a Public Communication Needs
challenge (imports from more than one 4.2.5 Charcoal and LPG Consumers
country) • Emphasize environmental harm of using
charcoal/firewood. An understanding of charcoal and LPG consumers
• Reign in unregulated LPG supply and trade and their choices with regard to energy sources is
(creates unfair competition) • Emphasize good points about LPG. crucial to the development of the feasibility study.
• Educate on how to safely use LPG.
• LPG importer says that a 1 or 2 Dollar per kg The distribution of charcoal consumers across
subsidy will not make much change. It is the • Use the available media channels to advertise the main income groups is shown in the following
‘initial cost’ that needs to be addressed. LPG. These include radio and Somali satellite charts 1 and 2, which demonstrate that the main
channels. targets for LPG usage development are low income
• The government needs to view LPG companies urban households:
as partners and provide government incentives.
Reduce financial levies on LPG companies. CHART 1: HOUSEHOLD MONTHLY INCOME – CHARCOAL CONSUMERS PUNTLAND
• Reduce tax and even subsidise LPG imports.
• Introduce special trucks for LPG cylinders
distribution, and not combine with other goods.
This will provide safety assurance.
• Open PPP shareholding to the public.
• Separate the importers and distributors roles to
create a wider distribution network.
• Large Somali companies want to participate in
PPP to diversify business.
• There is lack of proper infrastructure in place.
• What role will the current distributors play
(partners or competitors)?
CHART 2: HOUSEHOLD MONTHLY INCOME – CHARCOAL CONSUMERS SOMALILAND
• LPG distributors in Puntland are open to a
formation of new PPP provided their businesses
are not adversely affected.
• Potential PPP participants include large trading
companies and financially adequate individuals.
• Government needs to view LPG businesses as
partners, and should provide incentives and
reduce levies.
• Provide subsidies on LPG imports.
Government 10
• Supports LPG but is not sure how to go about
growing demand.
• Has increased tax on charcoal while LPG remains 10
Puntland Government has recently decided to make LPG imports free of taxes/ duties. Same situation applies in Somaliland.
27
Sources of household incomes were not surveyed
but it is understood that small-time trading and
remittances from relatives and friends abroad
provide important income streams to households.
Out of 1,251 households surveyed in Puntland
and 965 households surveyed in Somaliland, use
of charcoal in households categorised as ‘High
Income’ is negligible and constituted about 1% and
0% respectively.
The survey results revealed that between 83% and
88% of the households in Puntland and Somaliland
fall within a monthly income bracket of US $222
and US $447, i.e. ‘Low Income’. Overall, estimated
average monthly income levels in Puntland and
Somaliland fell between US $303 and US $289.
CHART 3: AVERAGE MONTHLY HOUSEHOLD SPEND ON CHARCOAL PUNTLAND
CHART 4: AVERAGE MONTHLY SPEND ON LPG PUNTLAND
28
Household monthly spend for charcoal and LPG are
shown in the following charts 4 to 6.
Charts 4 and 6 relate to existing household users of
LPG and represent those households that can afford
to pay for the convenience of using LPG at existing
(high) supply costs and prices.
gThe variations in spend for each energy source
occur mainly due to market and economic factors.
The information provides interesting back- ground
to the development of the LPG market but the data
is not germane to market development as such. The
patterns of expenditure in the main towns across
the two regions for charcoal and LPG are not too
dissimilar.
With regard to Charts 3 and 4:
• The use of charcoal and firewood, based on
household surveys, is linked to poverty and
perceived under-development, not directly
to the gender of household head, the size of
household or cultural preferences.
• Households estimated to have consumed an
• Low income households purchased charcoal in
small quantities (single bags/ sacks) reflecting,
in part, unpredictable income flows. The
remaining users, with more stable income,
purchased the fuel in larger quantities (two
bags/ sacks plus per purchase).
• There were no significant variations observed
in the relative use of firewood and charcoal
between Puntland and Somaliland.
» In terms of relative contributions of
different fuels used, the lion’s share of
CHART 5: AVERAGE MONTHLY HOUSEHOLD SPEND ON CHARCOAL SOMALILAND
household fuels consumption (76%) was
met by charcoal and firewood (15%) in
Puntland.
» In Somaliland the contributions were
charcoal (80%) and firewood (12%).
average of 99 Kg (2.75 bags/ sacks for Puntland
and 88 Kg (2.44 bags/ sacks) for Somaliland
respectively.
» The daily per capita consumption of
biomass in Puntland and Somaliland
amounted to 3.3 Kilograms and 2.9
Kilograms per day per household.
» Household biomass consumption per
inhabitant per day was estimated at 0.47
Kg in Puntland and 0.42 Kg in Somaliland.
29
 CHART 6: AVERAGE MONTHLY SPEND ON LPG SOMALILAND CHART 8: MONTHLY FUELS SPEND SAMPLED HOUSEHOLDS SOMALILAND

Total monthly household fuel costs for the sampled
households by town are shown in the following
charts 7 and 8. There are effectively two markets in
each town, one for charcoal and one for LPG, each
driven by its own market dynamics/ economics.
Some households that use LPG as the main fuel will
resort to using charcoal as a back-up but they are
very few and far between.
The charts themselves suggest that there is no
correlation between charcoal and LPG expenditures
in any particular town or across the market among
towns.
The levels of expenditure on charcoal in particular one-off exercises and in the absence of comparable
suggest that the potential to switch to LPG is high. historical data from similar household surveys
of Living Standards Measurement Surveys no
4.2.6 Relative Costs of Charcoal and LPG regression or related analyses could be performed.
The average prices of charcoal and LPG are as shown
in the following charts. The market survey was a

CHART 7: MONTHLY FUELS SPEND SAMPLED HOUSEHOLDS PUNTLAND CHART 9: UNIT PRICES OF CHARCOAL AND LPG PUNTLAND

30 31
It is interesting to note that the unit cost of charcoal
is higher in Bosaso than the other towns, whereas
the unit cost of LPG is lower in Bosaso than other
CHART 10: UNIT PRICES OF CHARCOAL AND LPG SOMALILAND
• A household is said to be in fuel poverty if it
needs to spend more than 10% of its income on
cooking and lighting fuels.
• Charcoal and LPG prices were only collected in
sample towns.
• The results focus on units prices of charcoal and
LPG:
» The mean unit cost for charcoal is US $0.81
per Kg compared to US $3.13 per Kg for LPG
in Puntland.
» The mean unit cost for charcoal is US $0.82
per Kg compared to US $2.35 per Kg for LPG
in Somaliland.
» Charcoal prices fluctuated between US $0.77
– 0.93per Kg in Somaliland and US $0.72 –
1.06 per Kg in Puntland, a fairly stable trend
during the survey period.
32
towns. In both regions we would put this down to
differences in supply logistics costs and the relative
spending power of households.
» In particular, the unit price of charcoal peaked
at US $1.06 per sack/ bag in the port city of
Bosaso.
» LPG prices ranged from US $2.27 – 5.17 per
Kg in Puntland and US $1.75 – 2.75 per Kg in
Somaliland.
» The unit price of LPG reached the peak of
US $5.17 per Kg in Buhodle, Puntland – the
major factor that contributes to higher unit
LPG prices is scarcity due to irregular imports.
• There were no households using LPG in Borama,
Puntland and Bocamo, Puntland
• Household fuels price comparisons in June 2014
show that:
» LPG was about 3 times more expensive than
charcoal in Somaliland.
» LPG was about 4 times more expensive than
charcoal in Puntland and seven times more
expensive in the town of Buhodle.
4.2.7 Factors Hindering LPG Market Development
From the above survey and workshop feedback,
the following factors can be identified as hindering
LPG demand growth. Also shown are processes that
would unlock LPG demands.
• High Cost of LPG refills
These results from high supply chain costs
associated with LPG imports in cylinders and ISO
Containers, and impacts on LPG affordability for
poorer households. Solutions would be:
» Reduce LPG procurement unit cost by
introducing bulk importation.
» Introduce and promote smaller size LPG
cylinders.
» Increased market competition among
importers and distributors.
» Government fiscal Interventions to waive
import taxes on LPG product, cylinders and
appliances.
» Reduce incentives to use charcoal (tax
charcoal, environmental control legislation
rules that make charcoal less available).
• Unreliability of LPG availability
This is as a result of low stocks of LPG due to slow
CHART 11: BARRIERS TO SWITCHING FROM CHARCOAL TO LPG PUNTLAND
turnaround of cylinders which are used both for
imports, distribution and consumer locations. This
issue can be addressed as follows:
» Increase supply of LPG in Puntland through
bulk imports.
» Sufficient storage and cylinder filling capacity
at Bosaso and possibly other key towns to
improve cylinder turnaround.
» Increase LPG distribution network and
efficiency.
• Insufficient public awareness on LPG use
Entrenched use of charcoal and limited knowledge
about benefits of LPG use limits LPG market
penetration. Many respondents cited lack of
awareness as a barrier to switching from charcoal
to LPG. Our understanding is that this relates to all
aspects of LPG use; simply the practicality of LPG as
an alternative to charcoal, environmental and health
benefits, safety issues in the domestic environment.
These matters can be addressed through a public
awareness/ education campaign jointly undertaken
by government and business.
4.2.8 Barriers to LPG Use
The questionnaire responses indicate that in the
minds of the interviewees the most overwhelming
barrier to LPG use is the initial cost of the cylinder,
see charts below:
33
 CHART 12: BARRIERS TO SWITCHING FROM CHARCOAL TO LPG SOMALILAND 4.2.10 LPG Market SWOT11 Analysis – Puntland market in Puntland.
From information obtained from the PFYDP-2 Plan This analysis sets the basis for assumptions to be
(Section 2.2), other sources, and the field survey used in LPG demands projections.
the SWOT analysis (Table 7 below) analyses the LPG
TABLE 7: LPG MARKET SWOT11 ANALYSIS PUNTLAND
Strengths
• The PFYDP-2 plans and supports LPG as an alternative energy.
• The PFYDP-2 plans and supports PPP for LPG projects.
• Private local and Diaspora capital that can support PPP.
• Enterprising business community who can support and expand LPG business.
• A business friendly liberalized market environment.
• A clear environmental policy on deforestation mitigation using alternative energy.
• Strong goodwill from development partners and international NGOs.
• Short distance from Arabian Gulf sources of LPG imports.
• Location of Bosaso on the busy Red Sea marine route.

Specific recommendations arising out of the
above findings are detailed a later report entitled
‘Financial Evaluation & Market Development’.
4.2.9 Other Observations
The following summarises other observations made
from the market survey:
• There are currently no bulk LPG storage/
distribution terminals in Puntland.
• There are no LPG bottling plants in Puntland,
save possibly those rigged up for filling bottles
from ISO Containers.
• Present supply arrangements are unstructured,
creating a ‘free for all’ market environment.
• It would appear that in general Health, Safety
and Environment (HSE) standards, if any, are
rudimentary.
Weaknesses
• Insufficient accurate historical data and information on the LPG market in Puntland (but our new
market survey provides a sound understanding of present market).
• Low existing base load LPG usage resulting in high unit costs.
• Absence of an efficient and cost effective LPG supply chain resulting in expensive LPG refills and
frequent LPG unavailability.
• Cylinders are mostly of large size resulting in higher refill costs.
• The “State” status which may hinder direct LPG funding by multilateral agencies.
• Weak state revenue base, which may be insufficient to fund LPG development projects and
subsidies.
• Absence of petroleum regulatory framework and standards.
Opportunities
• Huge LPG market growth potential due to strong government support for LPG as an alternative
to charcoal.
• Potential high LPG demand from institutions, businesses, and middle/high income households if
availability is guaranteed.
• Diaspora cash inflows for LPG supply chain development.
• Potential synergy of joint bulk LPG imports into Djibouti, Bosaso, Berbera, and Mogadishu Ports
will reduce bulk import costs.
• Potential LPG re-exports to Western parts of Ethiopia.
• Increased employment opportunities from an expanded LPG supply chain.

Threats
• Potential insecurity situations.
• Fluctuating LPG global prices.
• Biomass energy cheaper than LPG.

11
SWOT: Strengths – Weakness – Opportunities – Threats

34 35
5. Historical Market Demand the use of ISO Containers. to achieving its market penetration objective companies. This lowers barriers to market entry and
It has not been possible to source from the market through financial support for procurement of creates a more level playing field. It would serve
Other than the anecdotal evidence from the survey cylinders and stoves and a form of subsidy for LPG to encourage and increase market participation
or Government sources reliable data in respect of work and Community Workshops, it is not possible
LPG imports. Information does suggest however supplies, the 25% penetration target may be taken and competition. It would accelerate investments
to provide a breakdown of cylinder and bulk as a basis for calculating forward demand. in distribution capacity (e.g. inland storage, filling,
that demand has been constrained by limitations supplies/ main customers.
on supply. delivery trucks).
7.2 Unrestricted LPG Supply Chain
Estimates of demand have been made in two 6. Supply Economics/ Value Chain “Common user” facilitation would be a regulatory
A critical assumption for market development is
previous reports undertaken for the UNDP, namely: Analysis intervention to be effected by the government
that supply can be regarded as unrestricted. At least during licensing. It could also be extended to
Examples of present supply channels and economics
• Energy For Sustainable Development Africa in the early stages, this will be the role of the bulk privately owned LPG filling facilities with a
are provided in Section 4.2.3.
(ESD) - July 2007* import terminal and bottle filling facilities, which requirement that hospitality services are extended
Detailed analysis of available data will be undertaken we are assuming would be fully functional by 2017. to existing marketers and new entrants. This has
• Horn Consulting Association (HCA) – November as a next step to identify the supply economics that
2010** Modular design would be an option for development the effect of reducing unit costs and also increasing
will need to be in place to encourage a massive fair market competition.
of the bulk terminal but the scope of the feasibility
Table 8 below shows the estimated demand figures switch from charcoal to LPG. This will entail
study requires us to consider in the first instance a 7.5 Government Interventions/Facilitation
by ESD, HCA and by Petroleum Focus Consultants/ establishing:
terminal having a storage capacity of 2,000 cubic
Channoil. By taking the average growth rate of 42% • The selling price for LPG that will make it meters. It is assumed that the Government of Puntland (and
apparent between 2007 and 2011, we have assessed competitive with charcoal. Somaliland) will be a ready and willing partner in
the likely level of demand in 2014 at 408 tonnes. A further option to aid market development would LPG demand promotion, driven primarily by the
However, given the general level of activity evident • The net-back to the point of importation from be to establish bottling plants at key demand environmental policy obligations to reduce biomass
from the survey reports, we believe the actual level end-user selling prices after deduction of centres such as Garowe, Galkayo, Badhan, Buhotle consumption.
of market demand to be significantly higher. delivery charges and taxes. and Bocamo, which would be fed with bulk LPG
by truck from the Bosaso terminal. However, this The areas that the study assumes will be
TABLE 8: LPG DEMAND ESTIMATES • The ‘throughput charge’ for use of the 2,000 option is beyond the immediate scope of this study, implemented by the Government to promote LPG
m3 import terminal and bottling plant that will but is noted here for consideration later. demands are:
Annual % Growth justify the investment.
Demand (MT) 7.3 Optimisation of Cylinder Sizes • Removal of import taxes on LPG
• The resultant ‘target’ import cost to make the
2007 36* -
project viable and how this compares with The field survey indicates that the current cylinder • Removal of import taxes on LPG cylinders , and
2008 48** 34% notional import parity costs over the last 12 sizes include 11, 20, 40 and 50 kg. We would expect appliances (regulators and cookers)
2009 64.4** 33% months. and will assume that that some rationalization will
• Public awareness campaign on use of LPG to
2010 102** 58% take place and that smaller units will be introduced
• The extent of subsidy and guarantees for ‘save the forests’. This would increase household
2011 142.6** 47% in the market to make LPG a more attractive
investors that could be necessary. acceptance.
2012 202.5*** 42% purchase for the consumer.
2013 287.5*** 42% This work will be progressed and the results covered
Rationalization of cylinder sizes to fit various income 7.6 LPG Demand Promotion - Strategy &
2014 408.2 42%
in our next report entitled ‘Financial Evaluation &
brackets should increase LPG affordability through Action Plan
Market Development’.
reduced refill costs and the initial cost of cylinders. The market survey and Community Workshops
*ESD Africa (July 2007)
Prospective Market Demand – Puntland For example 3 kg and 6 kg cylinders would target performed in Puntland and Somaliland have
**Horn Consulting Association (Nov 2010) lower income households; the 13 kg would be identified barriers to LPG demand growth. In the case
7.1 LPG Market Penetration of 25% in the suitable for middle/higher income families; 40/50 of Puntland, a partnership between Government
***Petroleum Focus Consultants/ Channoil (June 2014) National Development Plan kg units would be used initially to target the food and business/ investors shall require the following
We consider that the huge leap in likely LPG industry and institutions. actions to unlock identified barriers and permit
The PFYDP-2 plan targets a 25% LPG market
consumption arises from the efforts of importers to penetration within the 2014-2018 plan periods. free growth of LPG demand. When this is achieved,
7.4 Lower Barriers to Market Entry
increase supplies. The increased consumption is in LPG demand would in all likelihood be left to grow
this case is driven more by improved availability. For The market survey indicates that charcoal users We are assuming for the purposes of this study that according to the state GDP growth rates, household
example the information received from field surveys will switch to LPG if their key concerns as set out the operating model and licensing of the bulk import incomes and of course LPG consumer prices.
indicates that LPG imports are already moving into in Section 4.2.5 are addressed. Assuming that the facilities shall be on a common user basis (open
the second level of supply sophistication through Regional Government of Puntland is fully committed access) that can be used by all licensed marketing

36 37
TABLE 9: LPG PROMOTION – STRATEGY/ PLAN SUMMARY
Interventions Completion Date (Adeso Responsibility
Plan)
1. LPG Supply Chain Upgrade (bulk import, Complete by 2015
distribution)
2. Cylinder Size Rationalization Commence by 2015
3. Import Tax Waivers
4. Public Awareness campaigns
5. LPG Regulations & Standards
7.7 LPG Demand Forecast (Provisional)
7.7.1 Broad-Brush Assessment
The Government’s target as described in Section 7.1
directionally provides an LPG demand expectation.
The population of Puntland is 3.9 million of which
about 40% reside in urban areas. The median
household size from the survey (e.g. Bosaso)
is 8 persons. The target number of households
is therefore 195,000. Average monthly LPG
consumption by an urban household is about 20Kg.
A 25% urban LPG penetration gives a demand of
975 tonnes per month, or 11,700 tonnes per annum
for urban areas. This figure does not include rural
areas, which would also be expected to carry a
share of demand penetration. We take this as our
Base Case.
We would say based on experience elsewhere that
such a demand figure may be difficult to achieve
in the short term, despite encouragement through
subsidisation of LPG, cylinder and stoves costs, and
a gradual build-up of volume will need to be allowed
for in the early years of market development.
7.7.2 Modelling Demand Forecasts
Our initial intention was to use a propriety model
for forecasting LPG demand. However, this process
would require access to comprehensive and sound
historical data in respect of the key parameters.
Unfortunately, such information with the reliability
needed is not readily accessible in the public
domain. We will continue to examine available
data and to assess the opportunity for adopting a
modelling approach.
38
feasibility of the project for the different cases. • It would seem that there are no other
companies looking to set up competitive
7.7.4 Other Factors Affecting Growth Prospects storage infrastructure/ bottling plants in the
for New Terminal regional market/ wider Somalia market.
JV/PPP
The issues to be addressed are as follows: 7.7.5 Volume Forecasts
Government, Business • We are not aware of any major infrastructure The volume forecasts based on our scenarios are
investments projected for Puntland that could shown in the following table.
Commence by 2015 Government
materially affect demand in the future.
Commence by 2014 Government, Business
Commence 2015 Government TABLE 10: VOLUME FORECASTS PUNTLAND
In addition, we will review the experience of similar Puntland LPG - Market Growth Scenarios (Tonnes)
ventures in similar markets and assess whether Scenario Growth Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
there are any indicators available that might point Base Case 10% 5,000 8,000 10,000 11,000 12,100 13,310 14,641 16,105 17,716 19,487
to market volume development in Puntland (e.g. Pessimistic Case 5% 3,000 5,000 8,000 8,400 8,820 9,261 9,724 10,210 10,721 11,257
Senegal, Kenya, Rwanda, and South Africa – Cape Optimistic Case 15% 5,000 10,000 12,000 13,800 15,870 18251 20,988 24,136 27,757 31,920
Town).
7.7.3 Volume Scenarios
In our view, there is a portion of the charcoal-using Summary of Scenarios: Optimistic Case: Government demonstrates
community that would switch to using LPG even through its actions that it means business, end-
with existing import and pricing arrangements Base Case: Government of Puntland shows user confidence in respect of economics and safety
providing supply to the market could be relied commitment to its market penetration target of issues soars and take up of LPG is high.
upon. However, we believe that the incremental 25% by enacting appropriate measures to ensure
volume so generated would be relatively small in that the end-user economics of switching from
the overall scheme. charcoal to LPG are sufficiently attractive
The real step-change in demand will be driven by Pessimistic Case: Government is slow to introduce
measures taken by the Government to put charcoal required measures and end-use confidence remains
users in the situation where their economics of low.
switching to LPG are at least break-even with or
preferably better than using charcoal. Details of
how this ‘thresh-hold’ price has been calculated are
provided in Section 6 above.
In these circumstances, subject to other non-
commercial issues being addressed, we see no
reason why market penetration would be held back
to 25% but with high consumer confidence could
be extended to as high as 40%. We take this as our
Optimistic Case.
In the event that the Government is more cautious
in terms of proving forms of financial support, then
market penetration is likely to fall short of target.
We take this as our Pessimistic Case.
These alternative volume scenarios will be fed
into our financial evaluation model to assess the
39
8. Main Conclusions or lower than the threshold price compared with APPENDIX 1: QUESTIONNAIRES USED AS BASIS FOR MARKET SURVEY
1. Only limited data is available on current demand. continuing to use charcoal. If consumers use
We believe the estimates are highly conservative LPG for cooking, they will not use the equivalent
FORM 1: FUEL CONSUMPTION PATTERN QUESTIONNAIRE
and that demand is likely to be running at a quantity of charcoal.
significantly higher figure, prompted by the 6. Such improvements in end-user economics and SECTION I : FUEL CONSUMPTION PATTERN – ALL HOUSEHOLDS
efforts of importers, especially semi-bulk using interest in switching to LPG will arise from:
ISO Containers.
» Subsidies on LPG import costs 1 Name of Surveyor : Date of Survey :
2. LPG demand is currently restricted by poor 2 Name of Household Respon- Household size :
availability, high refill costs, and consumer anxiety » Use of smaller cylinders to lower cylinder dent:
with regard to safe handling. and refill costs and make LPG more 3 Average monthly household income:
affordable to less well-off households 4 Name Of Town: Tick if Urban ( ) Suburban( )
3. Investment in the bulk import facility, filling and
» Removal of LPG taxes Rural( )
distribution facilities will unlock demand growth
potential, even at current consumer prices 5 What Fuel is used for cook- LPG ( ) Electricity( ) Kerosene
» Increased taxation on charcoal ing? ( )
because of improved availability. However, bulk
imports will lower costs and prices, which in turn » Increased public awareness of health and Charcoal ( ) Firewood ( ), Other
will trigger further increments in demand. safety issues (a) adverse health effects of specify ( )
using charcoal and (b) safe handling of LPG 6 What Fuel is used for Light- LPG ( ) Electricity( ) Kerosene
4. Demand will increase from existing charcoal
ing? ( )
consumers, some of whom will convert to LPG » Environmental benefits
even at current prices if they are assured of LPG Charcoal ( ) Firewood ( ), Other
benefits and safety. Our recommendations following on from the specify ( )
above conclusions are detailed in our subsequent 7 Total fuel used per month
5. A further demand increase will be generated report entitled ‘Financial Evaluation & Market (Kg, Litre)
by current charcoal consumers (low and middle Development’. 8 Unit cost of fuel
household incomes) who will be persuaded to
shift to LPG if LPG prices are low enough and at 9 Where is fuel source from?
10 Type and cost of stove/cook-
er used?
11 What prevents household
from using LPG?

SECTION II- LPG DOMESTIC CONSUMERS

1 Name of Surveyor: Date of Survey:
2 Name of Consumer: Household size:
3 Average monthly household income:-
4 Name Of Town: Tick if Urban ( ) Suburban( )
Rural( )
5 How many LPG cylinders and Initial costs per cylinder :-
their sizes?

6 What type of cooker? Initial cost of cooker :-

7 What is the cost of LPG per
cylinder?
8 How much LPG do you use in
a month?
9 How long have you used Tick : Less than 1 year ( ), 1-3 years (
LPG? ) , More than 3 years ( )

40 41
 9 Where do you purchase your 12 How do you plan to expand
LPG from? LPG business?
10 What prevents you from
using more LPG?
11 What other Fuels do you use
and how much? 13 What should the govern- • .........................................................
FORM 2: LPG IMPORTERS/DISTRIBUTORS QUESTIONNAIRE ment do to help expand LPG .........................
demand and business?
1 Name of Surveyor: Date of Survey: • .........................................................
...........................
2 Name of LPG importer: Year Registered:
3 LPG imports in 2008( ), 2009 ( ), 2010 • .........................................................
( ) ............................

2011( ) 2012 ( ) 2013 • .........................................................

( ) .............................
4 Countries and Ports of LPG
• .........................................................
Imports origin.
..............................
5 In what form are LPG im- Tick : Bulk tankers ( ) Iso-con-
ports? tainers ( ) , Cylinders ( )
6 How many shipments in a
year?
7 What are the LPG cylinder FORM 3: LPG INSTITUTION/BUSINESS CONSUMERS QUESTIONNAIRE
sizes?
8 What are the initial costs of 1 Name of Surveyor: Date of Survey:
LPG Cylinders? 2 Name of Institution: Year Registered:
9 How many shipments in a Location Rural
year?
10 What are the latest unit im- • FOB.....................................US$/Ton • Town...........................
port costs? ..............
• Freight..................................US$/
ton • Rural Area...................
.............
• Insurance..............................US$/ 4 Category of Institution (speci- • Business...........................................
Ton fy function or business) • Government.......................................

• Port charges..........................US$/ • Private..............................................

Ton
• Foreign Mission...................................

• Warehousing costs................US$/ • NGO....................................................

Ton
• Other................................................
• Taxes.....................................US$/ 5 LPG Consumption in KGs 2008 ( ), 2009 ( ),
Ton 2010 ( )

2011 ( ), 2012 ( ),
11 What are margins like? • Importer mar- 2011 ( )
gin......................................... 6 Who are the LPG suppliers?
• Distributor mar- 7 What are the unit prices of
gin...................................... LPG?

• Retail mar-
gin...............................................

42 43
 8 What type of burning/ cook-
ing/ lighting equipment do
you use?
9 What are your concerns on
LPG supply and costs?
2 Population
• What is the latest national population for the country?
• ......................................................... • What is the population growth rate?
............................
• What is the split between urban and rural population?
• .........................................................
............................ • What are populations of the towns listed for the study?

10 Are there any government
interventions on LPG that you
would wish to recommend?
• .........................................................
.............................
• .........................................................
...............................
• .........................................................
...............................
• .........................................................
............................
• .........................................................
...........................
3 Infrastructure
• What is the general condition of the roads between
various towns (bitumen, all weather gravel, seasonal)?
• What are the largest sizes of ships that can dock at
port?
• How is the supply of electricity across the country and
in towns?
• What are the consumer electricity prices?

• ......................................................... • How is electricity generated?

............................ 3 Petroleum policies, laws ,regulation
• ......................................................... • Which ministries are in charge of petroleum, environ-
........................... ment and internal trade?
10 Do you use other types of fu- • Electricity...................................................

els and how much quantity? • Are there any specific policies, laws and regulations
• Kerosene..................................................
governing petroleum supply?
• Charcoal..................................................
• As there a body responsible for standards and also
• Firewood..................................................
environment?

• Are there any standards for LPG?

FORM 4: COUNTRY GLOBAL INFORMATION • What is the tax structure for petroleum products and
LPG in particular?
GENERAL COUNTRY INFORMATION
• Are there any past studies done for the government on
1 Economic Indicators
petroleum including LPG?
• Provide economic growth (GDP) figures for the years
2008-2013

• What are the key economic sectors and their GDP

share?

• What is the average monthly salary for the highest mid-

dle and lowest paid government employee?

• What are the personal income tax rates?

44 45
4 LPG Business APPENDIX 2: COMMUNITY WORKSHOP PUNTLAND
Community Workshop – Puntland, City: Bosaso
• Are total LPG imports/demands available for the year
2008-2013?

• Can you list the largest individual consumers of LPG Focus Point Feedback
(universities, schools, hospitals, hotels, industries etc.)
and the individual consumption? Potential supporters and • The government is also a strong supporter of bringing LPG to Somalia, but
blockers and reasons for are currently not entirely sure how it is to be done. They have increased
• Can you list all LPG importers and volumes imported in positions taken taxes on charcoal but it has only made it more difficult for the low income
2013? groups to buy charcoal as well as LPG; therefore creating two problems
instead of solving one.
• Can you describe briefly how the LPG business and
supply chain is organized from import to the final Ideas on viable approaches to • A two way approach, informing people of the harmful effects that
consumer? promoting LPG use across all charcoal and firewood has on the environment and how it will affect their
categories of the market livelihoods; and at the same time there should a promotion for LPG.
5 Other Fuels
Interest of the different players • Two of the largest gas importers and new participants in the LPG
• Do you have any indications of relative costs of in participating in specific market (Sahal Gas & Punt Gas), have expressed eagerness to work with
charcoal, firewood, kerosene? elements of the supply chain international and local participants (public or private sector).
from importation to final
• How readily available is kerosene across all parts of the delivery to the customer either
country? as solo operators or in JVs/
PPPs
• Are there any regulations restricting use and trade in
charcoal and firewood?
6 Cross-border LPG trade Potential participants in PPPs • Business companies in Somalia that have the capital to invest.
purely as investors
• Approximately how much cross-border trade of LPG • Middle Eastern Investors those are willing to invest in Somalia (Gulf
takes place with neighbouring countries both formal Countries).
and smuggling?
Perceived constraints to plans • Stable supply and source of LPG, currently LPG is imported from more
than one country

• There should be an also a legal supply as well, because some LPG imports
come from illegal means (black market).

Key issues to be addressed by • LPG Importers have expressed their scorn at the proposed “price
Regional Governments to facil- reduction” for LPG. They stated 1 or 2 dollar discounts will not change
itate project moving forward in anything. The biggest problem is the initial cost barrier that needs to be
PPP format solved.

• The government needs to view LPG companies as partners and provide

government incentives to help foster alternatives to charcoal and
firewood consumption in the region. The majority of the issues revolve
around the financial constraints that are levied on LPG companies, the
government needs to provide financial incentives such as tax reduction
(0% tax) and even subsidize LPG imports.

46 47
 Community Workshop – Puntland, City: Galkayo
Focus Point Feedback
Potential supporters and blockers • The current LPG distributors in Puntland are open to a formation of new
and reasons for positions taken LPG Company/businesses and will support as long as their business is not
adversely affected.
• Individuals and businesses in the charcoal industry are fearful of losing
their business.
• Current consumers of LPG, either household or non-domestic consumers
are eager to support any measure to reduce their current costs/expendi-
ture on LPG
• Ministry of Environment and other departments in the government are
welcome to the idea of moving forward and protecting the countries natu-
ral resources from exploitation.
Ideas on viable approaches to • Educating the consumers on how to “SAFELY” use LPG. From household
promoting LPG use across all consumers, safety issue is number one. They need re-assurance that their
categories of the market house will not “blow up”. Some shop owners have even stated they refuse
to allow businesses that use LPG to even rent their shop outlet due to fear
of an “accident” taking place.
Interest of the different players in • LPG Importers also play the role of distributors and unlike the charcoal/
participating in specific elements firewood industry it is does not have as many layers of brokers (or people
of the supply chain from impor- profiting in the middle). If the importers became strictly importers and
tation to final delivery to the provided significant discounts to distributors, the supply chain might be
customer either as solo operators widened to reach a greater populace.
or in JVs/ PPPs
Potential participants in PPPs • Large trading companies that have the capital to invest and have experi-
purely as investors ence in importing goods to Somalia.
• Financially adequate individuals that wanted to invest in LPG before but
didn’t have the knowhow or experience in this industry and were wary of
current importers.
Perceived constraints to plans • LPG prices fluctuate and this causes concern to the importers and con-
sumers.
• Some people have complained that LPG cylinders are not always properly
filled (i.e. they don’t receive the exact quantity they pay for). Therefore
there needs to be adequate quality control
48
Key issues to be addressed • The government needs to view LPG companies as partners and provide
by Regional Governments to government incentives to help foster alternatives to charcoal and
facilitate project moving forward firewood consumption in the region. The majority of the issues revolve
in PPP format around the financial constraints that are levied on LPG companies, the
government needs to provide financial incentives such as tax reduction
(0% tax) and even subsidize LPG imports.
Community Workshop – Puntland, City: Garowe
Focus Point Feedback
Potential supporters and block- • There are companies operating as an alternative and environmentally friend-
ers and reasons for positions ly provider of clean energy, such as solar energy and wind energy. A good
taken example would be the current only provider of electricity in Garowe, which
has decided to use wind to generate power. Companies such as these support
all initiatives to bring environmentally friendly sources of fuel to the general
public in hopes that they too will receive support and aid in the future.
• Small time LPG traders are also welcome to new initiatives which they feel will
increase their monthly and annual sales.
Ideas on viable approaches to • A good approach to promoting LPG is using the available media channels to
promoting LPG use across all advertise LPG to the Somali public. Somali people like to stay updated with
categories of the market current events and the radio along with Somali satellite channels are the best
means of promoting LPG usage throughout the country.
• The promotion should also focus on all segments of the Somali household,
meaning both Husband and wife. There have been instances where one part-
ner was open to using LPG but was blocked by the other partner, due to fear
for his children’s safety (a gas leak/explosion).
Interest of the different players • Imported goods are distributed across the country by truck drivers/owners.
in participating in specific ele- Since LPG is different to the regular products trafficked across the country, it
ments of the supply chain from requires special transportation. If the current trucks can be adapted to trans-
importation to final delivery port LPG safely then this will increase participants in the industry.
to the customer either as solo
operators or in JVs/ PPPs
Potential participants in PPPs • If investing was open to the public, there would be investors willing to buy
purely as investors shares in the company.
• Large Somali companies that want to diversify their company portfolio and
looking for new opportunities.
Perceived constraints to plans • There is lack of proper infrastructure in place.
• What role will the current distributors play? How will they work together? Will
they be competitors or partners?
49
APPENDIX 3: COMMUNITY WORKSHOP SOMALILAND Perceived constraints to plans • How to reduce the price of LPG while still making profit.

• Not all LPG importers are open to cooperation and are wary of new LPG
Community Workshop – Somaliland, City: Berbera initiatives

• Poor knowledge on use –leaflet instruction in Somali

Focus Point Feedback
• High taxes
Potential supporters and block- • Potential supporters are Government-because it is their responsibility to
Key issues to be addressed by • Tax exception
ers and reasons for positions protect the environment
Regional Governments to facil-
taken • Policies –That safeguard the environment
• Pastoralists- their animals depend on the local environment and itate project moving forward in
vegetation and will die if there is lack of fodder PPP format
• Land provision –for building /storage
• Potential blockers are-Low income families-Because they can’t afford to • Improving the banking sector to allow for loans to be made available
buy LPG and fear losing their cheaper fuel/energy sources.

• Risk associated with LPG – Local populace afraid of a gas explosion

Community Workshop – Somaliland, City: Hargeisa
happening in their home and risking their children lives
Ideas on viable approaches to • Increase Awareness Campaign (Educating people on the uses & Focus Point Feedback
promoting LPG use across all advantages of LPG ,and the safety procedures required) Potential supporters and block- • Potential supporters are gas traders –because it is their business
categories of the market ers and reasons for positions
• Low price – LPG needs to be at a competitive price with charcoal –maybe • Environmental activist –because they care strongly about their local
taken
even cheaper than charcoal environment and habitat
• Distribute at every business centre\shop • Gas users (HH, cafeteria, hotels and others)-they already know the
advantages of using LPG.
• Media Advertising: Local Radio and Somali Satellite TV Channels
• Potential blockers are-Charcoal \wood traders – because they are
• Making sure that the LPG sold is of high quality and the right weight and
afraid of becoming jobless because they don’t have any other source of
cooker/stove is affordable
livelihood at the moment.
• Provide credit- Allow for monthly instalments so customers can buy initial
costs (cylinder and cooker).
Ideas on viable approaches to • Market should be open and free for healthy Competition. Monopolies will
promoting LPG use across all be harmful to the local economy.
categories of the market
• Free delivery & local distribution at initial stage to provide incentives for
people to buy LPG

Interest of the different players • Government can help ensure that there are no governmental regulations • Price Promotions such as buy two and get one for free
in participating in specific ele- or restrictions on the LPG industry
• Home delivery- making it more convenient for the customers
ments of the supply chain from
importation to final delivery • Current Gas traders/importers
• Network marketing
to the customer either as solo
• Charcoal/firewood traders might be willing to participate if their own
operators or in JVs/ PPPs • Employ charcoal traders- therefore eliminating some of the resistance
business is outlawed
• Employing charcoal/firewood traders also allows you to tap into their own
• NGOs can be hired to increase awareness and provide training
loyal customer base
Potential participants in PPPs • High Income individuals
purely as investors • Cylinders should be different sizes to meet different customer needs
• Large corporations operating in the region such telecommunication and
remittance companies • Smaller cylinders should be made available for low income families

• The general Population is willing to invest and buy shares in a public LPG • NGOs should help with fund to the traders
company

50 51
Interest of the different players • The government if it can receive funding from the international
in participating in specific community will be willing to subsidize LPG prices
elements of the supply chain
from importation to final • Suppliers of cylinders and cooking equipment are willing to reduce their
delivery to the customer either prices if the government or LPG importers will buy in huge quantity.
as solo operators or in JVs/
PPPs • Current LPG suppliers in Somaliland are wary of new competition entering
the market but if they are chosen as sole operators they will participate
SECTION 3
and provide assistance.
Potential participants in PPPs • Large Business owners
purely as investors
• Alternative Energy Companies that are already operating in the region

• The Government or Government Officials?

Perceived constraints to plans • Lack of proper Infrastructure-such as transportation, roads, storage

tankers and no railway system

• Poor market- Purchasing power is low

• Cultural/Traditional barriers – The belief that LPG is a huge security risk

• Supply- Availability & shortage of supply; Charcoal and Firewood is

produced locally while LPG must be imported
Financial Evaluation/
Market Development Report
Key issues to be addressed • Government must develop -LPG storage/Depots
by Regional Governments
to facilitate project moving • Mobile tankers
forward in PPP format
• Improve road infrastructure

• Government must establish, build and maintain strong relationships with

the international LPG market participants

• Government should help subsidize LPG costs

52
 TABLE OF CONTENTS Executive Summary 6. Based on our proposed business model, our
Base Case volume estimates and other Base Case
Executive Summary ................................................................................................55 1. Most people interviewed during our market assumptions and the above terminal throughput
1. Introduction ..... ...................................................................................................... 56 survey work have indicated that they would like charge, the project will develop attractive rates
2. Liquefied Petroleum Gas (LPG) ............................................................................ 56 to switch from charcoal to LPG. of return, generating an IRR of between 15.2%
3. Volume Estimates - Puntland .............................................................................57 2. LPG is traded extensively in the international (100% equity) and 18.3% (50% external finance).
The key sensitivities are operating costs and land
4. Bosaso Terminal Location .......................................................................................57 market, where its price is set and which determines
rental.
4.1 Bulk Supply .. ...................................................................................................................... 57 the import cost into Puntland. The selling price
4.2 Terminal Capacity and Configuration .............................................................................. 57 of LPG in the domestic market will be set by the 7. The price of charcoal in the domestic market is set
4.3 Tanker Moorings/ Discharge Pipelines ..............................................................................58 price of charcoal, with which as a domestic fuel it by local market dynamics and taxation levels. The
will have to compete. From an economics point price for LPG in the international markets from
4.4 Bottling Plant - Capacity ....................................................................................................58
of view, LPG has a higher calorific value than which product would be sourced for the domestic
5. LPG Supply Options - International Market Access ................................................59 charcoal and in use it should be more efficient to Puntland market fluctuates due to seasonality
5.1 Current Supply Arrangements .........................................................................................59 use. It should be possible, therefore, to sell LPG factors, which are clearly not reflected in charcoal
5.2 Market Traders .............................................................................................................. 60 at premium prices over charcoal, but it will be a prices in the domestic market in Puntland. There
6. LPG Pricing ...... ...................................................................................................... 60 major challenge to convince potential customers is therefore a disconnection between price
7. Proposed/ Recommended Business Model ......................................................... 60 of the economic as well as the environmental movements in the two markets that would need
benefits of switching to LPG. to be managed such as to assure investors with
8. Methodology.... .......................................................................................................61
regard to the security of their investment in the
8.1 Affordable Price for LPG .................................................................................................... 61 3. A suitable site for the new LPG import facilities
and terminal has been identified, in the vicinity terminal and distribution business. Several forms
8.2 Netback Value to Bosaso from Affordable Price ........................................................ 61 of subsidy arrangements are available, which will
8.3 Bosaso Terminal Throughput Charge ..............................................................................62 of Bosaso airport, which has been taken as the
assumed location for the purposes of design and need to be considered and evaluated.
8.4 Import Cost and Margins .........................................................................................62
cost estimating. It has been agreed that the most 8. During Northern Hemisphere winter months,
9. Financial Analysis ............................................................................................... 64 cost effective option for product storage will be a when international market LPG prices are
9.1 Financial Model and Base Case Assumptions .................................................................. 64 conventional sphere. The design of the terminal relatively high, a form of price subsidy may
9.2 Discounted Cash Flow Base Cases - Internal Rate of Return (IRR) ..................................66 and tanker berthing jetty will take into account be necessary to ensure investors’ returns are
9.3 Sensitivity Review ....................................................................................................69 the manner in which LPG is currently traded and secured but the medium and longer term outlook
10. LPG Market Promotion and Development ......................................................... 70 supplied to East Africa and the Horn of Africa suggests the relevant international markets will
10.1 Overview..... ......................................................................................................................70 region. be oversupplied, putting downward pressure on
10.2 LPG Demand Drivers ....................................................................................................70 4. To encourage consumers of charcoal to switch international prices and possibly obviating the
10.3 LPG Market Development Action Plan ................................................................... 72 to LPG for domestic use, the prices of LPG need for inland market subsidies.
11. Recommended Way Forward .............................................................................75 would need to afford them at least break-even 9. Rationalisation of the market offering, effective
11.1 Government Support .................................................................................................... 75 economics, which have been assessed taking into communications on economic and safety issues
11.2 Import Cost Subsidy .................................................................................................... 75 account calorific value differences and relative and extensive sales promotion will be essential to
11.3 Market Price of Charcoal ......................................................................................... 75 stove efficiencies. These derived prices have been growing the market
11.4 Distributors and Distributor Margin .............................................................................. 75 netted back to the prospective Bosaso terminal
taking into account current transport costs and 10. The role of the Government as a potential
11.5 Competition ...................................................................................................................... 76 market regulator, overall supporter of the
estimated Distributor Margins and average 1,450
11.6 Next Steps... ...................................................................................................................... 76 initiative and provider of a secure operating
$/Tonne.
Appendix 1 - Map and Site Location (Red Circle) ..........................................................77 environment will be crucial to the success of the
5. Investors in the prospective bulk LPG import
Appendix 2 - Example of a Typical LPG Sphere ..........................................................77 venture.
terminal and distribution business will need to be
Appendix 3 - LPG International Supply Contacts ..........................................................78 assured that their investment is secure and will 11. Adeso will play a key role in supporting
generate a return commensurate with the nature environment awareness campaigns and in the
of the business and implied risks. Our financial appointment of an Energy Adviser.
evaluation model using Base Case assumptions
suggests that the terminal throughput charge
should be of the order of 150 $/Tonne.

54 55
1. Introduction
A detailed market survey has been carried out
focussing on that sector having the greatest
potential to switch from charcoal to using LPG as the
main domestic fuel, i.e. charcoal users resident in
urban households, and existing LPG users, i.e. urban
domestic, commercial (factories, cafes, restaurants)
and institutional (diplomatic residencies, hotels).
Our Market Report dated July 2014, covering work
undertaken between May to July 2014, indicates
that, subject to appropriate responses and
support from Government agencies and business
communities, there is a clear case for establishing
a new bulk cargo import terminal for LPG at Bosaso
and developing the market for bottled LPG, in
particular during the initial stages the domestic
urban sector.
From the findings of this report, it is clear that
although an existing LPG supply capability exists,
it is fragmented and lacks the economy of scale to
facilitate reductions in unit costs and allow suppliers
to offer more competitive pricing.
It is also clear that there is a huge potential demand
for LPG for domestic use in urban communities that
would be unlocked by improving supplies through
establishing a bulk cargo import and distribution
capability and adopting the range of market
development initiatives set out in the following
sections of this report.
This document is designed to report on key
matters relating to and the financial evaluation
of the prospective investment in bulk import
(shore terminal to receive cargo shipments from
ocean going tankers) and distribution facilities
(bottling plant and bottle sizes more economic and
convenient for the end-user).
56
2. Liquefied Petroleum Gas (LPG)
This term refers to Propane (C3) and Butane (C4)
or combinations of the two. The ‘C’ number refers
to the number of Carbon atoms in each molecule.
[LNG is Liquefied Natural Gas, i.e. Methane or C1,
having one Carbon atom in each molecule.]
LPG gases are produced in oil refineries from crude
oil distillation and from up-grading processes. Also,
a source of growing importance is from field gas
production, where LPG gases are generated as by-
products along with associated gas liquids.
Both C3 and C4 are gaseous at ambient
temperatures but may be liquefied under pressure
or by refrigeration. Pressurisation is usually the
process used for liquefying C3 and C4 for use as a
convenience fuel, delivered to market in pressurised
containers (e.g. cylinders and small tanks). We will
advise in due course on the appropriate gas or blend
suitable for the Puntland LPG market. Because the
two gases have different vapour pressures, there
may be implications for cylinder design criteria.
These two main sources produce respectively
’refinery quality’ and ‘field quality’ having slightly
different quality characteristics, especially with
regard to purity.
Both C3 and C4 are heavier than air and in certain
situations without adequate ventilation leaked
product will ‘creep’ at ground level and/ or sink
into lower levels when accessible, where it may
find a source of ignition. Being naturally odourless,
as a safety measure, LPG is therefore ‘stenched’
(this means the addition of a trace highly odorous
compound) to ensure that in cases of leakage
its presence can be detected by smell. Ensuring
product awareness and knowledge of safe handling
procedures are important aspects of domestic
market expansion.
3. Volume Estimates - Puntland
Demand volume estimates as per our Market Report dated July 2014 are as shown in the following table.
TABLE 11: PUNTLAND LPG – MARKET GROWTH SCENARIOS
Puntland LPG - Market Growth Scenarios (Tonnes)
Scenario Growth Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Base Case 10% 5,000 8,000 10,000 11,000 12,100 13,310 14,641 16,105 17,716 19,487
Pessimistic Case 5% 3,000 5,000 8,000 8,400 8,820 9,261 9,724 10,210 10,721 11,257
Optimistic Case 15% 5,000 10,000 12,000 13,800 15,870 18251 20,988 24,136 27,757 31,920
An option for estimating forward demand would building up cost estimates for the terminal/ bottling
be to use a forecasting model and data based plant and scoping the marine facility requirements.
on historical demand and relevant economic Full details including engineering drawings will be
parameters. Reliable market demand information provided as a supplement to this report.
and economic data is not readily available.
Furthermore, the impetus for growth in demand will Concerning, moorings and water depth, pressurised
tankers engaged in LPG supply for the East/ North
come from Government and institutional support.
We have therefore adopted a scenario approach to East African coastline trade typically having the
following dimensions:
demand estimating and we have based our further
assessments on the above volume estimates. TABLE 12: TYPICAL LPG PRESSURISED TANKERS
4. Bosaso Terminal Location Typical LPG Pressurised Tankers
4.1 Bulk Supply Capacity M3 3,500 5,000
Capacity DWT 1,800 2,500
The most suitable means of supply will be by sea to Tonnes
Bosaso in pressurised LPG ocean-going tankers. The
Fully Laden 5.5 6.0
original intention was that land for sitting of the new
bulk import terminal with an area of 65,000 square Draft Metres
metres could be secured within Bosaso Port but this Length Overall 100 100
has not been possible. An alternative suitable site Metres (LOA)
has been identified in the general locality of Bosaso The tanker jetty and LPG discharge facilities will
airport as shown in the map and site location need to be designed accordingly. In all likelihood,
provided in Appendix 1. The area of land is sufficient at least initially, tankers will be engaged in multi-
and the site should meet other key criteria in terms discharge activities and although cargo sizes will
of access to the sea, water depth and easy access to be relatively small, larger tankers will need to be
transportation logistics and utilities. accommodated. Essentially, 8.0 metres of draft will
The site has been reviewed and accepted for planning be required for vessels averaging 5,000 DWT or
and development purposes by the Adeso team in occasionally up to 8,000 DWT.
Puntland in conjunction with local administrations,
4.2 Terminal Capacity and Configuration
local communities, a locally based industrial
engineer acting in an advisory role, Channoil Asia Adeso has indicated that the capacity of the terminal
and Trident Engineering (Trident). Trident are in the should be minimum 2,000 cubic metres. Based
process of undertaking the terminal design work, on this assumption and our assessed provisional
57
Base Case volume estimates set out in our market
report (approximately 11,000 tonnes per annum,
increasing in year 4 by 10% per annum), we would
expect supply to be effected in the form of part
cargoes of around 750 tonnes from pressurised
vessels supplying a number of ports along the east
African coastline.
However, if as is expected, the market volume
grows significantly and quickly, it may be more
economical to ship larger cargoes into the terminal
and/or increase delivery frequency.
Our estimates of capital costs have assumed:
• Storage capacity of minimum 2,000 cubic
metres
• Marine facilities having the capacity to handle
and to discharge efficiently the range of vessel
sizes as in Section 4.1 above (taking into account
occasional high seas during the summer season)
During a recent meeting between the Adeso
Project Director and Trident at Trident’s offices in
Glasgow, the safety advantages and disadvantages
of large mounded LPG bullets versus LPG spheres
were discussed and it was agreed in principle that
the option of installing bullet storage would be
progressed. However, it has subsequently emerged
that there are weight restrictions in Bosaso Harbour
and alternative Somalia harbours for receiving/
unloading large bullets or sections of bullets. If the
design assumed smaller bullet storage vessels, then
as a result the costs of valves, tank gauging and
safety equipment would all increase proportionally.
Taking into account the above considerations,
Trident have recommended installation of a
58
traditional LPG sphere for receipt and storage, with 5. LPG Supply Options - International Large Gas Carriers – VLGCs) carrying +/- 45,000
associated fire-fighting systems /cooling water, as tonne cargoes, primarily to Asian markets. The
the most cost effective installation. A drawing of a
Market Access
supply terminals do not usually permit loading of
typical storage sphere and ancillaries is provided in 5.1 Current Supply Arrangements small pressurised LPG tankers, so as a direct source
Appendix 2. this supply option would not work for the relatively
Currently product is imported into Puntland and small cargoes required for Puntland. ENOC, from
4.3 Tanker Moorings/ Discharge Pipelines Somaliland in cylinders and ISO Containers, mainly their Condensate Splitter Units in Jebel Ali, was but
from the UAE and Yemen. is no longer a supplier of small refrigerated cargoes
Since in all likelihood pressurised vessels (small)
will be used for shipping LPG to Bosaso, it is not The Arabian Gulf (AG) is a major source of LPG, which since all their LPG production is absorbed into the
envisaged that cryogenic discharge pipelines will is mostly exported in refrigerated vessels (Very UAE market.
be needed. If refrigerated vessels (large) were to be
used then we would expect the terminal storage to CHART/IMAGE 13: VERY LARGE GAS CARRIER (REFRIGERATED)
be ambient with the vessel heating/ warming the
cargo on discharge, but this is an unlikely scenario.
There is not an existing jetty structure at the selected
site. Therefore, a new tanker jetty will need to be
constructed, which will be the most cost-effective
solution.
4.4 Bottling Plant - Capacity
The market survey work suggest that the desired
market penetration should initially be supported
by the introduction of 3Kg, 6Kg and 13Kg cylinders
for domestic users, in addition to 20 Kg cylinders
(wealthy households and small catering businesses)
and 50 Kg cylinders (institutions, hotels, larger
catering businesses).
Current practice is to supply the East African 20,000 tonnes, all pressurised. Delivery is put into
The bottling plant capacity will be sized to allow coastline from Kenya southwards (occasionally effect using VLGC’s en route from the AG, which
filling operations to run 240 days per annum on a including Djibouti) from floating storage moored discharge a part cargo and proceed on to Asian
single shift basis. Short term increases in demand off Mauritius. Floating storage capacity is around destinations.
could be met by double shifting and possibly week-
end working.
CHART/IMAGE 14: SMALL LPG TANKER (PRESSURISED)
Capital costs will be estimated accordingly.
59
To avoid piracy-affected areas, vessels carrying
smaller cargoes can route alternatively south of
Madagascar and run along the African coast, but
this arrangement incurs high freight costs. Some
supplies are made to northern areas (e.g. Djibouti)
in refrigerated vessels out of regional refineries
such as Sohar (Oman).
5.2 Market Traders
The main traders supplying this market are Shell,
Vitol and Petredec, who should be contacted in due
course. Their relevant offices and contact details
are provided in Appendix 3.
6. LPG Pricing
LPG is priced into the whole Asian market at prices
FOB AG set at the beginning of each month by
Saudi Aramco, the so-called Contract Price (CP).
Prices for supplies into the East African markets
are established on the same basis with a premium
added for freight, insurance, profit and risk.
The Saudi Aramco CP price comes into effect on the
first day for the month and applies to all loadings ain
that month. The CP price does not change during
the month, irrespective of what happens to crude
or other product prices during that month, rise or
fall. Platts publishes daily prices for pressurised LPG
cargoes, Argus for refrigerated LPG cargoes.
In terms of price hedging, the C3 swaps market is
active but not for C4. The former may be used to
hedge C4 price risk but the Basis Risk is high.
Historically, prior to the advent of piracy in the
region, prices CFR Mombasa equated to CP +
125/150 $/Tonne. For the past 5/6 years or so prices
have been significantly higher, and for the last 12
months CFR Mombasa prices have equated to CP
+ 300 $/Tonne. Prices CFR Philippines, for example,
are lower, approximately CP + 100/140 S/tonne.
7. Proposed/ Recommended
Business Model
For the purposes of this evaluation we have assumed
that the business will be established on the basis of
the principles outlined below:
• Participants from the public, private and
60
international sector form a new joint venture 8. Methodology What this means in its simplest form is that all other
enterprise (the JV) for the purposes of importing things being equal and ignoring hardware (cylinder
bulk LPG into Bosaso and distributing it to the 8.1 Affordable Price for LPG and stove) costs, using the ‘stove efficiency’ figures
market. above the end-user can afford to pay for LPG 3.63
The market survey has generated valuable data
times the $/Kg price he pays for charcoal (1.5574
• JV invests in the establishment of the storage relating to the ‘affordable price’ that an urban
X 2.3311) and using the ‘conservative estimate’
terminal, tanker discharge facilities, bottle filling domestic charcoal user can justify paying, such that
figures 2.22 times the price he pays for charcoal
plant and bottles for supply and distribution to his fuel bill would be comparable with his existing
(1.5574 X 1.4286).
the market (the terminal). cost of charcoal.
• JV secures LPG cargoes from the market on the Besides its many health and environmental benefits, 8.2 Netback Value to Bosaso from
most advantageous terms and imports into LPG offers two main economic advantages over Affordable Price
Bosaso. charcoal: The following table sets out the calculation of the
netback from each of the towns surveyed in Puntland
• JV operates the terminal and bottling facilities • Its calorific value is higher
in the most efficient and cost-effective manner based on the above ‘conservative estimate’ figures.
• LPG stoves used for cooking should be more
consistent with internationally recognised
efficient than charcoal stoves, even widely used
standards of Health, Safety and Environment
‘Birjiko’ stoves in the latter case
Protection.
Comparative figures and the respective conversions
• JV and Government agree that to attract
are provided in the following table.
investors the return on investment12 and
the operating costs of the terminal will be TABLE 13: CALORIFIC VALUES AND STOVE EFFICIENCIES
underwritten by the Government through
payment of a unit throughput charge13. Calorific Values: Stove Conservative
• JV sells bottled gas to Distributors ex-terminal Efficiency16: Estimate5:
at market prices less a Distributors Margin14
(details of cylinder deposits and handling to be
develop). Charcoal MJ/Kg 29.6 % 22.8 % 35
• JV sells semi-bulk LPG ex-truck to end-users LPG MJ/Kg 46.1 % 53.15 % 50
using its own bulk vehicles15. Conversion 1.5574 2.3311 % 1.4286
• Difference between the netback from the TABLE 14: NETBACK VALUE
market to the point of importation (selling
prices minus Distributors Margin minus annual
terminal throughput charge) and import cost
of LPG to be covered by a Government subsidy
payable to the JV (or if in credit paid to the
Government by the JV).
12
Return on Investment to be agreed and to be applied in perpetuity.
Arrangement could be finessed by reducing the guaranteed return
but allowing investors to reap any upside financial benefits.
13
Charge to be set at the beginning of each year based on estimated
throughput and adjusted at the end of each year based on actual
throughput to keep investors whole.
14
Distributors Margin in a free market would be set by market
conditions but in the initial stages of market devolvement it will
probably need to be regulated by the Government.
15
This development is most likely to be a later business development
rather than from the outset.
61
The foregoing table indicates that the average
netback from the market at the affordable LPG price
would be 1.45 $/Kg, or 1,450 $/Tonne.
N.B. The LPG break-even prices as calculated in the
above table are highly competitive with the prices
charged by importers under existing regimes as
shown in our Market Report of July 2014, Table 5.
8.3 Bosaso Terminal Throughput Charge
Taking into account comparable throughput charges
applicable in the region, we have based our Base
Case assessments on assumed throughput charges
of 150 $/Tonne and 200 $/Tonne.
Of course, the throughput charge (the total of unit
charges levied for receiving, storing, delivering/
filling LPG bottles) may be set at any level but we The following chart shows graphically the surplus (deficit) for the period concerned.
believe that the JV will need to accrue revenues
from levying charges of this order of magnitude to CHART/IMAGE 15: SURPLUS/DEFICIT $/TONNE JULY 13-JULY 14
ensure its financial viability.
8.4 Import Cost and Margins
The average netback from the market to Bosaso
is 1.45 $/Kg, i.e. 1,450 $/Tonne, refer Section 8.2.
Subtracting the Bosaso Terminal Throughput Charge
and the LPG Import Cost for the past 13 months
gives an indication of the surplus (or deficit) that
would have been generated during this period.
The results are shown in the following table.

TABLE 15: SURPLUS/DEFECIT $/TONNE JULY13-JULY14

It will be seen that a healthy surplus would have
been generated for all months except December
2013 to January 2014, when a subsidy would have
been required to maintain the throughput charge
necessary to maintain the financial viability of the
terminal and distribution operation.
The international market prices for LPG streams
were relatively high during this period due to tight
supplies and the onset of seasonally cold weather
in the Northern Hemisphere and Northeast Asia,
which (as would be expected) were not matched
by increased charcoal prices in the Puntland towns.
The volatility of the international price of LPG
represents a threat to the commerciality of the
business of importing and distribution, in respect
of which investors would naturally seek firm
assurances from Government.
16
Stove efficiency figures quoted in public sources are ‘variable’ and may be subject to revision. Over the period concerned, assuming a throughput
charge of 150 $/Tonne and a monthly throughput
of 1,000 Tonnes per month, the net surplus position
would have totalled US $1.5 million. Such an
outcome could not be guaranteed for future periods
but market commentary widely suggests that the
growing boom in shale oil and gas production in the
US will fuel very significant LPG exports from the
US into already well supplied LPG markets in Asia,
the traditional home for large refrigerated cargoes
exported from the Arabian Gulf region.
The propensity medium to longer term will
therefore be for the Saudi Contract price to come
under increasing downward pressure, hence, all
things being equal, reducing the risk of the need for
a subsidy on inland LPG supplies.

62 63
9. Financial Analysis 7 above. Table 18: LPG working losses Table 22: terminal value of facility

9.1 Financial Model and Base Case The assumptions made are as set in the tables below Assumed losses LPG 0.50% Terminal Value of Facility
Assumptions (figures highlighted in yellow are entered figures in 3
Conversion m Tonnes 1.908 Methodology:
the financial model:
Table 19: annual fixed operating costs Replacement Value minus Depreciation
We have developed a model for evaluating the
financial feasibility of developing a new bulk LPG Assumptions:
Annual Fixed Operating Costs $ Cash Flow 10 years
import and distribution business at Bosaso. The
assumed Business Model is as described in Section Salaries & social taxes 79,200 Terminal Value Assessed at Year 11
Marketing costs 30,000 Replacement Original Value escalated at 2% per
TABLE 16: CAPEX AND SCHEDULING Office costs 15,000 Value annum
Insurance 0.50% 29,424 Assumed life of 30 years
Capex and Scheduling asset
Utilities 50,000
Period Year -1 Year 0 Year 1 Year 2 Total Depreciation Straight line
Other fixed 50,000
Storage 2,000,000 665,000 2,665,000
Land rent - Table 23: volume and throughput charge
Jetty 1,000,000 500,000 1,500,000 Total 253,624 projections
Pipes/ Pumps/ Tanker Loading 400,000 800,000 1,200,000 Operating Cost Escalation 2%
Electrical Installation 900,000 1,000,000 1,900,000 Volume and Throughput Charge Projections
Civils/ Buildings/ Roads 1,500,000 700,000 2,200,000 Table 20: annual staff costs
Year 1 Year 2 Year 3
Fire Protection 500,000 750,000 1,250,000 Annual Staff Costs $ Annual Volume Tonnes 5,000 8,000 10,000
Security 250,000 250,000 Daily Daily Annual Growth Post
Cylinder Filling Plant 500,000 500,000 Year 3 10%
Rate Cost Cost
FEED 160,000 160,000
Superintendent 1 50 50 18,000
PM/ Commissioning 30,000 100,000 240,000 370,000 Throughput Charge (Marine and Terminal) $/Tonne
Supervisors 2 30 60 21,600
Site supervision 200,000 280,000 480,000 Base Case 150.00
Labourers 9 10 90 32,400
Sub-total 190,000 6,600,000 5,685,000 12,475,000 Annual
Sub-Total 72000 Escalation 10%
Contingency @ +20% 38,000 1,320,000 1,137,000 2,495,000 Benefits 10%
Fixed Facilities Total 228,000 7,920,000 6,822,000 14,970,000 79,200
Cylinders/ tanks 1,367,361 820,417 546,944 2,734,722
Table 21: working capital calculation
Land 0
Total ($) 228,000 9,287,361 7,642,417 546,944 17,704,722 Working Capital
Stock
#Costs of land have been provisionally assessed as shown in the following table. Storage capacity cubic metres 2,000
Storage capacity Tonnes 1,048
TABLE 17: LAND/WAYLEAVE COST ESTIMATES
Minimum stock days sales 10
# Land Area $/m2 Year 1 Cost $ Maximum stock % of capacity 90%
Terminal 65,000 5 325,000 Assumed Import Cost $/Tonne 1,150
Wayleaves 0 15 Days Sales
Days sales financing 30
Annual Escalation % 2.0
Total stock plus days sales 671,104

Interest Rates
Capex finance 10.00%
Working Cap (premium) 0.20% 10.20%

64 65
9.2 Discounted Cash Flow Base Cases - As shown in the following Discounted Cash Flow,

(10% interest with a 10 year loan repayment period) generates an IRR of 18.3%
The 50% leveraged case, as shown below, assuming a unit throughput charge of 150 $/Tonne to cover operating costs and bank financing costs
Internal Rate of Return (IRR) the unleveraged case assuming recovery of a unit
throughput charge of 150 $/Tonne generates for
We have run two Base Cases as follows, both investors an IRR of 15.2%.
assuming a terminal throughput charge of 150 $/
Tonne escalating at 5% per annum:
• Unleveraged – 100 % equity
• Leveraged – 50% bank borrowing at a
commercial rate of 10%

TABLE 24: DISCOUNTED CASH FLOW 100% EQUITY

66 67
 9.3 Sensitivity Review promotion initiatives.
Reducing the cost of finance to 7% increases the IRR to 19.7% and increasing the bank borrowing to 70% increases the IRR further to 23.20%.
Our sensitivity review results are summarised in the • Success will also depend on the structure of the
following table. company and how the business is run and the
supply chain costs of LPG imports.
TABLE 26: SENSITIVITY CASES
• Close management of the engineering aspects
Sensitivity Cases IRR @ 100% IRR @ 50% of the project and cost control will be critical
to completion within capex budgets and
Equity External
achievement of expected returns.
Finance
Throughput Charge 150.00 200.00 150.00 200 • The cost of land will be a major factor affecting
$/Tonne the project economics and every effort should
Base Case be made to limit initial rentals and escalation

TABLE 25: DISCOUNTED CASH FLOW 50% EXTERNAL FINANCE

Volume 15.2 20.3 18.3 25.8 factors. With the structure and business model
Capex + 20% 13.0 17.6 9.5 15.0 envisaged, it will not be possible to pass on
higher land costs to consumers and they will
Capex – 20% 18.0 23.6 22.4 30.8
need to be covered by or compensated for by
Rent 10 $/m2 12.6 17.7 14.4 21.8 subsidies or other forms of support.
Operating Costs 13.9 19.0 10.7 16.3
+50%
Optimistic Case
Volume 19.7 25.6 24.8 33.4
Capex + 20% 17.3 22.7 21.3 29.2
Capex – 20% 22.7 29.1 29.2 38.7
Rent 10 $/m2 17.3 23.3 21.2 29.7
Operating Costs 16.1 22.1 19.4 27.9
+50%

The Base Case assumptions show that the project

would generate attractive returns for investors at
a throughput charge of 150 $/Tonne, which are
significantly improved using the Optimistic Case
assumptions.
The foregoing points to the following factors as being
critical for the success of this venture:
• Financing the project through external finance
does not improve the IRR that significantly.
Whether external finance could be obtained
from the independent banking sector might be
uncertain given the general security situation in
the region. Possible options would be the major
institutions such as World Bank, IFC and African
Development Bank.
• Success will be dependent on achievement of
market volume projections, for which there
would need to be relentless drive in terms
of financial support to end-users and sales

68 69
10. LPG Market Promotion and
Development
10.1 Overview
The latent demand for LPG in Puntland is substantial.
Barriers to expanding the use of LPG have been
affordability, unreliable/ limited availability and
lack of public awareness with regard to LPG as a
domestic fuel.
promote LPG as an alternative fuel to wood based
fuels (mainly charcoal and firewood).
Specific roles to be played by the Government
include support for installation of bulk import
facilities; participation in public awareness
campaigns on LPG use; fiscal measures to reduce
taxes on LPG product and appliances; and drafting
appropriate regulations and standards to mainly
ensure LPG safety and fair/ free trade.
4 Public awareness: Emphasise:
Market survey showed that after price, Economic benefits – higher unit price but correspondingly
ignorance on LPG use is highest barrier to higher energy content (simplified message)
switch from wood-based fuels to LPG.
Health benefits vs. charcoal
Safe handling in domestic environment
Environmental benefits to region and country
5 Government environmental interventions: Introduce taxes on charcoal

The Government wishes to promote the use of LPG Discourage use of charcoal by making it
to reduce deforestation and to ensure sustainability more expensive relative to LPG.
of forest cover. Government policies and the national 6 LPG Legal and Regulatory Regulations: Ensure safety and provide consumer confidence.
development plan point to a commitment to
LPG safety regulations Encourage private enterprise by ensuring free market
and absence of harmful trade malpractices.
Open market regulations (promote fair
competition)
10.2 LPG Demand Drivers LPG trade licensing (ensures standards and
Table 27: lpg demand drivers legal trade)
7 International support: Environmental protection is a global concern requiring
LPG Demand Drivers Outcomes global approach/ support.
Infrastructure funding
1 Macro-economic Factors: Limited availability of reliable macro-economic and
socio-economic data and information in Puntland Specific LPG promotion programs
Per capita GDP growth hinders reliable modelling of LPG demand projections. 8 Government Fiscal Interventions: Lower entry threshold for lower income households.
Household incomes growth
Reduced taxes on LPG product and Consider tax incentives for investors.
Population growth and Rural to Urban appliances
migration
Investor tax relief on construction materials
import taxes and income tax
2 LPG Supply availability and reliability: Critical initial investment in terminal unlocks LPG
demand.
Bulk LPG import infrastructure
Investment reduces LPG unit supply costs (and price).
Expanded and efficient LPG distribution
systems

3 Affordability – reduced initial and refill Interventions lower LPG consumer entry and refill costs
costs: and promote more demand.
Reduced supply costs (bulk imports
infrastructure)
Introduction of smaller size cylinders
Consumer credit for initial appliances costs
Tax reduction on LPG product and appliances
LPG product subsidies

70 71
10.3 LPG Market Development Action Plan
An LPG market development plan should prioritise
implementation of the LPG demand drivers in a
sequence that systematically adds impetus to LPG
demand build up.
10.3.1 Legal, Institutional and Regulatory An efficient supply chain is the foundation for
Framework
A legal and regulatory framework should provide
the confidence for investors to provide their capital
to develop facilities and businesses. This regulatory
capacity should serve to facilitate achievement of
safe LPG facilities, distribution processes and safety
at consumer locations. If LPG safety is not perceived
and assimilated by the potential consumers, it will
be difficult to achieve widespread LPG acceptance
in the market.
The Puntland Second Five-Year Development
Plan 2014-2018 states that the Puntland State
Authority for Water, Energy and Natural Resources
Corporation (PSAWEN) in the Central Government
body (Puntland level) is the sole institution
responsible for water, energy and minerals. It is
understood that in practice PSAWEN may not fully
exercise its responsibilities in the energy sector. The
Ministry of Environment is the Government agency
responsible for the environment and it is understood
that this ministry, and the Ministry of Commerce
and Industry can be the competent authorities for
development of LPG usage in Puntland.
Whatever the situation, in the absence of an
all-encompassing Energy Law or a Downstream
Petroleum Law, the Government should enact a
stand-alone LPG Law that empowers the relevant
competent authority (the authority) in respect
of LPG trade thereby permitting it to draft and
implement LPG regulations and standards.
The authority should be provided with resources
(budget, personnel, training etc.) to make it an
effective agency for LPG business promotion,
regulation and monitoring. When capacity is
established within the authority it should encourage
international donors and NGOs to associate with
Puntland in the promotion of LPG demand by
providing the necessary resources.
72
It is recommended that the prospective new
business enterprise is operated under the umbrella
of the authority and is managed by a consortium of
private companies governed by a board of directors.
10.3.2 LPG Supply and Distribution Chain orders more efficient.
sustainable LPG demand growth that encompasses
affordability and availability of LPG:
• Bulk Import Facilities. facilities as common user facilities. This increases
Construction of appropriately sized bulk LPG
import facilities is the critical base on which LPG
demand shall grow. The facility permits increased
LPG supplies at lower unit import costs.
In the initial years, project cash inflows for investors
may be low due to carried higher initial installed
capacity compared with the initial demand. It
is therefore important that the Government be
prepared to offer sufficient and attractive financial
and, if necessary, fiscal (tax free) incentives to
investors.
• Joint Importation of LPG.
Getting LPG importers in Puntland to organize
themselves to undertake joint importation of bulk
LPG will make it possible to create larger cargoes
sufficient to attract lower freight cost by reducing
dead-freight and demurrage. Joint shipments
certainly improve economies of scale, with lower
unit cost that translate to lower prices and finally
higher LPG demands and this option will need to be
explored in due course.
Opportunities for multi-port Joint importations
(Bosaso-Berbera-Djibouti-Mogadishu) should be
explored and developed as a further step to reduce
unit import costs through increased economies of
scale.
• LPG Cylinder Filling and Distribution.
In due course, at each of the key towns of Badhan,
Bosaso, Buhotle, Garowe, Galkayo, there should
be sufficiently sized intermediate storage and
cylinder filling capacity. This shall permit increased
distributorship network and competition. Transfers
of LPG from the import depot to filling plants
and to bulk institutional consumers shall involve
investment in appropriately sized bulk LPG trucks. stove. The initial costs and refill costs are relatively
low and the cylinder is conveniently portable. The
Converting institutional consumers from cylinders Kenyan market has subsequently introduced the
to use of small bulk tanks (1 to 5 tons) medium 3 KG cylinder. By way of further example, Somgas
term will further reduce costs, while making LPG re- supplies 2Kg, 4Kg, 11Kg and 22Kg cylinders in
Somaliland. Cylinder sizes to be introduced to the
• Common User (Open Access) Facilities. market will have to be decided nearer the time of
project launch.
To reduce market entry barriers, the Government
should encourage and license import and filling TABLE 28: LPG CYLINDER DISTRIBUTION IN KENYA
(2011)
facility utilization while avoiding investment
duplication. Common user and open access facilities Package Estimated No. %age of sales
reduce unit operating costs which finally translate to of cylinders
lower prices. This model of operations also helps to 6 Kg 300,000 60%
bolster competition by making market entry easier. 13 Kg 250,000 30%
22 Kg 40,000 10%
• Dealers/ Distributors
The future role and remuneration of dealers/ The following table shows the initial entry costs for
the main cylinder sizes in Kenya (July 2014).
distributors, not only for LPG but also for charcoal,
will need to be clearly defined and set out in Cylinder LPG Hardware (US$) Total
legislation. Size Refill Initial
Cylinder Burner
US$ &Fittings Cost
US$
10.3.3 LPG Cylinders Rationalisation 13 Kg 35.6 40 60.4 136.0
• Standardized Sizes of Cylinders. 6Kg 16.1 18 7.5 41.6
LPG market regulation could establish a set of 3Kg 8.0 5.1 7.5 20.6
standard cylinder sizes meeting consumer needs Clearly, the 6 Kg cylinder is a very attractive option
and achieving distribution and filling efficiency to be considered for the Puntland market.
and convenience. Criterion for size selection is
affordability (initial and refill) by various household • Cylinder and Appliances Microfinance
income groups and ease of handling (total weight).
Credit is a very important step for LPG consumer
The smaller size cylinders shall in particular lower
entry, especially for the lower income households.
the refill costs for lower income consumers while Once the 6 Kg and 13 Kg and possibly other sized
reducing the “initial equipment cost” barrier.
cylinders have been introduced, the next important
It is recommended that 3Kg, 6 Kg, 13 Kg, 40 (or 25 and critical step is to link the LPG marketers with
and 50) Kg be established as the standard cylinder the microfinance sector to provide the initial cash to
sizes. The other “non-standard” cylinders could be procure the cylinder and cooker. This may involve
phased out over time. setting up loans and repayment through monthly
instalments.
• Smaller Size Cylinders
10.3.4 Public Awareness Campaign (Media Plan)
In Kenya, which could be a model for LPG market
• Responsibility For Campaigns
development in Puntland, introduction of the 6
Kg cylinder has increased LPG household use. The The objective of the public awareness campaign will
6 Kg cylinder comes with a simple grill fixture and be to emphasize LPG as a cost-effective and safe fuel
therefore it does not require a separate burner/ that is clean and convenient. The environmental
73
message should seek to educate the public on the
need to preserve forests by turning towards the use
of LPG. Public awareness campaigns are a shared
responsibility between LPG marketers, Government
and INGOs, NGOs etc. This is because there is the
business interest and the national environmental
significance.
• Timing Of Campaign
For full impact and effectiveness, market
development launch campaigns should be
undertaken once the regulatory framework is in
place, infrastructure in terms of import bulk storage
and the distribution network are established
and cylinder sizes are rationalized. Adeso in
consultation with the Ministry of Environment, and
gas companies should lead this campaign.
• Medium of information
Communication should target the most popular
medium that offers maximum outreach and impact
and should consider the following:
» Language: The national language (Somali)
should cover the target market.
» Print media: LPG supplements and
advertisements in the local publications will
greatly add to the information to be put across.
Flyers and brochures should also be given out
to the public from strategic points.
» Electronic Media: The use of television and
radio advertisement and talk shows to reach
the wider population.
» Demonstrations: Live demonstrations should
be used on usage of LPG. This can be in form of
road shows for targeted village groups.
10.3.5 Fiscal Interventions and Incentives generate a surplus and for the northern hemisphere
• Reduced Import taxes.
To reduce the threshold price that permits charcoal
users to convert to LPG the Government may wish
to consider reducing taxes on LPG product, cylinders
and appliances.
74
• Investor Incentives 11. Recommended Way Forward
Should the return on bulk import facilities turn out
as inadequate for investors, the Government should
consider waiving import taxes on construction
materials; and also providing income tax relief for
an appropriate length of time.
11.1 Government Support
The extent to which the prospective bulk import
facility can provide the means to facilitate a
switch to LPG from charcoal for domestic use to
the extent envisaged is highly dependent on the
encouragement and support provided by the
Government in respect of the critical success factors
highlighted in this report.
It is uncertain at this stage whether the opportunity
will attract investment from the independent
banking sector, even though under any scenario
bank finance will improve the IRR as compared
with eh 100% equity case. We therefore propose
that the Base Case 100% equity should in the first
instance be taken as the reference point for further
consideration of the project, which yields an IRR of
11.2% assuming the JV receives a throughput fee of
150 $/Tonne.
Whilst, given the economic and political situation
prevailing, such a return might not be attractive
to international bankers, it should be of interest
to local investors and the international institutions
sharing the Government’s vision of environment
protection by reducing charcoal consumption and,
thereby, deforestation.
We have set out below the main risks to the venture
and how the Government might provide necessary
support through management and underwriting
measures.
11.2 Import Cost Subsidy
As indicated in Section 8.4, based on historical
data for the past 13 months, in general for much
of the year the netback from the market minus the
terminal throughput charge minus import cost will
winter period a deficit will result.
We would suggest the following as an option for
managing these imbalances:
» Credits to be accumulated and paid over by the
JV monthly to a central fund managed by, say,
the Ministry of Finance.
» A percentage, say 10% or 20% of any surpluses
could be retained by the JV as an incentive
to encourage efficiency in supply chain
management, operating cost management and
profitability improvement.
» The accumulated credit to attract interest,
payable into the fund by the Central Bank.
» Deficits arising from high import costs to be
claimed by the JV monthly for payment out of
the central fund.
» A running balance to be maintained by the
Treasury/ Ministry of Finance.
11.3 Market Price of Charcoal
Potentially under the influence of a growing
LPG domestic market, the price of charcoal
could diminish and in so doing undermine the
fundamental economic drivers of the project. It
will beholden on the Government to tax charcoal
supplies to the extent necessary to ensure stability
of the domestic charcoal price and that it does not
become eroded. Taxation will impact on the rural
community where the use of charcoal is widespread
and the probability of consumers switching to LPG
is lower, but such a measure is unavoidable and
beyond the short terms will help to encourage LPG
usage.
Since the charcoal price and public education are
the key components determining the affordable
LPG price and hence is a key driver for the project, it
will need to be constantly monitored and managed
by regulation to ensure that LPG remains the more
economic fuel for domestic consumers.
11.4 Distributors and Distributor Margin
The Distributor Margin (DM) is a key component in
the supply chain cost structure to market and impact
directly on the netback calculation from which the
surplus/ deficit over import cost is assessed.
Whilst ultimately it would be preferable for the DM
to be established by competition in the market,
it would be necessary initially at least for the
DM to be regulated and set by the Government.
The arrangements are likely to be complex, given
possibly the different transportation costs that
75
distributors will have to cover out of the DM for
the different towns but we would suggest that such
arrangements would be unavoidable in the initial
phases of the project and key to effective market
development.
One solution, for consideration, would be for the
JV to be responsible for and to cover the costs of
delivery to the towns, with the distributors receiving
a fixed DM irrespective of location. Consultation
with distributors and other market participants will
be necessary to achieve the appropriate solution.
11.5 Competition
From the market survey and analysis to date, it
would seem that existing suppliers importing in
cylinders and ISO Containers would not be in a
position to compete effectively on cost grounds
with the prospective new business importing in
bulk and filling cylinders in-country.
That is not to say that with competition from the
new JV business existing suppliers will not sharpen
their supply chain cost management and position
them to offer more competitive prices using their
existing supply network. However, beyond the
76
short term it is highly unlikely they would be able Appendix 1 - Map and Site Location (Red Circle)
to compete with a bulk importer with a large and
growing volume and existing suppliers are more
likely to switch to becoming major distributors and
participants in the venture rather than remain as
competitors to it.
Recent new initiatives by existing suppliers such
as offering free supply of a cylinder and stove in
exchange for an undertaking from the customer to
become a long-term customer may have to be taken
into consideration in establishing the marketing
strategy for the new JV.
11.6 Next Steps
Given the importance of Government’s role in
ensuring the success of this venture, a Government
Awareness Seminar has been arranged in Garowe,
Puntland, and the aim is to:
1. Present the findings of our studies for both
Puntland and Somaliland.
2. Secure the commitment in terms of the
structures and financial support required from
Government to ensure success of the venture.
Appendix 2 - Example of a Typical LPG Sphere
77
Appendix 3 - LPG International Supply Contacts
Shell:
Shell International Eastern Trading Co
The Metropolis Tower 1 SECTION 4
9 North Buena Vista Drive
Singapore 138588
Tel (65) 68337707
Fax (65) 6384 8837
Contact: Elmer Baguioro
Email: Elmer.A.Baguioro@shell.com

Vitol:
Vitol Asia Pte Ltd.
Engineering, Technical & Operations
Vitol Singapore Pte Ltd. Report
260 Orchard Road
The Heeren #13-01
Singapore 238855
Tel (65) 6737 9922
Fax (65) 6737 0917

Petredec:
Petredec Services (Asia) Pte Ltd
8 Eu Tong Sen Street
#17-92 The Central
Singapore 059818
Tel: (65) 6305 1288
Fax: (65) 6305 1298
Contact:
Email: lpg@petredec.com.sg

78
 TABLE OF CONTENTS 1. Terminal and Marine Facilities
1. Terminal and Marine Facilities Design ....................................................................81 Design
2. International Codes of Practice for LPG Facilities and Operations ....................81 Trident Engineering’s design, layout drawings and
3. Operational/Health Safety and Environment (HSE) Guidelines .............................82 Bill of Quantities in respect of the terminal and
3.1 Objectives ..... ......................................................................................................................82 marine facilities have been made available in soft
3.2 LPG Potential Hazards ....................................................................................................82 copy, which may be printed off on site by the client
3.3 Key Elements of an LPG Operation HSE System ........................................................83 as required. Such documents as provided are listed
in Appendix 1.
3.4 Consumer/ Household LPG Safety Guidelines ........................................................83
Appendix 1 - Engineering Drawings/ Technical Documents List ............................ 84 The basic design criteria are:
• A new jetty facility for berthing and discharging
pressurised LPG ocean-going tankers normally
used for LPG supplies to the East African
coastline.
• A bulk LPG storage sphere of 2,450 cubic metres
capacity; this form of storage has been selected
over a combination of smaller bullet storage
tanks as being the most practical (taking into
account weight limitations on offloading
capabilities specifically at Bosaso and generally
at Somalian ports) and cost-effective solution
• LPG bottle filling plant having the capacity to
meet requirements for the start-up phase and
the first three years of operation
• Bulk road vehicle loading capability to meet
future requirements for bulk delivery
• All equipment and facilities meet international
standards for bulk LPG storage and handling.
2. International Codes of Practice for
LPG Facilities and Operations
Several sources of guidelines exist covering the
installation and operation of bulk LPG terminals
in accordance with internationally recognised
HSE standards protecting the assets, staff and
the environment. We recommend the following
as suitable References for International Codes of
Practice for the proposed Bosaso operation.
Energy Institute (UK) – Previously Institute of EN 13776 Filling and Discharge Procedures for
Petroleum (IP) LPG Road Tankers
Model Code of Safe Practice:
Part 9 (IP 9) Liquefied Petroleum Gas
80
Volume 1: Large Bulk Pressure Storage &
Refrigerated LPG
Part 15 (IP 15) Area Classification Code for
Installations Handling Flammable Fluids
Part 19 (IP 19) Fire precautions at petroleum
refineries and bulk storage installations
Liquefied Petroleum Gas Association (LPGA)
codes of practice (COP)
COP 1 Bulk LPG Storage at Fixed Installations
Part 1 Design and Installation
Part 3 Examination and inspection
Part 4 Buried/Mounded LPG Storage Vessels
COP 3 Recommendations for prevention and
control of fire involving LPG
COP 14 Hoses for the transfer of LPG in bulk:
Installation, Inspection, Testing and Maintenance
COP 15 Valves and fittings for LPG service – Part 1
Safety Valves
COP 17 Purging LPG vessels and systems
COP 22 LPG Piping Systems: Design and
Installations
European Standards
PD 5500 Specification for Unfired Fusion Welded
Pressure Vessels
EN ISO 10497 Testing of valves; fire type-testing
requirements
EN ISO 17292 Metal ball valves for petroleum,
petrochemical and allied industries
EN 1762 Rubber Hoses and Hose Assemblies for
Liquefied Petroleum Gas, LPG (Liquid or Gaseous
Phase), and Natural Gas up to 25 Bar (2,5 MPa) –
Specification.
EN 13799 Contents gauges for LPG tanks
EN 14129 Pressure relief valves for LPG tanks
81
EN 14570 Equipping of LPG tanks, over ground
and underground
Industry Standards
American Society of Mechanical Engineers (ASME)
ASME B31.3 Process piping
ASME viii ASME Boiler and Pressure Vessel Code
American Petroleum Institute (API)
API RP 500/ API 505 Area Classification
API STD 2610 Design, Construction, Operation,
Maintenance, and Inspection of Terminal & Tank
Facilities
API STD 607 Fire Test for Soft-Seated Quarter-
Turn Valves
API STD 608 Metal Ball Valves-Flanged,
Threaded, and Welding End
API RP 2003 Protection Against Ignitions Arising
out of Static, Lighting and Stray Currents
API PUBL 2510 A Fire-Protection Considerations
for the Design and Operation of Liquefied
Petroleum Gas (LPG) Storage Facilities
API STD 2510 Design and Construction of LPG
Installations
National Fire Protection Association
NFPA-15 Water Spray Fixed Systems for Fire
Protection
Marine Facilities LPG Tankers safety of all concerned.
OCIFM (Oil Companies International Marine
Forum):
Design and Construction Specification for Marine
Loading Arms
ISGOTT 5th Ed – International Safety Guide for Oil
Tankers & Terminals – 10 – ISBN 1 85609 291 7 &
13-ISBN 978 1 85609 291 3
International Code for the Construction and
Equipment of Ships Carrying Liquefied Gases in
Bulk (IGC Code) ISBN 292 801 1277 5
Liquefied Gas Handling Principles on Ships and in
82
Terminals (Third Edition) ISBN 1 85609 164 3
Tanker Safety Guide (Liquefied Gas), (ICS) 1995
ISBN 0 906270 03 0
UK Health and Safety Executive Guidance
Document HSG 186
SIGTTO Liquefied Gas Fire Hazard Management –
2nd Draft
SIGTTO A Guide to Contingency Planning for
Marine Terminals Handling Liquefied Bulk Gases.
Kenyan Standards – DKS 1938:2012 ICS 75.160.30
Handling, storage, and distribution of liquefied
petroleum gas in domestic, commercial, and
industrial installations — Code of practice Part 3:
Liquefied Petroleum Gas installations involving
storage vessels of individual water capacity
exceeding 9,000 L.
3. Operational/Health Safety and
Environment (HSE) Guidelines
3.1 Objectives
The objectives of HSE guidelines and their
implementation are to protect the public,
employees, consumers, property and the
environment. This is achieved through prevention
of accidents, injuries, occupational illnesses
through continuous efforts to identify and
eliminate (or manage) safety risks associated with
LPG operations and, in the event of an incident,
to ensure proper disposal of any leakage and the
All management and staff should be committed to
and engaged in the foregoing activities.
3.2 LPG Potential Hazards
The main hazards and risks to be managed can be
summarised as follows:
• Bulk facility fires and explosions
• LPG cylinder fires and explosions
• Medical emergencies – asphyxiation, liquid
LPG contact or vapor inhalation risks exposure
levels beyond an ‘acceptable’ Threshold
Limited Value (800 ppm for 8 hours) • Risk analysis and identification
• Off Site Emergencies during LPG transportation • LPG Plant Operations/ hazard communication
by road
• Safety Rules/ HSE programs and initiatives
3.3 Key Elements of an LPG Operation HSE
• Personal protective equipment/ medical
System surveillance
To ensure a safe LPG operating environment the
• Routine preventative maintenance
following key elements will need to be in place
and reinforced through regular inspections, and • Regular facility and operations inspections/
regulatory checks for compliance. follow up procedures
1 General Requirements • Emergency Response Planning
Most OSHA standards require employers to • Incidents and investigations including follow-
provide a safe and healthy work environment. up/ prevention measures
They should:
• Equipment and plant commissioning and
• Effectively manage hazards and practices that decommissioning
could cause accident, injury or illness
Procedures should cover the following:
• Identifying, assess, control and review hazards
and formalize risk assessments • Practices for periodic cylinder/ valve/ regulator
testing and revalidation
• Effectively manage incidents
• Cylinder testing and filling procedures
• Provide resources to manage, maintain and
implement HSE programs • Safe cylinder transportation and handling
procedures.
• Develop safe work procedures and ensure they
are implemented, maintained and reviewed 3.4 Consumer/ Household LPG Safety
regularly Guidelines
These should cover LPG consumer safety
• Maintain adequate communication channels
guidelines and communications. Public and
for HSE
consumer awareness and education on LPG safety
• Measure, monitor and review HSE should be put into effect through posters, leaflets
performance and results reviewed by and media communication.
Management
• In the event of a work related injury or illness
ensures the full recovery of injured employees
is supported through prompt treatment and
active rehabilitation programs.
Standard Operating Procedures
Comprehensive written operating procedures
should be provided that are regularly reviewed and
updated. Management and staff should receive
regular and documented training in application
of such procedures, which should incorporate the
following areas:-
83
Appendix 1 - Engineering Drawings/ Technical Documents List
Copies of the following documents have been provided in PDF format:
1. Proposed Location (Map)
2. Site Layout Drawing SECTION 5
3. Typical Buildings Drawing
4. Jetty Layout Drawing
5. Typical LPG Sphere Drawing
6. Piping and Instrumentation Drawing
7. Fire Fighting Piping and Instrumentation Drawing
8.
9.
Electrical Layout Drawings (X 11)
Electrical Bill of Quantity and Cost Estimates
Milestone IV Report
10. Mechanical Bill of Quantities and Cost Estimates
11. Civil Works Cost Estimates

Project Review, Regulatory Requirements

12. Hazardous Area Classification Drawing (Layered)
13. Kosan Containerised LPG Bottle Filling Plants – Description and Photographs
14. Kosan Price Quotation & Joint Venture Principles
15. Listing of Design Guidelines for LPG Terminals (Ports and Jetties)
16. LPG Jetty – Tanker Alongside (Photograph)
17. Terminal Cost Summary
18. Terminal Cost Breakdown
19. Jetty Cost Breakdown

84
 TABLE OF CONTENTS 1. Introduction Somaliland and the economic drivers that will
be essential to put into effect the desirable
1. Introduction .... .......................................................................................................87 The objective at the inception of this study was switch from charcoal to LPG for domestic
2. Consultancy Assignment - Achievements and Lessons Learned ....................87 to assess the opportunity for establishing a bulk use in urban households and ultimately rural
2.1 Achievements ............................................................................................................... 87 LPG import and distribution business, focusing on households.
2.2 Lessons Learned ............................................................................................................... 87 Puntland, in the form of a PPP business structure.
The main drivers for pursuing the PPP route were: 2. Raising substantially public awareness across
3. Joint Venture Formation - Government/ Local Authority Relationships ......... 88 the two regions of the opportunity to substitute
3.1 Joint Venture (JV) Structure .........................................................................................88 • The Government wishes to do something LPG for charcoal/ wood.
3.2 Role of Government/ Local Authorities ...................................................................88 meaningful to protect the environment by
3. Identification of a suitable coastal site for
4. Puntland LPG Regulatory Framework ................................................................... 88 reducing deforestation through encouraging
establishing the prospective new bulk LPG
4.1 Background .. ......................................................................................................................88 the use of LPG instead of charcoal and wood.
import, storage and distribution terminal.
4.2 Proposed Institutional and Regulatory Framework ........................................................88 • It was perceived that direct Government
4.3 Proposed LPG Regulations .........................................................................................89 involvement as an investor was going to be 4. Designing a ‘fit for purpose’ bulk import
4.4 Other Regulatory Partners and Agencies .................................................................. 90 necessary to provide the required impetus to terminal complete with an LPG tanker berth
4.3 Market and Price Regulation ........................................................................................ 90 move the project forward. and discharge facilities, an LPG storage sphere,
bottle filling pant and bulk truck loading
5. Joint Venture/ Potential PPP Business Operation ............................................... 90 However, it is understood from the meeting in facilities; providing relevant site plans, high
5.2 Basic Principles .............................................................................................................. 90 Nairobi on 11th September 2014 between Adeso level design drawings and a Bill of Quantities.
5.2 Benefits of JVs ............................................................................................................... 91 and Channoil Consulting/Petroleum Focus Group
5.3 Risks of JVs .. ...................................................................................................................... 91 that since starting our work several substantial 5. Estimating the capital expenditure costs for the
5.4 Identification/Selection of Potential Partners - Criteria ............................................. 91 locally based private entities have come forward new bulk LPG handling and ancillary facilities
5.5 Key Clauses for Inclusion in the JV Agreement ........................................................ 92 who are eager to invest in developing new LPG 6. Building a DCF based financial evaluation
5.6 Making It Happen ............................................................................................................... 92 businesses independently of direct Government model and on the basis of assumptions
partnership. In addition, as a result of our work we
6. Government Stakeholders Awareness Seminar (GSAS) .......................................92 are of the view that formation of the new business
covering volume estimates, prices, LPG cargo
6.1 Seminar Arrangements .................................................................................................... 92 import costs, operating expenses, project
venture may accomplished with or without financing, interest rates and other key criteria
6.2 Puntland Government Feedback ..............................................................................93 Government involvement as business partners. developing a series of cash flow and financial
Our recommended approach is therefore now return projections, which show that the project
to consider the formation of a joint venture (JV) is sound in investment opportunity terms.
partnership made up of local/ regional private 7. Setting out regulatory requirements covering
investors. Accordingly, although we have set out both price and margin regulation and
in this report issues and our comments related to operational, marketing and distribution issues.
the formation and operation of a PPP, we do not
believe this need be the preferred option. We 8. Developing a set of market development and
have addressed JV matters but they apply equally public communication strategies for both the
whether the business has Government shareholder Government and the JV designed to support
participation in the form of a PPP or not. achievement of sales volume target goals and
to overcome resistance to switching to LPG due
2. Consultancy Assignment - to safety concerns.
Achievements and Lessons Learned
2.2 Lessons Learned
2.1 Achievements
Because of the security risk in Puntland and
These can be summarized as: Somaliland, regrettably it was not possible for the
external consultants to personally visit either region
1. Through an extensive market survey and to obtain a direct on the ground appraisal of the
through community workshops in major towns, market situation. Accordingly, it was necessary to
developing an in depth understanding of the engage the services of Somalia based Sahan Group
charcoal and LPG markets in Puntland and

86 87
to undertake the direct market research.
Effective communication with the client, the
Nairobi based market consultants (Petroleum
Focus), Sahan Group and Channoil Consulting was
therefore essential to ensure successful completion
of the assignment. Although no major issues
arose, we believe a series of kick-off meetings
in Nairobi between the interested parties at the
commencement of the project would have been
helpful in allowing individuals to meet to agree on a
project plan and development issues, get to know
each other and by so doing ensure there were no
subsequent misunderstandings. Unfortunately no
allowance was available in the budget to allow such
meetings to take place, which we believe would
have speeded up subsequent project processes.
Since undertaking the assignment, we have come
to learn that the opportunity exists for the project
to be developed entirely in the private sector
and without Government partnership. With this
knowledge, we would probably have directed
some our survey work more directly at the private
investor sector.
The public have a very negative feeling about
switching to LPG for domestic use on safety grounds,
which will be a major challenge in developing the
market further.
3. Joint Venture Formation -
Government/ Local Authority
Relationships
3.1 Joint Venture (JV) Structure
Our proposed JV business structure has been
described in Section 7 of our July 2014 ‘Financial
Evaluation & Market Development Report’.
Essentially the JV would be formed of private
investors and, if it were so desirous, Government
or Local Authority entities. The responsibilities
of the JV would encompass all business activities
from sourcing bulk supplies of LPG to shipping,
importation, storage, bottle filling and distribution
to the market.
88
3.2 Role of Government/ Local Authorities
The role of Government/ Local Authorities would
be to set out and enforce the regulatory framework
within which the JV would operate, including,
certainly in the early years, regulation of prices for
domestic fuels, namely charcoal, LPG and possibly
Kerosene.
4. Puntland LPG Regulatory
Framework
4.1 Background
LPG is a petroleum-based fuel suitable for domestic
household use and institutional consumers. It will
be imported in bulk and distributed/ traded both
in semi-bulk and in cylinders. In its gaseous and
liquefied form, LPG is inherently hazardous and
misuse can lead to explosions and fires.
There is no indication that there are immediate
plans to formulate laws in Puntland to regulate
energy trade, HSE standards or licensing. Such
regulation would usually include coverage of LPG
supply and distribution businesses.
LPG regulations will be essential to ensure investor
interests are safeguarded and to promote LPG
safety standards. Typically LPG would be regulated
together with the other petroleum products as
part of downstream petroleum sector legislation
(as distinct from upstream oil and gas exploration
and production). Institutionally, the downstream
petroleum sector would usually be controlled
through a Ministry of Petroleum or a Ministry of
Energy.
It is usual to have a downstream petroleum law
covering regulation of all petroleum products
including LPG. However, due to its unique hazardous
features it is a common practice to establish stand-
alone LPG regulations, established under the
umbrella of downstream petroleum laws.
4.2 Proposed Institutional and Regulatory
Framework
A legal and institutional framework for petroleum
(and therefore LPG) does not currently exist in
Puntland. Energy in general has been delegated to
the state agency, Puntland State Agency for Water,
Energy & Natural Resources (PSAWEN) and it is
therefore around this agency that the necessary
‘interim’ regulatory and institutional framework for
LPG could be established. However, the consultants
were informed that the Ministry of Environment
has a more direct responsibility for energy matters.
Within the proposed timeline for establishing
an infrastructure and processes for LPG demand
promotion in Puntland, it may be unrealistic to
expect responsibility for progressing this project
to be clearly assigned to a particular state entity,
or even for a downstream petroleum law to be in
place in time.
Whichever Government agency is assigned
responsibility for energy/ development of the LPG
project, the following steps are recommended to
ensure that LPG promotion and regulations are ‘fast
tracked’:
• Establish a specific Government body or agency
having the mandate for energy to specifically
regulate and police the downstream petroleum
sector (call it, say, the Downstream Petroleum
Regulatory Unit (DPRU)).
• Prioritize petroleum (and LPG) regulatory
capacity building at the DPRU.
• Prioritize establishment of human resource
capacity in the DPRU through recruitment and
petroleum training; launch LPG training for
DPRU and stakeholders.
• In respect of LPG the proposed DPRU would
embark on the following activities :-
» Draft and enact a downstream petroleum
law.
» Draft and implement LPG regulations.
» Undertake licensing of LPG business.
» Promote growth of LPG demand through
infrastructure development, consumer
awareness and education, promotion of fair
trade and competition.
» Monitor LPG business and operations to
maintain consumer confidence and public
safety.
» Draft (adapt) and implement LPG standards
as the basis for safe LPG regulation
4.3 Proposed LPG Regulations
The following is a list of proposed LPG regulations to
be drafted and implemented preferably before the
launch of the LPG implementation and promotion
programme:
• LPG business licensing. These regulations shall
ensure that all LPG supply chain activities are
regulated and that facility operators are held
to account, especially in the area of standards.
Ideally licensing should be to oil marketing
companies who include LPG in their business
portfolios.
• Specific areas of licensing should include
LPG importation, LPG storage and filling, LPG
transportation, LPG wholesale and retail.
• LPG facilities construction. These regulations
should ensure that all facilities are constructed
to meet basic international and local design
and HSE standards. This is facilitated through
issuance of construction and work permits.
• LPG transportation. This entails setting
guidelines for safe road transportation of bulk
and packaged LPG.
• LPG cylinders issue/ usage monitoring. The
regulations should require cylinders of standard
sizes to be introduced into the market and for
them to be routinely checked/ maintained, in
particular the operation and functionality of
the valves/ regulators, and filled under safe
operating conditions.
• LPG emergency response procedures. LPG is
a hazardous product and guidelines will be
required for operators and consumers covering
safe handling, emergency preparedness and
response.
• Fair Trade and Competition. Regulations should
reflect provisions that ensure unhindered
market entry and fair competitive conditions.
89
4.4 Other Regulatory Partners and
Agencies
It is assumed that PSAWEN will be required
to interact with other Puntland ministries and
agencies, which, we would suggest, should include
the following:-
• Ministry of Maritime Transport, Ports
and Counter Piracy; provide support for
development and regulation of LPG import
facilities in Bosaso.
• Ministry of Finance; define fiscal incentives for
LPG investments and trade and, if appropriate,
define PPP financing structure.
• Ministry of commerce and industry; coordinate
LPG trade licensing with PSAWEN.
4.3 Market and Price Regulation
As set out in our July 2014 ‘Financial Evaluation &
Market Development Report’, the returns from the
proposed investment in the new bulk LPG facility
will be dependent on several key commercial issues.
Although generally undesirable in many respects,
regulation of the market will be essential to ensure
at least in the early years of the business operation
that investors enjoy a high degree of security in
terms of their financial returns.
Market and price regulations will need to cover
control of the domestic market price for charcoal
through taxation – LPG should be priced so that in
terms of domestic fuel costs consumers’ economics
of switching to LPG from charcoal are at least break-
even or better.
In addition, the regulatory framework will need to
provide the following in respect of the JV business
operation:
• Determination of an ‘allowable throughput
charge’ for the new terminal covering LPG
receipt, storage, bottle filling, semi-bulk delivery
and primary distribution that provides investors
with an agreed acceptable rate of return on
their investment.
• Provision of financial support from Government
funds for the business in the event that the
‘allowable throughput charge’ falls below the
90
agreed level, either due to extraneous factors
such as a failure in the taxation system and/ or
a collapse in the domestic market for charcoal,
or due to inflation of the international market
price for LPG.
The regulatory framework could also make for
provision for financial support from Government
funds should the terminal LPG throughput volume
fall short of expectations to the extent that revenue
streams prove insufficient for the business to meet
its agreed minimum acceptable level of IRR, for
either the unleveraged or leveraged case. However,
since the throughput volume is dependent on sales
volume, which would be largely a responsibility of
the JV business operation, it is recommended that
in the first instance investors not be offered this
safeguard. Ultimately, this is a matter on which the
Government/ Local Authorities should decide.
5. Joint Venture/ Potential PPP
Business Operation
5.2 Basic Principles
The principles for establishing a PPP (or, equally, a
privately funded JV) for developing the new LPG
import, supply and distribution business were
set out in our first report ‘Summary of Approach
to Establishing/ Enhancing LPG Business PPP in
Puntland, Somalia’. Reference was also made in
this report to the ‘Guide to PPPs in Puntland State
of Somalia’, published in January 2011 under the
auspices of the International Labour Organisation
and the United Nations, in which the general
requirements for a prospective PPP are set out.
Rather than summarising or repeating its contents,
we believe it should be taken as the reference
document for setting the framework for any new
PPP or, more specifically now, the proposed JV
entity.
The business model proposed for establishing the
new LPG import and distribution business is set out
in Section 7 of the July 2014 ‘Financial Evaluation
& Market Development Report’. It is proposed
that the business be established as a JV between
interested local investors and, if possible, an
international participant in the LPG supplies and
marketing business, which would bring to the JV the
added benefits of extensive experience and skills.
Several Middle East based entities have expressed
interest in principle to the Consultants in joining
such a JV, subject to a secure operating environment
prevailing in Puntland.
It is recommended that they and other potential
regionally based operators be contacted once the
basis for moving the project forward has been
agreed between the key stakeholders. We believe
it is appropriate to finalise a list of parties to be
contacted once the decision to progress to the next
stage has been made.
5.2 Benefits of JVs
The key benefits of JVs can be summarised as below:
• Access to markets: JVs can facilitate increased
access to customers. One JV partner might,
for example, enable the partner to sell
goods/services to their existing customers.
International JVs involve partners from
different countries, and are frequently pursued
to provide access to foreign markets.
• Distribution networks: JV partners may be
willing to share access to distribution networks.
If one partner was previously a supplier to
the other, then there may be opportunities to
strengthen supplier relationships.
• Capacity: JV partners may take advantage of
increased capacity in terms of production, as
well as other economies of scale and scope.
• Staff: JVs may share staff, enabling both entities
to benefit from complementary, specialised
staff. Staff may also transfer innovative
management practices across entities.
• Purchasing power: As a result of their increased
resource requirements, JV partners may be able
to collectively benefit from better conditions
(for example, price, quality, or timing) when
purchasing.
• Technology/ intellectual property: As with other
resources, JV partners may share technology. A
JV may also enable increased research, and the
development of new innovative technologies.
• Finance: In a joint venture, firms also pool their
financial resources, potentially eliminating the
need to borrow funds or seek outside investors.
• Taken together, the benefits suggest an
improved competitive position for the JV, and
each of the partners.
Many of these benefits would be derived from
formation of a JV to establish the new LPG import
and distribution business I n Puntland.
5.3 Risks of JVs
The key risks of JVs can be as described as follows:
• Communication: The entities forming the
JV may not communicate their objectives
clearly, resulting in misunderstandings. These
communication issues can be exacerbated
by geographic and cultural distance among
partner entities.
• Strategy: The combining entities may have
divergent strategies for the joint venture, and fail
to reach a set of mutually agreeable objectives
regarding business and exit strategies. Risks can
also emerge from a lack of agreed processes
regarding governance, accountability, decision-
making, HR, and conflict resolution.
• Imbalanced resources: The JV entities may bring
imbalanced resources to the table, a potential
source of conflict. Another source of conflict
may be that the JV disproportionately allocates
resources among the firms. For example, one
firm may find that its technology is being
appropriated by another firm.
• Culture: The JV partner firms may have distinct
corporate (and in the case of cross-border JVs,
national) cultures and management styles,
resulting in poor integration and cooperation.
• Effective management of these risks will be
necessary, ideally, where possible, at the
formation stage of the JV.
5.4 Identification/Selection of Potential
Partners - Criteria
The entities forming the JV should preferably meet
the following criteria:
91
 • They should share the same business objectives
and vision for the joint venture.
• They should be trustworthy and financially
secure.
• Other business interests in which they are
involved should be successful, have a good
track record in terms of production, marketing,
customers, personnel, innovation, and
reputation.
• There should be no conflict of interest with
other businesses in which they are involved.
• Strengths and weaknesses of the potential
partners should be complementary.
5.5 Key Clauses for Inclusion in the JV
Agreement
In addition to the usual clauses to be set out in
the Shareholders’ Agreement , the Memorandum
and Articles of Association and similar documents
required for the establishment of the JV, we
recommend that further provisions be included
covering the following issues:
• Business objectives
• Financial/ other resource contributions of
partners (e.g. land, rights of way and way-
leaves)
• Provision of products and services to the JV by
partners (arms-length/ market related terms)
• Transferability of assets or employees to the JV
• Ownership of intellectual property created
within the JV
• Management and control responsibilities and
processes
• Sharing/ reallocation of liabilities, profits and
losses
• Dispute resolution
• Exit strategies
92
5.6 Making It Happen
To succeed, the JV partners should strive to mitigate
several potential sources of risk:
• Communications; JV partners must establish
clear communication channels at senior level in
the entities involved and also with employees.
This communication is often facilitated through
regular, face-to-face meetings to establish not
only the benefits from the JV, but also the risks
if the JV does not work.
• Objectives and Milestones; Key performance
indicators (KPIs) should be established to
measure performance and provide early
warning guidance.
• Balanced Resources; Where possible, the
contribution of resources such as different
levels of financing or expertise should be
reasonably balanced. If imbalances exist and
where necessary, market based compensatory
arrangements should be put in place.
• Language and Culture Differences; Flexibility
and an open approach to trying to make things
work will be essential to ensure that individual
partner cultures and management styles do not
impede progress, in particular in the case of a
foreign partner being involved in the JV.
6. Government Stakeholders
Awareness Seminar (GSAS)
6.1 Seminar Arrangements
The Government Stakeholders Awareness Seminar
(GSAS) was held in Garowe, Puntland on Sunday
31st August 2014 and was attended by senior
Government officials and other key stakeholders
having an interest in development of the new bulk
LPG import and distribution business. The seminar
was broadcast on the radio. A group photograph of
the attendees is provided in Appendix 1.
The seminar was organised by Sahan Group on
behalf of Channoil Consulting, who provided the
presentation material used based on the findings
set out in its reports covering the LPG market,
commercial and economic feasibility of the project
and market development strategies.
The agenda set for the GSAS was as follows: groups including the poorer families would be
able to buy LPG (and to provide cheaper gas
• Market Study – Key Findings cylinders, so the initial cost decreases).
• Financial Evaluation – Assumptions, Cash Flows, 6. Moreover, all the Government Ministers stated
IRR their support for the LPG initiative. In particular,
a strong supporter of the LPG initiative was the
• Regulatory Issues
Minister of Women and Family Affairs who stated
• Critical Success Factors that most charcoal sellers and distributors in
the main cities/ towns are women. She pledged
• PPP Related Issues
that her Ministry will work with those female
Key deliverables from the GASA was intended to be groups and encourage them to stop charcoal
Government feedback and statements of intent/ burning and switch to other better business
commitment to the project. opportunities.
6.2 Puntland Government Feedback 7. The chairman of the Puntland Chamber
of Commerce has also confirmed that his
The statements of intent and commitment to the organisation will encourage more companies
project expressed by the Puntland government are
to join and take part in the LPG market and
as follows: participate in the proposed LPG terminal
1. The Puntland Government of Somalia expressed project to be built in Bosaso.
eagerness to support alternatives that protect 8. Other important Ministries of the Puntland
the country’s natural habitat and made several Government also expressed support for the LPG
pledges; these pledges include the promise initiative, such as the Ministry of Environment
to encourage the business communities to
& Tourism which stated they will back this LPG
increase their LPG consumption. initiative because it will preserve and protect
2. An undertaking to provide strong awareness Somalia’s natural resources and wildlife.
to the general public about the advantages Channoil considers that the seminar in Puntland
of LPG and the disadvantages of charcoal and was successful in raising awareness of the project
firewood. with Government entities and securing the required
commitment of support for its progression.
3. Although the Government stated it will support
LPG initiatives and also promised to reduce
taxes, it gave no undertaking that it would
provide funds for the construction of an LPG
terminal.
4. Furthermore, the Vice President of Puntland
has stated that his Government has committed
to eradicate the export and use of charcoal and
to quote ‘Government will either exempt or
significantly reduce the tax for LPG importation’.
5. The Vice President of Puntland has requested
that all the key stakeholders to work together
and encourage the public to switch from
charcoal consumption to LPG. The Vice
President has further requested that the LPG
importers/ distributers provide cheaper LPG
to the general public, so that the lower income
93
Ministry of Environment,
Wildlife and Tourism