Tbilisi, Georgia, September 25, 2015 - Transparency International Georgia published its first study on the Georgian fuel market in 2012, covering major trends and problems in this sector until 2012, and offering recommendations to resolve them. Reporting period of the present study spans over 2010-2015. The second study has led to the following key findings:

Market Regulation

• Until 2014, the state enjoyed a rather limited capacity to observe competition. This situation changed considerably on 14 April 2014, when the Competition Agency with increased powers was set up pursuant to the new Law of Georgia on Competition;
• Due to high public interest, on 12 November 2014, the Competition Agency launched an inquiry into the fuel market aimed at finding abuses of market power. In July 2015 the agency completed the study and fined eight companies for breaching competition legislation 55 million GEL in total;
• As for the fuel quality control, legislation of Georgia sets standards that the oil products and natural gas sold on the Georgian market must meet. Nevertheless, there is no quality control mechanism for these products in the country. Further, no adequate sanctions exist for violating the quality controls;
• All fuel in Georgia is imported, which means that quality control starts from the moment it crosses the customs border. Yet, a state quality control mechanism for fuel supplied to wholesale and retail networks is absent, which is a serious gap;
• According to the Levan Samkharauli Forensics Bureau, oil products were examined based on requests of interested parties only. In 2010-2015, 489 samples (petrol and diesel) were examined, 38% (187 samples) of which failed to meet quality norms set by the legislation.

Market Characteristics

• Motor fuel consumed in Georgia is entirely imported and in 2014 was the largest imported good in Georgia in terms of cost. In 2014, 903.2 thousand tons of motor fuel worth 1.415 billion GEL were imported to Georgia;
• In its first study, Transparency International Georgia noted that by 2012, a clear oligopolistic structure had been formed in the fuel market of Georgia. Five companies dominated the market in imports of fuel as well as wholesale and retail trade. Statistical indicators measuring competition confirm these conclusions;
• Given this background, a close eye has been kept on changes in this trend since 2013, particularly when the new government came to power, since ensuring markets are more competitive was one of the promises given by the Georgian Dream Coalition. Statistical data illustrates that competition in this market in 2013-2014 grew slightly, while the market structure is still far from perfect. In 2013 the market share of large enterprises reduced by 2% compared to the previous year, constituting 93%;
• As for other indicators, the number of companies importing motor fuel increased several times in 2013-2014, but is still considerably smaller compared to the years prior to 2008;
• In 2013-2014, the Herfindahl-Hirschman Index declined by approximately 1000 points, compared to 2012. This is progress, but still insufficient. Interestingly, the trend of a declining level of concentration in the fuel market in 2013 did not continued in 2014, resulting in a reduced number of fuel-importing companies and an increase in the Herfindahl-Hirschman Index. Although small-scale, these changes still pose a risk that an oligopoly of this market will persist in the future.

Prices

• Prices in the Georgian fuel market have always drawn public attention and suspicion was voiced concerning a collusive agreement on prices among companies in this sector;
• Because only imported fuel is consumed in Georgia, local prices should be closely linked to the global price of oil. Several conclusions can be drawn by comparing the global price of oil during 2012-2015 and prices of fuel in the Georgian market:

• Overall, the local fuel price followed the general trend of the global price of oil, but in some cases, changes in global prices were transmitted to the Georgian market several months later. This trend was especially visible during reduction of prices;
• Prices of fuel of five key players in the Georgian market in last three years have been changing simultaneously.

• Bearing the above facts in mind, the existence of a cartel in the Georgian fuel market cannot be excluded and concerns raised by the Competition Agency towards these companies seem fair.

Public Survey

• To identify current trends in the Georgian fuel market, the Caucasus Research Resources Center (CRRC) conducted a public survey in December 2014, commissioned by Transparency International Georgia. The survey was conducted across Georgia, interviewing total of 1867 adult citizens;
• According to the survey results, 42% of respondents (himself/herself or his/her family) owned a vehicle, majority of which (71%) operated on fuel, while 27% operated on natural gas. Only 16% of respondents consumed diesel;
• Twenty-six percent of respondents purchase fuel from different companies, 20% prefer Wissol's fuel, 17% purchase fuel in Gulf's gas stations, 16% in Rompetrol and 14% in Socar. Lukoil is the least popular among five large companies - only 10% of respondents buy fuel in gas stations of this company;

In choosing fuel, 50% of respondents give priority to the fuel quality, while 41% base their choice on the fuel price. Moreover, the price of fuel is a priority for respondents with income up to 400 GEL, while the population that has a relatively higher income (over 800 GEL) gives first priority to the quality of the fuel.

The report was prepared with the financial support of the Swedish International Development Cooperation Agency (Sida). The views expressed in the report to not necessarily coincide with those of Sida and Transparency International Georgia is solely responsible for the report's content.