State-owned fuel stations are a recognition of regulatory failure

There are currently 3,200 fuel stations in Bulgaria and the country ranks ninth in the EU (excluding Croatia) according to the fuel stations’ number. However, in terms of the number of fuel stations per capita, our country is in second place, with 1 fuel station per 2188 people, ahead only of Greece.

Source: Eurostat

Of course, the stated goal of the government to reduce and stabilize fuel prices in the country by building a chain of state fuel stations can be achieved, but the question is whether this is really the mechanism by which this should happen.

It is obvious that the country has a highly developed sector, consisting of powerful, mainly foreign, but also local chains of gas stations. In order for the state to be able to significantly influence retail prices, it must build a huge number of petrol stations, which will require a serious capital resource, which can certainly be used more adequately for other most urgent purposes. The stated intention of the government to build a hundred gas stations is unlikely to have the potential to significantly affect the price level of fuels in Bulgaria, as such a number would represent about 3% of the total number of fuel stations. At the same time, such an investment is estimated at around BGN 250 million.

In addition, there are currently several gas station chains that sell at significantly lower prices than the prices of major market players in the sector. From this point of view, there are still players on the market who de facto fulfill the goal of the state – to provide an alternative and to offer fuels at lower prices. It is not clear why the state thinks it will play this role more successfully.

As the problem with fuel prices in the country is very old and the Bulgarian public has been dealing with it for many years, numerous analyzes and institutional studies of the sector show that the main reasons for higher prices at gas stations of large chains are actually two:

1. First of all, this is the fact that Lukoil-Bulgaria owns about 80% of the volume of tax warehouses in which fuel can be stored in the country, and access to these warehouses is difficult and economically unprofitable for independent market players in the sector.
2. The stubborn refusal of the Bulgarian government to allow the use of licensed tax warehouses in Bulgaria’s neighboring EU countries for the purposes of trade and supply of fuels, thus depriving Lukoil-Bulgaria of its monopolistic advantage

Of course, in this case it should be noted the impossibility or refusal of the Commission for Protection of Competition  to certify the existence of cartel practices in the pricing of fuels in Bulgaria. The government’s decision to set up state-owned petrol stations is in fact a recognition of the defeat of the state fulfilling its regulatory role in the fuel sector.

Other EU countries with public fuel stations

The existence of public fuel stations in EU Member States is not a precedent. Currently, at least two other Member States have state-owned gas station operators – Hungary and Slovakia, but it should be borne in mind that these structures are a legacy of socialism and simply they have not been privatized, while in Bulgaria the privatization of the state monopoly Petrol was performed long ago. From this point of view, the mention idea at the moment seems completely unacceptable, because it aims to return to a policy that the state abandoned during the transition to a market economy.

Economic consequences

The construction of a minimum number of gas stations is unlikely to seriously change the price level in the country, if this remains the only mechanism on which the government relies to achieve low and stable prices.

From a purely economic point of view, if the prices of state-owned gas stations are not in line with market conditions and are too low, this will cause serious demand and, or prices will have to increase and reach the level of other gas stations that still offer fuels at lower prices, or to continue to sell at lower than market prices, which in turn will lead to a loss of public resources, as well as a reaction of the EC to unacceptable government intervention, which has a dumping effect on other market players.

If we assume that the state will not allow itself to sell at below-market prices, then what added value will its intervention have, since there are currently gas stations that sell fuels at much lower prices than those of the main chains?

Impact on the fuel sector

Based on all the above, unless the state implements additional mechanisms to influence the market, its impact on the sector will be minimal or imperceptible. On the other hand, serious state resources will be spentinefficiently instead of being used for much more meaningful purposes. There is also a danger with a very high probability that such an undertaking of the state will lead to unacceptable management and corruption practices, from which unfortunately Bulgaria suffers and has been criticized for many years.