Department’s Response to public hearings on Petroleum Products Amendment Bill; NCOP Amendments to Mining Titles Registration Amendment Bill

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
27 August 2003
DEPARTMENT’S RESPONSE TO PUBLIC HEARINGS ON PETROLEUM PRODUCTS AMENDMENT BILL; NCOP AMENDMENTS TO MINING TITLES REGISTRATION AMENDMENT BILL

Chairperson: Mr M Goniwe (ANC)

Documents handed out:
Petroleum Products Amendment Bill Working Draft (as altered in light of submissions)
Petroleum Products Act (No 120 of 1977), with Sections deleted by the Bill indicated.
Mining Titles Registration Amendment Bill [B24D-2003]
Petroleum Products Amendment Bill [B25-2003]

[Monitor’s note: As this draft of the Bill had not been properly renumbered, so the numbering of Clauses includes struck-through characters.  For example Clause 2B, there is a sub-clause (3) in addition to the sub-clause (23), as dropping the struck-through character would make it ambiguous.  In Clause 2F, the references in the sub-clauses to sub-clause (1) appear to be to sub-clause (2)(3), where the Minister is granted the power to prescribe the licensing system.  Sub-clause (1)(2) is a redefinition of ‘retail’ for the Clause.  There is no 2F(1).]

SUMMARY
The Committee adopted the Mining Titles Registration Amendment Bill with the amendments proposed by the NCOP.

The Department briefed the Committee on changes to the Bill in the light of submissions and Committee comments.  Applications for retail and wholesale licences may now only be made by the property owner.  A new objective and new Clause are added concerning transformation of the industry.  There is also a new Clause allowing a separate system of licensing for the retail of liquefied petroleum gas and paraffin to low income households for household use.  Licensing systems must go through a public consultation process.  A preference for petroleum product made from coal, natural gas or vegetable matter is added to the Bill.

The Committee questioned the Department at length about the ownership requirement for licence applications.  Members expressed concern that this raised capital cost barriers to entry to the industry by the historically disadvantaged. Members were also concerned that oil companies might hoard licences to limit access by competitors.

MINUTES
Formal consideration of Mining Titles Registration Amendment Bill
The Chair noted that there had been consensus at the previous meeting that the Bill should be accepted as amended by the National Council of Provinces (NCOP).  The Committee agreed to report the Mining Titles Registration Amendment Bill with the amendments proposed by the NCOP.

Department’s Response to Public Hearings on Petroleum Products Amendment Bill
Dr R Crompton (Deputy Director General: Hydrocarbons and Energy Planning, Department) briefed the Committee on the changes made to the Bill in the light of the submissions and Committee suggestions.  He dealt first with the deletions from the principal Act (Petroleum Products Act, No. 127 of 1977).

Deletions
Section 4A, which concerns the publishing and releasing of information on the industry, is deleted.  The Section is a hangover from the past secretive state of the industry.  The Section placed serious constraints on the information that could be revealed.

Section 4B, giving the Minister power to enter agreements, is deleted.  Dr Crompton stated that the Department imagined that the reference was to oil agreements and it was deemed unnecessary to retain the Section.

Section 5, giving the Minister power to grant exemptions, is deleted.  This was considered a very serious power and could lead to accusations of favouritism.

Section 7, making the employer responsible for any offence by an employee, is deemed unnecessary and deleted.

Section 8 is deleted.  The intention is unclear and the Section has never been used to the best of the Department’s knowledge.

Section 10 is deleted.  It is replaced by new provisions.

Section 11 is redundant in terms of the new structure since the courts impose fines not the Minister and so is deleted.

There was no comment from the Committee on the deletions.

Changes to the Bill in light of submissions and Committee comments
The phrase ‘to promote the transformation of the South African petroleum and liquid fuels industry’ is inserted into the Bill’s introduction.  This is at the request of the Committee that the Bill be aligned with the industry Charter.

In Clause 1(a), a new definition of bulk is provided.  The term ‘prescribed quantity’ in the definition will allow for varying prescribed amounts according to product.  A definition of ‘Charter’ is inserted, defining it in reference to the industry Charter attached to the Bill as Schedule 1.  The definition of ‘hold’ is altered to cover only owning, not leasing.  It should be read in the context of the definition of ‘site’ in 1(f). 
In Clause 1(b), a definition of Liquefied Petroleum Gas (LPG) is provided, and in 1(d) there is now a definition of Paraffin and of ‘prescribed petroleum product’.  These are necessary because of the system introduced for LPG and Paraffin for sale to low income households for household use.  In lay terms, prescribed petroleum product for service stations refers to petrol and diesel.  In Clause 1(i), the definition of wholesale is altered because of submissions.

In Clause 2(a), ‘safe’ is deleted since the Bill is not a safety Bill.  In 2(f) ‘sold’ is changed to ‘available for sale’ to clarify the intent of the Clause – this is in line with submissions.

Clause 2A(1)(a) to (c), on prohibition of certain activities (without the necessary licence), has been replaced with 2A(1)(a) to (d) to provide clarity.  Clause 2A(4) is inserted to indicate who should apply for the licences in terms of 2A(1).  In the case of wholesale, retail and site licences, only the owner of the property may apply for licences.  In the case of manufacturing licences, either the owner or someone with his/her permission may apply.

Mr G Oliphant (ANC) interjected at this point to observe that 2A(4) stressed ownership.  He wondered about the case of persons who lease retail sites.

Dr Crompton responded that the Clause mentions the owner because of the provision for environmental remediation.  In the case of manufacturing, he noted that some current facilities are on leased land.  Where a retail site is leased, the owner of the site should ensure that his/her responsibility for remediation is placed in the hands of the lessee in the contract.  The Department needs to know where sites are because this is important when looking at the density of sites.

Mr Oliphant asked that this be flagged for later discussion.

Dr Crompton returned to the briefing.  Clause 2A(5), on vertical integration, is altered to allow the ownership by wholesalers of retail licences for training sites.  The Clause excludes wholesalers and retailers of LPG and paraffin from the prohibition since it is conceivable that in some areas wholesaler-retailer vertical integration might be necessary for commercial viability.  There is no prohibition of vertical integration between manufacturer and wholesaler.  2A(5)(b), on self-service, is now more precisely worded.  2A(6) makes clear that, except for export, licensed manufacturers may only sell to licensed wholesalers.  2A(7) makes clear that licensed retailers may only purchase petroleum products from licensed wholesalers.

Clause 2B(1) places an obligation on the Controller of Petroleum Products to issue licences.  2B(2)(a) expands the objective of promoting efficiency to the wholesale and manufacture sectors.  The word ‘efficient’ is added to 2B(2)(b) so that the objective is to facilitate an environment conducive to efficient and commercially justifiable investment – this is because of a suggestion that investments be ‘sustainable’.  The Department did not use the term ‘sustainable’ since this implies ecological/environmental concerns; their view is that any efficient and commercially justifiable investment should be a viable one.  2B(2)(c) is moved to the new Clause 2C on empowerment.  2B(2)(f) is a new objective – the promotion of access to affordable petroleum products by low income consumers for household use.  This refers to LPG and paraffin.  Clause 2B(23)(a) is reworded to tidy up the language.  The wording of 2B(3)(b) is provisional and does not apply to sites, which are covered under 2B(3)(c).  In Clause 2B(3), ‘may’ is changed to ‘must’ to make clear the Controller has no choice.  2B(4) provides for temporary licences – this is based on submissions that such licences may be necessary to deal with unforeseen circumstances that lead to closure of sites, such as the death of the licence holder.  2B(5) is new, laying down the preference for petroleum products manufactured from coal, natural gas and vegetable matter.  The wording of this has yet to be finalised with the State Law Adviser.

Clause 2C is a new Clause on transformation, added at the request of the Committee so that the Bill gives effect to the Charter.  2B(2)(c) has been moved to 2C(1)(a).  2C(2) allows the collection of information to keep track of the implementation of the Charter.

Clause 2C of the original Bill is now Clause 2D, transitional licensing provisions.  In 2D(1), the definition of ‘process of developing’ is altered so the period is twelve months from the commencement of the Act not 540 calendar days – this is in line with submissions.  The phrase ‘Notwithstanding any provision of this Act’ is deleted from 2D(2) on legal advice.  2D(2) does not include those who retail LPG and paraffin in a small way – they are not automatically required to apply for licences.  This will be developed in due course.  In 2D(3), ‘in terms of section 2A’ is deleted since this sub-Clause is in terms of several Clauses.  2D(4)(a) makes clear that those that already hold licences need only comply with provisions in force immediately prior to the commencement of the Act to be eligible for licences.  ‘Financial’ is added to 2D(4)(b) to make clear that it is financial security requirements that do not apply.

Clause 2D of the original Bill is now Clause 2E, system for allocation of licences.  The phrase ‘Notwithstanding any provision of this Act’ is deleted from 2E(1) on legal advice.  2E(1) now states that the Minister ‘must’, rather than ‘may’, prescribe the system.  A reference to amendment to the system is included because there is the possibility of a review of the system.  The framework for the licensing system in the original Bill is deleted and replaced.  2E(2) requires a public consultation process on the system.  2E(3) gives the objectives of the system prescribed by the Minister: (a) is the objective for an optimum number of sites; (b) is the objective to achieve equilibrium; (c) refers to the objectives of 2B(1) and 2C; (d) lays down the so-called ‘cap’ on the number of sites and links the number of sites to the volume of product sold; (e) allows wholesalers to trade their rights and obligations to licensed retailers; (f) refers again to the preference for petroleum products made from coal, natural gas and vegetable matter (this appears again so that both the retail and wholesale sectors are covered); (g) is struck out; (h) allows linking the issuing of a new site and corresponding retail licence to the transfer or termination of one or more existing site and corresponding retail licence(s); (i) allows linking the issuing of a new retail licence to the transfer of wholesaler rights and obligations under (e).  2E(4) states that the Minister shall review the system and may amend it, with a public participation process.  In 2E(5), ‘hold’ is changed to ‘possess’ since ‘hold’ is a defined term.

Clause 2F is a new Clause, added to provide a system for Liquefied Petroleum Gas (LPG) and Paraffin for supply to low income households for household use.  2F(1)(2) provides a definition of ‘retail’ for the purposes of the Clause; it is not geographically specific to allow for mobile retailers.  2F(2)(3) grants the Minister the power to prescribe a system of licensing for wholesaling and retailing of LPG and/or paraffin which will bind the Controller.  2F(3)(4) limits this system to poverty alleviation.  2F(4)(5) requires public consultation on the system.  2F(6) allows concessioning in designated areas.  2F(6)(7) requires the Minister to review the system from time to time and amend it if necessary, subject to public consultation.

Clause 4 amends Section 3 of the principal Act so that it requires the Minister to appoint a Controller and permits him/her to appoint regional controllers or inspectors, with conditions and remuneration determined in consultation with the Minister of Finance.  Clause 5 repeals Section 4A of the Act.  Clause 6 repeals Section 4B of the Act.  Clause 7 repeals Section 5 of the Act.  Clause 8 repeals Section 7 of the Act.  Clause 9 repeals Section 8 of the Act.  Clause 10 repeals Section 10 of the Act.  Clause 11 repeals Section 11 of the Act. 

Clause 12, Offences and Penalties, is substituted for Section 12 of the Act.  Clause 12 is unchanged from the original Bill.  Clause 13, Appeal, contains the new 12A which is substituted for Section 12A of the Act.  Clause 12B, Arbitration, has been altered based on submissions.  ‘Licensed’ and ‘or unreasonable’ are inserted into 12B(1) so that it now refers to a ‘licensed’ retailer, who may allege unfair or ‘unreasonable’ contractual  practice by a ‘licensed’ wholesaler, or vice versa.  12B(2) provides the voluntary arbitration mechanism.  Should this fail, 12B(3)(a) requires that the Controller appoint an arbitrator within fourteen days of notification of the failure to reach agreement.  In 12B(4), the arbitrator’s powers have been clarified.  12B(4)(a) and (b) have been replaced: (a) now clearly allowing an award to compensate for unreasonable or unfair contractual practice; (b) allowing the arbitrator to determine if the allegation was capricious or frivolous and to make compensatory awards if it was.  12B(5) makes clear that the arbitrator’s decision is final and binding and that awards for costs may be made.

Clause 12C, Regulations, has been reworded and a public consultation process included.  In 12C(a)(v) ‘conditions or restrictions’ becomes ‘conditions of licence’; it is clarified by division into paragraphs i. to iii.  12C(a)(v)iii. introduces the training sites exception to vertical integration to the conditions of licences.  12C(a)(vii) provides the provision for the transfer of licences and explicitly excludes regulation of the price of licences.  12C(b) now includes reference to the empowerment objectives of the new Clause 2C, in addition to the objectives of 2B(1).  12C(d) allows amendment to licences in case of emergency.  12C(g) makes clear with whom the lodging of financial security resides.  12C(h) allows regulation on the period within which an appeal decision must be given.  12C(2) requires public consultation except in emergency.  This has been copied from the Standards Act, with the addition of 12C(2)c. requiring due consideration of comment.

The new long title of the Act is altered to include the new objective of the transformation of the petroleum and liquid fuels industry.

Discussion
Prof I Mohamed (ANC) raised the definition of paraffin, which applies only to hydrocarbons ranging from C₉ to C₁₆.  He asked if it would be easy for someone to change paraffin to C₈ or C₁₇ and so escape the Clause.

Dr Crompton replied that he suspected that this would not be possible, but could not say for certain.  The Department will check on this.

Mr A Blaas (ACDP) posed a scenario where a person had a site licence but not a retail licence because the site was still under development.  Such a person could be beaten to the retail licence by someone else, so there is a risk for the first.

Dr Crompton replied that the system would set out the basis for dealing with applications.  Conventionally, this meant first come, first served.  However, if an application for a site licence in an overtraded area arrived before one for a site in an undertraded area, then the latter would likely be considered first.

Mr Blaas responded that sites are secured well in advance.  With the guidelines given for issuing retail licences based on volume, there was a risk on the licensing of a site.  The Department should link site and retail licences well in advance to eliminate the risk.

Mr H Gumede (Chief Director: Hydrocarbons, Department) replied, stating that his answer should also address some of Mr Davidson’s questions.  The system should be looked at as a three-sided coin.  The prudent investor would ensure all three sides were in place.  First, s/he should establish if the site has the proper zoning and site licence.  Second, s/he should consider the retail side – is there a retail licence and what are its conditions?  Third, s/he should consider the question of who supplies the site.  It would be possible to have a site owned by BP, operated by some individual or other, and supplied by Shell.  Who gets the site licence is determined by zoning.  The retail licence is determined by compliance with the conditions on the licence.  Finally, even with both of these, it must still be settled which oil company will supply the site.

Mr Blaas asked if the preference for product made from coal, natural gas or vegetable matter meant that a wholesaler would have to test the market whenever making a purchase to ensure that such product is or is not available.

Dr Crompton replied that the answer is ‘yes and no’.  It is conceivable that wholesalers will enter into standard and long-term contracts.  In the inland market there is a consistent supply of the preferred product and supply needs cannot be met without using it.  In the short term, wholesalers would have to check the market.  However, once they had been through the exercise once or twice it would cease to be onerous – there are few producers and so not much consultation is necessary.

Mr Blaas responded that one could not accept a ‘yes and no’ answer on a legal question.  Legal opinion should be obtained on this.

Dr Crompton replied that he meant ‘yes and no’ regarding the practical effect of the requirement.  If the wholesaler had a long-term contract, s/he would have consulted the market at the start of the contract and so fulfilled the requirement.  Only if there were no long-term contract would s/he have to consult the market each time a purchase was made.

Mr B Douglas (NNP) questioned the use of the word ‘promote’ in the insertion to the introduction of the transformation objective and in Clause 2C(1)(a).  He stated that this implied that it would be a promotional exercise and that ‘transform’ should be used instead.  He also raised Clause 2E(3) stating the intentions of the licensing system – he wondered whether the Committee was considering a law or expressing a wish.

Dr Crompton replied that this was a matter of language and Parliamentary practice.  It is up to the Committee which they prefer.  The argument for using ‘promote [transformation]’ instead of ‘transform’ is that the Bill will not achieve transformation by virtue of its passage.  The Department have no strong view on this.  Regarding the use of ‘intend’ in 2E, the Department have no strong view.  The argument here is that the system must intend these things though it is possible that its intentions will not be achieved.

Mr Douglas stated that Clause 2C(1)(b) should state to which Charter it refers.

The Chair responded that Charter is defined in the Bill so this is not necessary.

Mr Douglas stated that the reference to ‘in terms of section 2A’ in Clause 2D(3)(a) should instead be ‘in terms of the Act’.

Dr Crompton agreed with Mr Douglas that ‘in terms of section 2A’ was incorrect.  The wording had been like that since the Department had thought that the Sections might commence in stages – it was no apparent that this would not happen.

Mr I Davidson (DA) raised the new definition of ‘hold’.  The previous definition had accepted that the holder could be a lessee.  He stated that he imagined that there were petrol stations on leased land.  Would such a person lose his/her rights in respect of such a station?  Would there be compensation for the loss?

Dr Crompton replied that leasing had been removed from the definition because future sites will require financial security for environmental rehabilitation.  One had to decide who to pursue in the case of an infraction.  The Department received advice that it is better to pursue the owner of the property because property is immovable and could be attached if necessary.  He stated that no one would lose any rights.  If a person was currently in the process of developing a site, s/he would automatically be entitled to a licence.  Licensees fell into two categories – those currently licensed, who would automatically receive licences, and those who applied for licences after the commencement of the Act.

Mr Davidson noted that submissions had made clear that no regulation was needed on refining.  Clause 2A, prohibition of certain activities, appeared to be regulating the whole industry.

Dr Crompton stated that the Department saw a distinction between regulation and licensing.  Whilst manufacturers and wholesalers would be licensed, they would not be regulated.  Licensing conditions would be necessary to steer the building of new refineries into appropriate areas – such as the proposed coastal hub.

Mr Davidson stated that the point had been made that vertical integration of operation, and not of ownership, should be addressed.  Many petrol companies own sites but do not operate them.  What would the effect of the vertical integration provision be?  Would such companies have to unbundle these sites?

Dr Crompton replied that the changes to the vertical integration provision had been made to deal with the concern Mr Davidson raised.  The provision referred to licensed parties, not to owners.

Mr Davidson stated that Clause 2B(5)(a) should read ‘manufactured from coal, natural gas or vegetable matter’ – the ‘or’ replacing an ‘and’.  It struck him as unlikely that petroleum products would be made with all three of these.

Dr Crompton replied that as long as a product met the specifications, whatever the composition of its source, it would qualify.

Mr Davidson stated that he needed clarity on the system of allocation of licences.  In Clause 2E(3)(d): he could understand (i), though noted that this appeared to be in contradiction with the earlier Clause guaranteeing that persons holding licences just before the Act commenced would receive licences.  He wondered what (3)(d)(ii), linking the number of licences to product volume, meant.  Would the regulator have the right to force a site operating below the volume threshold to close?  How would this promote an efficient industry?  He asked how a person would go about getting a new licence.  Would s/he have to purchase a licence from a current operator?  Petrol companies are unlikely to give up their licences – doing so would lose them market share to competitors.  He asked how the system would work in practice.

Dr Crompton replied that the system dealt with a ten year period.  It was conceivable that the system might involve a ten-year plan, which would be adjusted according to volumes.  The average volume per site would give a rough guideline – retailers suggested that this should be 400 000 litres per month per site.  New sites would not be allowed if they would only process a trickle.  There would be guidelines for the ten-year plan and guidelines for a particular site.  A site could only be closed if it was unlicensed.  There is no provision for the Controller or Minister to close a licensed site.  Sites will close due to economic and commercial considerations, as they have in the past.

The Chair asked if it would be possible to hoard licences for unprofitable sites to starve one’s opposition.  If no additional sites could be licensed, because of the cap, there would be added value to holding on to a licence.

Dr Crompton responded that it might make better sense to be able to close sites, but the legal advice on this was that the Constitutional protection of property rights rules this out.  Nothing would be taken away from what people have.  People might want to hang on to sites, but if there is a trend towards greater efficiency, doing so would cost money.  This raised the question of how long a company would subsidise a loss-making site to hang on to it.  It is a question of the depth of oil company pockets and tolerance for losses.  He noted that no provision guaranteed that a company closing a site would automatically get a licence for a new site.

Mr Davidson responded that Dr Crompton was correct in theory.  However, it would not be in the interest of a petrol company to give up a site.  They need outlets to get rid of their product and made most of their money on the crude purchasing side of their business.  The question of when a site became uneconomic is complex.  One should consider sites that have other revenue-generating activities, such as car washes and stores.  Petrol companies would hang on to sites to ensure they sold their product.

Dr Crompton stated that the origin of the question lay in the failure to come to agreement when the Ratplan was re-discussed.  To put matters crudely – the discussions involved ‘haves’ and ‘have-nots’.  The ‘haves’ agreed to accommodate the ‘have-nots’ but not at the speed the ‘have-nots’ wanted and so the discussion broke down.  There is thus a perception that the ‘have-nots’ must be accommodated.  Government was then faced with managing the process or retreating completely, deciding on the former in the public interest.  The process will not be easy, but the social cost of not addressing the problem would be high.  One has to make a certain assumption – that companies will behave in commercially rational ways; that the profit motive will drive them.  Companies answer to shareholders and to sit with a loss-making asset-base would be difficult to explain.  Managing the process would be more difficult if the profit motive did not hold, but the Department expect that it will.  There will thus be limits to what companies could hang on to – constraints based on expected return on assets.  Further, there is the element of good will – oil companies are prepared to accommodate new-comers and know that the alternative will have high costs, with submissions referring to an economic ‘bloodbath’.  It is a difficult process and there are constitutional constraints – the system is designed within these limits.

The Chair asked that the Committee turn to Clause 4, flagged by Mr Oliphant for discussion.

Mr Oliphant stated that he was raising an inconsistency in the Clause.  In the case of manufacturing licences, the owner or someone with the written permission of the owner could apply for a licence.  In the cases of retail and wholesale licences, only the owner could apply.  What if the property were leased from a trust?

Dr Crompton replied that there is a big difference between an investment in a refinery and one in retail – the former is orders of magnitude larger.  It was thought unlikely that refineries would be built on leased land.  However, refineries do lower capital cost activities, such as blending, on leased land in the current set up.  The Department wished to accommodate this.  It is unlikely that a refinery investor would be fly-by-night.  In the case of the other sectors, it is more likely that someone could be a fly-by-night operator and the Department received advice to focus on the owner.

The Chair responded that if one looked at the objective of the Bill, it is to promote transformation.  If the legislation required that before one could develop a refinery, one must own the land, this would go against that objective because one would then have the additional burden of finding capital to purchase the land.  Leasing reduces overheads and it would not be prudent to require ownership before the person could apply for a licence.

Dr Crompton replied that the cost of the land is a small fraction of the overall cost of a refinery.  In any event, manufacturing licences may be granted to persons that lease the land.  In the case of retail sites, there are already too many of these, so the Department are not trying to make it easier to set up a retail site.  Someone has to pick up the cost of environmental rehabilitation – this can either be the taxpayer (as in the enormous amounts spent rehabilitating old mines) or the land owner.  Further, in the case of a retail site, the land could be land in a suburb with no building on it – this would involve a small capital outlay.  If an ordinary citizen owned the land, s/he could give power of attorney to a developer as occurred with new developments all the time.  When the Department looked for someone to whom to attach the costs, the easiest person to find is the property owner, failing which the property could be attached.  It is not uncommon for tenants to disappear without paying rent and they are then difficult to trace.

Mr N Ngcobo (ANC) stated that the Bill unintentionally allows for the exclusion of historically disadvantaged South Africans, who were mostly given a very small share to operate.  If all the Bill’s restrictions requiring capital access were passed, it could allow oil companies to run the retail sector indirectly though capital access.

Mr Oliphant supported Mr Ngcobo’s point with an example.  If one wanted to build a petrol station in a township area, the Bill suggests that because the land is owned by the municipality, one must buy the land.  One may not lease it because of concerns about fly-by-night investors and financial security for environmental rehabilitation.  He did not want to place capital restrictions on people – whilst the provisions might have to stay the same, this must be looked at.

Dr Crompton replied that the dilemma faced by a potential investor would be no different from the dilemma s/he faced now.  For example, one would not know in advance if the property would be rezoned.  Property dealings may involve an offer contingent on the rezoning.  What the Bill contained is no different from current practice.

Mr Gumede added that the Department would look into building in township areas since most land was owned by the Council.

Mr Oliphant responded that he was raising a substantive matter about buying land – this posed a financial burden.  The process is another matter.

Mr Davidson asked how the Bill facilitated new entry to the market.  There seemed two routes in: first, one might try to obtain a new licence.  However, there are already too many operators so this is not a good option.  Second, one might buy a licence from an existing licence holder.  However, a person would not sell a licence unless it was for a loss-making entity.  Only marginal or loss-making sites would be sold.

The Chair added that the current problem for historically disadvantaged individuals is the arrangement of renting sites from oil companies.  People paid high rent for such sites – for example, R20 000 per month on a site with bond payments of R14 000 per month.  If the Bill claimed to promote the historically disadvantaged and yet did not intervene in these relationships, it would simply perpetuate the dominance by the majors.  He asked what advantage the Bill gave to historically disadvantaged individuals.

Dr Crompton replied that if one looked at the Bill as constructed, it made reference to the Charter, which was attached as a schedule.  This gives it the force of law and the Charter is the main vehicle of entry for historically disadvantaged South Africans.  It was used by a number of oil companies and empowerment consortia.  It refers to the industry in general terms.  When it came to new entrants, one had to consider that South Africa has many expanding suburbs.  The population shifts and one needed to service people in new areas.  This process is continuous, so new opportunities were emerging all the time.  Further, densification of areas increases demand and leads to a need for more service stations.  Regarding current sites, the Department expects that oil companies will only want to sell ‘dud’ sites.  He noted though that if a ‘dud’ site closed, the license holder does not retain the licence.  As long as there are closures, one could open new sites.  Finally, if rentals were deemed unreasonable or unfair, the arbitration provision could be invoked.

The Chair asked what would guide the arbitrator in such cases.  People might have been renting the property for generations, with the owner having recouped the value of the site.  Further, if one went to arbitration, much depended on how one’s case was presented – the historically advantaged have access to consultants and other professionals to aid them in this.

Dr Crompton replied that the provision states that the rules must be agreed by the parties and this could include restrictions on the use of experts.  If there is no agreement on the rules, then the arbitrator makes the rules and will have to ensure fairness if faced by parties with unequal resources.  The arbitrator might then rule out the use of experts.  Cases would be made on business principles and the age of the site would come into it.  The normal legal procedures would apply and the arbitrator would have to hear both sides.

The Chair stated that the Committee would have to come back to this question.

Mr Ngcobo stated that the case the Chair had been putting was not one of unfairly inflated rentals, but a case where the new entrant had to pay rent of R20 000 and a bond of R14 000 – leading to costs of R34 000 per month.

Dr Crompton responded that many people believed that retail is an easy industry to get into and that sites are ‘cash cows’.  This is a popular perception and there was little the Department could do to dispel it.

The Chair responded that one of the reasons site are not ‘cash cows’ is the skewed relationship between the oil company owners and the lessees.  If a large slice of one’s income went to rental, it made things very difficult.

Dr Crompton agreed that it is difficult to get into the industry.  He stated that there was no getting away from this.  The Bill could not address the cost of capital to new entrants – its objectives do not extend that far.  He noted that government had done a number of things to address the cost of capital.

Mr Ngcobo retorted that the aim of the Bill is to promote historically disadvantaged South Africans.

Dr Crompton agreed and stated that the Charter was the main avenue for this.  Further, licence conditions could include empowerment requirements.

Mr Oliphant stated that when it came to capital cost requirements, this contradicted the promotion of historically disadvantaged South Africans.  He suggested that the Committee and Department go away and consider this.

The Chair wondered if the Charter represented a minimum threshold or the maximum.  He stated that a twenty-five percent share of the industry is a joke – black economic empowerment companies would then just be subsidiary companies.  If the Charter is a minimum and there was an opportunity to move forward, the Charter could be used as the beginning.

Mr Gumede responded that licence conditions had to be considered.  The issues being raised could be dealt with through these.  For example, there was the issue of historically disadvantaged retailers being required to make upfront payment for supplies whilst others had 48 hours in which to make the payment.

The Chair responded that the issue is that ownership should be promoted.  A provision that you may rent out a site until a point where you had recouped the investment and made a profit should be considered.  If a person has rented a site continuously for, say, fifteen years, why not transfer ownership?  This could be included in the Bill as a principle.  Otherwise the Bill would entrench servitude and owners would keep sites for as long as possible.

Mr Gumede responded that the Chair was touching on contractual agreements and these are protected by the property clause in the Constitution.  The Department are looking at using licence conditions, but existing contracts are protected.  Issues around rental are commercial issues and the Department cannot get into them unless they are global and can be made part of the licensing conditions.  If the Department saw a general problem, they could place conditions on licences but they cannot interfere with contracts.

The Chair responded that there was an opportunity here with the entrance of two new players.  The issue might be separate from the Bill but had to be attended to.

Ms L Mbuyazi (IFP) asked what would happen if a person continued with an activity despite a written notice from the Controller that s/he should cease it, under Clause 2A(2)(a).

Dr Crompton replied that such a person would be proceeding unlicensed.  The Controller may allow time for the person to apply for a licence.  If the unlicensed activity continued, the Bill contains a provision for fines to be imposed by a court.

Ms Mbuyazi asked if there was a mechanism to ensure that a licensee continued to comply with the conditions of a licence – Clause 2B(23)(a) states that a licence is valid for as long as the licensee complies.

Dr Crompton replied that the most helpful guardians are other site owners.  They would continue to inform the Department of infractions because they lose out to the guilty site otherwise.  There is also a provision in the Bill allowing the appointment of inspectors.

Ms Mbuyazi drew the Department’s attention to a possible error in Clause 2A(5) where business was spelt ‘bus ness’.

Dr Crompton replied that he could not see the error to which Ms Mbuyazi referred, but he had probably simply mistyped the word.

Mr Davidson asked for clarity on the application of Clause 2(b) on price prescription, which has been altered to allow prescription of the price at which product is bought as well as sold.  He noted that the South African Petroleum Industry Association had stated that the Clause was intended to eliminate cross-subsidisation and thought the original version went further than this.  Did the new version mean that there would be price control all the way up the value chain?

Dr Crompton replied that the industry was going through its biggest change in twenty years with the end of the upliftment agreement.  Matters would be left to the market up to the point where the supply was in danger of running dry.  If this should happen, the Government would intervene if the reason the supply was not reaching consumers was lack of agreement amongst strategic players.  The Department hopes never to have to do this.  The provision could apply to any part of the value chain, legally speaking.

Mr Oliphant asked if the Bill’s definitions of Liquefied Petroleum Gas (LPG), Paraffin and wholesale were consistent with other laws.

Dr Crompton replied that he could not recall from which dictionary they had taken the definition for LPG.  They consulted English and chemical dictionaries, the South African Bureau of Standards (SABS) definitions, and the Import Export Act.  On Paraffin, they consulted a number of people.  The definition was derived from a proposal by the Paraffin Safety Association and the SABS.  The definition of wholesale is designed for the Bill.

Mr Oliphant noted that licensed manufacturers may only sell product to licensed wholesalers.  The law prohibits retailers from buying from manufacturer.  He asked why this prohibition was there – he had been told it was for tax reasons.

Mr Gumede replied the value chain had always worked like this.  There were issues of economy of scale.  It would be a disaster if, say, 1000 trucks turned up at a refinery to make purchases for 1000 retailers.  There are logistical reasons for large wholesalers.  If retailers were allowed to get product from refineries this would cause problems, including problems around taxes and levies. 

The Chair responded that he observed a decline in the need for wholesalers in the market.  Why was the system being enforced?

Mr Gumede replied that economies of scale came into it – it is better to transport product in large quantities over pipelines than to have individual retailers collect it and transport it by road.  Allowing this would increase the cost of retailing.

Mr Oliphant asked what the licence conditions would be for export.

Dr Crompton replied that, for the purposes of the Bill, the Department were not concerned about exports except that they went to other countries. 

Ms Mbuyazi stated that problems arose in Durban around exports because historically disadvantaged individuals were not considered when land for manufacturing and refining was considered.  Consequently, one ended up with historically disadvantaged individuals living next to refineries and suffering ill health effects.  She expressed concern that the Department were not concerned about the environmental and health impact of exports.

Dr Crompton replied that different countries had different health and safety standards.  It is not incumbent on South Africa to tell other governments what their standards should be.  The Government was engaged in discussions on this in SADC (Southern African Development Community) structures.  Whilst transport vehicles are in South African territory, South African health and safety laws applied to them.  Just because product is intended for export did not mean it would be exempt from South African health and safety law.

Mr Oliphant asked, when it came to the preference for product from ‘coal, natural gas and vegetable matter’, what the ‘other raw materials’ are.

Dr Crompton replied that the most popular one would be crude oil.

Mr Oliphant asked why the Bill included a preference for product made from coal, natural gas and vegetable matter – was this to promote local buying?  He later agreed that the question should be held over to the next meeting.

The Chair stated that the Committee would go through the Bill page by page and then consider it informally Clause by Clause at the next meeting.  If possible, he hoped they could consider it formally.

The meeting was adjourned.