Draft Petroleum Products Amendment Bill: briefing

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Mineral Resources and Energy

14 November 2001
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The aim of this report is to summarise the main events at the meeting and identify the key role players. This report is not a verbatim transcript of proceedings.Â

Minerals and energy portfolio committee
14 November 2001

Mr R. Mofokeng

Documents handed out:
Department of Minerals and Energy Amendments to the Petroleum Products Act, 120 of 1977: Presentation to the Parliamentary Portfolio Committee on Minerals and Energy

The Department of Minerals and Energy (DME) briefed the Portfolio Committee on the Draft Petroleum Products Amendment Bill that seeks to amend the Petroleum Product Act, 120 of 1977. The Committee were also due to consider issues arising from the Committee's Report on the abolition of the Lebowa Minerals Trust but this second item on the agenda was cancelled.

Dr Crompton (DME) proceeded by briefly presenting the rationale, objectives and challenges behind the proposed amendments and regulations and went on to broadly identified their content. Dr Crompton concluded by presenting the comments received from key stakeholders during the public commenting procedure. This was followed by a brief session of questions and comments being addressed to Dr Crompton many of which related to the fact that the Committee did not have sufficient information to properly consider the issues before them. The Department undertook to provide them with any information they required.

The Chairperson opened the meeting and stated that it would likely be the Committee's final meeting this year. Though two items had been on the agenda, the Department had cancelled the briefing on issues arising from the Committee's Report on the abolition of Lebowa Mineral Trust. He then introduced Dr R. Crompton, Chief Director of Hydrocarbons for the Department, to give the presentation on the Draft Petroleum Products Amendment Bill.

Presentation on the Draft Petroleum Products Amendment Bill
Dr Crompton began by discussing the necessity for amending the Petroleum Products Act of 1977. He stated that the current dispensation within the industry was complex and interrelated, and vertical integration was prohibited by existing regulations. Furthermore, the Service Station Rationalisation Plan introduced in the 1940s was no longer viable. The Plan had been intended to limit the number of service station sites, but a recent estimation concluded that there were now 40% more sites than competition would have produced. Additionally, the application for renewal of exemption required by the amendments to the Competition Act had not been made.Â

He continued by presenting the government's rationale behind the Draft Petroleum Products Amendment Bill:

Implement the White Paper on Energy Policy and Empowerment Charter;
Facilitate managed liberalisation of the liquid fuels sector and eventual liberalisation through good corporate governance mechanisms;
Ensure acceptable arrangements between synfuel producers and marketers of crude oil based fuels on the marketing of synfuels;
Formalise the rationalisation of the service station sector;
Concerns about SMME promotion, fuel standards and price setting mechanisms.

Proposed amendments and regulations were discussed with stakeholders and published in the Gazette for comment on 24 August 2001, and submissions were received from SAPIA, SAFDA, AMEF, NAAMSA, FRA and others.

Dr Crompton told the Committee that economic, social and other policy imperatives required trade offs, and the necessary trade offs were a major source of the challenge in creating the legislation. The government had to be aware of strong and weak vested interests. He also commented that fuel pricing could be very emotional and they had to try to avoid emotion in making decisions on policy. He stressed that the Draft Bill was only one part of the change to the industry and the Committee could not therefore expect to understand the entire restructuring process by considering only the Draft Bill.Â

Objectives and Challenges
Dr Crompton then presented a list of policy challenges in the petroleum sector:

Comparing Low cost intermediate inputs with low energy costs to the poor;
Weighing the value of jobs created by full service versus efficiency in the industry without it;
Incorporating SMMEs;
Liberalising and increasing competition within the energy sector;
Choosing whether or not to have transparency of subsidies and cross subsidies;
Deciding if South Africa should attempt to be internationally competitive;
Sustaining the South African synfuels industry in a liberalised environment;
Having a stable and continued supply of quality products nationwide;
Maintaining an efficient network of transport, retailing and storage infrastructure;
Upholding safety standards and environmental standards;
Promoting “correct� pricing in the refining, wholesale and retail sector;
Extending ownership to historically disadvantaged South Africans;
Efficiently using oil products in times of high oil prices and a weak Rand;

He then stated that the Committee should be able to gauge from this list the extensive policy challenges and the necessary trade offs that must occur between them.

Dr Crompton continued by presenting the objectives of the amendments and regulations:

Managing the transition from the Service Station Rationalisation Plan to proper regulation and managed liberalization;
Ensuring economies of scale, capital productivity and viability in the fuel retail industry;
Minimising job losses in the petroleum retail sector;
Promoting empowerment and viable small business activity in the retail sector;
Ensuring that appropriate fuel standards be maintained;
Ensuring a long-term sustainability of synfuels refiners in the marketing and supply sectors in the absence of “Upliftment Agreements�;
Securing the government's ability to collect important statistics and information.

He added that there currently appeared to be a large amount of capital tied up in surplus petrol stations that could possibly be used more efficiently in a different capacity. Also, he commented that Sasol's Upliftment Agreement would soon be coming to an end, though the Department was not certain when. He reminded the Committee that these specific objectives took place within a broader group of energy sector objectives. Those broader objectives included increasing access to affordable energy services for disadvantaged households, small businesses, farms and community services as well as improving energy sector governance, stimulating economic development, managing energy-related environmental and health impacts, and securing supply through diversity.Â

The Amendments and Regulations
Dr Crompton proceeded with the actual amendments and regulations being proposed. Key definitions under the Act would include “wholesale�, “site� and “retail�. The amendments would also introduce the licensing authority and licensing system. The areas of regulation by the Minister would be the following:

Three-tier licensing: wholesalers, retail sites, retail sales;
Conducting business in respect of petroleum products;
Keeping records and information in respect of licenses;
Maintaining continuity of petroleum product supplies;
Creating specifications for the quality control and standards in respect of petroleum products;
Upholding appropriate transitional provisions for phasing in the licensing system.

Regulations proposed in the Draft Amendment Bill, as listed by Dr Crompton, would be as follows:

Amendment of licenses;
Surrender, suspension, cancellation or ceasing of effect of license;
Display of license;
Cash sale of fuels;
Prohibition of benefits;
Prohibition of self service;
Prohibition of mixing or blending petroleum products;
Correct measuring instruments to be used in the trade of petroleum products;
Specifications and standards of fuels;
Register of licenses and information keeping;
Particulars of dealing with petroleum products;
Service of, contravention of, or failure to comply with notice;
Confidentiality of information;
Immunity from personal liability;
Transitional provisions.

He stated that each change proposed in the Draft Bill aimed at achieving a particular objective, and, in discussing these particular objectives, he would outline the key issues rather than discuss it comprehensively. Specifications and standards were for rationalising the number of fuels and coordinating this with improvements in engine technology. The aspects on regulating against mixing or blending fuels was to prevent crimes such as diesel spiking. Correct measuring instruments were for ensuring accurate and honest measurement. Regulations with regard to licensing, prohibition of integration, and information recordal worked towards small business promotion and in assessing whether service was adequate nationwide. The consolidation of self-service prohibition was a matter of preserving jobs, while regulating the number of service stations, cash sale of fuel, and transitional provisions would all assist in promoting a viable network, economies of scale, and capital productivity.Â

Stakeholder Comments and Concerns
Dr Crompton advised the Committee that the Department's focus thus far had been on discussing the issues with key stakeholders. He then elaborated on the key comments received from a number of the groups with which the Department had already consulted
Security of tenure by operators seemed to be crucial;
The principle of negotiation and consultation between parties should not be surrendered, but supply contracts should comply with minimum standards;
Bulk sale of petrol could lead to abuse, and retail levels of petrol and diesel would have to be set;
Retailers should be protected from large oil companies;
Prevention of vertical integration was important;
Discretion of the Minister was too wide;
Large number of zoning permissions were already granted and could lead to abuse if, for transitional purposes, zoning alone vested the right to be issued a license;
Fines were too high.

Supported inclusion of product standards as part of the Bill but reserved their position on whether it should be SABS standards or some other form of world standards. (This issue could be problematic according to SAPIA members and should preferably be re-promulgated);
Generally supported the Bill.

South African Petroleum Industry Association (SAPIA):
Unlimited discretionary powers could impact negatively on investor confidence because the objectives of the Act were not defined;
Would like to see detailed guidelines and criteria to be used for granting and allocating licenses;
Definition of “hold� was crucial for site licenses;
Safeguards to ensure investor certainty in sector would be helpful;
Some members believed it was only necessary to regulate aspects that could not be effectively dealt with by market forces;
The Act needed to define wholesale, retail and site licenses;
Believed the Bill had workable transitional provisions acceptable to the industry;
Supported the broad approach of adapting the regulatory mechanisms to further government's social and other policy objectives while fostering a climate of certainty and fair returns to investors.

African Minerals and Energy Forum (AMEF):
Rules of the game needed to be spelled out from day one;
Rules should be skewed in AMEF favor;
Too much power rested with the Minister;
The Minister's decision might be contested in court, and consideration should be given to a review board;
The powers given to the Minister inherently included an element of uncertainty making it difficult for business to take risks;
There was no indication in the amendments as to how they would facilitate HDSA;
There must be some surety given based on compliance with requirements;
Generally approved the efforts.

Concerned about the investments in the industry and their participation in the retail sector;
The proposed criteria in the Act should favor the synfuels refineries and Natref regarding access to retail markets;
The Minister's regulatory powers should be circumscribed in the Act and may be too wide;
The enabling section should oblige the Minister to publish, for comment, any regulation she or he wanted to make under the Act;
Provisions of the Petroleum Products Act should be binding on the Competition Authorities in order to ensure clarity where they do not agree;
Generally in agreement with SAPIA comments except concerning access to retail markets;

Concerned about their participation in the retail sector;
Generally in agreement with SAPIA comments except concerning access to retail markets;
Playing field should be leveled in their direction to ensure meaningful participation in the retail sector;

Fuel Retailers Association (FRA):
Regulatory authority should be wider than one person;
Appropriate arrangements should be made to ensure fair trade agreements between wholesaler and retailer;
Definitions of “end consumer� and “bulk quantity� were necessary.

Dr Crompton stated that many of the stakeholders believed that the playing field was currently uphill from where they stood. Common issues raised by all stakeholders consulted included the following:

Plan provisions conflicted with Competition Act principles;
Concurrent jurisdiction issues needed to be resolved;
Disclosure of information held by the government was necessary;
There was the possibility of a long drawn out regulation arbitration;
An independent body was needed to make decisions;
Objectives of the Act needed to be clearly stated;
The dual licensing system (sites and retail) was generally acceptable.

Additionally, some individual companies made presentations varying slightly from the organisational viewpoint (ex. Shell, Total).

The concerns of the stakeholders were being scrutinised in accordance with the government's objectives regarding the proposed amendments. The three-tier licensing system was adopted, and a licensing authority would issue licenses. Dr Crompton added that most of the legitimate stakeholder concerns would likely be addressed and an appropriate transitional phase was suggested to ensure that industry would evolve into a level playing field. The substance would be incorporated into the Draft Bill while the detail would be covered in regulations. He stated that one of the critical challenges was how to deal with the retail sector. Though there was currently a 40% surplus, many industries wanted to build more sites thereby increasing that surplus. Accommodating the gross oversupply in the market was a challenge, and it was difficult to decide on what criteria they should use to judge: the market forces alone or additional social criteria. Dr Crompton then thanked the Committee for their attention.

The Chairperson opened the floor to questions of clarity and comments.

Mr G. Oliphant (ANC) stated that, as Dr Crompton had claimed, the Committee was not getting the full picture though it was necessary.Â

Dr Crompton replied that he would be happy to speak on the full picture if invited, but today he had only been asked to speak on the Draft Bill.

Ms D. Motubatse (ANC) said that she needed clarity on the question of the Minister's role and the stakeholders' problems with the Minister's discretion.

Mr M. Ramodike (UDM) brought up the question of conflicts between the Plan provisions and the Competition Act principles. He also asked if the Department knew at this point what the role of the provinces would be.

Dr Crompton replied that provincial and local governments already had roles in regulation tasks that would work in conjunction with these proposed regulations, but the amendments involved economic regulation at the national level. Concerning the conflicts, he agreed that the economic regulations had an overlapping nature with the Competition Act, but the possible conflicts would not necessarily cause problems if properly regulated.

Another member was concerned that the Drat Bill sought to introduce new players though they were already in oversupply. He stated however that, whatever they did, the Draft Bill needed to secure the employment of personnel such as service station attendants.Â

Dr Crompton stated that, concerning rationalisation of service stations, competition would have stopped a surplus overflow, but regulation had removed this factor as service stations did not compete with regard to pricing or service. He said that there was an explanation within the oil industry for the surplus but added that he had already discussed the trade offs involved in doing away with full service. He told the Committee that changes were necessary if they wanted to move towards more influence of market forces, and the amendments contained in the Drat Bill would assist in that.

Mr I. Davidson (DP) stated that the Department had given a framework but had not yet told the Committee what the end result would be. He added that they knew there were problems in the industry and that much of retail was running at a loss. He stated however that the Committee needed to understand what was really going on within the industry before the Committee could consider legislation of this kind. The presentation had not told them enough about empowerment. He asked why they were not looking into deregulating the industry rather than imposing further regulation and why they could not do more to empower the average person on the street to sell petrol on a corner.

Dr Crompton replied that the Department was trying to implement the White Paper on Energy Policy. He said that they had looked at the experience of countries in the North that had “pulled the plug overnight� with regard to regulation. He stated that many of these countries experience had proved disastrous. This government had chosen to introduce liberalisation with regulation to manage that change. He also stated that petrol stations could be dangerous if anyone could run one. On the question of empowerment, he said that the Minister was engaging with industry in an attempt to achieve their objectives towards empowerment. The “mom and pop� petrol stations had more or less disappeared, he added, so they needed to also consider empowerment in terms of providing access to good, cheap products that average people could put into their trucks and tractors to use rather than only empowerment by ownership.

Mr S. Mongwaketse (ANC) said that he believed that the Department needed to hold a workshop for the Committee to give them a chance to get the full picture so that they could then decide on the issues for themselves.

Dr Crompton said that the Department would be happy to put on a workshop if invited to do so. He stated again that he had made the trade offs between jobs and efficiency clear, and the question remaining was where to draw the line.Â

Mr J. Blanche (FA) argued that the problem was with bringing benefits to the average South African rather than to big business. He said that most sales took place in areas of big malls where big companies used the land and benefited, and it was here that the surplus was rather than in general areas in South Africa.

Dr Crompton replied that the separation between “havesâ€? and “have notsâ€?, and the nature of economic growth, was simply a part of the market system in which they existed. Changing this would require regulating irrespective of the trends of the market system.Â

Mr Davidson emphasised that they still did not know the end gain, and the Committee would only be able to judge the steps towards that end if they knew what the end was. He asked if the purpose of the legislation was to protect big oil companies or to enhance benefits to ordinary people. Concerning the reference to African countries further north, he replied that anyone can take the worst example and make an icon out of it, but that was not productive. He claimed that the focus of the proposals for the Draft Bill appeared to further entrench the interests of the large players.

Dr Crompton said that the end gain was managed change. The tools created by the amendments were necessary because they were methods previously done through informal agreements. He stated that this system was not good regulation and was simply not working anymore. He added that what tended to “kill off� single pump trading stores and smaller businesses was that oil companies supplying them determined it uneconomical to deliver fuel to them. He also said that the Department had taken the stance that there should be some minimum requirements and standards on petrol sale.

Mr J. Nash (ANC) stated that it seemed as though the Department was trying to sneak a bill in through the back door, and empowerment was not sufficiently addressed. He commented on the major petrol companies consulted and listed in the presentation and said that they merely gave lip service to empowerment. He wanted to see the business deals that presently existed regarding empowerment. He added that the Department could not merely present the Committee with bits of information when it suited them.

Dr Crompton stated that he had expected members of the Committee to have copies of the Empowerment Charter, and documents from individual companies providing what they were doing to promote empowerment could be requested as well.Â

Mr Oliphant enquired about the Charter.

Dr Crompton replied that the Charter gave one criteria for issuing licenses as promotion of empowerment.

The Chairperson stated that they were coming to the end of the meeting, and he mentioned that suggestions had been made for the agenda for next year. The proposed agenda would be available later in the week, and different parties would have an opportunity to comment. The meeting was adjourned.

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