Presentations by Sasol and Exel on Black Economic Empowerment in the Liquid Fuels Industry

Meeting report

This report is produced by the Contact Trust -

PORTFOLIO COMMITTEE MINERALS AND ENERGY
10 SEPTEMBER 2002
PRESENTATIONS BY SASOL AND EXEL ON BLACK ECONOMIC EMPOWERMENT IN THE LIQUID FUELS INDUSTRY

Chair: M M Goniwe

SUMMARY:
Sasol's contracts with other oil companies will end on 31 December 2003. Until then they are unable to participate in service stations and are limited with regard to their marketing. They had however started to implement Black Economic Empowerment long before the the Liquid Fuels Charter. The establishment of Exel was one such initiative. Exel emphasised the fact that their success can be attributed to the quality of the relationship between the partner and the Black Economic Empowerment operator. The Committee expressed concern about the future of Exel once Sasol participates fully in the value chain. Exel assured the Committee that the relationship between the two companies is robust enough to overcome any hurdles

Documents handed out:

Sasol's Liquid Fuels BEE Initiatives first part
Sasol's Liquid Fuels BEE Initiatives second part
Exel Petroleum: BEE Presentation to PPC

Presentation by Sasol Limited

Mr Z Mkhasibe, Mr Strauss and Mr J Botha delivered the presentation on behalf of Sasol. Mr Botha stated that while the company's roots are in SA they believed that it should be able to compete internationally. Their aim is to improve on current achievements. Its contracts with other oil companies end on 31 Dec 2003, after which they will be able to participate in service stations. At present they are limited to roster sites. They are however not waiting until 2004 to implement the Charter, but have in fact started to introduce Black Economic Empowerment (BEE) already.

Sasol is, until December 31, limited to marketing through blue pumps. They have two plants dealing with Synfuels, while Natref in which they have a 64% share deals with crude oil. Because they are situated inland their exports throughout Africa take place overland. They have 49% shareholding in FFS and 22.5% in Exel.

None of their four depots are operated by Historically Disadvantaged South Africans (HDSA). Equity participation of forecourt attendants is facilitated through the Autoworkers Pension Fund.

Sasol has since 1998 consistently invested R5 billion per annum in the SA economy. They are in fact one of the leading investing companies in SA. In 2000 they contributed to 24% of SA's investments. They will contribute about 30% by 2004 (if one has regard to projects which have been approved at this stage). They employ 25 000 SA based people. They contribute R18 billion to SA's GDP per annum. They make a 13% contribution to Mpumalanga and Free State alone, since their plants are situated here.

With regard to their corporate social investment expenditure for 2002 they have spent R22 million on education. This is spent on the establishment of learning centres in Sasolburg and Secunda and bursaries. Their R4million spending on the environment includes initiatives outside the plant only. Half of the R6million allocated to the gas pipeline which runs from Mozambique has already been spent.

Target for 2002: 75% new appointments from HDSA
Achieved: 91%
They also aim to ensure that 53% of promotions are from HDSA groups.

Sasol also invests extensively in technical skills development. They have an advanced leadership programme to increase diversity at senior management level. Their progress in this initiative has been slow.

With regard to procurement the problem is that much of their goods are imported. The answer is to develop the businesses from whom procurement takes place. It is also important to create and develop new business.

Sasol was the first oil company to support and foster BEE in the petroleum industry through the establishment of Exel in 1997. It is not however their only BEE initiative. They have a joint venture with CEPR pipeline, which will be launched in October 2002. There is another venture with Mkumbi we Africa, which is headed by a black woman. In addition the group information management system have been outsourced to Comparex, which is a black-controlled company. The Durban South Pipeline Gas BEE venture consists of seven Black groups, two of which are women's groups. The venture receives no government finance. Black Top Holdings, which is a successful BEE venture in the road-building industry, has 70% Black shareholding. The MacAdam Franchise Team was responsible for building Madiba's road ( a road leading to Madiba's home in the rural areas). The project which was labour intensive created 24 franchisees (and therefore 24 entrepreneurs) and 265 jobs.

Sasol describes Exel's growth as spectacular, despite the fact that it had not received much marketing. Many of the original shareholders have exited, e.g. promoters and quasi-government organisations. Where they put in R1.8million for example, many of them were able to realise profits of R22million upon selling their shares. Sasol therefore started a trust to buy back the shares for HDSA's. 9.5% was set aside for Nozala Trust, a women's group. Forecourt attendants received 13% via the Autoworkers Pension and Provident Funds, while Exel staff received 10%. One way in which Sasol had facilitated the establishment of Exel was by providing R290 million in financial assistance. To date hundreds of millions of rands' value has been created for Exel shareholders.

One of the key challenges for the future is that the industry is mature and the market static. The industry is therefore not necessarily attractive enough for black investors. The approach should therefore not just be to bring in shareholders, but to build robust models by which to make the industry viable for investment.

The total value of Sasol's new liquid fuel business is R10 billion. The total value of the BEE's share is therefore more than R2.5 billion

Questions and Discussion
Mr B Bell (DP) asked what the percentage of foreign holdings in Sasol is.

Mr Botha said that foreign companies hold 25% of the total share issue.

Mr Bell asked if Sasol has an employee share incentive scheme by which employee's purchase of shares is encouraged.

Mr Botha said that there is the share incentive scheme on the one hand and the scheme whereby Sasol in fact purchases some shares on behalf of employees who wish to purchase shares on the other.

Ms E Ngaleka (ANC) complemented Sasol on their achievements. She asked why none of the four depots were operated by HDSA's.

Mr Mkhasibe responded that all depots were owned by Sasol and that black persons do in fact operate these depots. Mr Strauss added that outsourcing the operation of depots was difficult, since this formed part of the value chain and it is in fact important to bring empowerment into the value chain.

Ms Ngaleka asked how Sasol had managed to avoid closures (unlike the other oil companies).

Mr Mkhasibe stated that these closures usually referred to the closure of service stations and Sasol does not have any service stations.

Ms Ngaleka asked what the plans were to operate and therefore benefit the provinces other than the Free State and Mpumalanga.

Mr Botha responded that these had been mentioned specifically since their plants were situated there and thus employees and their families obviously benefited. They were not the only provinces to benefit though. In fact 8.5% of all the Company Tax of SA can be attributed to Sasol. He however added that Sasol is looking to establish service stations throughout SA in the future.

Mr S Mongwaketse (ANC) commended Sasol on the positive steps taken to implement BEE. He however referred to the fact that only R2 million was spent on health and only R9 million on job creation. These were vital, especially in the rural areas and therefore required more attention.

Mr Mongwaketse suggested that when Sasol expands its business throughout Africa, they should take their BEE partners along.

Mr Botha agreed that this would be done.

Mr E Lucas (IFP) also praised Sasol's presentation. He suggested that BEE should get involved in offshore investments. He said that while this may seem to be a step for the distant future, it is the Committee's duty to be progressive.

Mr Lucas said that since Sasol has claimed that the market is saturated they should actually embark on a special marketing programme. People are generally not particular as to where they fill up, making such programme important for the growth of Sasol.

Mr Lucas referred to Sasol's statement that they were the first oil company to support BEE. He pointed out that Total and Sasol entered the townships at approximately the same time. He felt that it would not be proper to diminish Total's contribution.

Mr Strauss apologised, saying that it had not been their intention to offend Total. Total has in fact been in the townships long before Sasol, but the presentation had in fact focused on broader BEE initiatives.

Ms Mtsweni remarked that there was room for improvement with regard to the empowerment of women.

Mr J Nash (ANC) complemented Sasol on their frank and forthright presentation. He was perturbed that the major oil companies seemed to have secrets. He did not understand why the IBLC negotiations should be seen as a stumbling block, since negotiations would be opened between them and Sasol. The IBLC should be used positively to improve the whole industry.

Mr Strauss said that the IBLC negotiations were not a problem. Sasol in fact participated in these negotiations. Their point had been that the refinery business was under pressure, especially with regard to issues like future investment for quality. Sasol was suggesting the system should be changed to make it more representative.

The Chair agreed with Mr Nash, saying all the oil companies have alluded to the IBLC . While IBLC will have a major impact on the companies and broad based BEE as a whole, the industry should not be unduly concerned. If the regulatory framework is changed in the future companies must remember that current contracts will be governed by existing regulations. The Chair suggested that public hearings should perhaps be held to determine if the IBLC will indeed affect oil companies and broad based BEE. One should not get the impression that Government can force a Regulator down industry's throat. Parliament's function is to consider the interests of all affected parties.

The Chair stated that SA must commend themselves on the birth and existence of Exel, as it is a South African creation. It should therefore be protected by SA and more particularly by Sasol (to whom its creation could be attributed). He was concerned that once Sasol enters the value chain it would mean the demise of Exel. He suggested that Sasol should at that point assist Exel to grow

Presentation by Exel

Mr M Radebe delivered the presentation. He stated that Exel was a wholly SA owned BEE company established in 1997. Its total market share increased from being zero-based to 3.76% by 2001. Its major customers consist of government, parastatals and large commercial enterprises. Their turnover, which includes levies, went from R71.47 million in 1997 to almost R1.3 billion in June 2002. Exel qualifies as a true BEE company in terms of ownership, control, management and skills transfer. They also have been involved in social investment (since their pre-Charter days) even though they are a small company.

EMPLOYMENT EQUITY
All Staff
Black: 55%
White male: 27%
White female:18%

GENDER EQUALITY
All Staff
Male: 53%
Female: 47%

SENIOR MANAGEMENT
White female: 34%
White Male: 33%
Black: 33%

They are committed to developing their employees' skills.

Procurement takes place based on affirmative action principles. BEE companies take preference. Exel is prepared to pay up to 10% higher for products purchased from BEE suppliers (provided that the quality is the same as that of other suppliers).

Exel has 89 prime sites, which are developed using property developers. 48% of these are owned by HDSA's. There are 50 roster sites, which are developed by the owners themselves. They have no depots, since they rely on partnerships and accommodation agreements. They also have no bulk vehicles, since most of their deliveries are handled by Sasol.

Sasol Oil is their strategic partner and enjoys board representation in Exel. Exel believes that their success is because of the quality of their relationship with their strategic partner. This is vital to ensure that BEE succeeds in the different sectors. Sasol's financial assistance has been given at market rates. Technical assistance was provided in terms of arms length, market related commercial agreements. Exel stated that if they had not received technical assistance from Sasol they would not even have been able to get the business off the ground

Questions and Discussion
Ms Ngaleka found the representation of women in Exel to be unsatisfactory.

Mr Radebe stated that this will be dealt with. Nozala will assist in this regard.

Mr Davidson asked at which point the relationship between Sasol and Exel would become problematic, given Exel's exponential growth which would lead to the two companies becoming competitors.

Mr Radebe responded that the relationship between the two companies was robust enough to overcome any obstacle. The shareholders will debate this issue and come up with an approach.

Ms Mtsweni referred to the fact that Exel has a strict code of conduct for its franchisees' relationship with pump attendants. She asked if Exel in fact monitored its implementation. She also asked what the findings were. This issue is particularly important to her, since Exels' pump attendants have in her experience proven to be the most efficient if compared to other service stations.

Mr Radebe pointed out that the agreement stipulates that franchisees should act in accordance with the Labour Relations Act and provide petrol attendants with training. Exel has done more than just monitor the process-they actually employ their own trainer who has to train attendants for one month before they commence business. With regard to Ms Mtsweni's observation regarding the quality of service, he announced that Exel had been rated as number one by an international company who had been doing a survey on the quality of service of the different service stations without their knowledge.

Ms Ramakaba-Lesiea (ANC) asked how Exel markets itself when entering a new community. Did they just establish an Exel service station without allowing the community to be part of the process?

Mr Radebe replied that whatever work could be done by local companies was in fact given to these companies e.g. construction, consultants, etc.

Mr Lucas referred to the idea of petrol attendants running franchises. He asked how practical this was given the amount of money required to obtain a franchise.

Mr Radebe pointed out that this is a target for 2005. In the meantime attendants can enroll for modules to teach business skills and provide the necessary training. The potential candidates would have to prove themselves. Access to finance is not a problem, since it is provided by Exel itself.

Mr Mongwaketse asked if the presentation figures relating to employees included petrol attendants.

Mr Radebe said that they did not. This is because service stations are run by independent operators.

Mr Mongwaketse disagreed with suggestions that the market is saturated. There is in fact still a market in the rural areas.

Mr Radebe completely agreed with this. However it costs between R3 million and R5 million to build a service station. Exel has developed the concept of a cost effective service station, which can be used in the rural areas. What makes a service station so expensive is the fact that tanks are situated below ground. Exel is suggesting the use of above ground tanks. However there have been problems with getting the approval of town planning authorities of the rural areas, as well as the SA Bureau of Standards. The tanks are, according to Mr Radebe, extremely safe for use above ground.

Mr A Nel (NNP) suggested that there may be too many regulations in the rural areas.