Introduction

Table of Contents
1 Introduction *
2 Procedural Concerns *
2.1 NEDLAC Engagement *
3 Substantive Concerns *
3.1 The Petroleum Pipelines Regulator *
3.2 The Privatisation of the Pipeline Network *
4. Recommendations *
4.1 Public policy objectives of the petroleum sector. *
4.2 An Independent Study of the Liquid Fuels Industry *
4.3 A single energy sector regulator *
4.4 Powers and duties of the Authority *
4.5 Meetings of the Authority *
4.6 Reporting by Authority *
4.7 Conditions of licence *
4.8 Health, safety, security and environment *
4.9 Setting and approval of tariffs *
5 Conclusions *

1 Introduction
Based on the powers and duties of the envisaged Petroleum Pipeline Regulatory Authority and the stated objects of the legislation, the Petroleum Pipelines Bill (hereafter referred to as the Bill) clearly represents government’s first step towards liberalisation of the liquid fuels industry.

"Government’s vision for the future is to create a stable and internationally competitive liquid fuels industry in our country. As South Africa is increasingly integrated into the global economy our industry will be well prepared to adapt to these changing circumstances. This implies an industry with limited government intervention and continued investment in new refining, wholesaling and retailing facilities. As a significant input cost to the economy, the cost of liquid fuels will be kept as low as possible and be available as widely as possible.

Thus, this Bill is part of the "managed liberalisation" that could eventually see the privatisation of state assets such as pipeline manager Petronet and the Mossgas gas-to-liquids operation. As in other sectors in which the Apartheid state established public monopoly corporations, the role played by Petronet in the development of the petroleum pipelines infrastructure has been exceedingly important in meeting the growing demand of liquid fuels and supporting industrial development since the booming 1960s. Thus, today Petronet continues to play an important role in the South African economy, transporting a wide range of fuel products including petrol, diesel, jet fuel, crude oil and methane rich gas through some 3000 kilometres of high pressure steel pipelines criss-crossing the eastern part of South Africa. The petroleum pipeline infrastructure as a whole comprises a lot more than pipelines. It includes feedliners, pumps and motors, storage tanks, the pipeline management system, servitudes, mainlines, etc. Petronet is able to play this role through synergic linkages with other Transnet subsidiaries such as Spoornet, actually reducing the Inland Transport Costs (ITC) as a component of the pump price of petrol between 1993 and 2003. In the medium to long term, as the economy develops Petronet will run out of capacity, needing to rollout new pipelines or embarking on debottlenecking projects. This points to its indispensable and necessary future role as a public entity.

The credibility of the government’s micro-economic reforms will largely be depended on whether they measure up to their stated goals i.e. lowering the input costs, maintaining and creating more employment opportunities.

The Congress of South African Trade Unions (Cosatu) and the Chemical, Energy, Paper, Printing, Wood and Allied Workers’ Union (Ceppwawu) are completely opposed to the liberalisation of the liquid fuels industry. We maintain that the restructuring of the State Owned Enterprises (SOEs) such as Petronet, does not have to lead to changes in their ownership from public to private and their role in the economy. Instead, the government must enhance the developmental role of SOEs such as Petronet, including the relevant regulatory framework in order to ensure affordable tariffs and continued subsidisation of the remote and poor markets and protection of synthetic fuels. Privatisation or contracting-out of the petroleum pipelines network (as in other sectors) could result in job losses, unsafe working conditions and environmental degradation. Black Economic Empowerment (BEE) should not be used to justify such policies unless a comprehensive costs-benefits study is conducted by an independent party to develop a suitable restructuring proposal for the industry.

The pipeline network is in itself a mode of transport, operating in a skewed competition with other modes, particularly the private sector road tankers. Despite the negative externalities caused by these road tankers, especially in relation to their adverse impact on the road infrastructure, they are still unregulated and incur no related extra costs. This situation is compounded by the fact that the road tankers are more rapid in their delivery and therefore unfairly advantaged compared to the petroleum pipelines network.

2 Procedural Concerns
2.1 NEDLAC Engagement
Cosatu and Ceppwawu are concern that the process that is followed by the Department of Mineral and Energy (DME) in the restructuring of the liquid fuels industry is at variance with its own policy as stated in the 1998 White Paper on Energy. It is inappropriate for the department to steam-roll the introduction of the sector regulator when the restructuring policy has not been concretely dealt with. The fact that the Bill is now introduced ahead of the industry restructuring legislation in the form of the Petroleum Products Amendment Bill underscores our point. According to the 1998 White Paper on Energy Policy, any restructuring endeavour in the liquid fuels sector will have to involve a consultative engagement with labour at NEDLAC;

"Such legislation will be discussed at NEDLAC in accordance with NEDLAC Act. The labour implications of market-related restructuring will be addressed jointly with the Department. Due cognisance will be given to any relevant NEDLAC agreements".

In the letter written to the Director General, Mr H.T. Burger in 2001, responding to the publication of the Draft Petroleum Pipeline Bill we concluded our comments by saying;

"We would like to have further engagement with the DME on the Draft Bill before it is processed further. This would allow us to clarify certain issues which are not clear at this point and to pursue the comments and the proposals we raise below. We suggest the DME propose suitable dates for such an engagement".

We reiterate this call to the DME and propose that the Portfolio Committee on Minerals and Energy recommend that the NEDLAC processes be followed in accordance with the government’s policy.

3 Substantive Concerns

3.1 The Petroleum Pipelines Regulator
Despite the fact that the government intends to establish a single energy sector regulator, the Bill’s objective of establishing a Petroleum Pipelines Regulatory Authority perpetuates the fragmentation and duplication of the regulatory authorities in the energy sector. This is a needless waste of scarce resource. Cosatu believes it is important to have a clear regulatory framework in relation to the state-owned pipelines, refineries, petroleum products wholesale and retailing industry as well as for the pipelines that may be constructed by the private sector or jointly with government in the future.
3.2 The Privatisation of the Pipeline Network
Chapter 1, section 2 (a) states that one of the Bill’s objectives is to promote competition in the construction and operation of the petroleum pipelines, loading and storage facilities. Cosatu believes that the liquid fuels industry is a strategic sector for South Africa, given its centrality in meeting the country’s energy needs and sensitive security considerations. The crude oil and petroleum products are the lifeblood of the economy whose secure supply through the strategic arteries of the pipeline network entrusted to Petronet, must be maintained in public hands.

In its operation and maintenance of the pipeline network, Petronet delivers a public service which could be under-supplied in the hands of private companies for whom the rate of return determines the continued operation or otherwise of a particular pipeline. Such considerations could deprive society the positive externalities and benefits in other socio-economic areas arising from Petronet’s role in meeting the energy needs of the country as a whole and the future extension of the infrastructure to the under-served regions. There is still an important developmental role that a public entity like Petronet could play in supporting the government’s industrial development strategy. The private sector companies operating in the sector as common carriers, may not have the synergic advantage Petronet has with Spoornet in linking their infrastructure to extend their supply areas and thus potentially they could be used to further support the industrial development of the country in areas needing infrastructure development.

The pipeline network industry is highly capital intensive with very limited employment generation potential. Despite its R3.4 billion net worth, Petronet employs only 585 individuals. This ratio can only become even worse if Petronet’s assets are to be privatised, given the diseconomies of scale that arise when a number of operators share a limited market, as opposed to where a single operator like Petronet serving a bigger market.

One of the primary objectives of the government’s microeconomic reforms strategy is to ensure that the restructuring of the public corporations would lead to the lowering of the input costs such as liquid fuels in order to enhance the competitiveness of our economy. The introduction of the private sector in the petroleum pipeline construction and operations, loading and storage facilities is bound to introduce a full cost-reflective pricing system which includes very lucrative rates of return. The South African economy is currently cushioned against the full impact of the real cost of the transportation of liquid fuels as a result of the discounted rail transport from the intermediate to the distribution terminals. The introduction of such costs-recovery pricing will immediately take away subsidisation and lead to higher ITC costs and therefore petrol and other petroleum products costs. Inadvertently, this approach to restructuring could militate against the government’s monetary policy objective of maintaining a lower inflation level. The participation of several private common carriers will negatively influence the transportation costs with the forfeiture of economies of scale which a single operator derives in such a natural monopoly context as the operation of petroleum pipelines.
In addition, Cosatu and Ceppwawu are concerned about the implications of the deregulation of the industry regarding;
the environment, health and safety of the workers in the industry and adjacent communities in which the pipelines are buried.
the security of supply and security of the infrastructure itself.

Table 1: Petrol Price: 93 Octane: PWV Area, 15 September 1993

Element	SA cents per litre	%
Basic Petrol Price	56.14	30.85
Inland Transport Costs	10.90	5.99
Retail Margin	15.60	8.57
Wholesale Margin	14.06	7.72
Multilateral Motor Vehicle Fund	9.00	4.95
National Road Safety Council	0.20	0.11
Equalisation Fund Levy	7.00	3.85
Custom and Excise	4.00	2.20
Delivery Costs	3.50	1.92
Fuel tax	60.90	33.46
Slate levy	0.70	0.39
Total	182.00	100

Table 2: Petrol Price: 93 Octane: Gauteng, 07 May 2003 – 03 June 2003

Element	SA cents per litre	%
Basic Petrol Price	169.80	43.76
Inland Transport Costs	12.30	3.17
Retail Margin	35.00	9.02
Wholesale Margin	28.29	7.29
Road Accident Fund	21.5	5.54
Equalisation Fund Levy	10.0	0.27
Custom and Excise	4.0	1.03
Delivery Costs	5.10	1.31
Fuel Tax	101.0	26.03
Slate Levy	1.0	0.27
Total	388.0	100

Source: Petronet, 2003.

Being such a significant mode in the transportation of liquid fuels, Petronet’s pipeline network transports approximately 40% of the South African fuel requirements and 100% of the NATREF crude oil requirements. In comparing table 1 and 2, it could be seen that over the past 10 years, the petrol price has grown by 4.6 % year on year, whilst the actual transport costs were maintained relatively flat, growing at 1.2 % year on year. This has seen a decline of transport costs as a percentage of the petrol price from 5.99% in 1993 to 3.17% in 2003, despite a slight change in the composition of the components of the prime price of petrol with the discontinued inclusion of the National Road Safety Council levy.

4. Recommendations
4.1 Public policy objectives of the petroleum sector
Cosatu and Ceppwawu believe that the key objects of government’s policy for the sector should include the following;
The setting of appropriate tariffs throughout the country, which are geared towards affordable energy supply for consumers, particularly the poor, as well as affordable energy for South Africa’s industrial development;
Ensuring consistency in supply;
Promotion of healthy and safety conditions in the sector, particularly for workers and affected communities;
Maximising the benefits of the industry for the entire South African economy, including optimising the contribution of the industry to the fiscus;
Contributing to the national imperative of maintaining and creating employment and promoting constructive labour relations;
Maintaining and promoting small business opportunities, with adequate protection of labour standards; and
Ensuring equitable access to the pipelines.
4.2 An Independent Study of the Liquid Fuels Industry
It would appear that the current DME’s restructuring process of the liquid fuels industry is ad hoc at best and free-market doctrinaire at worst. The restructuring of the liquid fuels sector (as with any other sector in the economy) must be informed by;
the concrete realities prevailing in the industry, in terms of the performance of particular public entities such as Petronet, the rail and road carriers.
the developmental objectives of our society, and
3. a comprehensive costs – benefits analysis as to a suitable restructuring model to be pursued, which enjoys broad-based support of the stakeholders, including that of labour.
4.3 A single energy sector regulator
The energy sector already has the National Electricity Regulatory Authority and the National Gas Regulator, Nuclear Regulator and the Petroleum Pipelines Regulatory Authority are envisaged. Cosatu and Ceppwawu support the creation a single energy regulator that is able to link the policies of different energy sectors through their regulatory divisions.
In addition, the jurisdiction of the petroleum regulatory division must;
extend to the currently existing privately owned pipelines linked to the refineries, wholesalers, retailers, etc.
extend to other forms or mode of liquid fuels transportation such as road and rail in terms of their tariff structures and also taking into account the former’s impact on the national road infrastructure.

We reiterate our long-standing call for a National Energy Policy Council (NEPC). The NECP would be a tripartite institution, representing the NEDLAC constituencies and dealing with all the branches of energy sector. This would provide an institutional forum for developing energy policy in an integrated, comprehensive and consultative manner.
4.4 Powers and duties of the Authority
Cosatu finds it contradictory that whereas it is the Bill’s objective to introduce competition on the assumption that such competition will lead to efficiency gains and therefore the decline in the costs for the consumers and industry, it still looks to create a mechanism for setting or approving tariffs and charges. Regarding the authority’s powers and duties to setting or approving of tariffs and charges, we proposes that Section 4.(1)(f) reads as follows;
Set or approve tariffs and charges in a manner that would promote all-round economic development, including ensuring affordable access for the poor and end-users in the remote areas.
4.5 Meetings of the Authority
Section 8. (8)(b) allows for decisions taken at informal meetings of members of the authority to be legitimate providing such decisions are "recorded in writing, signed by a majority of the members and submitted for noting at the first formal meeting of the Authority following the decision". Cosatu and Ceppwawu have grave concerns regarding this clause, especially in the context of a deregulated sector, with competitive operation of vested interests and in the light of section 8. (8)(a), which basically opens the authority’s meetings to the public. This may inadvertently open the way for practices that fall short of values and ethos of transparency and accountability, and may lead to undue external influences. Cosatu therefore proposes the deletion of section 8 (8)(a).
4.6 Reporting by Authority
Section 14. (2) deals with the key issues that the authority’s reports must include. We proposes that section 14.(2)(e) reads as follows;
Labour, socio-economic, health, safety and environmental issues in the petroleum industry.
4.7 Conditions of licence
Amongst other conditions that must be met for the licence to be granted, we proposes that Section 20(1)(x) to read;
Labour, health, safety and environmental standards required by the Authority, including incorporating by reference any existing standard in terms of other legislation.
4.8 Health, safety, security and environment
Cosatu and Ceppwawu propose that section 27 to read as follows;
The Authority may require a licensee to submit a guarantee, or make such other arrangements as may be acceptable to the Authority, to ensure compliance with any condition relating to labour, health, safety, security or the environment, prior to, during or after the period of validity of the licence.

4.9 Setting and approval of tariffs
Section 28 of the Bill deals with the setting and approval of tariffs. This section is mainly technical and does not set out the principles which should guide the setting or approval of tariffs, such as the need for affordable energy for households. We propose that this should be incorporated here, either explicitly or by cross-referencing.

5 Conclusions
In the absence of a meaningful consultative engagement in the sector or at NEDLAC and a comprehensive and rigorous analysis justifying the introduction of private sector common carriers, there is no basis to assume that Petronet’s operations are inefficient and that competitive private sector operation would yield even lower transport costs. In fact, the Bill only explains the need for the liberalisation of the petroleum pipeline operations, loading and storage facilities by saying that now there is "a possibility that parties other than national Government may become active in the ownership and operation of petroleum pipelines". Clearly, by failing to justify the shift to a new policy paradigm on the basis of the failures of the current performance of the liquid fuels industry, only suggests free-market doctrinarism.
It is necessary that the DME as soon as possible initiate legislation establishing a single energy sector regulatory authority rather than the seeming perpetuation of fragmentation and duplication. The fact that the government’s liberalisation is also intended to eliminate cross-subsidisation and the protection of synthetic fuels from external competition could spells disaster for the sector in general, the workers’ jobs in particular. Cosatu and Ceppwawu are implacably opposed to the government’s doctrinaire restructuring of the SOEs and the economy through its microeconomic policy reforms. It highly unlikely that either the desired lower input costs for the economy or increased growth and employment are going to be yielded by these policies. The government’s objective of promoting coastal refining and petrochemicals hub from which some value matrices could be exploited as part of its Integrated Manufacturing Strategy could be better catalysed through public entities such as Petronet and Spoornet.