ACTION WITHOUT VISION IS ONLY PASSING TIME VISION WITHOUT ACTION IS MERELY DAY DREAMING BUT VISION WITH ACTION CAN CHANGE THE WORLD NELSON MANDELA

1
ACTION WITHOUT VISION IS ONLY PASSING
TIMEVISION WITHOUT ACTION IS MERELY DAY
DREAMINGBUTVISION WITH ACTION CAN CHANGE THE
WORLD
NELSON MANDELA
2
AGENDA

• Brief Background to Petroleum Products
  Legislation (as we see it)
• Brief Background to the Fuel Retailers trading
  environment in South Africa
• A few results from the current Retail Margin
  Investigation
• Where the Fuel Retailer fits into the Chain of
  Costs
• Threats to the sustainability of the Fuel Retail
  Industry
• Economic Empowerment the role the Petroleum
  Products Amendment Bill has to play

3
BRIEF BACKGROUND TO PETROLEUM PRODUCTS
LEGISLATION

• 1977
• Energy Policy governed primarily by desire for
  greater energy security
• Energy Policy not formally communicated in
  writing
• Specific policy gaps exist
• Gentlemans Agreement
• Unhealthy Imbalance of Power
• Petroleum Products Amendment Bill 2003
• We cannot over emphasize the critical influence
  this will have on the sustainability of the
  industry as a whole
• Not over regulation necessary intervention

4
BRIEF BACKGROUND TO THE FUEL RETAILERS TRADING
ENVIRONMENT IN SOUTH AFRICA

• Classic Oligopoly 5 major companies supply most
  of the approximately 4 800 service stations.
  These 5 major companies own about 45 of sites
  and these sites pump over 55 of the volume
  throughput.
• The industry is overtraded in terms of the number
  of service stations
• This situation will be aggravated by
  SASOL/PETROSAs entry into the market.

5
BRIEF BACKGROUND TO THE FUEL RETAILERS TRADING
ENVIRONMENT IN SOUTH AFRICA

• The Fuel Industry has an undisputed role to play
  in the economic development of the country. It
  is characterized by
• High levels of competition
• Low gross profit margins/High stock turnover
  rates.
• Is capital and labour intensive for both Fuel
  Retailers and Oil Companies

6
RETAIL MARGIN INVESTIGATION BY POTCHEFSTROOM
UNIVERSITYS SMALL BUSINESS ADVISORY BUREAU
(SBAB) ON BEHALF OF THE DEPARTMENT OF MINERALS
AND ENERGY

• At present the Fuel Retailers average driveway
  related gross profit margin has dropped from
  10.3 in 1998/1999 to less than 7.45 in
  2001/2002.
• The SBAB norm is that operating costs should not
  absorb more than 80 of the gross profit. The
  Fuel Retailers average for 2002/2003 margin
  investigation is 90.45.

7
RETAIL MARGIN INVESTIGATION BY POTCHEFSTROOM
UNIVERSITYS SMALL BUSINESS ADVISORY BUREAU
(SBAB) ON BEHALF OF THE DEPARTMENT OF MINERALS
AND ENERGY

• SBABs norm for rental to gross profit is 13.33.
  The average spent on rental was 15.18
• Bank charges in monetary terms show an increase
  of 31.44
• Even after 0.7 c/l Fuel Retailers Margin
  Increase in August 2003, 52 of Fuel Retailers
  will still be in an under recovery situation
  (based on the above principal that not more than
  80 of gross profit to be spent on operating
  expenses).

8
WHERE THE FUEL RETAILER FITS INTO THE CHAIN OF
COSTS
Basic Fuel Price
Manufactures/ Wholesalers
Fuel Retailers Margin
Levies/Taxes
BFP
35.7 c/l
Motorist
(1)
(2)
(3)
NB
Behavior paid for by Motorist
2 (i) Marketing Margin (ii) Refining
Margin (iii) Zone Differentials (iv)
Rentals/Franchise Fees etc
3 (i) Fixed Margin (ii) Increasing Costs
(iii) Only solution Increase average
throughput
We support open and transparent pricing in a
regulated environment
9
THREATS TO THE SUSTAINABILITY OF THE FUEL
RETAILERS INDUSTRY

• TO PROVIDE FOR THE LICENSING OF PERSONS INVOLVED
  IN THE MANUFACTURING OR SALE OF PETROLEUM
  PRODUCTS
• Over Proliferation of Service Stations

10
OVER PROLIFERATION OF SERVICE STATIONS

• Beginning 2003 - FRA Document
• Why is the public at large paying too much for
  fuel?
• CONCLUSION
• As a result of the investment spree of the
  Oilcos and the MPAR guaranteed ROA the
  distribution margin of the Oilcos is
  significantly higher than what it should be. The
  public at large is paying for this through higher
  fuel prices.

11
CONCLUSION (continued)

• The Fuel Retail Industry is severely compromised
  from a profitability perspective because of low
  average volumes caused by the over proliferation
  of service stations resulting from the investment
  spree of the Ohios. This is putting upwards
  pressure on the Retail Margin. The public at
  large is paying for this.
• The MPAR Agreement is essentially fair, however
  it does not control capital expenditure and can
  be exploited. The Agreement needs to be amended
  to prevent additional capital expenditure unless
  need and desirability is proven.

12
OVER PROLIFERATION OF SERVICE STATIONS

• THE WAY FORWARD
• Oilcos should not be allowed to invest in new
  service stations and gain the benefits guaranteed
  through MPAR unless they can prove that they are
  experiencing and have achieved real and
  significant growth on average throughout the
  networks they control. The DME should aim for
  average volumes of around 400 000 litres per
  month on average before issuing permits for new
  service stations

13
OVER PROLIFERATION OF SERVICE STATIONS

• 26th May 2003. DME Leadership Workshop The
  South African Retail Sector
• Number of Sites
• Retail Margins
• Wholesale Margins (MPAR)
• Security of supply in Rural Areas
• Cross Subsidisation of Non Viable Sites
• Empowerment
• Competition
• Appropriate Regulation

14
THREATS TO THE SUSTAINABILITY OF THE FUEL
RETAILERS INDUSTRY

• TO PROHIBIT CERTAIN ACTIONS RELATING TO PETROLEUM
  PRODUCTS
• Relationships between Fuel Retailers and their
  supplying companies
• Changes in wholesalers behaviour
• Sustainability of forecourt activities
• Card initiatives

15
THREATS TO THE SUSTAINABILITY OF THE FUEL
RETAILERS INDUSTRY

• TO PROVIDE FOR APPEALS AND ARBITRATION
• At the present time leases, franchise/rental
  agreements are very one sided
• Werksmans Document
• Based on all the grounds and reasons mentioned
  above, we believe that there is more than enough
  scope and justification for appropriate
  regulations to be made under the presently
  relevant section quoted above in par 1 of this
  memorandum, particularly regulations prohibiting
  certain types of provisions justifiably
  criticised in the Werksmans Principles.

16
THREATS TO THE SUSTAINABILITY OF THE FUEL
RETAILERS INDUSTRY

• TO PROVIDE FOR APPEALS AND ARBITRATION
• Fuel Consultants Africa Draft Commentary
  Comparative Analysis
• Compulsory Arbitration as an acceptance that
  the current situation is equitable and must be
  dealt with

17
THREATS TO THE SUSTAINABILITY OF THE FUEL
RETAILERS INDUSTRY

• TO AUTHORISE THE MINISTER OF MINERALS AND ENERGY
  TO MAKE SPECIFIC REGULATIONS
• Rehabilitation of land used in connection with a
  licensed activity
• Cost of Rehabilitation

18
ECONOMIC EMPOWERMENT

• In 2000 the Charter For The South African
  Petroleum and Liquid Fuels Industry on Empowering
  Historically Disadvantaged South Africans in the
  Petroleum and Liquid Fuels Industry was signed
• Agreed Quotas from RATPLAN to be used for
  HDSAs
• RATPLAN cancelled
• HDSAs been drawn into a vacuum by the targets
• In the main purchasing bottom 60 of sites
• Training inadequate
• Being set up to fail!
• Key Monies becomes an income stream

19
FUEL RETAILERS ASSOCIATION. ECONOMIC EMPOWERMENT
POLICY

• The transfer of skills and knowledge is
  paramount. There must be a strong operational
  involvement. Opportunities of partnership with
  professionals and targeted skills enhancement.
  The industry has a powerhouse of knowledge,
  people must be correctly compensated for sharing
  their knowledge and experience.

20
FUEL RETAILERS ASSOCIATION. ECONOMIC EMPOWERMENT
POLICY

• This transformation must keep the industry
  competitive, sustainable, open and transparent
  and proud.

21
IN CLOSING
Basic Fuel Price
BFP
Levies Taxes
Motorist
Fuel Retailers Margin
Manufactures/ Wholesalers
Amendments To Petroleum Products Act As per Draft
Bill

• Address Balance of Power
• Encourage Common Agendas
• Improve Efficiencies
• Improve Sustainability
• Release Pressure on Motorist