A big shake-up in the structure of the petrol price in South
Africa will take effect this year, but the move is not expected to offer
much relief to cash-strapped motorists.

South Africa's highly regulated petrol price is influenced by supply
and demand for petroleum products in international markets, combined
with the rand/dollar exchange rate. On March 5 consumers felt the full
effect of these factors when the pump price jumped to a record high of
81 cents a litre.

But the fuel component is only about 65% of the price that motorists
pay. The remaining influences are linked to margins for intermediaries
such as wholesalers and retailers.

Wholesalers are mainly the big oil companies, which often also own
petrol stations. Retailers operate the petrol stations. There are about
5 000 retailers countrywide, but only 30% own the facilities outright.
The remainder are servicing loans or leasing the sites from wholesalers.

Although the petrol price is regulated at the retail level, the
diesel price is not. There have been calls for regulations to be used to
set maximum petrol prices and also to allow retailers to cut the price
as they can do in the case of diesel. However, this reform is not under
consideration by the energy department. (See "Transformation key to
liberalising the sector").

Concern among retailers
The regulatory accounting system (RAS),
which is now partially in place, will be fully implemented in December.
The system, which is based on assets, is used to determine margins for
wholesale, storage, handling and distribution.

Although there is concern among some retailers that wholesalers will
take advantage of the system, the energy department has threatened to
impose more regulations should stakeholders not play ball.

The RAS seeks to introduce transparency into the market as well as
root out inefficiencies and uncontrolled costs. The system has been
phased in over the past two years and the final measure — a decrease in
the wholesale margin and an increase in the retail margin — will be
implemented in December.

The claim is that the new formulas will benefit consumers in the
longer term. The current structure is said to encourage over-investment
in petrol stations and inflate marketing and operating costs.

The point of the restructuring is twofold — to ensure that there is
no duplication or cross-subsidisation of costs and to make returns on
investment more transparent.

The intention is to favour retailers over wholesalers or those with
more assets. Margins were previously determined by aggregated costs
submitted by wholesalers and retailers, meaning that motorists paid for
inefficiencies in the value chain.

The new system will benchmark all the costs so that there will be no
room to recover extra operational or marketing expenses. It will also
ensure parties are not rewarded for over-investing in assets as they had
done previously.

But, contrary to expectations, retailers are deeply concerned about the new margins.

Reggie Sibiya, chief executive of the Fuel Retailers Association,
said there were potential effects for retailers and small businesses
were ­particularly vulnerable.

Under the old system, wholesalers enjoyed "double dipping", Sibiya
said. The wholesale margin not only provided a return on assets, but oil
companies also profited through the rentals of their petrol stations.

From December, retailers will enjoy a higher margin to provide a
better return on assets, but Sibiya said retailers were concerned that
oil companies will simply push up the cost of rentals to recover profits
the new system will take away.

Now that the RAS is imminent, contracts between wholesalers and
retailers are beginning to be renegotiated. Contracts are meant to be
renegotiated based on the matrix of the system. But "negotiations are
basically coming to a halt because oil companies are not sticking to the
spirit of [the system]", Sibiya said.

Avhapfani Tshifularo, executive director at the South African
Petroleum Industry Association, said the old system calculated the
required return on investment and passed this on to oil companies
through generous wholesale margins.

The wholesalers, in turn, would pass this on to retailers in the form
of low rentals and other mechanisms such as interest-free loans, he
said. "Oil companies were not charging market-related rentals — now they
have to renegotiate their agreements," Tshifularo said. And the market
would now set the correct rental price, not the wholesaler.

Muzi Mkhize, chief director for hydrocarbons at the energy
department, said if parties could not work together responsibly, the
department might have to impose further regulation.

"I don't think their [retailers'] concerns [about whether the
wholesalers will negotiate in good faith] is baseless at all," Mkhize
said.

"What concerns me is that the behaviour of the industry has driven us
to more regulation. If they give us cause … we may have to go in and
regulate, but it is not something we want [to do]."

Mkhize said wholesalers could operate profitably on the new margins
set by the department and noted that a technical committee had been set
up to look at the implementation of the new system.

Sibiya said higher costs imposed by the wholesalers would cut into
the entrepreneurial margin — an additional 20% on gross profits allowed
by the department to protect the profit margin for entrepreneurs.

The estimated cost of acquiring a service station is R6-million,
Sibiya said. If higher rentals eat into the entrepreneurship margin —
which is intended to encourage investment by small businesses — many
retailers could go out of business.

The market was already oversaturated and retailers were being squeezed by the volume per outlet.

Sibiya said bank charges made up 5% of transactional costs, and these
go up with the petrol price. Moreover, operating costs are only
reviewed once a year.

"The costs we recover are 12 to 18 months old," said MC Lamprecht,
chairperson of the Petroleum Retailers Alignment Forum. "The
entrepreneurial compensation acts as a reward, but is also a bit of a
buffer against the regulatory lag."

In renegotiating contracts with wholesalers, Lamprecht said, the
forum's members had experienced differences in interpretation and
opinion from the oil companies relating to the new regulatory system.

"It makes us wary and uncomfortable, although in some instances there
has been an acceptance of [the Regulatory Accounting System]."

"The [energy department] is driving the agenda of transformation within the sector," Sibiya said.

"But because of high gearing, they [historically disadvantaged South
Africans] can barely make it with the current entrepreneur margin.

"Oil companies, in their behaviour, are just sabotaging
transformation —giving smaller-volume sites to historically
disadvantaged South Africans and now wanting to take the entrepreneur
margin. It's a recipe for disaster," Sibiya said.

Transformation key to liberalising the sector
​Government has
made it clear since 1998 that deregulation is at the top of the
liquid-fuels policy agenda — but 15 years later the transformation of
the ­sector remains a key hurdle if ­discussions about liberalising the
market are to begin in earnest.

Avhapfani Tshifularo, executive director of the South African
Petroleum Industry Association, said deregulation was not part of
current discussions "at all". Issues such as ensuring the security of
supply were more ­pressing, he said.

Muzi Mkhize, chief director for hydrocarbons at the energy
department, said a move to maximum pricing or the deregulation of petrol
pricing would only happen once the sector had been transformed.

"We are working to build up a system which can be transparent: when
you can see where the money flows … and have arms-length oversight. You
cannot have it [deregulation] when you are building such things."

Gary Ronald, spokesperson for the Automobile Association, said
deregulation of the petrol price would put far too many jobs at risk and
was simply not worth the trade-off for paying a cent or two less for a
litre of petrol.

Tshifularo doubted that setting a maximum price would bring the
consumer price down. "Even if you have a maximum price, that maximum
will still be increasing."

Reggie Sibiya, chief executive of the Fuel Retailers Association,
does not believe the industry can regulate itself. Only once empowerment
took effect could a discussion about deregulation take place, he said.

The Democratic Alliance's spokesperson on energy, Lance Greyling,
said the party supported the liberalisation of the market in principle,
but that dynamics such as market dominance or job losses needed to be
considered first.