28 November 2014
Opinion & Analysis
Anthea Paelo, Genna Robb and Thando Vilakazi
DOES the strategic importance of maintaining security of supply necessarily trump policies to increase entry and participation in SA’s liquid fuels industry? The evidence from recent studies suggests it does. Historically, the sector has been dominated by the multinational fuel majors and there has been muted progress in introducing new, black economic empowerment participation. This is despite the stated objectives of the Department of Energy and the principles of the Liquid Fuels Charter, which advocate wholesale transformation.
A recent study by the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg focuses on the barriers to entry at the wholesale level. Based on interviews with wholesalers and industry stakeholders and associations, the study identifies constraints in the regulatory and policy environment as critical barriers to entry. Access to a reliable supply of fuel can also be challenging when the major oil companies maintain a tight hold on control of the supply chain.
This results in many new wholesalers failing, while survivors are generally not effective competitors to incumbent firms Sasol, Shell, Engen, BP, Total SA, Chevron, and state-owned PetroSA. Only about 10% of the wholesale licences that have been issued are in productive use. This is partly because it is difficult for wholesale companies to compete with their suppliers. The major oil companies are not only present at the refining level of the industry, but in distribution. This means that wholesalers that can present a competitive threat to the "‘majors" could face a squeeze on their supplies of fuel if there aren’t other sources available.
This is made worse by the fact that the incumbent oil companies control the key infrastructure for landing, refining, storing and distributing fuel imports. As it stands, the refineries have aged and any competitors looking to bring in fuel from alternative international sources in direct competition with the major oil companies are constrained by the lack of alternative storage facilities.
This would not be problematic if there was greater competition between the incumbents. However, a Competition Act exemption granted to these firms in 2009 in effect sanctions the already close co-operation and tacit co-ordination between them for the purposes of ensuring security of supply.
This week, the National Energy Regulator of SA is evaluating an application by Burgan Cape Terminals to erect new fuel storage and distribution facilities in the port of Cape Town. This is an important initiative that would make it possible for independent firms to import finished fuel product within the import policy guidelines. The charter recognises infrastructure constraints as prohibitive to the growth of emerging companies, and a review of the charter commissioned by the department in 2011 showed little progress had been made towards alleviating this constraint. The question now is how the regulator and the department, cognisant of transformation objectives, the need to ensure long-term security of supply, and the potential benefits of reducing the price of fuel to industries and consumers, will balance the need for greater competition and entry with the short-term interests of incumbent firms. In terms of ensuring security of supply, the ability to import and distribute fuel in a more competitive environment using efficient infrastructure and logistics is likely to make the ability to refine fuel domestically less critical.
Control over what are called "essential facilities" in the Competition Act is one of the primary constraints to changing the structure of SA’s economy.
In this sector, the real losers from this state of affairs are farmers, industrial users and, ultimately, consumers, as high fuel prices feed through directly into the cost of goods. The concomitant losses also accrue to wholesalers and other small downstream businesses, which, without the space to grow their businesses and become effective competitors, cannot expand their output, improve their competitiveness, and hopefully contribute to job creation.
The plight of wholesalers in this context is only part of a story in which the overall structure of key markets needs to change towards greater rivalry on merit, if the objectives of the National Development Plan are to be achieved in the long term. Until then, the status quo, in which the interests of incumbents trump those of transformation and participation, is likely to persist.
• The writers are CCRED economists.