An address by the outgoing Chairman of SAPIA
It is my privilege, on behalf of the member companies of Sapia, to present to you its second annual report. The report bears testimony to the progress of the Association because, while the first report was dedicated to destroying the enforced secrecy of the past, this one is dedicated to building a new vision for the future.
Sapia is a young organisation. It is as young as the new democracy which allowed for its formation, and its formation sustains and supports the new democracy. Sapia has been formed in the middle of an historic period of change; in this period when transformation has become the gauge with which all facets of South African life are measured. But for change to succeed, new ideas and new attitudes are necessary. Sapia, itself a new concept in local terms, is one of those seeking to lead the way in new ideas for a new era in our industry.
We believe change has come in three waves, three five-year periods, beginning with the last years of the old order. The 1985-1989 half-decade brought states of emergency, with mounting conflict, confrontation, sanctions and secrecy. The next half-decade, 1990-1994, was the time of reform. The current half-decade leads up to the 21st century, and offers the opportunity of true transformation, growth and exciting development. It is an opportunity which has to be seized.
The year 1995 marked the beginning of this promising new era - though the process of birth and development can be painful as well as fruitful, as the issue of profit margins and lack of national energy policies in 1996 proved.
The year under review also marked the beginning of a new relationship between ourselves and the new government. It is a burgeoning relationship which we hope will, in the interests of all, lead to better understanding and a better working relationship guided by a common vision for the development of the industry and the new South Africa.
The third significant long-term change wrought in 1996 was the ushering in of new attitudes, offering new ways in which all of us can operate for the good of the country as a whole.
In this annual report, my colleague, the current chairperson of Sapia, gives a vision of the new era before us. But certain fundamental preconditions need to be fulfilled before the country is ready to achieve it. Reaching national goals will require a new dispensation involving co-operation, compromise and mutual understanding among all role players. No role player will have it all his or her own way.
In 1996, the change from a transitional government to normal democratic rule caused, among many local and international investors, a downward turn in economic confidence, as change usually does. The slide of the rand contributed to this uncertainty. I am pleased to report, however, that most of South Africa's significant economic players remained optimistic about the future. These included South Africa's major foreign investors - the oil companies.
We are confident about the economic policies forged by the new government, and its will to implement them. A huge combined effort will be required, and there will be setbacks. However, so long as the main pillars of the new government's economic policy - growth and fiscal probity - are in place, the nation's future should be secure. Business needs to contribute to the process, and to support actively the national economic aims. It is pleasing to see that organised business is increasingly recognising this.
We welcome the appointment of the new Minister and Deputy Minister of Minerals and Energy. The Hon. Penuell Maduna, took over the vital portfolio in mid-year. Deputy Minister Susan Shabangu was appointed earlier in the year. Their presence in itself will ease the task of sweeping away past practices and developing a new approach to Energy Policy. The Minister's approach indicates de facto acceptance that the mechanisms controlling the industry in the siege economy of the past require a total reappraisal. We support this view, and understand his concerns about finding solutions which fit the priorities of his government, which ensure economic growth, and which meet the needs of all interest groups in this country, especially the under-privileged.
In 1996, however, the oil industry - so vital to any economy, so close to the pocket of every individual - still dangled betwixt and between the policies of a State-dominated past and the developing strategies of a democratic and equitable future.
Past mechanisms still keep the oil industry rooted in the old regulatory environment, while Sapia's members seek a new dispensation which is more responsive to the needs of all South Africans. The year 1996 saw government and the petroleum industry left idle in no-man's land. The dilemma was illustrated in 1996 when Sapia members, for want of an alternative, applied to government for the margin increase due to them in terms of the regulatory system. No action was taken, though the arithmetic in support of the industry's case was not seriously questioned.
The old rules remain in place. They are not being applied. New rules are required.
The process of formulating a policy for restructuring the liquid fuel industry began four years ago. While some progress can be discerned, no fundamental changes to the previous system have occurred. This policy impasse has created a high degree of uncertainty for the industry. For the sake of the nation as a whole, the situation obviously cannot continue. If South Africa had adequate refining capacity, or if demand was not rising, we could perhaps afford a leisurely transition from the old dispensation to the new. However the nation will soon have insufficient refining capacity, and demand in 1995 and 1996 grew by 6% a year. In the national interest something must be done.
Sapia views the options facing government as:
Sapia's members believe in a free market with free competition. However, Sapia recognises that total deregulation may not meet the needs of all sectors of the nation. Government may decide that a truly free market would not be in the short-term interests of job-seekers and the very poor, and that a degree of official intervention is necessary - it is the norm in most developing countries. Government may then re-examine existing tools to see how they might be adapted to meet the needs of policy imperatives.
The Service Station Rationalisation Plan is currently used to regulate the number of service station sites allocated to various oil companies. It will be necessary to revise the so-called Ratplan to take into account the needs of new, emerging oil companies.
The MPAR formula, which the government used in the past to determine the industry's marketing margin, was developed from price-control mechanisms of the 1970s which were put in place to grant all price controlled industries a reasonable rate of return on assets.
During the course of democratic debate on new energy policy the MPAR issue has been highlighted. Negotiations about this issue have been going on for many months now. It is perceived that this formula protects business interests rather than consumers. It, too, will need to be revised as part of a package for industry to move towards minimal regulation. Sapia members have indicated a willingness to participate in implementing a change.
Any reappraisal aimed at aligning energy policy more closely with the social agenda of our democratic government would obviously include a more searching look at the structure of synfuel arrangements and at the controls inhibiting the oil industry.
Whether Government seeks to scrap existing control mechanisms of the oil industry, or to revise them, Sapia members stand ready to assist with all available capacity, industrial data and relevant information from international markets to aid the decision-making process.
Our core interest is to help develop the country's economy and to establish a fair return for investors, for that is the only way the market can operate and grow. We are not blind to the needs of all other interest groups in the country. A balancing act needs to be performed. Low energy prices are necessary if the needs of the very poor are to be addressed. Reasonable returns are necessary if investors are to be encouraged to commit the substantial sums needed to increase South Africa's oil industry capacity.
Data from Sapia members indicate that no major refining capital expenditure projects were launched in 1995-96. With the current uncertainty on levels of investment return, this is hardly surprising. Greater certainty in national policy and a higher return is essential if long-term planning is to be carried through.
Sapia figures also show that the country is running out of capacity to refine enough petrol to meet national demand and economic growth. The industry would have to address this issue soon, but can do so only when there is certainty about the direction of policy.
A searching reappraisal may be essential to aspects of government policy and plans for restructuring state assets. What has to be taken into account, for instance, is the need for major investment in strategic infrastructures such as oil pipelines. The amount of product moving into Gauteng, by rail and pipeline, is growing by an estimated 20% a year. A restructuring of this strategic state asset may be an appropriate method of attracting new investment and increasing operational efficiencies.
The Government's macro economic plan provides a framework and an opportunity to follow the best course. All that is required in the Energy sector is a new dispensation which is fair to all. It is in the national interest that the government and the oil industry work together to create this new system.
During 1996, much time and effort was spent by Sapia - a less than three-year-old organisation representing a vitally important industry which had suffered decades of enforced secrecy - to encourage transparency, and open dialogue with all South Africans.
Sapia participated actively in all transparent processes to formulate policy geared towards the restructuring of the oil industry. The processes are essential to democracy, and Sapia finds them refreshing in comparison with previous government practices.
At mid-year Sapia published its first annual report, and used the occasion for a public launch of the Association and promotion of its goals (which are listed again in this second annual report). In May, the leaders of our industry and I took time to meet the media in all major centres, and to establish contact with the media, answer questions and provide an oil industry perspective on a range of issues vitally affecting us all.
"Project Transparency" revealed that a policy of openness requires a shift in attitudes - even in culture - in many sectors of society besides our own.
The decline in the aggregate financial returns of Sapia members experienced since 1993 was apparently arrested in 1996 with reported net income after tax rising from R0,8bn in 1995 to R1,4bn in 1996. However, if after-tax stock profits, arising from the increases in oil prices during 1996 of R0,6bn are excluded from the 1996 income, net income after tax was R0,8bn, lower than the R0,9bn of 1995.
Favourable factors in 1996 were good growth of volume and an improvement in refining margins in rand terms.
The failure of government to approve the MPAR margin increase depressed marketing returns, which remained below 10% on the MPAR basis for industry. Sapia members' after-tax return on marketing assets declined from 9.1% in 1995 to 7.8% in 1996. Refining returns, as mentioned above, improved. However this improvement in after-tax returns on assets was from 3.4% in 1995 to 8.0% in 1996.
The combined marketing and refining after-tax return on assets of 7.9%, a figure which includes the stock profits, is insufficient to ensure that the necessary investments in the industry will be made. It is less than can be earned on a bank deposit.
This is a matter of great concern to Sapia and its members. There may be those who feel that if Sapia members do not invest in the necessary capacity others will. We, however, doubt that new investors will be attracted by the returns currently available in this industry. In anticipation of fair returns, Sapia members in 1996 invested R1.4bn, mainly in marketing assets.
The labour unions, like all employees and dependents and suppliers and servicers of Sapia members, have an integral part to play in the growth of the petroleum industry in South Africa. Sapia recognises the need to consult with these interest groups on all matters affecting their well-being. Sapia is not an employers' organisation and does not negotiate with labour on behalf of the industry. However, we welcome the new labour laws passed in 1996 and hope that the Commission for Conciliation Mediation and Arbitration will set a new pattern in South Africa which will avoid conflicts and disputes. The logic of economic development and growth demand such an approach.
Organised Labour - like industry and other large commercial concerns labelled as Business - has a special role to play in helping government to find socio-economic solutions that will help South Africa expand and prosper. Again, balance will be required: a balance between making reasonable profits in order to ensure growth; and ensuring improved conditions and opportunities for the disadvantaged.
The Association is committed to democratic change, economic growth, the upliftment of the under-privileged and the further development of the petroleum industry in South Africa. All these tasks require great effort, determination and nation-wide support for reconstruction and development. They require vision in every sector of the economy and the community. They also require clear, practical, mutually acceptable policies.
Members of Sapia, so competitive in other areas, speak and act in unison on these matters, as they do in achieving the aims and objectives of our Association.
We must all work together to build a stable and prospering South Africa and, to ensure stability, we must also work together to meet the needs of the impoverished communities of our country.