How the fuel price has been politicised

Image by © Imaginechina/Corbis

Oil companies shocked by minister Jeff Radebe’s intervention.

A crucial element of President Cyril Ramaphosa’s New Dawn is to improve policy certainty to create an environment conducive to investment.

However, it seems policy certainty is the very thing that was sacrificed when government intervened and absorbed a fairly moderate fuel price hike a month ago.

On September 3 energy minister Jeff Radebe announced that fuel prices for September would remain unchanged bar a 4.9c per litre increase in the retail margin for petrol to provide for wage increases for some petrol station staff.

The intervention applied to the prices of petrol, diesel, paraffin and liquid petroleum gas (LPG).

This means that somehow government protected the consumer against an increase of about 30c per litre.

Nevertheless, the prices were at record levels. The inland petrol price, for example, rose to R16.03 a litre in August from R11.24 in January. Coastal prices increased to R15.44 per litre from R10.83 at the beginning of the year.

Radebe did not disclose in his statement exactly how his capping of the fuel prices would be funded, save to say it was a “once off temporary intervention”.

Department of Energy (DoE) director for fuel prices Robert Maake subsequently told Engineering News that the intervention was to provide some relief while government finalised a longer-term intervention strategy. The strategy should be finalised by the end of September in line with a Cabinet resolution, he said.

At a background briefing to the media last week the South African Petroleum Industry Association (Sapia) shed some light on the mechanism the minister used for his intervention and what the consequences would be.

According to Sapia executive director Avhapfani Tshifularo, government did consult oil producers through this industry body before announcing the decision. Although Sapia apparently accepted the move, it is clearly very uncomfortable with the whole business.

To understand what happened one should first understand a mechanism called the Slate Levy Trust Fund.

This is a self-adjusting mechanism aimed at mitigating the possible under-recovery of fuel prices due to the difference between the average price oil companies pay for fuel on the international market and the revenue recovered from the retail market where government sets the price once a month.

The price on the international market fluctuates daily and it would be impossible to exactly match the average price industry pays during a specific period to the retail price charged during the corresponding period.

To mitigate the risk, companies are entitled to claim from the fund for such under-recovery and are compensated from it. There is, however, a lag of about a month and they are not paid interest.

The fund only deals with under-recovery, not with over-recovery.

When the balance of the fund dips to a negative R250 million, a levy is added to the fuel price to have it replenished. If the balance is too low to refund the oil companies, the claims remain live until the fund is replenished.

The mechanism was implemented in terms of regulations in 2009 and has worked well ever since, according to industry sources.

What happened in August is that the ministry convinced Sapia that there was money in the Slate Levy Trust Fund to refund oil companies for the under-recovery his decision forced upon them. This eventually amounted to more than R500 million.

On the face of it, nobody was prejudiced.

But it’s not that simple.

Clearly, the intervention would result in a lower fund balance that would have to be replenished at a later stage, most probably in November. In a rising oil price environment, this could result in another gigantic increase in that month, following the R1.00-odd expected in October.

And it goes beyond that.

As in any other industry, oil companies assess their risks before investing, and the frequency and extent of under-recovery would be a major factor in assessing such risk.

Having a transparent set of rules governing the fuel price makes it easier to take a view on this risk and it is on that basis that companies decide whether they will proceed with their participation in the local market or not.

What the minister did was to deviate from the rules and force an under-recovery when it should not have occurred in terms of the rules. While the companies would eventually be refunded, it does impact their cash flow and introduces additional risk – that of political interference.

Having a politician fiddling with one’s cash flow is a fact too ghastly to contemplate for any business.

Radebe did say this was a once-off, but the way the international oil price is going, and in the build-up to a crucial national election, he will be faced with much more compelling conditions to intervene in the coming months. The pressure from his cabinet colleagues could become unbearable. “Come on Jeff, you did it once before and it worked …”

A further complication is that the LPG suppliers and other importers of diesel and petrol are not part of the Slate Levy mechanism and there is no way for them to recover their lost revenue.

Whether Radebe’s intervention was even lawful can be seriously questioned. Even though the Petroleum Act gives the minister of energy the authority to set the retail fuel price, it is doubtful that he has any discretion to deviate from the rules that he set formally to exercise that authority. What he should do is change the rules if they have become inappropriate in his view.

Whether this really was a once-off, and what the “longer-term intervention strategy” might be, remain to be seen.

The fact is, our fuel price has just been politicised and an industry crucial to the South African economy has received a shock, with regulatory certainty making way for populism.

That is exactly what Ramaphosa promised would not happen in his New Dawn.

Brought to you by Moneyweb

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