South Africa’s liquid fuels industry could face serious reform and possible windfall taxes, according to a discussion document released this week by a Treasury task team.
The report, which suggests that Sasol generates “supernormal profits” at the consumer’s expense, will be followed by a public hearing before recommendations are forwarded to Finance Minister Trevor Manuel.
In May this year, Manuel appointed a task team to investigate possible reforms to the fiscal regime applicable to windfall profits in the sector, particularly the synthetic fuels industry.
This week, the task team released a discussion document that outlines possible windfall taxes, and how they could be applied to industry players. It also suggests reform measures for the regulation of the sector.
The document makes no recommendations, merely outlining the case for possible action and raising a number of questions for further investigation.
“We have refrained from expressing and concluding views in this document. This would be premature at this early stage of the investigation,” the report says.
The report provides a detailed background of the development of the liquid fuels sector and clearly defines super- normal profits, windfalls and economic rent, using case studies from other countries which have confronted the same issues.
The report says that windfall taxes can often be considered when service industries with market power, which are subjected to regulatory measures based on a range of future expectations, undergo change.
“It is the fact that firms are deemed to generate supernormal profits at the expense of consumers with no alternatives that is generally considered inappropriate and attracts political attention.”
The report calls for a review of the basic fuel price (BFP) mechanism, stating that there appears to be a discrepancy between the BFP and true import parity prices, resulting in excessive profits for industry players.
“It is assumed that the regulator did not intend to put in place a regulation designed to generate profit in excess of normal profit; this is supernormal profit,” says the report.
The report also questions how the BFP may benefit synfuel manufacturers who do not have crude oil as their major input cost — even though the crude oil price is reflected in international petroleum prices used to calculate the BFP.
The report says liquid fuels provision should be considered a basic infrastructure of the economy and an essential service to consumers because of the lack of alternatives. It adds that the historic role of taxpayers and consumers in funding the establishment of the sector needs to be taken into account.
“Concerns exist that the present dispensation benefits the synthetic fuels producers and their shareholders disproportionately, at the expense of the consumer and taxpayer,” it says.
“South African taxpayers and motorists have historically supported the synthetic fuels industry through sizeable subsidies, when the administered fuel price has been too low to recover the costs of production.”
The report calls for further investigation into the tariff protection systems used to protect synfuels manufacturers when the oil price was low.
As reported by the Mail & Guardian last year, synfuels giant Sasol received billions of rands in subsidies from the South African government as part of a tariff protection system in place from the 1980s to 1995.
As a result of this protection, Sasol received subsidies when the oil price was below $23 a barrel. However, once the oil price rose above $28,70 Sasol was, according to the agreement, expected to repay these subsidies.
In 1995, the government decided to introduce a new dispensation based on a report prepared by Arthur Anderson, which did not include the provision stipulating that Sasol should continue to pay into the Equalisation Fund while oil prices were high.
The report questions whether the government intended the repayments by Sasol to balance out the subsidies it received, and whether the Arthur Anderson model delivered greater benefit to the company than was intended.