Motorists paying record prices for fuel — R7 a litre in the case of Gauteng — will be more than a little surprised to learn that earlier this year an inter-governmental committee, after five years of deliberation, recommended to Cabinet that the system — where synthetic-fuel manufacturers were required to pay back monies received if oil prices were above $28,70 a barrel — be reinstated. Oil prices are trading at record levels of $76 a barrel this week.
If the recommendation had been implemented, funds would be flooding into the equalisation fund at current oil prices. These, in part, could be used to ease fuel-price pressures.
The no-profile committee, known as PVM, recommended that the pricing system, which was used until 1995, be reinstated.
Synthetic fuel producers Sasol and Mossgas received payments from the equalisation fund if oil prices were below $23 a barrel. They were required to pay into the fund above $28,70 a barrel in terms of a claw-back provision until all payments received had been repaid.
Sasol received between R6-billion and R6,8-billion in such payments between 1979 and 2000, and Mossgas R1,5-billion.
The existence of the PVM committee is disclosed in a discussion document released last month by the task team that is investigating the fiscal structure as it applies to the fuel industry. The team’s brief includes the possibility of applying windfall taxes.
The task team says “this PVM report recommended the maintenance of tariff protection along the lines of the dispensation preceding 1995 to 2000 and also recommended the reintroduction of a ‘clawback’ provision.
“The Committee had just finalised its recommendations and had prepared a Cabinet memorandum when the minister of finance announced in his 2006 Budget speech the appointment of a task team. The Cabinet subsequently requested that certain aspects of the recommendations be reworked.”
The windfalls task team says when prices rose above $28,70 a barrel “Sasol was required to refund the equalisation fund 25% of its revenue until the slate of cumulative benefit of protection received since 1979 was wiped clean. The slate was never wiped clean.
“It is noteworthy that this was achieved by means of a ‘gentleman’s agreement’,” says the report of the task team. “When in 2003 Sasol believed that it no longer required tariff protection it refused to reintroduce such a ‘gentleman’s agreement’.”
The system was replaced by a decision of Cabinet in December 1995 and a new dispensation, based on the National Economic Forum-commissioned Arthur Andersen Report, was introduced.
This new system differed from its predecessor by the removal of an absolute price floor ($23), and its replacement with a floor price which declined over time. In exchange for this declining floor price and loss of an absolute floor price the “clawback” mechanism when prices were high was abandoned. This new dispensation, which meant that the support or floor price declined to $16 a barrel prevailed until 2000 when it was to be reviewed and a report given to Cabinet as to whether or not further protection was warranted and, if so, in what form.
It is not clear why the PVM committee took so long in its deliberations, what Cabinet did not like about its recommendations and why Minister of Finance Trevor Manuel announced a new investigation at more or less the same time as the last one finally finished its work.
Requests to the Department of Minerals and Energy for clarification were not successful. The Treasury referred inquiries to the department. Sasol and the South African Petroleum Industry Association said they had not seen the PVM report.