Liquid Fuels Charter audit outcomes

Meeting report

Mr Tseliso Maqubela, Deputy Director-General: Hydrocarbons, Department of Energy (DoE), introduced the DoE delegation. He outlined some of the issues with which the DoE had been grappling. At the beginning of 2012 there had been an increase in fuel prices, which the Department had indicated as being temporary. There had been a subsequent decrease due to external developments, but the price was on the way up again. Developments in the liquid fuel sector, such as the drought in the United States of America (USA), would have an impact on the price. The shortage of corn in the USA would reduce the supply of ethanol and hence of biofuels. Winter was almost over. In the previous two years the winters had been tough on the industry. There had been shortages of liquid petroleum gas (LPG). The industry had improved their ability to supply the local market. The shortages of previous years had not recurred. It was important to continue in this vein so that the economy could be kept supplied. The audit had been conducted by a consultant, and was a snapshot of the situation at the time. The DoE felt that the findings had been objective, pointing out the shortcomings on all sides. The accuracy of these findings had been accepted.

Ms Gosetseone Leketi, Director: Petroleum Licensing, DoE, provided Members with an outline of the presentation. The objective of the assessment had been to assess compliance to the Liquid Fuels Charter (LFC). The signatories had made various commitments. Interviews had been conducted with various stakeholders, including Black Economic Empowerment (BEE) consortium leaders, chairpersons, Black directors and Chief Executive Officers (CEOs), Divisional Heads, historically disadvantaged South African (HDSA) suppliers, retailers and wholesalers. Compliance with several aspects of the LFC was evaluated. The quality of the submissions was rated at between 55 and 90%. The LFC and BEE codes both sought to advance HDSA enterprises. The LFC lacked weighting measures, targets, measurable categories and indicators and a bias towards ownership. It was important to note that the LFC had several key requirements not accommodated in the codes.

Ms Leketi pointed out some key findings. In terms of ownership, Black women only enjoyed 7.3% of voting rights and the economic interest was evaluated at 6.7%. Ownership was found to be the highest scoring LFC element. Black shareholding was 18.9% as opposed to a target of 25%. The representation of Black women was 6.7%. None of the black shareholders had fully fulfilled obligations except for those in one company. Most of black women ownership was through trust beneficiaries or as junior consortium partners. White women were excluded from all deals. Most beneficiaries had only received trickle benefits. Most deals were relatively clean.

Ms Leketi said that management control was the highest scoring element. In terms of top management, 59.1% of directors were in the HDSA group (51.5% black) and 53% of executive management (32% black). However, most of the key decision makers were white males and foreign nationals. The highest portion of HDSA individuals were in human resource (HR), strategy and procurement (but not of crude oil) roles. The highest portion of whites and foreigners were in refinery management, financial and planning functions. Black directors experienced an expectation gap as most were in non-executive positions. Their influence was curtailed by multinational leadership structures. Transformation was not seen as a key focus area. The rotation of foreign CEOs sometimes resulted in a lack of transformation. Chevron and Total had hardly any black representation at executive and few blacks in senior management.

Ms Leketi said that core, priority and scarce skills training was questionable. Learnerships were available in trades such as welding, boiler making, mechanical fitting and professional driving. Internships were being offered in various engineering categories. Most of the bursaries granted were for studies in project management and mechanical and chemical engineering. Most HDSAs were not found in the core scare skill fields, but in other disciplines such as finance, project management and HR. Most interventions were dominated by HDSAs. More males went on overseas training visits. The capacity building element was the second worst performing one. There was a lack of mentorship, overseas exposure, talent identification, fast-tracking and effectiveness reviews. What was described as overseas training referred mainly to attending conferences and short contracts with little long-term exposure. This sector was the worst performing element in terms of broad-based BEE due to the lack of work-based exposure and assessment programmes. Some progress was being made. There was still a lack of artisan training. Another opportunity was being lost due to HDSAs not having the chance to acquire trading knowledge. The average spending on HDSAs had decreased from 71% to 55% since 2006. The expenditure in terms of Rand had decreased as well.

Ms Leketi said that employment equity (EE) and supportive culture was the third lowest scoring element. There was fair progress in terms of black people representation overall. The percentage of women was still too low, especially at higher levels. In one company there was a skewed level of Indian professionals. At all management levels, the black representation was below the economically active population (EAP) target of 87.5%. In terms of supportive culture, there was a lack of awareness of the LFC. Frustration led to a high turnover of black staff. Line managers were seen to be major stumbling blocks. The seniority of dedicated managers had been lowered over time. There was a perception that supportive culture management was superfluous, but HDSA staff, suppliers and staff suggest otherwise. This function was performed by HDSA managers. The implementation was seen as an HR task rather than a line function.

Ms Leketi discussed the findings under procurement. The figures for more than half of the HDSA companies showed that at least 25% of expenditure was on civil and maintenance, transport and service industries. Expenditure on packaging, crude oil purchases, telecommunications, natural gas, other capital expenditure, additives, finance, insurance and coal was below 5%. Procurement from HDSAs was less than 5% for about half of the product lines. Only three of the six oil companies complied with this element, and then one of these companies had last bought crude oil in 2009. Most crude oil importation was controlled by international parent companies. Local traders could not trade in crude oil but rather acted as brokers, and as a result their prices were higher. Support to and from the Southern African Social Development Agency (SASDA) had not happened as planned. Supplier development was sparse. There was no visibility of technically qualified and competent suppliers. Some HDSA suppliers failed health and safety requirements. There was a lack of development finance.

Ms Leketi presented the findings on access to joint infrastructure and wholesaling. The National Energy Regulator of South Africa (NERSA) was not adhering to its own regulations. There was no access to the Transnet pipeline from the coast. The company was not employing empowerment policies aggressively enough. Many storage and distribution facilities had been closed where they could have been offered to HDSA companies. The Competition Act was being cited as a reason for withholding information. There was a lot of uncertainty in the industry. Compliance of one of the several acts affecting the industry could lead to a breach of another. HDSA companies faced special challenges in being competitive. They could not match the prices paid by major companies for crude oil, had to face more stringent licence conditions, could not be vertically integrated as major companies already were, faced allegations of illegal operators and had to pay more for credit. There was a perception that there were too many HDSA wholesalers. The market share for such companies was too small to enable growth. One major company had a strategy to cap the number of HDSA companies it used in order to accelerate their growth. The least supported group was importing wholesalers. A few major companies did offer discounts. This was not working out so well in practice. Only three major companies bought from the HDSA wholesalers. Volumes could not be confirmed. Smaller companies faced challenges of cash flow constraints, insufficient commitment, a lack of benefits and incentives and greater expenses.

Ms Leketi moved on to the retailing sector. Shell and Sasol Oil had not provided information. The number of businesses owned by black and coloured dealers was significantly less than 1% of the total. Whites owned 78% of dealerships and Indians 22%. There were challenges in site allocation to HDSA dealers due to limited availability. There were some evergreen agreements with white dealers which made it difficult for others to enter the market. Where outlets were owned by companies, 93% were white owned. HDSA retailers faced several challenges. The first was the lack of capacity to negotiate and manage contracts, including the provisions for royalties and rental payments and unreliable product suppliers. There were anomalies with regulatory processes and turn-around times. Goodwill was not regulated so suppliers could set their prices as they wished. During initial training of retailers there was no entrepreneurship or business skill training. The modus operandi for stock items was not friendly to local small businesses.

Ms Leketi said that average rate of full compliance was 19%. The average performance rate was 48%. The average compliance rate for “low to yes” levels was 62%. Half of the companies complied with each element. The Broad Based BEE rate was 70%. In terms of BEE levels, two companies were on level 3, four on level 4 and one on level 6. Progress since 2006 was that there had been improvement on most indicators since 2006. However, there had been decreases in terms of supportive culture, capacity building for HDSA spending and learnerships, EE and retailing.

Ms Leketi presented a summary of the comparison between LFC and BEE. The two frameworks had different areas of emphasis. The current LFC was not clear in terms of expectations. The two top performing elements were management control and ownership. The worst performing elements were enterprise development, skills development and employment equity. The focus on BEE had been detrimental to key LFC requirements, especially regarding enterprise developments. Some sub-elements were not scored under BEE codes. There was an insufficient incentive for the major oil companies to improve in the areas concerned. Performance in the retail sector had regressed since 2006. Other areas affected were retailing, synthetic fuel supply and import wholesaling. There were no minimum targets and no bonus incentives, especially regarding access to key infrastructure and crude procurement. A future framework would have to ensure that performance on agreed sectoral priorities was rewarded and disincentives put in place for areas of non-performance.

Ms Leketi listed the conclusions of the audit. She noted that oil companies had made some progress regarding LFC requirements, but only really in years between 2008 and 2010. The three worst performing elements in respect of both LFC and BEE were enterprise development, skills development and EE and preferential procurement. The biggest lost opportunity in the previous ten years had been technical skills transfer. There had been insufficient training, promotion levels and employment for HDSAs, and black entrepreneurs had not been capacitated. The highest scoring areas were the quickest to remedy as they would involve a narrow base of beneficiaries. Those targeting the majority of beneficiaries took longer to set up but had a wider reach. The initial vision had been fair ownership over a wide range of HDSA entrepreneurs, but what had happened was partial ownership of some assets by serial investors who were not actively involved in the sector.

Ms Leketi had a number of recommendations. In terms of ownership, the DoE would cause all companies failing to reach the 25% mark to implement concrete plans within a set time-frame. A further disincentive should be introduced on the new scorecard. Further consideration was needed on increasing HDSA ownership requirements in order to achieve more female ownerships. A broad based approach was needed and marginalised groups, including the youth, should be included. The capacity of staff to assess BEE deals should be developed. A pro-active role should be taken to ensure that the best advantage was gained by HDSAs, particularly women, from the divestment from downstream operations. A similar strategy to the equity equivalents scheme should be considered. Incentives should be put in place for locating upstream business of oil majors in South Africa. Amicable and mutually beneficial solutions for the deals under pressure, or where there was an impasse, should be facilitated.

Ms Leketi said that in terms of management control, appropriate measurable stretch targets and incentives for female appointments should be incorporated in the scorecard. Oil companies should focus more on executive and independent directors. In terms of supportive culture, reliable organisational climate checks should be conducted regularly. This should be managed be the CEO and reported to the Board. Relevant supportive culture targets should be set and included in the performance contracts of senior managers. In terms of EE, oil companies should ensure that there was an equitable allocation of budget and job content responsibilities to black executives and managers. Job shadowing should be introduced to fast-track HDSAs, especially women. There should be balance between the black groups. The DoE should seek guidance from the Department of Labour (DoL). Government should impose penalties on companies that were not advancing HDSAs in EE.

Ms Leketi continued with the recommendations. In terms of capacity building, more practical and formally assessed exposure should be provided for black trainees. The DoE should collaborate more with Chemical Industries Education and Training Authority (CHIETA) and the South African Petroleum Industry Association (SAPIA) to ensure better training programmes were put in place. Institutions should be informed of the requirement for scarce skills training on a continual basis. There must be an effective partnership between DoL, DoE, the Department of Higher Education and the industry to develop programmes. In terms of procurement, parent companies should set a percentage of crude oil procurement from HDSA companies. The DoE should include a minimum level of such procurement in future scorecards. HDSAs should be given longer term projects that would improve their sustainability. The DoE should investigate why SASDA was not being fully supported by oil companies. Appropriate incentives should be put in place for women-owned and small businesses.

Ms Leketi said that the recommendations in terms of access to joint infrastructure and wholesaling were that all legislation should be aligned to promote HDSA participation through a coherent strategy. Conflicting objectives between competition authorities and the DoE and LFC should be resolved. Regulatory barriers should be revised. The unfair competition practices of the oil majors needed to be addressed. Better regulation of oil imports should benefit HDSA companies. Measurable stretch targets should be set for wholesaling. Stricter conditions should be set for licensed importers. All legislation should be enforced. Allegations of unlicensed wholesalers and illegal activities by licensed operators should be investigated. NERSA's allocation mechanism guidelines needed to be ensured. In terms of enterprise development, Transnet needed to be helped to implement an empowerment framework for HDSAs more aggressively. A funding model for HDSAs to import crude needed to be facilitated. A minimum capacity needed to be facilitated for HDSAs in the new multi-products pipeline. Beginner's guides needed to be developed for wholesaling. A benchmark needed to be created for realistic HDSA wholesale licence conditions.

Ms Leketi continued that in terms of refining capacity, consideration should be given to local economic development requirements by tools such as a minimum procurement levels for local communities. HDSA companies should be involved with refinery upgrades. In terms of retailing, oil companies should introduce product lines from local small business suppliers. DoE should consider incentives for the renegotiation of evergreen contracts. Goodwill prices should be evaluated by oil companies and government. The DoE needed to improve the retail and site licence management programme. Current non-HDSA retailers should be given incentives to sell shares to HDSAs. Certain clauses should be discouraged from franchise agreements. The skewed representation of Indian people should be investigated. More stretch targets should be set to ensure that this element did not regress further. Development funding institutions (DFIs) should be encouraged to develop appropriate funding and support packages.

Ms Leketi concluded the recommendations. In terms of access to finance, local international banks should be lobbied to make introductions to their international arms. DFIs should be assisted to develop tailor-made and relevant packages. International suppliers should be sensitised through their governments to South Africa's capabilities and transformation objectives. Government should establish a reporting framework for the monitoring and measurement of compliance. Oil companies should have a uniform reporting format. A web-based monitoring and evaluating system should be developed. A mechanism was needed for more regular and systematic reviews. Compliance assessments to the LFC should be conducted annually. A vibrant platform should be established to share information and strategies. Real incentives had to be provided for companies while punitive measures should be taken against companies not complying with the LFC. Companies performing well in transformation aspects should be rewarded. The DoE had to lead a process to develop a sector code. Measurability was needed, but the cornerstones of the previous charter had to be preserved. Alternatively, the Department of Trade and Industry (DTI) should reach agreements with the oil companies to reach a similar outcome. Sector code key enablers should include categories, indicators and sub-elements, weighting points, compliance targets, bonus points and sub-minimums, and additional elements.

Discussion
Ms N Mathibela (ANC) asked who was monitoring the oil companies. More power should be given to BEE companies. It seemed that the DoE was not monitoring this. The Committee was always concerned with scarce skills. Each Department should provide skills training. Women were not being trained. Only a handful of women came forward to make use of opportunities.

The Chairperson asked what had happened to the Empowerment Monitoring Unit.

Mr J Smalle (DA) noted references to observations on regulations and licensing commitments. This should refer to the role of NERSA. He asked how NERSA could be asked to provide responses on matters under their supervision. In terms of skills development, he asked if there was any body determining the skills needed in the sector, and the relevant qualifications. The energy sector had an overarching issue with skills.

The Chairperson noted that public hearings had been held. Ownership fulfilment was zero. He had noted the reference to trickling benefits. There was a fairly high number of learnerships, but this had declined remarkably. He asked how skills transfers were identified. He asked for clarification on how the age of businesses were defined. There had been a reference to serial investors. He asked if there was any other form of investor that had been identified. He acknowledged the achievements regarding empowerment but asked how rural communities had benefited. He was disturbed by the statistics on directors.

Mr Smalle said that there were some training incentives in place. Five of the companies had not been able to develop their communication models. The DoE had made a bold statement by referring to supplier development efforts being unstructured. There were allegations of illegal operators in the Johannesburg – Maputo corridor. He asked how this impacted on the South African industry. There were major challenges to cash flow. The industry needed a big cash flow, and it was not easy to get into the market unless one had a few billion Rand to spare. He asked what DoE meant by putting incentives in place. The big five companies controlled the industry, and it was very difficult for a new company to enter without a fully developed value chain. He asked if a points system could be put in place. He asked why penalties had not been imposed in cases of non-compliance. There were measures in place. Many of the statistics referred to foreign employees. It was a specialised field, and many of these employees were specialists. He asked if DoE was trying to get the demographics of the country reflected in the companies. He asked how specialists could be accommodated if this approach were to be followed.

Mr Maqubela said that it was about doing the right thing. Transformation was a way of ensuring the sustainability of the sector. Total South Africa was 49.9% South African owned. Half of the ownership belonged to a group of white South Africans, and the other half black South Africans. This proved that transformation could happen and was an example to others in the industry. Transformation could be achieved without loss of competence. Total had been struggling with skills development, but had turned this situation around.

Mr Maqubela said he was ultimately responsible for monitoring. He took full ownership for the process or the lack thereof. He committed himself to making presentations to his principals to increase the monitoring capacity within the Department, and his pleas had been accepted. On scarce skills, he had been responsible previously for a sector that had struggled in this aspect. A lot had been done since then. There was a need for government to look at consolidating the efforts being made. An initiative had been launched by the industry, which the DoE welcomed, together with the University of the Witwatersrand. The model being used was the Institute for Petroleum in France or a similar body in Australia. Other institutions such as the University of the Western Cape also had programmes. There would be a focus on skills development for the sector. The LFC had seen companies pledging to send staff for overseas training, and a number of them had. Not all had complied. The DoE had seen a number of competent persons starting their own businesses. This was encouraging. DoE might have taken its foot off the pedal at the time of the fuel shortages. At that time, which coincided with the start of the audit, the industry had slowed down in terms of transformation.

Mr Maqubela said that NERSA people had been interviewed. Some of the information provided would have to be aggregated. At some point the way forward must be plotted. The audit had been commissioned by the Minister, partly because she had thought that nothing was happening in the industry. She could not base that opinion on anecdotal evidence, and the audit was a way to gather sound evidence. At the public hearings stakeholders had expressed their disappointment with the current situation. The audit had been thorough.

Mr Maqubela said that DoE's opinion on penalties was that government was dealing with responsible corporate citizens. It was the view of the Department that penalties would not be needed if all players committed themselves to moving forward on transformation. The Minister had been consulting with heads of companies to chart the way forward.

Mr Maqubela said that government wanted to see a systematic way of transforming the industry. Full demographic representation could not happen overnight. The current position did not reflect the positive attitude towards the sustainability of the country. DoE had not applied its mind yet to full demographic representation. It was looking for meaningful change but not seeing it at present.

Mr Maqubela said that there had been discussions on financial support. There had been discussions with the Reserve Bank on methods of raising finance. Emerging operators would need support. Training could be provided using various institutions around the country.

Mr Maqubela said that in terms of site location, certain sites did have an advantage. Stations on major routes and in highly populated suburbs had a distinct advantage. There were also advantages to being located near shopping centres. The oil companies did not always have a say in these locations. It often fell under the control of property developers.

Mr Maqubela said that the DoE was encouraging applications, particularly in the wholesale sector, from the youth and those with disabilities. On the rural front, the DoE was encouraging oil companies to partner the Department in uplifting communities.

Ms Leketi noted that the audit was based on both qualitative and quantitative data gathering. The information provided should have been a true reflection of the situation. The level of credibility applied to the audited results.

Mr Maqubela added that some companies had provided all the information required. Fully completed questionnaires had been returned. Others had skipped some of the questions as they did not take the audit as seriously as their peers. There might be explanations. He singled out Engen for the completeness of their return.

The Chairperson concluded that there was a degree of inaccuracy in the information provided.

Ms Leketi said that the timeliness of the returns affected the quality of the information. Procurement was a critical issue.

Mr Maqubela said that the patterns indicated in the audit coincided with the Department's experiences.

Mr Smalle said that refineries had contracts in place when selling their products. There was a suggestion that a certain amount should be sold to HDSA companies. Going forward, refinery feedstock was a combination of products derived from crude oil. He asked if the other derivative products such as bitumen would also be subject to quota procurement. He asked if there was any commitment in terms of time for the higher education institutions to get involved. It was important to put the skills programme in place. Certain traders bought crude oil, but there was a risk which had to be borne. The crude had to be shipped to South Africa. Related study modules should be presented locally.

Ms Leketi said that trickle dividends were a question of how returns were investment. Money could be retained to pay off debt. Some companies chose to take their dividends and re-invest elsewhere. Evergreen contracts were regulated. Agreements had been reached before the relevant legislation had been passed. Some companies had long-term access to land. Oil companies with a vertical structure had ownership of land.

Ms Leketi said that transformation did not occur in a vacuum. It was clear to say that the object of transformation had to be embraced. The provisions of the EE Act had to be considered.

Mr Maqubela said that a myriad of skills were required for the industry. Generally all these skills were being taught in the country. An approach of 'learn by doing' was being adopted. This could be accelerated by overseas training under the supervision of multi-national experts. Various degrees of success were being achieved. The DoE wanted to go into an infrastructure agreement. Skills would be needed. A programme should be compiled, identifying the requirements and where the tuition was available. It was still early days but something was happening. There was an opportunity where the country was importing products. There was a lot of petrol and diesel available in countries such as India, Singapore and China. The requirements for export were not as onerous as for crude oil. Suppliers would have to take South Africa's requirements into account, such as the suggestion that a certain percentage of crude oil be supplied to HDSA companies. The DoE would not get involved except to vouch for the viability of compliant companies.

The Chairperson was curious about multi-national involvement.

Mr Maqubela replied that such companies might restructure. For example, any LPG business might have to report to an office in Egypt and the local office had no control over the business unit. This led to complications. There would be a way to approach this. It had to be accepted that this was the way the multi-national was structured and South African operations would have to adapt. The awareness issue was more one of attitude. To say that one was not aware of the articles of the Charter was not acceptable given the many ways in which it had been published. This was the easiest way to avoid compliance, but he did not think that this was correct.

Mr Maqubela said that the issue was SASDA was difficult. There had been general commitment to support the initiative. The internal decisions taken by companies was undermining the process. Government had to decide what to do with an entity that was not supported by the industry. SASDA should also be looking to develop biofuel suppliers.

Ms Leketi said it had been recognised that the demands for transformation in terms of ownership required distributors to enter the industry. The intention was that a black-owned company should enter the market. However, experience had showed that black investors saw the oil companies only as channels for investment and did not get involved with operational issues.

Mr E Lucas (IFP) said that the fuel industry was not transformed. Education was needed for traders to buy crude oil. He had met a young lady who had trained as a geologist at the University of the Western Cape but was now working for a French company. She could not find a job in South Africa. Finances were a crucial area. He was happy to hear that some banks were prepared to help. Huge investment was needed. Change was needed now, not in another eighteen years. There had been success in the mining industry due to legislation.

The Chairperson agreed with these sentiments. Many of the recommendations made by the Committee were going to the DoE. A briefing was still needed on alternative fuels. Policies were being revised. A comprehensive view was needed for the Committee to make recommendations on the industry, not based solely on one energetic presentation. The culmination would come through either public hearings, or through another meeting. In September there should be an energy stakeholders meeting, facilitated by DoE. The Committee needed to be pro-active. He had looked at the record of the public hearings, and what was being done currently represented a shift in what had been done previously. The root of problematic deals and the lack of privatisation had to be investigated. There were some suggestions of corruption in the industry. Communication should no longer be a problem with modern systems. Closure of inland storage facilities was a problem area. A platform was needed to discuss these issues. He raised a number of issues that still needed to be addressed. Another area of concern was the decline in performance. These and other issues had to be tackled in a robust manner. The DoE needed to create awareness. He committed himself to drawing up a plan to engage with the issues mentioned. Investors were watching carefully.

Committee Report Oversight Visit Report to Kwa-Zulu Natal & Eastern Cape
The Chairperson said that the preliminary report on the oversight visit to KwaZulu-Natal and the Eastern Cape had not yet been distributed to Members. In January Members had embarked on an elaborate process. In Durban they had been briefed on the refineries. A stakeholders meeting had been held. Many administrative issues had been raised. The revised policy had still not gone through Cabinet. He asked Members to consider the report with a view to its adoption at a later meeting. The Committee would then share the report with the industry. At present the document would be considered confidential in terms of the Rules of Parliament.

Ms Mathibela pointed out that those Members who had been on the visit were not present in the current meeting.

The Chairperson said that the following meeting would focus on the LPG industry.

The meeting was adjourned.