1. ACTION WITHOUT VISION IS ONLY PASSING TIME VISION WITHOUT ACTION IS MERELY DAY DREAMING BUT VISION WITH ACTION CAN CHANGE THE WORLD NELSON MANDELA

2. AGENDA 1.Brief Background to Petroleum Products Legislation (as we see it) 2.Brief Background to the Fuel Retailers’ trading environment in South Africa 3.A few results from the current Retail Margin Investigation 4.Where the Fuel Retailer fits into the “Chain of Costs” 5.Threats to the sustainability of the Fuel Retail Industry 6.Economic Empowerment – the role the Petroleum Products Amendment Bill has to play

3. BRIEF BACKGROUND TO PETROLEUM PRODUCTS LEGISLATION 1977  Energy Policy governed primarily by desire for greater energy security  Energy Policy not formally communicated in writing  Specific policy gaps exist  Gentleman’s Agreement  Unhealthy Imbalance of Power Petroleum Products Amendment Bill – 2003  We cannot over emphasize the critical influence this will have on the sustainability of the industry as a whole  Not over regulation – necessary intervention

4. BRIEF BACKGROUND TO THE FUEL RETAILERS’ TRADING ENVIRONMENT IN SOUTH AFRICA  Classic Oligopoly – 5 major companies supply most of the approximately 4 800 service stations. These 5 major companies own about 45% of sites and these sites pump over 55% of the volume throughput.  The industry is overtraded in terms of the number of service stations  This situation will be aggravated by SASOL/PETROSA’s entry into the market.

5. BRIEF BACKGROUND TO THE FUEL RETAILERS TRADING ENVIRONMENT IN SOUTH AFRICA The Fuel Industry has an undisputed role to play in the economic development of the country. It is characterized by: High levels of competition Low gross profit margins/High stock turnover rates. Is capital and labour intensive for both Fuel Retailers and Oil Companies

6. RETAIL MARGIN INVESTIGATION BY POTCHEFSTROOM UNIVERSITY’S SMALL BUSINESS ADVISORY BUREAU (SBAB) ON BEHALF OF THE DEPARTMENT OF MINERALS AND ENERGY At present the Fuel Retailers’ average driveway related gross profit margin has dropped from 10.3% in 1998/1999 to less than 7.45% in 2001/2002. The SBAB norm is that operating costs should not absorb more than 80% of the gross profit. The Fuel Retailers’ average for 2002/2003 margin investigation is 90.45%.

7. RETAIL MARGIN INVESTIGATION BY POTCHEFSTROOM UNIVERSITY’S SMALL BUSINESS ADVISORY BUREAU (SBAB) ON BEHALF OF THE DEPARTMENT OF MINERALS AND ENERGY SBAB’s norm for rental to gross profit is 13.33%. The average spent on rental was 15.18% Bank charges in monetary terms show an increase of 31.44% Even after 0.7 c/l Fuel Retailers’ Margin Increase in August 2003, 52% of Fuel Retailers will still be in an under recovery situation (based on the above principal that not more than 80% of gross profit to be spent on operating expenses).

8. BFP 35.7 c/l Motorist Basic Fuel Price Levies/Taxes Manufactures/ Wholesalers (1) NB Behavior paid for by Motorist Fuel Retailers’ Margin (2) (3) 3 (i) Fixed Margin (ii) Increasing Costs (iii) Only solution: * Increase average throughput 2 (i) Marketing Margin (ii) Refining Margin (iii) Zone Differentials (iv) Rentals/Franchise Fees etc WHERE THE FUEL RETAILER FITS INTO THE “CHAIN OF COSTS” THE “CHAIN OF COSTS” We support open and transparent pricing in a regulated environment

9. THREATS TO THE SUSTAINABILITY OF THE FUEL RETAILERS’ INDUSTRY  TO PROVIDE FOR THE LICENSING OF PERSONS INVOLVED IN THE MANUFACTURING OR SALE OF PETROLEUM PRODUCTS –Over Proliferation of Service Stations

10. OVER PROLIFERATION OF SERVICE STATIONS Beginning 2003 - FRA Document “Why is the public at large paying too much for fuel?”CONCLUSION As a result of the investment spree of the Oilco’s and the MPAR guaranteed ROA the distribution margin of the Oilco’s is significantly higher than what it should be. The public at large is paying for this through higher fuel prices.

11. CONCLUSION (continued…) The Fuel Retail Industry is severely compromised from a profitability perspective because of low average volumes caused by the over proliferation of service stations resulting from the investment spree of the Ohio’s. This is putting upwards pressure on the Retail Margin. The public at large is paying for this. The MPAR Agreement is essentially fair, however it does not control capital expenditure and can be exploited. The Agreement needs to be amended to prevent additional capital expenditure unless need and desirability is proven.

12. OVER PROLIFERATION OF SERVICE STATIONS THE WAY FORWARD –Oilco’s should not be allowed to invest in new service stations and gain the benefits guaranteed through MPAR unless they can prove that they are experiencing and have achieved real and significant growth on average throughout the networks they control. The DME should aim for average volumes of around 400 000 litres per month on average before issuing permits for new service stations

13. OVER PROLIFERATION OF SERVICE STATIONS 26 th May 2003. DME Leadership Workshop – The South African Retail Sector 1.Number of Sites 2.Retail Margins 3.Wholesale Margins (MPAR) 4.Security of supply in Rural Areas 5.Cross Subsidisation of Non Viable Sites 6.Empowerment 7.Competition 8.Appropriate Regulation

14. THREATS TO THE SUSTAINABILITY OF THE FUEL RETAILERS’ INDUSTRY  TO PROHIBIT CERTAIN ACTIONS RELATING TO PETROLEUM PRODUCTS Relationships between Fuel Retailers and their supplying companies Changes in “wholesalers” behaviour Sustainability of forecourt activities Card initiatives

15. THREATS TO THE SUSTAINABILITY OF THE FUEL RETAILERS’ INDUSTRY  TO PROVIDE FOR APPEALS AND ARBITRATION –At the present time leases, franchise/rental agreements are very one sided Werksman’s Document –“Based on all the grounds and reasons mentioned above, we believe that there is more than enough scope and justification for appropriate regulations to be made under the presently relevant section quoted above in par 1 of this memorandum, particularly regulations prohibiting certain types of provisions justifiably criticised in the Werksman’s Principles.”

16. THREATS TO THE SUSTAINABILITY OF THE FUEL RETAILERS’ INDUSTRY TO PROVIDE FOR APPEALS AND ARBITRATIONTO PROVIDE FOR APPEALS AND ARBITRATION –Fuel Consultants Africa – Draft Commentary Comparative Analysis “Compulsory Arbitration as an acceptance that the current situation is equitable and must be dealt with”

17. THREATS TO THE SUSTAINABILITY OF THE FUEL RETAILERS’ INDUSTRY  TO AUTHORISE THE MINISTER OF MINERALS AND ENERGY TO MAKE SPECIFIC REGULATIONS Rehabilitation of land used in connection with a licensed activity Cost of Rehabilitation

18. ECONOMIC EMPOWERMENT In 2000 the Charter For The South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry was signed Agreed “Quota’s” from RATPLAN to be used for HDSA’s RATPLAN cancelled HDSA’s been drawn into a vacuum by the targets In the main purchasing bottom 60% of sites Training inadequate Being set up to fail! “Key Monies” becomes an income stream

19. FUEL RETAILERS’ ASSOCIATION. ECONOMIC EMPOWERMENT POLICY The transfer of skills and knowledge is paramount. There must be a strong operational involvement. Opportunities of partnership with professionals and targeted skills enhancement. The industry has a powerhouse of knowledge, people must be correctly compensated for sharing their knowledge and experience.

20. FUEL RETAILERS’ ASSOCIATION. ECONOMIC EMPOWERMENT POLICY This transformation must keep the industry competitive, sustainable, open and transparent and proud.

21. BFP Levies Taxes Motorist Basic Fuel Price Fuel Retailers’ Margin Amendments To Petroleum Products Act As per Draft Bill Manufactures/ Wholesalers IN CLOSING Address Balance of Power Encourage Common Agenda’s Improve Efficiencies Improve Sustainability Release Pressure on Motorist