Special acknowledgement
It gives me great pleasure to be part of this official opening of the petroleum blending plant by Econ Oil a Black owned petroleum company and a product of the South African government economic transformation policies. Economic growth is essential to addressing unemployment, gender equality, education and other social development related areas. Without financial and infrastructural support in a form of a financial and infrastructure support in a form of a loan, integrated support system, increased accessibility to finance, lower cost of capital, creation of decent jobs and other poverty eradication strategies will not be achieved.
Hence as the government we have committed to the South African citizens that State Owned procurement spend will ensure that it creates new enterprises in their supplier chain and resources will be allocated to supplier development programme. We fully understand that investing capital and time in helping people establish or expand their businesses and pursue income generating activities that contributes to the development of local economy. During apartheid the majority of South Africans were excluded from meaningful participation in the economy. Wealth was confined to racial minority of white population, entrenching racial, income and social inequality.
Since government adopted economic transformation policy, South Africa has seen a change in the structure of the economy and this can be measured through African and Black participation in various sectors of the economy. This contribution has been through public sector procurement. This however has not changed the patterns of ownership of South African economy in various sectors of the economy. The economic transformation agenda has always been based on principles of inclusive growth and social inclusion. It does not only seek to broadening the productive base of the economy but also expand job creation, raise productivity, improve competitiveness and promote the greening of the growth as well as diversification of ownership patterns.
Other economies in the developing countries perceive adjusting growth and development strategies as a complex and difficult exercise from both economic and political economy perspectives. We have learnt lessons over the years which ensured that our policy mix is responsive to social and economic shift. After the democratic dispensation our government introduced Black Economic empowerment, later amended to include broad economic participation which recognised special material conditions and constraints experienced by co-operatives, women and youth led business initiatives.
This was followed by various economic institutional reforms and access to funding. As the government we observed that we need to roll our sleeves if we are to make a transformative impact in our country. The call for developing industrialisation capabilities through State Owned Companies and stimulate the economy by demanding that a certain portion of the goods are locally manufactured- is not a political talk. Today is about the substance of that call.
The South African downstream petroleum industry is in the hands of whites and multinational oil companies during the apartheid era and still highly concentrated industry. Many Black South Africans were excluded from the mainstream industry through, among other instruments, laws passed by the government such as the Petroleum Products Act 120 of 1977. This Act therefore made it difficult for those who were not in the industry or Government, particularly blacks, to acquire information in order to enter the mainstream industry. The democratically government instituted a policy process aimed at restructuring and transforming the petroleum industry to allow blacks to enter the industry, in order to achieve sustainable presence, ownership and control of approximately a quarter of the industry by previously disadvantaged individuals.
Since the introduction of this process, which culminated in the release of the White Paper on the Energy Policy of the Republic of South Africa (1998), little progress has been made towards achieving this Government’s key policy objective. Instead, there is still little entry into the industry by Black Oil Companies (BOC’s), these companies continues to struggle to increase their market share. There are three barriers of entry in the downstream petroleum industry, namely, economic barriers to entry, noneconomic barriers, and cross-sectoral barriers to entry.
In practical terms these could be sunk costs, vertical Integration and transport costs incurred in the distribution and marketing of fuel. These are socially undesirable limitation to entry, which are due to protection of resource owners already in the market.
The petroleum industry is an important and crucial component of the economy in just about all countries, including South Africa. The contribution of the industry to the South African economy is huge. For instance, according to the 2002 South African Petroleum Industry Association (SAPIA) report, the total income tax payment to the state was more than R3 billion.
Their wealth and continuous increase in income is buttressed, among other instruments, the measure their profit margins framework (called the Marketing of Petroleum Activities Return – MPAR), which regulates the returns of the oil companies in the marketing and retailing sub-sectors, excluding refining activities. This formula does not cover the refining subsector, since this sub-sector was deregulated in 1991. In other words, the MPAR involves petroleum related activities outside the refinery gate and other related activities namely, storage; transportation; distribution; marketing and administration.
These sectorial market failures were confirmed by the Petroleum industry audit report undertaken by Department of Energy. It indicates that to date, the petroleum sector has not been compliant to Enterprise Development, Skills Development and Employment Ownership across the value chain follows on the overall ownership deals and is thus 18.91%. Exploration and Production is however 0% as it is either separately incorporated or based outside the country. While the supply side of black ownership in the retail percentage is 40% and wholesaling 33%. Access to affordable and practical financing mechanisms is a major issue for retailers and wholesalers, in terms of cost and accessibility to credit and own contribution requirements. Local banks lack expertise to effectively service the wholesale market.
Econ-Oil has experienced these market failures and black women showed resilience, true entrepreneurial spirit to establish this company against all odds. The constraints imposed by the industry’s failure to commit to transformational and the financial sector’s unwillingness to support many black entrepreneurs have not deterred the growth of the company. They have proven that our economy can build black industrialist who contributes to the creation of decent jobs, revival of rural economies as this plant and expansion of our industrial capability. The State owned Companies are ready to support resilient black industrialist not middle man entrepreneurs.
Econ Oil supplied 18% of Eskom’s Fuel oil needs in the 2003 to 2006 contract. In 2006 to 2009 secured a contract to supply 60% of Eskom’s Fuel oil needs, and the first time supplied Grade three. In order to add better value to customers and to enhance its product offering, Econ Oil developed a blending plant in Marble Hall, Limpopo, which will start by supplying Hendrina Power Station with effect from 1 September 2013. Econ Oil took this bold step after being awarded a five year contract to supply three clusters of Eskom Power Stations with fuel oil. Without the support of Eskom, the development of a Black owned blending plant would never been built. To date Econ Oil has created 30 permanent jobs, it supplies 16 million litres per month and owns 10 trucks.
The multiplier effect of the Marble Hall investment is measurable in job creation, development of technical skills and technological progress. We would like to encourage the owners of Econ Oil to ensure that they support localisation in the expansion of their plant and if all the capital equipment used in the plant was imported, I urge you to convince your supplier to open their manufacturing plants in South Africa.
We invite you to consider starting a business development a mentorship programme so that in the next five to years we have ground swell of entrepreneurs like you.
I thank you.
