profits in South Africaâs liquid fuel energy sector, with particular reference
to the synthetic fuel industry
20 July 2006
In May 2006, the Minister of Finance appointed a Task Team to advise him
on:
* possible reforms to the fiscal regime applicable to windfall profits in
South Africaâs liquid fuel energy sector, with particular reference to the
synthetic fuel industry,
* options for securing the optimal contribution of the synthetic fuel industry
to South Africaâs long-term development.
The task team releases a discussion paper for public comment, today 20 July
2006, and which is available on the National Treasury website (http://www.treasury.gov.za follow left hand
column down to â22 June â Windfall Tax Task Team).â
This purpose of this document is to provide a basis for public discussion of
the issues that the task team is required to address as well as to solicit
informed comment. It does not represent a full discharge of the terms of
reference at this stage. Indeed several areas require further development and
sections of the document pointedly raise questions that have arisen in the Task
Teamâs work thus far. Few conclusions have been reached and no recommendations
are made at this stage. The discussion document therefore does not reflect the
views of the government or of the National Treasury, who are also invited to
make formal inputs into this process along with other interested parties.
If any views are expressed in this document, they have been derived from the
task teamâs respective analyses of:
* the historical trajectory of the South African liquid fuels industry,
* relevant international experience of fiscal and other measures applied to
liquid fuel and related industries,
* a definition of the term âwindfallâ and its relation to various forms of
economic rent.
The South African liquid fuels value chain is technically complex and that
complexity is increased by the regulatory system that has been applied
historically, elements of which prevail to this day and which are in the
process of being reformed. In addition to considering the history of the
industry the task team has also considered the economic contribution of the
industry and the continuing role of the industry to the South African economy
particularly given the need to accelerate growth in South Africa. The task team
is also mindful of the need for fiscal and policy certainty for all sectors of
the South African economy, including the liquid fuel industry and that such
policies are in line with recognised best practices.
The task team has approached its work with care and in as even handed a
manner as is possible. We have refrained from expressing and concluding views
in this document, other than those based on the facts at our disposal. It would
be premature at this early stage of the investigation to have expressed
specific views as the task team is open to learning key lessons from past and
current policies with a view to recommending that they be considered for the
future. The task team therefore, as suggested in the terms of reference (TOR),
is soliciting the views of industry participants and other interested and
informed parties by posing a series of pointed questions, regarding the
desirability and feasibility of the options that we are asked to examine.
Stakeholders are also free to also provide comments on any relevant criteria
that may not have been taken into account in the discussion document.
Readerâs guide to and summary of the discussion document
The discussion document is organised as follows. In section three we analyse
the associated fiscal regime that has evolved for the upstream and downstream
segments of the South African liquid fuel industry value chain. The methodology
used is to conceptually separate upstream and downstream components of the
value chain and to examine the differing fiscal approaches adopted for each. In
this section we also explore the interrelationship between current fiscal
policy considerations (as the task team understands it) relating to liquid fuel
production in South Africa and considerations from other policy spheres,
including energy policy, mining policy, industrial policy, technology policy
and environmental policy.
We also analyse selected international fiscal policy experiences and
approaches in respective value chains elsewhere.
In our work thus far, we have tried to more precisely define âwindfallâ and
to apply that definition to a rigorous analysis of the liquid fuels value
chain. In section four we develop a working definition, which clearly
distinguishes between the two different forms of super normal profits that are
of interest to the task team namely windfall profits on the one hand and other
forms of super normal profits/economic rent. We also review various âwindfallâ
and super normal profit taxation and levy initiatives taken by the governments
of different countries at different times on the upstream and downstream
segments of the energy/fuel value chain and at different stages of development
of the value chain/system. Our scan of international experiences is not fully
comprehensive and we would welcome any additional perspectives that may be
relevant and useful.
The development of South Africaâs liquid fuel industry has been unique
compared to post war growth of similar sectors in other countries. Today some
30 percent of South Africaâs liquid fuel is produced from coal and natural gas
using a domestically developed synthetic fuel technology. The same process
produces the bulk of the basic organic chemicals that are utilised in the
downstream chemical and allied industries, as well as a significant proportion
of South Africaâs chemical exports.
The liquid fuel industryâs growth and development (both crude oil based,
coal based and gas based) has taken place under an interventionist industrial
policy that gave priority to increasing fuel security/self sufficiency, using
the key policy instruments of investment incentives and regulation of the
entire liquid fuels value chain. Section five details the intricate nature and
history of the regulatory system that governs the industry. Section six
discusses the role of the liquid fuel industry in the economy, in particular
the contribution of the synfuel industry.
The concepts of âwindfallâ developed in section four are applied to the
South African liquid fuel value chain in section seven where we test whether
windfall profits have been generated in the liquid fuels industry and whether
super normal profit generation can be expected to continue into the foreseeable
future.
In section nine we conclude by pointedly raising key issues and questions
that have arisen thus far in the investigation including confirmation of the
methodology that we have adopted and the analytical steps that we have
taken.
Optimal contribution of the synthetic fuel industry to South Africaâs long
term development, the terms of reference also require the task team to advice
on options for securing the optimal contribution of the synthetic fuel industry
to South Africaâs long term development. We have interpreted this largely in
terms of the desirability and feasibility for further synfuel/alternative fuel
production to meet the needs of a fast growing economy and we raise a number of
questions in this regard in section eight of the document. It is our intention
to focus more intensively on this area of our brief in the next stage of
investigation.
Process
In soliciting responses to this document, the task team welcomes
clarification and correction of any of the analyses that we have undertaken as
well as any alternate views and approaches that may be more accurate and/or
relevant.
The task team invites comment and views from interested and potentially
affected parties in electronic format to be sent to the Secretariat at:
kiyasha.thambi@treasury.gov.za
by no later than 4 August 2006.
We further request that respondents indicate whether or not they would like
to make an oral presentation in addition to the written response submitted.
Oral presentations will be heard at public hearings that will be held in second
or third week of August 2006.
Flowing from this and in accordance with the terms of reference given to the
task team, a report will be compiled and recommendations made to the Minister
of Finance by mid September 2006.
Summary biographies of task team members
Dr Zavareh Rustomjee (Chairperson and convenor) is an ex Director-General of
the Department of Trade and Industry. He is currently an independent consultant
and a director of a number of companies, including the Central Energy Fund
(Pty) Ltd. He is a qualified chemical engineer and holds a PhD in economics. Dr
Rod Crompton is currently with the National Energy Regulator. He was previously
the Deputy Director-General for Hydrocarbons and Energy Planning with the
Department of Minerals and Energy and the Managing Director of the Minerals and
Energy Policy Centre.
Ms Almorie Maule is an independent businesswoman with extensive experience
in the petroleum industry. She served as CEO of Engen from 1999 to March
2002.
Dr Boni Mehlomakulu is responsible for the Resource based Industries Unit at
the Department of Science and Technology. She worked in the synthetic fuels
industry from 1997 to August 2003.
Dr Grové Steyn is an independent consultant with expertise in the areas of
regulation, technology and innovation. He is a qualified industrial engineer
and holds a PhD in the economics of Science and Technology.
Issued by: National Treasury
20 July 2006
