Why is administered prices needed

Department of Trade and Industry presentation Mr Lionel October, Director General, Department of Trade and Industry, noted that the manufacturing sector was one of the leading trade sectors and competitiveness was key to enlarging and strengthening it.

Administrative prices were vital. The industrial policy of the Department of Trade and Industry dti or the Department was starting to show improvements in the sector, and on the previous day, KPMG had delivered a report in which South Africa was ranked fifth ahead of most European countries in the motor sector. This showed that the country had the ability to become globally competitive.

However, it was necessary to look at the factors that negated competitiveness. At the micro level this could include port and electricity charges. Macro factors, as confirmed by the OECD report, included high interest rates and the over-valued currency, and in both, more stability was needed. Mr Garth Strachan, Deputy Director General, dti, said that the strategic issues tabled last year, such as the Eskom revenue strategy and municipal revenue, would not be debated again.

Instead, dti wanted to concentrate on some proactive proposals. He briefly noted that shocks on the manufacturing sector included the protracted global recession and changing demand from the traditional trading partners. Successive iterations of the Industrial Policy Action Plan IPAP had highlighted the impact of sharply escalating administered prices, which were basically electricity prices, especially where high municipal premiums were added, and port charges, since those in South Africa were amongst the highest in the world, and were also hampered by significant port and rail logistic inefficiencies.

Several sectors were under threat. The industrial policy was a complex set of interlocking and transversal interventions. Electricity and port tariff setting and regulations did not fall within the mandate of dti, although they had a profound impact.

However, where municipalities added further on to that, this could give rise to further complications and disparities such as two businesses on opposite sides of the street being charged different tariffs. The short term policy options were to strengthen the Manufacturing Competitiveness Enhancement Programme MCEP and to scale up support for cleaner and more efficient energy projects. An appropriate approach was needed to expedite implementation of the Eskom Integrated Demand Management IDM , with prioritisation of the manufacturing sector.

Dti, for its part, would scale up support to the National Clean Production Centres, in both energy and audit implementation. In the last two years, dti had worked with companies and had managed to save GwH by introducing energy efficient methods.

There also should be engagement with the South African Local Government Association SALGA , metros and municipalities on the position of vulnerable and strategic sectors in municipalities, to encourage a coordinated approach in assisting the sectors and in moderating municipal tariff increases.

If manufacturers were to go out of business because of the high costs, it would ultimately decrease the municipal revenue base. Dti believed it was urgent to roll out, in the appropriate places, Smart Grid and Smart Metering technology, and it was working with municipalities already, whose efficiency and billing systems also needed improvements.

It would be important to ensure local manufacture of at least some components of the Smart Grid technology. Labour-intensive IDM approaches had been used in other countries. Mr Strachan again noted that South Africa had amongst the highest port charges in the world.

This was compounded by significant port inefficiencies, which presented a constraint to the export of manufactured and tradeable goods. South African manufacturers were perceived as subsidising other operations. Tariffs for export of bulk commodities seemed to be lower than global averages although the export was also below global average. Foreign-owned cargo trans-shipments through South African ports benefited also from lower prices.

Dti had met with the Transnet National Port Authority TNPA on the draft pricing strategy, and suggested that alternative or independent asset valuation should be used as the basis for cost recovery.

A rigorous inclusive assessment and economic cost benefit analysis was needed, and dti also proposed that there should be international bench-marking of ports pricing strategy, efficiencies and other value-adding revenue generating activities in the ports pricing model. He finally noted that, despite significant effort, dti had not yet managed to get the upstream oil and gas industry off the ground.

His presentation would deal with both petroleum products and the electricity pricing policy. He noted that South Africa was heavily reliant on liquid fuels, and even Eskom and Botswana were increasingly making use of these in diesel generators.

South Africa was currently dependent on imported oil and petroleum products. The price of crude oil and finished products was increasing, globally, and was impacted upon by events beyond this country; for instance, the latest fuel price increase was due to problems in Yemen explosion of oil pipeline and Algerian unrest.

The EU sanctions on Iran also had a steady impact on the petroleum-products price. Although there were some promising indictors for gas, there were as yet no proven reserves.

Unlike other countries such as South Korea, there was no significant footprint of crude externally. South Korea had spent a great deal buying equity in oil-producing countries.

This was something that South Africa may need to consider, after looking closer to its own shores. The liquid fuel industry supported 10 direct jobs, excluding the Sasol Coal-to-Liquid facilities, whereas the whole sector provided 70 direct jobs. There had been a suggestion that South Africa should not pursue refining capacity, but the impact of this on job losses must be considered.

Other jobs were also indirectly supported, such as manufacturing of feedstock in the chemical industry. If the refineries did not produce those, South Africa would have to increase its imports. He set out some slides showing the supply and demand balance, and noted that South Africa had an import parity pricing system, which DoE suggested must be maintained.

It would also need to keep up the levels currently at barrels of finished product of imports, which were resourced from refining centres that met South African fuel standards.

Retail pricing was the basic fuel price BFP plus levies and margins. Mr Maqubela said that there had been positive sentiment about the prospects for economic growth in China and the USA. China recorded the third highest import of crude oil, ever, in the last year, which had affected the crude and petroleum prices.

In China, refineries came on line, pushing up demand and prices. There were planned and unplanned refinery shutdowns in the USA and Europe at the end of , and, bearing in mind that they would then source from the same markets as South Africa, this also increased demand.

December was the tax year end in many jurisdictions, such as USA, and many players there would run inventories for as long as possible leading up to December, pushing up demand and price when they started to re-stock in January.

Blumberg's survey of fuel prices in 60 countries ranked South Africa at number However, DoE realised that fuel prices did not have a constant impact everywhere, and the population in South Africa spent a larger proportion of their income on travel costs.

DoE was currently reviewing the import parity framework. It believed that, although tweaking may be necessary, South Africa still should avoid only importing finished product, because of the impact on other sectors and jobs.

The refining sector was beneficiating crude oil. At the same time, however, South Africa must accelerate its efforts find its own crude oil. There were ongoing engagements with the Department of Mineral Resources DMR as there was apparently potential for large hydro-carbon finds along the shores.

If this could be realised, the competitiveness could be improved. Mr Mthoxozisi Mpofu, Deputy Director: Electricity, Department of Energy, said that the electricity sector objectives were drawn from the White Paper on Energy, and briefly outlined that they included the fact that tariffs must cater for the low income group, enhance efficient and competition by providing reasonably priced power to all sectors, provide non discriminatory access to the transmission system and facilitate participation of the private sector in power generation.

Various supply options should be considered to reach the best economic cost to the supplier and consumer. People had to understand what they were paying for, and understand the impact of consumption on the grid. There was a huge build programme necessary in the sector, but it was recognised that this should not unduly burden the fiscus, and there was a need to move the electricity sector to a self-funding position in future. Financial viability of the sector was paramount, but there was also a need to ensure no discrimination between categories and to have fair tariffs.

Free Basic Electricity FBE to the indigent was pursued, but users must also respect the resources and use electricity efficiently, to smooth the pricing.

The industry had not funded its own development properly in the past, with the result that the developments necessary now were coming at a higher cost. Social support was based on a prudent operator earning a reasonable return, and reinvesting into the sector, to avoid maintenance backlogs. The licensees should be able to get a fair and reasonable return for the service they supplied. Prices must be transparent and unbundled, with no hidden costs. Mr Mpofu concluded that the three main concerns were the cost of the build sector, limited funding either from borrowings or tariffs , as well as the choices made on how to use the energy, and from where it would be sourced.

The whole life-cycle would need to be considered. It attempted to dovetail with the Industrial Policy and beneficiation programmes.

The methodology looked at how much revenue the TNPA should be allowed to generate, whereas the pricing strategy looked to which group of port users paid. The Ports Act of , in section 72 1 a , described the approval process and types of charge, and required the TNPA to annually publish a tariff book.

The Directives of set out the tariff requirements, which included a consistent, fair, non-discriminatory methodology providing tariffs that were simple, transparent, predictable and that avoid cross-subsidisation, unless this was in the interests of the public.

TNPA should promote access to ports and efficient management and operations. The Chairperson interjected at this point to say that the Committee wanted to hear about the pricing strategy impact on the manufacturing sector. Mr Morwe said that he would deal with that. The current tariff structures was a carry-over of historic practices. Up to , the wharfage was determined "ad valorem", or as a percentage of cargo value, but this had led to manufactured goods being charged at higher tariffs.

The current tariffs were not backed by a clear set of principles, cargo dues did not prefer exports over imports, and the structure had not supported industrial policy. Certain cargo owners complained that costs were excessive, particularly on the manufacturing lines.

Shipping lines were calling for efficiency and increased tenure on leases. TNPA was currently, in this week, sharing its new strategy with the stakeholders. The objective was to find tariffs that would be sustainable, comprehensive, defendable, simple, competitive against international ports, and implementable as well as complementing IPAP.

There were four key principles. There should be cost-recovery, at port system level, not individual ports. The user-pay principle would apply. The revenue must be sustainable, and competitive, to position the South African ports internationally.

The cost allocation would drive the user-pay principle. For ports, there were three users — shipping lines, cargo owners and tenants. However, it was looking to bring in funding from cargo-owners. He tabled a number of slides showing that the new proposals would achieve a shift in revenue apportionment. TNPA believed that this proposal was fully implementable. Because vessels coming into South Africa currently faced lower costs than elsewhere, they could pay more.

The container business largely carried manufactured goods. Comparative figures were set out in slide There would be a reduction of container charges and increase of dry bulk. This was very much in line with the new strategy also to reduce containers and increase dry bulk, which were unprocessed goods or raw materials.

Mr Abdool said that TNPA had introduced the beneficiation programme, focusing on value added goods and beneficiation, and was looking to discount tariffs further where beneficiated commodities were being exported.

To accommodate this reduction in export tariffs, the import tariffs would be increased. Slide 18 of the attached presentation showed comparative prices for dry bulk, break bulk, liquid bulk, containers and road to rail. Mr Abdool reiterated that this pricing strategy was under discussion in this week, and although the time lines for implementation might shift, TNPA believed that quick wins could be achieved.

Some of the tariffs could apply in the next financial year. The Ports Act could accommodate changes in rental arrangements. Ports Regulator comments The Chairperson noted the presence of Mr Riad Khan, Chief Executive Officer, Ports Regulator, who stated that although he did not have a formal presentation, he welcomed the opportunity to make comments.

He noted that in the past, the working relationship with TNPA had been somewhat strained, and the Ports Regulator had intervened to stop excessive price escalations, as a first step, and to target port pricing in accordance with national directions in the longer term. The Regulator agreed with the principles behind the initial movement by TNPA, although it was not necessarily in agreement with the outcomes. In the last year, there had been a R1 billion rebate on export of vehicles.

However, the Regulator was concerned that this did not necessarily return to the manufacturing sector. Some containers may also have been filled with un-beneficiated materials. However, generally, the cost of a box had dropped from R1 to R, and that was a significant step.

Bulk had, traditionally, been preferred, with the vessel owners, who were generally foreigners, also preferred over local owners, with foreign cargo preferred over domestic.

For instance, a Chinese manufacturer moving goods to Brazil would, in a South African port, pay well below the global rate, but a South African manufacturer following the same rout would pay around times the global rate. There were, however, more nuanced instruments being put in place. There were serious concerns about the absolute numbers but the general direction was correct, and the TNPA was moving to supporting the economy.

Mr Khan emphasised that no matter how much was reduced in the supply chain, it would be meaningless unless the supply chain was efficient.

The Regulator was trying to work out solutions to some of the current problems, such as a vessel waiting three to five days to get a berth at Durban, which would obviously increase prices for the vessel owner, who would then load prices to the consumer. The Regulator was also concentrating on efficiency, and he stressed that although Port Elizabeth, a small terminal, showed great efficiencies, Cape Town faced a huge problem in that incorrectly-specified equipment was slowing down operations. Although people had blamed labour, even overseas specialists brought in to address the problems had ended up taking even longer.

There was not a simple solution, and an integrated approach and nuanced perspective was needed. Mr Brian Molefe, Group Chief Executive Officer, TNPA, noted that new equipment had been ordered for Durban and was being installed in phases, but this also required the harbour walls to be strengthened, so the delays were indeed occurring, but would be addressed through the improvements. Discussion on Ports and Regulatory issues Mr G Selau ANC said that the exercise done on value-add against bulk simply seemed to shift the revenue, without affecting the total flow, and asked for more clarity on the point.

Mr Abdool agreed that this was indeed a new apportionment, and the shift was in line with the user-pays principle. That issue was addressed with the Ports Regulator. Mr Selau asked for more clarity on the difference of imports and exports, particularly in relation to automobiles. This was a proposal still under discussion. Imports would cross-subsidise exports. TNPA believed the principle was correct, although the quantum would still need to be finalised.

Mr Molefe said that it was difficult to compare South African ports to others with very different institutional arrangements, who capital expenditure was budgeted for by a local authority.

It must be remembered that Transnet was not subsidised at all by provincial or national government and that was the reason for its structure. The several billion rands worth of spending on the ports over the next few years would have to be generated from operations.

If the prices of containers were cut, as dti suggested, yet increased capital spending was ongoing, the money would have to come from somewhere, and the same applied if bulk were also to be cut. The numbers must add up. The flip side to this was that it would represent a massive increase in revenue for TNPA. He asked if there were any figures on the projected increase in revenue, under the new tariffs. Mr Abdool commented that TNPA was trying to operate under revenue neutrality, which was why user-pays and competitiveness were being applied.

The revenue itself would not increase, but apportionment would be shifted. It was important that dry bulk be increased, but the current context would be considered and the approach phased in. Coal was currently high in percentage terms, but there would not be a significant rand value difference. The drive behind the pricing was that TNPA would like to see break bulk commodities that could be containerised to be put into containers.

Some may not be able to be boxed, but then it was likely that the break-bulk commodity had largely been beneficiated, and it would not attract substantially higher prices.

Mr Hill-Lewis said that more detail was needed on the numbers for the future, and an indication of whether this would be sustainable for those businesses. Mr Khan noted that each year the Ports Regulator would determine how much revenue the TNPA could make, and could adjust the entire pricing regime, to achieve revenue-neutral changes.

Committees decided on the process, the impact on investments, and the prices generally. Mr Hill-Lewis agreed that tariffs and efficiency were interdependent. He asked what plans there were to exploit the significant oil and gas industry on both of South African's coastlines, as South Africa was largely missing out at the moment.

Mr Molefe said that TNPA had designated Saldanha as the port where services would take place, because of the availability of land, although the other ports were also considered. TNPA would put up infrastructure and ring-fence activities around oil and gas. Your trusted data source since Sep Observation: Sep Account Tools Add to data list Get email notification.

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