Stop+whingeing,+market+and+SASOL,+Crotty,+B+Report

INSIDE BUSINESS
=Market, Sasol must stop whingeing=

Business Report, Johannesburg, February 22, 2006

 * By Ann Crotty**

What's so wrong with a little bit of a windfall tax? Sasol is pumping so much profit these days that it would hardly be noticed.

And anyway, another fire beside some or other refinery, another refinery-destroying hurricane, another truculent outburst from the ruler of some or other oil-rich nation and the oil price would rise sufficiently to more than compensate.

Indeed, why shouldn't the expenses side of Sasol's income statement be as whimsical as the revenue side? You don't hear Sasol management and shareholders whingeing about the latest dramatic and unexpected increase in oil prices and how this makes planning so difficult for them.

No, all that happens is that they take this whimsical and uncontrollable factor in their stride and bravely march on to the next bonus in their remuneration package. Is there not a comforting sort of symmetry about the prospect, obviously a totally uncertain prospect, of being faced with a windfall tax or a windfall surge in the oil price?

It seems not. Uncertainty is only tolerated if it boosts the bottom line. And on the Sasol windfall tax, the amorphous market has spoken. Or rather, it has screamed in that strange way it has of appearing, to the uninitiated, to be thoroughly spoilt and neurotic.

The initiated, of course, understand that this loud response is in line with the threat to the efficient workings of the market and that such efficiency requires certainty.

My personal gripe about a windfall tax on Sasol is that it represents a continuation of the situation that has characterised the oil industry in this country for several decades - it is an industry that is run for the benefit of the government and the oil companies.

At this juncture it is worth noting that higher oil prices also benefit the government in the form of increased fuel taxes. And who do you think is funding all of this? That's right, you and I are.

You see, a windfall tax would be just another leg in that complex but essentially cosy relationship between the government and the oil companies. The fact of the matter is that while Sasol could afford it, why should the government get even more money? It has huge difficulty spending what it already has.

So doesn't the solution just scream out to you at this stage? Or is it only apparent to those individuals who had the good fortune to be able to attend the competition tribunal's hearing into the proposed merger between Sasol Oil and Engen?

Lob a windfall tax on all the oil companies that would be sufficient to pay for the immediate enlargement of the pipeline between Durban and Gauteng with enough left over to cover the cost of implementing black economic empowerment in the industry. And at the same time - immediately - deregulate the industry.

Or if not a windfall tax, perhaps something a tad more nuanced, like doubling the tax on dividends. That would mean that management wouldn't have to worry about whether or not it has enough money to sustain its investment plans.

What the government needs to do is unwind the complex relationship it has with the oil companies and allow at least some market principles to take hold. One of the many fascinating aspects of the tribunal's 18-day hearing was the increasingly desperate attempts by the tribunal members to find evidence of a market at work in this industry.

At one stage tribunal chairman David Lewis likened it all to Gosplan circa 1926. Gosplan was the highly inefficient central planning agency that dominated the Soviet Union. It was a description that few at the hearing seemed inclined to challenge.

There's no doubt Sasol played a key role in the government's plans for the oil industry for decades. Indeed, much of the evidence that emerged in the hearing indicated that the industry was structured to accommodate Sasol's growth and profit plans.

But while Sasol received the lion's share of the government's largesse, benefiting from what one oil company executive described as "state steroids", the benefits of this Gosplan-type situation were felt by all the oil companies. The high degree of regulation in the industry means that they all enjoyed exceptionally high profit margins on their South African business. These high margins were deemed necessary to induce them to continue supplying the country during the dark days of apartheid. That they are even higher in post-apartheid South Africa is a travesty.

One disturbing explanation for the delay in the much-awaited deregulation is the need to finance black empowerment in the industry - making this the only industry in which consumers rather than shareholders have to carry the immediate expense of empowerment. Using some of the proceeds of a windfall tax to fund empowerment would surely be more appropriate.

And the rest of the proceeds could be devoted to increasing the pipeline capacity between Johannesburg and the coast, because in a deregulated environment it would be advisable not to have Sasol enjoying too much control over supply in the inland region.

Increased pipeline capacity between Durban and Johannesburg would put the other oil companies on a more even footing with Sasol inland. And when that happens, Sasol should perhaps get improved access to the retail side of the industry.


 * From: http://busrep.co.za/index.php?fArticleId=3124344&fSectionId=560&fSetId=662