TERMS OF REFERENCE APPLICATION OF A REGULATORY ACCOUNTING MODEL TO DETERMINE MARGINS RELATING TO WHOLESALING, COASTAL STORAGE AND HANDLING AND SECONDARY STORAGE AND DISTRIBUTION ACTIVITIES OF THE SOUTH AFRICAN OIL INDUSTRY 1. INTRODUCTION Refined petroleum products are manufactured by six refineries in South Africa and supply of refined petroleum products is supplemented by imports of refined petroleum products. These refined petroleum products are transported by pipeline, rail, road, sea and a combination thereof to depots across the country. These products are then distributed directly to commercial customers and to points of resale, particularly, retail service stations. The retail prices of petrol are regulated and fixed on a monthly basis. Although the Department does not regulate the wholesale and retail prices of diesel and the wholesale prices for illuminating paraffin, these prices are published on the Department of Minerals and Energy’s website. The Department also regulates the Single Maximum National Retail Price (SMNRP) for illuminating paraffin and a maximum LPGas refinery gate price. The retail and wholesale price structures in Gauteng for the month of January 2008 are tabulated hereunder in cents per litre: Price element Petrol (95 Diesel Illuminating Unleaded) (0.05% paraffin sulphur) Basic Fuel Price 445.413 509.630 500.128 Transport costs 13.900 13.900 24.100 Delivery costs 7.000 7.000 14.400 Wholesale margin 39.487 39.260 39.472 Retail margin 59.700 N/A N/A IP tracer dye levy N/A 0.010 N/A Fuel Tax 121.000 105.000 N/A Customs and Excise 4.000 4.000 N/A levy Road Accidents Fund 41.500 41.500 N/A levy Petroleum Pipelines 0.190 0.190 levy Slate levy 4.810 4.810 5.000 Demand Side 10.000 N/A N/A Management Levy (DSML) The Basic Fuels Price (BFP) is determined on a set of Working Rules to administer the Basic Fuels Price1 Coastal storage and stock financing are two of the elements that make-up the BFP. Coastal storage covers the cost of providing storage and handling facilities at coastal terminals. 1 Working Rules to administer the Basic Fuels Price (www.dme.gov.za) Coastal storage and handling activities are also executed by parties other than the oil majors and to promote investments in storage and handling, oil majors and independents should earn a similar return on storage assets. Currently marketers are compensated for wholesale activities through the MPAR (Marketing of Petroleum-Activities-Return)2 mechanism. Refined petroleum products are stored and handled at storage facilities before these products are transported from these storage facilities to points of resale or end-consumers for own consumption. The marketing companies are currently compensated for the storage and handling of products at depots and for the distribution thereof from the depots through the so-called service differential which is based on a set of Guidelines3. Capital costs in respect of storage and handling are however compensated through MPAR. The Department of Minerals and Energy has recently concluded an investigation into the implementation of a Regulatory accounting system4. This approach seeks to ring-fence marketing and distribution activities that take place beyond the refinery gate. The approach seeks to ring-fence wholesale, storage, secondary distribution and retailing activities. It further seeks to delink the costs of regulated businesses from those costs that are related to unregulated parts of the oil industry. At the moment costs of servicing unregulated commercial business are mixed with costs related to regulated activities. In line with the provisions of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) the National Energy Regulator of South Africa (NERSA), inter alia, approves the tariffs for storage activities. The Department is however still responsible for setting the margins for wholesaling, transportation, storage, distribution and retail activities. 2 .MPAR Guidelines can be obtained from the Department of Minerals and Energy. 3 .Service differential guidelines can be obtained from the Department of Minerals and Energy. 4 Task 141 Report can be obtained from the Department of Minerals and Energy. The rate of return for marketing assets in South Africa has traditionally been 15% but lacks a scientific basis. In terms of the Regulatory Accounting system, the return on assets (ROA) in respect of all ring-fenced activities will now be determined based on the Capital Asset Pricing Model (CAPM) approach, which seeks to provide a return for an activity that is commensurate with the risks associated with each activity. 2. SCOPE OF WORK 2.1 Develop an activity based approach to set the wholesale, secondary storage and distribution as well as coastal storage and handling margins of the local industry. That is, coastal storage and handling activities will be taken out of the BFP determination and set separately. 2.2 Determine which costs should be allowed in each part of the petroleum value chain thereby ring-fencing costs that are related to each ring-fenced activity. 2.3 Develop an approach to ensure that all costs related to non-regulated activities do not form part of the cost base associated with any of the ring- fenced activities. 2.4 Determine the rate of return that would be applicable to each part of the value chain using the CAPM methodology. 2.5 For each margin, determine the appropriate period for its review and the review of the elements that underpin it and develop rules for effecting such adjustments. 2.6 Develop computer programs/models, to be utilised by the Department, to determine margins and its elements, including the rate of return, on an annual basis in order to determine the applicable tariffs to be included in the price structures of petrol, diesel and illuminating paraffin. 3. OUTPUT FORMAT 3.1 The contractor will be required to deliver the following: 3.1.1 An appropriate margin for the wholesale, storage and secondary distribution activities of the oil industry. 3.1.2 An appropriate rate of return for assets associated with storage and secondary distribution activities of the oil industry 3.1.3 Rules to determine margins for each of the wholesaling, storage and secondary distribution activities of the oil industry. 3.1.4 Computer-based programs/models which will be utilised by the Department to determine the margins and tariffs to be included in fuel price structures. 4. COMMENTS ON TERMS OF REFERENCE 4.1 Comments on the Terms of Reference must be submitted by tenderers at the same time as when the bid is submitted to the Department of Minerals and Energy. 5. TRANSFER OF SKILLS 5.1 Tenderers must submit, at the same time as the bid, to the Department of Minerals and Energy a skills transfer plan and program 4. TIMEFRAME 4.1 The project should be completed within 6 months from the time of the signing of the contract. 6. INTELLECTUAL PROPERTY 6.1 Outputs, data, models, copyrights, trademarks and logos arising from the project and generated in the execution of the project shall vest in the Department of Minerals and Energy. 7. FUNDING AND COSTING 7.1 Quotes should be in RSA Rands on a fixed cost basis and include Value Added Tax. 8. EVALUATION CRITERIA 8.1 Proposals will be evaluated against the criteria listed below:- CRITERIA WEIGHTING (%) (a) Total costs 30 (b) Qualifications, experience and track record 20 (c) Project design, methodology and work program 40 (d) HDI 10 TOTAL 100 8.2 Only bids which score a minimum score of 60 percent in respect of criteria (b) together with (c) will be considered. 8.3 A form will be used which will reflect the name of the tenderer, the different criteria with space provided to record points awarded. 8.4 Each tenderer will be awarded points out of 100. 8.5 COSTS: Formula for each calculation on price: 50 X Lowest tender on a comparative basis (R-value) Relevant higher tender on a comparative basis (R-value) 8.6 All prospective contractors must have a significant BEE component. In the case of a consortium, the lead company must have a significant BEE component. 9. QUALIFICATIONS, EXPERIENCE AND TRACK RECORD 9.1 Contractors would be required to demonstrate a good understanding of the oil industry’s wholesale and secondary distribution sectors and have appropriate financial experience in the application of financial models. 10. METHODOLOGY AND WORK PROGRAM 10.1 The tenderer must give a detailed description of the methodology it will utilize to successfully complete the task directive, as well as a detailed program/project plan. 11. EVALUATION METHODOLOGY 11.1 A panel of four (4) officials will evaluate the proposals. The panel members will each individually evaluate each of the proposals received against the criteria and weightings reflected in paragraph 7. 12. GENERAL INFORMATION 12.1 The Project Leader should at all times be available. 12.2 A compulsary information session, prior to the submission of final proposals, will be held at the offices of the Department of Minerals and Energy on 20/02/2008 at 10:00. 12.3 The Department of Minerals and Energy is not obliged to award a tender And has the right to readvertise the Terms of Reference. 12.4Final proposals must be deposited into the Tender Box on the ground floor of the Department on…07/03/2008……. by 11H00. 13. QUERIES 13.1 Should you have any queries, please contact Ms Zime Ndlangana or Ms Bongiwe Sithembile. 13.2 Telephone number (office): Ms Z Ndlangana: (012) 317-8053; Ms B Sithembile: (012)-317-8744 Facsimile No: (012) 317-8969; E-mail address: Zime.Ndlangana@dme.gov.za Bongiwe.Sithembile@dme.gov.za 13.3 Office No: A809, Mineralia Centre, corner of Andries and Visagie Streets, Pretoria.