In a recent Special Occasional Bulletins of Economic Notes, South African Reserve Bank (SARB) economists Zaakirah Ismail and Christopher Wood said there are four ways the national government can step in to address the country’s consistently rising fuel prices.
These include a review of the methodology for calculating retail margins and instating a “maximum” instead of a regulated petrol price, reviewing how inland transport costs are determined, reviewing the viability of the Road Accident Fund (RAF) against alternative approaches such as third-party insurance, and removing or updating several outdated elements of the basic fuel price calculation.
Additionally, the economists said it would be viable for the Department of Mineral Resources and Energy (DMRE) to increase the frequency with which fuel prices are changed given the mechanical nature of this calculation, as global benchmarking indicates that other markets often release new prices every two weeks.
“This would require additional work on the part of retailers, but would improve the responsiveness of the fuel price and reduce the burden on the slate levy to adjust for short-term imbalances,” they said.
Fuel prices, of which taxes account for between 27-31%, are a major contributor to inflation in South Africa as over 80% of the nation’s goods are transported via road, with higher prices at the pumps consequently having an adverse effect on the cost of food, clothing, and just about everything else consumers need.
Retail margins
Since a major change in methodology came into effect in 2015, retail margins have consistently been the most significant driver of fuel price inflation outside the basic fuel price (BFP) and taxes and levies.
“The greatest contributors to underlying cost increases appear to be wages and earnings for owners, with attendant wages growing particularly fast during this time, while basic capital expenditure costs like buildings, land, and equipment also continue to rise,” said the SARB economists.
Much of this wage growth appears to result from the increasing number of retail employees, with little associated growth in sales.
Between 2015 and 2020, forecourt employee numbers grew by 19% and cashier numbers by 52%, while sales volumes remained mostly stagnant, resulting in attendant wages accounting for 44c of every litre purchased.
“This appears to indicate either that employment is growing per service station, or that the number of low-volume stations expanded over the period,” said the economists.
In South Africa particularly, the “social cost” of reverting to self-pumping petrol stations would be too high as over 70,000 individuals are employed in the forecourt sector.
Given these considerations, three areas may offer the greatest scope to manage retail margin costs:
- Review the portion of the margin received by owners.
- Apply a more frequent and transparent approach to calculating retail margins to determine the root cause for their sudden ballooning.
- Implement the proposals made by the DMRE in 2018, which would reposition the regulated petrol price as a maximum price, allowing retailers to set prices below the petrol price.
“This would presumably be achieved by individual retailers discounting their margin, adding an element of competition that could account for failures in the retail margin calculations,” said the SARB report.
“Given the complexity of the retail petrol market, and the limits to the methodology detailed above, this may be the best available option to build a naturally correcting calculation for the retail margin.”
Road Accident Fund
The RAF is one of the “most unusual aspects” of South Africa’s fuel price structure because there are very few schemes of this kind in other countries, as a more common model of managing costs associated with road accidents is to require mandatory third-party insurance for all drivers.
While the RAF functions as sort of a safety net for underinsured and non-insured motorists, the rising cost of its associated levy means that the additional impact on petrol prices has rapidly eroded the cost-benefit for drivers relative to mandatory private insurance.
“For example, an online quote for third-party insurance for a Toyota Corolla returns prices ranging between R280 to R300 per month (based on a search in February 2023), whereas one full tank of petrol in the same car would pay about R109 in RAF levies,” said the SARB economists.
“To examine this trade-off from another angle, the DMRE estimates that 10 billion litres of petrol were sold in the retail sector in South Africa in 2019, while NaTIS estimates that 7.7 million passenger vehicles were actively driven at the end of 2021.”
“At this level of petrol consumption, the total RAF levy costs consumers R2,849 per car per year, meaning insurance would be, on average, a more competitive option if it could be offered at a rate of R237 per month.”
General Fuel Levy
The general fuel levy (GFL) has been the single largest driver of administered price inflation in petrol prices over the last 10 years.
It is meant to be distributed to a range of agencies and departments focused on road maintenance, and is considered alongside licence and toll fees as one of the central funding pillars of South Africa’s road infrastructure.
The GFL’s rapid increase stems from a challenging fiscal environment facing the country and the government’s need to find alternative sources of taxation to narrow a widening fiscal deficit, accounting for 5.8% of total tax revenue in 2021/22.
“As a result of these concerns, the Minister of Finance introduced an above-inflation increase in the general fuel levy for every year between 2009 and 2020, with the exception of 2014,” said the economists.
While the GFL is allocated to road maintenance and upgrades, it has seemingly not been used for such, as the National Treasury estimates that repair backlogs on provincial roads alone will cost in the region of R186 billion to work through.
However, the GFL can’t be scrapped or lowered by an extreme amount given its important role in plugging the fiscal deficit and tackling the poor state of logistics infrastructure.
“Despite this, costs of the fuel levy remain high. Beyond the pure inflationary impact, continued increases are concerning because, like all product taxes, the fuel levy is regressive,” said the economists.
“While poorer South Africans are less likely to drive, they nevertheless feel the impact of these increases through transport costs. Globally, fuel levies are also considered regressive because poorer drivers tend to have older and therefore less fuel-efficient cars.”
Therefore, the GFL should be subject to a “more detailed review” as part of any revision of the petrol price.
Transport costs
Transport costs are a much smaller component of fuel costs than the elements above, but it nonetheless indicates how marginal inputs have rapidly changed over the years with no obvious justification.
Transport costs refer exclusively to domestic transport of refined petroleum, with international shipments falling under the BFP, and storage and other associated wholesale costs dealt with in separate margins.
“While high-quality information on liquid fuels transport costs is not available, evidence from general freight costs indicates that the transport cost component has been rising significantly faster than market rates,” said the economists.
“The DMRE has previously stated that transport costs are calculated by applying the ‘most cost-efficient mode of transport to determine primary transport cost implemented into fuel price structures’, but no detail is available on how this is achieved.”
This lack of transparency, combined with the above-average increases, makes transport costs one of a number of components that require review and greater public scrutiny.
Keyword: 4 ways South Africa can curb rising petrol costs – Including price changes every 2 weeks