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September 10, 2018
Formerly known as Task 141, the Regulatory Accounting System (RAS) in the South African fuel retail industry was introduced in December 2013 by the Department of Energy (DOE). We explain some of the key elements of RAS to help new entrants to the industry better understand the topic, and to also give our opinion on how it can improve from the perspective of existing dealers.
RAS is in the South African fuel retail industry is a break-down of costs to operate a benchmark service station. It includes all activities to establish and operate a service station and breaks it down into a cost per litre. RAS is not a regulation, but a ‘guideline’ and therefore is not enforceable in a court of law at the time that this article was published.
Operational Expenditure or OPEX (the costs to operate a petrol station).
Capital Expenditure CAPEX (the costs in establishing a petrol station and some capital costs required to run a service station, for example being inventory costs)
EC (Entrepreneurial Compensation).
The oil companies have always maintained that it is within their prerogative to determine the return they deem fair for their investment or asset.
The CAPEX values in the RAS model are very rewarding to the owners of the asset. An asset can be anything from a roof canopy to the fuel tanks themselves.
The values and the subsequent returns from the asset are based on current replacement values - even though in many cases the asset has aged significantly. For example: an investor of pumps, tanks and canopy will still get allocated the same (if not higher) return for the assets purchased 20 years ago. Currently, RAS does not take depreciation into account.
In the case where the property is owned by a third party, the reasons are clear, that the owner wishes to “cash in” on the advantages of the new RAS model as well. This remains a significant grey area in the RAS model, where third party owners are primarily excluded from the model’s benefits. We will explore this topic further in an upcoming blog post focusing on leases.
RAS is a mechanism that seeks to give a return to the investor. If an investor, for example, invested into a site 10 to 20 years ago, the tanks themselves depreciate in value but the return in assets appreciate with inflation. Given that there is no mechanism that takes depreciation into consideration, It is our opinion that this is an inherent flaw of RAS.
As a result, the investor of the asset does not have a timeframe from which to recoup the investment from the asset.
The investor can keep the asset even if its old. That means that the investor could potentially just ‘enjoy’ the return from the asset even though it may not be working properly anymore. As an example, RAS does not give clarity on how the ‘return’ must be allocated in cases where the asset was never bought, e.g camera system or perhaps a generator.
Consequently, equipment or assets are kept but in reality they are poorly maintained or breaking down. An old rusty site canopy will still see a return to the investor on the RAS model, and the appointed dealer can’t replace it (in a case of a CORO or Third Party Owned site). In the end, this may result in various operational or reputational risks for the business from the customer’s perspective.
Our proposed solution is to introduce or define what the average life span of an asset should be beyond which an investor cannot continue to claim for the value of the asset.
After the lifespan of the asset has been reached, we believe that investor must ensure that the asset is maintained. If the investor of the asset fails to maintain then the operator must take the margin and assume accountability to maintain it.
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