Fuel Tax Inquiry

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Attachment - Proposal for a Service Station Adjustment Fund

SUBMISSION

TO THE

2001

Submitted by Terry Conroy, Manager,
Service Station & Convenience Store Division
of the
Victorian Automobile Chamber of Commerce

22 October 2001

Secretary
Fuel Taxation Inquiry
C/- Department of the Treasury
Langton Crescent
PARKES ACT 2600.

Terry Conroy
Manager, Service Station and Convenience Store Division
VACC

Re: Submission from Victorian Automobile Chamber of Commerce to the Fuel Taxation Inquiry

Dear Sir / Madam,

The Victorian Automobile Chamber of Commerce represents service station operators from single site franchisees to multi-site franchisees and commission agents. We also represent branded and unbranded independent operators.

VACC is pleased to have the opportunity to provide comments and suggestions to the Fuel Taxation Inquiry. In the past, the Chamber has contributed to the many inquiries into issues surrounding the petroleum sector.

VACC also wishes to raise an issue that is not included in the issues paper, yet is nonetheless vitally important to the environmental and economical impact of fuel sales taxes. This issue being, modification of the structure of the present fuel tax regime to enable the establishment of a structural adjustment/environmental clean up fund to rectify critical environmental and structural issues within the Petroleum Retailing Industry.

Taxation on Fuel for Transport Uses and Revenue collected

Taxation on an essential product like fuel for transport and off-road use is always a vexed issue. It is acknowledged as a necessity to ensure the population can enjoy the benefits of an ordered, modern society.

In general, the public accepts taxation on fuel as a necessary imposition on society. The way in which the revenue collected by the Government is used, however, is an issue which has caused many heated debates.

To be more specific, over sixty billion dollars has been collected in fuel excise alone between 1996 and 2001. Yet according to the current government's publication "Heading in the right direction", sent to all Australian homes, only one billion, four hundred and thirty seven thousand dollars have been spent on road related issues in that period. (These figures do not include the issue of double taxing where GST is imposed not only on fuel products, but also on their excise (tax) component.)

The purpose of adding an excise on fuel, in the first place, was to establish a source of income for the Government to fund the development and maintenance of the national road infrastructure system. An extra surcharge on fuel of 1cpl in 1982 under the Australian Bicentennial Road Development Trust Fund Act was introduced to also establish a roads funding programme. However, only a total of approximately 6cpl of the excise is actually linked to road expenditure - out of (currently) over 38.14cpl collected in excise, not to mention the trust fund and GST that is added on top.

The collection of excise is not proportionally linked to the funding of road programmes and it is clear that that the revenue collected by the government does serve other purposes. In particular, spillover effects, which are not reflected in the price of fuel, should be addressed via the revenue collected through the excise on fuel.

The terms of reference of the "Fuel Taxation Inquiry" do touch on those externalities but not beyond the quality of air and emission standards. VACC firmly believes that Measures for a Better Environment need to include funding for a "Service Station Structural Adjustment Fund" which in principle has been agreed upon as part of the "Environmental Clean-Up Fund".

In the "Report on the Provisions of the Petroleum Legislation Repeal Bill 1998", also know as the Crane Report, the Committee supported the investigation by the Government into the establishment of a "structural adjustment fund", which would be "used either to assist in site remediation and thereby enhance the economic benefits of the site to the owner, or to compensate the owner/operator for the loss of the capital asset and investment on exit from the industry." (Recommendation Three, Crane Report.)

It is high time that the financing for this fund is agreed upon and VACC is asking the Committee for the Fuel Taxation Inquiry to set aside funding for the Service Station Structural Adjustment Fund.

Developments in the Service Station Industry

Given that Service Stations were originally constructed to service the motoring public throughout the country, the commercial result of a social need, the demise of such enterprises has resulted from changes to infrastructure and society.

The number of Service Stations in Australia has declined steadily over the years. Of the 20,000 service stations that operated in Australia in the 1980s only around 8,000 remain in the whole of Australia, with around 1,800 operating in Victoria. This decline of the service station industry has resulted from infrastructure and social change in which the Government has played a large role.

The introduction of legislation to remove the Sites Act and the Franchise Act, and then replace them with an Oil Code was destined to failure and rightly did so. The lengthy arguments for and against the repeal of these Acts and their subsequent examination have resulted in a "claytons" restructure of the industry anyway. This has lead to the premature closure of many service stations and the uneconomical "viability" of others with accompanying hardship on the operators.

Federal and state governments have further contributed to this demise through the
bypassing of many regional townships, even whole regions, through the construction of intercapital freeways and other major road works. This has caused the closure of many businesses including service stations due to their resultant decreasing demand for goods and services in these mainly rural areas.

As these businesses fail and the service stations close, simply "selling off" and walking away is not an option - unlike merchandise traders. Service station sites have, in many cases, become an environmental liability. The low value of land in rural areas and the projected costs involved in cleaning up potential soil and groundwater contamination have caused some sites to be simply abandoned.

Site clean-up and removal of underground fuel storage tanks is often not considered because of the following:

a) Environmental issues, such as potential contamination, are not always immediately apparent.

b) Even if the operator was aware of issues of tank leakage, fuel monitoring and environmental requirements, such things faded into the background as all their endeavour focussed on survival. The lack of income and any structural adjustment assistance, makes it impossible for them to do anything about it.

c) The desperate hope of selling the site as a going concern. Therefore, the equipment is retained so that another person may be able to "make a go of it".

d) Cost of tank removal and site clean-up is beyond the capabilities of the service station operators/owners to pay. However, many are orphaned sites. The owner who closed the site is either not available or not contactable. Some have even died.

e) Many simply walk away from the business and lose everything - including their "superannuation" which is or was, the now non-existent or even negative value of the business and property.

Consequently, fences are erected around the perimeters of orphan sites, leaving behind a legacy of negativity and destitution. Many orphaned sites are described as "eye-sores" of the townships. Beyond being a major environmental and economical issue, this has become a major Local Government issue in regional areas. The closure of many service stations has had a major negative impact on the towns' morale.

The Municipal Association of Victoria (MAV) is currently surveying regional and metropolitan municipalities to quantify the number of closed, abandoned and orphaned sites throughout Victoria. This process is currently still underway and accurate figures are not available as yet. Similar surveys will be required in all other states and territories. VACC will pass the results on as soon as they become available, as an addition to this submission.

The Example of Euroa

A classic example of the extent of this problem is the Victorian regional township of Euroa. By-passed with the building of the Hume Freeway in 1992, this township originally boasted 14 service stations. These were constructed to service the needs of both the local community and the passing traffic. Today, the number of service stations has been reduced to three, with only one offering 7 day operation and, this site has to remain open 24-hours to maintain it's viability.

The main street of Euroa currently has 2 large "eye-sores" in the form of closed sites fenced off and looking derelict. Accompanying this problem of "visual pollution" is the major issue of ground pollution. The EPA has established that the ground water in the area is contaminated with residual fuel that has leaked into the ground over many years. The actual extent and origin of this problem are yet to be accurately identified.

Environment issues for fuel are like a Tree, we are aware of the trunk, branches and leaves they are clearly evident, because they are visible, as is air pollution.

However, we forget that the tree's supply network of roots under the ground is potentially just as large if not larger, but is unseen and therefore often overlooked. Just as the potential for ground and ground-water pollution can also be overlooked.

Measures for a Better Environment - A Clean-Up Fund

The structure of fuel taxation has evolved over many years to pursue a range of economic, revenue raising and environmental objectives. While this structure of fuel taxation may or may not be suited to the needs of the Australian nation, it has been a source of revenue for the Government. And in return, this revenue can effectively finance the other objectives of setting up fuel taxation in the first place.

The economic and environmental issues associated with the developments in the service station industry should be financed via a share of the revenue collected through the fuel taxation process. The establishment of a mutual fund initiated by a government grant should be used to monitor service station sites and support the clean up of those sites that are contaminated. This needs to happen quickly before one of our most precious natural resources, groundwater, is contaminated beyond redemption.

Additional comments about the taxation of fuel

GST on fuel prices

This "tax on a tax" has been acknowledged by Government as a contributor to high regional fuel prices, hence the introduction of the highly expensive and ill-conceived "Regional Rebate" system. Causing expenditure of dollars that we have shown to have been captured by the oil companies and thus have NOT been available to reduce the regional fuel price by the "one to three cents" originally intended.

Fuel pricing in regional areas - current taxing structure "flawed"

Another factor is the lack of parity between metropolitan and regional fuel prices. Until this glaring issue is addressed, the issue of taxes vs. fuel prices will never go away. If fuel-pricing policies were fair and equitable, regional fuel prices would only reflect the slightly higher transport charges and extra handling costs (due mainly to lower volumes) in many regional service stations.

The current situation disadvantages the regional customers in particular and will continue to do so until access to a fair and true wholesale price is made available to all fuel retailers, both regional and metropolitan.

A regional price that is higher due only to cartage costs and the slightly higher margin required to cover the costs similar to those incurred by dealers in metropolitan areas, but on a lower volume, would be acceptable to the majority. This should eliminate the price variance of 10 to 23 cpl that we have experienced in the past.

It is this 10 to 23 cpL extra that is adding significantly to the GST burden carried by some regional areas.

If fuel prices were truly transparent, then this would be accepted by the public provided they knew it was clearly a fair price, even if that resulted in a slightly higher average retail price (which should not be necessary).

Introduction of a true Terminal Gate Price

To complete the fuel issue solution, a fair and equitable, unadulterated Terminal Gate Price (TGP) for fuel, set by the oil companies - not set by Government - must be introduced.

Such a TGP must have no allowance for discounts after the wholesale TGP has been set. The TPG should be based on a minimum price for large volumes of say, 5 million litres plus, to a maximum TGP for the minimum volume of say, 30 thousand litres (with a price variation of say 1.5cpL) across these volumes. This would allow scope for competition through volume sales at the wholesale end of the market.

Allowance should be made for price "add-ons" to cover such costs as transport, maintenance, branding and credit. However, this allowance should only occur where such costs are not already included in current franchise or supply agreement fees, this is to ensure "double dipping" does not occur.

Current TGP practise in Victoria

TGP legislation recently introduced in Victoria provides for declaration of a minimum Terminal Gate Price and then allows add-on charges for components as outlined above. The only flaw is that it then allows for DISCOUNTS. This, we are told, is due to the Trade Practices Act. How can it be a minimum TGP and still have room for discounts?

It is obscene to suggest that disallowing any rebates after the TGP is set, is against the Trade Practices Act. Allowing manipulation of prices so as to favour one player against another is the trade practice that is obscene.

Not as is the current case where the RETAIL competition allows fuel prices to be adjusted to disadvantage regional suppliers and customers. (Including a higher GST component.) While at the same time, withholding supply of product at a competitive price to independent operators (both regional and metropolitan). Thus destroying their ability to compete. The long-term ramifications of this are too disastrous to contemplate.

The current pricing structure in Victoria gives the impression that oil companies believe it is poor business practice to allow sufficient margin in a product, to enable retailers to earn even a moderate wage. And this from a product (fuel) that contributes up to 70% of their business volume or more.

The Victorian TGP is, therefore, not a true minium TGP. If it was, there would be an excellent base for true competition at the wholesale level, giving all in the industry a fair go. It would result in lower retail prices and an even amount of GST paid by all, through true retail competition, not higher retail prices through wholesale price manipulation and volatility as currently exists with its accompanying window of opportunity for "abuse of market power".

This is evident in the fact that the Victorian TGP is regularly higher than the retail price. The selective application of rebates allows oil companies to totally manipulate the price of fuel in this country.

Free access across Australia to fuel at a true TGP price, by any accredited fuel transporters, must be introduced to ensure that regional and metropolitan fuel suppliers have clear access to the product at a truly competitive WHOLESALE price, thus maintaining a fair equity in pricing throughout the country.

For refiners and distributors to be involved in fuel sales at the franchisee / retail level is a clear conflict of interest and leads to manipulation of the market in favour of the refiners.

Any reform package for the oil industry should require all refineries to divest the retail arms of their businesses to remove this conflict of interest.

Get rid of Regional Rebates

There truly is no need for the Regional Rebate that currently costs an exorbitant amount per annum. Such a rebate only ends up injected into the oil company coffers, and adds to government and administration costs. When the Regional Rebate is removed, oil companies must be required to reduce the wholesale price by that exact amount to maintain equity in retailers' margins.

The rebates should be redirected into a major initiative to clean up polluted service station sites, and even encourage uneconomical sites to leave the industry as well, without placing any further burden on the Treasury.

This proposal clearly fits with current government policy of meeting the challenge of environmental sustainability. It provides national leadership in the setting and enforcement of standards for the adoption of new and cleaner technologies and provides an opportunity to display leadership in the domestic political scene.

If action is not taken in the immediate future, it may be impossible to sustain a useable environment - given that the ground water in some areas has already been affected by hydrocarbon leakage.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Recommendations:

1. That funding be made available for an Environmental Clean-Up Fund through this Inquiry.

2. That the GST be removed from fuel and that excise be re-instated to pre-GST levels.

3. That a transparent true TGP policy be established.

4. That the Regional Rebates be removed and retailers wholesale buying prices be re-instated to pre-GST levels to ensure retail margins are maintained.

Sincerely,

TERRY CONROY
Manager,
Service Station & Convenience Store Division
VACC

Attachment - Proposal for a Service Station Adjustment Fund