N2-Road Mount Frere Alfred Nzo District Municipality Umzimvubu Local Municipality Eastern Cape Province

September 2015

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Company Details (herein after referred to as Petrorex)

Company Name DOTCOM TRADING 278 Trading as Petrorex Registration number CK 2008/008384/23 Members JL Pieterse Slogan “Energy in Motion” Official Logo

Website www.petrorex.co.za Address 42 Bontebok crescent Theresaburg security village Thereseapark Pretoria Postal Address P O Box 52039 Dorandia 0188 Telephone number 012-542 1368 Hannes Pieterse 082 440 7969 e-mail [email protected] Dawie Pieterse 074 585 5085 e-mail [email protected]

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DOCUMENT DISCLAIMER

 This report has been prepared by Petrorex , with all reasonable skill, care and due diligence within the terms of the appointment with the client within the parameters specified in this document, incorporating our General Terms and Conditions of Business and taking account of the resources devoted to it by agreement with the client.  We disclaim any responsibility to the client and others in respect of any matters outside the scope of the above.  No warranty or representation are made, either expressed or implied, with respect to fitness of use and no responsibility will be accepted by Petrorex or the authors for any losses, damages or claims of any kind, including, without limitation, direct, indirect, special, incidental, consequential or any other loss or damage that may arise from the use of the document  This report is confidential to the client and we accept no responsibility of whatsoever nature to third parties to whom this report, or any part thereof, is made known. Any such party relies on the report at their own risk  Petrorex does not accept responsibility for any errors or omissions in the supplied information and does not accept any consequential liability arising from commercial decisions or actions resulting from them.  Any decision based on the contents of this report is, however, the sole responsibility of the decision maker.  Opinions presented in this report apply to the site conditions and features as they existed at the time of the survey, and those reasonably foreseeable.  These opinions do not necessarily apply to conditions and features that may arise after the date of this Report, about which Petrorex had no prior knowledge nor had the opportunity to evaluate.  No part of this document may be changed/ altered without permission and approval of Petrorex.

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DOCUMENT CONTROL SHEET:

Report prepared for: Umzimvubu investment Group

Report Number: 20150903-03

Remarks Date Prepared by Signature Reviewed by Signature Authorized by Signature Project Number

1st issue None 03/09/15 Dawie Pieterse Hannes Pieterse Hannes Pieterse 201450903-03

1st ------Revision 2nd ------Revision 3rd ------Revision

Distribution

Name Company Copy No Date Authorized by

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DECLERATION

DOTCOM TRAIDING 278 Registration number 2008/008384/23 (Herein after referred to as Petorex) including of its directors, Chief Executive Officer, members, consultants, employee’s, sub-contractors/consultants including of their direct family members hereby declare the following :

1. That Petrorex including of its directors, Chief Executive Officer, members, consultants, employee’s, sub-contractors/consultants including of their direct family members does not have personal relationship outside of the work environment with the client / applicant. 2. That Petrorex does not have a relationship to sponsor (consultant serves as an executive to a company sponsoring the research or serves on the company’s board of directors); 3. That Petrorex does not combine the business operations in any way with the client’s /applicant’s business operations instead of maintaining all such operations separately and distinctly. 4. That Petrorex does not have any financial or personal interest/gain in the proposed development, or from its developers or any subsidiaries, apart from the provision of the services rendered and accepted from the official appointment. 5. That Petrorex does not have any non-financial interest, gain in the proposed development or from its developers or any subsidiaries, apart from the provision of the services rendered and accepted from the official appointment. 6. That the consultant is listed as an investigator on the project or is a member of the research team within the Petrorex business unit 7. That the Banking details provided for payment is registered and in use by Petrorex and not registered to any directors, Chief Executive Officer, members, consultants, employee’s, sub-contractors/consultants in their personal capacity. 8. The business does not establish a quality standard for the individual (except that the business may provide plans and specifications); 9. That Petrorex does not establish a quality standard for the client’s/ Applicant’s development and planning process (except that Petrorex may provide plans, recommendations and specifications regarding work but cannot oversee the actual work or instruct the individual as to how work will be performed)

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10. That Petrorex does not dictate the time, performance and progress of the planning and development process. 11. That the research and report was compiled and completed under supervision of the director, CEO before distributed 12. That the information including but is not limited to research and the report compiled and completed will be confidential and under the distribution from the client / applicant or with requested approvals distributed from Petrorex.

Petorex including of its directors, Chief Executive Officer, members, consultants, employee’s, sub-contractors/consultants including of their direct family members will at the best of their ability, capability and knowledge adhere to the declaration obligations.

A breach of the declaration will result in an investigation and findings will be made available between the parties for action to be taken.

I Dawid Jacobus Pieterse ID No 9002285071087 hereby being of sound mind hereby acknowledge fully understand and accept the declaration made available.

Consultant 21//09/2015

Signature Position Date

I Johannes Lodewickus Pieterse ID No 6507215004084 hereby being of sound mind hereby acknowledge fully understand and accept the declaration made available.

CEO 21/09/2015

Signature Position Date

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INDEX DESCRIPTION PAGE Document Disclaimer 3 Document Control Sheet 4 Declaration 5 Acronyms used 8 SECTION ONE INTRODUCTION / 1 Background 10. 2 Planning approach, objectives & limitations 10. 3 Work method 11. 4 Use of this document 12. 5 Report outline 13.

SECTION TWO THE MACRO ENVIRONMENT 1. Background 15. 2. Regulatory accounting system 18.

SECTION THREE THE MICRO ENVIRONMENT, PHYSICAL AND LEGAL FEASIBILITY, MARKET FEASIBILITY, FINANCIAL VIABILITY, ECONOMIC FEASIBILITY. 1 Physical and legal feasibility 22 1.1 Geographic site location 22 1.2 Description of the proposed development 24 1.3 Accessibility 25 1.4 Visibility 26 1.5 Property Information 27 1.5.1 Title deed information 27 1.5.2 Surveyor’s information 28 1.5.3 Zoning information 29 1.5.4 Environmental authorization 29 1.5.5 Site and Retail license 30 1.5.6 Availability of services 30 1.6 The planned development 31 1.6.1 The development concept 31 1.6.2 The development team 34 2. Market feasibility 34 2.1 Catchment area 34 2.2 Demographic and economic information 37 2.3 Existing road network 44 2.4 Fuel sales projection / Market demand analysis 45 2.4.1. Volume projection 46 2.4.2 In Terms of socio-economic impacts 50 2.5 Competitor service stations 52 2.5.1 Market supply analysis 52 2.5.2 Undeveloped Service Stations 56 3. Financial viability 56 3.1 Operational viability 57 3.2 Development viability 61 3.2.1 Oil Company transaction 62 3.2.2 The service station development assessment 63 3.2.2.1 The Income Approach 64 3.2.2.2 The Goodwill/Business assessment 67

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68 SECTION FOUR CONCLUSION AND RECOMMENDATIONS – NEED AND DESIREBILITY

REFERENCES Umzimvubu Local Municipality Integrated Development Plan 2013/2014- 1st IDP review for the period :2012-2017 Alfred Nzo District Municipality 2014/15 Integrated Development Plan Traffic Impact Assessment July 2015: Engineering Advice and Services (Pty) Ltd- Project Name Proposed Filling Station and Truck Stop NR00220 KM 9.8 Umzimvubu Municipality

Revision of the guidelines for access to filling stations. – 07/2001

LIST OF TABLES PAGE Table 1 – GPS Co-Ordinates of proposed development 22. Table 2 – Population profile 38 Table 3- Population by Gender 40 Table 4 - Traffic Highlights of Site 688 (2015) N2. 46 Table 5 - Interception rates versus passing-by traffic. 47 Table 6 - Average Fill per Vehicle Type. 48 Table 7 - Projected average fuel sales per month from year 1 to year 5. 50 Table 8 – Parties involved 56 Table 9 – RAS opex 59 Table 13 - Volume Loss – Market Shift Based On Shared Traffic Stream Appendix K Table 14 - Volume Loss – Moving Market Factor / Calculation Appendix K

LIST OF FIGURES Figure 1- Location of the proposed development in relation to surrounding 23. suburbs in the area Figure 2- Proposed development in relation to the Surrounding road 24. network

LIST OF APPENDIX’S Appendix A -Proposed service station layout Appendix B –Areal view of the application site and surrounding areas Appendix C –Proposed accesses Appendix D – Title Deed Information Appendix E – Surveyors information Appendix F – Zoning information Appendix G – Environmental Information Appendix H – Site and Retail License Appendix I – Photographs of the application site Appendix J –Photographs and information of the competition sites Appendix K –Financial analysis

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ACRONYMS USED: ACRONYMS. ADT Average Daily Traffic ADTT Average Daily Truck Traffic AMEF African Minerals and Energy Forum ATM Automatic Teller Machine APO Additional Profit opportunity BBBEE Broad Based Black Economic Empowerment BEE Black Economic Empowerment BID Background Information Document BSS Benchmark Service Station CBD Central Business District CBO Community Based Organization DCF Discounted Cash Flow. DEAT Department of Environmental Affairs and Tourism. CCTV Close Circuit Television network CORO Company Own Retailer Operator DASC Direct Access Service Centre DGO Diesel Gas Oil DoE Department of Energy DWAF Department Water and Environmental Affairs. EIA Environmental Impact Assessment EMP Environmental Management Plan FRA Fuel Retailer Association GDP Gross Domestic Product GVA Gross Value Added HDSA Historical Disadvantage South Africans HES Health Environment & Safety IDP Integrated Development Plan ISO International Organization for Standardization LED Local Economic Development LFC Liquid Fuels Charter LPG Liquid Petroleum Gas LRP Leaded Replacement Petrol MDZ Magisterial District Zone MPAR Marketing of Petroleum Assets Return MSDS Material Safety Data Sheet PPA Petroleum Products Act PPM Particles per million PTO Permission To Occupy QTY Quantity RAS Regulatory Accounting System RON Research Octane Number RORO Retailer Own Retailer Operator SABS South African Bureau of Standards SANS South African National Standards SAPIA South African Petroleum Industry Association SAPRA South African Petroleum Retailers Association SASRIA South African Special Risks Insurance Association SDF Spatial Development Framework SMME Small Medium Micro Enterprise UIG Umzimvubu Investment Group ULP Unleaded Petrol WWTP Waste Water Treatment Plant

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SECTION ONE

INTRODUCTION

1. BACKGROUND

DOTCOM TRADING 278 CC t/a Petrorex registration number. 2008/005718/23 ,an independent consultant, was commissioned by Luzuko Mdutyana member of Umzimvubu Investment Group (UIG) (herein referred to as “the applicant/client”) to perform a detailed analytical survey on the feasibility and economic viability inclusive of construction and operation costs involved of the proposed service station development.

Petrorex will make specific emphasis with regards to the influence of the locality of the property as well as the assessment on the Need and Desirability, which comprises Market Delineation, Market Demand and Market Supply.

Based on the findings of the survey the “Applicant” would be able to determine the risk factor involved as well as to make logical deductions obtained from the feasibility study.

2. PLANNING APPROACH AND OBJECTIVES

The planning approach ensued in the preparation of the feasibility study was based on the following aspects:

 To provide a plan and document which would be practical, understandable, realistic and enhance the implementation there-of.  To provide a Feasibility Study that would serve as a guideline or framework in the various decision-making processes.

The main objectives of this study are:

 Provide evidence of the suitability of the proposed site for the intended development as part of the Physical and legal feasibility,  Description of the site, Market feasibility, to determine and estimate the potential market for the products and services that the proposed service station is intended to provide.  The last phase is to determine whether the project satisfies the financial requirements of the parties, Developer, Operator and the Oil Company involved.

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Limitations

. The identified Competitor Sites in the local trading area fuel volume sales in literage information is considered as confidential by the relevant Dealers. At the time of the survey the Dealers were not approach to obtain such information. The respective Oil Companies and the Department of Energy are the only institutions that attain this classified information. The volume of sales or throughput can only be accurately included in an amended report once obtained through a public participation process, if applicable. . Information obtained in regards to undeveloped service station sites (sites / property carrying the relevant zoning classification) are obtained from the relevant Local Authorities. Although Petrorex uses it best endeavors to obtain the relevant information Petrorex has to depend on the administrators’ cooperation in providing such reports and insight of the local trading area. . A traffic count was conducted by means of a manual counts at the proposed service station site for a 12 hour period from 06h00 until 18h00 (30 minutes interval) on a typical weekday of Tuesday, Wednesday and a Thursday. The manual count gathered data for determination of vehicle classification (Light vehicles, Taxi’s and heavy vehicles) taking into consideration turning movements and direction of travel. A key limitation of a manual counts is the lack of information about long-term temporal variation. Average daily traffic (ADT) counts represent a 24-hour count at any specified location. To determine the 12 hour count to an ADT an expansion factor was used. This calculated expansion factor is determined from electronic counts comparison in the vicinity obtained from local authorities and traffic count engineers. . That there is currently no universal scientific method available in the calculation of the economic influence on competitor sites and that each Applicant has to formulate their own methodology.

3. WORK METHOD

Congregation of information relating to the physical characteristics and existing land uses of the trading area was compared to the global development and activities obtained by means of interviews and insight in existing reports to acquire a general impression of the trading area.

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The methodology of the working method utilized in the compilation of the Feasibility Study was based on:  Document Review: Various strategic government documents and reports were consulted during the research process. They include the following: o Umzimvubu Local Municipality Integrated Development Plan 1st IDP Review for the period: 2012-2017 o Alfred Nzo District Municipality 2014/15 Integrated Development Plan o Traffic Impact Assessment July 2015: Engineering Advice and Services (Pty) Ltd- Project Name Proposed Filling Station and Truck Stop NR00220 KM 9.8 o SAPRA Newsletter – 05 June 2012 o Department of Energy MDZ Zones and Price regulations  Desktop Research: Desktop research was undertaken to collect some of the economic and social data and information.  Databanks: Data were also from strategic documents and other publications on economic and social development in Umzimvubu Local Municipality  Site Visit: A trip was taken by the study team to the proposed site for the purposes of: o Identifying the areas that are likely to be affected by the proposed development, o Identifying the locations of the potential competition of the proposed development, their distance from the proposed development site, and o Deepening understanding of the potential catchment area. o Information was collected through observation during this trip

4. USE OF THIS DOCUMENT

This report will provide details regarding the necessity of appointing qualified professionals Such as:  Plans to be designed by an architect.  Costing and economic evaluation to be done by a quantity surveyor.  In- and egresses improvement to be determined by a traffic engineer.  Environmental Management Plan to be performed by an independent consultant.

This report can also be utilised for the following purposes:

 Negotiating transactions with an Oil Company / Registered Wholesaler.

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 Obtaining approval for financing of the project.  Consent for the proposed development activities from the applicable local governing authorities.  Obtain an relevant approval documents from the Department of Energy

5. REPORT OUTLINE

The report consists of four sections. Apart from the first section, which provides the introduction and background, the report contains the following:

 SECTION TWO: This section provides an insight into the Macro-environment of the Oil Industry which comprises of the institutions, broad issues and trends outside the Service Station Facility over which you have no, or limited control. Emphasis has been made to process (Project ME 686) undertaken by the Department of Energy and its appointed consultants, included all stakeholders, from Oil Companies, SAPIA, Retailers (SAPRA) and a group representing Independent Wholesalers. Project ME 686 had to establish margins for the various components of the value chain under review.

 SECTION THREE: This section focuses on the Micro-environment such as;

 Socio-economic information - the active and effective acquisition of the service station dependents upon favourable socio-economic factors as well as the socio-economic profile of the potential catchment area. The section comprises a number of sub-sections. They are; a description of the area, a demographic profile, an economic profile, an assessment of the types of transport used by people living in the area, an analysis of traffic flows in the catchment area, and a description of the future developments in the area.  Physical and legal feasibility is an analysis of the suitability of the site for the proposed development,  Marketing feasibility comprises of a study of the demand and supply and the analyses thereof to determine whether the property would be marketable, taking into consideration the socio-economic impacts of the proposed service station. It examines the demand side of the proposed

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development. This provides a market delineation and demand assessment for the proposed filling station. Specifically, it analyses the location of the proposed development site and traffic flows in the area where it is located. It also describes the geographic extent of the possible demand for fuel and other products and facilities that the proposed filling station is intended to offer. It assesses the key characteristics of the service stations located in proximity to the proposed development site in order to determine their implications for the proposed development. These characteristics include the estimated volumes of fuel sales that they supply and convenience facilities that they provide. It investigates the possible impacts of the proposed development and assesses their intensity. Specifically, the section examines the possible impacts on existing filling stations and on the area surrounding the proposed development site.  Financial viability - the last phase of the feasibility section is to determine whether the project satisfies the financial requirements of the Operator / Dealer, the Developer and the financial institution.

 SECTION FOUR: This last section provides a summary of the main findings and some recommendations for the proposed development, based on the need and desirability, as well as a conclusion on the overall feasibility of the investing in the service station.

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SECTION TWO

THE MACRO ENVIRONMENT: DOWNSTREAM FUEL INDUSTRY

1. BACKGROUND

1998 White Paper on Energy Policy set the sustainable presence, ownership or control by historically disadvantaged South Africans of a quarter of all facets of the liquid fuels industry or plans to achieve this as a milestone to trigger the substantive re-regulation of the petroleum and liquid fuels industry in South Africa.

The government has linked the re-regulation of the industry to the meaningful participation in the industry by South Africans who were excluded in the past through the general racial political dispensation, social inequalities and provisions governing the industry specifically. In pursuit of this objective, the government has taken various steps together with industry leaders and associations, such as the South African Petroleum Industry Association (SAPIA) and the African Minerals and Energy Forum (AMEF).

At several meetings between Pumzile Mlambo Ngcuka, the then Minister, and industry associations in 1999 and 2000, the idea of a task team as well as an industry summit were proposed as mechanisms to take forward the imperative posed in the White Paper. In her Parliamentary budget vote address on 11 May 2000, Ms Mlambo Ngcuka announced the appointment of a ministerial task team.

While transformation and de-regulation need to take place with a minimum of disruption and unintended negative consequences, the meaningful participation by historically disadvantaged South Africans in the economy is an urgent and overriding national economic and political imperative. After initial consultations, the task team embarked on a series of workshops examining the entire liquid fuels petroleum industry in South Africa:

 Oil and gas exploration and production;  Crude oil refining;  Synfuels manufacturing;  Marketing of petroleum products; and  Transportation of petroleum products.

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Industry associations were tasked to ensure that any unorganized industry players are brought into the process. Efforts were made to this end, and some of these companies did participate in part of the deliberations.

The Liquid Fuels Empowerment Charter (LFC) emerged as an attempt to capture the frustrations of the new participants in the industry and the ways in which transformation could best be facilitated. In some ways, the process leading to the signing of the charter was as important as the document itself. The final document, signed by key industry players in November 2000, is a statement of the commitment of the signatories to transformation of the industry as a principle, as well as details of the key measures and expectations.

Since then, it has become the organizing force in the transformation of the liquid fuels sector. “Focus areas”. The areas focused on by the task team were:

 Employment equity The key concern here was the participation of historically disadvantaged South Africans in the mainstream of the industry, especially at managerial and operational levels.

 Capacity building The industry requires certain high level skills that are in general inadequately provided for in the South African labour market. Emerging companies are especially under-skilled. A key driver in their success will thus be the extent to which their capacity can be accelerated.

 Ownership and control The industry is highly capital intensive, with major infrastructure. This has historically been in the hands of the multinational companies. The focus here was on the acquisition of such ownership by historically disadvantaged South Africans, and what such ownership would entail.

 Financing The key obstacle for new and small entrants into the industry is its high capital intensity and relatively low or slow return rate. Financing mechanisms will need to be

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devised if this objective is to be achieved.

 Procurement In the past, positive or affirmative procurement policies have been used to accelerate the growth of new entrants. This avenue was examined as a key driver in the nurturing of emerging companies from all sectors. The focus here was on both private sector and public sector procurement.

 Legislation and regulation Within which the White Paper milestone is to be achieved was examined to determine the extent to which it may assist or hamper progress, and to arrive at interventions at this level. Industry agreements were also examined as part of this focus.

In May 2010, the minister of energy, Ms Dipuo Peters, indicated that the Department of Energy (DoE) will conduct an audit into the compliance of the oil industry with the provisions of the Liquid Fuels Charter (LFC) before the 10th Anniversary of the signing of the first ever empowerment charter, the Liquid Fuels Charter.

The compliance audit was finalized in April 2011 and the final audit report with recommendations was in circulation in Cabinet. The objective of the audit was to have a comprehensive independent and representative assessment of the state of transformation within the industry against the set charter targets. It also would identify bottlenecks in its implementation, the interventions required and develop standardized criteria to assess and monitor transformation and compliance within the petroleum and liquid fuels industry, throughout the value chain.

The LFC strategic focus areas were: ownership, control, supportive culture, capacity building, employment equity, financing, preferential procurement and terms of credit to Historical Disadvantage South Africans (HDSA) companies.

There were a number of implementation challenges that the charter faced:  LFC compliance was not monitored regularly and there were no serious consequences for non-compliance.  Financial sustainability of Black Economic Empowerment (BEE) deals.

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 Continued barriers to entry such as access to finance, access to infrastructure, lack of pricing transparency and skills transfer to retailers.  The lack of women representation.  The abuse of the HDSA definition that was used to include white females.

With regards to retailers, the license applications the DoE reflected a trend in that a particular section of the population was applying for the licenses. The most lucrative sites were still unobtainable and the playing field was not level. In relation to people with disabilities, the DoE was not doing as well as they were supposed to do. There was one wholesale application the DoE received from an association of people with disabilities and the application had been processed. The minister of energy also mentioned the reviewing of the Petroleum Products Act (PPA) with a view to further strengthening legislative framework’s ability to address the needs of a developmental state, including the transformation of the liquid fuels industry. By law it has become the DoE responsibility to implement transformation in considering license applications to:  promote the advancement of historically disadvantaged South,  give effect to the Charter.  The Controller of Petroleum Products may require any category of license holder to furnish information, as prescribed, in respect of the implementation of the Charter.

2. REGULATORY ACCOUNTING SYSTEM (RAS)

In the Minister of Energy, budget vote address during April 2010, to the national council of provinces energy portfolio committee, Ms Dipuo Peters gave emphasis to the DoE’s finalization and implementation of the Regulatory Accounting System (RAS) for the petroleum sector that will be used to determine appropriate margins for:  wholesale,  coastal storage,  handling  secondary storage,  distribution, and  Return on assets for the Benchmark Service Station (BSS).

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In ensuring that the RAS system was effective, the process had to look at correcting the past irregularities that were embedded in the old Marketing of Petroleum Assets Return (MPAR) system, some of these included:  Cross subsidies between different products (petrol/diesel)  Retail customers were subsidising commercial customers  Uneven treatment between assets owned by oil companies and those owned by retailers  To limit the amount of investment made into retail developments  Secrecy that surrounded the MPAR system

The ultimate goal was to achieve a uniform and transparent set of regulatory accounts where costs are allocated according to predetermined methods. To provide certainty to investors with regard to the return on assets throughout the petroleum industry value chain. These objectives would be achieved by separating regulated from unregulated activities in order to eliminate actual and potential cross-subsidies to promote appropriate investments in this sector.

The process (Project ME 686) undertaken by the DoE and its appointed consultants, included all stakeholders, from Oil Companies, SAPIA, Retailers (SAPRA), (FRA) and a group representing Independent Wholesalers. Project ME 686 had to establish margins for the various components of the value chain under review.

Essentially Regulatory Accounting is about:  Effective pricing regulation and should promote efficient and equitable prices, industry viability (fair returns), availability and access to Energy services and products as well as policy goals including the PROHIBITION OF VERTICAL INTEGRATION, development of SMME’s, Black Economic Empowerment, price stability and economic development.  The Industry being rewarded in terms of the regulation via a revenue requirement formula. In order for this formula to be applied models of the activities needed to be developed in conjunction with regulatory accounts based on Activity Based Costing for each of the categories.

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The long awaited Regulatory Accounting System (RAS), widely known as Task 141, was implemented December 2013.

The spirit of negotiations under RAS will hopefully be that the owner of an asset should be fully compensated for that asset, whether that owner is a retailer or Oil Company (around 60% of retail assets are still owned by Oil Companies).

The bottom line is that at full implementation, the retailer will collect all margin related to the operations and assets of the Benchmark Service Station (BSS) and the investor on the asset will recover their return due in both Company Own Retailer Operator (CORO) and Retailer Own Retailer Operator (RORO) operating platforms or agreements.

A scientific, financial model was developed by the consultants for each of the components under review. The RAS is based on a foundation, that “whoever invests in or whoever incurs the cost” should receive the remuneration. The first step in the process was to establish a margin for selling fuel only which set in motion a survey to determine the average volume of all fuel sales over the past ten years. A figure of 297 000 kl/month was reached for combined petrol, diesel and paraffin sales through Retail sites. The next step was to determine the kind of facility that would be needed to pump this amount of fuel which resulted in a Benchmark Service Station (BSS) being built but for fuel sales only. The idea behind this was that the methodology would aim to provide an appropriate return for an “efficient” benchmark service station rather than provide for a return on total industry assets, which could worsen investment incentive problems. An amount of R6.7m would be required to build a fully operational BSS accounting for all assets, from land to relevant equipment. The BSS margin was then calculated to establish the required margin, in cents per litre, to produce a fair return on the investment where the Rate of Return was determined based on the Capital Asset Pricing Model methodology. The following equation was used to calculate the margin: Permissible revenue = (Asset base)*ROR + expenses + taxes where ROR refers to Rate of Return and expenses refer to the operating expenses that would be incurred when running the BSS. Together these elements form the foundation of RAS which ultimately intends to remove vertical integration in the industry.

With CORO (Company Owned, Retailer Operated) sites, Oil Companies shall recover their capital portion less an entrepreneurial compensation for operating the assets on their behalf.

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They will recover from the OPEX numbers those expenses that are incurred by the oil company as per the BSS model i.e. pump and tank maintenance, rates and taxes as well as any other assets and operating expenses allowed in terms of the BSS model.

With RORO (Retailer Owned, Retailer Operated) sites, Oil Companies may own the pumps and tanks and, in certain instances, some small assets such as generators, hence the calculations work differently. The capital expenditure recovery will be based on the BSS assets owned by the company and OPEX recovery will be based on the expenses incurred as per the BSS model. In a nutshell, RAS will reward the investor who owns the assets and incurs the operating expenses as per the BSS model.

The proposed service stations would be established as a RORO sites that would comprises of a supply–only agreement with a Wholesaler and where the Retailer would be the investor to capitalise on a maximum return on investment.

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SECTION THREE

THE MICRO ENVIRONMENT: PHYSICAL AND LEGAL FEASIBILITY, MARKET FEASIBILITY, FINANCIAL VIABILITY AND ECONOMIC VIABILITY.

1. PHYSICAL AND LEGAL FEASIBILITY

1.1 Geographic site location

In the macro context- Mount Frere is a town located in the Eastern Cape Province, previously known as the Transkei region. Mount Frere is situated between Kokstad and Mthatha along the N2 road about 100 km north east of Mthatha. It is administered by the Alfred Nzo District Municipality (one of six districts of the Eastern Cape Province); the District Municipality includes local municipalities of Matatiele, Umzimvubu, Mbizana and Ntabankulu. The Umzimvubu Local Municpailty includes villages / towns Mount Frere, Mount Ayliff, Amahlubi, Makaula, Mosesh and Matandela.

In the micro- context- the Site is situated on the eastern periphery of the N2 road, 10.6 kilometers north east of Mount Frere next to the Umzimvubu River known as the KuMakhola. The property description needs to be obtained as the property is part of rural tribal land. The property and the size of the proposed service station development need to be determined according to the road, access, services and site layout plan.

The closest geographical co-ordinates of the proposed service station development is:

TABLE 1: GPS CO-ORDINATES OF PROPOSED DEVELOPMENT Latitude Longitude

30°50'59.62"S 29° 4'18.52"E

The proposed service station development property is bounded by:

 The N2 National Highway to the north  Tribal/Community village and grazing land to the east  The Umzimvubu River to the west  Community farming activities to the south

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The land use surrounding the proposed sites can be described as rural in nature.

The figure below, illustrates the location of the proposed development in relation with other suburbs in the Mount Frere Region, Eastern Cape Province.

Refer to Appendix I for additional photographs/images and information of the proposed development.

FIGURE 1: location of the proposed development in relation to surrounding suburbs in the area.

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FIGURE 2: Proposed development in relation to the surrounding road network

Source Google earth, 2015

1.2 DESCRIPTION OF THE PROPOSED DEVELOPMENT

The proposed development is a new filling / service station facility development.

The land use surrounding the proposed development can be described as rural in nature.

A service / filling station land use can be defined as a building designed or used for the supplying of fuel, the sale of oil, additives, new emergency spares, promotional items, firewood, charcoal and fire lighters, a shop (convenience store), one working bay for emergency repairs to vehicles, an area for mechanical car wash unit, an automatic teller machine (ATM) and offices which are direct relation to a filling station.

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Truck stop land use can be defined as a facility especially for truckers that include fuel pumps, sanitary facilities, resting and overnight activities accompanied by a shop with basic items for truckers convenience.

It aims to serve all traffic, travelling along the N2 Highway eastbound and westbound. The service station is also intended to provide service to vehicles in the local trading area consisting of residential, recreational, business, agricultural and tourism activities as well as the heavy vehicle commuting along the N2 Highway by providing facilities in accordance.

1.3 ACCESSIBILITY

Accessibility illustrates the level of access to the development site by means of various transport modes and is paramount to the success at a filling station development. Accessibility in terms of potential access points, level of vehicles movement and transport infrastructure surrounding the site are analysed in the sub-Section

Due to the site having topographical constraints due to road and ground level difference, road and earth works are required to accommodate the designed access and egresses.

The following aspects should be taken into account regarding road safety and traffic capacity when considering the availability of Diesel facilities for larger vehicles, inclusive of the fuel delivery trucks:

 The service station positioned to optimise the line of sight to incoming traffic so that the decision making can be timeously affected.  Layout to the Site is adequate in order to accommodate the turning radius of a large fuel delivery truck and would also prohibit any damage due to the off-tracking of its rear wheels.  There are no sharp turn movements that can cause unwanted freight movement resulting in damage and/or loss of valuable freight. In order to prevent these situations trucks would also be required to slow down to speeds well below that of passenger vehicle to be able to enter the site safely.

The Site is accessible from the adjacent N2 Highway westbound and eastbound traffic through  A left-in / left-out movement on the N2 Highway, with deceleration lanes with adequate length to allow for safe left – in / left-out movements.

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 A right turn access on the N2 Highway with an extended lane for motorist intended to make a right turn into the site.  Entry radius. The entry radius can make or break the effectiveness of the deceleration lane.

Refer to Appendix C for the proposed accesses layout.

1.4 VISIBILITY

Visibility of a service station relates to the applicability of stopping sight distance as well as the behaviour of the driver when driving along a road. The driving task, as described in the SA Road Safety Manual, consists of several tasks and is quoted here below. The driving task consists of three components, namely:  Navigation – Route following and trip planning  Guidance - Following the road and keeping a safe path in response to the traffic conditions  Control – Speed control and steering.

The driving task requires the following process:  The driver receives input (mostly visual)  The driver processes the information  The driver predicts the outcome of alternative actions  The driver decides on the appropriate action and execute them  The driver observes the effect of the actions through reception and processing of updated information

A driver has peripheral vision and focal vision. Peripheral vision is what the human eyes see in the total cone of vision (based on the SA Road Traffic Sign Manual, this is 15 degrees to each side, i.e. 30 degrees). Any movement or change in this peripheral area is picked up by the eye and interpreted by the brain, although the eyes are not focused on the object specifically. This

26 | P a g e allows the driver to observe the whole road reserve in front of him, while focusing on the vehicle he is following or on the colour of the traffic light, for example. Focal vision, which has a width of about 1 degree, is used to read road signs, focus on specific objects, to judge distance etc. If the driver is following a vehicle, his focal vision is mostly on the vehicle he is following as this presents the critical braking scenario. Peripheral vision is then used to pick up other information such as accesses, road signs etc., and if necessary, the focal vision is shifted to these areas to interpret the information.

The site is highly visible and located directly along the N2 Highway

The Site is visible from approximately 200 meters westbound and 300 meters eastbound on the N2 Highway.

The visibility profile aims to highlight the exposure of the development site which is directly correlated to the potential utilization of the filling station by passing traffic

 The high visibility levels are likely to attract a high volume of potential consumers owing to the outstanding exposure to the public and provide transport market.  The site enjoys above-average exposure and advertising capabilities  The visibility of a service station is critical to its success and marketability.

Strategic location of the main identification signs will increase the drivers’ observation capacity at the respective property.

1.5 THE PROPERTY INFORMATION

1.5.1 TITLE DEED INFORMATION

This property falls under communal land, a letter from the traditional council for further use with respect to a Service Station needs to be obtained. a PTO is a less formal tenure right that merely evidences a user right and as such is only a personal right. It is not proof of titled ownership in land and therefore cannot be classed as a Title Deed to Land.

The holder of the Permission to Occupy (PTO) can be described as a "putative holder". A "putative holder" in the definitions means that the person occupies an erf as if he or she is the holder of the land tenure right in respect of that erf, but who is not formally recorded in the

27 | P a g e register of land rights as the holder of the right in question.

The permission to occupy can be regarded as a land tenure right. This statement can be confirmed by the definition of Land Tenure Right set out under the definitions of the Upgrading of Land Tenure Rights Act. The definition reads as follows "land tenure right" means any leasehold, deed of grant, quitrent or any other right to the occupation of land created by or under any law and, in relation to tribal land, includes such land under the indigenous law or customs of the tribe in question.

PTO's are not eligible for registration in a Deeds Registry as they are by nature classified as mere personal rights whereas only real rights and limited real rights can be registered in a Deeds Registry.

PTO tenure is not an economically viable form of land holdership as it is not acceptable as real security or collateral by any financial institution (in other words it cannot secure a debt or mortgage against it).

PTO’s are no longer procured, since 1 September 1999 (section 2(2),(a) Schedule 2: Upgrading of Land Tenure Rights Act 112 of 1991) as they are automatically upgraded ex lege as long as the following requirements are met, namely:

 That the land in question has been formalised (by laying it out on a general plan) or survey diagram  That a township register thereof has been opened in the relevant deeds registry.

Refer to Appendix D for the Title Deed information.

1.5.2 SURVEYOR’S INFORMATION

The external form of development site is an irregular rectangular shape of land along the southern boundary of the N2 Highway. The dimensions of the site were not available at the time of the study.

The Surveyors General Diagram needs to be obtained.

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Refer to Appendix E for the SG diagram.

1.5.3 ZONING INFORMATION

A formal application needs to be lodged for final approval at the Umzimvubu Local Government in alignment to the integrated development plans (IDPs) in terms of the Municipal Systems Act in 2000 (“MSA”). The MSA (2000) IDPs include a mandatory spatial component in the form of spatial development frameworks (SDFs) to direct municipal planning decisions and developmental interventions.

The purpose of the Upgrading of Land Tenure Rights Act, 1991 (Act No. 112 of 1991) is "To provide for the upgrading and conversion into ownership of certain rights granted in respect of land; for the transfer of tribal land in full ownership to tribes; and for matters connected therewith".

The Act is used in the former self-governing territories to upgrade land tenure rights (PTO’s and Deed of Grants) in unproclaim settlements and townships, and to convert tenure rights mentioned in Schedule 1 and 2 to the Act (e.g. leaseholds, PTO’s, etc.) into rights of ownership.

Refer to Appendix F for the Zoning information.

1.5.4 ENVIRONMENTAL AUTHORIZATION

An application needs to be submitted in term of the National Environmental Management Act (NEMA) No. 107 1998, List Notice (GN R 544) of the EIA regulations, direct the department of Economic Development, Environment, Conservation and Tourism, Eastern Cape Province Government to consider the social, economic and environmental impacts of activities, including disadvantages and benefits of such an listed activity by an Environmentalists.

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Refer to Appendix G for the Environmental Information./SRK ENVIRONMENTAL

REPORT

1.5.5 SITE AND RETAIL LICENSE

A Retail and Site Licence needs to be obtained in terms of the Petroleum Act, 1977 (ACT 120 of 1977).

1.5.6 AVAILABILITY OF SERVICES

It is the responsibility the Applicant to provide sustainable services in regards to water reticulation, sewerage and waste management, storm water drainage and electricity supply to the infrastructure of the foreseen activities. Taking into consideration the location far from existing services from Umzimvubu local municipality the Applicant needs to focus on the quantity and quality water required, waste and effluent quantity and treatment thereof, volume of waste generated, storm water accumulation due to hard surfaces and the capacity of electricity distribution and required and the capacity of the local authority to fulfil in these requirements.

The Technical Services Department of Umzimvubu local Municipality is responsible for water and sanitation, waste removal, technical services, roads and storm water drainage, electricity, expanded as indicated in their repairs and maintenance programme. The Project Management unit will be responsible for the implementation and management of capital projects such as the proposed service station development in the municipality environmental management.

It is foreseen that the development would be supplemented by making provision for a bore hole for water supply and onsite septic tank for effluent waste, containment crease and oil separation traps. The tank shall be designed and constructed in accordance with the information contained within SANS 10400 – 1990.

Refer to Engineering Service Report for Proposed Fuel Service Station Near

Mount Frere, Eastern Cape- Report Number 489097/2.

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1.6 THE PLANNED DEVELOPMENT

1.6.1 THE DEVELOPMENT CONCEPT

Service Stations are designed according to the standard Oil Industry minimum requirements and in accordance with specific conventional construction techniques.

The design must also be in compliance with the minimum development requirements of the National Road Agency. Being a highway site development provision must be made to acquire the property or a portion thereof opposite the proposed development property for future utilization should the traffic count warrant such an additional development. An added advantage of commercial note is that the Wholesaler / Oil Company could obtain the rights for brand advertising on the National Information category marketing boards alongside the N2.

The size of the subject site is sufficient to be utilised for the proposed activities with ample of free space for the envisaged activities, vehicular movement and parking

The Service Station Site is of sufficient size to operate successfully. Manoeuvring space and parking space is sufficient to prevent vehicles from obstructing each other as well as the entrances and exits.

The following facilities will be available,

 Fuel bay - Providing a 24-hour and courteous service. The pump islands are strategically placed on site to prevent traffic flow problems, and to ensure maximum utilization of all servicing points.  24/7 Petrol and diesel categories under one roof o Pumps; 4 x 6 hose, 1 x 2 hose. o Five (5) islands . Product – Unleaded 93 & 95 RON, Diesel 50ppm & 500ppm. . Separate – Diesel 50ppm & 500ppm island at the fuel delivery point to accommodate larger vehicles. . Centrifugal or submersible pump units will be used to pump the product through a metering device into a vehicle fuel tank or to a portable container. . Erection of a suspended forecourt roof above the dispensers to protect customers and dispensing facilities from the elements

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. Remote fuel filling points will be installed as close to the USTs as possible, although the location of the filler points is dependent on delivery tanker access.  Construction of a concreted forecourt  Installation of an oil/water separator connected to the surface drainage from the concreted forecourt and fill containment areas, discharging into the municipal sewer system  Quick Service Restaurant 1 ,900m²  Play park 150m²  Storage yard for flammable products (e.g oils and greases)  The tank farm1 will, at a minimum, include the following: o Monitoring wells and leak detection system installed around the tank farm  24/7 Convenience Shop – Take- aways for consumers in the local trading area and or passersby. 180m2  Parking facility for at least 19 vehicles integrated with the shopping centre parking facilities.  Staff ablution facilities  A small waste water treatment plant to serve the staff ablution facilities  Ancillary offices  Storage area  Security -The premises will be well lit at night by providing a high level of illumination in the parking areas and on the walkways to the restrooms in and around the buildings.  Security will entail guard services, armed response and armed escorts service if and when necessary.  Reaction services to unwanted behavior ensuring right of admission and linkage to a centralized South African Police Services.  State of the art security and camera surveillance will be installed and the cash will be connected to the high security safe.  Communication services will be readily available in the event of emergencies. o Pay phone facilities for private and work related calls. o Provide an information display complete with a map of the trading area and descriptions, street names, major routes and places of importance.

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 Convenient and functional, ablution only facilities for the vehicle operators will be developed on the proposed site, providing both male and female patrons.  Restrooms - Sufficient restroom facilities will be provided to minimize the inconvenience to the traveling motorists when either the men or the woman’s restrooms are out of service these facilities will also be incorporated with the shopping center facilities.  Truck stop facility guarded with necessary security measures, providing trucker convenience and basic sanitary services  Bulk service supply – in regards to water storage facilities not only for human consumption or gardening but also in sufficient capacity for firefighting purposes. In regards to sewerage, waste and effluent water a specialized plant should be considered.

The internal layout is in accordance with the following, in addition to more restrictive local conditions and bylaws which may be applicable;

 The width of the access driveways should be between 4 and 8 meters,  The driveways between pumps should be 6 meters wide,  The nearest pumps to the property boundary should be 3.5 meters clear or a distance equal to the building line restriction, whichever the larger,  The pump islands are located behind the ingress point, to allow proper and safe circulation through the forecourt.  The layout of the forecourt designed to minimize traffic conflict with the balance of the site and ensure that vehicles entering the forecourt do not interfere with vehicles queuing at the stop Line exiting the site

These above mentioned facilities tend to attract passing motorist because it creates a “one-stop shop” for motorist and make their trip more convenient

Refer to Appendix C for the proposed site layout.

1.6.2 THE DEVELOPING TEAM

The professional team for the development of the Service Station facilities need to consist of the following parties:

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 Landlord / Developer.  Architects.  Quantity Surveyors.  Civil Engineers.  Traffic Engineers.  Electrical Engineers.  Building Contractor.  Project Management.  Safety Officer.

The Landlord / Developer in collaboration with the Retailer / Lessee and Oil Company appoint the professional team to develop and manage the Service Station development process.

2. MARKET FEASIBILITY

This section provides a description of the study area in order to determine the potential market for the products and services that the proposed service stations is intended to provide. Specifically, the section identifies the catchment area and describes its characteristics. It is structured as follows:  Identification of the potential supporters of the service stations in the catchment area,  Demographic profile of the catchment area,  Economic profile of the assessment of the assessment area,  Types of transport used by people living in the area,  Travel patterns within the study area and between the area and other places,  Traffic flows in the assessment area, and  Future developments in the area.

2.1 CATCHMENT AREA

Taking into consideration the accessibility, visibility and convenient location of Service Station site, the Trading Area in which the Service Station is going to operate, primarily consist out of the following:

The primary market can be described as -Through traffic on the N2 Road, traveling west to east and east to west between Kokstad and Mthata.

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Definition of through traffic - traffic initiated at and destined from points outside a local zone

Tourism:

South Africa’s ‘Wild province’ the Eastern Cape features expanses of untouched beach, bush and forest. This was former presidents Nelson Mandela’s home province and is an area with some enticing attractions- among them the Addo Elephant National Park with densest elephant population in the world; the dramatic Wild Coast, and of course the Mandelas’s home at Qunu.

The landscape is extremely diverse. The western interior is largely arid Karoo, while the east is well-watered and green. The Eastern Cape offers a wide array of attractions, including 800 km of untouched and pristine coastline along with some particularly splendid beaches, and "big- five" viewing in a malaria-free environment.

The province is the location of South Africa's only Snow skiing resort, Tiffindell, which is situated near the hamlet of Rhodes in the Southern Drakensberg on the slopes of Ben Macdhui, the highest mountain peak in the Eastern Cape (3001 m).

The National Arts Festival, held annually in Grahamstown, is Africa's largest and most colourful cultural event, offering a choice of the very best of both indigenous and imported talent. Every year for 11 days the town's population almost doubles, as over 50,000 people flock to the region for a feast of arts, crafts and sheer entertainment.

The Tsitsikamma National Park is an 80 km long coastal strip between Nature's Valley and the mouth of the Storms River. In the park the visitor finds an almost untouched natural landscape. Near the park is the Bloukrans Bridge and Bloukrans Bridge Bungy which is the world's third highest bungee jump,

Jeffreys Bay is an area with some of the country's wildest coastline, which is backed by some of Africa's most spectacular sub-tropical rainforest. Famous for its "supertubes", probably South Africa's longest and most consistently good wave, it's charged with a surf vibe as relaxed as it is friendly, and this tends to soften the effect of the wealthy set who have made this part of the coast their own.

Aliwal North, lying on a splendid agricultural plateau on the southern bank of the Orange River, is one of the country's most popular inland resorts and is famous for its hot springs.

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The rugged and unspoilt Wild Coast is a place of spectacular scenery, and a graveyard for many vessels. Whittlesea, Eastern Cape, situated in the beautiful Amatola Mountains, is now famous for the first wine estate in the province.

Agriculture

There is much fertile land in the Eastern Cape, and agriculture remains important. The fertile Langkloof Valley in the southwest has enormous deciduous fruit orchards, while sheep farming predominates in the Karoo. The Alexandria-Grahamstown area produces pineapples, chicory and dairy products, while coffee and tea are cultivated at Magwa. People in the former Transkei region are dependent on cattle, maize and sorghum-farming. An olive nursery has been developed in collaboration with the University of Fort Hare to form a nucleus of olive production in the Eastern Cape.

Domestic stock farming is slowly giving way to game farming on large scale, fueled by the commercial benefits of eco-tourism and the lower risk needed to protect wild game against drought, the natural elements and poaching.

The area around Stutterheim is being grown extensively with timber plantations.

The basis of the province's fishing industry is squid, some recreational and commercial fishing for line fish, the collection of marine resources, and access to line-catches of hake.

Industry

With three import/export harbors and three airports offering direct flights to the main centres, and an excellent road and rail infrastructure, the province has been earmarked as a key area for growth and economic development in modern South Africa.

The two major industrial centres, Port Elizabeth and East London have well-developed economies based on the automotive industry. General Motors and Volkswagen both have major assembly lines in the Port Elizabeth area, while East London is dominated by the large DaimlerChrysler plant, now known as Mercedes-Benz South Africa.

Environmental-friendly projects include the Fish River Spatial Development Initiative, the Wild Coast SDI, and two industrial development zones, the East London Industrial Development Zone and the Coega IDZ near Port Elizabeth. Coega is the largest infrastructure development in post-apartheid South Africa. The construction of the deepwater Port of Ngqura was completed

36 | P a g e and the first commercial ship anchored in October 2009. It is expected that this development will give the province a major economic boost.

Other important sectors include finance, real estate, business services, wholesale and retail trade, eco-tourism (nature reserves and game ranches) and hotels and restaurants.

The secondary market can be described as Commuter trade – these are motorists with their point of origin and destination inside the trading area to and from the residential areas surrounding the Site utilizing the N2 Highway.

Commuter traffic can be define as traffic created by people going to or returning from work whereby traffic can be described as the combination of things (pedestrians or vehicles) coming and going in a particular locality during a specified period of time

There is one major street in Mount Frere and it is the Main Street on the N2 road. It has many restaurants, shops and public services including the Police Station, Post Office, Municipal offices and the newly built Madzikane Ka Zulu Memorial Hospital. Most of the businesses and shops are situated along the Main Street, there are only a few outside this area.

There are farmers in and around Mount Frere and most of the people rely on subsistence farming for their basic needs. Peaches, pears, oranges and maize meal are the most popular fruits and vegetables in Mount Frere and recently there has been involvement from the Municipal to change these Subsistence farmers into Commercial farmers.

Public transport activities- There are no formal public transport facilities in the direct vicinity of the proposed site however several minibus taxis were observed parking informally on the road network within the study area making special trips between towns.

Pedestrian activities- A fair volume of pedestrian activity was observed in the vicinity of the proposed petrol filling station. No pedestrian sidewalks provided along a section of N2 while in other sections of the study area pedestrians use the grasses road verges or the roadway itself to commute

There is currently a low residential market in Mount Frere area but tends to have a significant potential for residential development.

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Refer to Appendix B for an aerial view of the trading area indicating Mount Frere

and

2.2 DEMOGRAPHIC AND ECONOMIC INFORMATION

Demographic Profile

There are various estimates for the population of the Umzimvubu Municipal area. For the purpose of the situation analysis the official Census 2011 and Community survey 2007 and Urban-Econ EC Calculations based on Quantec, 2010 will be used and these figures are widely used within all spheres of government.

Population Estimates

Umzimvubu Local Municipality has a total population of approximately 191 620 people on 2506 square kilometers area, 99.8% are Africans and the remaining 0.2% of the population includes the Coloureds, Asians and Whites. The average population density of Umzimvubu Municipality is 88 people per square kilometers which is higher than the district average of 70 people per square kilometers but is relatively low.

Population Profile and Household Trends

This section will briefly discuss trends and changes in the Umzimvubu populace. These are characterized in Table below within the district’s standing, and allow for a beter understanding of the area as an investment destination.

Table 2: Population profile

Indicator Year Umzimvubu LM Alfred Nzo DM Area km² Population Size 2009 223 330 481 601 1999 205 779 413 853 Number of 2009 50 969 108 060 households 1999 46 511 95 513 Population Density 2009 89 70

38 | P a g e p/km Household Density 2009 20 15 (h/h p./sk Average H/H Size 2009 4.3 4.4 (people) Average Population 2009 0.85% 1.64% Growth Rate per year (1995-2009) 2009 0.85% 1.64% Age structure 2009 0-14:40.3%% 0-14: 40.3% 15-34:36% 15-34: 35.5 % 35-64:17.9% 35-64: 18.74% 65+ :5.6% 65+: 5.3% (Urban-Econ E.C. Calculations based on Quantec, 2010)

The Umzimvubu IDP (2010/2011) estimates that 90% of the population reside in rural areas, with the rest being found in the two urban centres of Mt Frere (15 444 people)and Mt Ayliff (6 618). The area has a large population given its rural nature and relatively spatial extent, as seën through the population and household densities. The population grew at a slow rate between 1999 and 2009, both in absolute and relate terms, mirroring Eastern Cape provincial trends. The average household size brings out the rural nature of the area With regards to the municipality’s age structure, it emerges that juvenile cohort (014) have a high level of representation. Converse experienced individuals are to be found 17.9% of the population. What thus stands out is thus the area has a youthful population, which is a factor to be characteriz in the economic development of Umzimvubu

Age and Gender Profile

The age profile for age groups 0 – 14, 15 – 65 and 65 and up is reflected in the table format below. These categories represent infants and school going age category, school leaving and economically active category and retired category, respectively.

The municipality comprises of 54% female and 46% male of the total population.

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Table 3: Population by Gender

Age Male Female Total %

0-14 47 924 45 803 93 727 42

15-65 48 811 62 886 111 697 51

65 and Up 4 992 10 214 15 206 7

Total 101 727 118 903 220 630 100

Racial Profile

The population of Umzimvubu municipal areas is predominantly African. African people constitute 99.8% of the population.

Socio- Economic Analysis

This section considers salient features that define the Umzimvubu area. The characteristics of an area determine its present investment climate, and also have a bearing on its suitability for various forms of economic activity in the future. If the planning principles and guidelines brought out in the previous section are to be implemented effectively, a good understanding of the area’s socio-economic traits is needed, as will be developed in brief in this section.

Level of Education and literacy

The education levels achieved by a group of individuals are indicative of the level of human development within a population group. It furthermore serves as the potential of the population generate an income, thereby increasing the capital (social and otherwise) circulatingin the micro-economy. The average educational attainment levels of residents of the Umzimvubu area are presented in Figure 3.4.1. The area has a low number of high and primary schools (SDF, 2010), as well as one higher learning institute (Ingwe Training College.

It can be seen that the area has low levels of educational achievement, with only 7.1% of the population having completed Matric or higher. This compares poorly against the Eastern Cape and is less than half of the provincial average of 16.5%. This has implications on the worker profile, as individuals that have not reached a certain level of educational attainment are often faced with barriers to entry into the formal employment market. This has further bearing on the nature of investment activity that will be feasible and sustainable in the area. Without the

40 | P a g e provision of adequate education and training, a skills deficit may constrain future development within the umzimvubu area.

Although there appear to be an adequate number of primary education facilities in the district, there is a conspicuous lack of senior secondary schools with less than 10% percent of schools providing secondary level education. This is aggravated by poor access to these facilities. The only tertiary education facility is a FET College in Mount Frere.

This lack of secondary and tertiary education facilities contributes significantly to the low literacy and education levels and lack of graduates in the area.

Employment Status & Occupation

As was indicated in the education profile, education levels have an impact on employment levels in an area. Employment in turn has an impact on household income levels and the overall economic structure of an area. An investment plan such as this takes due characterized of the relationship between the levels of education and how these translate into characterizedeconomy employment opportunities for the residents of the area. Any actions by the Umzimvubu local municipality must thus consider the current state of employment in the area.

For the purposes of this section, people’s employment status may be categorized as employed, unemployment and not economically active. These statuses may be defined as:

Employed have within the last seven days performed work for pay.

Unemployed (i.e. Those people within the economically active population who: did not work during the seven days prior to the interview; want to work and are available to start work within two weeks of the interview; and have taken active steps to look for work or to start some form of self‐employment in the four weeks prior to the interview.)

Not economically active (i.e. A person who is not working and not seeking work not available for work) Umzimvubu has a working age population of approximately 118 122 individuals. However, given the low levels of functional literacy in the area (adult population that has gained at least a grade six level of education), the quality of the Umzimvubu labour poor is compromised, giving rise to a small base of employable individuals from the area.

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Employment levels are very low, with fewer than one in three adult residents engaged in gainful employment of a formal or informal nature. It is further estimated that almost a quarter of all employment in the area is informal in character. This leads to a low labour force participation rate of 38% in the area (Quantec, 2010)

It can be seen from the high percentage of individuals classified as ‘not economically active’ that there is a high level of worker discouragement in the area, which are those individuals that have given up their attempts to gain employment, because of perceived futility in the action.

This undermines the otherwise low level of unemployment and puts to the fore the reality of Skills mismatch (given the educational profile of the area)

New entrants into the labour market (given the youthful population demography of the area) Barriers to entry into the job market (geographic and financial, especially given the rural nature of the area) Low wages in the area in comparison to wages commanded in other places such as Kokstad.

The high level of economic inactivity and de facto unemployment is a structural issue that is to be addressed by planning documents such as this investment plan. The nature of employment in the area is presented above, with most employment opportunities arising for semi-skilled individuals. The implication of this is that:

There are limited opportunities for highly skilled labour to be employed in the area, which may perpetuate structural brain drain. The majority of the population which is unskilled is also not fully catered for through labourabsorbing opportunities. These two factors serve to undermine the quality and robustness of the Umzimvubu labour pool.

Household Income

The demographic make‐up of an area, coupled with its educational characteristics and employment trends all have an impact of household incomes. Household incomes in the context of this report are important insofar as they function as a proxy that reveals the extent of poverty in the area. An investment (social, infrastructural, financial or otherwise) that takes place in Umzimvubu will be undertaken within the socio-economic parameters enforced by poverty and income levels of local households.

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Household income is defined as the combined income of all members of a household. The determination of the income includes:

 Labour remuneration

 Income from property

 Transfers from government (including pensions)

 Transfers from incorporated businesses

 Transfers from other sources

Household income is concentrated and compressed in the lower brackets, with a cumulative 65.4% of all households earning less than R1 600 per month. Although South African government does not prescribe to any universal measure of poverty, based on the Bureau of Market Research’s Minimum Living Level and the UNDP’s parity US$1 per day, over 65.4% of all households subsist to varying degrees in income poverty.

The low levels of income have wide-ranging ramifications on the Umzimvubu economy, perpetuating depressed HDI score cycles and limited access to economic opportunities within the area. This corresponds with a high percentage of the population being dependant on grants, subsidies and other forms of transfer payments from the government for their daily livelihoods.

The low levels of household income negatively affect the effective dependency ratios, which compares the portion of those in the population not able to work with those that make up the productive labour pool in Umzimvubu

Employment per Sector

The employment per sector categories for the study area reflected in the column graph below. The information is derived from the 2007 community survey.

The employment sector is dominated by elementary occupations and occupations requiring low skills levels. Elementary occupations constitute 34.3% of the employment sector. Craft and related workers, service shop market and sales workers, and clerks jointly constitute a further 22.5% of the employment sector. Professionals, technicians and associate professionals and legislators /senior managers jointly constitute only 36.8 % of the employment sector. If one compares Matatiele Local Municipality to Umzimvubu Municipality, there is a significantly higher

43 | P a g e number of the latter group in Umzimvubu Local Municipality which is probably attributable to a high number of government services in the municipal area, including a Local Municipality, District Municipality and the District offices of several Government Departments as Mt Ayliff was declared by the Provincial Legislature as the home of district offices of sector departments. This dominance of elementary and other low level occupations is testimony to the low skills base of the area. This is aggravated by an absence of tertiary educational institutions which contribute significantly to the low levels of graduates in the area. Consequently there is an acute shortage of skilled artisans, engineers, project managers, business management skills and technical skills in agriculture, tourism, forestry and environmental management.

2.3 EXISTING ROAD NETWORK

National context:

The N2 is a national route in South Africa that runs from Cape Town through Port Elizabeth, East London and Durban to Ermelo. It is the main highway along the Indian Ocean coast of the country. Its total distance of 2,255 kilometres (1,401 miles) makes it the longest numbered route in South Africa. Major towns and cities along the route of the N2 include Cape Town, Somerset West, Caledon, Swellendam, Mossel Bay, George, Knysna, Humansdorp, Port Elizabeth, Grahamstown, King William's Town, Bhisho, East London, Mthatha, Kokstad, Port Shepstone, Durban, KwaDukuza, Empangeni, Piet Retief, and Ermelo.

In the Eastern Cape the N2 passes near Humansdorp and Jeffrey's Bay before becoming a four-lane divided freeway through the city of Port Elizabeth, ending at Coega. The N2 continues in a north-easterly direction from Port Elizabeth, moving away from the coast towards Grahamstown; en route the N10 splits from the N2, going northwards towards Middelburg. After Grahamstown the N2 passes through the former Ciskei; at King William's Town it turns back towards the coast, meeting it at East London. The N2 passes around East London on a bypass; it meets the N6 which runs northwards from East London towards Bloemfontein. After East London the N2 turns again towards the interior, to avoid the difficult terrain of the Wild Coast. It passes through the former Transkei and its former capital Mthatha. Near Kokstad, KwaZulu- Natal the N2 crosses into the province of KwaZulu-Natal. The route passes the site on its western periphery.

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Regional context:

The R61 is a provincial route that connects Beaufort West with Port Shepstone via Graaff- Reinet, Queenstown, Mthatha and Port Edward. The R61 is co-signed with the N9 for 103 kilometres from Aberdeen through Graaff-Reinet to Bethesdaweg, and with the N6 for 18 kilometres near Queenstown. The R61 is located approximately 47.5 kilometers east of the proposed development.

The R617 is a Regional Route with its north-eastern terminus is the N3 at Howick. It initially runs south-west, along the southern shore of Midmar Dam. It wends west-south-west passing through Bulwer. Just after Bulwer, it intersects with the northern terminus of the R612. After that intersection, it heads west to the town of Underberg, passing through Underberg; it leaves to the west before wending first south-south-west then west to reach Franklin. South of Franklin, the route ends in Kokstad at an intersection with the R56. The R617 route is located approximately 47.63 kilometers north west of the proposed development.

The R56 is a provincial route that connects Middelburg with Pietermaritzburg via Molteno, Maclear and Kokstad. It is co-signed with the N2 between Kokstad and Stafford's Post for 39 kilometres. The R56 route is located approximately 43.46 kilometers north west of the proposed development.

The R396 is a Regional Route that connects the N2 north of Mthatha to Indwe via Maclear, Rhodes, and Barkly East. The R396 route is located approximately 59.57 kilometers south west of the proposed development.

The R612 is a Regional Route with its north-western terminus is the R617 near Bulwer. It heads southeast through Donnybrook, KwaZulu-Natal to Ixopo, where it crosses the R56. From Ixopo, it heads east-south-east. It passes through Umzinto just before crossing the N2 at an interchange and ending its route at an intersection with the R102 at Park Rynie. The route is located approximately 121.56 kilometers north east of the proposed development.

2.4 FUEL SALES PROJECTIONS/MARKET DEMAND ANALYSIS

This section provides the market demand assessment for the proposed development in order to determine the feasibility of the development. The demand of the facilities are determined by estimating the amount of fuel sales that may be attracted as well as the amount of business attracted to the additional profit opportunities associated with a service station.

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2.4.1 VOLUME PROJECTION

Taking into consideration the accessibility, visibility and convenient location of Service Station site, the Trading Area in which the Service Station are going to operate, primarily consist out of the commuter and through traffic.

The effective fuel / petrol demand is one of the means to determine the sustainability of the service station development by means of calculating the potential volumes of fuel sold by the proposed service stations.

The total number of vehicles passing the site over a 24-hour period, disaggregated into types of vehicles as indicated by Table__, are utilised for the purposes of calculating effective demand.

The basic formula used in the calculation of the anticipation of fuel sales is: = N x P x L x D  N: Number of vehicles passing the site during a 24 hour period.  P: The percentage of those vehicles calculated in N likely to support the Proposed Site.  L: The amount of litres likely to be purchase by the vehicles calculated in N and P.  D: The number of days per month in which the calculated support is expected.

A traffic count was conducted on the location of The Site and was done by means of a physical count over 12 hours. This 12-hour count was then converted into an Annual Average Daily Traffic Count (AADT) by means of an expansion factor of 1.20.

(N): SUMMARY OF THE 24 HOUR TRAFFIC COUNTS.

TABLE 4: Traffic Highlights of Site 688 (2015) N2

Conducted by: Mikros Traffic Monitoring KZN (Pty) Ltd Date: June 2015 Proposed site: Mount Frere N2

To Mount To Mount 2015 Ayliff Frere Lane 1 Lane 2 Date count started 2015/06/01 Date count ended 2015/08/31 Actual available data ( Hours ) 2,208 Actual number of days counted 211 Total number of vehicles counted over total period 39,556 19,758 19,798

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Average Daily Traffic ( ADT ) 4,489 2,242 2,247 Average Daily Light Vehicles 3,712 1,849 1,863 Average Daily Heavy Vehicles 777 393 384 Percentage of Trucks 17.3% 17.5% 17.1% Truck Split % ( short : medium : long ) 41 : 17 : 42 40 : 17 : 43 42 : 17 : 42 Percentage of Night Traffic ( 20:00 - 06:00 ) 12.7% 11.6% 13.9% Speed Limit ( km / hr ) 60.00 60.00 60.00 Average speed ( km / hr ) 92.40 92.30 92.50 Average speed - light vehicles ( km / hr ) 94.30 82.40 94.30 Average speed - heavy vehicles ( km / hr ) 83.30 82.40 84.20 Average night speed ( km / hr ) 92.90 62.50 93.30 Percentage vehicles in excess of speed limit 96.50% 96.10% 96.80%

(P): In the analysis of the feasibility of a service station, the interception rate (percentage of traffic on the adjacent road that turns into the service station) is a critical variable. It also has an implication on the operation of the accesses to the service station as the number of potential conflict movements’ increase with increasing vehicles that enter the filling station.

The turn-in percentage (interception rate) is also influenced by the following factors:  Convenience (clean new facility and easily accessible);  Visibility (good-long time to decide whether to use the facility or not);  The amount of passer-by traffic (fixed, as per traffic count);  Type of traffic (transient, Commuter and residential);  Other nearby filling stations (competitor sites);  Service provided to public (car wash, convenience shop, ATM. etc.);  Good accesses (proper deceleration and acceleration lanes);  Location (homebound and work bound);  Site layout (large enough to have proper site circulation)

The expected interception rates for the proposed development are indicated in Table 5

TABLE 5: INTERCEPTION RATES LIGHT HEAVY ROUTE TOTAL VEHICLES VEHICLES 1 1,849 393 2,242 2 1,863 384 2,247 Total 3,712 777 4,489

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1) Light vehicle traffic:

From this traffic a support of "P" 10% to 12% is expected.

2) Heavy vehicles:

That the expected support from the Trucks would vary 8% to 10% between "P"

Taking into consideration the Truck Split %(short: 41.00% 17.00% 42.00% medium: long)

The percentage % market allocation - split% 85.00% 75.00% 5.00%

Calculation 34.85% 12.75% 2.10%

Total allocated market 49.70%

Average litres were obtained from surveys done at the service stations in the area.

The average fill per vehicle, facilities provided at the various sites, and estimated current monthly sales were surveyed at all sites within the study area. The average fill expected from the proposed site was consequently estimated, given the location and expected increase in amount and quality of facilities. The average fill at a site also varies depending on the type of traffic that the proposed site is exposed to. Higher average fill rates are generally encountered for sites exposed mainly to transient traffic, while lower average fill rates are generally encountered for sites exposed to local traffic.

Competitor sites were surveyed to determine an average fill per vehicle at a station. These competitor service stations represent the average fill for vehicles within the study area.

(L): Average litres were obtained from surveys done at the service stations in the area.

The estimated average fill per vehicle type is indicated in Table 6 below.

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TABLE 6_: AVERAGE FILL PER VEHICLE TYPE

Light Vehicle 23 litres

Heavy Vehicle 70 litres

(D): The definition of full normal trading days in a month is the number of typical weekday sales in a month. A typical weekday is a Tuesday, Wednesday or a Thursday during a week with no holidays or public holidays. If there was no variation in the traffic there would have been 29.5 (365/12) full normal trading days in a month. If, for example, the weekend traffic demand is higher than during the week, the full normal trading days in a month become less. It is thus wrong to assume that a default value of 29.5 days should be used due to the fact that a 24 hour facility will be operated for each day of the month.

Traffic patterns have an impact on the number of trading days per month. It is suggested that 29.5 trading days in respect to light vehicles and 22.5 operational days for heavy vehicles be used for this study.

The following assumptions applied when this volume projection was done:  The Site will be operated by an average dealer with average effort.  Direct accesses are approved from the adjacent roads.  Visibility from both directions remains unobstructed.  No other service station development takes place in the trading area during the projected period.  Upon the first two years of operation a service station’s fuel sales reach a high percentage of their full potential, but only during the third year the full (100%) potential is usually reached.

When looking at the future demand potential for the proposed service station, a five year growth scenario was considered. Given the characteristics of the site and the future development potential of the area in which the proposed site of the service station is positioned, it is expected that there will be increased volumes of traffic in the area. An additional assumption was made based on traffic volume growth of 3.5% is in line with realistic economic growth in the area

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Based on the above methods we were satisfied that a reasoned and dependable weighted projection of fuel sales per month at the application service station site would be,

TABLE 7: PROJECTED AVERAGE FUEL SALES PER MONTH FROM YEAR 1 TO YEAR 5.

AVERAGE YEAR L.P.M 1 - 2015 331,785 2 343,397 3 355,416 4 367,855 5 380,730

Refer to Appendix K for detail traffic counts, volume projections and financial

analysis

Different minimum fuels sales exist for different fuel companies. For example, Sasol has adopted a minimum fuel sale amount of ±300 000 liters per month as an adequate indicator of the potential feasibility of Sasol filling stations. However other factors also contribute to this, such as the capital expenditure and other forms of investments as well as the operational requirements that have been made. For the purposes of this study, the minimum fuel sales amount of ±150 000 liters / month, adopted by some emerging Companies such as Viva Oil (Royal Energy), MBT and Brent Oil, will be used.

2.4.2 IN TERMS OF SOCIO-ECONOMIC IMPACTS

Employment Impact

In business and government policy, social impacts refers to how the organisation’s action affect the surrounding community

Recent advances in economic forecasting and modelling techniques consider not only the direct benefits of the development on its users, but also the broader impact on the local and regional economy. For example, increased jobs could lead to increased household incomes, which could result in increased spending which could result in increased business sales (turnover), which

50 | P a g e could result in expansion of businesses and thus the need to employ more people and improve the lifestyle of the community

The property, once developed, is envisaged to have the feasible potential to generate up to 25 permanent employment opportunities, consisting of Cashiers, Forecourt attendants, Chars and Management.

It is estimated that the proposed service station development will create an estimated 50 job opportunities during the construction phase alone. This will have a great impact on lives of people currently employed as it will alleviate the level of their poverty.

The implication of an additional permanent jobs being created in the local economy is that multiplier effects could result in additional income being generated in terms of additional household income for the local population. Most of this additional income would be spent in the local economy (excluding leakages into the regional economy) which would result in increased turnover for local businesses.

Safety and Security or crime impact

In some cases, the service stations pose the problem of safety and security for the surrounding residents. As people know that there is a safe for cash at the petrol station, this becomes a major target for criminals. While targeting the service station, criminals might end up by victimizing other residents

It is important to indicate that the development does not impact negatively on the desired lifestyle of the surrounding areas. The development should not encourage crime or alcohol abuse since the presence of security in place will discourage any criminal activity in the area

Life style impact

The proposed development is likely to improve on the lifestyles of those residing in the study area mainly since the cost of living of residents is that of the low to middle income. These impacts are explored below.

As a result of the position of the proposed site for service station, the convenience aspects of its positioning are envisioned to lower the cost of living. This results from local residents having to travel shorter distances to purchase fuel for their vehicles and additional items such as the daily consumables.

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Shopping Patterns

The proposed petrol filling station will act as a “one stop shop” that will positively impact on residents looking for shopping convenience so as to simplify their lifestyles.

Pollution and Noise impacts

There are various pollution risks during the construction phase of the proposed development as well as the operational phase. These pollution risks may impact on the groundwater systems, the watercourse systems and the air quality of the area surrounding the proposed site. Water and air pollution has a negative impact on the health of individuals and households.

It should be indicated that during the construction phase, residents living up to 500 metres from the site will be affected by the noise of the construction heavy vehicles.

During the construction phase of the proposed petrol filling station, there will be a noise pollution impact especially of the surrounding residents. Again this will be a temporary concern that will end once the project is completed

Visual Impact

The visual impact depends on the design of the service station as well as on the location of residents. If the service station will be designed to have fuel tank above the ground, viewing that, close residents will be psychologically affected. Further, some surrounding residents who are use to a quiet atmosphere will be sometimes affected when viewing a large number of cars queuing to fill up.

In terms of visual impacts, there is a need to indicate that this is a temporary concern that will end with the end of the construction phase of the proposed service station.

2.5 COMPETITION SERVICE STATIONS

2.5.1 MARKET SUPPLY ANALYSIS

This section examines the findings of the market supply assessment undertaken within the trading area. Specifically, it discusses the key characteristics of the service stations located in proximity to the proposed development site. A better understanding of such characteristics will help determine their likely implications for the proposed development and vice versa.

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This discussion covers the following issues:  Location of existing service station within the study area and its description in relation to the proposed development site,  Estimated fuel volumes sold by existing service stations,  Convenience facilities provided by existing service stations, and  Implications of the existing service stations for the proposed development

Competitor sites identified were based on the general guideline “within 30 kilometers of an existing filling station along a national route”.

The adoption of the policy guideline by several Departments was mainly influence by Environmental Impact Assessment (“EIA”) Administrative Guideline ─ Guideline for the Construction and Upgrade of Filling Stations and Associated Tank Installations, March 2002.

This limitation on the distance between service stations was highly influence by international experience, views of interest persons as well as the anticipated limited end-use of filling stations. The reuse of filling stations must therefore be considered especially if there accesses have been granted at Provincial level where such direct accesses cannot be used for any other purposes.

The rational to this reasoning is to avoid so called “graveyard” sites” and remediation cost are high if environmental damage should occur. Given the so called proliferation of filling stations within a specific trading area there exists a serious concern by Authorities and effected parties as to the economic viability of the new filling station and the potential economic effects that the filling station will have on already existing service stations. It should be noted that the distance rule is only a guideline and that the Decision makers accordingly have the right to deviate from the guideline where appropriate. It is therefore in the interests of the Department to make informed and defensible decisions in regard to the merits of each application.

The Study reveals the following considerations to be taken into account:  The location of the site in relation to the competitor sites in sharing in the same trading area with the emphasis on sharing in the same directional platoon of traffic.

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 The geographical area divided into several market segments due to natural barriers such as mountains and rivers as well as manmade structures such as arterial roads, railway lines and open land for recreational purposes or government institutions.  The physical characteristics of the competitor sites in regards to accessibility, visibility and overall its visual manifestation.  The diversity in quantity and quality of services offered by competitor sites in relation to market demand.  The positive economic influence of the RAS module on RORO sites.  That there is currently no universal scientific method available in the calculation of the economic influence on competitor sites and that each Applicant has to formulate their own methodology.  Limited to none statistical market related information, inclusive of volumes throughput of the competitor sites, accessible.

In this study Seven (7) existing service station sites were identified, the closest 3.14 km radius to the furthest at 9.33 km radius.

The competitor sites primarily sharing in the same directional platoon of traffic on the N2 highway were identified as all the seven competitor sites numbered 1 to 7.

Competitor site 1,Kwampiti Station, is an Exel branded service station. This site does not represent Sasol’s latest visual manifestation and presents itself as a dilapidated site due to unpaved entrances and shop front, but this site is equipped to serve its customers. The site is located approximately 10.30 kilometers west of the proposed development in Mount Frere along the N2 Highway (Main road). The site’s visibility from the N2 highway is poor due to lack of branding and identification markings present. Due to the site layout the accessibility is restricted due to site layout and size which leads to poor maneuverability on site.

Competitor site 2,Mount Frere Motors,is an Engen branded service station. This site does not represent Engens latest visual manifestation but is equipped to serve its customers. The site is located approximately 11.00 kilometers west of the proposed development in Mount Frère along N2 Highway (Main road). This site is convenient accessible and mainly serves the commuter and transient trade on the N2 (Main road). This site’s visibility is sufficient but has restricted onsite maneuverability due to the site layout and design.

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Competitor site 3, this site indicates that it was branded as an Engen Service station, this site appears to be closed for operations and has a poor visual manifestation and presents itself as dilapidated. The site is located approximately

Competitor site 4 is a Total branded service station. At the time of visit this site was under construction and the assumption was made that it was upgraded and will represent Total’s latest visual manifestation and will be equipped to serve its customers. The site is located approximately 12 kilometers west of the proposed development in mount frère along N2 highway (Main road). This site is convenient accessible and mainly serves the commuter and transient trade on the N2 (Main road). This site’s visibility is sufficient and has proficient onsite maneuverability due to the site layout and design.

Competitor site 5 is an Engen branded service station. The site does represent Engen’s latest visual manifestation and is well equipped to serve its customers. The site is located approximately 33 kilometers east of the proposed development in mount Ayliff along the N2 highway. Although the site does not share direct access to the N2 Highway it is conveniently accessible and mainly serves the commuter and transient trade on the N2 Highway. Due to the sites layout and design of the site the visibility and onsite maneuverability is sufficient

Competitor site 6 is a Shell branded service station, The site does represent Shell’s latest visual manifestation and is equipped to serve its customers. The site is located approximately 49 kilometers west of the proposed development in Qumbu along the N2 passing through the village. The site has convenient accessibility and mainly serves the commuter and transient trade on the N2 highway. The onsite maneuverability and visibility of the site is sufficient due to the site layout and design.

Competitor site 7 is a Total branded service station, The site does not represent Total’s latest visual manifestation but is equipped to serve its customers. The site is located approximately 49 kilometers west from the proposed development in Qumbu along the N2 passing through the village. The site has convenient accessibility and mainly serves the commuter and transient trade on the N2 highway. The site’s visibility is obstructed due to overgrown vegetation but the onsite maneuverability is sufficient due to the site layout and design.

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The majority of competition sites are located in Mount Frere area, approximately 10 Kilometers west from the site. With respect to the competition sites identified, the oil company with the highest representative’s sites in the study area is “Engen” at 42.86% brand market share followed by “Total” with 28.57% brand market share.

Refer to Appendix K to Table 19 and 20 indicating a detail calculation of the potential volume loss off the identified competitor sites. Inclusive in Table 19 is also an indication of the volume loss recovery in year one to three after the proposed sites has been activated.

Refer to Appendix J for photographs and information of the competition sites.

The potential volume loss on all off the identified competition sites would not lead to their closure at all.

2.5.2 UNDEVELOPED SERVICE STATIONS

Information could not be obtained in regards to undeveloped service station sites (sites / property carrying the relevant zoning classification) from the relevant Local Authorities. Although Petrorex uses it best endeavours to obtain the relevant information Petrorex has to depend on the administrators’ cooperation in providing such reports and insight of the local trading area.

3. FINANCIAL VIABILITY

The major objective of the financial viability is to determine whether there is sufficient scope in the market to proceed successfully with the Service Station as an investment and business opportunity.

This entails a detailed investigation of the viability from the Operators/Dealer who would be involved in the day to day running of the Service Station as well as from a Development / Investors point of view.

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The viability must be determined both from the point of view of the operator / dealer who would be involved in the day to day running of the service station as well as from the point of a developer / investor / oil company transaction.

TABLE 8: PARTIES INVOLVED

3.1 Operational viability

The Operator of the service / filling station would be a separate entity than the Development Company. The operational company also known as the “Dealer” would be responsible for the day to day operational requirements of the service station.

The Dealer has to be approved by the relevant Oil Company to ensure that the Dealer is suitable and has the ability to continue to achieve its operating objectives and fulfill its mission over the long term.

Business start-up costs are the expenses the business incurs before actually begin business operations. The following are typical start-up costs for a filling station:

 Office furniture,  Electronic equipment – personal computer & printer,  Stationary,  Uniforms for Staff,  Marketing / Promotion,  Working Capital ( to cover a large percentage of the first most expenses)  Deposits for water and electricity usage,  Stock

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o Wet stock – Fuel: Tanks should at least be filled to 50% of the overall capacity, o Dry stock – Oils and lubes & shop stock.

Part of the start-up cost would be “key-money” payable either to the Oil Company or to the Development Company depending on the overall deal structuring. The key-money payable is based on a “goodwill” calculation of the service station operational ability to generate a profit. This key money is non-refundable and the Operator can only recover such money in the event of selling the business rights / goodwill to another Operator.

Proof of sufficient funds available, preferably no finance should be obtained, must be delivered before the Operator would be approved and commence business.

Refer to Appendix K – 14. Operational and development capital required.

A big chunk of the costs of running your business will go to a broad category called operating expense. They're also called operating expenditures, operational expenses (or expenditures), or OPEX. It's the ongoing cost of running your business. The OPEX incurs as a result of normal business operations.

The two main expense items are the rent and wages. The operational rental per month was normally based on a fixed rental component based on the floor areas of the service station as well as a turn-over / gross profit percentage share to be paid to the Oil Company / Developer. During the RAS module negotiations 11cpl was allocated from the litrerage volume of fuel sales towards a rental component based on a BSS. This excludes Revenue generating areas such as the convenient store, ancillary profit centres and non- revenue generating areas as well as turn- over percentages on shop sales. A market norm for all rental components payable should between 20% to 24% for a non-branded service station (white site) and 25% to 30% for a completely branded service station.

The following table illustrates the OPEX allocated to the Dealer from a RAS perspective (Fuel sales only).

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TABLE 9:RAS OPEX Advertisements 1,788.50 0.769 Audit fees 1,230.25 0.529 Bank charges 6,345.33 2.729 Credit Card Commissions 303.25 0.130 Credit Crad Losses 165.17 0.071 Credit Card Swipe machine 270.25 0.116 Cash Shortage 585.92 0.252 Cleaning Materials 1,130.83 0.486 Computer expenses 451.83 0.194 Cash collection fess 2,571.00 1.106 Donations 398.17 0.171 Electricity & water 12,058.50 5.187 Entertainment 828.50 0.356 Equipment rental 0.00 0.000 Franchise fees (driveways) 0.00 0.000 Interest paid 0.00 0.000 Insurance 3,921.75 1.687 Internet costs 487.17 0.210 Legal cost 175.42 0.075 Maintenance and repair 3,235.00 1.391 Membership fees 170.75 0.073 Owners rumination 24,507.17 10.541 Professional fees 204.83 0.088 Rates and taxes 523.50 0.225 Security 1,551.08 0.667 Stationary 945.00 0.406 Staff uniforms 777.17 0.334 Staff welfare 1,306.92 0.562 Motor vehicle expenses 1,842.17 0.792 Rental driveway property 0.00 0.000 Telephone and fax 442.50 1.900 Subscriptions 309.08 0.133 Depreciation 0.00 0.000 General expenses 847.17 0.364 Travel and accommodation 599.00 0.258 Other 3,400.83 1.463 Other 2 Other 3 Total attendance wages 64,693.75 27.827 Total cashier wages 15,268.33 6.567 Total Admin salaries 12,702.33 5.464 Rates a taxes (oilco) 2,023.58 0.870

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Maintenance and repair (oilco) 9,676.25 4.162 Evaporation 6,753.50 2.905 Operational Gains and losses 6,753.50 2.905

Opex margin contributions 191,245.25 83.97

Taking into consideration the substantial, annually, increase in wages, determined by the DoE, it has become imperative for all Dealers to revise their wage bill and time-schedule to their own financial advantage. This action lead to an actual increase in newly appointed staff instead of paying expensive overtime.

Refer to Appendix K – 12. Operational Shift Roster & 13.Operational Wage

calculation, for a detail analysis.

Other monthly expenses applicable on all departments (excluding “Rent to the Landlord”) are suggested in detail in Appendix K – 14.Operational expenses. The monthly rental payable was calculated as part of 16. Financial Analysis.

As part of the financial analysis a statement is included illustrating the operating and potential income activities. Provision has been made for Rental payable on a percentage of the foreseen gross profit as well as for tax payable. Although it is not a cash flow statement, the financial analysis statement, is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. The financial statement also reflects the business ability to make a profit or loss.

Refer Appendix K – 16.Financial analysis for a detail breakdown of the

Operational income ability as well as the suggested Operational Expenses applicable. It also indicates the profitability of the Operational business.

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Refer to Appendix K – 17. Break even, scenario 1 from an Operators point of view, illustrating the point at which cost or expenses and revenue are equal: there is no net loss or gain / a profit or a loss has not been made. This break- even point determined by the amount of litres to be sold compares favourably with the market viability of the business.

CONCLUSION

The conclusion is that the market viability shows that the required level of sales can indeed be realised and from an Operators point of view the business is financially viable.

3.2 DEVELOPMENT VIABILITY

The financial feasibility from a development point of view consists out of the following;

 Estimation of the total capital outlay of the project  Estimation of the total net project income  A financial analysis statement projection

The estimate of the current building cost is based on the preliminary design and consists mainly of:

 Basic items  Special items  Site works  Preliminaries  Contingencies

The Client / Developer and the Oil Company will appoint a Quantity Surveyor to do a final costing of the proposed development.

The soil conditions appear suitable for development however a geological survey will be performed before the final costing is to be calculated. A final costing on the earthworks that includes all roadwork to be done needs to be part of the final costing report of the proposed development.

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Refer to Appendix K – 10. Estimated Development Cost.

For this project it was assumed that the Development Company has taken out an amortization loan and it will need to make periodic payments (monthly) for this loan over a period of 10 years (120 monthly payments) at a predetermined interest rate ( prime rate).

For the sake of financial planning and analysis amortization rate and calculation procedure were followed as indicated in Appendix K – 11.Ops. & Dev. Assets Required.

The bond payment that includes capital and cost of capital, incorporating operational cost for the development company, normally indicates the basic income required from any agreement either from the Dealer and / or Oil Company. Provision has been made for the Dealer by means of allocating percentage of the Operational Gross Profit and in accordance with the RAS allocation to the Landlord.

Refer to Appendix K – 16. Financial Analysis.

3.2.1 THE OIL COMPANY TRANSACTION

The following transaction is applicable:

RORO – DODO “Dealer Owned site”

This option suggests that the Developer constructs the facility himself. The contract entered into is a “Supply Agreement “and the Oil Company will then recover a margin fee from the operator / developer based on the monthly petrol purchases only and on diesel pay the operator a rebate according to the level of gasoline sold for that month. The owner will development and nominate the operator.

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The following agreements are applicable;

 Head lease agreement, notarial registered against the title deed of the property and ceded to a financial institution,  A development agreement that contains all the conditions regarding the development,  a Product servitude securing the Oil companies sale of product from the property for the duration of the agreement  Sub-lease agreement / Operating lease,  If the Landlord wishes to have the right to be the Dealer/Operator or to nominate such and Operator, the Oil Company can retain the right to approve and appoint the Landlord as a Dealer/Operator according the Oil Companies standard rules and regulations for Dealer/Operators  A Deed of Surety ship

Refer to Appendix K – 16. Financial analysis for an indication of the required

monthly Lease Amount.

3.2.2 THE SERVICE STATION DEVELOPMENT ASSESSMENT

There are various factors, which arise when an assessment on Service Station Development is done. It is assumed that the property has the correct attached rights, proper accessibility and the capability of being used for future income and amenities, which is likely to be produced.

The improvements on a Service Station Site are specifically designed and built to sell fuel and allied products. Therefore an investor’s primary interest in a Service Station is its income stream and desirable return on his equity.

The purpose of the assessment is to act as a guideline to enable the role players such as the investor to make decisions as to the financial viability of this development based on the RAS module principles.

For an analysis of the Service Station Development Assessment Approach, refer to Appendix J.

A formal feasibility study is essential in assessment of a Service Station Property. The improvements on a Service Station Site are specifically designed and build to sell fuel and allied

63 | P a g e products. There is actually no alternative use for a Service Station Development therefore an investor’s primary interest in a Service Station is its income stream and desirable return on his equity.

The purpose of the Assessment is to act as a guideline to enable the role players such as the Investor / Financial Institution, Department of Energy or the Oil Company to make critical decisions.

The assessment of Service Station Developments can be placed into three categories.

1) Cost approach

2) Income approach

2.1) Modern Capital Approach / DCF Analysis

2.2) Cap rate method

3) Goodwill / Business assessment.

3.2.2.1 THE INCOME APPROACH

The Income Approach is applicable to Service Station Developments due to the fact that income can be derived from:  Rent receives on non-fuel sales developments such as offices, workshop's and car wash as well as well as income receives on the fuel-sale improvements on the forecourt.  The day to day operation of the Service Station. It is important to evaluate the applicable Oil Company transaction, Lease Agreement, the amount, escalations and the period of payment before applying the income approach.

It is important to note that when both the development and operational income is evaluated that there must be a clear distinction made between the goodwill value and property assessment.

3.2.2.1.1 Modern capital budget approaches-discounted cash flow analysis

Discounted cash flow is a vital concept for any investor. It has many applications, and can be regarded as the most important of all techniques used in finance.

The major methods used to make capital budgeting decisions are presented as follows:

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 Net Present Value (NPV)  Internal Rate of Return (IRR)  Profitability index (PI)

THE PRESENT VALUE MODEL

The present value (PV) model, also called the net present value (NPV) and the discounted - cash-flow (DCF) method work as follows:  determine the sum of all cash flows (both-in -and outflows, and initial outlay), and  discount to present values at the project’s cost of capital.  With a positive NPV the project can be accepted and it should be rejected if the NPV is negative.

The Present Value can also be regarded as the maximum price the investor should pay if discounted at the chosen Cost of Capital.

INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is defined as the rate of return, which will make the present value of future cash inflows equal to the present value of the initial investment, cost and other cash outflows. The NPV would therefore be exactly zero if the IRR is used as the discounted rate. If the IRR is greater or equal to the Cost of Capital the project can be accepted and it should be rejected if it is less than the Cost of Capital.

THE PROFITABILITY INDEX (PI)

The profitability index (PI) is merely the present value of cash inflows divided by the investment cost. It also refers to as the benefit/cost ratio and is indicated as an Add Value percentage in the DCF.

THE DISCOUNT RATE

All cash flows are discounted at a certain rate.

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This rate could be as follows: RISK PREMIUM Property is usually more risky than a “risk free” investment and therefore a premium is added to the risk free, to present the risk of the property investment. The rate used in this study is based on the R208 long bond rate plus 5% risk factor.

WEIGHTED AVERAGE COST OF CAPITAL (WACC) The goal is to estimate the overall cost of capital, or the weight average cost of capital (WACC) and is calculated on an after-tax basis.

The concept of WACC can be applied in any situation where an asset has to be finance and different forms of financing or a combination thereof, are being considered.

Refer to Appendix K – 18. Assessment Investor Scenario - for a detail economic

evaluation of the proposed sites.

Sensitivity Analysis (what if scenarios) shows what would happen to the key aspects (debts service ability, return on investment, oil price changes) of the business; how the business ability to service debt would be affected by an increase in interest rate.

Refer to Appendix K – 19. Sensitivity Indicators for an indication of the changes

in the following criteria’s:

 Initial Volume projection

 Yearly Fuel Sales growth

 Cost of Finance / Interest rate

 Yearly escalation in Retail Margin

 Yearly operational cost escalation

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 Company tax adjustment

 Discounted rate @ DCF model

After the Sensitivity Indicators has been taken into consideration a new DCF was done to determine the financial / economical outcome thereof.

Refer to Appendix K – 20. Assessment Investment Sensitivity- outcome.

3.2.2.1.2 CAP RATE METHOD

The value of the development using the capitalization rates is based on the market comparison method to determine these rates. The cap rate analysis are based on a one year income stream and do not take the sale or any renovations into account, which is a limitation.

Refer to Appendix K – 18. Assessment Investor Scenario & 20. Assessment

Investment Sensitivity- outcome.

3.2.2.2 THE GOODWILL/BUSINESS VALUE

A definition:

“Going concern value indicates the existence of business assets ready for use in producing business income. The value is created because a business can effectively apply its capital (financial resources and equipment), labor (employees), and coordination (management) to produce economic benefits for its owners.”

The goodwill associated with a Service Station is also influence by the Site’s position in the marketplace and its ability to effectively serve its customers. The fair market value of Goodwill in the Service Station industry is whereby a willing Dealer / Operator and a willing seller (In this

67 | P a g e case the Landlord / Developer) reach an agreement, with both parties acting in full knowledge of all facts (financial outcome).

In determining the market value of a Service Station Operations / Business, the Capitalized Earnings method was used and the following were taken into consideration:

 The net profit derived from Fuel and Other sales, before Owner’s remuneration cost of finance and taxes payable.  Monthly Operational rental to the Landlord was adjusted to the market related rentals.  The required Return on Investment. A payback period as a result of the capitalization earnings method served as an indicator of the willingness of an investor to invest in the operations or not.

Refer to Appendix K – 18. Assessment Investor Scenario & 20. Assessment

Investment Sensitivity- outcome.

SECTION FOUR

CONCLUSION AND RECOMMENDATIONS-NEED AND DESIRABILITY

It is imperative to satisfy the needs and requirements of both the transient trade and the traffic from the local trading area to ensure a concurrent and full time support of the Service Station facility. The usage of fuel facilities is the only method to ensure financial benefit towards the Oil Companies and the Operator of the Service Station facility.

Among complying with the basic requirements the application site also enjoying very specific and desirable special advantages such as,

 The development of the site will contribute to a new and modern look with decent facilities to suit the consumers’ requirements.  The site does offer the highest convenience for drivers when filling up with fuel as the layout and the availability of a suitable access point do not encourage motorist travelling into Mount Frere or the surrounding residential areas, to make special trips to the service station itself. Overall the Site encourage the reduction of energy consumption by

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reducing special trips to Service Stations when filling up with fuel,  The convenience and safety factors of vehicles travelling at lower speed differentials are highly advantageous and desirable,  The proposed site is extremely visible and accessible from the N2. The site will also be extremely visible during night as light poles are positioned in close proximity of the entrance to the propose site. The result thereof is that access to the site is safer and the additional illumination contributes to the safety and security aspect of the proposed site,

 The main access from the N2 road was designed according to sound road planning principals, to satisfy the obligatory requirements for a direct entrance point to the proposed service station for vehicles and trucks.  Product type distribution on the forecourt and the fact that the canopy and pump island layout is directly behind the ingress point will not cause traffic conflict points. The layout will also allow for proper and safe circulation between motorists and heavy vehicles, including that of fuel delivery vehicles. This principle will apply to the forecourt itself as well as for traffic flow to enter and exit the site.

Each and every logical requirement for a Service Station is focused on the convenience and safety of the motoring public this is what is needed and this is what the proposed service station will provide and it is therefore the ideal site.

The availability of a Service Station is very important that they do have to provide for the requirements of convenience and safety, diversion is inconvenient, causes many additional conflict turning movements and thus negatively affect road safety. Diversion also often causes inconvenience to other legitimate uses, which are served by the diversion route. The assessment of the proposed development from an Operational and Developers point of view indicates that it will be viable and sustainable based on the demand for fuel in the market area. All the above factors show that the development of the application site will be desirable. A further desirable factor is also that it provides a much needed and safe facility, secure, well lighted, with ablution and refreshment facilities. Taking into consideration that the volume projection clearly indicates that the projected level of sales can be realized as well as the above-mentioned findings, the proposed development is highly likely to be viable.

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APPENDIX A: PROPOSED SERVICE STATION LAYOUT

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APPENDIX B: AERIAL VIEW OF THE APPLICATION SITE AND SURROUNDING AREAS

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APPENDIX C: PROPOSED ACCESSES

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APPENDIX D: TITLE DEED INFORMATION

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APPENDIX E: SURVEYORS INFORMATION

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APPENDIX F: ZONING INFORMATION

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APPENDIX G: ENVIRONMENTAL AUTHORIZATION

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APPENDIX H: SITE AND RETAIL LICENCE

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APPENDIX I: PHOTOGRAPHS OF THE APPLICATION SITE.

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The proposed development property from (DIRECTION)

The proposed development property from (DIRECTION)

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APPENDIX J: PHOTOGRAPHS AND INFORMATION OF THE COMPETITION SITES.

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1. Name Kwampiti Station Brand. Exel Location. Mount Frere-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 30°53'40.97"S 28°59'49.42"E 8.70 10.30

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Non Branded shop 135 15 150  Carwash Wet stock diversification.  Neighbor to “Built it”

 ULP 95  QTY Entrance:2  DGO 50ppm and DGO500ppm  QTY Islands:4  No LRP and ULP 93 available  QTY Storage tanks:4  One dispenser X Single Nozzle  One dispenser X Six nozzle’s  One dispenser X Eight Nozzle’s

2. Name Mount Frere Motors Brand. Engen Location. Mount Frere-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 30°54'0.56"S 28°59'39.85"E 9.26 11.00

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Non branded shop 215 15 230  Neighbor to retail activities  Payphones Wet stock diversification.  Vehicle Spares sales  ULP95  QTY Entrance:2  DGO 50ppm and DGO 500ppm  QTY Islands:2  No LRP and ULP93 available  QTY Storage tanks:4  Five dispensers X Dual Nozzle’s

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3. Name “No Name Visible” Brand. Engen Location. Mount Frere-N2 Northbound

GPS Co-ordinates Distance from Site / km Radius Road 30°54'3.37"S 28°59'36.67"E 9.38 11.10

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Closed for operations 0 0 0  QTY Entrance:1  QTY Islands:4 Wet stock diversification.  QTY Storage tanks:3  Close for operations

4. Name Total Mount Frere Brand. Total Location. Mount Frere-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 30°54'33.52"S 28°59'29.66"E

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Steers 365 25 390  Debonair’s  KFC Wet stock diversification.  Neighbor to Retail activities  (under construction) Product availability  QTY Entrance: 2 not determined  QTY Islands:6  One dispenser X Dual Nozzle’s  QTY Storage tanks: (Under construction)  Four dispensers X Six Nozzle’s

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5. Name Mount Ayliff Convenience Centre Brand. Engen Location. Mount Ayliff-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 30°47'53.19"S 29°21'59.23"E 28.78 33.80

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Quick Shop

345 45 390  ATM  Lotto Wet stock diversification.  Corner Bakery  LRP  QTY Entrance:1  ULP 93 and ULP 95  QTY Islands:4  DGO 50ppm  QTY Storage tanks:4  No DGO 500ppm  Four dispensers X Eight Nozzle’s

6. Name Qumbu Service Station Brand. Shell Location. Qumbu-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 31° 9'35.81"S 28°52'8.70"E 39.46 49.30

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  QTY Entrance:2 225 35 260  QTY Islands:2  QTY Storage tanks:4 Wet stock diversification.  LRP  ULP95  DGO 50ppm and DGO 500ppm  No ULP 93  Three dispensers X Four Nozzle’s

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7. Name Total Qumbu Brand. Total Location. Qumbu-N2 Southbound

GPS Co-ordinates Distance from Site / km Radius Road 31° 9'48.56"S 28°52'4.17"E 39.86 49.70

AVERAGE FUEL SALES. KLPM. Diversifications. Petrol Diesel Market  Non branded shop 215 25 240  B&B  QTY Entrance:2 Wet stock diversification.  QTY Islands:5  LRP  QTY Storage tanks:5  ULP95  DGO 50ppm  No ULP93 and DGO500ppm Available  One dispenser X Dual Nozzle’s  Four dispensers X Six Nozzle’s

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APPENDIX K: FINANCIAL VIABILITY.

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