Regulators are ruinous in SA

EVIDENCE: DIRECT ACCOUNTABILITY MORE WORKABLE

Treasury wants to replace successful water model with failed energy one.

There are a host of reasons why a country’s economy must be regulated. One of the main ones is to ensure that dominant firms don’t abuse their market power. When it comes to state-owned enterprises (SOEs), government has a further obligation – to ensure they perform in the public interest.

Since SOEs are owned by government, one option is to hold them directly accountable to a political and administrative head. A popular alternative has been to establish economic regulators to operate at arm’s-length from the government. SA followed this trend after 1994, creating the National Energy Regulator. The other regulators are the National Ports Authority and the Independent Communications Authority. Proposals to expand this approach to transport and water have been endorsed in the draft policy document recently released by National Treasury.

However, the model has failed dramatically to achieve its objectives. In our view, it has also been a wasteful use of scarce expert capacity and institutional resources. An important example is how the energy regulator failed to assure a stable pricing path for electricity. This is its most basic function. And in trying to perform its function, it is now hindering the resolution of the crisis at Eskom by awarding tariffs that offset support from the Treasury – at a time when the country faces serious fiscal and energy threats.

There are four main reasons why SA economic regulators are failing. First is policy incoherence. Second is a lack of government support. Third is the issue of performance. Most SOEs are performing badly but in many sectors, the primary challenge is poor performance at municipal level resulting from weak governance. In such instances, national-level economic regulation will have limited impact if service delivery mechanisms fail.

Another final practical consideration is that independent regulation needs substantial technical capacity. Government must have the capacity to support the regulator. The question then is whether further proliferation of regulatory capacity is possible, or even desirable. We believe the answer is no and argue that there is a radical, but simple, alternative.

It’s a given that political decision-making will guide the oversight of state enterprises – that’s because the government wants to use them to promote broader development policy. This means the focus should be on building government’s capacity to guide the process. That way, political heads will be accountable and failures cannot be blamed on other parties.

The water sector has been cited as one where a new regulator might be introduced. But it actually serves as a case study of how public entities can deliver well without a regulator.

Bulk water prices are set by the national government department, using criteria legislated 20 years ago. The department calculates the tariffs and consults major stakeholders. Price increases greater than inflation have to be justified. Unlike the electricity case, this system has worked reasonably well. Some organisations still argue that a regulator would reduce mismanagement. But this is based on a superficial notion of democratic accountability.

By contrast, in energy, a former regulator and sector expert acknowledged the regulatory agency’s price setting had produced huge fluctuations in the tariff, causing uncertainty. Yet, Treasury inexplicably wants to replace a relatively successful model (in water) with a failed one (in energy). We believe that ending dependence on failed independent regulators will ensure much more direct accountability and lead to a focused effort to improve governance in both government departments and SOEs.

Tough action needs to be taken, and soon. If government doesn’t get oversight of public enterprises right, a different form of “regulation” will be imposed by international financial institutions and other lenders. But their focus will be on what’s needed to ensure debt repayment, not the broader national interest.

Sean Mfundza Muller is a senior lecturer in economics, University of Johannesburg

Mike Muller is visiting adjunct professor, University of the Witwatersrand

– Republished from TheConversation.com