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, whether public or private, don’t abuse their market power. When it comes to state-owned enterprises, government has a further obligation – to ensure that they perform in the public interest.
Since state-owned enterprises are owned by government, one option is to hold them directly accountable to a political and administrative head. A popular alternative in recent decades has been to establish economic regulators, mandated to operate at arms-length from the government which acts as shareholder on behalf of society.
South Africa followed this trend after 1994, creating the National Energy Regulator, which regulates electricity and other energy sources. The other regulators are the National Ports Authority and the Independent Communications Authority. Proposals to expand this approach to transport and water have now been endorsed in the draft policy document recently released by the National Treasury.
However, the model has failed dramatically to achieve its objectives in both the energy and communications sectors. In our view, it has also been a wasteful use of scarce expert capacity and institutional resources. This is our conclusion based on an analysis of independent regulation as applied in South Africa.
An important example is how the energy regulator failed to assure a stable pricing path for electricity. This is it’s most basic function. And in trying to perform its function, it is now hindering the resolution of the crisis at the state-owned power utility Eskom by awarding tariffs that offset support from the Treasury – at a time when the country faces serious fiscal and energy threats.
What’s not working
South Africa’s state-owned enterprises are supposed to provide a foundation for the country’s development. Yet many are performing badly, or not at all. In some cases they are doing actual harm by, for example, draining public resources.
Existing independent regulators are supposed to:
set fair prices to ensure that users are not ripped off;
ensure that the performance of enterprises meets minimum standards, and ideally keeps improving;
make decisions that reflect government policy goals; and,
at the same time, avoid short-term or otherwise inappropriate political pressures.
There are four main reasons why South African economic regulators are failing to achieve these objectives.
First is policy incoherence. Independent regulators are supposed to protect enterprises from the short-termism, opportunism and the fickleness of politics. But they cannot do that effectively if state owned enterprises must give effect to government policy that is still in flux.
Second is a lack of government support. Regulators can never be entirely free from political influence precisely because they need supportive decisions and actions by the state. And that support often hasn’t been forthcoming.
The National Ports Regulator is a good example. The regulator wanted the Minister of Transport to separate port services from the rest of Transnet’s operations as envisaged by the relevant legislation. But that hasn’t happened because Transnet has been lobbying government to retain the revenue from the profitable port business. And government itself is disinclined to tackle the financial challenges that would arise if the Ports Regulator was allowed to do its job and reduce bloated tariffs.
Third is the issue of performance. Most state owned enterprises are performing badly but in many sectors the primary challenge is poor performance at municipal level that results from weak governance. Whether in the local supply of electricity, water, or sanitation services, municipal failure can either compound the failure of state enterprises, or diminish any benefits they might bring.
In such instances, national-level economic regulation will have limited impact if service delivery mechanisms fail. Fiddling with pricing decisions is of little significance to citizens and firms that don’t have reliable access to water, electricity or transport services.
Part of the problem is that independent regulation was often promoted as a pathway to privatisation. But that has not happened. And in many instances the case for privatisation has not been convincing, meaning that it might just replace public dysfunction with notional accountability mechanisms for private dysfunction with little accountability. If privatisation is not the way forward, at least for now, these entities should be managed differently with a focus on public performance.
The final practical consideration is that independent regulation needs substantial technical capacity. There are various parts to this.
The regulator must have the staff who can evaluate enterprises, challenge them where appropriate but not intervene unnecessarily.
The regulated enterprise must employ people to engage with their regulator.
Government must have the capacity to set up and support the regulator. If more than one department is involved, all must have appropriate capacity.
Policy makers must provide clear policy expectations and resolve uncertainty quickly.
Ideally, other parts of society also need to be able to engage with regulatory issues. Civil society needs to have a voice as do companies that use the services of the state-owned enterprise. And courts need to be capable of dealing with these specialised issues.
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 that the focus should be on building government’s capacity to guide the process. That way, political heads will be clearly 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 an independent regulator. Bulk water prices are set by the national government department, using criteria legislated 20 years ago. The department calculates the tariffs and consults with major stakeholders. These include municipalities, big users such as Eskom and Sasol as well as organised agriculture. Price increases greater than inflation have to be justified.
Unlike the electricity case, this system has worked reasonably well and tariffs have increased smoothly and predictably. User participation keeps government honest in its calculations.
Some organisations still argue that a regulator would reduce mismanagement. But this ignores the lessons of experience and is based on a superficial notion of democratic accountability.
By contrast, in energy a former regulator and sector expert acknowledged that the regulatory agency’s price setting had produced huge fluctuations in the tariff which caused uncertainty. Yet, Treasury inexplicably wants to replace a relatively successful model (in water) with a failed one (in energy).
The way forward
We believe that ending dependence on failed independent regulators will ensure that there’s much more direct accountability. It will also lead to a focused effort to improve governance in both government departments as well as state-owned enterprises. And limited capacity can be integrated from disparate departments, entities and regulators.
There is no getting round the fact that 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 on the country 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.
Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of Johannesburg and Mike Muller, Visiting Adjunct Professor, University of the Witwatersrand