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Editor's Note Share
 

Copycat Institutional Reform Breeds Incompetent Regulators

 

 

 

Competition is the name of the game in the battlefield of ideas in the era of globalisation. As ideas are transformed into products, the battle extends to the marketplace with each idea valued in monetary terms. As long as competition matters, institutions endure trading within it.

While the rule remains, practice falls short, excluding some sectors from the sphere of competition. Public utilities are excluded from the whole, driven by monopolistic lineage.

However, globalisation has eroded their exclusion to such an extent that partial competition has become the trend. As the developed world becomes accustomed to the trend, least developed countries still struggle to learn the lesson.

Driven by their ideology of a democratic developmental state, which promotes state driven economic development, the EPRDFites have sheltered public utilities from competition. A monopolistic market structure for utilities ensures universal access to services, they argue. Cross subsidisation, within which overtaxed urbanites finance rural infrastructure expansion, is claimed to be the way to this end.

A transformational model of institutional reform, which ended up splitting utilities into weak regulators and powerful operators, pass competition up, argue opponents. The poor technical capacity and lack of resources of regulators has driven them to the edge, while the promise of competitive service delivery was broken, opponents claim.

Consumers are exposed to soaring prices, suboptimal service quality, and limited service choices while they are excluded from involvement in any operational changes.

By contrast, the world has gone far to recognise that monopolies reduce aggregate welfare. The privatisation and partial privatisation of utilities proved to be the best way to serve consumers. In India, the most populous democracy in the world, there are over 20 privately owned power utilities with a power generation capacity ranging from 1,650MW to two gigawatts.

Likewise, each of the 50 states of the United States (US) is served with a minimum of three power utilities, whereas Turkey, another vibrant democracy, has 13 electricity operators.

Liberalising the telecommunications sector has even gone further, with most Sub-Saharan African countries boasting more than two operators. Kenya has four operators, while Sudan has six. Similarly, Uganda has seven telecom operators, of which only the state owned company, Uganda Telecom Ltd, operates fixed line services.    

With utilities being monopolised in the electricity, water supply, and telecommunications sectors at home, Ethiopians have no alternatives. No foreseeable hope of privatisation exists, as Prime Minister Meles Zenawi affirmed at the seventh party convention of the EPRDF held in Awassa, the capital of Southern Regional State, in 2008.

The universal access agenda of the EPRDFites has brought changes in access to utilities.

To their credit, the number of telephone users has grown from 500,000 in 2005 to 6.5 million in 2010, while the size of the population with access to telephone services within a radius of five kilometres has grown from 13pc to 62.5pc during the same period. Similarly, the national electricity generation capacity reached 2,000MW in 2010, while electricity coverage stands at 41pc. 

Eschewing the global trend of partial competition, the Revolutionary Democrats have also divided the utility sectors along the lines of service delivery and supervision.

The Ethiopian Electric Agency (EEA), established in 2000, oversees the lone power generator and distributor, Ethiopian Electric Power Corporation (EEPCo). Similarly, the Ethiopian Telecommunications Agency (ETA), which was established in 1996, supervises the telecom monopoly, Ethio-Telecom (formerly the Ethiopian Telecommunications Corporation).

Other such modes of institutional arrangements can be witnessed in the aviation, roads, and commodity exchange sectors. In each instance, the regulators were born from the operators. Most are so shockingly understaffed and under resourced that they remain ceremonial. As opposed to the promised competition, they foment market capitalisation.

Replicating institutional reform is not typical to Ethiopia, as Japan’s growth after WWII can be attributed to copying US institutions. Dubai, the largest city in the United Arab Emirates (UAE), replicated the financial institutions of London to transform itself into the financial capital of the Arab World.

Yet, isomorphic reforms are risky as they mostly fail to take the peculiarities of the sector and political priorities into account. The incessant Japanese recession and the bankruptcy of Dubai in 2009 can partially be explained through the exogenous nature of their institutions, analysts argue.

Institutional reforms initiated by the Revolutionary Democrats are politically driven, top down, and prearranged. Biased towards separating regulators and operators, they overlook competition and efficiency in allocating resources. Rather than inspiring innovation, they breed wastefulness.              

Ironically, and if not rhetorically, all the regulators claim that their objective is to ensure competition.

The EEA aims to ensure competition and righteousness in electricity provision, it stated in its vision statement. Ensuring telecom service quality and customer satisfaction is the primary agenda of the ETA, it claims. The same goes for the Ethiopian Commodity Exchange Authority (ECXA), which is mandated to establish fair competition among commodity markets. There is only one on the block.

In reality, the regulators are overseeing monopolies with an oligopolistic capability of fixing prices. With a nominal rate of 0.045 dollars per kilowatt hour (KWH), the price of electricity in Ethiopia may appear cheap, especially in comparison with Kenya, which charges 0.085 dollars per KWH, and Uganda, charging 0.16 dollars per KWH. Yet, since an average Kenyan and Ugandan earns 809 dollars and 501 dollars annually, respectively, and not the 350 dollars an Ethiopian earns, the net charge remains a burden.   

In response to the high net price and poor service delivery, the public confidence rating remains too low. Only 28pc of Ethiopians have confidence in federal government institutions, revealed the 2007 Gallup Institutional Confidence survey. Only 45pc confirmed confidence on financial institutions in the same survey.

In the absence of competition in utility sectors since then, less improvement can be expected in terms of public confidence.

The one-size-fits-all reforms instituted by the Revolutionary Democrats in different sectors have also disowned public participation in decision-making. Compounded by weak regulators, operational changes in service provision and tariffs happen randomly. Besides, service interruptions pass unaccounted for.

The unusually frequent power interruptions two weeks ago, to the great irritation of many across the country, would no doubt pass without the regulator daring to hold Meheret Debebe et al at EEPCo publicly accountable for their failure to provide services.

Indisputably, flexible institutions are the basis of sustainable economic growth. However, flexibility can only be achieved if institutions are established in line with the stage of economic growth of the country, industry peculiarities, and resource availability. Superimposing institutions does not guarantee flexibility.

To expand access to and quality of public services, reforms should be undertaken on a case by case basis, instead of copycatting. The focus should be on high impact changes, not worthless splitting. In case the EPRDFites’ resistance to partial privatisation continues, customised incentive structures could be established to initiate innovation within the monopolies.

No measures can compare with the benefits that privatisation or partial privatisation would bring. Only if competition is institutionalised through market based service provision will idle regulators become active and relevant. In a way, private investors should be afforded the opportunity to offer an alternative to paying high prices for poor quality.

 
 
 
 
   
   
   
 

 

 

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