Kenya should learn from EU postal liberalisation pitfalls
Liberalisation is the perfect way to increase the efficiency of regulated sectors in order to decrease prices and increase performance to consumers.
However, much of market deregulation in Europe has had the opposite effect: higher prices and lower performance.
At the same time, the profitability of the privatised utilities, or parastatals, has tended to stay far below the expectations of the new shareholders. Kenya should learn from the pitfalls encountered by the European utilities.
In Kenya, liberalisation of "regulated" markets is high on the agenda of the National Rainbow Coalition (Narc) government. Concrete examples include the privatisation of the Kenya Ports Authority, the pursuit of a second licence for a fixed telecommunication service provider and the proposed privatisation of KenGen and Kenya Power and Lighting Company as part of the eventual plan to liberalise the energy market.
Europe is indeed far ahead of Kenya when it comes to deregulation of public utilities. Telecommunications, postal services, energy, water, ports, railways and cable television are some of the examples.
Whereas they should have learned from each other’s mistakes, European countries have failed to learn from errors earlier made by fellow European countries. Kenya has the advantage of the dialectics of progress. Kenya can still benefit from these mistakes. These pitfalls can be categorised into four groups.
Liberalisation without privatization
This is a major problem in the European energy sector. Some countries have privatised their utilities, while in some, the energy sector is still regulated. The French government, for example, still owns majority of shares of the national electricity company ElectricitÈ de France (EdF). Scandinavian countries, the UK, The Netherlands and Germany on the other hand did privatise their energy corporations.
This is causing a problem in Europe. Governments face a conflict of interests. The French government, in this example, on the one hand wants their utilities to maximise their profits, but on the other, it has committed itself to opening up the market, which has certainly placed the profitability of EdF under pressure.
Liberalising a market with only one supplier
In the mid-nineties, England liberalised its gas market. The government expected other companies to intrude into main concession areas. This did not happen. The companies remained in their own areas and did not compete at all. Due to this lack of competition, consumer gas prices exploded in 1996 and clients were unable to change gas providers. In actuality, the English government had failed to establish the right environment for competition, but, rather had created little geographic monopolies.
Liberalisation without a sound regulatory mechanism
Much as its sounds like a contradiction in terms – a regulatory mechanism as part of a deregulation process – is still an important one to have. Most activities of utilities are monopolistic by nature. This is due mainly to the infrastructural aspects of any given utility.
It is, for example, a waste of capital to construct two railway infrastructures next to each other so the customer can choose which one to use. The railway infrastructure is a monopolistic activity by nature (railway transport services are very suitable for a competitive market though).
In order to control the monopolistic activities, a regulatory body should protect customers against unacceptably high prices and poor performance by such monopolists. They should also ascertain that the monopolists treat their customers equally.
In the Dutch system, the OPTA (regulatory body for postal services and relecommunications) obliges the owner of the fixed telephone network, KPN, to apply the same level of tariffs to the companies that sell communication services via KPN¥s infrastructure. KPN is not allowed to seek lower prices for its sister company, which is actually transmitting the information over the infrastructure. This would create false competition.
The regulatory body also has to protect the rights of the end-customer. Once a utility is privatised and the market is liberalised, short-term profitability becomes the highest goal, which, in most cases leads to a drastic decrease in performance for the customers.
The best known example is the California energy crisis in 2000. The devastating results of this deregulation: an increase of the electricity prices of more than 45 per cent, a total debt of the two main energy distributors (Pacific Gas & Electric and Southern California Edison) of US$13 billion and a huge power black out lasting three days.
Another important task for the regulatory body is that of enabling free competition. In some cases, the incumbents buy out new entrants as soon as they present serious competition for them. A competition Act should prevent this from happening.
Too fast liberalisation process
Utilities are enterprises with their own values and culture. Keywords to describe a European parastatal include: "internally focused", "inertia", "technology driven", "resource-driven operations", "poor performance management" and "risk averse".
The European utilities were not used to have competition either. Years of working in this setting is deeply embedded in an organisation’s culture. The government should, therefore, give such a utility enough time to prepare itself for the necessary transition into a more externally focused organisation, which would be more customer-oriented and strive for optimal shareholder value. The utility should also be capable of competing with large foreign corporations entering the newly freed up market.
In addition, many European utilities were in bad shape financially at the onset of privatisation, a factor which did not make the transition process easier. They therefore need to develop capabilities, adapt their organisational structure, streamline business processes and update their IT-systems.
If the liberalisation process moves too fast, one will often see that the former utility would not be capable of defending itself against aggressive foreign-competitors. For instance, many local and regional UK water companies were acquired by French Vivendi within a year after privatisation.
The coming two years will provide a huge window of opportunity for Kenya. Privatisation and liberalisation of KPA, KPLC, Kenya Railways and Telkom Kenya could lead to economic prosperity – unless Kenya moves towards the European pitfalls. In that case, privatisation and liberalisation could end up in a financial and societal catastrophe.
It is up to Kenya, its corporations and its citizens!
