TAX REDUCTIONS, COMPETITION LAWS THE WAY TO GO ON ENERGY

The Standard
Nairobi, Kenya

October 8, 2008

By Eric Mgendi

We cannot have a competitive market without regulation to guard against market malpractices.

The dismal reduction of local petrol prices by Sh3-4 a litre after global crude prices dropped by over $40 (Sh2,900) a barrel — Sh18 a litre — exposes the inadequacy of developing countries’ ability to regulate trade to ensure fairness. It also puts to question the Government’s commitment to protect consumers.

Proponents of free markets argue regulating businesses may be counterproductive in the long run. They say incentives to out-compete rivals would lead to lower costs and to the production of goods consumers want, allowing consumers and society to benefit from both. The ideology is driven by the theoretical assumption that markets are perfect. But experience the world over has shown market and institutional imperfections.

In the rush to make profits for their shareholders abroad, mining and oil companies often pay bribes to get all manner of favours, such as protection from competition. This allows them to set prices or overlook environmental safety regulations. Many of these giants have more resources than most developing countries, a stature that enables them to successfully influence regulatory frameworks.

The United States Foreign Corrupt Practices Act, enacted in 1977, makes it illegal for Americans to bribe foreign governments. At an Organisation for Economic Co-operation and Development ministerial meeting in 1996, similar statutes were imposed on other countries to bar then legal bribes that even enjoyed tax breaks.

Despite this, the practice has continued in other forms, such as political campaign contributions in return for above-market prices, tax breaks or favourable changes in policy, all in the name of business facilitation.

Here in Kenya, weak regulation has resulted in exploitation of consumers on several occasions. In the second half of 2005, for instance, the country was hit with a sugar shortage after the main sugar miller, Mumias Sugar Company, closed for maintenance at a time when there was no adequate stock in the market. Importers took advantage of the production imperfection and weak regulatory framework to charge exorbitant prices despite having lower total costs than local producers. Such episodes make a clear case for better regulation to ensure consumers are protected against market malpractices.

Superficial

The Government seemed to have resorted to superficial prescriptions. Energy Minister Kiraitu Murungi suggested a media campaign to enlighten people on petrol stations with cheaper pump prices.

Rather than spend public money telling people about pump prices, work that media houses are doing so well, the minister should help cushion those who depend on paraffin (kerosene) by removing the tax on it.

If the Government has to resort to activism, who will protect us from market abuses? It should strengthen regulations to guard against malpractices and address the problem of high taxes on fuel. The huge tax charged on fuel should be a balancing tool to cushion consumers against variations in world prices, secondly, a means to protect the environment and, lastly, a way to make money. When global prices rise, responsible governments adjust taxes to protect consumers. In Kenya, tax collections increase steadily with fuel prices. This is costly in the long run because of the social costs that come with increased inflation.

Monday’s announcement VAT would be removed on bulk fuel for power generation is a good start. Legislation against malpractices will help to protect consumers against exploitation. Consumers should be able to sue for compensation from losses incurred as a result of oil companies’ anti-competitive behaviour.

Globalisation has meant that the problems created by monopolies and cartels are harder to detect and curtail. Advanced countries have enacted competition (European Union) and anti-trust laws (US) to makes collaboration with supposed competitors a criminal act. The Government must do the same to protect citizens.