Hail Botswana Energy Regulatory Authority!

This past week, the Botswana Energy Regulatory Authority (BERA) made me very happy. In its maiden case, the energy regulator rejected Botswana Oil Limited (BOL)’s bizarre application to be granted monopoly power on the importation of petroleum products. It found no business case behind BOL’s application. None exists! 

The petroleum industry, though having only a few key players - Shell, Engen, PUMA, Caltex and Total - is very competitive. It trades at very low and regulated, margins. So profits are made through efficiency and volumes. Furthermore, public policy is decidedly pro-competition. Botswana has instituted a regulatory framework for competition, comprising a Competition Policy, a Competition Law, and a Competition Commission.  The essence of this framework is to promote fair competition in as many markets as market structure and public interest considerations permit. This requires firms to play by the same rules. BOL essentially seeks exemption from the rules.

From a public interest perspective, effective competition delivers several well-documented benefits. It guarantees consumers a wider choice of products and value for money (good quality and great service at low prices). It correlates positively and strongly with creativity and innovation at all conceivable levels - technology, product design, processes, customer convenience and marketing techniques. And there is plenty of empirical evidence showing that competition drives external competitiveness and growth. The European Union (EU) argues on its website that “Competition within the EU helps make European companies stronger outside the EU too - and able to hold their own against global competitors”. Competition generates all these benefits because it punishes and banishes complacency in firms. Monopoly does just the opposite. It breeds complacency that consumers pay for through higher prices, and inferior products and service. Why then would we turn a competitive industry into a monopoly? And in a country that wants to develop a market led economy? According to its website, BOL’s mandate is threefold: ensure the security and efficiency of the supply of petroleum products to Botswana; manage state-owned strategic fuel reserve facilities, strategic stocks as well as bulk storage and distribution of petroleum products; and facilitate the participation of citizen emerging companies in the petroleum sector. None of this requires BOL to be a monopoly. I have strained my brain trying to figure out conceivable economic justification for the monopoly BOL seeks. I could not find one. Yet, the monopoly BOL wants will put it in a position of total market dominance, from whence it could drive the prices of petroleum products up through one, most likely both, of two channels, namely, monopoly rents or inefficiency.  In fact, turning an efficient and competitive industry into a monopoly through regulation would put Botswana’s fuel security and efficiency at risk because where we once had a multiplicity of importers, we will now have one, a fairly new and untested player in the industry for that matter. It will put all industry players at the mercy of a single supplier and limit the pace of innovation, productivity growth and development in the industry to the competence and enterprise of this import monopoly that will become a monopsony (a single seller) in the local market. I wonder what oil industry players large and small thought of BOL’s application.  

Monopolies and monopsonies do not generate efficiency. Nor do they encourage innovation and competitiveness. They are generally complacent because, as street language would have it, “they are sure of their story”. They do not have to fight for market share. And they will clean our pockets because we simply cannot punish them when they get sloppy by opting for alternative suppliers of goods and services. Worse still.  The monopoly BOL sought was bad for Botswana at another level, that of policy certainty and incentives and policy certain. Economies are driven by incentives. Economic incentives require policy certainty. Granting BOL the monopoly it sought would have created uncertainty about the government’s strategy for investment and private sector development. That is what the Competition was in part created to achieve.  Our long-term economic development strategy is premised on fair play, private sector-led development and openness to foreign direct investment. Granting BOL its wish would have sent a contrary message about the government’s commitment to competition, efficient markets and foreign direct investment. Turning a competitive and efficient industry into a monopoly would be an assault on existing industry players and a violation of their rights. It would offend the public policy and act as a disincentive to investment and growth.  I would be surprised if the Competition Authority did not take interest in the BOL application. I am also curious as to what BOL’s parent ministry ever supported BOL’s pursuit of the monopoly it sought. None of this matters anymore. “My heart is white” (to borrow a phrase from my favourite athlete) because BERA made the correct judgment call. My greatest disappointment is that BOL actually made this application and was not stopped in its tracks at the level of the parent ministry. That suggests that government ministries do not sing from the same hymnbook and that the risk of policy dissonance within government is high. That can be quite costly.