IS SOUTH AFRICA READY FOR MARKET PRICING DEREGULATION

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IS SOUTH AFRICA READY FOR MARKET PRICING /
DEREGULATION?
Date 09 OCTOBER 2008 OIL SUMMIT, MIDRAND
Presented by Muzi W. Mkhize Chief Director
Hydrocarbons Tel [phone] muzi.mkhize_at_dme.g
ov.za
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Regulation What comes to mind?

• Restriction and undue interference by the State ?
• Capped profits and limited innovation?
• Please privatize my profits but you would be
  most welcome to socialize my losses?
• Bush Administrations US0.7 trillion bailout
  plan of the troubled financial sector
• Whos socialist now?
• Ill-directed regulation by incompetent
  bureaucrats?
• Inefficiencies (that tend to be worse than the
  failures they were intended to correct)
• Dont you know that preserving or increasing
  competition good economic performance always?
  
• Historical remnant of an economy under siege
  during apartheid era?

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1998 EWP Statement

• the desired attributes for the liquid fuels
  industry can ultimately best be met in an
  environment of minimum governmental intervention
  and regulation. Its vision emphasised
  international competitiveness and investment in a
  rapidly globalising economy as a contribution to
  low cost and widely available products.
• Government will embark upon a phased and managed
  transition and will seek the co-operation of key
  stakeholders in this process. Deregulation will
  proceed as far as practicable towards clearly
  identifiable milestones and on the basis of
  cost-benefit analyses to ensure minimum
  disruption Government will introduce
  deregulation in three sequential phases. It would
  like to proceed as swiftly as possible but will
  be reliant to some extent on the continued
  co-operation of other stakeholders.

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Why regulate?

• Is it out of choice for oil industry?
• No EWP
• market failure vs regulatory failure balancing
  act
• Market failure economic complementarity, merit
  goods, public goods, stabilization of cobweb
  markets, externalities, transaction costs and
  information asymmetries
• Regulatory failure regulatory capture, perverse
  incentives, sovereign or inter-temporal risk,
  information asymmetries, unclear or mixed
  objectives and multiple regulators

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Approach to regulating

• when is regulation required and justified?
• primarily to avoid market failure
• raising revenue, promoting technical progress or
  development, public interest, national
  importance, national security, ensuring adequate
  provision of merit and public goods, and
  distributional objectives
• how should the enterprise or activity be
  regulated?
• To avoid regulatory failure
• Dependent on industry characteristics type of
  regulation selected
• direct price setting / imposing limitations (on
  production) to influence price?

Regulate if market failure exists regulation
alleviates misallocation of resources or correct
the cause of the market failure and benefits of
regulation gt concomitant administrative costs
induced allocative inefficiencies
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Phase 1 Milestones

• Sustainable presence, ownership or control by
  HDSAs of 25 of all facets of the liquid fuels
  industry or plans to achieve this NO
• Mutually acceptable arrangements (bet. synfuels
  producers marketers of crude oil based fuels)
  on the upliftment marketing of synfuels YES
• The introduction of necessary legislation to give
  effect to the cornerstones of government policy
  including the protection of "full service" YES
  and the equitable participation of small
  businesses in the industry NOT ENTIRELY
• The introduction of suitable transitional
  arrangements within the Service Station
  Rationalisation Plan YES
• The introduction of any necessary institutional
  and regulatory capacity required to enable
  Government to adequately monitor possible post
  deregulation distortions and to enable it to act
  against such distortions NOT ENTIRELY
• Suitable arrangements to address any labour
  related consequences of deregulation NO
• The introduction of suitable institutional
  capacity and measures to license and/or regulate
  oil and liquid fuel pipelines and possibly also
  storage facilities if this is found necessary YES

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Phase 2 Milestones

• The second phase will be characterised by
  allowing market forces to set prices. Retail
  price regulation, import control and Government
  support for the Service Station Rationalisation
  Plan will be simultaneously removed.

The sequence of events has not penned out in the
manner envisaged by the EWP
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Phase 3 Milestones

• The third phase will be the post deregulation
  transition phase. This will be characterised by
  government vigilance and monitoring for possible
  problems arising from the introduction of
  deregulation and corrective action to address
  these. In the event uneven competition results in
  price distortions, for example rural- urban cross
  subsidies, then fiscal measures or price capping
  may be employed to counter balance such
  distortions.
• Government will monitor and evaluate possible
  problems arising from the introduction of
  deregulation and will take corrective action.
• The Department of Minerals and Energy will guide
  the transformation process.

Regulation is not entirely ruled out as part of
corrective action
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Points to ponder

• Will deregulation / market liberalisation lower
  prices
• Milk example (previously regulated by Dairy
  Board)
• Other countries
• Continual re-assessment of market failure vs.
  regulatory failure unavoidable

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Verdict

• Progress on EWP milestones indicates that RSA is
  presently not ready for market pricing /
  deregulation
• THANK YOU !!!

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The 3 RSA Petroleum Industry Regulatory Pillars