Regulatory regimes and economic modernization

Regulatory authorities vested with vast powers of controlling the behaviour of market participants occupy a sort of no man’s land between the state and the market. They are sometimes so powerful that the question of who regulates the regulators has often been raised

Regulating economic activity has always been a part of the role of governments.

Social progress in a nation, from the time of the Industrial Revolution onwards, has been measured by the extent to which government intervened for protecting the weaker segments of society. What we refer to as Regulatory regimes in the post privatisation and liberalization era of the end of the last century however, constitute a qualitatively different set of principles and rules which purport to deal with a far more complex socio-economic setup.

Regulatory authorities vested with vast powers of controlling the behaviour of market participants occupy a sort of no man’s land between the state and the market. They are sometimes so powerful that the question of who regulates the regulators has often been raised. Their roles are ambiguous enough for them to be considered sometimes as vestiges of market interventionism (mostly, it must be said, by thinkers on the right and far right) and sometimes as the true saviours of competitive capitalism because they are there to ensure that the rules of the game are observed by one and all and that greed and predation do not take over. The near total absence of effective regulations is now generally acknowledged as having been one of the principal causes of the recent financial crisis and the resultant “too big to fail” logic which forced otherwise liberal governments to “nationalize” failing private banks and other financial institutions.

The case for a regulatory order was initially associated principally with huge infrastructure projects. Many utilities are characterized by increasing returns to scale – power grids, airports, telecoms services. If left to the forces of the market, they will inevitably tend to be monopolized, which is why they are defined as natural monopolies. Privatisation or in some cases corporatization (the setting up of government owned companies under the Companies Act to run some of these utilities) call for the setting up of Regulators whose main responsibility is to protect the interest of those who purchase the products and services of these various organizations.

In the absence of competitive market forces – sometimes referred to as instances of market failure – the regulator is ideally expected to produce outcomes that the market would have provided in the absence of such failures. When Mauritius Telecoms was privatised through the sale of around 40% of its shares owned by government to the private company France Telecom as a strategic partner, the need for a regulator to ensure that newcomers to the industry could access key inputs and resources at fair prices was imperative. Of course a basic working principle of regulatory supervision is that an incumbent monopoly has inbuilt incentives to prevent newcomers from creating competition.

In a small island economy like Mauritius the list of such activities which can be likened to “natural monopolies” becomes even longer and includes the import and distribution of products such as cement and petroleum products because of constraints in logistics at the port. Even when these products or services are not provided by private sector companies, their production or distribution is generally delegated to some form of State Owned Enterprise (SOE). This is often the case because of their very nature requiring specialized know-how or technology which is not manageable within normal government structures. Sometimes it requires different remuneration structures to attract the kind of talent which is needed for the effective delivery of its functions.

Other forms of activities which call for strong regulators are the financial services sector. They almost permanently represent potential systemic risks for a national economy as large bank failures have vast network effects. They are also characterized by the fiduciary nature of their roles as agents of their customers’ assets.

In Mauritius some regulatory bodies such as the Bank of Mauritius have been in place for a long time and are now mature organisations. Yet a rapidly changing environment puts constant pressure on its management to innovate to keep pace with developments in technology and new products. The recent cases of what is popularly known as the “Ponzi Schemes” have challenged the resourcefulness of the Bank. Other institutions which have more or less been recently put in place, such as the ICTA or the Gambling Regulatory Authority and to a certain extent the Competition Commission of Mauritius (there is a case to be made, which is more than academic, that a competition authority is not strictly a regulator) are all on a fast moving learning curve although of course some have the benefit of longer experience. These institutions are by their very nature on the frontline as far as public opinion is concerned. Expectations from their various “publics” are very high and any disappointment may have serious social consequences.

There have been plans for some time now for setting up a Utilities Regulatory Commission. The two natural monopolies which are constituted by the CWA and the CEB and the critical role of these products in the economic welfare of the nation militate for these plans to be implemented as soon as possible. Indeed the ambiguous roles of these institutions as operators and regulators at the same time are becoming increasingly untenable in the present macroeconomic environment. There are of course several courses of action which can be envisaged, including privatisation and restructuring of the CEB by carefully separating it into its monopoly and competitive parts.

As a general rule it would seem that it is high time for government to have a review of the whole Regulatory Order in Mauritius. If regulatory bodies are first and foremost concerned with market failures, one cannot ignore the mirror image of “government failure”. The success of a regulatory regime is predicated on the assurance of regulatory independence – which means that the regulatory agency is allowed to operate at arm’s length from the government.

* Published in print edition on 14 February 2014