Regulation versus potential loss of investment

What you need to know:

  • The private acquisition of prime Ukwala outlets in the Nairobi CBD by Tuskys was deemed to be giving Tuskys an unfair advantage as it would command the market share in the CBD effectively being in a position to potentially act in a manner that could reduce consumer choice.
  • Key characteristics of a perfectly competitive market include the presence of many buyers and sellers, availability of information to all and no barriers to entry into the business.
  • To the capitalist though, regulation is often not in their interest and investors will be watching keenly these recent developments and making careful considerations before taking to the market.

When the Competition Authority of Kenya stopped the takeover of Ukwala Supermarket by giant rival Tuskys, a lot of people were caught by surprise.

The regulator stepped in and penalised the two supermarket chains for what was deemed uncompetitive behaviour.

The private acquisition of prime Ukwala outlets in the Nairobi CBD by Tuskys was deemed to be giving Tuskys an unfair advantage as it would command the market share in the CBD effectively being in a position to potentially act in a manner that could reduce consumer choice.

The two companies were required to comply with several conditions before the authority could give the go-ahead. That cloud has since passed.

Another notable action by the authority is the demand to have Safaricom open up its M-Pesa platform to other players in the mobile money transfer business.

But why would the authority interfere with the private dealings of companies when such dealings are not per se illegal? Are the actions of the authority not counter-productive to business growth and intellectual property rights? Shouldn’t businesses be left to fight it out in a survival for the fittest economy?

A better understanding of the benefits and effects of competition requires a brief look at what a competitive market entails. Key characteristics of a perfectly competitive market include the presence of many buyers and sellers, availability of information to all and no barriers to entry into the business. In other words, in a perfectly competitive market, the sellers cannot take advantage of the buyers.

Perfect competition is practically a myth. In capitalist economies, what exists are usually competitive markets which are not perfect. Even in competitive markets there are still barriers to entry into the business and information is not available to all.

BENEFITS

Entrepreneurs take advantage of this situation to benefit themselves by offering products that only a few others know how to offer at a profitable level.

On the other end of the markets continuum are the monopolies who are in full control of the market. Before Kenya was liberalised and before the privatisation of many state corporations, the market for most goods and services was tightly controlled by a few big players. Liberalisation opened up the country to competition which brought in increased foreign direct investment, created new jobs, brought in new technology, expanded the financial services sector and generally set the conditions upon which Kenya’s competitive advantage in the region has continued to grow.

It is important to note that there are still monopolies existing in competitive Kenya. Think power distribution, think railway services and you get the drift.

The authority was formed in 2010 “to enhance competition and consumer welfare in the Kenyan economy by regulating market structure and conduct in order to ensure efficient markets for sustainable growth and development”.

The formation of this body is not an invention by Kenya, similar bodies have existed in developed countries for many years with similar intent of protecting the consumer and ensuring efficient allocation of resources.

CAPITALISM

Protection of the consumer and best allocation of resources is not the primary objective of capitalism. The capitalist’s philosophy is maximisation of benefit to the investor. This naturally tends to promote the investor’s interest at the expense of the consumer. It leaves the consumer at the mercy of business owners and hence the need to have an oversight authority.

The Competition Authority is not the only significant regulatory step Kenya has recently taken to protect the consumer from being taken advantage of. Efforts to regulate the matatu sector have been in similar spirit. Enacting number portability in the mobile phone business was meant to expand consumer choice. Allowing the operation of mobile virtual networks is also intended to eventually improve and increase service range availability.

To the capitalist though, regulation is often not in their interest and investors will be watching keenly these recent developments and making careful considerations before taking to the market. This could see some foreign investors who like to take advantage of underdeveloped economies move to African economies that are yet to make serious attempts at consumer protection.

Whatever action Kenya takes, it is important to weigh the socio-economic benefits of regulation versus potential loss of investment.   

Peter Botany is an auditor based in Nairobi.