Tuesday, July 24, 2007


Kenya boasts of running a capitalistic economy. Such a market encourages a reasonable level of competition enabling consumers to get the best quality goods and services at the least price possible.
This is possible because businesses are forced to adopt acceptable and ethical business practices as well as take care of the environment in which they operate.
The oil industry in Kenya runs contrary to market competition ideals, displaying instead cartel behaviour. A cartel can be simply defined as a conspiracy among formally independent firms to distort the operations of the market.
This collusion enables them to exploit the market unfairly to achieve supernormal profits at the expense of consumers and even the environment.
Typically, cartels are usually brokered in secret, verbally and are often informal. The agreements could be on prices, output levels, discounts, credit terms, which customers to supply, and who should win a contract, commonly called bid rigging.
Due to their clandestine nature, it is difficult to understand how they operate because they also keep changing their mondus operandi.
HOWEVER, CARTELS exhibit characteristics that can help identify them and take appropriate action against their operations. Commenting on cartels, the first great political economist, Adam Smith, said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
In Kenya's oil industry, one would be forgiven for believing that there is only one company retailing petroleum products. The prices are almost uniform and always capped at the highest possible level.
Most intriguing is the movement of price in response to global crude oil price changes.
The industry also shows complete disregard of customers and the authorities. No matter how much the consumers complain, no action is taken nor any response given. In a competitive market, that would be business suicide.
This industry even ignores the Ministers of Energy and Finance and recently only weakly responded to a presidential appeal. This reeks of cartel behaviour per excellence.
The kind of advertising and promotional activities we see in other sectors are non-existent. This points to a clear intention to limit competition and rivalry among the operators.
The emergence of joint ventures among close competitors, competitors combining their operations and selling their operations among themselves should send warning signals.
Lack of competition thus makes oil in Kenya overpriced. Being an essential source of energy for industry, the cost of producing goods and services skyrockets, making our products uncompetitive both locally and in international markets.
This also fuels inflation because increased cost of energy increases cost of production across the board. It slows down economic growth as the purchasing power of Kenyan consumers is reduced.
The Kenyan consumer suffers twice: directly when they fill their cars, buy cooking gas or kerosene; and secondly, through the increased cost of other products as a result of increased cost of production.
The consumers lose billions of shillings every year from this overcharge from monopolistic prices.
The oil cartels harm consumers and the economy by distorting the ordinary processes of innovation and product development.
THIS CONDUCT in turn damages Kenyan business by increasing input prices, adversely affecting domestic and international competitiveness of goods and services, and ultimately resulting in reduced employment opportunities for Kenyans.
Beyond Kenyan borders, oil producing countries worldwide suffer reduced sales due to reduced consumption by price sensitive consumers, especially in the developing world, as a result of overpricing of oil. It is worth noting that most of the oil multinationals do not come from oil producing countries and the welfare of producers is not their concern.
Regardless of the untold damage the oil cartels have continued to inflict on the Kenyan economy, they have continued to thrive because, the Kenyan economy is largely oil powered, making it an essential commodity without much of a substitute currently.
Secondly, the Kenyan legal and policy framework to guide business conduct is weak. The laws are archaic and cannot meet the challenges of modern times.
The institutions supposed to referee the conduct of business are also weak. The Monopolies Commission has no capacity to punish cartels. That is why even threats by the Ministers of Energy and Finance have been reduced to impotent grumbling, because they lack both capacity and policy support.
So, what can Kenya do to streamline the oil industry and dismantle cartels?
Cartels thrive under corrupt regimes. Fighting corruption in Kenya should be stepped up so that all businesses operate overboard and follow acceptable business practices.
The policies and regulations guiding business conduct in Kenya should be overhauled. The relevant ministries, instead of issuing empty threats, should take Bills to parliament and craft tough anti-competition laws. We should borrow a leaf from other countries that have been able to defeat this vice, especially the US and the EU.
Karithi A. Ngeera is a business consultant in Nairobi.
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