Regulatory economics and accounting

Extensive regulatory oversight is a key feature of a number of critical sectors such as energy, telecommunications, transport, water, healthcare, financial services and broadcasting. The prevalence of regulatory interventions in these sectors is largely driven by concerns of market failure and the protection of consumers. These sectors provide important social services or products, and effective regulation is critical to facilitate the achievement of social goals such as access to services and greater affordability.

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Expertise Areas

Sector strategy and regulatory frameworks

These include assessing the basis for policy and regulatory action, developing suitable policy and regulations within the socio-economic context, designing and assessing specific economic regulatory tools such as price regulation and pro-competitive behavioural remedies, and designing and assessing suitable universal service policies and enabling regulations.

Licensing advisory and support

Advice and support to  firms in submitting or assessing licensing applications across the energy sector (piped gas, petroleum pipelines, electricity) including construction and operating licences for facilities. Our expertise also extends to other sectors, such as telecommunications and broadcasting. 

Tariff design and determination

We provide expert advice in assessing, and assisting to develop, tariff proposals by regulated firms using our in-house financial and regulatory accounting expertise. Our regulatory accounting services include the innovative design of appropriate regulated price remedies, the design of regulatory account reporting requirements to support those remedies, and the determination of regulated prices. We also have extensive expertise in assessing and calculating the cost of capital, a key element in any regulated tariff.

Regulatory impact assessment

We work with banks, credit providers, insurers, industry associations, financial market infrastructures, as well as regulators, to understand and identify the potential, or realised, impact of regulation and policy on individual businesses, entire markets and competition within markets. Our offer is strategic: to review regulation and policy, develop insight into how each might affect the trajectory of business and to develop scenarios of impact that inform our clients’ choices.

Regulatory development and engagement support

The complexity of the financial sector is such that development and implementation of regulation requires significant engagement between the public and the private sector. Genesis’s offer to financial institutions and regulators alike is the provision of targeted research, stakeholder engagement and strategic support that assists in the engagement with specific regulatory outcomes.  

Projects

Balancing innovation with regulation to grow SA financial services

Project name:
The impact of the fourth industrial revolution on financial services in South Africa

Service:
Business and operating models
Market analysis and positioning
Regulatory economics and accounting

Sector:
Financial Services

Area of Expertise:
Payments
Retail banking
Capital markets

Client:
Centre for Excellence in Financial Services

Date:
2017

Country:
South Africa


Technology is changing the way financial services are produced and consumed worldwide. South Africa has long been acknowledged for having a sound, advanced banking system. However, at the onset of the fourth industrial revolution, with humans and technology interacting like never before, South Africa faces a new set of opportunities and challenges as technology becomes a central part of financial services. 

Policymakers and regulators must find ways to preserve our sound financial system, while enabling innovation that promotes improved access to finance and growth in the financial services sector.

To understand which policy and regulatory approaches best suit the South African financial sector in managing this balancing act, it is crucial to know where South Africa stands relative to its global peers. Genesis partnered with the Centre of Excellence in Financial Services to answer this question in a report titled “The impact of the fourth industrial revolution on the South African financial services market”. 

The centre wanted to benchmark our technological innovation against international trends, and partnered with Genesis to undertake an industry-wide analysis of financial-technology (fintech) and innovation in the South African financial services market. This is a landmark report that provides the most comprehensive analysis of innovation in financial services in South Africa, how it is disrupting the sector, and what the implications are for South African regulators based on international best practice.  

The analysis included identifying and researching successful local fintechs in the core banking functions of payments, deposits and lending, capital raising, investment management, and market provisioning. The team conducted over 40 interviews with stakeholders from banks, innovation labs, fintechs and regulators to understand their perceptions of innovation in the South African market, how digitally enabled banks were, the impact of a digital revolution on the existing operations of banks, and any challenges in achieving a digital strategy. 

This information, together with research, allowed us to document the approach the industry was taking with regard to fintech, to highlight some of the cutting-edge technology that is shaping innovation, and to consider how regulation could support this industry while protecting consumers and ensuring the stability of the financial services sector.

The report provides a comprehensive overview of fintech and financial innovation in South Africa, the approaches to fintech regulation around the word, and how this should influence South African regulators’ approach to regulating fintech. The Centre of Excellence chose to submit the report to the Basel Committee on Banking Supervision in response to their consultative document on the implications of fintech for the financial sector. The report is now available to the public on the Centre of Excellence website and will generate necessary debate amongst industry stakeholders and regulators on this important topic.  

Impact of 4th industrial revolution on SA financial services market: Executive summary and Full report

Media report: Better banking through technology

Pricing models for liquid-fuel price regulation in Zimbabwe

Project name:
Pricing models for liquid-fuel price regulation in Zimbabwe

Service:
Regulatory economics and accounting

Sector:
Energy
Public and Social

Area of Expertise:
Tariff design and determination

Client:
Zimbabwe Energy Regulatory Authority

Date:
2015-16

Country:
Zimbabwe


Genesis assisted the Zimbabwe Energy Regulatory Authority to develop pricing models for the regulation of liquid fuels in Zimbabwe. 

The liquid fuels include petrol and blended petrol, diesel, aviation fuel, biofuel (ethanol) and LPG. To this end Genesis conducted electronic surveys and provided expert advice to ensure the price regulation framework is both practical enforceable.

We used our expertise in liquid-fuel regulation in other jurisdictions to develop appropriate approaches to ensure reasonable returns to oil companies and fuel retailers. 

Despite data challenges, the team developed evidence-based fuel-price building blocks that would greatly enhance the viability of the liquid-fuel industry in Zimbabwe as well as enhance transparency in the price-setting process.

Genesis study of Zimbabwe fuel price

Financial model sets new mobile termination rates

Project name:
Expert economic advice and financial cost modelling for the development of new termination rates

Service:
Regulatory economics and accounting

Sector:
Communications and Media

Client:
ICASA

Date:
2014 – 2015

Country:
South Africa


The Independent Communications Authority of South Africa (ICASA) issued new termination-rate regulations during the first half of 2014, which were challenged in the High Court by some of South Africa’s mobile network operators (MNOs), particularly MTN and Vodacom (Challenge to ICASA by MTN and Vodacom). After the court ruled that ICASA had to develop new termination-rate regulations later that year, Genesis was asked to assist in this regulatory process.

‘Termination rates’ are the prices telecommunications operators pay each other to terminate calls originating on each other’s networks (for example, when an MTN customer calls a Vodacom customer, MTN pays a termination fee to Vodacom). For a variety of pro-competitive reasons, regulators around the world set these rates equal to the costs operators incur to provide termination services to each other.

Financial models built by Genesis on behalf of ICASA uncovered the termination costs of South Africa’s fixed and mobile telecommunications operators. This enabled ICASA to introduce truly cost-oriented termination-rate regulation in South Africa for the first time. To maximise their pro-competitive potential, the regulations progressively reduce termination rates over time, to encourage future termination cost reductions. The regulations also recognise that smaller MNOs have higher termination costs and accommodate this through asymmetric rates, making more manageable the adjustments required of smaller MNOs.

Genesis’s independent expertise improved decision-making in two different respects. It first helped the High Court to understand that, while ICASA’s initial 2014 regulations would not harm any operator, scope existed to develop new regulations that would deliver better competition and consumer outcomes. It then helped ICASA to realise this objective, resulting in a best-practice regulatory outcome that has sparked greater price competition between South Africa’s telecommunications operators, particularly between the MNOs.

Genesis Analytics was a critical component of a regulatory process that lowered the costs of communication in South Africa, an outcome that benefits every South African consumer.

Financial evaluation of third National Lottery applicants

Project name:
Financial Evaluation of Third National Lottery Applicants

Service:
Damages, trade and other litigation

Sector:
Public and Social
Entertainment

Client:
Minister of Trade and Industry

Date:
2014

Country:
South Africa


Every eight years the licence to operate the National Lottery is awarded to a successful bidder through a rigorous and lengthy tender process. After receiving conflicting recommendations from the Evaluation Committee and the National Lotteries Board, the Ministry of Trade and Industry brought in Genesis to conduct an independent and substantive evidence-based assessment of the financial and business models of the competing applicants. 

The purpose was to assist the minister in selecting a successful (and reserve) bidder in order to negotiate and conclude a licence, and where the rationality and reasonableness of the decision would likely be under intense scrutiny.

Genesis used its experience to distil the key features of each business and financial models, and identify quantitative measures that would enable an independent evidence-based comparison across the bids on the five different variables that formed part of the assessment criteria. This included assessing a ranking on likely sales based on capex, distribution networks, prize payouts and new game development. It also included assessing financial solvency by subjecting the financial models to different revenue scenarios. In the process Genesis developed a robust new scoring method that built on the quantitative measures of the business and financial plans, but also built on the techniques applied in other government procurement programmes (such as relative points based on relative pricing).

The Genesis assessment provided the basis for the decision by the minister to select the successful bidder. Furthermore, the Genesis report and scoring have stood up to intense scrutiny as the minister’s decision has been subject to a number of reviews by one of the unsuccessful bidders. As such, the Genesis work has also proved invaluable to the High Court judges in adjudicating the litigation.

Critical analysis of Eskom’s multi-year price determinations

Project name:
Critical review and analysis of Eskom’s multi-year price determinations (MYPD 1, 2 and 3)

Service:
Regulatory economics and accounting

Sector:
Energy

Area of Expertise:
Tariff design and determination

Client:
Electricity Intensive Users Group

Date:
2010 – 2015

Country:
South Africa


Eskom’s tariff increases as part of the MYPD (Multi-Year Tariff Determination) process has had a critical and far reaching impact on the South African economy. The Genesis team has played an important role in ensuring that these tariff increases are governed by sound regulatory principles, being deeply involved in critically assessing all the MYPD tariff applications of Eskom since 2009. 

This involvement has included providing technical assistance and expert advice to the National Energy Regulator of South Africa (NERSA). This input comprised comprehensive responses to the tariff increases proposed by Eskom during its MYPD2 and MYPD3 applications, and its MYPD3 reopener application.

The price regulation of energy utilities raises intricate questions that require one to protect the interests of consumers while still preserving the operational sustainability of the utility and the impetus for investment needed to ensure energy security for the country.

This balancing act was particularly complex in these MYPD applications, given the need for Eskom to dramatically expand its generation capacity and to raise the necessary capital for such expansion.

Against this backdrop, we provided expert input on the appropriate tariff increases, drawing on our extensive regulatory accounting expertise, rigorous economic analysis and deep sector knowledge. In each instance the submissions from the Genesis team played an important role in shaping the final decision made by NERSA:

  • In 2009 we assisted Business Unity South Africa (BUSA) in assessing Eskom’s MYPD2 tariff application, which covered electricity tariff proposals for the three years ended 31 March 2013. Eskom initially proposed a tariff increase of 45% per annum.  In our report we provided a comprehensive independent expert assessment of Eskom’s operating and capital cost assumptions using best regulatory accounting practices. We also undertook an assessment of the impact that the proposed price increases would have on the economy. Our assessment found that a tariff increase of 25% per annum was justified. NERSA’s MYPD2 tariff determination was consistent with this recommendation from the Genesis team.   
  • In 2012 we assisted BUSA in assessing Eskom’s MYPD3 tariff application, which covered electricity tariff proposals for the five years ending 31 March 2018. Eskom proposed tariff increases of 16% per annum. Our technical assessment, once more drawing heavily on our regulatory accounting expertise, found that Eskom’s proposed increases were based on unsubstantiated cost escalations significantly in excess of inflation, with limited assumed efficiency gains. We identified about R138-billion worth of cost savings in addition to the savings identified by Eskom. We ultimately found that tariff increases of 10.8% per annum were justified, and our recommendations played a significant role in shaping the basis of NERSA’s MYPD3 tariff determination which was set at 8%.
  • In 2015 we assisted the Electricity Intensive Users Group (EIUG) and NERSA in their review of Eskom’s application to have its approved five-year price path reopened. Eskom applied for a further R62-billion of revenue allowance for the remainder of the MYPD3 period. In line with our recommendation, NERSA rejected the 'selective' reopener outright, indicating that there was rather an ex-post option to apply for the Regulatory Clearing Account settlement. 

Icasa employs Genesis to sharpen SA telecoms competition

Project name:
ICASA priority market study

Service:
Regulatory economics and accounting

Sector:
Communications and Media

Area of Expertise:
Sector strategy and regulatory frameworks

Client:
The Independent Communications Authority of South Africa (ICASA)

Date:
2016 ongoing

Country:
South Africa


The government’s vision for South Africa as set out in the National Development Plan (NDP) recognises the role of technology as a key enabler of economic activity: “By 2030, ICT will underpin the development of a dynamic and connected information society and a vibrant knowledge economy that is more inclusive and prosperous.” (National Planning Commission (2011), National Development Plan 2030: Our Future – Make it Work (“NDP”), p190)

Affordable access to broadband services was also highlighted in the National Broadband Policy - SA Connect. However, key telecommunications markets remain ineffective due to high prices (exemplified by the recent “DataMustFall” campaign), low access and competition complaints about the behaviour of dominant operators. As a result, the social and economic benefits envisaged by the NDP via ICT development have not come to full fruition. 

Having established a long-standing relationship with ICASA, Genesis Analytics has been retained by the regulator to assist with their Priority Market Study to identify key markets that are not characterised by effective competition and may require regulatory intervention to ensure that the goals of the NDP can be met.  

In particular, Genesis will identify the product and service markets in the telecommunications sector that are susceptible to ex-ante regulation and require prioritisation for regulation. Genesis will also consider possible pro-competitive remedies for the priority markets which have been identified.

A vital part of the project will involve engagement with key stakeholders in the telecommunications markets to understand the problems they are facing, which would lead to subsequent engagement with the regulator.

ICASA set to probe SA's high data costs

Chevron objects to liquid-fuel import terminal

Project name:
Chevron objection to Burgan liquid fuel import terminal licence

Service:
Regulatory economics and accounting

Sector:
Energy
Infrastructure

Area of Expertise:
Licensing advisory and support
Sector strategy and regulatory frameworks

Client:
Chevron South Africa

Date:
2014

Country:
South Africa


Genesis was retained by Chevron SA to provide expert economic analysis and testimony to the National Energy Regulator of South Africa (NERSA) in terms of a licence application by Burgan Cape Terminals to build a liquid-fuel off-loading and storage facility in the port of Cape Town.

We used our specialist knowledge of petroleum pipelines regulation, the policy directives of government, as well as our keen understanding of the Western Cape market dynamics in submitting an assessment of the impact and appropriateness of granting the requested licence to Burgan Cape Terminals. Our analysis submitted to the regulator included strong policy and evidence-based arguments to differentiate between storage and off-loading services and to demonstrate the impact the granting of the licence would have on the sustainability of local refining capacity.

The licence was ultimately granted with conditions by the regulator, with the analysis of the Genesis team being an important input into the process and the decision by NERSA.

Optimum interest rate regime for microlenders and moneylenders

Project name:
Determining the optimum interest rate regime for microlenders and moneylenders

Service:
Regulatory economics and accounting

Sector:
Financial Services
Public and Social

Client:
The Namibia Financial Institutions Supervisory Authority

Date:
2014

Country:
Namibia


Genesis was appointed by the Namibia Financial Institutions Supervisory Authority (NAMFISA) to review options for an optimum interest rate regime for microlenders and moneylenders. The premise to the study was that the interest rate caps set under the Usury Act 73 of 1968 and the Exemption Notice No. 189 of 2004 issued under the Act were no longer aligned to current practices in the industry. In addition, as contemplated in the Namibia Financial Sector Strategy 2011-2021, the threshold annual finance charges by the industry were not aligned to international best practice.

To determine an optimum interest rate regime Genesis investigated the local context in Namibia through an in-depth analysis of the microlending industry, the current regulatory and macroeconomic environment and the impact of microfinance on financial inclusion. Genesis then engaged with relevant regulatory bodies (including NAMFISA, the Bank of Namibia and the Ministry of Finance) as well as a host of microlenders and moneylenders of all sizes to obtain a perspective on required changes to prevailing legislation. The third part of the research included a review of international practice in the setting of interest rate regimes for microlenders across a range of comparable markets.

Having conducted this research, we developed a series of recommendations to guide NAMFISA's future approach to regulating interest rates charged by microlenders and moneylenders in Namibia. 

Review of a self-regulatory financial market model in South Africa

Project name:
Technical review of the effectiveness of the self-regulatory model of financial market regulation in South Africa

Service:
Capital markets
Regulatory economics and accounting

Sector:
Financial Services
Public and Social

Client:
The National Treasury of South Africa

Date:
2013

Country:
South Africa


Genesis was commissioned by the National Treasury to conduct a technical review of the effectiveness of the SRO (self-regulatory organisation) model in South African financial markets in the context of the move toward a Twin Peaks regulatory framework. The focus of the analysis was on the SRO status of the JSE and STRATE as frontline regulators with delegated authority by the Financial Services Board.

The review consisted of three primary components: An evaluation of the effectiveness and efficiency of the SRO model, economic analysis of the impact of the SRO model on market structure and competition informed by a study of international trends, and a recommendation as to the appropriate model of financial regulation from a set of alternatives. The findings of the report informed the regulatory changes being considered under Twin Peaks.

Review of new Twin Peaks model of financial regulation

Project name:
An assessment of the unfolding Twin Peaks model of financial regulation

Service:
Regulatory economics and accounting

Sector:
Financial Services

Client:
A large South African insurer

Date:
2013

Country:
South Africa


Genesis was commissioned by a large South African insurer to provide the business with a review of the unfolding Twin Peaks model of financial regulation, as well as of resulting changes to the country’s overall regulatory architecture.

The outcome of the assessment provided the client with a description of the regulatory processes involved in the implementation of the Twin Peaks model. It also provided a description of the likely scope of Twin Peaks and the division of responsibility among key financial sector regulators. The client was further provided with an indication of the early implications that regulatory restructuring might have on the business and on the long-term insurance industry as a whole.

Regulation of medicine dispensing fee in pharmacies

Project name:
Regulation of the dispensing fee for medicines through pharmacies

Service:
Damages, trade and other litigation
Regulatory economics and accounting

Sector:
Health

Client:
Pharmacy Stakeholders Forum of South Africa

Date:
2006 – 2010

Country:


Genesis has worked extensively with the Pharmacy Stakeholders Forum of South Africa (PSF) in its protracted litigation with the Department of Health regarding price regulation of the dispensing fee for medicines sold through pharmacies.  The central question was whether the dispensing fees prescribed by the Department of Health were sufficient to provide a reasonable revenue stream to community pharmacies so as ensure the viability of the businesses.

Price regulation, by its very nature, raises intricate questions that require one to protect the interests of consumers while preserving the impetus for investment and operational sustainability of the regulated firm.  This was particularly complex in the case of community pharmacies, which comprise a large number of widely diverse individual businesses with differing operating models and levels of financial vulnerability.  Against this backdrop, Genesis was able to provide input to the key economic principles that would be important to ensure appropriate forms of price regulation that not only achieved the objectives of the Department of Health, but also safeguarded the sustainability community pharmacies.  Genesis also provided an economic assessment of the impact that the proposed dispensing fees would have on a sample of 142 pharmacies, for which detailed operational and financial information had been collected. 

Based on this analysis, Genesis found that the proposed dispensing fees, in their existing form, threatened to undermine the viability of a large number of community pharmacies.  This economic analysis proved instrumental in a settlement between PSF and the Department of Health which led to the suspension of the proposed dispensing fees in their original form.

Facilitating LPG shipments to the Western Cape

Project name:
Avedia LPG storage facility licence application and related advice

Service:
Regulatory economics and accounting

Sector:
Energy
Infrastructure

Client:
Avedia Energy SA LTD

Date:
2014 – 2016

Country:
South Africa


Genesis was retained by Avedia Energy, a firm involved in a wide range of LPG handling, trading and bottling activities, to assist in its contested application to the National Energy Regulator of South Africa (NERSA) for a licence to construct and operate an LPG storage facility in Saldanha in the Western Cape. Central to the success of Avedia’s storage facility was to the ability to interconnect with the off-loading facility of a company in the area that was already licensed by NERSA, Sunrise Energy. 

Sunrise Energy objected to Avedia's application, arguing that it had an exclusive right to both off-loading and storage in the port, and that Avedia should be compelled to use its facilities as otherwise Sunrise's project would not be viable.

Drawing on our knowledge of the relevant legislation and regulations, our deep understanding of LPG markets, and evidence-based approach to our analysis, we provided expert economic analysis and testimony on this matter before NERSA.  The Genesis team found that access to, and interconnection with, the Sunrise Energy off-loading facility should be guaranteed to Avedia and other third parties, and that there was no basis for exclusivity in storage services with competition in storage being important for the growth of the industry and the viability of the off-loading facility.

Our analysis and independent testimony were key inputs into the regulatory process of NERSA and its ultimate decision was to grant a licence to Avedia and enforce the requirement for Sunrise Energy to provide interconnection.

Genesis has since provided ongoing assistance to Avedia Energy, including representations to NERSA regarding Sunrise’s tariff application, as well as in developing Avedia’s own tariff application in 2016.

Meet the Team

Areas of Service Expertise

  • Sector strategy and regulatory frameworks
  • Licensing advisory and support
  • Tariff design and determination
  • Regulatory impact assessment
  • Regulatory development and engagement support

Related Sectors

Projects

Project

Balancing innovation with regulation to grow SA financial services

Genesis partnered with the Centre of Excellence in Financial Services to understand which policy and regulatory approaches best suit the South African financial sector in managing the balancing act of preserving the country's sound financial system, while enabling fintech innovation that promotes improved access to finance and growth in the sector.

View Project
Project

Pricing models for liquid-fuel price regulation in Zimbabwe

Genesis assisted the Zimbabwe Energy Regulatory Authority to develop pricing models for the regulation of liquid fuels in Zimbabwe. 

The liquid fuels include petrol and blended petrol, diesel, aviation fuel, biofuel (ethanol) and LPG.

View Project

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Leading the team

James Hodge

Director and Managing Partner (Competition and Regulatory Economics)

James Hodge
Director and Managing Partner (Competition and Regulatory Economics)
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Paul Anderson

Partner (Competition and Regulatory Economics)

Paul Anderson
Partner (Competition and Regulatory Economics)
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Anthony Felet

Partner (Competition and Regulatory Economics)

Anthony Felet
Partner (Competition and Regulatory Economics)
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Azande Ntanzi

Manager

Azande Ntanzi
Manager
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Richard Ketley

Director and Managing Partner (Financial Services Strategy)

Richard Ketley
Director and Managing Partner (Financial Services Strategy)
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Mauro Mela

Principal (Financial Services Strategy)

Mauro Mela
Principal (Financial Services Strategy)
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