Advocata advocates abolishing price controls

• Politically motivated measures destroying market dynamics and benefits to consumers

By Darshana Abayasingha

Politically-motivated price controls offer very little value to reduce costs and are detrimental to trade, industry and consumers asserts The Advocata Institute, launching its new report ‘Price Controls in Sri Lanka: Political Theater’ in Colombo on Tuesday. 

In a survey carried out by Advocata and Breakthrough Business Intelligence, it compared controlled prices of 13 basic grocery items against retail prices in the open market, which revealed that only one item – milk powder – was sold at the controlled price throughout the entirety of the period. 

In addition, it was also revealed that no State institution including the Consumer Affairs Authority possessed a comprehensive list of items that are subject to said price controls. “A list of price-controlled items is a straightforward piece on information that should be readily available to any consumer,” the Advocata report added.

For instance, the survey found that though the controlled price of imported b-onions was Rs. 78, it retailed at Rs. 111 per kilogram in the market, whilst for green gram the fixed price was Rs. 205 but retailed for Rs. 258 instead. 

The report also finds that enforcement is confined to goods produced by multinationals or established corporates, with token enforcement in the informal sector. The Advocata report charged that the Government’s policies are often “schizophrenic” and mutually contradictory; with taxes and price controls imposed on the same items. The taxes raise retail prices and conflict with the controls that are supposed to limit price increases. 

As per the report, traders react to price controls by importing low quality items in bulk form that are closer to expiry. Over 40% of importers interviews during the survey had admitted to sourcing low quality products to remain competitive within the controlled price. When such attempts also failed, then they choose to ignore the directive and sell above the controlled price, which in effect is giving wing to lawlessness and black markets. 

During the sparse periodic raids fines are imposed by the Consumer Affairs Authority, but traders averred that it was economical to pay the nominal fine and continue to sell at their new rates. 

The real loser in this process are the consumers or the public. Not only must they purchase above the stated controlled price, but as traders struggle to make amends the consumers are left with low quality goods. If price controls were strictly enforced, then shortages would occur as they need to purchase at market rates the traders had added. 

Furthermore, the report added that whilst a maximum retail price is imposed on milk powder as an essential commodity, however imports are subject to tax. In addition, the price of raw milk at the farm gate is controlled, which translates to higher costs to local producers. Whilst large scale multinationals are able to minimise the losses through economies of scale achieved globally, such disconnected controls hamper local producers and entrepreneur. 

The Advocata research team led by Ravi Ratnasabapathy urged the Government and policymakers to do away with politically-motivated price controls and allow market forces to determine prices. Drawing on the example of the Sri Lankan telecommunication sector, he remarked that competition will encourage greater value and world-class products and services to enter the market, whilst providing significant cost advantages to users that the Government cold then effectively regulate together with industry. 

“What we want is lower consumer prices and best choices, that’s the ultimate objective,” he told Daily FT. 

“In the UK, the construction industry has founded a consortium to bring construction costs down, and they are working with government on how to improve efficiency because they want to be internationally competitive.  In Sri Lanka, traders function as a mafia at times, because the environment does not help them otherwise. Governments need to make things clearer, unfortunately politicians have added so many things on top of the other and there are all kinds of issues. This is also due to the issues of capacity and skill in the state sector, as what we have is politics based on patronage. We must give what is best to our consumers, and making way for market-based competition is the best way forward and you could get the best prices in the world by doing so,” Ratnasabapathy averred. 

The Advocata report recommends a simplified tax system moving to uniform rates and a lowering of taxes as a priority. It adds also that instead of attempting to protect the agriculture sector via taxes- which raises prices for consumers – it must facilitate and focus on the modernization of the sector and support further investments to enhance productivity. 

For sectors such as the dairy, policymakers must realise that the stated goal of self-sufficiency in milk production is not realistic, and abolish maximum retail price and lower taxes in order to allow healthy import competition for domestic producers and consumers, it added.