No evidence matatu price capping will lower bus fares

Commuters traveling to different parts of the country at Machakos Country Bus station on Saturday, December 22, 2018. Travelers were stranded as most matatus doubled their fares during Christmas rush [David Njaaga, Standard]
The government has proposed amending existing legislation to introduce price controls in the matatu sector.

Last week, Transport Cabinet Secretary James Macharia told Parliament the government had drafted amendments to the Traffic Act and the National Transport and Safety Authority (NTSA) to introduce caps on matatu fares.

The amendments include the introduction of a new sub-section in Section 119 (1) of the Traffic Act that will allow the Cabinet Secretary to prescribe a formula for setting PSV fare tariffs, a review mechanism for the same and prescribes penalties for non-compliance.

The government says this will protect commuters from exploitation by some matatu operators who arbitrarily change the fares, particularly during the rainy seasons.

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However, a look at several studies and Kenya’s own experience with price controls in several sectors shows no evidence that price controls are effective in reducing the cost of goods or services for the poor. Following plans by parliament to introduce price controls legislation in 2012, former World Bank President Wolfgang Fengler warned that price controls are the surest way to create a shortage.

“Evidence around the world demonstrates that attempts to control prices, in fact often leads to higher prices (in a parallel market),” he stated adding that the hardest hit are usually the poor.

Another study by Wycliffe Kipkorir and Emanuel Manyasa from an international journal indicates that price controls introduced in Kenya’s petroleum industry have only benefited private companies while dampening market competitiveness.

“It is evident that price regulation has a negative impact on the performance of the industry which conforms to findings in other countries that import oil,” explains the study in part. “This is in conformity with previous findings by George Stigler who demonstrated that economic regulation often advances private interest such as increasing the profits of the industry being regulated,” explains the study.

The study found that competition was adversely affected, with companies exiting the oil businesses to more profitable ventures or venturing into other products. “The estimates support the theory that regulated markets became relatively less competitive and more crowded,” explain the researchers.

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Similarly, the introduction of price controls in the maize sector has led to perennial scandals as opportunistic businessmen manipulate prices through patterns of importation and hoarding at the expense of consumers and local farmers.

This is why Members of Parliament and private sector lobby groups have over time called for the review of regulations in the energy sector long perceived to exist as a cartel of a handful of companies who guarantee their profit margins by fixing market prices across the sector.

The government’s assertion that introducing price controls in the matatu sector will lead to fairer prices for consumers is thus untrue.  

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Transport Cabinet Secretary James MachariaTraffic ActPrice CappingMatatuBus Fare