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Return of price controls in Kenya

By Domnic Omondi and Otiato Guguyu | October 16th 2018 at 09:14:52 GMT +0300

A trader displays fresh produce at the Kisii Municipal Market. [Sammy Omingo, Standard]
Read more at: https://www.standardmedia.co.ke/business/article/2001292464/food-prices-to-go-up-as-imf-strike

A trader displays fresh produce at the Kisii Municipal Market. [Sammy Omingo, Standard]
Read more at: https://www.standardmedia.co.ke/business/article/2001292464/food-prices-to-go-up-as-imf-strikes

For a business, interaction with the State is usually restricted to seeking a licence, periodic inspection and hopefully, during each budget when policy changes around taxation and rarely when it offers incentives.

Yet, that line between business and Government is disturbingly being breached by the national and some county government as populism decisions replace sound economic policy.

The invisible hand of demand and supply is increasingly being replaced by the visible hand of Government, as free pricing gives way to price controls.

In Nairobi County, Governor Mike Sonko has got himself and his gang of county askaris a new task of walking into retail outlets to ensure that all the price tags on unga packages do not read a price of more than Sh75.

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Those found to have flouted this have been arrested or harassed.

They do not want to consider a retailer’s cost of getting that unga on the shelve or his or her profit margin. Yet, the price control on unga is just a pronouncement that has no legal backing.

Although Kenya has The Price Control Act, 2010, which gives the Government powers to determine the price of essential commodities such as unga, the Cabinet Secretary for Agriculture Mwangi Kiunjuri did not consult all the players in the business of selling unga nor did he gazette the policy as the law requires.

“As much as it is a free market, every responsible Government must ensure that it protects its people,” said Kiunjuri at a press conference that was also attended by millers under their umbrella body, the United Grain Millers Association.

The Secretary-General of Consumers Federation of Kenya (Cofek) Stephen Mutoro says what is happening amounts to “lawful hooliganism.” “All these are symptoms of a dysfunctional market that arises out of absent or skewed regulations,” explained Mutoro, noting that in many cases the Government cannot purport to regulate prices.

Mutoro, who has been a staunch supporter of the law capping interest rates on loans, says it is difficult for the Government to control prices of fast moving consumer goods. And Kiunjuri is not alone. It seems like as the Government’s regulatory capabilities become stretched, it has resorted to a lazy approach to fixing prices.

A fortnight ago, the Cabinet Secretary for Health Sicily Kariuki said they were working on price control for drugs which have been the single largest expenditure for those seeking treatment. She noted that county governments would have to adhere to the prices set for drugs and non-pharmaceutical products. “The county governments we have talked to are happy with the idea,” said CS Kariuki.

Health economists, however, argue that the Government’s approach to addressing the cost of medication should be systematic.

Dr Nelson Gitonga, a health economist, says that the Government should comb through the entire value-chain and find out where there are inefficiencies so as to address the problem. Dr Gitonga said controlling the price of drugs might help inpatient and outpatient care where the cost of a drug is the largest component, but for inpatient, the cost of is driven up by other fees.

“Even if you control cost without managing poly-pharmacy it is an exercise in futility. They will just increase the volume of drugs,” says Dr Gitonga. Poly-pharmacy is the practice of administering many different medicines to a patient. Almost every institute wants prices to be controlled. Even accountants want a price floor on their fees.

The chairman of the Institute of Certified Public Accountants of Kenya (ICPAK) Julius Mwatu, has turned to the Treasury to push the Competition Authority of Kenya (CAK) to give members the green light to prescribe minimum fees for each category of service in non-assurance, company audits, saccos, pension schemes and public benefit organisations.

Accounting scandals

In the absence of fee guidelines, he argued, the auditors undercut one another with some getting compromised - exposing investors to the possibility of accounting scandals.

“Definitely if one (firm) is quoting Sh1 million and another Sh200,000, the Sh200,000 audit firm will do less quality work by cutting some processes. That’s where the risk comes in,” said Mwatu.

Most of the issues have revolved either on corrupt practices, financial malpractice or on bad governance.

A number of institutions have been in the headlines including Uchumi Supermarkets, National Youth Service, Chase Bank, Imperial Bank, and National Bank.

“As a regulator, we take concern that in all these institutions, there was an accountant or an auditor involved. Our role is to assure the public that we are keen to the regulation of the profession and to that effect, be seen to have taken all the necessary steps whenever any issues of misconduct arise concerning accountancy,” said Mwatu.

Price controls are mostly populist, but do result in market failure with consumers are exposed to exploitation.

Despite the frequent use of price controls, however, and despite their appeal, economists are generally opposed to them, except perhaps for very brief periods during emergencies.

The reason most economists are sceptical about price controls is that they distort the allocation of resources. Besides, price ceilings, which prevent prices from exceeding a certain maximum, cause shortages.

Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time. Suppose that the supply and demand for wheat flour are balanced at the current price and that the government then fixes a lower maximum price.

The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without or get it from the black market.

Before the signing into law of the Price Control Act, an MP had come up with a more radical bill which sought to fix the prices of essential commodities such as maize, maize flour, wheat, wheat flour, rice, cooking fat or oil, sugar, paraffin, diesel and petrol without consulting manufacturers.

This was after consumers grappled with high prices of essential commodities, including those that Kenyans were paying as much as six times the global retail price.

Before September 2016, the price of loans had surged to a high of even 30 per cent, with control measures by the Central Bank of Kenya to bring down interest rates falling on deaf ears.

This forced the State to fixed the rate of borrowing to four percentage points above the Central Bank Rate after it introduced legislation to cap interest rates. It plans to limit State-sponsored mortgages at 10 per cent.

And in the lead up to last year’s election, a drought struck the country depressing harvest of such produce as maize, a factor that saw the price of a two-kilogramme of maize-flour hitting a high of Sh151 in May from a low of Sh100 in January.

The Government was forced to cap the price of the product at Sh90, through a subsidy programme that saw the State supply maize to millers at a low price. Yet this time, control of the price of maize flour has not been received well in some quarters, with some terming county government’s behaviour as harassment. “If a miller sells you at Sh76 there is no way you would sell at a lower rate and by Tuesday, some had not yet changed the prices,” said Retail Trade Association of Kenya CEO Wambui Mbarire.

“By Tuesday’s inspections, we could only sell if we get a price recommendation and factor in the cost price,” she added. “Unlike the one on petrol and interest rate, this one was not well thought out,” said Mutoro, noting that as it stands, those found selling unga at Sh76 are not breaking any law. “If you withdraw a licence for someone selling unga at Sh76, which law are you using?”

The Government also wants to limit the price of selling land citing huge infrastructure costs.

Housing Principal Secretary Charles Hinga recently said that the Government is trying to establish a land value index to help standardise pricing so that it is not overvalued especially when the Government wants to compulsorily acquire it, but the law is still stuck in the legislative process. The State also plans to tax idle land based on valuations that owners place on their land rather than the low-land rates currently being paid.

“If you are going to value your land at market rate when we want it, then you should pay land rates based on that value,” said Hinga.

He added that the ministry would also look at land value to avoid a situation where State infrastructure helps surrounding areas balloon in valuation yet the Government does not benefit from the land on which the infrastructure stands.

Already, there has been a control on the prices of fuel. There are also plans to cap the price of liquid petroleum gas.

In schools, the Government limits tuition fees even though it does not keep school charges at manageable levels to sustain operations.

And the county government is catching the fever. Nairobi County has banned nursery school graduation to cushion parents from being exploited.

The State is not only intervening with prices but has also gone into business, resulting in a command economy.

Shareholder loans

The Government has increased its stake in Kenya Airways, converted Sh20.9 billion KenGen debt into equity, has given Uchumi supermarkets and Consolidated Bank shareholder loans and has been quite unsuccessful in privatisation.

In addition to pricing the borrowing rate to four percentage points above the Central Bank Rate, the State also plans to limit State sponsored mortgages for low-cost housing under President Uhuru Kenyatta’s plan to build half a million cheap houses by 2022 at 10 per cent.

President Kenyatta even directed Public Service Vehicle operators not to raise fares beyond the rates recommended by the National Transport and Safety Authority (NTSA).

This was after the 16 per cent VAT on all petroleum products took force on September 1 this year before the rate was reduced to eight per cent after public outcry. Lawyers, matatu operators and NTSA sources said that the transport regulator has no power to regulate fares because none of these directives is embedded in law. “It is not a good thing that we are headed to the era of price controls. In our sector, unga is one of those things that we get a recommended retail price from millers and retailers have little say on the matter,” explained Mbarire.

She said that the issue was bigger than the supermarkets. “We claim to be a free market and we should let the free market sort itself out,” she added.

“If the Government wants to deal with the cost to mwananchi, let them put in measures that bring down the cost of business, infrastructure, electricity, and fuel. Then and only then can you call out retailers,” said Mbarire.

Mbarire called for more efficiency in the system because as it currently stands, it allows for the existence of brokers who come in and dictate prices.

“What we should have is that potato farmer gets access to the market without a middleman and because there is good infrastructure, that NCPB buys maize without corruption or that the farmers are not paid on time,” said Mbarire.

In healthcare, for example, Dr Gitonga notes that the Ministry of Health has treatment guidelines, as well as market, recommended retail and wholesale prices. “But who educates the consumer?”Moreover, in most sectors including healthcare and even maize market, the Government can come up with recommended retail prices, which consumers would use as a gauge against exploitation.

In healthcare, many countries have treatment protocols, a formula that physicians follow. And should they deviate from the formulae, then they need to explain why they had to do that. “When people follow protocol, it is easy to price healthcare and even compare,” said Gitonga.

Indeed, in keeping with the dictates of a free market, the Government at some point mooted plans to get rid of price control on petroleum products - kerosene which was introduced in December 2010 to protect consumers from high retail prices.

“We have seen efficiency and discipline return to the petroleum market and the government has no business to continue dictating prices,” said Energy CS Charles Keter.

The first round of price controls imposed in Kenya was in late 1971 to control prices directly and curb profiteering. But the experience, especially in the 1990s, was not good. Anyone who defied the policy was arrested then.

Kenya Institute for Public Policy Research and Analysis (Kippra), a public policy organisation, found that, among negative effects, price controls led to food shortages that resulted in long queues, black markets and even collapse of the targeted sectors.

“Price controls in Kenya in the 1990s were dogged by claims of manipulation, corruption and political interference, leading to unpredictable markets, massive losses to businesses and layoffs that triggered social discontent,” said Kippra.

Generally, rather than enforcing price control, the Government can establish a social welfare programme to cushion the most vulnerable segments, enhance agricultural productivity and increase the acreage of food crops under irrigation.

Price Control Governor Mike Sonko Uchumi Supermarkets
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