The folly of price caps

By Kenneth Kwama

The decision by Parliament to ratify the introduction of price caps on essential commodities has left manufacturers twitchy.

Speculation is rife that some could even be considering relocating their manufacturing units elsewhere with the option to import finished products to navigate the high cost of production locally and orbit within the expected price ranges.

Although she didn’t say expressly who was in the loop, the Chief Executive of the Kenya Association of Manufacturers (KAM) Betty Maina hinted at this possibility, reiterating that the introduction of price caps would make it even harder for manufacturers — already saddled with high costs of production — to operate.

"The Bill is misguided and harmful to producers of final products," says Maina. "It was initiated without considering the entire price chain that affects the final products."

Companies like bread manufacturers will find it difficult to operate with price fixing in place. [Photo: COURTESY]

The common sentiment among manufacturers is that the Government has been aloof and slow to respond to their concerns. Generally, the feeling is that the business environment in the country is becoming rougher and expensive to navigate because of the high cost of power and other attendant services like transport, which determine the cost of production. The addition of price control to these ills, they argue, would be a disaster.

counter productive

"Consumers may think they are being protected, but the move could be counter productive. It sounds consoling to say the price of petrol is being regulated, but the truth is that motorists could have to wait hours to get their tanks filled — a cost of time that far outstrips the price increases that would have resulted without Parliament’s intervention," a managing director of an oil company who requested anonymity says.

Although producers and manufacturers are unhappy with the Bill, most consumers believe price control will help tame rogue profiteers who deal in products such as maize, sugar and petrol.

"It is one of the best things Parliament has done. Hopefully, it will stop petroleum companies and other producers from arbitrarily increasing prices of products," says Meshak Ang’ang’o, a motorist who has seen pump prices increased arbitrary.

Ang’ang’o hopes the expected price caps would also help avoid extreme situations like when the price of maize flour skyrocketed at the height of a countrywide famine, mainly due to actions of speculators hoping to make quick kills.

MPs passed the Price Control (Essential Goods) Bill 2009 last week. The only hurdle remaining for it to become law is presidential assent.

This is, however, not guaranteed and some manufacturers are optimistic President Kibaki’s ideals that are supportive of a free market economy, in which case then, he is expected to decline from assenting to the Bill.

Fix prices

If this prayer comes true, it will not be the first time for Kibaki who is an economist to decline to assent to a Bill. Last year, the President rejected the Fiscal Management Bill that would have given MPs a say in preparing the national Budget. The President wrote to the National Assembly Speaker Kenneth Marende informing him of the veto.

On the other hand, if the President assents to the Bill, it would give the Government through Treasury the power to fix retail and wholesale prices of maize flour, wheat flour, cooking fat, and fuel prices for essential goods.

Companies like bread manufacturers could especially find it difficult to operate if the Bill becomes law because the sector is already a low-margin industry with profits between Sh2 and Sh5 per loaf sold.

Pricing has remained pretty close to the bone for the makers of bread as it is, and several might be forced to go out of business if the expected caps, which will also target their key raw material, wheat, don’t work in their favour.

In competitive markets, price hikes only come about when an increase in the cost of production forces producers to raise prices.

The passage of the Bill, which came at a time when East African countries are preparing to usher in a new protocol, could focus unwanted attention on Kenya, especially from its trade partners within the East African Community and the Common Market of East and Southern Africa (Comesa), both of which have been apathetic to price controls.

The World Trade Organisation (WTO) does not also promote price regulations, and the Bill, if signed into law, could pose a serious challenge to the relationship between Kenya and the WTO whose treaties the country has ratified.

If the Price Controls (Essential Goods) Bill 2009 becomes law, it might also throw back the country to the 1980s, when Government interfered with the pricing of the competitive market by fixing the prices of essential commodities like sugar.

Shopkeepers used to hoard essential commodities like sugar until after a Budget speech in the hope of cashing in case of price increases. Further price controls ignited an orgy of hoarding of goods resulting into artificial shortages.

Strong case

Locally, the feeling is that the Government has never made a strong case for the manufacturing sector. According to Vision 2030, manufacturing, which grew by about 10 per cent after independence when the country’s Gross Domestic Product growth rate averaged 6.5 per cent, has remained sluggish for the past quarter century averaging only seven per cent.

It has, therefore, never been a key thrust of the economy because it is considered uncompetitive.

Just how difficult it could be to operate business in the country is illustrated by what happened to computer manufacturer, Mercer in October, 2004 when inconsistencies and policy obstacles impeded its operations. Because of this, it found itself unable to clear products from the Export Processing Zone (EPZ).

This made it difficult for it to compete with importers of fully built computers. The move was fanned by a 2.5 per cent duty, which the Government slapped on computers assembled in the EPZ and lengthy clearing processes that involved several requirements, including documentation and pre-inspection demands associated with the new duty, and for which procedures were apparently not in place.

Mecer (EPZ) Ltd was thus wound up and operations of the company taken over by its sister company, Mecer East Africa Ltd, which started importing completed units.

If some manufacturers relocate their production units to other countries, they will follow examples set by multinationals like Procter & Gamble, Colgate Palmolive, Unilever and Mecer, which have all ceded manufacturing to other countries in the last seven years.

In Kenya, the first company to remodel its business approach alongside this trend was Johnson & Johnson — the world’s most comprehensive manufacturer of health care products.

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