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Monday, April 6, 2020

Price Controls on Fuel Will Inhibit Competition

Economy Feature Economy Price Controls on Fuel Will Inhibit Competition

People waiting for Fuel when there was a fuel shortage in Lusaka

By Henry Kyambalesa

I wish to comment on plans by Energy and Water Development Minister Kenneth Konga to “introduce uniform prices for oil products throughout Zambia to ensure equity among consumers regardless of their geographical location,” as reported in a recent Times of Zambia article entitled “Government to Introduce Uniform Fuel Prices.”

If by “uniform prices” the Minister means “uniform retail prices,” then I am afraid this would not be a good idea as it would lead to price controls by the government.

One of the essential elements of the economic liberalization program that we embarked on upon the defeat of the UNIP administration and its regime of price controls and state monopoly in commerce and industry was the idea of competition, which, in Economics, actually refers to price competition in contrast to non-price competition involving advertising and other sales-getting tools.

Competition provides the incentive for business entities to operate more efficiently in order to reduce costs and prices, and benefits consumers in a variety of ways. Among other things, it leads to lower prices when businesses are discouraged by law from charging uniform prices for similar (or substitute) products. Moreover, it can reduce the smuggling of products whose government-controlled prices are below those obtaining in neighboring countries.

Besides, competition generally cures the problem of black markets since it entices suppliers to increase their outputs in order to benefit from economies of scale, thereby resolving the problem of commodity shortages which can bolster black marketeering in a country’s economy. In this regard, I am often reminded of the words of Murray Sanderson, which I wish to quote from a paper entitled “The Reme­dies for Black Marketee­ring and Smuggling” presented at a semi­nar held at Baluba River Motel between August 26 and 27, 1989:

“Price con­trols have the effect of discourag­ing supply while en­couraging demand. The inevita­ble result is scarcity of commodi­ties; and when there is scarcity, you always get people who buy up commodities wherever they can and resell them on the black mar­ket. In Zambia, we call them ‘black marke­teers’. It is a useful term, for it puts the blame upon them rather than the authori­ties.”

Under a re­gime of price controls, there are certain arrangements which suppliers may resort to in an effort to maximize income (or minimize costs) which would tend to have adverse effects on the economic welfare of citizens.

Exam­ples of such arrangements include the following:

(a) discon­tinuing the production or sale of affected commodi­ties;

(b) restricting or reduc­ing the quantity and quality of affected commodi­ties;

(c) smuggling of affected commodities to countries where prices are higher than controlled prices obtaining in the domestic market;

(d) restricting or abandoning attendant market­ing services, such as delivery service;

(e) impos­ing condition­al sales on consumers, such as tying contracts;

(f) engaging in speculation in the con­trolled commodi­ty.

There are several important elements which suppliers take into account when making pricing decisions other than transportation and storage costs; they include costs relating to labor, insurance, advertising, buildings, and contributions to host communities. These costs may not necessarily be the same among the retailers of oil products in Zambia. Also, the returns on investment expected by oil retailers are not likely to be the same. The idea of uniform retail prices for oil products is, therefore, uncalled-for.

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  1. I’m impressed with the growing contributions on economic issues affecting our nation. We may not all be economists like Henry but we can learn a lot from such articles. And the more we show interest in our economy, the more we question the policies, the more the government shall be forced to remain true to the principles of social responsibilty.

  2. Price controls are always the quick fix for governments. The problem is that they distort demand and supply in a way that does not lead to long term solutions. The only proper response to a shortage in supply or high demand is to *increase production*. That could mean:

    1) Eliminating political interference with INDENI
    2) Creating multiple Indeni’s
    3) Getting off fossile fuel, and replacing it with biofuels, wind and solar energy.

    The technology exists, it only takes the political will to invest in it.

    I have said it before, but I think the very concept of privatisation is allowing politicians to be rewarded for non-performance. Why invest, when you can run down Indeni, get rewarded for massive fuel importation contracts, and then collect even more money privatising Indeni?

  3. The nation needs protection from greedy bands of plunderers who have a strangle hold on essential supplies. Like why zambia remains the most expensive place to fly to in Africa. Because greedy middle men have a stranglehold on aviation fuel. Mark odonnel who is something to do with the manufactruring sector complained recently about this issue. Even ownres of filling stations form cartels and fleece the common man. were will you go if the next filling station is accross town ?. Or if it is the only filling station in town charging abnormally ?. The pipo need protection. Zambias infrastructure is not developed enough to leave consumers to the mercy of gangs of maurading cartels most times involving ministers. even in he west there is some form of Goverment intervention in controlling prices

  4. I also do not agree with price controls. However the problem with fuel in Zambia is on supply. What must be done is privatization of indeni and opening up the borders to other sources of fuel. What I mean is allowing private companies like BP and Caltex to import fuel from e.g Botswana (duty free) and also allowing INDENI (privately owned of course) to supply other countries e.g Malawi (duty free) with fuel.

    What can happen is if Indeni has shortages, Private companies can import from other nations and if Indeni has surpluses, it can export to other nations. The importing and exporting of the fuel must be done in a duty free environment to enhance competition. This is a SADC/COMESA integrated system that can work.

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