Effective regulation of prices: what did the government prepare?

The Cabinet of Ministers pondered the issue of effective regulation of food prices and developed a special resolution. Journalists of the website “24” tried to find out in what way it is planned to deal with the price regulation.  

The state price regulation in its current form is ineffective and this situation requires some actions. However, there are so many problems accumulated that it is simply impossible to find a fast single tool to solve them. Both the experts and the government understand that these Augean stables should be cleaned step by step.

The Resolution of the Cabinet of Ministers of Ukraine “On the implementation of the pilot project on pricing for goods and services in the production and sale of food products” that will come into force on October 1 was the first such step. According to it, Ukrainian farmers, food producers and retailers will be free from compulsory declaration (actually – permit) to change prices and forced limitations of extra charges.

Pricing and regulation

The expert of the Agriculture sector of the Better Regulation Delivery Office (BRDO) Bohdan Andryuschenko who conducted the regulatory impact analysis and the M-Test regarding the above resolution together with his colleagues explained in comments to the website “24” that there were even several problems with the pricing regulation.

The first one: the basis for price regulation is a very old invention. As for this issue, the current legislation of Ukraine “inherited” these rules and had no significant changes nearly since 20s of the last century.

The second problem: the public administration system has a huge apparatus designed to perform this administration. However, it is legally incompetent: the State Price Inspectorate, which is a special body that controlled the pricing, has been in the process of liquidation for two years.

The third problem – we’ve used to use direct and grossest ones among the whole arsenal of tools to regulate the pricing that exist in the world – fixing prices, limiting the profitability of manufacturers, establishing trade mark-ups and others. They are effective for the state-planned economy, but they are of little use for sophisticated settings of the market economy.

In particular, the fact that both food prices covered by the state regulation and prices of unregulated products are growing almost equally despite of the usage of the existing direct price regulation and this increase correlates with the total consumer price index confirms the doubts about its effectiveness.

We can give an example of the bread prices, which is one of the most regulated products. In recent years, the annual dynamics of bread prices corresponds to the total deviation of inflation at around 2%.

Moreover, entrepreneurs who ‘regulate’ the prices in this way and, therefore, own incomes as well have learned how to circumvent these rough requirements. And consequently – the ineffective regulation is harmful, especially for those who want to work legally, moving the business “into the shadows”.

How to make the pricing control effective

To achieve this – we need to understand which tools of the system of pricing regulation don’t work, which ones are working and which of them, on the contrary, create obstacles.

However, we lack the information to make the relevant decisions.

“This is the reason why the government launches the pilot project. The main idea of this “pilot” is to suspend specific instruments of pricing regulation for a certain period and see what will happen and what consequences it will have. A relevant decision will be made on the basis of the received data,” Bohdan Andryuschenko says.

What instruments will be suspended

As the Ukrainian legislation doesn’t imply the possibility to suspend an act and simply announce that “it isn’t applied from today”, we chose such a way as this pilot project. Actually, it is the Resolution of the Cabinet of Ministers “On the implementation of the pilot project on pricing for goods and services in the production and sale of food products”: the requirements existing now and identified by experts as potentially invalid in the current economic environment won’t be applied for hypothetical three months. These requirements are following:

1. Declaring of sale prices.

If a manufacturer wants to change it by more than 1% in a month, he has to submit a set of documents about that and prove that it is necessary.

“Now this instrument has a very restricted opportunity to be applied. It is based on the findings of the State Price Inspectorate, which has been in the process of liquidation for two years. That’s why the entity that wants to comply with this requirement – can’t do that,” Andryuschenko explained.

2. Restriction of trade mark-ups.

We have a rule that a retailer can’t establish a trade mark-up, which is above 15%, for some products. Andryuschenko believes that it means losses for entrepreneurs. A standard trade mark-up to have a premise, pay salaries and others is more/less than 25%. However, the state says – no, it is 15%. What will the entity do? It will find out how to circumvent it. There are a lot of way to do this – from manipulation to shifting the responsibility.

“For example, there is the information that entities that want to supply their products to certain retailers have to pay the difference between the established trade mark-up and the one this enterprise requires. Nominally, everything is great. But in fact – it isn’t,” the expert explained.

3. Determining the profitability.

“If previously the state owned everything and the State Planning Committee assigned the state enterprises what they should produce and how much and to whom to give it, it would be logical to identify certain standards as a guide. Now, when an enterprise determines itself what to produce and how much – this requirement has a less sense,” Andryuschenko said.

The effect of the restriction of price regulation

The main task of the above mentioned government’s pilot project is to get information about possible consequences in case they suspend certain regulatory requirements. Experts emphasize – as it is the pilot project, it is limited in time. However, it doesn’t mean that prices will be sky-high. It may even occur in the opposite way – the business will be able to balance the prices of some goods without unnecessary regulation.

This experiment to some extent should result in identifying price regulations that don’t work and prevent the business development in Ukraine.

Who and in what way will control the process

The process hierarchy is following: the Cabinet of Ministers made the decision to implement the pilot project. But it is sufficient for the current state legislation. Local authorities that adopted regulations – orders that should be suspended – will implement the government’s decision.

Therefore, experts emphasize: a lot of preparatory work should precede a launch of the project. In order to get the results (and information respectively), we need to have an adequate vision of the current level of prices, a starting point and develop the methodology of the monitoring process. Regional administrations and departments of statistics will have to deal with this issue under the guidance of the Ministry of Economy. Then they will track and analyze the information received during the pilot project. Following this analysis, it will become clear which price regulations don’t work or are ineffective. And then the government will make the administrative decision – what to do with the state price regulation: to abolish, change or develop and adopt a new law.

Risks and prospects

As the expert said, there is a risk that populists who have been trading on this topic and using it as a main tool of pre-election manipulation for years, will start again to create tensions by trading on the issue of possible raising in prices. However, it should be noted that there are many factors that influence the prices and, above all, it is the market and consumers. That’s why this phenomenon is unlikely to be systematic.

“The positive aspect – a manufacturer doesn’t have to deceive consumers in case of no unnecessary regulation: to use various kinds of manipulation such as “holiday special!”, reduce the weight of goods, use law materials of less quality, etc.,” Andryuschenko explained.

Thus, the pilot project on pricing aims to determine in what cases the state price regulation prevents the business development and in what way to change it to make it an effective tool to protect the interests of consumers and not prevent the development of entrepreneurship.

According to Bohdan Andryuschenko, this is the tenth attempt of that kind. But now it seems that there is a high chance that the pilot project will be successful and we start moving towards the effective regulation.