The pernicious effects of administered prices

Administered prices can have dire consequences when charged by dysfunctional state-owned entities, warns CHRIS HATTINGH.

Administered prices refer to the prices of goods or services set by a government or centralised authority. These stand in contrast to those prices and businesses that operate using market forces, signals, and supply and demand to inform their interactions with each other and consumers. 

While “normal” prices can, of course, be set too high for consumers to bear, these are generally more sensitive to market moves – and can be more quickly adjusted. If not, those associated businesses will bear consumers’ adjusted behaviour. By contrast, administered prices are more “fixed”: insulated and protected from harsher market forces. They do not necessarily need to take full recognition of market forces or supply and demand (or the numerous pressures impacting on consumer decisions). Hence, they are not always adjusted as and when appropriate; indeed, they may simply increase over time, in spite of economic realities.

A South African Reserve Bank (SARB) Special Occasional Bulletin of Economic Notes, published in August 2023, found that, “Between 2007 and 2017, the average Eskom tariff increased by 333%. By 2022, it had increased by 450% since 2007. Electricity price inflation has consistently exceeded headline inflation by a substantial margin, driving up the overall price level and impacting South Africa’s price stability.” Such massive increases have debilitating effects on small-to-medium businesses, new players across a host of industries and sectors, and households. The pain becomes yet more pronounced when the increases do not support or result in increased electricity production. That South Africa has been subjected to loadshedding since 2008 is testament to this. 

When state-owned entities (SOEs) are as dysfunctional as Eskom and Transnet (in particular) have become, a clear risk behind administered prices is that these could be set too high, as an attempt to recoup losses and assist said SOEs over time. Presuming that there remains a private sector capable of absorbing said increased prices and costs, there is no guarantee that revenues and funds collected will be used for productive ends. All too often, those funds are instead used to help pay off SOE debt burdens.

In the same SARB bulletin from August 2023, Zaakirah Ismail and Christopher Wood investigate the composition of fuel costs. They explain: “Fuels costs are a key driver of inflation, both directly through transport costs and indirectly through their role in producing essential goods. Over the past decade, administered elements have accounted for between 40% and 60% of the final retail petrol price. The most important drivers of fuel price inflation have been the fuel levy, retail price margins and the Road Accident Fund (RAF) levy.”

Most importantly for this particular column, “South Africa’s administered price regime means that a significant portion of the price for domestic fuels is determined by a complex mix of taxes, levies and cost margins.” Over the 10 years to November 2022, “the retail margin, [RAF] levy and transport cost components [increased] by 40%, 44% and 49% respectively in real terms”.

With South Africa’s medium-term growth rate likely to register between 1% and 2%, and inflation remaining stubbornly high, there are strong economic and practical reasons for the government to investigate lowering at least some administered prices. While this is unlikely to happen in an area like electricity – in the context of the serious fiscal and debt pressures facing Eskom – the fuel price and others are ripe for investigation, and possibly the implementation of downward adjustments. The SARB bulletin explains: “Although improvements in municipal price setting may help cushion the impact of these increases, significant annual electricity price increases will be necessary for the foreseeable future unless direct support is provided to Eskom or broader reforms in the industry are fast-tracked.” 

If the current government – and possibly a future coalition government – is to take the economic challenges facing South African businesses and households seriously, it is certainly within their ambit to review and possibly adjust a whole range of administered prices.