Why price regulation of cement is not an optimal solution

The past two weeks have seen a raging public debate as to whether the proposed Legislative Instrument (LI) by the Ministry of Trade and Industry (MOTI) meant to regulate the prices of cement is the best in the face of increasing prices of cement.

This LI has generated some controversy from the Cement Manufacturers Association of Ghana (CMAG). Other industry players have also waded in their opposition to regulation. As a consumer protection advocate, I do not endorse any measure that can lead to market distortions and create inefficiencies.

Short Term vs Long Term and the Unintended Consequences

In the short term, consumers in the country may be able to see cement prices stabilizing or plummeting because of the tsarist effort by the government. As an economist, I am equally concerned about the medium and long-term implications of a regulatory intervention. When the government intervenes in a deregulated market and comes with price control, it has the potential to scare industry players as well as potential investors. In the long run, some of the players may decide to exit the market because they do not find it profitable to be here. This can also send signals to the broader investors and the country’s share of foreign direct investment (FDI) may start to dip.

Potential new entrants into the cement industry would not want to risk their investment so there will be no new players. If care is not taken, the 14 cement companies in the country could be reduced to one or two. This can take us back to the antediluvian days of the Ghacem monopoly or the Ghacem-Diamond duopoly. The solution that the government is proposing should not be worse than the problem it intends to solve. In the words of Martin Luther King Jr this price regulation will be like “a tranquilizing Thalidomide, relieving the emotional stress for a moment, only to give birth to an ill-formed infant of frustration.” In the long run, consumers may not be able to buy cement because of the potential effect of this regulation.

I am sometimes worried about how regulations are crafted in this country without ministries and agencies undertaking a robust Regulatory Impact Assessment (RIA) to understand the potential of any unintended consequences. The financial sector clean-up ended up with the decimation of indigenous banks, and savings and loans from the banking landscape. What has been the effect of the banking sector clean-up? Now majority of the high street banks in the country are owned by foreigners and when they wire their profits and dividends in dollars back to Lagos and Johannesburg, the cedi bleeds heavily.

The Problem of the Cement Industry

The Trade Minister, K.T Hammond in an interview said that the total installed capacity of the local cement producers in the country is about 11 million metric tonnes and the demand is not up to the supply limit. The Minister believes that there could be cement cartels in the country. But far from the issue of demand and supply, the Minister failed to admit macroeconomic factors like inflation, interest, and exchange rates that conspire against cement manufacturers. It is not only cement prices that have gone up. The prices of almost all goods in the country have gone up: iron rods, nails, paint, used and brand-new cars, roofing sheets, clothing, rice, and cooking oil. Why are we subjecting only cement to price regulation?

Without any complete diagnostic study of the cement sector, any over-the-counter approach will be counterproductive. A problem half identified is half solved. Failure to diagnose the problem of the sector will result in a solution that does not solve and an explanation that does not explain.

GSA and Price Regulation

Everywhere in the world, standards authorities like the Ghana Standard Authority (GSA) have a duty to set and enforce technical standards as contained in Act 1078. Nowhere in the world is a standard agency involved in price setting and price control. The Cement Price Committee consists of six scientists headed by the Director General of the GSA Professor Alex Dodoo. Price regulations fall within the competencies of economists and mathematicians. Take for instance, the Energy Commission is a technical regulator of the energy sector whilst economic regulation of electricity falls under the competencies of the Public Utility Regulatory Commission (PURC).

A careful reading of the Ghana Standards Authority Act 2022, Act 1078 makes me doubt whether the lawmakers conferred any mandate to the Minister to formulate a regulation to regulate cement prices. The GSA (Pricing of Cement) Regulations derive its basis from paragraphs (f & r) of Section 80 of the GSA Act 1078. Section 80 preamble is: the Minister shall, within six months after the coming into force of this Act and on the advice of the Board, by a legislative instrument, make regulation, (f): to govern the treatment, processing, and manufacture of goods, the packaging, labelling, advertising and selling of goods, and the size, dimensions and other specifications of packages of good. Paragraph (r): generally, for the effective implementation of this Act. Clearly, the rules on statutory interpretation do not confer price regulation to the work of the GSA. This could be a matter for the Supreme Court for an interpretation.

What the Cement LI Cannot Achieve

Whilst the LI may succeed in the short run to tame cement prices, the LI cannot resolve the issue of cartels, if any in the cement industry. Cartels can connive to control the supply of essential goods just to cause the prices to go up. The LI cannot resolve the issue of price fixing and territorial allocations in the industry if any. Currently, price fixing in Ghana is not an offense except in Section 44 of the National Petroleum Act 2005, Act 691 which criminalises the conduct of price fixing, cartels, market sharing and other restrictive trade conducts within the petroleum downstream sector.

There are lots of businesses and trade associations engaging in restrictive trade and other anti-competitive conducts that tend to conspire against consumers and other businesses. All of these conducts cannot be prosecuted because Article 19 (11) of the 1992 Constitution mandates that “no person shall be convicted of a criminal offense unless the offense is defined and the penalty for it is prescribed in a written law.”

What will the Competition and Fair-Trade Practices Bill do?

The purpose of competition law is to promote fair competition, protect consumers, ensure a level playing field for businesses, and foster innovation and economic efficiency. Competition law seeks to prevent the formation of monopolies and the abuse of dominant market positions, ensuring that no single entity can control a market to the detriment of competitors and consumers.  It addresses practices such as price-fixing, market sharing, and collusion among businesses, which can restrict competition and lead to higher prices and reduced choices for consumers. Competition authorities review mergers and acquisitions to ensure they do not significantly reduce competition or create monopolistic entities that could harm the competitive landscape. By fostering competitive markets, competition law helps to ensure that consumers benefit from lower prices, better quality products and services, and greater innovation and variety. It also ensures that MSMEs are protected against unfair business practices. Competition results in increased efficiency.

Since 2006, Ghana has a draft National Competition and Fair-Trade Practices Bill, and the Consumer Protection Bill with the Ministry of Trade and Industry. I am sure by now the document has gathered dust. In commercial aviation, it takes an average of ten years for a manufacturer to design and manufacture new aircraft and get regulatory approval. It took Boeing about eight years from the launch to the first delivery of its Boeing 787 Dreamliner. Similarly, it took Airbus about ten years to launch the first delivery of its A-350 aircraft. Clearly, the 18 years that it has taken Ghana to get the bills passed into law is not acceptable.

With all the conundrums happening in the cement market and those latently simmering in other sectors, the greatest antidote is for the MOTI to take these two bills to Parliament. The current LI before Parliament cannot resolve the raging barrages of anti-competitive conduct in the country. By the Minister’s action, if care is not taken, we may have an LI to regulate every item in which the price is going up. I am not sure that the best use of Parliament’s time is to receive an LI for every product that the Minister considers a price regulation is necessary. When there is a magic bullet that solves all problems is available, we do not atrophy our energy and time on bits and pieces of subsidiary legislations. It is through a functional competition regime that can safeguard the free market from the tyranny of unfair trading practices and bring efficiency to the market.