PRICE CONTROLS IN SRI LANKA

www.advocata.org

PRICE
CONTROLS IN SRI LANKA
– POLITICAL THEATRE

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3PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
CONTENTS
The Authors ………………………………………………………………………………………………………………………………………………….. 5
Foreword……………………………………………………………………………………………………………………………………………………….. 7
Acknowledgements ……………………………………………………………………………………………………………………………………… 8
Key Points and Recommendations ……………………………………………………………………………………………………………. 9
PART I
Introduction…………………………………………………………………………………………………………… 13
Introduction: Price controls in Sri Lanka………………………………………………………………………………… 13
The legal basis for the regulation of prices and trade in Sri Lanka……………………………………… 16
1 Price controls on basic foodstuffs …………………………………………………………………………… 19
2 The crucial role of prices in solving the economic problem……………………………………….. 29
(First published by the Institute of Economic Affairs)
3 Summary of Industry Surveys ………………………………………………………………………………… 35
i Price Controls on Milk Powder ………………………………………………………………………………………….. 35
ii Price Controls on Cement …………………………………………………………………………………………………. 35
iii Price Controls On Pharmaceuticals …………………………………………………………………………………. 35
4 Some Overlooked Costs of Price Controls ……………………………………………………………….. 39
How price controls negatively interfere with the market system ……………………………………….. 39
(first published by the Institute of Economic Affairs)
5 Public perception …………………………………………………………………………………………………… 49
(Survey by Breakthrough Business Intelligence)
What are price controls? When were they imposed? …………………………………………………………… 50
Who benefits from price controls? …………………………………………………………………………………………. 54
The experience of dealing with the government …………………………………………………………………… 55
How does the enforcement of price controls affect market outcomes? ……………………………. 61
Conclusion …………………………………………………………………………………………………………………………………. 62

4PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
PART II
INDUSTRY SURVEYS ON PRICE CONTROLS ……………………………………………………………………………. 64
1 The Cement Sector …………………………………………………………………………………………….. 65
Overview of the cement industry ……………………………………………………………………………………….. 65
Introduction to the regulatory environment for cement in Sri Lanka …………………………….. 67
Analysis of the impact of price controls ……………………………………………………………………………. 68
2 The Pharmaceutical Sector ………………………………………………………………………………… 75
Overview of the pharmaceutical industry ………………………………………………………………………….. 75
History of price controls ……………………………………………………………………………………………………… 76
Sector analysis …………………………………………………………………………………………………………………….. 76
Pharmaceutical Companies and Hospitals ……………………………………………………………………….. 77
Industry perspectives on price controls ……………………………………………………………………………. 79
Conclusions ………………………………………………………………………………………………………………………….. 81
3 The Dairy Sector…………………………………………………………………………………………………. 82
Overview of the dairy industry…………………………………………………………………………………………….. 82
History of price controls …………………………………………………………………………………………………….. 83
Sector analysis …………………………………………………………………………………………………………………….. 84
Industry perspectives on price controls ……………………………………………………………………………. 87
Conclusions ………………………………………………………………………………………………………………………….. 89
Appendix 1 :
Price controls in the dairy industry: Milking the consumer …………………………………………… 90
Appendix 2:
Do price controls on cement reduce construction costs? ……………………………………………. 92

5PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
THE AUTHORS
Breakthrough
Ravi Ratnasabpathy
The industry Surveys on Price Controls were commissioned by the Advocata Institute and are published
as Discussion Papers. Discussion Papers are published to stimulate a discussion on the subject of price
controls in Sri Lanka.
Viroshan Tissera and Trisha Peries contributed to the reports.
The field work for this report was completed in November 2017 and compiled by 31st March 2018. The
reports as at 31st March 2018, except for Section 2 “Price controls on basic foodstuffs” where data was
updated as at 30th June 2018.

7PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The control of prices as a means to control the cost of living
The ‘cost of living’ is a topic that is never far from the minds of voters. When inflation rises, the clamour
to do something mounts, in both political circles and the media. Freezing prices seems to be an obvious
answer; something that goes back to 1970 in Sri Lanka.
Several years of monetary expansion had by 1970, created a cumulatively increasing inflationary pressure
and an escalation in prices. The country was basically living beyond its means and corrective measures
were urgently needed. Accordingly, a system of higher taxation (capital levy, wealth tax, etc.), income
ceilings and forced and voluntary savings were introduced, accompanied by price control and rationing of
essential commodities. The intervention increased as the performance of the economy deteriorated, so
much so that Ronald Herring, in an article in the Economic and Political Weekly in 1987, identified the Sri
Lankan economy at that time as the most controlled and restricted economy outside the Soviet bloc.
While prices and controls were partially freed in the post-1977 era they never completely disappeared.
With increasing mismanagement of the economy, the fundamental problems that confronted the
government in 1970; external and internal deficits and rising prices have returned to haunt Governments
of today. It is not entirely surprising therefore to see the Government reverting to price controls once
again.
The price controls of the 1970’s were rigidly enforced; imports were strictly controlled through licensing
procedures, state monopolies and rationing of hard currency. Essential commodities were rationed
and offered at subsidised prices. The widely-recognised result was scarcities, corruption, and black-
marketeering, as well as shortages.
The price controls of today do not seem to cause these problems, has the Government succeeded in
finding the means by which prices may be controlled with no ill-effects?
This limited study attempts to unravel some of the questions around price controls in Sri Lanka, the
economic and theoretical aspects on price controls, trader perceptions and the reality of some markets
where price controls are applicable.
Unfortunately it fails to uncover some serendipitous exception to the known laws of economics that
suggest that controlling prices may be done to no ill effect.
DHANANATH FERNANDO
Chief Operating Officer
Advocata Institute
FOREWORD

8PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
This project would not have been possible without the gracious support of many people who contributed
their time, offered advice and helped in innumerable ways. In particular we wish to thank the Atlas Network
for their support in making this report and project a success.
Acknowledgements

9PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Key Points
• The Government imposes price controls
on a variety of items but our survey shows
they are of limited value in controlling
the cost of goods, particularly in the
consumer market.
• A comparison of controlled prices over a
ten month period with the prices in the
retail markets as per the open market
weekly average retail prices showed
that of 13 basic groceries only one
(milk powder) was being consistently
sold at the controlled price throughout
the entire period. No one, not even the
Consumer Affairs Authority possesses
a comprehensive list of items subject
to price control. Loose enforcement
prevents the most obvious symptoms of
price controls from manifesting but at the
expense of consumer choice and quality.
• Serious enforcement seems confined
to items produced by multinationals or
large corporates (milk powder, cement,
cooking gas) which are administratively
easier to police and who may be expected
to comply. There only appears to be token
enforcement in the unorganised sector.
• Where price controls are enforced (eg:
cement, milk powder) it is done so in
consultation with the industry, leading
to a stickiness in prices. Retail prices are
slow to rise when world market prices rise
but are equally slow to fall when world
market prices decline. It is doubtful if
this exercise leads to any sustainable
improvement in consumer welfare.
• The Government’s policies are often
mutually contradictory; taxes and price
controls are imposed on the same items.
Taxes raise retail prices conflicting with
the controls that are supposed to limit
price increases.
Key Points and Recommendations
• In responding to price controls, 40% of
importers said that they would source
lower quality products in order to remain
within the vicinity of the controlled price.
• The survey indicates that price controls
are of limited value in reducing costs.
They can cause significant welfare losses,
a deterioration in product quality, a
reduction in investment and, in the long
run, higher prices.
• Price Controls introduce a level of
uncertainty to traders, especially when
changes are made ad-hoc. This deters
the development of a more formalised
trade and tends to criminalise otherwise
legitimate economic activity..
• Ultimately, fostering competition and
improving productivity are the best form
of price control as evidenced in the
telecoms sector of Sri Lanka.

10PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
KEY RECOMMENDATIONS
• Little serious attempt appears to be
made to impose the price controls on
basic foodstuffs, particularly in the
public markets. The controls encourage
sub-optimal behaviour including the
sourcing of poor quality or substandard
items. Abolishing the controls will
have minimal impact on prices while
improving choice and quality.
• Taxes, specifically the Special
Commodity Levy and CESS play a
significant role in raising consumer
prices. These are subject to ad-hoc
revisions which prevent suppliers
from entering longer term supply
arrangements that could lead to lower
long term prices. Creating the fiscal
space for simplification of the system,
moving to uniform rates and the
lowering of taxes should be a priority.
• In specific sectors, Sri Lanka should
either loosen or completely abolish price
controls. For example:
 Tea and Hopper shops were subject
to an arbitrary price control in
2015, that’s rarely enforced. At
best, the control is useless and at
worst it works against these small
entrepreneurs legitimate business
activity and open up for corruption.
This control should be abolished.
 In the cement industry, the
competent authority should at first
move toward more dynamic pricing
where firms in the industry are
allowed more flexibility to cope with
high demand or spikes in costs.
 In the dairy industry, policymakers
should recognize the stated goal of
self-sufficiency in milk production
is not realistic. Abolishing of the
MRP and lowering taxes would allow
for healthy import competition for
domestic producers, and would
ultimately benefit consumers who
are likely to get lower prices.
Instead of attempting to protect agriculture
through taxes (which raises prices for
consumers) the government should facilitate
the modernisation of the sector, supporting
investments that improve productivity.

PART I

12PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

13PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
INTRODUCTION
Introduction: Price controls in Sri Lanka
In Sri Lanka price controls are often associated
with the pre-1977 era, but this is still in existence
and its use only expanding. Most recently, price
controls were imposed on sixteen essential items,
including dhal, sugar, potatoes, and imported
onions. The full gamut of controlled items
ranges far wider than just food and includes fuel,
electricity, telecommunications, transportation
amongst others.
Why does the government do this? In short: for
political expediency – to be seen to be doing
something about the rising cost of living. Does this
work? No.
If we look at Sri Lanka today, for the most part,
price controls do not benefit consumers. In fact,
government policy does exactly the opposite – it
maintains high prices for consumers.
For food products in particular, the government
intervenes actively with a variety of trade and
price policies. These policies often have multiple,
sometimes conflicting goals, such as containing
retail prices, protecting farmers, and encouraging
local producers.
The extreme distortions associated with price
controls (shortages, queues, rationing, etc.) are
not immediately visible in Sri Lanka, so it may
be believed that the typical problems associated
with controls are absent. This is in fact not the
case, because closer analysis reveals a number
of problems, the effects of which however are
masked by the clever methods of implementation.
Nevertheless, the impact of price controls is
certainly not trivial, even if unseen.
The Advocata Institute has recently conducted a
survey on price controls, identifying a number of
reasons for the absence of obvious distortions;
including loose enforcement, loop-holes for
producers and industry influences in setting
controls on prices.
This survey of the retail and wholesale trade
(Part II) indicates that for dry rations such as
onions, potatoes, pulses, and rice, traders react to
price control in two ways:
1. The controlled price serves as a guide, but is not
strictly followed.
2. Low quality items are sourced, particularly bulk
lots, close to expiry.1
Traders do try to import goods that they can then
sell at the controlled price. This is sometimes a
possibility. When it is not, the controlled price
is either ignored or adjusted temporarily. 2 What
traders do is source the cheapest possible
items and sell at above the controlled price. The
Consumer Affairs Authority conducts periodic
“raids” and if the trader is found out, they pay a
fine . 3
As the fine is a nominal one it does not serve as an
effective deterrent, nor does it create an incentive
for corruption; but the final result is that the
controlled price is not followed. This explains the
absence of shortages and queues.
Is the solution the strict enforcement of controlled
prices? This would almost certainly cause
shortages, because traders would then curtail
imports if it was uneconomical to import.
The trader does however attempt to minimise
the difference between the selling price and the
controlled price, but the controlled price is not
observed and quality suffers as a result.
As price is the main concern when sourcing, the
quality of the goods is often lower than it could
be. In attempting to comply with controlled
prices, traders sometimes source large volumes
of produce that are close to the end of shelf-
life.4 These are cheap enough to be sold at the
controlled price. Such items are quickly disposed,
occasionally below the controlled price and before
the items become unsaleable.
1 See Graph 13, 14, 21 in the “Public Perception” section
2 See Graph 13 “Public Perception” section
3 See Graph 15, 17, 20,22 in the “Public Perception” section
4 Although not a specific interview question, was revealed to interviewers in follow up questions during the course of the interview.

14PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The invisible problem is quality. Recent news
reports inform us of raids that have detected
rotten vegetables and potatoes in Karagampitiya
(April 2018)5 and substandard cooking oil in
Dambulla (December 2017) 6 .
The annual reports of the CAA for 2014 (the
latest available on its website) notes that 72
consignements of goods were re-exported due to
non-compliance with standards. In the previous
year (2013) a total of 207 consignments were
rexported. Why do traders import low quality
goods? The theory predicts that if prices are set
below the equilibrium, quality is likely to suffer, as
noted in section 5. The limited survey of traders
carried out in this study confirms this so perhaps
the best way to minimise quality problems is
to remove the incentive to bring low quality
goods, which results from the imposition of price
controls.
The photographs at the start of this section
stocks of substandard onions and potatoes that
were being returned by supermarkets to traders.
Unscrupulous traders reportedly dispose of these
in the informal markets or to food processors.
Older news reports (2013 7 , 2014 8 ) confirm this.
Rotten vegetables have been detected being used
in the National Hospital and also in warehouses –
to be sold to eateries and bakeries.
All the traders surveyed admitted to the problem
of low-quality goods being brought into the
market, but always blamed “other” traders as the
ones bringing in inferior goods 9 .
If the price controls were rigidly enforced on these
items, then shortages would occur, but either by
design or by accident, enforcement is lax. Quality
suffers as a result, and as almost all traders
face similar pressures and import the cheapest
available products, consumers are left with limited
choice.
While citizens are made to believe that price
controls are imposed to protect consumers,
other government policies such as taxation and
restrictions on imports, actually serve to increase,
rather than cap retail prices. Many basics
subject to price controls are also taxed, including
potatoes, Bombay onions, ( taxed at Rs.40/kg)
chillies (taxed at Rs.25/kg), and dried fish (taxed
at Rs.102/kg*). The taxes add anything from 5%
to 30% to retail prices.
The government attempts to minimise price
movement in by changing the controlled price
level or taxes, to compensate for movement in
world market prices. Sometimes taxes are lowered
when world market prices rise, and sometimes
they are raised -as in the recent case of sugar-,
when world market prices drop.
For example, taxes on sugar were increased by
Rs.8/kg following a Rs.10/kg decline in world
market prices; but the controlled price remains
unchanged at Rs.95/kg. Thus, consumers have to
pay a higher price than necessary, thanks to the
price control. A decline in world market prices has
not been passed, instead has been split between
the government and traders.
In this example the government intervenes first
to tax, raise costs, and then to set a maximum
selling price. The tax is substantial at about 30%
of selling price (and over 50% of landed cost)
which raises prices; it then imposes a maximum
selling price. The two policies are mutually
contradictory and resulted in consumers paying
higher prices than if a free a market prevailed. This
is true of several other commodities.
As price controls and taxes on food imports
change in an ad-hoc manner, traders take a very
transactional approach to imports, bringing down
whatever can be quickly disposed at the lowest
cost. There is little incentive to develop supplier
relationships based on quality, reliability, or regular
supply, which could possibly lead to better prices
in the long term.
Moreover, the unpredictable policy environment
caused by ad-hoc revisions to taxes and
controlled prices inhibits the use of futures/
5 Although not a specific interview question, was revealed to interviewers in follow up questions during the course of the interview.
6 https://www.pressreader.com/sri-lanka/daily-mirror-sri-lanka/20180424/282282435903385
7 https://www.newsfirst.lk/2017/12/thousands-litres-substandard-cooking-oil-surfaces-dambulla-raid/177926/
8 http://www.sundaytimes.lk/140413/news/rotten-fruit-juice-and-spoilt-onions-caa-steps-up-raids-during-festive-season-92479.html
9 http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=108124
10 Although not a specific interview question, was revealed to interviewers in follow up questions during the course of the interview
*Some varieties taxed at Rs.52/kg

15PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
forward contracts by traders that could hedge
against unexpected spikes in commodity prices.
In other industries such as dairy or chicken**,
price controls are imposed on selected items only,
enabling producers to sell other items at higher
prices and recover any losses.
For example, until recently price controls were
imposed on whole chicken but not on chicken
parts. Producers naturally prefer to sell chicken
parts but the government pressures the industry
to supply a minimum quantity of whole chicken. It
follows that there are frequent shortages of whole
chicken but as chicken parts are freely available
(albeit at higher prices), consumers may not
notice the shortage.
Similarly, in the dairy industry a price control
exists on powdered milk, but not on other
products which are sold at much higher prices. In
this instance, importers of powdered milk are large
companies and the controlled price is easier to
police. Shortages do not occur as the companies
supply even at a loss, but the controlled price
is not reduced significantly when world market
prices drop, in order to allow the companies to
recoup losses incurred at times when prices are
high. There is greater stability in prices, but the
controls reduce the level of risk and serve as a
deterrent to price competition. Players seek to
maximise returns when raw material prices are
low to the detriment of consumers to compensate
for anticipated losses when costs rise. Uncertainty
in prices may also be a deterrent to new entrants,
reducing the level of competition.
It appears that price controls in Sri Lanka
are largely political theatre – done for public
consumption. Politicians strive to gain approval
from the public by being seen to do something
about the cost of living. Tax policy is frequently at
variance with the objectives of the price control
regime – taxes are imposed raising costs, even
while selling prices are controlled. For example,
almost all the commodities recently subject to
price controls including dhal, sugar, potatoes, and
onions are also subjected to import taxes, some of
which add significantly to costs.
The Consumer Affairs Authority, which is meant
to regulate prices, does not even publish a
comprehensive list of the controlled prices 10
. The
website lists only six items (LP Gas, cement, milk
powder, chicken, rice, and pharmaceuticals) and
some data had not been updated since 2014/15.
Customer complaints are fundamental to effective
enforcement– if consumers have no knowledge of
the controlled price, then the system is bound to
be ineffective.
Given the widening use of price control, the critical
question is: are price controls an effective tool to
achieve the stated objective of controlling the cost
of living? Does it improve overall welfare?
Far from improving welfare, it appears that the
tangle of price controls and taxes actually raises
retail prices. The price control regime appears to
be little more than a charade. The way to reduce
the cost of living is not through price controls, but
by reducing taxes and dismantling the controls.
* Some of these taxes have recently been
reduced after the completion of the report.
** Price controls on chicken have recently been
lifted.
10 Although not a specific interview question, was revealed to interviewers in follow up questions during the course of the interview.

16PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The legal basis for the regulation of prices and trade in Sri Lanka.
The regulation of prices is carried out by the Consumer Affairs Authority (CAA) of Sri Lanka.
The CAA was set up by the Consumer Affairs Authority Act No.9 of 2003.
The previous laws which dealt with issues of trade and prices, viz the Consumer Protection
Act No.1 of 1979, the Fair Trading Commission Act No.1 of 1987 and the Control of Prices
Act of 1950 were repealed and the Fair Trading Commission and the Department of Internal
Trade were abolished and replaced with the establishment of the Authority.
The Consumer Affairs Authority consists of a Chairman and a minimum number of 10
other Members representing different fields of expertise, such as industry, law, economics,
commerce, administration, accountancy, science and health, in order to assist the policy
making in meeting the goals and objectives of the Authority under the Act. Provision is
made available in the Act for the appointment of 3 of the Members, in addition to the
Chairman, on a full-time basis. The Director General, who is also the Chief Executive Officer,
is responsible for carrying out the functions of the Authority who is also required to function
as the Secretary to the Authority.
The CAA is authorized to regulate trade in a number of ways.
• Regulate prices. Any item of goods or services, which is considered as essential
to the life of the community, may be “specified” as an essential commodity by
way of gazette notification by the Minister responsible for the Consumer Affairs
Authority. Manufactures or traders cannot increase the price of the product
without the prior written approval of the Authority. A period of 30 days is provided
for the authority to examine the application for any price revision and convey the
decision to the applicant company.
• CAA can intervene in the market in order to curb malpractices and safeguard
consumers.
• Determine general and special directions relating to manufacture, import, selling,
storing, distribution of goods and services.
• Taking action to assure the quality of the goods and services.
• Investigate or inquire in to products and services which do not confirm with
standards or warranties.
• It may enter in to agreements with manufacturers or traders on maximum price,
standards, and specifications or other conditions of manufacture, import, supply,
storage, distribution, transportation, marking, labeling or sale of any goods.
• Investigate or inquire into anti-competitive practices and abuse of dominant
position.
• The authority may on a compliant or request made to it by any person, any
organization, of consumers or associations of traders, carry out an investigation
with respect to the prevalence of any anti-competitive practices.

17PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
-1-
PRICE CONTROLS
ON BASIC
FOODSTUFFS

18PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

19PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
1 PRICE CONTROLS ON BASIC
FOODSTUFFS
A Game of Charades : The lackadaisical
implementation of price controls on basic foods
By Ravi Ratnasabapathy
The Government has imposed price controls on a
number of basic foods in order to control the cost
of living. For the purpose of study, we wanted to
ascertain the products subject to controls, as well
as the prices at which they were supposed to be
sold.
A list of price controlled items is a straightforward
piece of information that should be readily
available to any consumer.
Unfortunately, this does not appear to be available
anywhere. The website of the Consumer Affairs
Authority (CAA) lists a few items; gas, cement, milk
powder, chicken, rice, and pharmaceuticals. The
other items were not listed.
The information on the CAA website is out dated
(eg. A controlled price from 2014 is listed for
chicken although chicken was removed from the
list of controlled items in April 2017). On inquiring
from the CAA over telephone, we were asked to
refer to the website. A list was eventually compiled
after a field visit to the CAA by extracting the
relevant information from copies of the gazettes.
How are price controls to be enforced if a list of
items subject to control is not readily available?
The proper approach would be to ensure that list
of controlled prices is displayed at every outlet,
so customers know if they are being overcharged
and can then make their purchasing decisions
accordingly.
Having compiled a list, we compared the
controlled prices with the weekly market prices
published by the Department of Census and
Statistics in its survey of the main markets in
the Colombo district in the period 1st September
2017 to 30th June 2018 (Refer Table 1).

20PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Table 1
Controlled prices v Market prices of groceries
Table 1
Controlled prices v Market prices of groceries June June June June May
4th wk
Jun
3rd wk
Jun
2nd wk
Jun
1st wk
Jun
4th wk
May
Import
Tax/kg
Controlled
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Item Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Mysore Dhal 15 159 149.95 150.33 149.59 149.96 152.03
Mysore Dhal MRP per KG (Controlled price) (w/e from 6th of
Dec)*
3 130
Green Moong (green gram) 205 255.75 256.94 257.26 256.37 253.53
Potatoes – imported 40 115 130.62 116.54 116.43 108.39 109.66
(tax reduced WEF 9th Nov 2017) 1
(tax increased WEF 24th Feb 2018) 30
(tax increased WEF 2 May 2018) 40
Potatoes – Local (not price controlled) 0 N/a 180.42 183.18 185.22 169.28 171.27
Gram (chickpeas) Kadalai 260 280.23 284.17 282.92 288.91 287.22
Wheat flour (1kg) 37 87 90.31 90.15 89.78 89.9 89.63
Milk powder imported 400g 52 325 345 345 345 345 345
Milk powder imported 1kg 130 810
Milk powder local 1kg 0 735
B Onions – imported 40 78 115.14 105.77 105.77 102.43 100.76
(tax reduced WEF 9th Nov 2017) 1
(tax increased WEF 2 May 2018) 40
B Onions – local (not price controlled) 0 N/a N/A N/A N/A N/A N/A
Dried Chillies – neither crushed nor ground 25 385 303.21 305.36 306.45 304 298.93
Dried Fish Katta (1kg) 102 1100 1328 1337.5 1334.62 1303.33 1320.45
Dried Fish Katta (MRP) /kg (wef 6TH Dec 2017)* 52 1000
Dried Fish Salaya (1kg) 102 425 578.39 589.33 595.61 605.18 595
Maldive fish 102 1500 1590 1668.42 1631.58 1593.75 1584.62
Coconut (w/e from 6th of Dec) Large 75 83.2 87.5 86.88 88.28 86.82
Coconut (w/e from 6th of Dec) Average 75 74.52 78.37 77.46 76.98 77.56
Coconut (w/e from 6th of Dec) Medium 75 75.16 78.33 77.88 77.86 78
Small 75 65.22 69.29 67.62 64.79 67.86
Nadu (w/e from 26th of Dec) Red 74 97.18 98.35 98.48 99 100.85
White 74 90.23 92.87 92.52 91.88 90.96
* Taxes reduced with effect from 9th Nov 2017
OPEN MARKET WEEKLY AVERAGE RETAIL PRICES – 1st week of September 2017 to 4th week of June 2018
Main markets in Colombo district, Dept of Census and Statistics

21PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
May May May April April April April March March March March Feb Feb Feb
3rd wk
May
2nd wk
May
1st wk
May
4th wk
Apr
3rd wk
Apr
2nd wk
Apr
1st wk
Apr
4th wk
Mar
3rd wk
Mar
2nd wk
Mar
1st wk
Mar
4th wk
Feb
3rd wk
Feb
2nd wk
Feb
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
146.42 149.69 148.29 148.18 147.31 149.88 151.8 156.49 149.64 152.95 146.34 147.93 148.97 149.14
250.94 254.7 254.63 257.58 257 250.92 234.31 250.58 247.96 248.8 246.64 248.17 249.44 248.19
111.48 101.67 101.38 89.38 89.8 91.88 95.2 87.96 84.19 83.33 85.89 76.92 76.8 82.08
163.46 159.08 158.25 142.52 142.72 143.92 141.18 130.2 134 134.58 136.19 139.72 140 145.48
295.52 299.25 298.12 318.9 318.65 314.7 303.07 316.61 339.72 333.06 363.32 361.64 354.57 368.29
89.88 89.82 89.77 90.74 90.58 90.27 89.71 90.1 89.6 89.81 89.57 89.76 89.59 90.1
337 325 325 325 325 325 325 325 325 325 325 325 325 325
97.5 89.52 89.88 68.4 66.74 68.83 73.85 78.7 78.65 87.06 95.53 109.73 107.25 110.26
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
300.36 294 294.83 299.63 297.67 298.97 299.17 297.35 288.48 280.97 278.13 270.47 280.31 271.31
1295 1302.94 1297.14 1266.67 1260.94 1250 1234.48 1216.13 1193.75 1206.25 1148.44 1158.53 1200 1192.86
567 562.22 546.67 578.08 580 571.97 570.67 553.89 551.43 563.1 589.29 572.86 586.14 601.04
1631.82 1622.22 1600 1620 1621.05 1652.63 1605.56 1644.44 1640 1631.82 1562.5 1582.61 1562.5 1580
86.74 90 87.8 86.3 85.19 87.4 89.58 90.24 90.91 91.67 94.2 87.35 87.08 85.91
75.93 79.81 78.1 76.87 75.66 77.54 79.74 78.68 79.52 78.46 81.85 78.62 78.2 76.25
76.73 78.86 77.8 76.04 75.18 76.5 78.48 79.19 78.48 77.13 81.17 78 77.81 74.8
64.32 70.58 68.7 68.26 66.6 68.71 71.15 66.61 69.17 66.58 70.19 70.52 69.71 68.04
99.33 98.9 98.69 99.57 99.52 100.33 99.19 98.56 99.52 99.81 100.84 99.46 98.18 101.3
92.9 90.81 91.85 90.93 91.46 92.88 92.34 92.15 90.65 91.04 91.33 91.96 92.04 90.92

22PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Table 1 (Cont)
Controlled prices v Market prices of groceries
Table 1
2018 2017
Controlled prices v Market prices of groceries Feb Jan Jan Jan Jan Decem-
ber
Decem-
ber
1st wk
Feb
4th wk
Jan
3rd wk
Jan
2nd wk
Jan
1st wk
Jan
4th wk
Dec
3rd wk
Dec
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Item Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Mysore Dhal 147.22 151.2 149.59 154.33 156.78 157.18 157.47
Mysore Dhal MRP per KG (Controlled price) (w/e from 6th of
Dec)*
Green Moong (green gram) 247.59 253.08 252.58 253.03 255.12 256.69 251.06
Potatoes – imported 84.22 79.63 82.31 92.78 100.56 95.33 100.17
(tax reduced WEF 9th Nov 2017)
(tax increased WEF 24th Feb 2018)
(tax increased WEF 2 May 2018)
Potatoes – Local (not price controlled) 162.19 150 151.15 158.65 162.73 158.52 161.92
Gram (chickpeas) Kadalai 365.03 374.88 374.07 372.09 376.09 377.93 374.42
Wheat flour (1kg) 91.46 89.81 90.04 89.62 89.88 90 89.58
Milk powder imported 400g 325 325 325 325 325 325 325
Milk powder imported 1kg
Milk powder local 1kg
B Onions – imported 124.18 149.87 149.13 144.95 140 151.88 156.08
(tax reduced WEF 9th Nov 2017)
(tax increased WEF 2 May 2018)
B Onions – local (not price controlled) N/A N/A N/A N/A N/A N/A 200
Dried Chillies – neither crushed nor ground 268.67 264.57 264.57 266.76 267.58 272.65 267.43
Dried Fish Katta (1kg) 1211.29 1162 1154 1197.73 1195.83 1174.07 1233.93
Dried Fish Katta (MRP) /kg (wef 6TH Dec 2017)*
Dried Fish Salaya (1kg) 576.19 581.7 574.89 569.62 563.03 571.33 554.7
Maldive fish 1609.09 1620 1631.82 1654.55 1652.17 1621.74 1591.67
Coconut (w/e from 6th of Dec) 89.25 85 84.32 82.75 89.23 86.7 95
Coconut (w/e from 6th of Dec) 78.31 75.38 74.82 75.29 78.81 76.36 82.73
Coconut (w/e from 6th of Dec) 76.8 75.37 74.78 75.36 77.41 75.82 80.59
68.89 65.77 65.37 67.78 69.78 66.55 72.61
Nadu (w/e from 26th of Dec) 105.04 101.95 102.33 104.21 105 105.32 105.15
92.05 101.7 99.73 100.47 102.52 101.42 102.71
* Taxes reduced with effect from 9th Nov 2017
OPEN MARKET WEEKLY AVERAGE RETAIL PRICES – 1st week of September 2017 to 4th week of June 2018
Main markets in Colombo district, Dept of Census and Statistics

23PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Decem-
ber
Decem-
ber
2nd wk
Dec
1st wk
Dec
4th Wk
Nov
3rd Wk
Nov
2nd Wk
Nov
1st Wk
Nov
4th Wk
Oct
3rd Wk
Oct
2nd Wk
Oct
1st Wk
Oct
4th Wk
Sep
3rd Wk
Sep
2nd Wk
Sep
1st Wk
Sep
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Market *
Price/kg
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
159.59 159.78 161.44 165.22 174.43 177.88 181.26 180.23 179.44 175.66 179.94 180.28 179.46 177.82
254 247.93 248.14 252.36 261.77 259.96 257.62 257.1 253.3 253.71 255.81 253.89 253.59 256.76
99.82 91.25 84.17 88.3 109.08 117.92 120.96 122.62 120.21 119.14 118.93 119.23 123.33 118.8
154.5 153.04 144.94 150.07 152.05 165.63 159.5 164.38 162.67 160.15 164.91 163.81 175 173.45
370.33 360.71 356.84 352 354.08 351.18 351.33 351.18 346.5 345.64 349.58 347.19 343.58 333.73
89.55 88.88 89.15 89.96 90.24 90.47 90.41 90 90.06 89.45 89.91 88.71 88.64 88.92
325 325 325 325 325 325 325 325 325 325 325 325 325 325
151.58 146.62 154.64 142.43 136.94 192.33 151.89 146.05 144.29 131.05 137.35 131.89 153.46 150.76
183.33 188 200 170 161.75 225.26 182.17 119.09 121.4 113.86 114.38 n/a n/a n/a
263.24 255 255.69 255.75 249.66 247.41 246.25 249.82 247.22 243.33 245.17 240.69 242.86 240.36
1217.74 1241.67 1262.9 1241.67 1250 1274.07 1264.52 1269.23 1266.07 1222.06 1253.03 1248.48 1266.67 1248.21
591.33 589.91 591.9 605.11 634.21 629.96 623.88 629.17 611.67 604.41 608.33 590.56 595.83 588.81
1595 1616 1632 1633 1706.25 1686.67 1657.14 1629.41 1608.33 1623.81 1600 1614.29 1612.5 1624
96.47 99.17
85.89 88.71
85.77 89.84
75.43 77.12
106.03 104.73
101.62 100.75

24PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
1 See Graph 16 in the “Public Perception” section
2 See Graph 14 in the “Public Perception” section
3 Economic Census 2013/14 – Informal Non-Agricultural Activities, Dept of Census & Statistics, November 2017
It is evident from the table we have collated that
the controlled prices are not being followed in
most instances.
The surveys of traders by Breakthrough indicate
that 67% of retailers and 46% of wholesalers react
to raids by the CAA by temporarily adjusting prices.
They later revert to business as usual. Trying
to enforce retail level price control across the
informal trade and public markets is a practical
impossibility. The CAA annual report (2014) states
that 22,402 raids were carried out that year and
25,287 in 2013. This is small fraction of 205,573
retail outlets (general as well as those specialised
in food, beverages & tobacco) in the country.
In any case if the controlled prices were strictly
enforced, then the usual distortions such as
shortages and queues would become obvious with
unpalatable political consequences.
The CAA is successful in enforcing prices on items
supplied by large businesses or corporates such
as in cement or milk powder. Whether this actually
keeps prices low is questionable.
Large businesses are relatively easy to monitor
and they are open to pressure to supply even at
a loss; on the implicit understanding that they
will be allowed to recoup this at some point, as
noted in the articles included in the appendices
to this report. This is very clear in the table below,
where the only item consistently being sold at
the controlled price is milk powder produced by a
multinational. Wheat flour, which is also produced
by large corporates tends to track the controlled
price closely. The majority of the other items were
being traded at prices above the controlled price.
During the period under survey, price controls were
imposed on Nadu rice ( 26th December 2017)
coconuts (6th December) and revised on dhal
and kata (6th December) with minimal impact on
prices as illustrated in charts 1-4.
Nadu White – Impact of imposing a new controlled price
(Rs.74/kg imposed on 26th Dec 2017
Coconut – Impact of imposing a new controlled price
( Rs.75/nut imposed on 6th Dec 2017
Mysore dhal impact of change in control price ( Rs.159/-,
revised to Rs.130/ on 6th December)
Nadu – Retail price vs controlled price
Coconut – Controlled price vs retail price
Mysore Dhal- Controlled Price vs Retail Price
65
70
75
80
85
90
95
100
105
Time period
1st week Dec
2nd week Dec
3rd week Dec
4th week Dec
1st week Jan
2nd week Jan
3rd week Jan
4th week Jan
1st week Feb
2nd week Feb
3rd week Feb
4th week Feb
1st week Mar
2nd week Mar
3rd week Mar
4th week Mar
1st week Apr
2nd week Apr
3rd week Apr
4th week Apr
1st week May
2nd week May
3rd week May
4th week May
1st week June
2nd week June
3rd week June
4th week June
Pric e in Rupees
Time period (2017- 2018)
Retail Price Controlled Price
65
70
75
80
85
90
Time period
1st week Dec
2nd week Dec
3rd week Dec
4th week Dec
1st week Jan
2nd week Jan
3rd week Jan
4th week Jan
1st week Feb
2nd week Feb
3rd week Feb
4th week Feb
1st week Mar
2nd week Mar
3rd week Mar
4th week Mar
1st week Apr
2nd week Apr
3rd week Apr
4th week Apr
1st week May
2nd week May
3rd week May
4th week May
1st week June
2nd week June
3rd week June
4th week June
Pric e in Rupees
Time period (2017- 2018)
Retail Price Controlled Price
Chart 01
Chart 02
Chart 03
110
120
130
140
150
160
170
180
190
Pric e in Rupees
Mysore Dhal Retail Price Mysore Dhal Controlled Price
Time peri od (2017- 2018)
1st week Sep
3rd week Sep
1st week Oct
3rd week Oct
1st week Nov
3rd week Nov
1st week Dec
3rd week Dec
1st week Jan
3rd week Jan
1st week Feb
3rd week Feb
1st week Mar
3 rd week Mar
1st week Apr
3rd week Apr
1st week May
3rd week May
1st week June
3rd week June

25PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
0
5
10
15
20
25
30
35
40
45
0
50
100
150
200
250
Tax per Kg
Retail Pri ce in Rupees
B Onions Retail Price B Onions Controlled price B Onions Tax/kg
Time period (2017 – 2018)
The impact of taxes on prices is particularly
interesting. (refer charts 5-7). When some taxes
were reduced in November 2017 (dhal, potatoes,
Big onions), prices declined on these items over
period of weeks, sometimes falling below the
controlled price. When taxes were later raised
(potatoes to Rs.30/kg on 24th February, B onions
to Rs.40 on 2nd May) prices rose again eventually
breaching the controlled price. In the case of dhal
prices eventually fell below the original controlled
price (159/kg) following the reduction in tax – but
prices did not respond significantly when the
controlled prices was reduced to Rs.130 (6th Dec
2017).
This underlines the case for reducing specific food
taxes if there is any serious intention to control
prices.
It is also worth noting the difference in prices
between imported and local items, potatoes,
and big onions. Locally produced items are not
subject to tax or price control, but when available,
these retail at prices higher than the controlled
price and are sometimes higher than the (taxed)
imported items.
Instead of attempting to protect agriculture
through taxes (which raises prices for
consumers) the government should facilitate
the modernisation of the sector, supporting
investments that improve productivity (eg
mechanisation, drip irrigation, greenhouses,
quality seeds etc). Addressing the inefficiencies
Katta impact of change in controlled controlled ( Rs.1100/-,
revised to Rs.1000/ on 6th December)
Potatoes : Impact of taxes on prices. Reduced in November,
raised in February and again in May
Dhal : Impact of taxes on prices. Reduced in November
Big onions : Impact of taxes on prices. Reduced in November,
raised in May
Katta- Retail price vs controlled price Potatoes (Price fluctuations)
Mysore Dhal- Controlled Price vs Retail Price
B-Onions (Price fluctuations)
Chart 04 Chart 06
Chart 07
Chart 05
900
950
1000
1050
1100
1150
1200
1250
1300
1350
1400
Pric e in Rupees
Time period (2017- 2018)
Dried Fish-Katta Retail Price Dried Fish-Katta Controlled Price
1st week Sep
3rd week Sep
1st week Oct
3rd week Oct
1st week Nov
3rd week Nov
1st week Dec
3rd week Dec
1st week Jan
3rd week Jan
1st week Feb
3rd week Feb
1st week Mar
3 rd week Mar
1st week Apr
3rd week Apr
1st week May
3rd week May
1st week June
3rd week June
0
5
10
15
20
25
30
35
40
45
0
20
40
60
80
100
120
140
Tax per Kg
Retail pri ce
Time period (2017- 2018 )
Potatoes Retail Price Potatoes Controlled price Potatoes Tax/kg
0
20
40
60
80
100
120
140
160
180
200
Pric e in Rupees
Mysore Dhal Retail Price Mysore Dhal Controlled Price Tax
Time period (2017 – 2018 )
1st week Sep
3rd week Sep
1st week Oct
3rd week Oct
1st week Nov
3rd week Nov
1st week Dec
3rd week Dec
1st week Jan
3rd week Jan
1st week Feb
3rd week Feb
1st week Mar
3 rd week Mar
1st week Apr
3rd week Apr
1st week May
3rd week May
1st week June
3rd week June
1st week Sep
3rd week Sep
1st week Oct
3rd week Oct
1st week Nov
3rd week Nov
1st week Dec
3rd week Dec
1st week Jan
3rd week Jan
1st week Feb
3rd week Feb
1st week Mar
3 rd week Mar
1st week Apr
3rd week Apr
1st week May
3rd week May
1st week June
3rd week June
1st week Sep
3rd week Sep
1st week Oct
3rd week Oct
1st week Nov
3rd week Nov
1st week Dec
3rd week Dec
1st week Jan
3rd week Jan
1st week Feb
3rd week Feb
1st week Mar
3 rd week Mar
1st week Apr
3rd week Apr
1st week May
3rd week May
1st week June
3rd week June

26PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
within local agriculture is the sustainable way to
lower prices: increased productivity raises farmer
incomes and lower consumer prices in the long
term.
Using controls to reduce prices does not appear
to work. The scheme itself is ill-conceived and
there seems little intent or capacity to enforce.
Reducing taxes, increasing competition and
productivity in local agriculture is a surer path to
lower consumer prices.

27PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
-2-
The crucial role of
prices in solving
the economic
problem

28PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

29PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
First published by the Institute of Economic Affairs.
Excerpt from “Flaws and Ceilings: Price Controls and the
damage they cause.”
Prices are a commonly misunderstood concept.
Many view prices as random numbers assigned by
a seller. Related to this, many see prices as being
an impediment to accomplishing their desired
goals. For example, a young adult may desire to
live in central London but quickly realises that
they cannot to do so given the relatively high price
of renting a flat in that area. The view of prices
as impediments to achieving one’s goals is one
reason why there are so often calls for politicians
and regulators to place controls on prices. The
belief, from the perspective of proponents of price
controls, is that, if regulators impose controls,
then people will be able to achieve goals that
would otherwise be unachievable. For example, in
order to assist younger citizens with their cost of
living, a politician may propose some combination
of rent controls and a living wage to make cities
such as London more affordable. These views,
however, misconstrue the fundamental nature and
role that prices play in an economic system.
Prices are central to solving the core economic
problem that all societies face: how are scarce
resources to be (re)allocated to meet as many of
the unlimited wants of consumers as possible?
Answering this question is crucial for improving
standards of living since the more consumer
wants can be met, the better off people are.
One of the main contributions of Nobel Laureate
F. A. Hayek (1945) was his clarification of the
exact nature of the economic problem. He noted:
‘The economic problem of society is … not merely
a problem of how to allocate “given” resources – if
“given” is taken to mean given to a single mind
which deliberately solves the problem set by these
“data”. It is rather a problem of … the utilization
of knowledge which is not given to anyone in
its totality’ (pages 519–20). Hayek’s point is
that economic interactions rely on dispersed
knowledge, some of which exists for all to grasp
but much of which is inarticulate, tacit knowledge
that is difficult to make explicit and is not available
to everyone (see Hayek 1945; Lavoie 1986). Such
knowledge must be discovered through experience
and experimentation (see Hayek 1978). Because
tacit knowledge cannot be expressed in an
objective manner, it is not ‘out there’ for others to
obtain in the same way as articulated knowledge
in books lining library shelves (see Lavoie 1985:
76–87; Boettke 2002). Part of the reason that
markets are so effective in allocating resources
is that they allow dispersed individuals to take
advantage of the knowledge possessed by others
to discover a solution to the economic problem.
But how do markets do this?
At the core of the effectiveness of markets is the
notion of ‘economic calculation’, which refers
to the decision-making process of how to best
allocate scarce resources among the array of
feasible alternatives. Economic calculation refers
to the determination of the expected value-added
of a potential course of action. For example,
should scarce steel be used to construct a new
office building, school building, hospital or some
other structure? Or should it sit idle because none
of the possible alternatives are profitable given
the cost of steel and other inputs? By comparing
the relative expected value-added across feasible
alternatives, decision makers are able to choose
the course of action with the highest expected
social return. Crucial to this decision-making
process are money prices and profit-and-loss
accounting.
Money prices, which serve as a common unit
of calculation, capture the relative scarcity,
or opportunity cost, of different goods based
on context-specific conditions, and they
communicate this information to others in the
economy (see Mises 1920; Hayek 1945; Thomsen
1992). This is powerful precisely because people
are able to act on the context-specific knowledge
reflected in prices without needing to actually
possess any specific insight into the actual local
conditions. For example, if a loaf of organic bread
from a local baker costs £1.50, this reflects the
costs of production and distribution of the bread
(including the value of the time of the assistant
serving in the shop) as well as reflecting the
demand for organic bread relative to alternatives
by other consumers. It is not necessary for
the buyer to know anything about the baker’s
preferences for leisure versus working, how or why
2 The crucial role of prices in solving
the economic problem

30PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
the ingredients cost the amount they do, or why
other consumers may be willing to pay more for
organic bread than other types of bread. Nor is it
necessary for potential suppliers who are thinking
of entering the market to know these things.
This information is reflected in prices in a freely
functioning economy.
The economist Thomas Sowell (1980) effectively
captures this point when he writes: ‘Prices are
important not because money is considered
paramount but because prices are a fast and
effective conveyor of information through a vast
society in which fragmented knowledge must
be coordinated’ (page 80). This information is
crucial because it allows people to compare
the prices of inputs, which reflect underlying
scarcity conditions, to the expected profitability
of numerous alternatives, all of which are
technologically feasible (see Hoff 1981; Boettke
1998; Horwitz 1996, 1998). The resulting
profit or loss – the difference between the cost
of production and the sales price – provides
feedback as to whether this estimate was
accurate or not. A profit indicates that resources
have been combined in a manner that generates
value to others, while a loss signals the opposite: it
signals that resources could have been allocated
to a higher-valued use that would increase welfare.
A simple example will illustrate this logic.
Consider a scenario in which an entrepreneur
produces a new product for a cost of £25 and
sells it for a price £50. What does this £25 profit
indicate? There are many other things that the
producer could have made using the resources
that cost him £25. Some would have led to a loss
while others would have led to a smaller profit.
The profit of £25 indicates that consumers value
the good produced more than the alternatives
that could have been produced with those same
resources. This profit signals to the producer, as
well as to other entrepreneurs, that they have
allocated resources in a manner that consumers
value relative to the alternatives and encourages
them to supply more. A loss signals that
consumers do not value the current allocation
of resources. The loss provides an incentive for
entrepreneurs to adjust by reallocating scarce
resources to other uses.
This ongoing process has several effects. The
profit will tend to draw other entrepreneurs into
the market who will seek to capture customers by
charging a lower price. Another important effect
is that entrepreneurs face constant pressure
to come up with new and cheaper means of
producing the good so as to increase their profit.
If they cut production costs from £25 to £20, they
keep these savings as additional profit – though
other producers will then be attracted into the
market so that prices may then fall. The result is
ever-present competition and innovation, which
benefit consumers since producers must adjust to
meet their demands in order to remain profitable.
It is the information and incentive provided by
monetary prices and profit-and-loss accounting
that makes markets so effective in solving the
economic problem. The process of economic
calculation guides market participants in adapting
their plans and reallocating resources to new and
more highly valued uses to maximise the well-
being of consumers. The lure of profit incentivises
innovation, and prices guide innovators in
determining which projects are feasible and
which are not. Mistakes are, of course, frequently
made, but markets provide the information and
incentives to adapt accordingly.
Economic calculation is especially crucial as
the production of goods and services becomes
increasingly complex, which is a defining
characteristic of economic progress and an
advanced economic system. The economist Don
Lavoie (1985) captures this point when he writes:
‘price information represents knowledge about
a continually and rapidly changing structure of
economic relationships’ (page 82). To understand
this point, consider the complexity involved in the
production of what is typically considered by those
in developed countries to be a basic good – a
toaster.
Thomas Thwaites (2014), a London-based
designer, embarked on a fascinating project, the
‘Toaster Project’, in which he attempted to build
a simple toaster by hand and from scratch. He
quickly found that the project was an extremely

31PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
complicated one. The toaster required copper,
iron, nickel, mica and plastic, all of which Thwaites
had to obtain from mines and other sources in a
variety of geographical locations. After much travel
and effort to extract and process the necessary
materials, he constructed his (extremely ugly)
toaster, which proceeded, upon being plugged
into an electric socket, to burn out in a matter
of seconds. His project is a perfect illustration
of the importance of economic calculation as
indicated by his realisation that ‘the scale of
industry involved in making a toaster is ridiculous
but at the same time the chain of discoveries and
small technological developments that occurred
along the way make it entirely reasonable’ (2014).
This chain of events was guided by the feedback
provided by economic calculation coupled with the
adaptability of markets. The result is that toasters
are readily available to consumers when they want
them at a relatively low price.
Further adding to the sheer complexity of
advanced economies is the importance of what
economists call complementary goods: goods and
services that are consumed together. For example,
cars require petrol, spare parts, repair equipment
and trained mechanics in order to operate. Just
like the construction of a basic toaster, most
people living in relatively wealthy societies take
the wide array of complementary goods available
for granted. However, when one considers the level
of coordination required for each of these various
complementary goods not only to be produced
but to be available and waiting when needed by
consumers, these taken-for-granted goods and
services are truly amazing phenomena. Someone,
somewhere, has to anticipate the need for these
complementary goods and services and make
them available to consumers on demand.
In markets, consumers do not submit a master
wish list to a central planner who then allocates
resources accordingly. Instead, prices and profit-
and-loss accounting guide entrepreneurs in
discovering a (new) solution to the economic
problem by producing and innovating existing and
new goods and services that consumers value.
This process is the essence of broader economic
progress as resources are reallocated, on an
ongoing basis, to their highest-valued, welfare-
maximizing use. It is precisely the fact that no
one is in charge that makes markets so flexible
and effective. Each individual who possesses
unique skills and knowledge is able to engage
in experimentation and discovery that benefits
not only themselves but others as well. Market
prices link individuals and markets together by
communicating a vast amount of information. The
lure of profit and fear of loss incentivise people to
continually adjust their behaviour.
Given this understanding of the market process
and the central role played by prices, we are now
in a position to understand the consequences of
imposing price controls.
References
Boettke, P. J. (1998) Economic calculation:
the Austrian contribution to political economy.
Advances in Austrian Economics 5: 131–58.
Boettke, P. J. (2002) Information and knowledge:
Austrian economics in search of its uniqueness.
Review of Austrian Economics 15(4): 263–74.
Hayek, F. A. (1945) The use of knowledge in
society. American Economic Review 35(4):
519–30.
Hayek, F. A. (1978) Competition as a discovery
procedure. In New Studies in Philosophy, Politics,
Economics, and the History of Ideas (ed. F. A.
Hayek). Chicago, IL: University of Chicago Press.
Hoff, T. J. B. (1981) Economic Calculation in the
Socialist Society. Indianapolis, IN: Liberty Fund.
Horwitz, S. (1996) Money, money prices, and the
Socialist calculation debate. Advances in Austrian
Economics 3: 59–77.
Horwitz, S. (1998) Monetary calculation and
Mises’s critique of planning. History of Political
Economy 30(3): 427–50.
Lavoie, D. (1985) National Economic Planning:
What Is Left? Cambridge, MA: Ballinger Publishing
Company.
Lavoie, D. (1986) The market as a procedure
for discovery and conveyance of inarticulate
knowledge. Comparative Economic Studies 28(1):
1–19.

32PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Mises, L. von. (1920 [1935]) Economic calculation
in the Socialist commonwealth. In Collectivist
Economic Planning (ed. F. A. Hayek). London:
Routledge.
Sowell, T. (1980) Knowledge and Decisions. New
York: Basic Books.
Thomsen, E. F. (1992) Prices and Knowledge: A
Market-Process Perspective. New York: Routledge.
Thwaites, T. (2014) The toaster project. http://
www.thetoasterproject.org/page2.html (accessed
10 March 2015).

33PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
-3-
Summary of
Industry Surveys

34PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

35PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
3 Summary of Industry Surveys
i Price Controls on Milk Powder
The survey conducted highlights the following:
1. The bulk of the consumption is in the form
of milk powder, which is price controlled.
Liquid milk and other value added
products (eg cheese, yoghurt etc) are not
controlled.
2. Maximum Retail Price (MRP) imposed
on milk powder, declared an essential
commodity in Section 18 of the Consumer
Affairs Authority Act No.9 of 2003.
3. The price of raw milk, at the farm gate is
also controlled.
4. In addition, the import of milk powder is
taxed.
These policies are inherently contradictory.
What is effectively a minimum farm gate
price raises input costs for producers, which
translates to higher prices for the consumer.
Similarly, the tax imposed on imported milk
powder also serves increase retail prices.
The price control creates a ‘stickiness’ in
prices which rise more slowly when global
prices rise but also fall more slowly when world
prices decline.
The survey concludes that ,” it is evident that
there is a disconnect with the aim of achieving
self-sufficiency and the role of price controls,
both at a retail level, with the use of MRPs,
and at a farm gate level. The removal of the
MRP would allow for a higher level of healthy
competition among both importers and local
dairy manufacturers, allowing market forces to
decide prices”.
The full survey is available in Part II of this
report.
An op-ed by Ravi Ratnsabapathy in the
Appendix 01 to this report examines some
of the absurdities with controls in the dairy
sector.
ii Price Controls on Cement
The survey highlights the following:
1. Cement is an important component of
construction cost, forming about 22% of
residential building cost.
2. There are two major local manufacturers
and competition is constrained by a
Government policy that restricts the
number of plants (to one per port).
3. The role of the industry in setting the
controlled prices. Local manufacturers
make periodic applications for revisions in
prices, depending on their input costs.
4. The report concludes that some degree
of prices control, albeit a more flexible
arrangement than the present, may be
desirable due to the oligopolistic nature of
the market.
The full survey is available in Part II of this
report.
This survey was restricted only to cement
but an op-ed by Ravi Ratnasabapthy
(Appendix 2) examines the wider issue of
overall construction costs – cement makes
up only 22% of construction costs. While
price controls apply to cement, policy on
other construction materials actually raise
costs leading to higher overall construction
costs. The op-ed, which highlights some
aspects of the muddled policies on
construction is available in the appendix to
this report.
iii Price Controls On Pharmaceuticals
The survey highlights the following
1. Although price controls on
pharmaceuticals has been discussed since
the 1970’s their actual imposition was only
relatively recently – in October 2016.
2. Price controls were imposed on only
48 drugs for common diseases such
as diabetes, heart disease, high blood
pressure, high cholesterol, and others.

36PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
3. They were imposed on drugs that
command a 2% or more market share
(by volume), and based the median price
prevailing in the market at the time.
4. The price controls were viewed more
positively by local manufacturers of
pharmaceuticals who expected to benefit
from lower competition from imports. The
importers viewed the policy negatively.
5. The report does not reach a firm
conclusion either positive or negative on
the controls, which may be understandable
given their recent imposition and the lack
of time for serious issues to manifest.
The full survey is available in Part II of this
report.

37PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
– 4 –
SOME OVERLOOKED
COSTS OF
PRICE CONTROLS

38PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

39PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
4 SOME OVERLOOKED COSTS OF
PRICE CONTROLS
How price controls negatively interfere with the
market system
First published by the Institute of Economic
Affairs. Excerpt from “Flaws and Ceilings: Price
Controls and the damage they cause.”
In addition to the direct and observable effects
of price controls – shortages and surpluses –
there is also a series of subsequent, indirect
costs which emerge. Perhaps the best source for
understanding these overlooked costs is to look to
those who were directly involved in designing and
implementing past controls. One such individual,
G. Jackson Grayson Jr, served as the chairman
of the Price Commission in the United States
under President Nixon from 1971 to 1973. In this
role Grayson was responsible for overseeing the
implementation and enforcement of Nixon’s price
controls. After leaving his post, Grayson (1974)
wrote: ‘[a]s a result of my sixteen months as
price controller, I can list seven ways that controls
interfere (negatively) with the market system
and hasten its metamorphosis into a centralized
economy’. Grayson’s list can be paraphrased and
summarised as follows.
(i) Price controls distort economic activity
Price controls distort the allocation of
resources both directly and indirectly. As
discussed in the previous section, the direct
effect is to create persistent shortages or
surpluses while reducing the number of
mutually beneficial exchanges that would
have otherwise occurred in the absence of
controls. But the implementation of price
controls leads to a series of subsequent,
indirect distortions as well, as people respond
rationally to the immediate and direct effects
of the controls.
In the absence of the ability to use prices to
ration scarce goods, alternative mechanisms
emerge. For example, shortages lead to
queues resulting from excess demand for the
good or service in question. This dynamic was
evident in the centrally planned economies
of Eastern Europe as well as in the US in the
1970s when the government-imposed price
controls on petrol. Long queues tend to lead
to subsequent government interventions
with rationing schemes. For example, the US
government reacted to long queues for petrol
by limiting consumer purchases of petrol to
every second day.
The emergence of crime and black markets
are another indirect negative effect of price
controls. Unable to adjust prices legally,
producers and buyers may move into the
extralegal market to engage in exchange.
Others, desperate to obtain goods for which
there is a shortage, may engage in theft to
obtain goods. To provide one illustration of
black market activities, consider the case
of farmers in the UK in World War II. Facing
wartime meat rationing, many farmers under-
reported animal births to the Ministry of Food
and then sold the additional meat in the black
market.
Yet another indirect effect of price controls
is evasion, which can take on a variety of
forms. For example, facing a price ceiling,
sellers may charge additional fees or tie-ins
to compensate for the fact that prices are
required to be artificially low. There is also
likely to be deterioration in the quality of
the product or service. This may include the
substitution of low-quality for high-quality
ingredients in the production of a good or, in
the case of rent controls, maintenance and
investment not being carried out and poor-
quality conditions being allowed to develop in
accommodation.
Finally, a legal mandate on prices lowers
the cost of buyers and sellers using non-
monetary criteria (e.g. race, gender, religion,
etc.) to allocate resources. Price floors will
allow buyers to indulge their non-monetary
preferences while price ceilings will allow
sellers to do so. Consider an example of each
to illustrate this. A minimum wage, which is a
price floor, will create an excess supply – i.e.
a surplus – of potential employees willing to
work at the legally mandated wage. In this
case employers, the buyers of labour, can
indulge their non-monetary preferences in
deciding who to hire. For example, they may
decide to discriminate against a certain

40PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
group or type of person in making their hiring
decisions. Due to the price control, they are
able to indulge these preferences precisely
because there is a surplus of potential
employees from which to choose.
Now consider the case of a rent control: a
price ceiling. In this case there will be an
excess demand – i.e. a shortage – for flats,
which means that sellers can indulge their
non-monetary preferences in choosing among
potential tenants. Precisely because the price
control creates an excess demand, landlords
can discriminate and indulge their preferences
without suffering a monetary cost for doing so.
Turning away certain potential tenants based
on non-monetary characteristics does not hurt
the landlord because other potential tenants
remain due to the artificially low price.
(ii) Price controls mask real changes to
economic fundamentals
Price controls are often implemented with the
goal of fighting inflation. But this, incorrectly,
assumes that all wage-price increases are the
result of inflation. In an unhampered market
economy, there are constant, genuine changes
to supply and demand conditions that will
often lead to real price increases and relative
price increases. The existence of price controls
distorts the ability of the price mechanism
to communicate this information by treating
all price changes as if they are the result of
inflation. The result is that scarce resources
will not be reallocated to meet changes in the
real, underlying economic conditions. Thus,
due to persistent resource misallocations,
standards of living will suffer.
(iii) During a period of price controls, the role of
profit is neglected, if not entirely ignored
Initial calls for price controls – whether
from the public or from policymakers – are
often justified on the grounds of profits
for certain industries being ‘too high’. By
implementing price controls, the logic follows,
the government can limit profits while passing
savings on to consumers. The implementation
of controls reinforces the, incorrect,
sentiment that profits come at the expense
of consumers as opposed to the actual
reality that profits flow from the successful
satisfaction of consumer wants.
Moreover, the implementation of controls
discourages long-term investments due to
the artificially low prices and a weakened
profit motive. We noted above how quality
deterioration under price controls will
affect customers in the short term as
producers respond to the implementation
of controls. However, this is only part of
the story, as quality deterioration will also
affect consumers over the long term. In the
face of price controls, suppliers will have a
disincentive to invest in either expanding
production or improving the quality of the
controlled good in future periods. Indeed,
the full impact of price controls may not
be felt for many years and then become
disconnected in the minds of policymakers
from the original policy, so that there is little
political pressure to reverse the controls. In
general, supply is more elastic in the long
than in the short run. An energy price control,
for example, may lead to a relatively small
reduction in supply immediately because
the short-run marginal cost of production
of energy may be lower than the controlled
price. However, the long-run marginal cost
will be higher than the short-run marginal
cost because the continued production of
energy involves investment in new plant and
equipment. That new investment might not
be forthcoming in the controlled market. This
is also problematic precisely because new
investment would lower the price of energy
in the future, the very end that proponents of
price controls claim that they are seeking.
Thus, during control periods, the role of
profits in rewarding producers for supplying
a good that consumers value is weakened
if not altogether removed. This discourages
increased future production, which only
exacerbates the initial perceived problem of
‘too little’ supply at ‘too high’ a price.

41PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Lack of profits and quality in the agricultural sector
The Farmer
My name is Sumasiri Walisingha and I live in Saliyapura (off Anuradhapura in the North
Central Province). I hail from a family of farmers with over 25 years of experience in farming
in this district. All my siblings have become farmers, and at present, we collectively farm a
total of 16 acres of paddy land.
There are no restrictions on us for the farming lands by the government, but the government
provides fertilizer subsidies for only 5 acres. Therefore, most of the farmers are limited to
less than 10 acres of farming.
We used to cultivate different types of vegetables such as snake gourd, okra, and plantains
during the seasons in which we could not cultivate paddy, owing to the weather conditions.
The rough cost of farming paddy per acre is approximately Rs.6000. Our produce is bought
by a middleman who constantly negotiates with us. They hold all power and we are helpless.
If they don’t buy from us, we have nowhere else to sell.
They negotiate with us stating the government price control on one side, and on the other
hand they claim that they have bought rice from other farmers at a particular price. Because
of these negotiation tactics, we are unable to obtain a fair price for our produce. Sometimes
we have to sell our goods with a Rs.1 or Rs.2 margin.
Even though the government announced that they will a provide a good price for farmers,
we know how difficult it is to sell our goods to the government; the process is not smooth
and systematic. We have to pay for the transport to carry our goods to the government
stores and wait in long queues. Sometimes we have to return without even having sold our
goods.
Rice farming is no longer a popular vocation. The youth strongly dislike being farmers as
they have better employment opportunities elsewhere. Furthermore, they know that we do
not get a fair price that aligns with the effort and the time we invest. As a result, finding
labour becomes a tough task for us during the cultivation periods. Currently we have to pay
approximately Rs,1,200 per day (excluding food) to hire labour.
Despite the effort we take to cultivate paddy, in having to spend approximately 80% of our
cost on labour and on the purchase of seed paddy, the return on our investment is very low.
Sometimes we have to get loans to settle labour chargers. At times we make only Rs.500/-
per acre.
As mentioned previously, the middleman also has the tendency to squeeze our margins,
and as a result this becomes a one-sided relationship.
In my opinion, trying to control the price of rice does not have a practical application.
Even though price control is in effect, there is no reasonable price at which the goods are
purchased from the farmers. It is important to look at setting a fair price when purchasing
from farmers, as well as to oversee the quality of rice being imported.
An investment with low returns – a case study on farmers.

42PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The Rice Importer
I have more than 35 years of experience in being an importer. Our head office and stores are
located in the Fort Market. We mainly import rice, dhal, chickpeas, green gram, and spices.
We import rice from India, Pakistan, and Myanmar; on average 400,000 kgs.
Unlike other products, rice can only be imported when the local production cannot meet
market requirement. Currently the government allows the import of rice, having taken into
consideration the current weather conditions and subsequent low local production.
Even though the government introduced the price control, they never did reduce our taxes.
We have to bear the cost irrespective of the price control. Unfortunately, the government
controls the selling price without having conducted any investigation into costs.
Price control results in the entrance of low-quality products into the market. Consum-
ers cannot recognize these low-quality goods because of their physical similarity with
good-quality products. Well established importers do not import low-quality products, but
there are low-quality goods plentifully available in the market.
We cannot import good-quality products and sell according to the controlled price. There-
fore, we refrain from importing goods that are price controlled. We have to change our
import portfolio according to the price control mechanism. No one knows which product will
face this price control tomorrow.
Currently, government regulators only inspect prices, and not the product quality. In my
opinion, the government should introduce quality checks for the different products and
enforce these controls and inspections regularly. These should be carried out at the port
itself, before the goods are offloaded
Price control is not a mechanism which reflects the market reality, and it is not at all a prac-
tical way of bringing relief to consumers. The price should be automatically decided by the
market according to the product quality and market demand.
A precedent for quality deterioration – a case study on rice importers.
(iv) Price controls replace market competition
with political competition
The implementation of price controls does
not change the fundamental nature of the
economic problem. Decisions still need to
be made about how to best allocate scarce
resources among an array of feasible
alternatives. In the absence of price controls,
these decisions are made through the market
process, which relies on true market prices
reflecting the relative scarcity of resources.
However, with the implementation of controls,
the market process is distorted and political
competition, at least partly, replaces market
competition. Efforts are shifted from pleasing
private consumers to attempting to influence
the political process, which ultimately
determines how controls are implemented
and enforced. The result is that price controls
attract an array of political interests who seek
to use controls for their own narrow pursuits
at the expense of the broader interests of
private consumers. As Grayson (1974) writes,

43PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
‘wage-price controls provide a convenient
stone for those who have economic and
political axes to grind, particularly those
interested in promoting a centralized
economic system’.
(v) Price controls normalise attitudes of
reliance on government
Price controls threaten the dynamism
of markets, which rely on profit and loss
to operate effectively. In the absence of
controls, those in business must weigh the
perceived risk and reward of alternative
courses of action. Misjudgement by
entrepreneurs results in losses and, at the
extreme, bankruptcy. However, price controls
change the decision-making calculus of
entrepreneurs. Instead of having to weigh
the true costs and benefits of their actions,
entrepreneurs come to see government
regulators as a potential source of economic
security that can insulate them from
the often-harsh realities of competitive
markets. The result is that ‘[t]he controlled
become dependent on the controllers and
want regulations continued in preference
to the competition of the dynamic market’
(Grayson 1974: 12). The cumulative effect
is the replacement of profit and loss as the
mechanism for determining winners and
losers with an increasing reliance on political
authorities for protection from the realities
of consumer- driven market competition.
Thus, the voices of private consumers are
weakened as is the incentive for businesses
to make consumer satisfaction a priority.
(vi) Price controls generate regime uncertainty
The implementation of price controls gives
regulators the power to shape economic
outcomes. In the unhampered market,
businesspeople must attempt to forecast
accurately the wants of consumers. Price
controls add another element of uncertainty
into the process. Now businesspeople must
not only anticipate what their customers want
but also forecast how regulators will act. This
creates ‘regime uncertainty’, which refers
to ambiguity surrounding the protection
of property and the stability of rules and
regulations in the future (see Higgs 1997). If
businesspeople are uncertain about future
regulations and controls, their ability to
plan and forecast is hampered, which raises
the cost of planning and investing. Further,
entrepreneurs must shift at least part of
their focus to attempting to anticipate what
regulators will do in the future. This shift
comes at the expense of private consumers
who would otherwise be the main focus of
for-profit business.
(vii) Price controls mask the true causes of
economic problems
Price controls are typically framed as a
response to some supposed market failure.
In this scenario, government regulators
are seen as the quick-fix solution to
perceived problems inherent in markets,
which are often, incorrectly, blamed on
such things as ‘speculation’ and ‘hoarding’.
This overly simplified framing masks the
true underlying cause of economic ills.
In an environment of high inflation, for
example, calls for government-imposed
price controls completely neglect the role
of monetary policy as a fundamental cause
of inflation. In the case of wage controls, a
minimum wage may raise the pay for some
individuals while leaving other individuals
unemployed. The policy may well, in effect,
be masking the effects of low productivity
caused, for example, by defective education
policy. The low levels of productivity will
manifest themselves in the form of higher
unemployment rather than in the form of
lower wages. The ultimate result is that price
controls mislead private citizens regarding
both the fundamental causes of perceived
economic problems and the solutions to
address those problems.

44PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The Hopper Seller
My name is Kumari Priyadharshini. I have been involved in this business for over 10 years. All
the family members help out and are involved in this business. We mainly sell rice, kotthu,
hoppers, and string hoppers. Our target is to sell 250 hoppers a day.
I have to allocate parts of the net income amongst all members involved in this business.
The average income for one person is around Rs.40,000 a month.
Finding labour to work for long shifts is difficult and very costly. As a result, the family has to
get involved in running a business like this in order to compensate for the labour shortage.
Everyone assumes that we make a good profit by selling hoppers. But the hoppers are not
the main income generator. Hoppers are just a fancy food (‘visithurubandayak’) item which
is a crowd-puller. Our main income is actually generated from regular rice and curry, fried
rice, and kotthu.
We make the hopper mixture for this quantity; whether the hoppers sell or not we make 250
hoppers a day, as we pay the hopper-maker a daily fee of Rs.1,500/-.
It is hard to determine the price of a food item because of rising prices of key ingredients.
Everything is expensive, from vegetables and rice, to flour and coconuts. Our overall profit
has reduced over the past few years due to the increase in prices of food items and ingre-
dients.
After the price control was imposed, we sold hoppers for Rs.10/- for about two months
and eventually stopped selling hoppers because it was not at all profitable. Thereafter we
recommenced our hopper sales at Rs.15/-.
In this area, none of the hopper shops follow the controlled price for more than two months
because of the cost of production. It is not profitable to sell hoppers at the controlled price.
Furthermore, the regulators do not come and conduct price audits at the hopper shops.
Customers are not too concerned about the price of hoppers. Rather, they want to be en-
sured of quality and taste, and do not mind paying a higher price for good quality and tasty
food. We have regular customers who visit our shop because of the quality of the food.
In my opinion, hoppers are not a staple food item where there is a major impact on consum-
er purchase power. As I mentioned before, what matters to them most is the quality and the
taste. Regular quality checks are more important than price control.
We strongly feel that the controlling of prices of food items such as hoppers is purely a
government propaganda versus addressing the real needs of the consumer. If this was an
actual need of the consumer, there would be a more stringent implementation process.
These policies are brought in just to obtain the votes.
Price controls on hoppers and tea : A violation of economic freedom
An economically futile pricing regulation: a case study on hopper sales

45PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The Tea Seller
I have been running this shop for over 15 years. It started on a small scale with only one
worker, and today we are a medium-sized tea shop. We mainly sell tea and a range of bakery
items, rice, carbonated beverages, and pastries. We sell around 150 to 200 plain tea and
milk tea cups per day. We also sell branded tea as there has been an increase in demand.
To plain tea we usually add ginger to make the tea suit the local palette. Customers are not
satisfied without ginger in their plain tea.
The cost of one cup of plain tea is around Rs.12/- to Rs.15/-, and Rs.30/- to Rs.35/- for a
cup of milk tea. Therefore, we sell plain tea for Rs.20/- and milk tea for Rs.40/-. Considering
this cost, it is not practical to sell tea according to the controlled price.
In addition to plain tea and milk tea, customers also ask for malted drinks like Nestomalt
and Horlicks; and these we sell at a much higher price. Therefore, the price of a cup of tea
is not a big issue for customers.
Now most customers ask for branded teas like ‘Nestea’ (Nestle tea), which is selling at Rs.
40/-. They now look for quality and hygiene when it comes to food and beverages. We sell
the branded as well as the regular handmade teas at the same price.
We stopped selling tea for few weeks after the price control was imposed. After about a
month, things returned to normalcy, where no one bothered or questioned about the price
of tea. We recommenced sales at the usual price.
It is hard to decide on the price of food and beverages because of the rising costs of sugar,
flour, vegetables, and other ingredients. We have our fixed costs, like the rent of our shop,
electricity, water, wages of employees, etc. This severely affects our margins.
Customers visit our shop looking for the quality and taste of tea that we offer. It is trust
and meeting the expectations of the customer that are the most important aspects. In my
opinion, price control is not needed for a product like tea. Consumers are not concerned
about price as much as they care about the quality and taste of the tea.
A case study of tea sales

46PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Conclusion
It is not hard to see why price controls are
appealing. They offer what appears to be a quick
and simple solution to rising prices and allow
policymakers to provide short-term benefits to
certain groups of people. It is true, by definition,
that price controls will either raise (in the case
of a price floor) or lower (in the case of a price
ceiling) the price of the good or service in
question. Further, it is true that not all people are
made worse off by the implementation of price
controls. Under a price floor, those who receive
a higher price for their good or service than they
would have in the absence of the control are made
better off. Likewise, under a price ceiling, those
who pay a lower price for a good or service than
they otherwise would have are made better off.
Economics, however, indicates that price controls
are far from costless, and the associated costs
are far reaching and potentially significant.
As we have emphasised, there are both direct
and indirect costs to price control policies. While
some of these costs are seen (such as a shortage
or surplus), many are unseen: for example,
long-term investments that would have taken
place in the absence of controls may no longer
take place because investors fear they will not
be able to make an adequate return on their
investment. When one appreciates the complexity
of the market system, it becomes evident that
understanding the full consequences of a price
control is very difficult. What is clear is that price
controls set in motion a series of unintended
consequences as producers and consumers
respond to the new incentives created by the
introduction of controls. More often than not,
these unintended consequences exacerbate the
very problem that proponents of controls claim to
correct.
The logic of the seen and unseen also helps to
explain why, given the costs associated with
price controls, they continue to remain popular
among politicians and much of the public. Price
controls are readily observable – i.e. seen – in
that the public can readily observe the legally
mandated price set by government. Given the
difficulty of understanding and tracing the unseen
consequences discussed throughout this chapter,
it appears to many that these controls are pure
benefit with little to no cost. But the economic
way of thinking indicates this is wrongheaded.
As Thomas Sowell (2007) writes, ‘[e]conomists
have long been saying that there is no free lunch
but politicians get elected by promising free
lunches. Controlling prices creates the illusion of
free lunches.’ Furthermore, price controls are a
low-cost method for politicians to reward interest
groups for their support at the ballot box. For
example, in some countries, advocating higher
minimum wage laws is a well-known method for
politicians to reward unions for supporting their
election efforts.
If the goal of policymakers is to improve
standards of living, policy must focus on
incentivising improved quality and availability.
This is accomplished by creating an environment
conducive to economic freedom and contestable
markets where entrepreneurs can experiment
and subject their conjectures to the market test.
Price controls undermine economic freedom
and, therefore, must be dismissed as a means
for improving standards of living. The reality is
that price controls harm the well-being of many
while providing political gains to the few. Until the
economics of price controls is appreciated, legally
mandated prices will remain a viable policy option
despite their historical failure and the significant
costs that they impose on the average citizen, who
suffers under such policies.
References
Grayson, C. J. (1974) Controls are not the answer.
Challenge, November– December.
Higgs, R. (1997) Regime uncertainty: why
the Great Depression lasted so long and why
prosperity resumed after the war. Independent
Review 1(4): 561–90.
Sowell, T. (2007) Pricing 101. National Review
Online, 21 February.http://www.nationalreview.
com/article/220039/pricing-101-thomas -sowell
(accessed 10 March 2015).

47PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
– 5 –
Public perception

48PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE

49PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Survey by Breakthrough Business Intelligence
Despite the many claims that government
makes on how these price controls are going to
benefit all parties engaging in the day-to-day
trade of essentials, the reality of the situation
can be completely different. This is exactly why
perceptions by those engaging in the trade
becomes an essential indicator. It will help gauge
what they think about the price controls imposed
and how effectively their lives have improved as
a result of these price controls imposed by the
government, which will either validate, or disprove
the flowery claims that the government makes.
In order to ascertain the impact of price controls
on the market, a survey with traders was carried
out by Breakthrough Business Intelligence
during May – August 2017. This survey covered
5 Public perception
Chart 01: Responder profile
the geographies of Colombo, Gampaha and
Anuradhapura with the aim of capturing trader
nuances in cosmopolitan markets as well as in the
heart of the paddy farming community.
The survey consisted of mixed methodologies of
both qualitative and quantitative data capturing
methods. The qualitative survey consisted 18 one
to one, in-depth interviews carried out with key
trade segments and value chain partners who
are affected by price controls; namely importers,
wholesalers, retailer, tea and hopper shops, bakers
and the farmers.
The quantitative survey consisted of a sample
of n= 182 respondents as per the following
breakdown
8%
18%
16%
7%
18%
33%
Importer
Wholesale
SME (retail)
Tea shop
Hopper shop
Farmer
How long have you been currently involved in this business? Total
Less than 3 years 3-6 years Over 6 years
Importer 0% 50% 50% 100%
Wholesale 21% 12% 67% 100%
SME (retail) 34% 21% 45% 100%
Tea shop 83% 0% 17% 100%
Hopper shop 45% 6% 48% 100%
Farmer 0% 20% 80% 100%
Total 25% 15% 60% 100%

50PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
A brief introduction of the respondent profile is
given below
a) Importers – The entrepreneurs involved
in importing the products to the country,
as well as those involved in wholesale
dealing and distribution of the products
across the country
b) Small entrepreneurs – The entrepreneurs
carrying out the small operations in order
to supply the price-controlled products to
the markets or to the larger companies
who process the food products. This
sample included the tea, hopper and
bakery shop owners
c) Farmers – The larger audience across
the country involved in growing most of
the price-controlled products, and who
are most affected by the price control
regulations
d) Wholesalers – The entrepreneurs that sell
large quantities of products to retailers
and small entrepreneurs. Wholesalers
mainly received products from importers
and from the middle man who take goods
from producers (eg: farmers)
e) Retailers – The entrepreneurs who
operate in small and medium scale,
that directly supply goods for the end
customers
The sample constituted a total of 182
respondents; including 25 importers, 30
wholesalers, 29 retail shops, 38 tea and hopper
shops, and 60 farmers. The sampling method used
for this report was random sampling, in order to
ensure the most reliable results that accurately
represent the real-world scenario.
The survey respondents were recruited using
the sampling methods of judgemental and
convenience based methodologies for the
qualitative phase. The identified respondents were
screened for their eligibility to take part in the
survey and their ability to articulate the impact of
price controls.
The respondents of the quantitative survey were
recruited based on multiple sampling methods as
detailed below;
a) Importers – Non random sampling
method of snowball sampling
b) Small entrepreneurs – Random sampling
c) Farmers – Random sampling
d) Wholesalers – Non random sampling
method of snowball and judgemental
sampling
e) Retailers – Random sampling
The qualitative interviews were carried out through
a semi structured interview, conducted by an
experienced moderator. Each interview was carried
out for a minimum duration of 45 minutes.
Post screening the respondents for their eligibility
based on predetermined criterion based on
the definitions highlighted above, the qualifying
respondents were invited to participate in the
survey.
The quantitative survey was carried out through
face to face interviews which were carried out by
trained enumerators. The respondents were once
again screened for their eligibility to take part in
the survey.
Each interview was carried out for an approximate
duration of 45 minutes. The research tools i.e.
survey questionnaires were designed based on the
qualitative feedback received and were translated
to the local languages and back translated to
English to ensure accuracy and usage of correct
lingo.
What are price controls? When were they
imposed?
One major concern our society has to face is the
asymmetry of information; which leads to citizens
not gaining an adequate understanding of the
policies passed by the government they have to
abide by. This truth also applies to price controls.
The need to question the target audiences on
their understanding of price control was owing
to discovery made during the qualitative phase.

51PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Some of the value chain patterns interviewed
during the qualitative phase exhibited a degree
of confusion between the maximum retail price
(MRP) and the price ceiling enforced by the
government. Hence, it was deemed important
to quantify the understanding of the value chain
partners had, on a law which affected them.
It is noteworthy that when most respondents
across all segments surveyed were asked to define
the concept of price control, there were mixed
opinions. In order to ascertain the impact and the
practicality of the application of price controls,
the respondents who were not able to articulate
correctly the definition of the concept were
explained what price controls meant.
Wholesalers
Interestingly, 2/3rd the wholesaler segment were
able to correctly define the term as they were
constantly subject to checks and scrutiny by the
government officials to evaluate their degree of
compliance.
Chart 02: What do you understand by the term
‘price controls’ imposed by the government?
Price controls have been introduced to various
product categories over a few years. This has
resulted in a certain degree of confusion amongst
the wholesalers as to when exactly the price
controls have been in effect.
This in turn questions the degree of compliance
as they were unable to correctly specify when
the price controls were imposed. Once again it is
interesting to note the varied responses provided
by the wholesalers in answering this questions,
reflecting the confusion which may exist as a
result of revisions of price controls and changes in
taxes.
Graph 01: When did the government introduce
price controls on the products you sell?
Retailers
Clear levels of awareness exist with regard to the
subject
Similar to the results seen amongst the
wholesaler segment, understanding of the
retailers with regard to the concept of price
controls was lacking. The survey results indicate
that only 52% of the sample were able to correctly
define the meaning of the term price controls.
The inability to clearly differentiate between the
terms of MRP and price controls could be owing to
government authorities checking the retailers for
two aspects of compliance.
One hand they are subject to scrutiny with regard
to their adherence to the imposed price controls
whilst on the other hand, they are also subject
to checks with regard the retailers correctly and
visibly displaying the maximum retail price at
3%
38%
28%
22%
9%
Over 10 years
Before 2 years
Before 1 ½ years
Before 1 year
Within this year
Government mandated legal
goods
Maximum retail price (MRP) of
products
No proper idea
70%
18%
12%

52PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
which products can be sold at. It was stated that
non adherence to both these regulations resulted
in a penalty being imposed on retailers.
Chart 03: What do you understand by the term
‘price controls’ imposed by the government?
Graph 02: When did the government introduce
price controls on the products you sell?
Tea & Hopper shops
Although a little more than half the sample were
able to define the meaning of the term price
controls, 1/5th of the sample had no proper idea of
the term. Whilst a majority seem to be clear with
regard to the floor price, the degree of confusion
continued with this segment owing to similar
reasons as retailers. The penalties imposed owing
to lack of adherence to MRP and non-display
of price boards seems to be contributing to the
degree of confusion which prevails in the market.
Chart 04: What do you understand by the term
‘price controls’ imposed by the government?
According to most retailers, it can be agreed that
price controls have been imposed more than 2
years ago.
Once again there was a degree of confusion
which prevailed as to when the price controls
were in place.Needless to say, the lack a clear
understanding of the concept resulted in the
period in which it was being imposed being
associated with different periods of time.
Go
Go
ve
ve
rn
rn
ment m
ment m
an
an
date
date
d
d
lega
lega
l
l
good
good
s
s
Ma
Ma
ximu
ximu
m retail price (
m retail price (
MR
MR
P)
P)
o
o
f
f
prod
prod
ucts
ucts
No
No
p
p
ro
ro
p
p
er ide
er ide
a
a
10%
38% 52%
53%
28%
20%
66%
7%
17%
10%
Before 2 years
Before 1 ½ years
Before 1 year
Within this year

53PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 03: When did the government introduce
price controls on the products you sell?
Importers
Data suggests that there is a lack of
comprehension among the majority of importers,
exhibiting similar trends to other segments,
in defining and comprehending the term price
controls.
Similar trends exits with regard to the period in
which it was imposed
Chart 05: What do you understand by the term
‘price controls’ imposed by the government?
There appears to be divided responses as to when
the latest price control was imposed.
Graph 04: When did the government introduce
price controls on the products you sell?
Farmers
Majority of the farmers affected by the
government imposed price control where
middle man or the mill owner starts to bargain
their goods. Their knowledge is based on the
information that brings to the village by the middle
man or the mill owner.
Chart 06: What do you understand by the term
‘price controls’ imposed by the government?
Government mandated legal
goods
Maximum retail price (MRP) of
products
No proper idea
Government mandated legal
goods
Maximum retail price (MRP) of
products
No proper idea
6%
50%
18%
20%
6%
Announced every year,
but not continouing
Before 2 years
Before 1 ½ years
Before 1 year
Within this year
40%
47%
7%
7%
Before 2 years
Before 1 ½ years
Before 1 year
Within this year
47%
13%
40%
52%
7%
42%

54PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
This segment appears to have no clear idea with
regards to the time period of the recent imposition
Lack of knowledge and the awareness may leads
towards to the confusion on the time period that
government imposed price control.
Graph 05: When did the government introduce
price controls on the products you sell?
Who benefits from price controls?
This section includes the views of stakeholders
on who are the beneficiaries of price controls. The
respondents were asked to name all beneficiaries
(multiples answers) on whom they perceive to be
benefitting from the imposed price controls.
Wholesalers & Retailers
Graph 06: In your opinion who is benefitting from
government imposed price control?
58% of whole sellers believe that the government
is benefitting by price controls, and another
6% is of the opinion that no one benefits. It is
noteworthy, that the traders perceived government
to be the beneficiary of price controls perceived it
to be more of election propaganda as opposed to
a measure which benefits the customers.
Overall, price controls are viewed to be a
burdensome regulation by the government by
more than half of the sample
Tea & Hopper shops
Graph 07: In your opinion who is benefitting from
government imposed price control?
However, an overwhelming 60% of tea and hopper
salesmen surveyed believed that customers stand
to benefit the most from price controls.
37%
32%
5%
20%
5%
Announced every year,
but not continouing
Before 2 years
Before 1 ½ years
Before 1 year
Within this year
21%
6%
14%
55%
14%
0% 0%
58%
24%
18%
0% 3%
9%
60%
9%
0% 0%
22%

55PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Importers
Graph 08: In your opinion who is benefitting from
government imposed price control?
Similar sentiments to the tea and hopper segment
were expressed by the importers with regard
to stating the beneficiaries of price controls.
A majority of the sampled importers stated
that the customers’ benefits whist 40% stated
the government. The government was seen as
imposing price controls to gain voters confidence
as opposed to looking at the best interest of
consumers or traders.
Importers are of the belief that customers stand
to gain most, followed by the government.
Farmers
Graph 09: In your opinion who is benefitting from
government imposed price control?
beneficiaries of price controls. A little over 2/3rd
of the sample perceived that customers were the
clear beneficiary. It is also noteworthy; they don’t
view themselves as one of the beneficiaries.
Notice that the stakeholders closer to the point of
buying are the ones who believe that the people
they are selling to benefit the most. Closer to the
point of buying is where the control price will have
its impact the most. Wholesalers on the other
hand, believe that the government benefits; they
are further away from the point of sale.
The experience of dealing with the government
Since the government passed these laws and
are keen on enforcing them, this part of the
study looked into whether the government has
been able to treat everyone equally. Once again,
despite the claims the government may make, the
respondents are in the best position to testify to
these claims.
A general sense of reluctance was witnessed in
answering this question as the enumerators were
perceived as undercover agents of the government
who was looking prosecuting the traders.
Wholesalers
Graph 10: How often do government authorities
audit/ visit to audit price controls?
The survey revealed that wholesalers have been
heavily targeted by government authorities. The
data suggests that authorities make frequent
visits to audit the controlled prices and the price
displays. A majority of the sampled stated that the
audits took place ranging from daily checks to one
in every two to three months.
It is interesting to note that the farmers
were most single minded in stating the key
40%
53%
0% 0% 0%
13%
0%
72%
38%
0% 0% 0%
28%
16%
9%
25%
13%
3%
0%
3% 3%
Daily Weekly Once a
fortnight Monthly Once in
every 2 -3
months
Twice a
year Annually Never
come to
check
Hardly
come to
check

56PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Retailers
Graph 11: How often do government authorities
audit/ visit to audit price controls?
Government authorities regularly visit over 60% of
the retailers sampled. According to the retailers,
government authorities visit at least every quarter
to audit the control prices and the updated price
displays.
Tea & Hopper shops
Graph 12: How often do government authorities
audit/ visit to audit price controls?
Despite price controls being imposed, it is
extremely interestingly to note that tea and
hopper shops were hardly audited. This is a
clear indication of how inconsequential the price
controls are on this segment as customers are
driven by the quality of what’s offered versus the
price of the consumable.
Importers
Graph 12: How often do government authorities
audit/ visit to audit price controls?
Polarising responses can be observed as
importers are not heavily targeted.
The government has largely implemented a
successful monitoring system which audits the
wholesalers and retailers. However, with tea shops
and hopper shops, there is no evidence that the
government conducts regularly audits. This could
be perhaps owing to this industry operating in the
domain of micro enterprises, scattered across a
large geography and in turn the lack of practicality
of conducting audits. There is a direct positive
correlation between how often the government
checks up on these stakeholders, and the chances
of them being fined.
It is important to note that farmers sell their
produce to the middlemen who use the price
controls to their advantage. Intense bargaining
takes place between farmers and middlemen;
often the buyers stating that they need to sell
rice based on the floor prices. Often the farmers
are unable to stand against the heavy bargaining
power of the buyer and supply their paddy at
prices dictated by the middlemen and / or mill
owners.
The price at which the farmers sell their paddy
does not come under scrutiny of audit process
of the government authorities as their interest
lies with the end price at which the consumers
purchase a kilo of rice. The price audits hence
takes place with the retailers.
0% 0% 0%
10%
52%
7% 7%
17%
7%
0% 0% 3%
8%
20%
15%
7% 7%
40%
Daily Weekly Once a
fortnight Monthly Once in
every 2 -3
months
Twice a
year Annually Never
come to
check
Hardly
come to
check
Daily Weekly Once a
fortnight Monthly Once in
every 2 -3
months
Twice a
year Annually Never
come to
check
Hardly
come to
check
Daily Weekly Once a
fortnight Monthly Once in
every 2 -3
months
Twice a
year Annually Never
come to
check
Hardly
come to
check
0%
7%
33%
7%
0%
7%
0%
40%
7%

57PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 13: Current steps and future actions in response to price controls in a snapshot
In response to the controlling of prices, retailers
tend to adjust prices temporarily since price
controls are mainly applicable at a detailed level.
Importers simply source cheaper goods where it
can be sold to the retailers at an affordable rate
for them to sell back.
The closer you are to the point of sale, the more
likely you are to temporarily change prices, pay a
fine, and then continue with the current market
price. The data clearly indicates the vicious cycle
of price controls. Importers bring down poor
quality products, and retailers temporarily adjust
prices or sell it at the price that they can afford to
sell. Consumers just have to live with poor quality
products even due to market distortions by the
price controls. If prices are kept free, and if certain
products are increased, people will consider
substitutes.
Wholesalers
Graph 14: What steps are you currently taking in
order to adhere to the government imposed price
controls?
A little more than one-third of the market was
looking at cheaper means of sourcing. Only a
minority is looking at innovation.
4%
7%
11%
32%
46%
Stop selling goods that
imposed price control
Source for low quality,
cheaper products
Temporarily adjust
the selling price

58PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 15: What future actions do you hope to take if exposed for not having adhered to imposed price
controls?
Given the insignificant penalty, they prefer to continue with business as usual. However, increasing the
penalty will cause complete stoppage of selling the specific product.
Retailers
Graph 16: What steps are you currently taking in order to adhere to the government imposed price
controls?
Retailers claim that they are likely to fall in line. The socially desirable response is clearly stated.
0%
7%
17%
34%
42%
Stop selling goods
4%
4%
7%
19%
67%
Stop selling goods that imposed
price control
Source for low quality,
cheaper products
Temporarily adjust the
selling price

59PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 17: What future actions do you hope to take if exposed for not having adhered to government
imposed price controls?
The actual behaviour is reflected here. Once again business will resume as usual.
Tea & Hopper shops
Graph 18: What steps are you currently taking in order to adhere to the government imposed price
controls?
A temporary price adjustment is opted for by this segment.
Graph 19: In order to adhere by price control, what are the innovative actions that you take?
0%
3%
14%
21%
62%
Stop selling goods
0%
15%
28%
57%
Stop selling goods that imposed
price control
Source for low quality, cheaper products
Temporarily adjust the selling price

60PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 20: What future actions do you hope to take if exposed for not having adhered to government
imposed price controls?
A clear indicator that price controls won’t work for this segment of retailers and small businesses.
Importers
Graph 21: What steps are you currently taking in order to adhere to the government imposed price
controls?
Cheaper products entering the market seem to be an accepted practice. Perhaps this could have been
triggered by constant price controls imposed by the successive governments. As suggested by data,
getting through the system seems to be the preferred option by importers.
Graph 22: What steps are you currently taking in order to adhere to the government imposed price
controls?
0%
6%
12%
41%
41%
Stop selling goods
13%
20%
27%
40%
Stop selling goods that imposed price
control
Look at bringing down the cost through
Temporarily adjust the selling price
Source for low quality, cheaper products
7%
27%
27%
40%

61PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
How does the enforcement of price controls affect market outcomes?
The main problem associated with such price controls is that it may bring about uncertainty. Thus, the
challenge is in figuring out what the outcome in the market would be- the final aspect this study focuses on.
Wholesalers
Graph 23: Summary of trader responses to price controls
It is clearly evident that the market will be flooded with cheaper products.
Tea & Hopper shops
Graph 25: Summary of trader responses to price controls
Retailers
Graph 24: Summary of trader responses to price controls
In reality, in the qualitative phase, these innovations are changing the scale to weigh lesser in quantities or
by adding impurities to further downscale the quality.
Innovativeness has been adhered to as a measure of profit maximization by hopper and tea shops.
0%
22%
45%
45%
84%
Business will decline & more issues for
small entrepreneurs
local players / suppliers
foreign players / suppliers
The players are looking brining the cost
cheaper products

62PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Importers
Graph 26: Summary of trader responses to price controls
All stakeholders assume that there will be a
significant drop in the quality of products with the
emergence of floor prices. Despite a majority of
the stakeholders believing that the control prices
are likely to benefit the end consumer, a drop in
the quality of what ‘s purchased will infact not
result in benefitting the consumers.
This needs deliberation as bringing in floor prices
does not really benefit the party that it meant
to benefitowing to inferior products flooding the
market. Lack of reluctance to invest in innovation
from the value chain partners is an aspect
which needs be taken into consideration by the
authorities.
Conclusion
The net effect of price controls is that it leads
to a multitude of problems. On the one hand,
the domestic producer loses in the form of
declining profit, which means that the chances
for profit to be retained for further investment are
substantially lower. At the same time, just because
the price control exists, does not necessarily mean
that the consumer benefits. As seen in the case of
the Bombay onion importer, they prefer to charge
a higher price whilst paying the fine of Rs.5000/-
charged by the consumer affairs authority. In
other words, not only does the importer see profits
fall because of the fine, but the consumer will see
their consumer surplus fall considerably as well.
At the same time, the price controls lead to
other spill-over effects. This is in the form of the
emergence of the black market, because sellers
may opt to look to undercover means to charge for
higher prices and gain higher profits. At the same
time, because of poor government efficiency, there
is a vast shortage of perfect information for both
buyers and sellers on price controls, which have
led to market failure.
We recommend abolishing the price controls
entirely in order to avoid such negative effects.
In its place, let the free market decide the most
efficient allocation of resources, and at the market
price determined by the forces of demand and
supply, will be the point where the producer and
consumer surpluses are maximised. In other
words, only at this point will consumer and
producer welfare be maximized.
The majority seems to be talking about what they currently do, and are likely to continue doing.
7%
14%
50%
71%
93%
Business will decline & more issues for
small entrepreneurs
local players / suppliers
The players are looking brining the cost
foreign players / suppliers
cheaper products

63PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Part 1
Methodology
The methodology used for this report had a
two-pronged approach; a qualitative phase and a
quantitative phase.
The qualitative phase includes a series of
closed-ended questions from a select group of
respondents. The idea was to gain an opinion on
price controls and the impact of price controls on
a select group of stakeholders. These respondents
include the following stakeholders.
a) Importers and traders – The entrepreneurs
involved in importing the products into the
country, as well as those involved in wholesale
dealings and distribution of the products
across the country.
b) Small entrepreneurs – The entrepreneurs
carrying out the small operations in order
to supply the price-controlled products to
the markets or to the larger companies who
process the food products. This sample
included the tea, hopper and bakery shop
owners.
c) Farmers – The larger audience across the
country involved in growing most of the price-
controlled products; those who are most
affected by the price control regulations.
d) Wholesalers – The entrepreneurs that sell
large quantities of products to retailers and
small entrepreneurs. Wholesalers mainly
received products from importers and
from the middle man who take goods from
producers (eg: farmers).
e) Retailers – The entrepreneurs who operate in
small and medium scale, that directly supply
goods for the end customers.
Annex
The achieved sample constituted of 18
respondents; includings3 importers, 12 small
entrepreneurs, and 3 farmers.
Respondents for qualitative phase
Importers 3
Small scale Entrepreneurs 12
Farmers 3
Total 18
The quantitative phase of the report included
quantifying the insights gathered in the qualitative
phase, by expanding the sample of respondents to
a total of 182. The responses were then analysed
using charts and graphs to observe any trends and
tendencies. Information was gathered from the
larger sample via a face-to-face survey.
Respondents for quantitative phase
Importers 25
Wholesalers 30
Retailers 29
Tea and Hopper Shops 38
Farmers 60
Total 182
Both surveys required random sampling to be the
sampling method used. This is because random
sampling allows for the best possible chances
to gain results that will be representative of the
real-world situation.

PART II
INDUSTRY SURVEYS ON
PRICE CONTROLS
These surveys of industry were commissioned by the Advocata Institute and are published as Discussion Papers.
Discussion Papers are published to stimulate a discussion on the subject of price controls in Sri Lanka. Viroshan
Tissera and Trisha Peries contributed to the reports.

65PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Overview of the Cement Industry
Introduction
The Cement industry in Sri Lanka consumed
approx. 6 million MT’s of cement in 2016. The
industry which provides a pivotal role in supporting
the construction activities in Sri Lanka, has grown
in importance since the post war period. In line
with this, the consumption of cement which is a
key input for the sector has more than doubled in
the period post the end of civil conflict.
Graph 1 – Cement usage has nearly doubled in
the post war period
THE CEMENT SECTOR
2012-2015
CAGR – 3%
2009-2012
CAGR – 23%
Demand
Key users of cement
Cement, being a derived demand, arises from the
demand from construction. There are broadly,
three groups of consumers for cement. They are
namely;
1) Households – Construction and
refurbishment of households by individuals
2) Private Sector – Large scale private sector
developments such as Hotels, Apartments
3) Infrastructure projects – Government
infrastructure development projects such as
Roads, Bridges
Graph 2 – Nearly a quarter of raw materials
consumed is accounted for by cement
Source: Survey of construction industries report
It is clear from the graph above, that cement
accounts for a significant chunk of the raw
materials consumed across the different
groups of consumers. In terms of the volume of
consumption, households account for the bulk
of the cement consumed in Sri Lanka. As per
company estimates, in 2016 the households
and private sector accounted for approximately
75% of cement demand while the remainder was
accounted for by the public sector.
Demand can also be segmented based on the
form in which cement is demanded. In the case of
households, cement is typically purchased in their
bagged form. The most common form of cement;
Ordinary Portland Cement (OPC) is available as
50kg bags. Bagged cement is usually purchased
from retail or wholesale channels. In this context,
cement is perceived by the end user as more of a
“good”.
In the case of large scale developments by the
private sector, as well as large scale infrastructure
projects in the case of the public sector, cement
is purchased in their un-bagged “loose” form.
In such cases, loose cement is usually supplied
directly by the cement manufacturers. In addition
to the cement, they also typically provide silos
for the storage of cement, equipment such as
cement mixers as well as advice on the optimal
application of cement. Therefore, in this context,

66PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
cement is generally perceived by the end users as
a “service”.
Demand Outlook
A slowdown in construction activity, and hence
cement demand, was witnessed in 2015 as a
number of mega infrastructure development
projects were temporarily halted for review.
However, with the recommencement of many of
these projects in 2016, as well as the continued
private sector demand due to growth in the
tourism and real estate segments, analysts expect
a second phase of high growth for the sector is
in the offing. Looking ahead, firms expect with
the recommencement of a number of mega
development projects, the public sector will
increase its share of cement demand to 30% in
2017.
Supply
Classification of firms
The supply of cement can broadly be classified
under local cement manufacturers and cement
importers. However, this distinction is less clear
cut as there is no cement manufacturer currently
operating in Sri Lanka that exclusively retails
cement manufactured domestically. Hence, the
classification is based on the weightage given
to the nature of the activities that they engage
in and the type of cement plants they operate.
Manufacturers broadly operate three types of
cement plants. They are:
1) Integrated Grinding Plants – These are
plants where limestone, which is the
primary raw ingredient for cement is
quarried, is refined into clinker and then
processed into the finished product.
2) Clinker Grinding Plants – These are plants
where the chief input is clinker, which is in
turn used to manufacture Cement.
3) Bagging Plants – These are plants where
cement in bulk (either imported or locally
produced) is bagged into standard 50kg
bags.
Apart from the above, a number of firms supply
cement to the local market by importing bagged
cement. In this report, cement firms that possess
either the 1st or 2nd type of plant that is based in
Sri Lanka are termed as ‘local manufacturers’
while any firm that only possess the ability to
bag cement locally or import bagged cement are
classified as ‘cement importers”.
Key Players
Given the high start-up costs and constrained
supply of raw materials which are found in limited
supply in the local market, Sri Lanka’s Cement
industry can be termed as an Oligopoly with
the top five firms accounting for approximately.
90% of cement demand, while three producers
accounting for approximately 70%-80% of the
market demand.
Domestic Manufacturers–Only two firms
manufacture cement domestically; Insee Cement
and Tokyo Cement PLC. Insee Cement, which
manufactures the well-established brand of
Sanstha Cement, is the only cement manufacturer
that possesses an integrated grinding plant in
Sri Lanka; located in the Puttalam District where
limestone deposits are found, as well as a grinding
plant that utilises imported clinker. Tokyo Cement,
which manufactures the Nippon and Tokyo super
brand of cement, uses imported clinker at its plant
located in Trincomalee. In addition, both local
manufacturers also possess bagging plants to
supplement their domestic cement manufacturing
capability. Regarding cement importers, large
global manufacturers such as Ultra-Tech possess
bagging plants at key ports in Sri Lanka, while
other players such as Lucky Cement exclusively
import bagged cement.

67PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 3 – Production Capacities of the top 3
cement players in Sri Lanka
* Includes both cement grinding capacity as well as bagging capacity
for imported cement
** Tokyo’s capacity includes the additional 1mn MT’s capcity which was
expected to have come online by end 2016
Source: TKYO Annual report 2016, Holcim Annual report 2015, Ultratech
cement Lanka website
Domestic Manufacturers
Cement Imports – Cement is imported in their
bagged or bulk form primarily from South-Asian
markets such as India and Pakistan, as well as
South-East Asian countries such as Malaysia,
Thailand, and Indonesia. Currently, Sri Lanka
offers zero-duty tariff concessions on bulk and
bagged cement imported from India and Pakistan
under their respective Free Trade Agreements.
For other countries, cement imports were subject
to a customs duty of 7.5%. However, in 2015 the
government in its interim budget removed the
customs duty, and hence a level playing field
prevails with regards to the import of cement.
Supply Outlook
Sri Lanka currently has no restrictions on the
import of cement, and hence any shortfalls can
be quickly remedied with cement imports. In
contrast, expanding domestic manufacturing is
more constrained. Apart from the long gestation
period required to construct a grinding plant (1mn
MT capacity grinding plant takes on average of
3-4 years to complete), the scope for expansion
is also limited due to geographical limitations.
In order to ensure its viability, a cement grinding
plant is typically operated in close proximity to
either limestone deposits in the context of fully
integrated plants, or is located close to a port
in the case of grinding plants. With respect to
the latter, Sri Lanka’s limestone deposits are
limited and geographically concentrated in few
areas. The only large-scale limestone deposit
which would facilitate large-scale development,
would be the limestone deposits located in
Kankasanthurai (KKS) at the now defunct KKS
plant. While attempts have been made in the past
to reconstruct the KKS manufacturing plants,
these endeavours have been stymied so far as the
economic viability of the quarrying is in question.
The scope for setting up cement plants at ports
is also limited due to both space constraints at
existing ports, as well as due to a government
policy introduced in October 2013 to limit the
number of cement factories to one per port
(Source: Tokyo Cement annual report 2014).
Hence, we believe that the majority of cement
demand will be met by greater levels of imports by
either existing domestic cement manufacturers or
new cement imports from the region.
Introduction to the Regulatory Environment for
Cement in Sri Lanka
There are broadly two types of regulations that are
of relevance to the cement industry.
Namely :i) Maximum retail price (MRP), and
ii) Quality standards.
Price Controls
The Consumer Affairs Authority (CAA) enforces
a maximum retail price (MRP) on all bagged
cement retailed in Sri Lanka. The uniqueness of
the MRP regime on cement in Sri Lanka, is that
the MRP imposed on a 50kg bag of cement varies
by the type of cement and by the manufacturer/
importer. The MRP is imposed on both
domestically manufactured and imported cement.
Revisions to the MRP is also unique, as the
process for changing the MRP is made by
representations provided by the individual cement
manufacturers or importers directly to the CAA.
The revisions are made on the basis of the cost
structures of each manufacturer and importer,

68PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
and takes into account cost factors such as
clinker prices, currency movements, electricity
charges, etc. After a period of negotiation, the CAA
may revise the MRP for a given manufacturer/
importer across all of its products. The typical
sequencing of price revisions is if there is a
general increase in cost factors that are felt
across the board by different firms; they could
make representations to the CAA, who would then
after a period of review decide to revise the MRP
selectively or across the board.
“There were five applications demanding a price
revision. We have appointed a committee to look into
it, and they will decide whether a price revision is really
required.”
– Consumer Affairs Authority (CAA) Chairman Rumi
Marzook
Graph 4 – Maximum Retail Price (MRP) for varied
cement brands*
*MRP in effect as at 01 June 2016
Source: Consumer Affairs Authority
Quality standards
Both domestically manufactured and imported
cement is subject to meet a number of technical
requirements and quality standards set by the Sri
Lanka Standards Institute (SLSI). Given the nature
of cement which has a limited shelf life, meeting
certain technical specification such as the level of
strength of the cement is a key aspect of ensuring
the quality of cement. As an additional precaution,
only firms that are registered with the SLSI are
allowed to import cement. Most domestic cement
manufacturers are of the view that the quality
standards are appropriate in preventing sub-
standard cement from entering the market.
Analysis of the Impact of Price Control
Introduction
After going into detail with regards to the various
elements pertaining to the cement industry in Sri
Lanka, in this section we provide an analysis of the
impact of MRP on cement prices on the cement
industry in Sri Lanka. In the firstsection, we
investigate the views made by varied stakeholders
on the consequences of the current regulatory
environment for cement.
In the secondsection, the impact of price revisions
to cement on various stakeholders is examined by
taking a closer look at the 2011/12-2013 period
when a significant revision in the MRP of cement
took place.
In the final section, we offer some insights as
to what we believe the impact might be if price
controls are removed from cement.
MRP and its Consequences
MRP and Building costs
Graph 5– Price indices of building materials
(100 =2002) – cement has seen a slower growth
in price
As illustrated above, compared with the cost
inflation that has been experienced by most of
the other building materials, the price inflation
Source: CBSL Monthly bulletin

69PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
of cement has been more constrained and may
be attributable to the MRP regime that inhibited
significant price revisions from occurring. It is
clear that while many of the building material
trended upwards in the post war period, cement
price revisions were more constrained; in line
with the government administration’s policy at
the time, where a key focus was on improving the
infrastructure of the economy. As shown in section
1.1.2, nearly a quarter of the input requirement of
large scale infrastructure projects such as roads,
bridges etc., is accounted for by cement. Hence,
the intention of the administration at the time
may have been to facilitate this endeavour while
limiting the cost pressures.
However, despite this, a significant upward revision
in cement prices occurred in the years 2012 and
2013, with the MRP on OPC cement growing by
13% and 10% respectively over the period. This
was primarily due to significant regional demand
for limestone and cement from countries such
as India, Pakistan, and Malaysia, feltduring the
period which led to supply constraint. This factor,
coupled with the high demand arising from the
post war construction demand which created
strong demand for cement, even led to shortages
in certain period (Source: Daily Mirror).
Most stakeholders are of the view that significant
revisions to the price of building materials has a
detrimental impact on the construction industry.
Commenting on the cement price hike which
took place in 2012, The President of the Ceylon
Institute of Builders,RohanKarunaratne, had
advised against measures taken to hike cement
prices. (Source: Sunday Times).
“Construction stopped at the last price increase,
but most of the clients, later agreed to continue with
the work after reconciling themselves to the increased
cost. However, this time, it’ll be that much harder to
convince them because this is the second increase
within six months.”
– KapilaRathnadissanayake; a small-scale contractor
In addition, an outsized impact of a significant
price hike in building materials is felt by small
scale construction contractors who may be forced
to absorb the cost increases and bear the losses
themselves, or else risk a delay or abandonment
of a construction project which threatens their
sustainability in the industry.
MRP and domestic production vs. imports
Graph 6– Clear shift in the production mix from
domestic to imports
Source: CBSL Social Statistics report
While the MRP of Cement has gradually been
revised higher, cement supply has come to
increasingly rely on the importation of bulk and
bagged cement to meet local demand. As of
2014, imports accounted for 70% of the cement
supply in Sri Lanka. A dip in imports was witnessed
in 2015, which may be due to the slowdown in
construction activity during the year as a result of
the temporary halting of some of the large-scale
infrastructure projects. By 2016 and 2017, cement
imports are expected to have increased alongside
the greater activity in the construction sector.
The prime reason for the dip in domestic supply of
cement over the period, is the lack of investment
by firms towards increasing domestic cement
manufacturing capacities. For example, Tokyo
Cement’s manufacturing capacity which stands
at 1.4 million MT’s per annum, has remained
unchanged until the end of the financial year
of 2016/2017 where the firm invested in
an additional 1 million MT capacity. Cement
manufacturers claim that the existing MRP regime
on cement is a key inhibitor to greater domestic
cement manufacturing.

70PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
“The price ceiling for bag cement is preventing
market-based pricing by the Company and valuable
management time, that can be utilised much more
productively, is spent on policy. This situation is holding
back the Company from its potential to create value for
stakeholders”
– A.S Gnanam, Managing Director, Tokyo Cement,
Annual report 2016
One economic argument as to why domestic
production has been slow to take off which could
be attributed to the imposition of the MRP, is
that as a result of this, the margins of cement
manufacturers are constrained and hence their
ability to generate surplus returns which can
in turn be used to reinvest in the business and
increase the firms plant capacity is limited.
However, given the high start-up costs associated
with the plant, its long gestation period as well as
geographical constraints that were highlighted
in the supply section of the report, could also be
significant factors which constrain the expansion
of domestic cement capacity. For example,
Tokyo Cement’s 1 million MT capacity expansion
is estimated to have cost USD50 million with a
gestation period of 2-3 years (TKYO Annual Report
2014). Further, from the perspective of a global
cement manufacturer with globally dispersed
plants, given Sri Lanka’s limited access to
limestone deposits and high costs associated with
the transport of clinker and other raw materials,
the case for setting up a domestic cement
manufacturing plant is less compelling than the
case for setting up a cement bagging plant in
Sri Lanka; with bulk cement being imported from
regional plants such as from India which enjoys
scale benefits.
MRP and Cement quality
The relationship between MRP and its impact
on the quality of a product can be illustrated as
follows. In a well-functioning market, the price is
used to signal a product’s quality. The imposition
of an MRP inhibits this function to a certain
extent. In a situation where an MRP is too strict or
is unresponsive to changes in the cost structures
of firms that produce the product, it creates an
incentive for firms to offer a sub-standard product
in order to enjoy higher profitability margins.
In the context of cement and the construction
industry, this is of significance given that the
application of sub-standard cement to the
construction process would be felt long after and
could have long lasting consequences. Cement in
particular, is a sensitive product where it must be
kept in an elevated position in a dry environment
and which typically has a maximum shelf life of
2-3 months.
In the case of the cement industry in Sri Lanka,
such a situation arose in 2012, when certain
products were pronounced by the Sri Lanka
Standards Institute (SLSI) to be of low quality
(Source: Daily Mirror). The possibility of low quality
cement imports is one of the prime reasons for
the domestic cement manufacturers to call for the
restriction of cement imports.
“An unequal playing field has been created through the
current national policy that imposes price controls on
cement, while allowing unlimited, duty free entry for
imported varieties.”
– A. S Gnanam, Managing Director, Tokyo Cement,
Annual report 2016
However, at the same time, domestic cement
manufacturers also do believe that the existing
regulatory environment and the minimum
quality standards that are imposed on cement
is adequate. A representative of a cement firm
stated that the MRP does not in general lead to
the proliferation of low quality cements flooding
the market given that the SLSI’s standards are
adequate and rigorously enforced. In fact, the
situation of low quality cement imported in 2012,
arose not due to the MRP -which in fact had
subsequently been revised up during that period-,
but due to the high demand for cement arising
from the construction activities taking place at the
time which resulted in a cement shortage.
The SLSI has in fact been quite proactive with
regard to preventing the entry of sub-standard
cement into the domestic market despite the high
demand experienced in 2011/12, which had even
earned the ire of the cooperatives and Internal
trade Minister at the time; Johnston Fernando for
not releasing cement into the market (Source:
Daily Mirror).

71PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
In addition, the problem of low quality cement is
less of a concern when it comes to large scale
infrastructure projects, as the end users are more
knowledgeable of the technical specifications of
the cement, and where cement is viewed more
as a service rather than a product;hence cement
suppliers are chosen on this basis.
All in all, varied stakeholders are generally of the
view that the regulatory environment that ensures
the quality of cement is adequate.
MRP and Cement Shortages
Another consequence of the MRP is that it may
give rise to a situation of excess demand, leading
to shortages. In the case of Sri Lanka, such a
situation arose in 2012 where cement shortages
were experienced at certain points of the year.
In a market-based system, this would lead to an
upward revision in the prices, which would then
spur a greater supply of cement to meet this
excess demand. Given the limits of Sri Lanka’s
domestic cement manufacturing capacities, it
must rely on imports to make up for any shortfalls
in demand. However, the case for importing in the
context of an MRP may be less desirable even in
a situation of excess demand, as the MRP curbs
the returns to importers. This was the situation
that arose in 2012 as importers from Pakistan
and India -which are the chief source markets for
cement imports to Sri Lanka- had found more
lucrative opportunities elsewhere, given the strong
regional cement demand that was experienced
over the same period. In this situation, several
importers had appealed to the CAA to increase
the optimum price of cement, but given the delay
in implementing the revised price, the cement
shortage was prolonged over this period. (Source:
Daily Mirror)
MRP and Hoarding
Another consequence of an MRP is that it could
result in hoarding of stocks by suppliers as they
attempt to anticipate a possible revision of
the MRP. This could in turn cause a temporary
shortage of cement. In order to prevent such
a situation from arising, a strong regulatory
environment must be in place, and as a result,
resources are expended on the state to ensure
that the MRP is enforced vigorously. In the case
of cement, the MRP is only applicable to bagged
cement where the relevant MRP, the technical
specifications of the cement, the quality standard
of the cement, and the manufactured date of the
cement, must be stated on the cement bag. Hence
the CAA must ensure that such criteria is met.
“We have already taken legal action against
10 cement dealers for hiding stocks. Our teams
have been on the ground since Saturday (September
2) investigating into the reports and we found about
200 bags of cement that were hidden in stores.”
– CAA Chairman, Rumi Marzook
Consequences of a cement price hike
Graph 7– Cement Prices over time
Households – Construction activity slows
Based on the number of housing approvals, it is
clear that the number of housing approvals which
had recorded a strong growth in the immediate
post-war period slowed down sharply in 2011/12-
2013 period with the year-on year (YoY) change in
housing approvals being limited to 6% YoY in 2012
and -4% YoY in 2013. This slowdown can partly
be attributable to the sharp increase in building
material prices, including cement, as well as due
to an increase in borrowing costs which rose over
the same period.
Source: CBSL Annual report

72PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graph 8– Housing activity slows
Source: CBSL Monthly bulletin Source: TKYO annual reports
Source: TKYO annual reports
Source: CBSL Social Statistics
Source: CBSL Annual report
Graph 9– Borrowing costs trended up over the
same period
Cement Manufacturers – Revenue slows while
profitability improves
Taking into account the financial performance
of Tokyo Cement Company (Lanka) PLC, which
is the only publicly listed cement manufacturing
company in Sri Lanka over the 2012-2013 period,
the firm’s performance was impacted noticeably.
Over this period, revenue growth slowed during
FY13-FY14 which may partly be on account of a
slowdown in demand due to higher cement prices.
Contemporaneously, core operating profit growth
which excludes any extraordinary gains or losses
during the period, was more volatile with a 65%
YoY growth in FY13 and a -23% YoY dip in FY14.
However, despite the volatility in its earnings,
from a gross and operating margin perspective,
margins trended up during FY13-FY14 period.
Graph 10- Tokyo Cement revenue vs profitability
Graph 11- Tokyo Cement – margins trending up
Impact of the removal of the MRP on Cement
Based on the above assessment of the structure
of the cement industry in Sri Lanka, there are
several scenarios that can play out.
Cement prices – Higher
Graph 12- Cement imports enjoy a cost
advantage

73PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
As highlighted by the stakeholders of domestic
cement manufacturers, there is a possibility that
cement prices would be higher than current levels.
Furthermore, there is also the possibility of seeing
greater pricing variation between the different
types of cement.
However, it is clear from the above graph
that cement imports enjoy an inbuilt cost
advantage when compared with domestic
cement manufactures. Therefore, while domestic
manufacturers may have greater flexibility in
terms of their pricing with the removal of the MRP,
they may be constrained by the fact that if they
revise their prices to a significantly higher amount,
it may lead to a shift in demand towards imported
cement; given that most household consumers
perceive cement as a generic good. Hence, while
there is the possibility of higher cement prices
prevailing in the market, the scope for a significant
price revision is constrained given this disparity
in cost between domestic manufacturers and
cement importers.
Cement imports – Higher
Following on from the previous point, assuming
that the potential for a cement price increase is
less significant, it follows that it is less likely that
this alone would be sufficient to spur greater levels
of domestic manufacturing of cement, given that
other cost factors such as the high setup costs,
and geographical restrictions remain significant.
However, we do believe that the removal of the
MRP would increase the scope for greater levels
of cement imports, as supplying to the Sri Lankan
market may as a result become more attractive.
Construction Activity – Mixed
A move to a more market-based pricing could
result in an improved operating environment for
construction firms and contractors, if this results
in more gradual changes in cement prices in line
with cost variations, as opposed to the sudden
spikes that occur due to MRP price revisions.
However, this consideration must also be balanced
by the fact that higher cement prices impact a
multitude of industries, including construction
and other building material industries. Given that
cement accounts for a large chunk of the input
cost of large scale infrastructure projects, the
impact significant cost inflation would have on the
viability of undertaking large scale projects as well
as the impact on government expenditure must
also be taken into account.
Cement firm’s profitability- Positive
Given the strong underlying construction-related
requirements for Sri Lanka as well as the limited
substitutability of cement, we believe that both
cement manufactures and cement importers are
likely to see further improvements to profitability
with the removal of the MRP. However, in a general
equilibrium context, we are less certain of the
desirability of this development. This is partly
on account of the nature of the MRP regime for
cement in Sri Lanka where the cost differential
for cement manufacturers is reflected in the MRP.
Hence the MRP regime in Sri Lanka is more akin
to a pricing mechanism whereby a fair rate of
return is given to the producer which is an efficient
solution in the context of an oligopolistic market
structure, as is the case with the cement industry
in Sri Lanka. This aspect seems to be mirrored in
the fact that while key input prices have witnessed
significant fluctuations over time, cement firms
have recorded more stable returns. Considering
the performance of Tokyo Cement, this appears to
be the case.
Graph 13- Cement firms manage to deliver an
acceptable rate of return
Source: TKYO annual reports

74PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Conclusions
A more flexible MRP combined with strong quality
assurance.
Taking into account the unique characteristics of
the cement industry in Sri Lanka and balancing
it against the needs of the various stakeholders
that are impacted by the existing pricing regime
for cement -namely households, cement
manufacturers, construction companies, and
the state- a certain degree of price controls is
desirable. This is given the derived demand nature
of cement, which is a key input for a product (the
construction industry) which has a long gestation
period where uncertainty is detrimental to the
smooth functioning of the industry.
In addition, the oligopolistic structure of the
cement industry entails that some degree of state
oversight on pricing maybe necessary to prevent
market failure. Hence, price controls on a key
product such as cement can bring about a greater
degree of certainty to the entire construction
related ecosystem.
Having said that, our analysis of the 2011/12-
2013 period underlies the fact that if price
controls are too rigid, it can lead to negative
outcomes such as shortages, hoarding, and entry
of sub-standard products to the market. Hence,
a more flexible system whereby in periods of
high demand or high cost increases, if cement
firms are granted the flexibility to respond more
in line with market forces, it may lead to the
creation of a more sustainable regulatory regime
that is beneficial for all stakeholders concerned.
Alongside this, a rigorous enforcement of quality
standards on both domestically manufactured
and imported cement, would be an essential
factor in mitigating some of the negative factors
associated with a price-controlled regime.

75PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Overview of the Pharmaceutical Industry
Introduction
The Healthcare and Pharmaceutical industry
consists of 622 hospitals (as at 2014), and a
large number of pharmaceutical importers and
manufacturers. The Government of Sri Lanka is
also heavily influential in the sector given the
existence of universal healthcare and the State
Pharmaceutical Corporation being a major player
in the industry. The government has shown keen
interest in the recent past to implement various
regulations in the sector as well.
In 2013 Sri Lanka had spent Rs.67.7 billion
(US$524 million) on pharmaceuticals, and
Rs.75.09 billion (US$570 million) in 2014. As for
healthcare, in 2013 Sri Lanka had spent Rs.261.04
billion (US$2.02 billion), and the amount increased
to Rs.283.97 billion (US$2.16 billion) in 2014.
[Source: BMI]
The global pharmaceutical industry is a US$1057
billion industry [Source: IMS Health Market
Prognosis, May 2015], while the pharmaceutical
industry in Sri Lanka is currently valued at around
US$600 million.
In Sri Lanka, the pharmaceutical industry
is dominated by the State Pharmaceutical
Corporation (approx. 40% market share),
followed by the private sector. The industry is
also heavily dependent on imports rather than
locally manufactured pharmaceuticals, with only
around 10-15% of pharmaceuticals being locally
manufactured, while the remaining 85-90% are
imports.
With the rapidly aging populations and the
increase in Non-Communicable Diseases (NCDs)
in Sri Lanka, the health care sector (including
pharmaceuticals) is expected to have a steady
growth.
Importing
In the private sector, this segment is dominated
by Hemas Pharmaceuticals (i.e. JL Morison Son
& Jones (Ceylon) PLC), followed by Sunshine
Holdings PLC, with many other players in the
market such as Emerchemie NB Limited, CIC
Pharmaceuticals, CiplaPharma, EmarPharma,
Taprobane Pharmaceuticals, etc.
THE PHARMACEUTICAL SECTOR
Local Manufacturers
In the private sector, this segment is dominated
by Hemas Pharmaceuticals (i.e JL Morison
Son & Jones (Ceylon) PLC) being the largest
manufacturer, alongside other players such as
Astron Limited, Akbar Pharmaceuticals, Ceylinco
Pharmaceuticals, Inter Pharm, etc.
The pharmaceuticals that are manufactured
domestically are predominantly generic drugs,
as Sri Lankan pharmaceutical manufacturers do
not focus on Research & Development and the
making of original/innovative drugs. The drugs
manufactured in Sri Lanka are also predominantly
general Oral Solid Dosage (OSD) drugs.
Industry Analysis
Suppliers in the industry are relatively powerful in
terms of bargaining power, since most suppliers
are multinational organisations which supply
across the globe and may view Sri Lanka as a
very small market in the global context. While the
existence of a large supply base from India would
enable a larger source of suppliers, it will however
be highly negative since the market will be
exposed to cheaper drugs which may fail in quality.
Consumers too will be relatively powerful in the
industry with the range of generic drugs available
for selection.However, consumer knowledge on
pharmaceuticals is limited and is highly dependent
on the advice by medical professions, which
reduces the end consumers bargaining power.
In the importing sector there is very low likelihood
of new entrants since the current price controls
seem to be quite difficult for importers to sustain
their businesses.However, with the 2017 budget
promoting the establishment of pharmaceutical
manufacturers, the threat of existing
pharmaceutical import companies moving into
the manufacturing space, or even new companies
entering the market, is moderately possible.
Nonetheless,consumers will benefit from this large
variety of generic drugs made available, and since
the price controls have allowed for generic drugs
and branded drugs to be priced similarly, it will
allow consumers to make a switch between these
two types of products relatively easily.
In terms of competition, it will be relatively high
between existing manufactures and importers
given that consumers are likely to be more price
sensitive in the context of stringent price controls
imposed on generic and branded drugs.

76PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
History of Price Controls
Previous Price Controls
The first ever attempt at controlling the prices of
drugs was proposed by Professor Senaka Bibile in
the 1970s, which was dismissed by the Sri Lankan
government at the time as it was perceived as
being impossible and did not suit Sri Lanka’s
open economy. The World Health Organization
eventually endorsed Professor Bibile’s policy by the
1980s.
The creation of a national drug policy resurfaced
but failed in 1991 and 1996. In 1996, the president
at the time, President Chandrika Kumaratunga,
initiated the establishment of a national drug
policy but failed to receive cabinet approval. In
2005, the government established the National
Medicinal Drugs Policy (NMPD) to ensure the
availability and affordability of drugs,andeventually
received cabinet approval. However, it was never
implemented until the recent steps taken by the
current government, and the establishment of the
National Medicines Regulatory Authority (NMRA).
There was however a price regulation in the last
few years, which was in essence a “price freeze.”
This regulation ensured that pharmaceutical
companies could not change the price of a drug
after it had been set and required special consent
from the relevant authorities if a price increase
was needed.
Current Price Controls
On the 21st of October 2016, a gazette notification
was released by the Health Ministry -i.e. National
Medicines Regulatory Authority (NMRA)- on
setting a price ceiling on 48 drugs for common
diseases such as diabetes, heart disease, high
blood pressure, high cholesterol, and others.
According to the Health Minister RajithaSenaratne,
this would result in an overall price reduction
of around 40-50%, and a total cost reduction
of around Rs.4000 million. (Source: Sunday
Observer)
The pricing mechanism takes into account the
prices of any drug that commands a 2% or more
market share (by volume), and then uses the
median price as the MRP for that particular drug.
The drugs which fall above the MRP are expected
to be reduced to below the MRP, and any drug
which is below the MRP is not permitted to have
an increase in price. The price of any other drugs
beyond the 48 drugs cannot be changed as well.
The 48 drugs currently under a price ceiling are
mainly the drugs identified by Prof.Bibile, with a
few additions after taking into consideration new
inventions.
It is also expected that a similar second phase
of price ceilings will be implemented in the
near future on expensive drugs for treating
tumours, benign lumps, and cancers. The
current price ceiling on 48 drugs is expected to
be fully implemented in 45 weeks from initial
implementation, after which the second phase will
then be implemented.
Sector Analysis
Overall Industry
The Health Ministry implemented the above-
mentioned price controls in the hopes of reducing
imports and encouraging local manufacturing.
This is not entirely evident with the value of
imports rising through Oct-16 and Nov-16, but
shows in the sharp decline during the month
of Dec-16 (Graph 1). However, it is too early to
expect full impact by Dec-16, hence the Mar-17
quarter is likely to give a better picture of the
impact of price controls.
Over the years however (until 2015), there
was a noticeable decline in the volume of
pharmaceuticals imported while the value of
imports continued to increase;an indication of the
sensitivity of the possible high pricing of drugs.
(Graph 2)
Graph 1 – Import values growth slows with
imposition of price controls
The government expenditure on healthcare
Source: CBSL Statistics

77PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Source: CBSL Social Statistics report
Source: JLM and SUN annual reports financials
Source: Hospital annual reports
has seen a steady rise over the years with the
expenditure on health per capita at Rs.7497 in
2014, while 2015 had an overall expenditure of
Rs.178 billion.
The budget allocations for the year 2017 for
health witnessed a decline from Rs.175 billion in
2016 to Rs.160 billion in 2017. The 2017 Budget
also mentions the government’s strategy for
the pharmaceutical industry, especially the local
manufacturing sector.
“To curtail draining out of foreign exchange from
the country I invite private sector to venture into
establishing Pharmaceutical Zones as PPPs. The
government will also contribute by providing land. A
buy-back arrangement will be agreed upon to
purchase the government requirement of the
respective pharmaceutical items manufactured
and they will also be encouraged to access
markets on their own”
Graph 2– Clear divergence in the volumes vs
value of imports
Pharmaceutical Companies and Hospitals
According to the Central Bank of Sri Lanka
as at 2015, the capacity utilisation in
pharmaceutical factories is at 91%, while the
State Pharmaceutical Corporation (SPC) has the
capacity to produce 1,900 million capsules and
tablets. However, the SPC achieved a production of
2,026 million capsules and tablets of which 2,054
million were sold.
The hospitals on the other hand did not experience
any major changes in margins, except for Lanka
hospitals, which experienced a major drop in gross
profit margin during the Dec-16 quarter (Sept-
16: 59.9% and Dec-16: 49.7%), but no significant
changes in operating profit margins and overall
profitability. (Graph 4)
Graph 4 – No visible impact on the performance
of Hospitals
The financial performance of the healthcare
segments of Sunshine Holdings, CIC holding and
JL Morisson were analysed, and the performances
were mixed, with Sunshine experiencing a sharp
decline in profits (loss making) while CIC and
JL Morisson witnessed continued steady profits
during the Dec-16 quarter. Operating profit
margins declined sharply for Sunshine while JL
Morisson continued to maintain a steady margin
(Graph 3). This mismatch in performance can
be attributed to the fact that sunshine is solely
an importer, while CIC and JL Morisson have
manufacturing facilities as well.
Graph 3– Divergence in performance reflects
differences in business activity

78PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
As seen in Table 1 there has been a relatively high impact on the prices of certain drugs for certain
companies. With some companies and drugs requiring price changes of up to 85% in certain drug prices.
Table 1 – Firm’s across the board impacted by price controls*
Sunshine
Healthcare
Lanka Ltd
Emerchemie
NB (Ceylon)
Ltd
Hemas
Pharma-
ceuticals
(Pvt.) Ltd
George
Steuart
Health
(Pvt.)
Ltd
CIC
Holdings
PLC
Akbar
Pharma-
ceuticals
(Pvt.) Ltd
A
Baur&
Co
(Pvt.)
Ltd
Maximum
Retail Price
(MRP)
Amlodipine 5 mg 4.59 15.07 13.08 1.21 10.44 16.33 15.3
Atorvastatin lOmg 3.11 20.82 21.11 15.25 14.92 8.11 11.15
Atorvastatin 20mg 5.29 29.82 33.64 22.03 25.28 2.65 14.2 17.6
Levofloxacin 250mg 26.45 20.53 25 21.87 21.64 40
Cefuroxime 250mg 49.45 69.98 35.85 47.2 45.5
Losartan K 50mg + HCT
12.5mg Combined 12.59 19.99 21.72 6.45 15.74 63.73 19.45
Losartan Potassium 25 mg 2.3 11.11 10.16 8.07 4.06 7.35
Losartan Potassium 50 mg 3.97 16.62 6.42 12.08 14.03 15.93 65.55 10.3
Metformin 500mg 2.3 5.66 3.75 2.3 3.28 6.9 3.95
Pantoprazole 20mg 13.8 22.17 15.4 3.45 23.87 17
Pantoprazole 40mg 23.46 31.63 24.3 15.02 24.87 28
RosuvastatinlOmg 37 36.92 39.88 17.25 31.83 10.35 19.52 37
Cefuroxime 500mg 83.95 73.26 71.83 88.68 72.6
Ciprofloxacin 250mg 5.7 4.2 5.42 5.75
Clarithromycin 250mg 119.83 88.84 55.82 21.85 36.79 28.18 36.5
Clarithromycin 500mg 219.65 133.86 79.34 40.25 68.92 75.4 74
Levofloxacin 500ng 12.08 42.92 47.13 13.8 52.03 39.64 24.2
In 2014, a survey showed that 17.8% of the population of Sri Lanka suffer from chronic diseases, while
14.7% take treatment for acute diseases. The current price controls have been implemented mainly on
drugs for chronic and acute diseases with the second phase of the price controls concentrating more
towards drugs for chronic diseases. This is an indication of the demand that exists for the drugs, hence
a downturn in pricing could result in a boost in volumes as predicted by the Ministry of Health when
implementing these controls.
*The drugs highlighted in red indicate the drugs that needed to be revised to be compliant with the MRP
Source: Pharmaceutical representatives

79PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Industry Perspectives on Price Controls
The perspective understood to be from individuals
in the industry has been quite contrasting. The
importers see the price control as mostly negative
to the sector, whereas companies involved in
manufacturing see many positives from the
implementation of such controls.
Positive views on price control
Stakeholders on both sides of the isle have a
pertinent point. The manufacturers expect that
these controls will eliminate importers flooding
the market with overpriced sub-par drugs, and the
influencing of doctors to prescribe such drugs. The
MRP is also expected to reduce anti-competitive
practices of branded drugs, and if branded
drugs perceive that Sri Lanka is an important
market, then they should have lower prices since
alternative generic drugs already exist in the
market.
They further went on to state that while they
understand the need for originators/innovators
at a higher price since there is a Research &
Development (R&D) cost involved, they felt that
most generic drugs were overpriced as well and
reiterated the fact that the current 48 drugs under
price control are all generic drugs.
It was also mentioned that there is a
misconception that locally manufactured drugs
are of lower quality, and it was dismissed by the
fact that there is more regulations and screening
of raw materials and manufacturing plants. They
claim that this leads to more consistency in the
quality of locally manufactured drugs, unlike
imported drugs which can vary from high to low
quality and there is no proper screening done with
regard to the quality of imported drugs.
The development of local manufacturing will also
create more jobs, while reducing the currency
outflow since manufacturing requires the
purchase of raw materials followed by a 20-80%
value addition done locally. It will also enable
local manufacturers to export and compete
internationally especially in the Indian market.
There were also a few suggestions to improve the
current price controls. One such suggestion has
apparently already been communicated to the
authorities. This involves the MRP of Paracetamol,
which is below the cost of production. It was also
suggested that drugs which are not older than
5-10 years should not have price control since
innovators will need to cover R&D expenses and
allow patents on such drugs. Another suggestion
was the allowance of gradual price increases of
around 10% on the price of a drug, provided that it
is still below the ceiling price.
Negative views on price control
Stakeholders who import expressed the need for
the market to decide the price, since individuals
can purchase higher quality drugs at higher
rates if they felt the need to do so, claiming that
this isn’t a “control” as such but more of a price
“reduction”.
One of the major reasons for the negative view
on the price controls is the depreciation of the
Sri Lankan rupee against the US dollar which
negatively impacts importers costs. Given that the
exchange rate has been more volatile as of late,
and with the inability to reflect this in the prices
of the pharmaceuticals, many pharmaceutical
importers will need to bear the losses made due to
the depreciation in the exchange rate.
Another issue mentioned was the fact that the
change in regulations came overnight and this
had apparently caused a lot of pharmaceutical
stocks to be held in stores. A suggestion to avoid
this would have been for the government to have
granted a grace period so that such stocks could
have been sold at usual rates to avoid heavy
losses. The implementation of the ceiling price
also has caused many pharmacies to return
unsold stocks.
A view expressed was that pharmaceutical
companies will need to resort to cost cutting
(like capital expenditure and costs related to
training of staff). Currently it has only affected
the hiring patterns of the relevant pharmaceutical
companies, but it may lead to retrenching of staff
and even the cessation of operations for certain

80PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
smaller companies, especially those firms that are
fully dependent on imports of pharmaceuticals.
Accordingly, it is perceived that the second phase
of price control will be too tough for the sector to
handle and could lead to the above outcomes.
Stakeholders in the industry mentioned that
negotiations with suppliers have taken place
and a few suppliers adjusted the prices of
imported drugs, but a few drug prices still remain
below cost. However, the actual impact on
pharmaceutical companies will be visible with the
March 2017 quarter results.
Suggestions for improvements to the price
controls based on these views were the fixing
of exchange rates. One of the above-mentioned
individuals proposed alternate approaches to
achieve the aim of current price controls, such
as improvements in the customs in screening
imported drugs to ensure quality standards,
improvements in the provision of universal
healthcare with better procurement to ensure
drugs are available for the general public, better
management of doctors and regulations on
prescriptions, reduction in corruption, and more
spending by the government on healthcare to
around 3-5% of GDP (currently at around 1.5% of
GDP).
Views on public forums, reports and media
The Sri Lanka Chamber of the Pharmaceutical
Industry (SLCPI) mentioned that the
pharmaceutical market in Sri Lanka is mainly
import-based, and enjoys the opportunity of
having access to high quality innovator products
from different countries as well as generic
drugs which are mostly imported from the Asian
region. Hence, patients had the freedom to avail
themselves of pharmaceutical products based
on their needs. However, with the imposition of
the current price controls there is a danger of
innovator pharmaceutical and drug companies
exiting the market due to the inability to price
drugs as low as what is expected by the ceiling
prices. They also mentioned the threat of the
closure of certain pharmacies around the country,
especially in rural areas since margins will be
squeezed and volumes may be lower in rural areas.
This can lead to certain drugs only being available
in bigger cities and towns, and only in certain
pharmacies. They also mentioned the threat to
the Sri Lankan economy of individuals travelling
overseas in search of better medicines. [Source:
Economy Next]
The Ceylon Chamber of Commerce (CCC) also had
a view on the recent price controls. They believed
that the pricing mechanism is derived from the
Indian model and is suitable for a large domestic
market with a substantial drug manufacturing
base; which is not ideally suitable for Sri Lanka.
They believe that the median price is derived from
a branded Indian generic which makes it unviable
for originators, and that the current MRPs are
not a good reflection of quality and cost. The CCC
also mentioned that the ceiling prices in Sri Lanka
would be below the regional ceiling prices, and
hence international brands are less incentivized
to supply quality drugs to Sri Lanka. The threat
of good quality drugs not being supplied by
originators, and the presence of solely cheaper
generic drugs was also mentioned.
The CCC also suggested that the regulator
consider an ‘automatic pass through’ for exchange
rate changes (movements up or down), which will
ensure a revision of prices (quarterly), and which
would be linked to the Central Bank approved
exchange rate. [Source: LBO]
However, in a recent report from the CCC in
March 2017, they expressed their appreciation
that the NMRA had used internationally accepted
research derived from the WHO guidelines
on pharmaceutical pricing policies. They also
mentioned that there has been no evidence so far
from the industry of any discontinuation of supply
of certain drugs due to the price control, and that
the benefit of availability and affordability of good
quality medicines outweighs the negatives. They
are also of the opinion that the industry and the
private sector should conform and support the
implementation of the NMRA initiatives. [Source:
Ceylon Chamber of Commerce]

81PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
A recent BMI report on the Sri Lankan
pharmaceutical industry mentioned this:
“However, while imported medicine will continue to
account for a large proportion of the total market, cost
control measures targeting pharmaceutical spending,
as well as low per capita drug spending, will keep a
lid on the country’s attractiveness to pharmaceutical
investors. This is illustrated by the likely introduction of
additional drug price caps in the coming quarters, which
pose downside risks to our forecasts.”
[Source: Fast Market Research]
The health minister of Sri Lanka mentioned that
the pharmaceutical industry recorded high sales
after the execution of price controls, despite
margins curtailed drastically. The pharmacies were
able to sell more drugs than before he said, and
patients who took drugs intermittently were now
taking them regularly after price controls were
imposed on a number of drugs. [Source: Ceylon
today]
Conclusions
The impact of price controls and the viability of its
implementation cannot be perceived as entirely
beneficial or detrimental to the industry. This is
evident by the mixed views relayed by stakeholders
in the industry. A conclusion that can be arrived
at present, is that the current price controls do
not help importers. The main concerns regarding
the current price controls is also the issue of
the rupee depreciation over time, the inability to
revise prices accordingly, and the possibility of
originator/innovator drugs not being sold in Sri
Lanka. The positives being the economic benefits
of promoting local manufacturing, the expectation
in the reduction of anti-competitive practices, and
overall that consumers have better access to good
quality drugs.

82PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Overview of industry
The dairy industry has been a key focus in
successive governments, with the key objective
repeatedly highlighted being to achieve self-
sufficiency in milk products. The target year for
the achievement of this objective appears to
be a moving target, with the most recent goal
being 2020. Despite this self-sufficiency goal,
local production meets below 40% of the total
domestic milk requirement; considerably below
the 80% levels in the 1970s. Therefore, presently,
the majority of the demand in milk products is met
through imports, mostly from New Zealand and
Australia. In 2015, local milk production amounted
to 374 million litres; a 12.1% increase from the
previous year. In comparison, imports of milk and
milk products grew by 21.5% over the year. Over
the last decade, in seven out of ten years, imports
of milk powder have grown at a higher pace than
the growth in local production.
For the purpose of this report we will focus largely
on milk powder and fresh milk (liquid milk) as they
stand to be the most exposed to the effects of
price controls and regulations. Consumers in Sri
Lanka tend to prefer milk powder over liquid milk
given its longer shelf life amid limited refrigeration
facilities, itshigher perceived nutritional value, and
greater availability to the masses.
According to the most recent Household Income
and Expenditure Survey conducted in 2012/13, the
domestic household spent an average of Rs.1389
per month on milk and milk foods, which accounts
for 8.9% of the total expenditure on food. Taking
a closer look at milk Powder specifically, the
household spent an average of Rs.1036 per
month. Interestingly however, over time, despite
the expenditure on milk powder rising at 11.8%
annually (Compound Annual Growth Rate –CAGR)
between the 2009/10 and 2012/13 survey
periods, quantities consumed have reduced by
1.4% annually. This also holds true for the period
between the 2006/07 and 2009/10 surveys. This
indicates that while consumers spend more on
milk powder, the quantity consumed is reducing.
Market Players
The dairy industry in Sri Lanka consists of multiple
players along the supply chain. Broadly, the
industry consists of dairy farmers, milk collectors,
THE DAIRY SECTOR
producers or processors, and the retailers. A more
comprehensive breakdown of the several players
in this industry is provided in Figure 1.
In terms of milk powder, Fonterra’s Anchor and
Ratthi hold the largest market share -according
to market information-, followed by Nespray
(by Nestle Lanka PLC), Lakspray (by Lanka Milk
Foods (CWE) PLC) and Maliban (by Maliban Milk
Product Pvt Ltd). Other domestic players include
Pelwatte(by Pelwatte Dairy Industries Ltd) and
Highland (by State-owned, Milco Pvt Ltd).
In terms of Fresh Milk, the key brands are Anchor,
Kotmale (by Cargills (Ceylon) PLC),Ambewela (by
Lanka Milk Foods PLC), Highland and Richlife (by
Renuka group).
The key players involved in milk collection and
value addition to milk powder are Milco, Nestle,
Lanka Milk Foods, Cargills and Pelwatte. Other
players mentioned above are largely involved
in packing and distribution of imported milk,
although a select few also do engage in the
production of fresh milk.
Figure 1 – Flowchart of Milk Industry
Source: FAO

83PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
History of price controls
Price controls in the dairy industry appear to
be commonplace, with impacts being felt from
the source to the end-consumer. Much of these
regulated prices and their constant revisions are
intended to encourage domestic production and
meet its overall objective of self-sufficiency, as
well as to shield consumers or producers from
unfavourable movements in global Whole Milk
Powder (WMP) prices. The most visible price
control in this sector is the Maximum Retail
Price (MRP) imposed on milk powder, declared
an essential commodity in Section 18 of the
Consumer Affairs Authority Act No.9 of 2003
[Source: Government Information Centre]. In
addition to this, at the source, the farm gate price
which is the price a farmer receives for supplying
fresh milk, is also controlled by the government.
Furthermore, the use of import duties and other
taxes could also be considered forms of price
controls in this industry.
Maximum Retail Price (MRP)
The MRP stands to be the most common form
of price control instituted by governments. In Sri
Lanka, both imported milk powder and locally
produced milk powder are subject to an MRP.
However, importers generally face a higher MRP
than local producers, with the aim of making
locally produced milk more competitive and
affordable to consumers.
Over the years, the MRP charged for importers
and local produce has varied significantly, with
revisions being seen almost annually. In 2010 and
2011, due to a significant increase in global WMP
prices, the MRP of a 400g milk powder pack was
raised by Rs.19 and Rs.20 each year respectively.
Since then, the MRP of the 400g milk powder
pack hit a high of Rs.386 in 2014, once again
driven by a surge in international prices reaching
up to US$5,000/MT. However, WMP prices have
dropped, and have since then been hovering
around US$2,000 to US$3,000 levels for the past
two years; allowing the government to reduce
prices. As at the time of writing, the MRP in Sri
Lanka stands at Rs.325 and Rs.295 for imported
and locally produced milk powder respectively;
unrevised since the 2015 Budget. Similar price
revisions are also evident to 1kg milk powder
packs.
Graph 1 – MRP of 400g Milk Powder Pack
Farm gate price
While MRP is used to protect the interests of
consumers and producers, the control of farm
gate prices is largely aimed at encouraging
domestic production and improving the quality of
domestically produced milk. Since 2010, farm gate
prices have doubled, rising to Rs.70 per litre in
2016 from Rs.34 per litre in 2010. In comparison,
from 2010 to 2015, domestic production grew by
51%, corresponding to an annual growth of 8.6%
(CAGR).
While the repeated revisions to the farm gate
prices support farmers, it increases the cost of
production for processors. According to the FAO
(Food and Agriculture Organisation of the United
Nations), farm gate prices are largely determined
by state-owned Milco’s costs and thus, is used as
a tool for this state-owned enterprise to manage
its costs.
Graph 2 – Farm gate price
Source: Ministry of Finance, news articles
Source: Ministry of Finance

84PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Import duties and sensitivity to tax changes
In addition to the MRP and government-controlled
farm gate prices, importers are further subject
to adjustments in import duties. These tend to
vary depending on the impacts of WMP prices
on importers, or follows the fiscal policies of the
present government. Most recently, in December
2016, it reduced the import duty by Rs.55,
immediately after reducing it by Rs.35 in the
November 2016 budget. The same budget also
planned to tighten the belts of both importers
and domestic producers, proposing to remove VAT
exemptions on milk powder.
Sector Analysis
Local Production versus Imports
The dairy sector in Sri Lanka is dominated
by imported products, with only a handful of
domestic producers in comparison. It is not
difficult to understand why being an importer
of milk powder is more lucrative than producing
locally. Firstly, given the shortage of milk
produced domestically, with domestic production
meeting only close to 40% of the total milk
requirement, imports are a necessity and cannot
be completely discouraged by the government.
Additionally, importers purchase its raw material
at international prices and can gain an advantage
when these prices moderate, as it currently
is.Conversely, they also incur higher costs when
these prices rise. On the contrary, at certain
times, importers can face greater adversity than
domestic producers, particularly through the
unpredictable revisions of import duties, which
negate any benefits from global prices.
Nevertheless, given the vast variance between
the quantities of milk powder imported against
domestically produced milk powder, it could
be argued that imports do not just meet the
production gap but far surpass it.
Source: Department of Census and Statistics
Graph 3 – Powdered Milk: Local Production vs.
Imports
Graph 4: Domestic Production Gap vs. Total
Domestic Requirement
Production Gap = Total Milk Requirement –
Domestic Milk Production
Domestic production to Total Requirement ratio
gives the percentage of total demand which is met
by local production.[Source: Ministry of Finance]
Input costs
While it is apparent that due to government-
controlled farm gate prices domestic producers
have no control over a significant portion of
their raw material cost, whereas importers on
the other hand are able to source from global
markets essentially allowing them to manage
their raw material costs, it could be argued that
their exposure to movements in WMP prices could
make their margins much more volatile than that
of domestic producers.

85PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
However, through revisions of import duties and
MRPs, the full effects of movements in global
prices are not felt by importers. For instance, in
periods where WMP prices surged such as in 2011
and 2013, the MRP of milk powder was increased
to reflect this, however, the benefit of this was
not fully passed on to importers as import duties
were raised, exacerbating their difficulties. Local
producers, on the other hand, were able to expand
their margins further due to higher retail prices.
As evident in Graph 4, these periods also helped
to reduce the domestic production gap, as well
with the domestic industry benefiting from a milk
shortage.
With WMP prices declining significantly since
then, the MRP was also reduced. However, while
importers are now exposed to considerably lower
input prices, local producers are not compensated
similarly with farm gate prices continuing to
be increased. In fact, despite low WMP prices,
duty waivers have been increased further to
benefit importers. However, it is possible that the
imposition of VAT on 1st November 2016 may have
eroded this benefit.
Graph 5 – Global Whole Milk Powder (WMP)
prices
Source: Livestock Bulletin 2015(DAPH)
Yield of domestic production
As mentioned previously, the control of farm
gate prices is expected to encourage domestic
milk production. In addition to this, a number of
other factors also contribute to growth in local
production of milk, including the number of
milking cows and facilities and training provided to
farmers to increase the yield from cows.
In the past three years, the numbers of milking
cows have remained quite stagnant; however, over
the same period milk production has continued to
increase. This could be attributed to technological
advancements in breeds of milking animals,
pasture developments, training and adoption
of advance animal husbandry, management
and milking techniques, etc. The government as
well as the private sector have supported these
developments, with the government also engaging
in importing cows over the past few years.
Graph 6 – Cow milk production vs. Number of
cows milking
Source: Department of Census and Statistics
* Excluding Killinochchi and Mulativu Districts
** Excluding Kilinochchi District
Profitability of dairy producers/processors
Milco (Pvt) Ltd.
Milco is the primary dairy state-owned enterprise,
in addition to the National Livestock Development
Board (which engages in issuing quality breeding
materials to farmers at reasonable prices, the
establishment and maintenance of marketing
outlets to supply quality farm products at
reasonable prices, and the sale of fresh cow
milk to the public). Milco is presently engaged in
collecting, processing and distribution of milk in
the country.
Analysis of Milco’s financial performance
indicates that despite revenues growing positively
through most years, it still incurs operational
losses consistently. These losses have largely
been attributed to the increase in farm gate

86PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
prices, which resulted in rising direct expenses
(particularly in FY2012 and FY2013) as well as
capacity expansion activities (in FY2015).
On the other hand, the impacts of MRP revisions
have also been evident in their margins,
particularly in FY2014 where it attributed increase
in profits to the upward revision of the retail price.
Meanwhile, the moderation in revenue seen in
FY2015 is likely due to the steep reduction in the
selling price during the year.
Graph 7 –Milco (Pvt) Ltd : Revenue growth vs.
Profitability
Source: Ministry of Finance
Lanka Milk Foods (CWE) PLC
Lanka Milk Foods (CWE) PLC packages and
distributes imported whole milk powder and
skim milk powder- Lakspray and Lakspraynonfat,
while its subsidiary Lanka Dairies (Pvt) Ltd
manufactures and distributes UHT treated fresh
milk and nonfat milk under the brand name
Ambewela.
Analysis of its financial performance indicated
that it is strongly impacted by all forms of price
controls, i.e. farm gate prices, MRPs, and import
duties. Additionally, due to the import of milk
powder by the company it is highly exposed to
changes in international prices.
In FY2013, the government increased the retail
price of milk powder, resulting in lower consumer
spending on this commodity during the year. This
was also amid rising global prices and increased
import duties faced by the company. Despite these
unfavourable conditions, the company managed
to grow its revenue through a brand re-positioning
exercise of Lakspray,and was also able to post
profits owing to forward booking of milk powder
stocks.
In FY2014, international market prices soared,
however it was not reflected domestically as the
Consumer Affairs Authority (CAA) did not revise
its retail prices in a timely manner. This exerted
pressure on the company’s margins, specifically
on milk powder. Due to a shift in consumption
patterns from milk powder to fresh milk, the liquid
milk segment was however, able to improve its
revenues despite poor margins.
During FY2015, international milk powder prices
began to decline. However, the local authorities
immediately responded with increased duties
on milk powder imports, while also reducing the
MRP. This created a very unfavourable situation
for the industry. During this period, the operating
profit margins of the milk powder segment
contracted to -1%. This was despite a revenue
increase observed due to lower prices increasing
consumption of milk powder.
With the subsequent decline in global milk powder
prices, the company was able to improve its
margins, both in powdered milk and liquid milk.
However, the impact of the VAT could limit these
benefits.

87PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Graphs 8, 9 – Performance of Powdered Milk
Graphs 10,11: Performance of Liquid Milk and
others
Industry perspectives on price controls
Overall, most producers and retailers have made
their displeasure with the use of price controls
publicly known. A few of the insights gathered
from annual reports as well as conversations with
industry stakeholders gave further clarity to this
notion.
Fresh Milk producers
“The successive increases in farm gate prices of fresh
milk have made local dairy farmers uncompetitive
against the cheaper imported milk powder. Milk powder
is an essential nutrition component in the diet of a
majority of Sri Lankans and the Company appreciates
the necessity to maintain lower prices in view of health
and nutrition-intake concerns. However, the context
is counterproductive to the effective expansion of
local dairy production due to the prohibitive pricing
that stems from the high raw material and processing
costs.”
– Cargills (Ceylon) PLC, Annual Report 2014/15 and
2015/16
Milk Powder importers
“The year under review proved challenging for the milk
powder sector, with the unprecedented hike in milk
powder prices in the international market. No sooner the
prices started decreasing in the international market,
the government authorities counteracted by increasing
the import duty Immediately. In addition to this, the
Consumer Affairs Authority brought down the selling
price of milk powder thus causing a very unfavourable
situation to the industry.”
-D H S Jayawardena, Chairman, Lanka Milk Foods (CWE)
PLC, Annual Report 2014/15
“The shortage of high quality raw milk to meet the
increasing liquid milk demand will continue to pose
an obstacle to meeting the needs of the sector.
Simultaneously, the increasing import duty on imported
milk powder will continue to make milk powder a
luxury and not a necessity, as should be the case for
the citizens of the country. The maximum retail price
imposed by the government authorities serves to
have a detrimental effect on the selling price of the
final product, thereby affecting the accessibility to a
nutritious essential product such as milk”
-D. S. C. Jayawardena, Director, Lanka Milk Foods (CWE)
PLC, Annual Report 2014/15
Source: Company Annual Reports

88PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
“The profitability of the powdered milk arm suffered
during the year due to the refusal by the Consumer
Affairs Authority to allow companies engaged in
the marketing and distribution of powdered milk
to hike their prices in keeping with the global price
rise in the rates of powdered milk. This ongoing and
unfavourable status quo for the last two years is
eroding the profitability of the powdered milk business
in the country and gives rise to an urgent need for the
renewed appraisal of price structures. We have made
several recommendations to the appropriate authorities
to consider the plight of powdered milk companies.”
“I am hopeful that the government authorities and the
Consumer Affairs Authority will take a well-informed
decision to allow price increases in line with rising
global prices of powdered milk in order to ensure a level
playing field in the industry.”
-D. S. C. Jayawardena, Director, Lanka Milk
Foods (CWE) PLC, Annual Report 2013/14
Other milk powder importers also echoed this
sentiment, noting that price advantages from
global price movements did not have their desired
impacts, as import duties are used to negate this
benefit. Moves like this have even convinced some
importers to stop imports and source milk locally,
despite the plethora of problems in this segment
as well.
Importers also expressed displeasure with the
fact that the maximum retail price for this product
has remained unchanged for the past two years,
despite several changes in both global as well as
domestic markets. The ad-hoc implementation
of VAT beginning in November 2016 was a further
blow to this industry.
Sector experts also pointed out the importance of
imports as it believed that self-sufficiency was not
a realistically achievable target for Sri Lanka. Both
given the shortage of milk production in Sri Lanka,
due to poor productivity, as well as constraining
supply factors such as the limited landmass in the
country, to meet the total demand requirements
(estimated to be between 80,000-85000 MT
according to industry sources).
“Sri Lanka plans to increase its domestic dairy
production to 100% self-sufficiency by 2016. This is a
challenging task, given the current state of the industry
which merely supplies approximately 35% of the
domestic requirements. Moreover, the limited landmass
in Sri Lanka poses a Herculean challenge to make the
country self-sufficient in liquid milk.”
-D H S Jayawardena, Chairman, Lanka Milk
Foods (CWE) PLC, Annual Report 2012/13
Responding to the effects of VAT hikes which
came into effect in November 2016, the Managing
Director of Fonterra Brands for Sri Lanka and the
Indian subcontinent,SunilSethi, expressed the
following sentiments at a forum:
“It is not the way to go about it. We will be happy if we
can source every drop of milk from this country. But
currently we (local sourcing) can meet only 30 percent
of the demand. But by curbing imports, we will run out
of milk. Needed is an end-to-end solution to grow the
local dairy industry[…]Like it or not, imports are here to
stay. And we prefer if it stayed till we are able to develop
our local dairy industry to fulfil our demand.”
[Source: Daily Mirror]
Local Producers
Local producers are greatly affected by price
controls, both at source-as they purchase milk at
farm gate prices-, as well as at the point of sale,
with the MRP being fixed. This leaves them with
minimal control over costs and profits, dissuading
them from local production while also constraining
innovation; which is a vital factor if Sri Lanka is to
improve this industry. Further, given the almost
annual increases of farm gate prices, farmers
have no motive to improve productivity and will
continue to remain at present levels.
Local producers further question the contradictory
motives of the government which accommodates
policies that allow imports to flood the market
while holding onto objectives of self-sufficiency.
This excess supply created in the market through
imports suggests that prices should be lower,
despite local producers being unable to sell at
such prices.

89PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Conclusions
Examining the market factors and players, as
well as by following careful analysis from views
provided by varied stakeholders in the industry,
it is evident that there is a disconnect with the
aim of achieving self-sufficiency and the role of
price controls, both at a retail level, with the use of
MRPs, and at a farm gate level.
The removal of the MRP would allow for a higher
level of healthy competition among both importers
and local dairy manufacturers, allowing market
forces to decide prices. In terms of controlling
farm gate prices, it is necessary that the
government consider the needs of 20 million
consumers above the 200,000 farmers who are
the sole beneficiaries of this control. This would
allow greater predictability and transparency of
costs and revenues among industry players.
It is also necessary for the government to
recognise that given several supply constraints,
the objective of self-sufficiency is not realistically
attainable in a Sri Lankan context. Thus,
authorities should recognise the importance
of imports in meeting the growing demands of
consumers and implement well-thought out
measures to level the playing field between
importers and domestic producers.

90PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Price controls in the dairy industry: Milking the
consumer
First published in the Echelon magazine,
January 2018
by Ravi Ratnasabapathy
The dairy industry has been promoted by the
government with the objective of achieving self-
sufficiency in milk products. The objective appears
to be a moving target, the most recent year for
achievement being set to 2020. Currently, local
production meets less than 40% of the total
domestic milk requirement.
In 2015, local milk production amounted to 374
million litres, a 12.1% increase from the previous
year. In comparison, imports of milk and milk
products grew by 21.5%. Growth in imports of milk
powder outstripped growth in local production in
seven of the last ten years.
Unfortunately, policy towards the dairy industry is
a confused tangle of taxes and controls designed
to achieve contradictory objectives.
The bulk of the consumption takes the form of
milk powder, most of which is imported. Local milk
is mainly used for value added products and only
surpluses are converted to milk powder.
The policy is complicated because there are
two administered prices in the value chain: a
maximum retail price on powdered milk, and
a guaranteed farm-gate price for liquid milk.
Influencing the value chain and adding complexity
are taxes on imports of milk powder.
Milk powder prices are politically sensitive. Policy
is primarily geared towards the goal of protecting
consumers, and interventions are made from time
to time to set maximum retail prices. The farm-
gate prices of milk are mandated to encourage
local production with the objective of achieving
self-sufficiency.
Farm-gate prices of local milk tend to be high;
the cost of production of MILCO being the key
determinant of price. According to the Food and
Agriculture Organization (FAO):
APPENDIX 1
“the farm-gate milk price is largely determined by the
state-owned MILCO’s processing and marketing costs,
both of which are reputed to be relatively high. The
Government uses the farm-gate price as a political
tool because it needs MILCO to cover its costs.The large
private firms engaged in milk product manufacturing
follow the purchasing prices offered by MILCO.”
Naturally this increases the cost of the final
domestic products.
Between 2010 and 2016, farm-gate prices
doubled from Rs.34/litre to Rs.70/litre.
International prices of powdered milk halved
between 2014 and 2016, but Sri Lankan
consumers did not benefit as the controlled prices
of imported powdered milk were only reduced by
16% from Rs.386/- to Rs.325/- for a 400g pack.
There is an inherent conflict between the
maximum retail price, designed to protect the
interests of consumers, and the minimum farm-
gate prices, aimed at encouraging domestic
production.
The contradiction between a floor price on liquid
milk and a price ceiling on powdered milk means
that producers have an incentive to produce
items not subject to price control such as liquid
milk, flavoured milk, butter, cheese, and yoghurt.
However, as the input cost is high, they can only
retail at high prices and are not competitive in
comparison to imported products.
The government resolves this particular dilemma
by imposing punitive taxes on imported dairy
products: Rs.880/kg on butter, Rs.625/kg on
yoghurt, and around 140% on cheese. This raises
the price of imports enabling local producers to
compete, but as this has the effect of raising
overall prices, it is to the detriment of consumers.
In a further contradiction, the government also
taxes the import of powdered milk, even while
it imposes a maximum selling price. The tax is
designed to earn revenue for the state. Importers
of milk powder are squeezed between the tax
(which raises costs) and the controlled price
(which sets a ceiling at which the product retails).
The taxes change depending on the world market
prices. In the past, when world market prices

91PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
dropped, the tax rates were increased (while retail
prices were unchanged) to earn revenue for the
government. When world market prices increase,
the importers lobby for revisions to the controlled
price and the government responds either by
raising the controlled price, or if a price increase is
deemed to be politically unfeasible, reducing the
tax temporarily.
After a recent reduction, the current tax
(approximately 28% of import price) is relatively
low, but historically it was much higher; as much
as Rs.350/kg in 2014.
The ceiling on milk powder prices also creates
problems for local liquid milk producers as they
are unable to convert any surplus liquid milk to
powder at a profit. The local dairy industry focuses
on value added products due to better margins,
but the market is too small to absorb the entirety
of liquid milk produced. As excess milk cannot
be stored for long in liquid form it must be either
converted to powder or disposed.
It appears that although the high taxes on value
added products means that local production is
encouraged, the resulting high consumer prices
restrict the growth of consumption. Whenever a
surplus of liquid milk is collected, producers face
the dilemma of either destroying it or converting it
to powder; both options resulting in a loss.
The government is committed to raising domestic
production and competitiveness, but structural
impediments mean that the cost of local
production is high. Prof. SivaliRanawana of the
Faculty of Livestock, Fisheries & Nutrition at the
Wayamba University of Sri Lanka, has identified
some of the reasons for the low productivity,
including lack of quality pasture/forage, small size
farm holdings, and climate (which restricts the
breeds that can be used).
The best livestock-pure European breeds- can
only be maintained in the hill country, and even
in that region there is a shortageof forage of
adequate quality. The FAO notes that:
“Animals are mostly fed on natural grasses available
in common lands, such as roadsides, railway banks,
fallow paddy fields, tank beds and other vacant lots, all
maintained under rain-fed conditions.”
Although the good breeds in the upcountry have
the potential to yield 20 litres of milk per day -a
level achieved on some intensive farms-, the
average yield even in the best climatic conditions,
is only half this level.
According to the last comprehensive survey
(conducted in 2008/2009) by the Department of
Animal Production and Health, the average daily
milk yields per cow were 10 litres in NuwaraEliya,
5 litres in Kandy, and 3 litres in Matale. Overall, Sri
Lanka’s cows produce a woeful average of 2 litres
of milk per day.
Given the problems facing the domestic dairy
industry, it is not surprising that the costs of
production are high.
Government intervention in the dairy market is an
elaborate charade. Price ceilings on milk powder
placate the public, even while the government
contributes to raise costs by taxing the input.
Minimum farm-gate prices please the dairyman,
but squeeze value added producers who then
need protection from imports. Consumers are the
ultimate losers, facing limited choices and high
prices.

92PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Do price controls on cement reduce construction
costs?
First published in the Echelon magazine,
January 2018
By Ravi Ratnasabapathy
Sri Lanka’s high construction costs: do price
controls on cement help?
The President of Sri Lanka’s Chamber of
Construction Industry has complained that
construction costs in Sri Lanka are higher than
the region. Players in the tourism industry have
claimed that high construction costs inhibit
capacity expansion in the tourism industry.
Why are construction costs so high?
Cement makes up around 22% of total
construction cost. The Government imposes price
controls on cement to keep costs low but is this
working?
Price controls distort markets, causing shortages
and creating black markets but obvious market
distortions are not visible in cement.
This may be because of industry involvement in
setting prices which are based on cost estimates
provided by manufacturers. This seems likely,
given that cement prices in Sri Lanka are higher
than the region.
According the JUBM & Arcadis Construction Cost
Handbook (2017) the cost of ordinary Portland
cement in Malaysia is between RM19-20 per 50
kg bag which is about Rs.715-750/-. The cost in
Indonesia is around Rs.845. The regulated price in
Sri Lanka is Rs.870-930/- per bag.
Naturally, producers would be quite happy to
supply a product if the price were set high enough
and no shortages would occur.
Promoting competition and allowing markets to
work properly is best way to lower prices but in
2013 the Government imposed a new restriction
that curtails competition. The number of cement
plants that may be operated in a port was limited
to one per port. If a new factory is to be set up,
APPENDIX 2
priority has to be given to existing operators in the
port. This limits new investment, competition and
prevents prices from falling.
If the price controls were removed the price
of cement would probably fall as it would give
cheaper imports the opportunity to compete on
price. Would this affect quality?
Quality
The local cement industry has complained of low
quality (and low cost) cement imports in the past.
Low cost cement benefits consumers but if quality
is a concern this presents a problem. Unlike
in other products users cannot detect inferior
quality. Substandard cement or construction work
is a serious matter since the consequences may
manifest after construction is completed.
Sri Lanka’s standards on the quality of cement are
good. Importers are required to submit samples
for testing and on meeting the standard must be
registered. Enforcement of the standard seems
based on inspection of samples but this alone is
probably inadequate. There is a need to move to a
system that is self-enforcing.
This issue needs to be addressed through a
comprehensive building code, which is lacking. A
proper code is needed for consumer protection
and public safety. Although old regulations such
as the Factories Ordinance exist these are not
up to date and enforcement is weak. A Standard
Code of Practice to regulate and enforce design,
construction and compliance requirements is
necessary.
While a uniform code is absent, a multiplicity
of approvals exist: at provincial, district,
pradesheeyasabaha, urban and municipal
level. These become even more complex when
central agencies such as Urban Development
Authority (UDA), Sri Lanka Land Reclamation and
Development Corporation and Department of
Agrarian Development. This leads to overlaps of
authority, conflicts of instructions, contradictory
regulations and compliance loopholes.
There is a lot of red-tape but it does not improve
safety or ensure quality.

93PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
The Government needs to replace these old
regulations with a single comprehensive code,
legally enforceable, covering all classes of
buildings and including safety, structural stability
and accessibility.
Along with a code, building contractors and
architects should be licensed and carry
professional indemnity insurance. The objective of
licensing is to ensure that work is done by people
who are conversant with the standard (which
should carry statutory force) and conduct their
duties competently and professionally.
In the event of any failure in buildings they
may lose their license to practice. This is
apart from any action taken in the courts. The
insurance ensures that consumers can receive
compensation for shoddy work. The code is self-
enforcing; if there is a failure they will not be able
to practice which gives the incentive to ensure
quality.
Specialist licenses should be necessary for more
complex work, including:
(a) Piling works
(b) Ground support and stabilization works
(c) Site investigation work
(d) Structural steelwork
(e) Pre-cast concrete work
(f) In-situ post-tensioning work
Overall construction costs
Cement is only one part of construction cost,
policy with regard to other construction materials
significantly increases costs.
The Government imposes high taxes on many
imported construction materials to protect
domestic industries. These include steel bars
and rods (taxed at 89.66%), ceramic Tiles (taxed
at 107.6%), sanitarywear (taxed at 72.4%).
Aluminium extrusions, granite, electrical fittings,
furniture and carpets are also heavily taxed. This
results in high overall construction costs.
For example, steel costs around USD 723mt in Sri
Lanka but costs only USD500mt in Thailand and
USD 470mt in China. The current (January 2018)
one month contract for LME Steel Rebar on the
London Metal Exchange is USD 564/mt, the one
year forward contract is USD 513/mt. By some
estimates, the construction cost of an average
(non luxury) high rise apartment block in Sri
Lanka may be as much as 60% above Thailand or
Malaysia, due to these protective taxes, despite Sri
Lanka’s lower labour costs.
The policy is a muddle of ad-hoc interventions.
Contrast this with the UK Government, which in
partnership with industry has developed a strategy
to improve the performance of the construction
sector by 2025. Objectives include lowering
costs: a 33% reduction in the initial construction
of new build and the whole-life costs of built
assets, a 50% reduction in the overall time, from
inception to completion of construction and a 50%
reduction in greenhouse gases. The UK industry
is focused on reducing costs through efficiency,
better methodology, technology and innovation.
The focus is on overall cost reduction not trying to
protect local producers of construction material.
Apart from protective taxes, the lack of scale
amongst contractors, low labour productivity,
outmoded methods and long delays in
approvals also contribute to higher overall costs.
Improvements in these areas will also reduce cost.
According to the industry the bulk of the cement
consumption is by households and private
developers. Current policy raises, rather than
lowers costs. High costs mean ordinary citizens
are unable to afford housing while the Government
intervenes to protect industry.
According to a report by Jones Lang LaSalle
(2014):
“high project development costs coupled with the
high borrowing costs for housing loans have breached
affordable limits and restricted the home buying
prospects for Sri Lanka.
Based on our understanding from the affordability
assessment, only the top-income-earning resident Sri
Lankans can buy homes in Colombo. Residents with
limited income are forced to opt for properties that are
at least 20-25 km away from the city limits.”

94PRICE CONTROLS IN SRI LANKA – POLITICAL THEATRE
Conclusion
Price controls for cement are clearly not helping
reduce construction costs. Restrictions on
competition deter investment and contribute
to raise, rather than lower cement prices. Other
interventions, to protect local industry has
resulted in raising overall construction costs.
While the State is eager to intervene in
unnecessary areas it has neglected its role as
a regulator. Although in most circumstances
the best protection is the common sense of an
individual consumer, in instances where technical
knowledge is needed to detect poor quality there
is a case for regulation, particularly if public safety
is involved.
The Government should stop controlling the price
of cement and focus on drawing up and enforcing
a proper building code. To lower costs, the taxes
on construction materials must be reduced and
competition facilitated.

NOTES

NOTES