“This is the second of a five part response to the failings of the PNC tax tariff policies. The first part of the response focused on how Treasurer Abel lied about the 25% tax tariff on milk did not apply to UHT products. The second part covered how the government has ignored expert advice from its own Independent Consumer and Competition Commission on building competitive markets in areas such as the flour industry. In the third, the Alternative Government put forward a constructive suggestion for a new Consumer Council to better protect consumer interests and take into account the cost of living pressures on PNG families. The fourth will discuss the timber manufacturing industry and discuss the former tariff reduction program introduced in response to the PNG’s last economic crisis in the late 1990s under the PNC. The fifth and final response will include better ways under an Alternative Government to increase incomes and jobs in PNG while keeping down the cost of living.
“The tariff on flour only affects retail packaged imported flour. The main brands such as Flame and 3 Roses are imported in bulk wheat and processed onshore therefore prices are not affected.”
The Treasurer is ignoring the findings of the 2015 “Flour Industry Pricing Review” conducted by the government’s own Independent Consumer and Competition Commission. That review stated “The Commission found that tariffs on imported flour are bad for consumers. Estimates indicate that tariffs are costing consumers K19 million per year and add approximately 14 toea per kilo to the price of flour…..Because imports are an important contributor to competition, the Commission believes that consumers would be better off if tariffs on flour were removed completely.” (page 9 of Executive Summary – complete extract in the attachments). Treasurer Abel, this is a pretty clear finding. So why have you ignored the expert advice provided to you? Why are you doing something which is so clearly going to hurt consumers? The report indicates that “From the evidence presented to the Commission it appeared unlikely that local mills need the tariffs in order to survive. Gross margins for local mill operators appear to be healthy.” So there was no need anyway to increase tariffs to protect local jobs. So how do prices for flour in PNG compare to other countries? The report finds “At present flour prices in PNG are twice as high as the lowest price in New Zealand” (page 8). PNG consumers are now going to get slugged with this massive increase in import tariffs on packaged flour – ignoring the government’s own expert advice and lifting tariffs to 25% rather than removing them altogether.
Let me put this another way – from the perspective of a business person. When you are a business person, when setting your prices, you look around and see the prices of your competitors. You want to match their price or be slightly lower, as long as you are still making a profit. Any economist knows that just two firms in a market is usually called a “duopoly”. It is not a competitive market. What can make a small market competitive is the possibility of another competitor such as a supermarket chain wholesaler being able to import similar quality products at a lower price. PNG Government’s have always aimed to give some advantage to local producers. So the tariff level on imported flour in both small and large packages was 10%. This 10% was a price advantage already to local manufacturing. The government has now decided to lift this price advantage by a further 15% – this is because the tariff has been increased from 1 January 2019 from 10% to 25% for all flours in packages less than 50kg. Given the lack of local competition, this will simply mean that the price of packaged flour will increase by 15% as that becomes the competitive price ceiling for local manufacturing. The local industry can now charge the higher price for 1kg and 2kg packets of flour and take the extra profits. Indeed, the Treasurer has ensured profit levels to these two firms will increase by even more as he has lowered the tariff on bulk packaged flour of over 50kg. Treasurer, prices will be affected, and this will hurt PNG families on such a staple product. What is the point of having an ICCC if you simply ignore their professional recommendations and instead turn to your industry besties?
“There are two large local producers of fresh chicken meat so prices should not be affected here.“
In the same way as the Treasurer was wrong about flour, the Treasurer is also wrong about chicken. He lacks business sense. Two firms are not enough to create price competition. The possibility of importing similar products creates a price ceiling on what local firms can charge. If you increase that price ceiling through lifting tariff rates, it is in the interest of local firms to lift prices to lift profits. Once again, it is consumers that are hurt as their interests are not advanced in the politics of Waigani.
Treasurer Abel is pursuing policies that have failed in PNG and in other developing countries. As Vietnam prepared for APEC, it lowered tariffs on over one thousand items. As PNG prepared for APEC, it increased tariffs on nearly one thousand items. A future part of my response will provide more details on the correct policy options for actually delivering on the goal of increasing local jobs and incomes.
Shadow Minister for Treasury & Finance
9 January 2019
Independent Consumer and Competition Commission Report on Flour
The 30 October 2015 ICCC report “2015 Flour Industry Pricing Review” is available at the following website https://www.iccc.gov.pg/reports/2015/447-30-october-2015-final-report-flour-industry-review-pdf-1/file
An extract from the Executive Summary (top of page 8 and then page 9) is below: