Price freeze deteriorates the quality of the public services - IDESA

Report Nº: 87604/09/2020

Price freeze deteriorates the quality of the public services

The national government froze the prices of internet, cellular phone services, and cable TV. Similar experiences, such as electricity in the metropolitan area, show that prices freeze leads to service deterioration quality and subsidies financed by monetary expansion, which brings more inflation.

With an Emergency Decree, entitled “Argentina Digital”, the national government established that internet connections and mobile telephony are essential public services. Therefore, the State will regulate a basic universal and mandatory service and will impose price controls. Simultaneously, a price freeze was established for these services plus cable television until December 2020.

Given the increasing importance of digital connectivity, it is pertinent to declare it an essential service to increase quality and accessibility. For this goal, great care should be in the design of regulations and its application’s professionalism and transparency. A different case is when interventions seek to use price controls for anti-inflationary purposes. An example is the manipulation of electricity fares to try to contain inflation and to pretend benevolence with family budgets.

The national government’s interventions on the electricity service in the Metropolitan Area of Buenos Aires (AMBA) during the period 2003 – 2015 are very instructive. According to data from the Ente Nacional Regulador de la Electricidad (ENRE), it can be seen that:

  • Residential tariffs were adjusted, in this period, by 36%, which implied a real value loss of 86% due to inflation.
  • State subsidies to electric companies to compensate for this tariff freeze went from zero to AR$ 511 billion or US$ 7 billion per year at current prices.
  • User complaints increased from 56 to 1,889 per day.

These data show that tariff freezes lead to deterioration in the quality of services and public funds to subsidize them. The reason is that when the State imposes an artificially low tariff, companies naturally tend to compensate by cuts in the investment plan, which deteriorates the quality of the service, increasing complaints and pressures for subsidies. Subsidies do not solve the problem because the companies that provide the service involve more energy ingratiating with the bureaucrat who distributes them than delivering good services to their clients.

The policy of subsidizing electricity services offers several lessons. The first is that manipulating tariffs is a terrible tool for controlling inflation. It may temporarily moderate the increase in the general level of prices, but the need for normalization comes sooner or later. The process becomes traumatic because accumulated delayed increases, and users become accustomed to artificially low rates. Additionally, the State ends up granting subsidies financed with money issuing, which brings more inflation.

Besides the inflationary effects, tariff manipulation deteriorates the quality of the service. The explosive increase in user complaints with the electricity price controls in 2003 – 2015 is illustrative. Experience also shows that tariff normalization is politically costly and does not restore the quality of service immediately. In 2018, after tariff normalization, there were fewer complaints about electricity cuts, but they were still high on 1,503 per day.

It is pertinent to propose a “Digital Argentina” as the decree is called. But, as the experience in the electricity sector shows, manipulating prices will produce the opposite results. Instead of discouraging investment, it is essential to promote it so that half of the poor households that do not have an Internet connection might have one or companies exporting digital services expand their capacity to generate more foreign exchange. More investment requires fair regulations that increase competition, market transparency, and consumer protection. If there are subsidies, they must be assigned to connectivity for the low-income families instead of freezing prices for the porteños to enjoy cheaper internet and cell phone service, as is the case with electricity, gas, and public transport.



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