Argentina tries and fails to raise its extremely low utility prices

Well, it’s happened again, to paraphrase the Car Talk guys from NPR: someone has wasted another perfectly good opportunity to do tariff reforms properly.

This time, the Government of Argentina is in the hot seat. The Economist reported that the government recently tried to quadruple the price of gas and raise the price of electricity sixfold. It did so just as autumn set in, when customers heating bills go up anyway. Protests erupted, predictably enough. Reducing subsidies or raising prices is a balancing act requiring

Now, raising the price of anything by 400% or 600% at one go may sound extreme. But Argentina’s utility prices have been at rock bottom for a long time. They are a a legacy of populist measures under the previous Kirchner regimes. In fact, the cost of electricity per kWh is just 1 cent per kWh, compared with 16 cents in Brazil and 12 cents in Chile. The previous governments had kept prices artificially low through massive state subsidies, which ballooned to 12.3% of government spending by 2014. A nice parting gift to the new administration of President Mauricio Macri. This is a precious use of public resources that could be put to far better use elsewhere. The Economist noted that the subsidies were costing the government $16 billion a year.

When a commodity is so cheap, it also tends to be wasted. Who is going to turn the lights off when you will hardly notice the difference in your bill? A knock-on effect is rolling blackouts, as power producers struggle to generate enough supply.

With mounting opposition to the price hikes on August 18, the Supreme Court ordered the increases blocked. According to the Financial Times , the grounds for the decision were that the gas price increase “violated the right to participation by consumers in the form of public hearings in the revision of tariffs.”

And so yet another chapter can be added to the story of how not to raise utility prices. There is a long list of governments failing in this particular endeavor.

What could the Macri government have done differently? Lessons from efforts by other countries to introduce price reforms could have been studied. They boil down to taking some basic measures. A few, but not all of them relate to the Supreme Court’s comments:

• Engage in consultations with key stakeholders
• Offer some concessions, instead of imposing the changes by fiat
• Study the potential impacts, preferably using multiple tools – surveys, focus groups, stakeholder consultations – and doing so in an open, manner.
• Time price increases better, so they didn’t kick in right at the time when usage is highest, i.e. with the cold weather season starting
• Do a better job of communicating your rationale for raising prices
• Introduce measures to mitigate the impact on those most affected

Of course, none of the above would have guaranteed that the price increase would have stuck. But preparing better would have considerably reduced the risk of failure, while also addressing public concerns. The failure to both raise prices and to consult more with consumers may effectively cost the government billions of dollars. That is money which could be spent on a host of other areas the country needs to invest in.