Pricing for poor returns

THE EDITOR: Index pricing or going-rate pricing is a way for ventures to set prices for their goods based on averaging market prices through a given time-period.

There can be many pitfalls associated with it: buyers tend to be part of a relatively fixed segment; high costs in a given period can not be compensated; higher spot and futures prices can not be accessed at will either for the present period or later periods; production-output can dip when price averages are higher or be too high when averages have fallen; a strong market trend gets averaged while a soft market trend depresses returns.

In other words for the original venture, output and prices can never be optimized. Better framed, closer managed index pricing can allow some compensation for the worst effects; but even with that, index pricing will generally be a non-competing structure that tends to transfer the greater advantages to the downstream sellers from the original venture.

Moreover, it gives insiders and associates and buyers a picture of where that part of the market is, allowing them to configure ways to leverage the downstream positions to their benefit, not necessarily for the original venture. Is index pricing being used in the new state enterprise paradigm in the Trinidad and Tobago energy sector? It will show at some point in poor returns on both capital and equity and in thinner dividends. State enterprise also sets the stage for engaging capitalistic contractors and sub-contractors. They take their payment straight off the profit-and-loss account well ahead of the bottom line and the dividend assignment.

The Constitution allows for recognition of merit, skill and integrity. It is meant to subserve the common good not capitalism and “waiting to see.”

E GALY

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