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Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

Budget and the Transportation Sector – Promising yet Incomplete

The budget allocated for the development of transportation sector for the upcoming fiscal year is Rs 24 billion (approx.). This year’s ambitious budget plans for building fast tracks, highways, and even foresees Nepal using trains and ships. Although the budget might look like the government has acknowledged that travelling in Nepal (both public and private) is arduous and inconvenient, it does not solve the major problem in transportation sector of Nepal – syndicate.

It is an open secret that the transport association practically controls the entire transport system in Nepal. It decides who gets into the industry and who doesn’t; it lobbies on price setting, among others. The budget envisages a country full of excellent roads with the aim of facilitating cheap and easy transportation of goods and people, but if the budget cannot (followed by pro-competitive policies) limit this anti-competitive practice by the syndicate these policies might not be efficacious.

In addition to this, one of the provisions (i.e. No. 85) of the budget mandates all taxis plying in Kathmandu valley to be equipped with a digital meter system. Although this looks propitious, the government’s inefficient monitoring system would make existing day light robbing perennial. Even with the existing meters in taxis, taxi drivers, on their discretion, decide the price before taking in passengers. But, due to the limited number of taxis plying in the valley, passengers have no choice but to agree on the rate drivers set. Although, one might argue that even passengers could bargain on the price but, how convenient is it if you commute on taxis everyday? When the number of passengers is far more than number of plying taxis, the drivers would always have better bargaining power.

So how can the government achieve its intended result of smooth and cost effective transportation system? One way of achieving its goals is by encouraging competition in this sector. To make it competitive, there are several provisions the government could make. The most important is by facilitating entry of new public vehicles by limiting syndicate’s influence in the registration process. From 2001 to 2011, the number of registered vehicles in Kathmandu valley increased 3.75 times. But public transportation comprises of only 1% of those vehicles. This shows there is a barrier that stems entry into the transportation industry. Similarly, with regards to taxis, since the year 2000, the number of taxis has dropped from 8000 to 5500, while the population of Kathmandu valley has risen from 1.6 Million to 3.5 million from 2001 to 2011. Opening up new taxi registration (it was closed in 2000; once opened in 2015) would reduce the ratio of taxis to population, which would instead increase passengers bargaining power, as now taxis’ would compete for passengers not the other way around.

Although the government has prepared and allocated budget for transportation sector development in good faith, it still doesn’t address Nepal’s major problem of anti-competitive behavior in transportation sector. Policies such as limiting syndicate’s influence in public vehicle registration, and opening up taxi registration are two of the several ways that government’s policies could engender competition.

 

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Non-Tariff Measures Hinders Trade: A Case of Nepal, South Asia and European Union

International trade for Nepal, like any other country, is always favorable. Consumers get choices and lower prices, and firms get introduced to better technologies, and cheaper and better factors of production; altogether it is a win-win for all. The freer the trade regime, the more the participating countries can benefit from trade.

However, the math does not seem to be resonating with too many countries. Countries, even those that have ratified free trade conventions and agreements, have been seen favoring one form or another of non-tariff measures. Sometimes, the argument is protection and promotion of domestic industries, at other times, it is minimization of risks to human health, national security; sometimes it is prevention of deceptive trade practices. In recent times, the agenda of protection of human, plant and animal lives has seen itself rise as one of the most politically sound arguments for these non-tariff measures – some tools include standardization and quality control. However, they can still equally hurt trade competitiveness and lead to rise in cost of goods and services – something that nobody wants.

Situation in Nepal — Problem while Exporting

Border compliances include obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. Nepal majorly exports agricultural products to India. But these sets of exports require standardized tests and certification mechanism, in which there is absence of Mutual Recognition Agreement (MRA) between India and Nepal. In other words the Bureau of Indian Standards (BIS) does not accredit the tests done by the Nepal Bureau of Standards and Metrology (NBSM) and Department of Food Technology and Quality Control (DFTQC). A major burden to exporters therefore is more time and higher cost since samples have to be sent to Kolkata, Delhi or Lucknow for certification.

What about South Asia?
A study done by CUTS (Consumer Unity & Trust Society) International India in 2012 found out the most cited non-tariff barriers in South Asia are lack of transit arrangements, poor trade infrastructure at border and ports, procedural delays on security measures and costs (both monetary and time) associated with documentation for import and export and rules of origin criteria.

Research studies have also shown that a 50% reduction in time of export can generate benefits equal to 4% of GDP of South Asia’s Least Developed Countries.

European Union

After economic integration was launched in Europe in the 1960s, and since the introduction of the Euro (currency) in 1999, how well has Europe performed in pursuing free trade? A study done by Warwick Research Institute, which examined 166 manufacturing industries in 11 member states over the period 1999-2003, found out that significant trade barriers still remains, and apart from the inevitable transport costs, the most substantial costs are technical barriers— pre-shipment inspection, sanitary and phyto-sanitary among others.

What do we learn?

Arguments for non-tariff measure might be politically sound, but in the end of the day, these measures can tantamount to rise in costs of goods and services and hurt trade competitiveness. One way forward for Nepal is sorting out the MRA with India. The government can upgrade its standardization facilities so that the Indian side accredits it. In addition, Nepal also needs to invest in ports, and infrastructures needed for international trade; improve on procedural delays and re-evaluate its document compliances. Example of Nepal – problems while exporting (standardization); South Asia’s procedural delays, poor infrastructures, etc; difficulty in trade in Europe despite having free trade agreements; shows just how it is important to limit such non-tariff measures in international trade.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Discretion of “The Honorables”

Regulatory discretion is not something that is unheard in Nepal. The government of Nepal time and again has stepped in and has amended policies, although market disruptive, in its own discretion. These are the some examples-

  • Himalayan Java prices a bottle of water at Rs 130. They get prosecuted (fined Rs. 75,000) for charging high price, although no Act or policy stipulates measure for charging certain amount of fine in such cases.
  • After the crash of Air Kasthamandap’s single engine aircraft, without any further investigation, the government banned operations of single engine aircrafts across the country.
  • Government agencies confiscating Surya cigarettes, for not carrying health-warning message on 90 per cent of the packet, although the Act to Control and Monitor Tobacco stipulates that the warning sign should cover 75 per cent of the packet.
  • Futsal was banned without any notice or warning stating that it promoted drug use, distraction from studies, etc. Futsal was gaining popularity as more and more futsal courts with investments over Rs. 1 crore were being established.
  • In 2008, the government banned registration of private schools because it was growing like mushrooms. Although growing number of private schools are beneficial as it promoted standards and increased choices for students and parents.
  • In 2000, taxi registration was halted with the rationale that there were too many taxis plying on the road. But in reality, the passenger taxi ratio suggested that the number of taxi plying in Kathmandu was not enough.
  • DoTM gave a 15 – day ultimatum to register e-scooters, stating that e-scooty sellers were selling it with false information that no registration, driving license or helmet is necessary for using them. But in reality, there is no law or policy that stipulates that an electric scooter should be registered with DoTM, neither do e-scooter drivers need a driving license. The department has also stated that from now on, the roadworthiness of the scooters will be tested and would be allowed to use on fixed routes only.

These are the instances of regulatory discretion in my mind; I bet there are more than dozens of such cases. But it all boils down to this: the government is not working under any rule of law, but is forming policies in its discretion.

So what difference does it make if our benevolent government practices regulatory discretion? Well, as a consumer and an entrepreneur, it makes a lot of difference. For example, if I were a futsal entrepreneur, seeing that there were profit prospects in this market, I would take loan from a bank, and would establish a futsal court. If, on the day of inauguration of my business, the government bans futsal, how would I repay my loan?

Similarly, as for the consumers, futsal is a popular sport among people of all ages. It is a recreational activity that leads to good health. Well, had it been banned, all of those people would not have been able to exercise and maintain good health, specially in a city like Kathmandu where there aren’t much open spaces to exercise.

All in all, this sort of regulatory discretion does more harm than good. It is because of such unstable business environment the private sector has not been able to become the engine of growth. While politicians and bureaucrats tend to emphasize how private sector will be incentivized to boost our economy, their policies turn out to do the opposite thing. Lets just hope, these sort of regulatory discretion doesn’t happen in the future.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Why transport syndicate is an ill system

Existence of public transport syndicate in Nepal is a common knowledge. Those who commute by bus, micros, and taxis, our stories might be somewhat similar. Clinging to the bus door, constantly struggling to grab a seat and getting stuck in the back end of the bus and not being able to get off on our stop because of the endless crowd inside it is an everyday bus trip.

While an ideal market would’ve had many public transport entrepreneurs, giving choices to the consumers, better quality service and competitive prices, it is not the case with this industry. The public transport syndicate is an ‘ill system’, as pointed out by the Supreme Court, which has in store a number of problems for commuters and prospective entrepreneurs alike.

1. Overcrowding

First of all, overcrowding makes our travel hectic. Passengers are asked to squeeze in so that the bus can carry as many passengers as possible. The incentive behind this – more passengers, more revenue. Altogether this makes the journey unpleasant.

There is another more serious problem at hand – insurance coverage. The Act governing the public transportation – Motor Vehicle and Transport Management Act, 1949 mandates insurance of the passengers of a public transport vehicle according to the number of seats. That means the ones who get a seat on the bus are insured, while the ones clinging to the door aren’t… Like hanging on to the bus door wasn’t risky enough.
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2. Barrier To Entry

For an entrepreneurial individual, getting into this industry is very costly – from making sure that one is in the good graces of the syndicate, to spending tons of money for acquiring a license for the vehicle. The syndicate has put a huge price tag on getting a route permit, without which one can’t ply the roads. This cost has kept competition at bay. An existing association’s recommendation is practically mandatory for one to acquire a permit and make sure that he gets to run his business without any threat after he does. How the syndicate has been able to erect this barrier would make for a story for another day, but this has effectively put prospective entrepreneurs at check.
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3. Limited Choices

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So why don’t buses with vacant seats ever show up? Well, the answer is the aforementioned barrier to entry created by the syndicate. Limiting competition and taking away all the profit from the industry is what the syndicate stands for. And while it does that, the ones who suffer are the consumers. Consumers are compelled to board those overcrowded busses with worn out seats and poor services because the syndicate restrains supply.

Arduous, frustrating and hectic are probably the three words that best describe travelling in a public transport in Nepal. Breaking this syndicate would not only bring competitiveness into the industry, but also bring more choices and better services for the consumers. And yet (even after the Supreme Court’s order to deal with the syndicate) the law enforcement mechanism lays mere witness to the nuances of the syndicate.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Across Borders

In light of the economic blockade faced by the country, trading across border has become a major topic for discussion among the Nepali people. However, even without the blockade, doing business across border is difficult in Nepal. In a recently released report by the World Bank titled ‘Doing Business 2016: Measuring Regulatory Quality and Efficiency’, Nepal ranked 99 out of 189 countries for ease of doing business. This, coupled with its poor performance in trading across border, shows that it is challenging for Nepali entrepreneurs to do business internationally, regardless of the economic blockade. The border and document compliance costs are high, ample amount of time is wasted at ports, and in contrast to other countries, Nepal’s performance is very poor.

Ongoing scenario

Amidst the current embargo, it is taking many days for the shipments to reach their destination, while a lot of them are stuck at the border for months now. But even before India’s unofficial blockade, one can argue that on-time delivery of shipments was not our strong suit. Ideally, to fulfil all the border compliances, it takes 60 hours for exports and only 30 hours for imports. These compliances include obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. A number of factors contribute to this delay, but especially for goods that are being exported, one of the reasons is the non-accreditation of the Nepal Bureau of Standards and Metrology (NBSM) approved tests by the Bureau of Indian Standards (BIS). This obstacle has led to increased time and cost, as samples have to be sent to labs abroad for approval. If the Indian side, regardless of the present blockade, has not been accrediting our tests, then NBSM should improve its standardised tests to meet Indian standards.

The goodwill of any business largely depends on its ability to deliver goods on time. The government obviously would want to promote exports, but the existing strenuous domestic compliances on exports, that do nothing but delay the delivery, is unreasonable.  Ten different documents are obligatory for international trade in Nepal, while other countries such as Serbia, Botswana, Japan, two of which are landlocked countries, require much less. Also, it is no surprise that to comply with all the documents required for trade, it takes 19 hours for exports and 48 hours for imports (as per the latest Doing Business report), probably owing to the lack of clarity in roles and responsibilities among ministries, departments and implementing agencies.

Other countries that export at a larger volume or have more variety of trading products have lower compliance costs. For instance, compliance costs in Sweden and Netherlands are only $55 and $0 respectively. One cannot expect Nepal to be at a par with them, but the current cost of almost $311 for exports from Nepal is huge.

Being a landlocked country, Nepal relies heavily on imports. If the required volume of essential commodities does not reach the country for some reason, shortages loom and prices rise. Also, when the cost of doing business through official channels is high, it is likely that unofficial channels would be used, which boosts the underground economy, or black marketeering. Lower cost of trade would encourage people do to business through official channels.

Overcoming challenges

One might argue that even if the government makes favourable policies for international trade, Nepal, being a landlocked country, does not have access to sea. Nor does it have railway systems or efficient airports. And thus, its performance gets adversely affected. But other landlocked countries such as Serbia, Bhutan and Czech Republic fare better than Nepal. Bhutan, for instance has a similar transport system as Nepal. It has one international airport, no railway system, and international trade takes place via road, just like in Nepal. However, in these countries, border compliances are more lenient and only four documents need to be submitted which takes far less time than in Nepal.

The quantitative indicators, as presented in the Doing Business report, reflect how a country performs in ten different components. Our performance in trading across borders shows that, regardless of the current embargo, there are some policy loopholes that need to be addressed. First, redundant documents required for international trade can be removed or combined if possible. Also, a one-window policy for some, if not all, documents would reduce the time and effort taken for document compliance. In addition, an integrated database system, interlinked between ministries, departments and related agencies can also be a viable option to improve coordination. The costs incurred during trading across borders need to be re-evaluated. This would make trade cheaper and encourage businesses to expand. In addition, creating mechanisms that aid in reducing border compliance time would make trade more professional. Policies that incentivise businesses in delivering their products on time would smoothen and boost trade across borders. There are landlocked countries that have strong economies and are competitive in the world market; if they can do it so can we!

This article was originally published in The Kathmandu Post on the 14th of January, 2016. The article was authored by Abyaya Neopane. For the original version of the article, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Commercial Import Provision- Welcoming Yet Incomplete

The ongoing Terai unrest and the Indian embargo have made doing business in Nepal difficult. Lack of fuel, medical supplies, raw materials and other imports have forced schools, industries, hydropower projects, and organizations to shut down. Nepal Oil Corporation (NOC), the sole supplier of petroleum products in Nepal has not been able to supply fuel; even at times when they have been, strict rationing policies follow.

Amidst all of this, the Council of Ministers has very recently taken a landmark decision, thereby temporarily allowing industries, diplomatic agencies, schools, hydropower projects, national and international non-government organizations and commercial banks to import fuel for sole consumption. This is a welcoming provision at a time when the sole petroleum products supplier NOC hasn’t been able to fulfill the country’s fuel demand. This decision is definitely a positive step. With this provision, different parties are now able to trade in the international market with a partner of their choice. More of similar policies will mean that Nepalese people will be able to exercise more economic freedom while the burden to the government also diminishes substantially.

Having said that, Nepal will have to scrutinize every single decision it makes along the way if we expect positive outcomes to follow. This very provision at hand, that of allowing a select few groups to import fuel from any supplier they can manage, lacks an important consideration and is thus incomplete. This provision could have been made more comprehensive.

Termed as a ‘good decision’ by Pashupati Murarka, this provision isn’t inclusive. The NOC wasn’t only responsible for supplying fuel to industries, schools, and organizations. What about the general public? Neither can these selected organizations (including the private sector) legally sell fuel, nor can the NOC meet the public’s demands. So whom should the general public depend on? The employers and workers in those select sectors might now have access to fuel, but what about the self employed? The farmers? And the list can go on!

Our economy is not only run by industries and hydropower projects. There are other players, too. Tourism sector, which includes hotels and restaurants, is not authorized to import fuel. How did the government miss out on such an important sector?

Logistics is an important issue to consider while importing fuel. The cost of logistics to every school, industry, and organization will be an added cost into their accounts. This might not be a major issue at the moment for these parties since getting petrol, anyhow, is their major concern. In the long run, however, the possibility of schools, industries, and organizations pooling together to import fuel to reduce transportation cost is pretty much likely; in other words, a body that imports fuel and sells it. If so, then why not allow this ‘future body’ to become a private petroleum trade company already, and reduce the logistical burden?

All in all, this provision is a testimony that the government and its enterprise – NOC – cannot meet the fuel demands of the country. Although, what it has done in response is very much welcome, it is still a discriminatory policy. For now, its next moves could be: one, to allow everybody to import petroleum product from any supplier they want; and two, to stop assuming this as a temporary solution and that the government will have complete control of the industry once the things come back to normalcy, rather to truly liberalized petroleum trade industry.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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