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Is the idea of state running large buses the solution to improve public transport experience?

Every one of us commuting in public vehicles in the city can recognize the awful experience in travelling by heavily crowded unmaintained buses while being squeezed up among commuters in most uncomfortable ways. The chronic victims are in fact the ones traveling to work on busy commuting hours when this recklessness is at its peak. For such commuters as we know, travelling between home and work has mostly been the area of tension besides work.

In recognizing the tragedy of the commuters, the central government has made a decision to urge the municipalities of Kathmandu Valley to jointly form a company to operate 50 large buses running around the city. And, given our common belief that state is somehow responsible for taking care of our fundamental necessities like proper public transport system, this decision can easily be perceived as virtuous effort. After all, this government commitment to provide better public commutation service to people seems as a move to rescue us from the daily bad commutation experience. However, this common logic doesn’t draw the complete picture for this matter. There are actually relatively unaddressed but severe realities that can lead us to come at more thoughtful conclusions.

In digging deeper down in search of the root cause of the terrible realities of our public transport service, one has to come across the existence of mafia-like transport syndicate. The transport syndicate being formed by influential associations of transport operators has enabled them to dominate the public transport sector in Nepal despite the horrible transportation service they are providing since decades. By preventing the entry of new transport entrepreneurs in the public transport sector by means of coercion and vandalism, the syndicate of public transport associations has heavily protected the limited number of below standard service providers from the mechanism of free competition that guarantees quality service. Meanwhile, their strong political connection and presence in regulatory committee (i.e., Transport Management Committee) that awards permits to new entrepreneurs in this sector has retained their impunity from law despite their illegal attempts to maintain monopoly.

The idea of government running its own bus fleets to put competitive pressure on the syndicate is understandable. But, it may not be the most sustainable solution to the benefit of public vehicle commuters and taxpayers at large. To clarify such contention, one can always refer to the misery of the state-run enterprises in having to hugely rely on state coffer financed by taxpayers to somehow run its inefficient and loss making operations producing below standard services. Though they carry the objective of running in a profit-model concept that expects them of surviving on their own revenue, the state-system instead offers them the facility to encroach on tax payer’s wealth indefinitely as they lose track of profits. And, given the upcoming transport company is to be functioning within the same system and incentive, we can logically expect same fate for this transport based public enterprise too. Alas, state could be only adding another avenue to leech taxpayer’s wealth in name of providing so-called “basic transport service” to the people without considering the financial burden it generates among the very people.

Having said this, utilizing regulatory tools to establish competitive market environment in the public transport sector can instead lead the state to create an effective solution that doesn’t require manipulating taxpayers’ wealth. By neutralizing the condition generated by the syndicate to keep new transport entrepreneurs away from the market, such measure will compel service providers to compete among each other to provide competitive service efficiently to survive in the market on profits. Most importantly, besides preventing taxpayer’s from the burden of financing transport service, it will enable commuters to travel more conveniently with impressive solutions that yield out of continuous innovation through sustained competition.

Prience Shrestha

About Prience Shrestha

Prience works in the research department at Samriddhi Foundation. And, he attempts to specialize in the field of Development Economics

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Let It Die

-This article was originally published by Akash Shrestha in Republica on September 26, 2016.

After the 1990 political change, Nepal embarked on the path of economic liberalization. The private sector would from then on lead the economy, with the government offering growth-boosting policies and laws. In this context, between 1990 and 1996, the country grew by 5 percent a year,  hitting an all-time high of 8.2 percent in 1994. This showed that liberalization works in Nepal if we have liberal policies. So in its ninth five-year plan (1998-2002), the National Planning Commission recommended privatizing 30 state-owned enterprises (SOEs).

But economic liberalization has not been a smooth sailing for Nepal. We have gone through a decade-long civil war, another decade-long peace-building and constitution-drafting transition and various political movements. Meanwhile, economic policy reforms took a back seat.

Nepali Congress had led the first wave of economic policy reforms. Today, NC is the largest parliamentary party and controls the Ministry of Industries (MoI), the same ministry that was at the forefront of first wave of economic liberalization. It is therefore interesting that MoI itself is looking to revive some of these sick public enterprises (PEs) that were picked for privatization during the 1990s. The ministry, we are told, aims to revive at least three PEs within this fiscal, including the Nepal Drugs Limited (NDL).

Some arguments in favor of reviving NDL are: It will ensure availability of quality and affordable drugs to the general public; it will save the government money that would have been spent in procuring drugs from outside; it will send a positive signal to private investors; and that it will help create jobs. Let us look at these assumptions.

First, government running the NDL will not send a positive message to domestic and foreign investors. NDL is only one drug manufacturer in an industry that has more than 50 registered private enterprises. Most of them are making profits. So private investors are already interested in the drug industry, having spent around Rs 20 billion in it. Private drug-makers today meet half the market demand in Nepal. NDL will struggle to compete in this competitive market.

Nor will reviving it send a more positive signal to investors. Since NDL is a state-owned enterprise, the rules that apply to private companies do not apply to NDL. NDL neither has to depend on investors for its capital, nor on consumers for its revenue. Therefore, it will put NDL at an unfair advantage.

Second, it is not true that reviving NDL will save government billions of rupees and ensure quality drugs in the market. Yes, NDL could produce drugs that replace some foreign incumbents. But the impact will be minimal. The government distributes a total of 70 drugs (including antibiotics, medicines for diabetes, high blood pressure and heart diseases) for free, spending big money. Going by NDL’s past record, if it is to produce all these drugs, it will do so at a higher cost than the costs of the private companies. NDL has already accumulated over a billion rupees in losses and another half a billion in unfunded employee retirement liabilities. It owes another billion rupees to the government.

nepal-drugs-limited_profit_loss

*Source: SOE Information: Yellow Book, Ministry of Finance, 2002/03 – 2015/16
** Data for the year 2012/13 could not be accessed

As is the case with most other sick public enterprises, NDL was also beset by constant political intervention and mismanagement, before it shut down. Millions of rupees have been injected into it to resume its operations (Rs 50 million four years ago being the latest injection of cash). With that track record, there is little prospect for structural reforms in the NDL. Again, with so many successful private enterprises, do we even need NDL?

As regards quality, 37 private drug industries in Nepal have the World Health Organization’s Good Manufacturing Practice (GMP) certificates. But NDC is yet to acquire GMP certification.

Third, of course new enterprises create jobs. But the government is not a productive agent in itself. Rather it is a redistributive agent. And, historically, the government-run state enterprises in Nepal have not been known for their job-creation capabilities. The money that is going to be injected into the NDL is going to come from the national budget, which means from taxes, grants and loans.

In today’s context, every job that the government creates displaces the job that the private entrepreneurs could have created themselves. Government does not create new jobs, it shifts jobs from one industry to another, and puts the human resources to a less efficient use. If it is employment we are worried about, like Milton Friedman said, we could simply ban the use of machines and make everything manually. Voila! Employment all around.

Fourth, on balance of payment, we export what is of lesser value in the domestic market and import what is of higher value in the local market. If everybody is gaining in value through this trade, should we be imposing a constraint on economic actors? Alternately, if local producers were producing high-value commodities, we would not need to import them. But in our effort to revive the NDL, we are ignoring the contribution of profit-making enterprises and putting our bet on a loss-making, inefficient enterprise. If it is so much about balance of trade, let’s export all electricity to Bihar and import fashion from there.

Finally, the Ministry has not clarified if the old structure of the NDL will be retrained. And will it be privatized based on public-private partnership (PPP), management contracting, or cooperative model? Saying that NDL will be privatized is not enough.

Yes, there are flaws in Nepal’s private sector, which indulge in own anti-competitive practices that have often compromised the well-being of consumers. But it is also true that Nepal as a poor country has serious administrative and fiscal deficiencies. If a government with this scale of administrative and fiscal deficiency tries to do it all, it will result in nothing but failure. The government should rather be acting as a facilitator and a monitor guaranteeing that there is a conducive policy regime, no anti-competitive practices and businesses compete to deliver affordable products.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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Modernisation of Agriculture – Evidences, Government Commitments and the Sorry State

I believe it will be worthwhile to repeat these numbers once again, before we begin. So currently, 66% of Nepal’s total workforce is engaged in agriculture. This two-thirds chunk contributes one-thirds to the GDP of Nepal. According to the World Bank, Nepal ranks among the lowests in terms of agricultural productivity in the whole of South Asia.  One of the major contributing factors to this is that 85% of the total workforce involved in agriculture is in it for subsistence. Furthermore, average land holding stands are mere 0.67 hectare (ha). These people lack access to improved technology. So much of the people involved in agriculture solely for subsistence, along with fragmentation of land at such a scale also means commercial agriculture is not feasible at present.

International experience over the last century shows that development of agriculture happens not by more people being involved in agriculture, but by modernization (video also available below) through newer technologies and commercialization of agriculture. In the process, a big chunk of the workforce involved in agriculture leaves this sector and shifts towards manufacturing and service industries. All the while, productivity of the sector increases and this, coupled with progress in other economic sectors of the country, leads to the growth of entire economy.

Identifying the need to increase the agricultural productivity and to diversify the sector such that it can lend inputs for the industrialization of the Nepal, Government of Nepal (GoN) has committed to (including in the budget for the FY 2016/17) modernization, diversification, commercialization and marketing of the agriculture sector. Scores of policies, plans and strategies have been laid out to “achieve” these. But, do they?

I was in Birgunj in May, 2016 (part of a longer visit to the districts in the Terai region) to meet entrepreneurs and local-level government agencies to learn the functions of regulatory agencies at such local level, and also test what kind of government services were available to the people. Unfortunately (but expectedly), I saw once again that government promises and practices do not resonate very frequently.

Lorik Prasad Yadav (with not much education, but very innovative), a resident of Sugauli, Birta -6 purchased a tractor with an initial investment of Rs. 1 million. He used it as a mobile mill to mill cereals like wheat and paddy. This was a huge service to the locals and made lives easier for everybody. Firstly, the women did not have to travel hours to the stationary mills anymore. Lorik would come to their doors. These women could now invest this time into some other economic activity.  His was a cheaper service, too. He charged only Rs. 1.5 per kilogram while the other stationary mills were charging Rs. 2.5. In other words, people were now able to save. He’d leave the chaff (bhoos) behind so the farmers could use it further. Since it operates on diesel, load shedding has no effect on it; so people could get service anytime.

Now, innovations and new technologies always threaten the status quo. The people running stationary mills were facing a massive competition. Either they had to upgrade their business and make lives easier for their customers as well in order to retain their customers and save their business. Or, they’d have to shut down. Of course, they chose a different alternative. They filed a complaint against Lorik at the Department of Cottage and Small Industries (DoCSI), Parsa.

The same government that has committed to modernisation of agriculture to enhance Nepal’s agriculture productivity came to their rescue. Citing reasons that there is no provision of registering mobile mill business in the Act, the DoCSI intervened and closed down Lorik’s business. Right across the border, in India, there are others like Lorik who are freely operating the same business.

On one hand, the GoN spends billions of rupees on agriculture subsidy for productivity enhancement, while on the other, the same government kills innovation that would in fact enhance productivity.

 

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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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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Rule by (Making) Law… That’s what they mean

On august 16, Bizmandu published a very bothersome news which paints a bleak picture of the business environment in Nepal. A Himalayan Java (restaurant) employee had been apprehended for black marketeering. Here is what happened:

A customer orders a bottle of water… as per the price on the item menu, he is charged Rs. 130 for the bottle of water… the customer thinks he is being over-charged, following which, he lodges a complaint at the nearest police station…the police apprehends an employee of the restaurant…The owners are then asked to present themselves before the police (one of them has to make it back all the way from the US)… the employee is released by now… the owners are then forced to pay a fine of Rs. 75,000 to bail themselves out as professed by the CDO of Kathmandu, Mr. Eknarayan Aryal.

This particular case raises various questions like:

• Is this offense by the authority justified?
• On what basis were the restaurant owners charged?
• Should the price be determined by the government? If so, on what ground? Does the government’s intervention and price control have real benefits?

“The Black- marketing and Some Other Social Offenses and Punishment Act, 2032 (1975)” explains the process of the determination of the wholesale and retail prices of the goods. It further goes on to talk about the punishment in the case of violation of the Act. However, no clause defines the process of price-determination in case of a service; in this case, the bottle of water being sold by a restaurant. In this regard, the CDO has rightly remarked that there is no clear policy; however when questioned on what ground, the restaurant was charged a fine of Rs. 75,000, he reverted back to the same Act. Now, this raises concerns on two fronts. First, if a specific sector doesn’t fall under the jurisdiction of a certain Act, is it legal to charge the sectorial entrepreneur on the basis of an irrelevant Act? Second, there is no provision of charging the guilty a sum of Rs. 75,000, not even in the case of the sectors that fall under the Act. So, on what ground did the authority fine the entrepreneur?

This Act shows that the authority thinks it is above the law. Today, it fined somebody Rs. 75,000; who will stop it from fining somebody a sum of Rs. 500,000 for a crime that is not even committed (as per the law)?

The government has intervened between the producer and the supplier and has tried to set the price. But on what basis has the government tried to do so? If the customer at a restaurant himself cannot decide how much value the restaurant is offering him, how can the government suddenly determine how much value is being created for the customer? So, the setting of the price by the government is not really justified. It cannot just set the prices neglecting various factors in the market!

Looking superficially, the price control may seem like a nice action from the government, but there are many unintended consequences it can bring along. First of all, it reduces the profitability for the entrepreneurs. This may very well lead many of them to exit the industry in addition to discouraging new entrants which may cause a shortage in the market. The consumers will then have to queue up to get a service, pay black market prices to get the service faster, or pay high price for mediocre service. And that’s still not all that there is to it. When the market is set free and the prices are not controlled, the service providers compete among themselves to provide better services in cheaper prices and you never know the market price may fall well below the government mandated price while the services get better and better. Moreover, the producers that charge higher prices get less customers and vice versa. The customers always have a choice not to go to a producer that charges too high for his liking.

When the price is determined by repetitive interaction between the producers and consumers, both are better off. The transaction will only occur between the two if both find it profitable i.e. if both find they are getting something that they value more than what they are giving up; or the transaction would not take place at all. So, it’s a mutual exchange of benefits.

The government, by making intervention strips down the benefits of the mutual exchange in the free market. The government, by intervening, like in the case of Himalayan Java, only negatively impacts the economy and risks stagnating the economy.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Linking democracy with development

Nilkantha Upreti, the Chief Election Commissioner, very truly pointed out recently that local bodies are the foundations of democracy. Technically, Nepal is a democracy; but we need to hold local-level elections to translate democracy into a reality that common people can relate to. What we have at present is a democracy that is quite far from this ‘reality that common men can relate to.’ The current system has created a disconnect between the people and the politicians. The people-politician link is missing; the tax-benefit link is missing; the democracy-development link is missing!

Why this has happened in present-day Nepal is not too difficult to fathom if we take some time to delve into what politics is about. Politics, from the perspective of individual politicians, never has to be about delivering; a politician just has to be good at selling promises. After all, how many votes a politician garners is a good measure of how successful an individual is, as a politician. And what earns them votes? Promises, not deliveries!

Cases to validate this belief are aplenty in contemporary Nepalese politics. All major parties promised to deliver the constitution within a year. They also promised to end load-shedding within two to three years, and three to five years, in Kathmandu and Nepal, respectively. The biggest party in the current government even promised to hold the local-level elections within the first six months of its coming to power. Oh, them promises sans delivery!

What is even more menacing in a democracy like the one that prevails in Nepal – the one without a people-politician link – is the potential it has to create a vicious cycle of ill-informed promises. Will you vote for a politician that now comes to you and says, “Forget about ending load shedding in Nepal in 3 years, that’s impossible! Let’s be realistic and try to create an enabling environment for hydropower developers so that we can hopefully end load-shedding in the next 10 years?” For a commoner who is not very well-informed about how an economy really functions, it is still very tempting to vote for the same old politician who promises to end the problem in 3 years, or who lures him into dreams of a handsome minimum wage, or who assures him a fat agriculture subsidy. And here is where the menacing power comes to life: the new guy will not make ‘deliverable’ or ‘economically sound’ promises as long as his competitors are making such palatable promises. Going against this popular practice puts him at a great political risk. The most probable scenario, if he defies the popular practice is that he fails to garner sufficient votes and becomes a political failure.

All of this has been made possible in contemporary Nepalese political economy because of the fact that we have not had a local-level election in over fifteen years now. The lawmakers we elected through the two constituent assembly elections are not representing the people to solve the day-to-day life problems of common men. Their mandate is to deliver the elusive constitution. Drafting the constitution is their job and problems like there being no course books in local public schools, locals’ taxes not being put to use to maintaining the dilapidated roads in the local levels despite there being three separate taxes for this very purpose (viz. vehicle tax, road construction and rehabilitation duty, and road maintenance and improvement duty), maintaining law and order, and resolving conflicts in the local levels “can wait!” F.A. Hayek sums up meticulously in his theory of ‘spontaneous order’ that even if the planners (the lawmakers in this case) wanted to solve these problems, the very fact that these people do not have knowledge of the ‘circumstances of time and place’ in the grassroots level renders them unable to solving the day-to-day problems of the common men. There is no institution in place that can link the people to their “supposed” representatives so that they can voice their problems and have something done about them. There is democracy, but the people are being left out of the political economic equation.

Coming back to the point that the Chief Election Commissioner was trying to make, it is the local elections that will link the people with their elected representatives. Local elections will foster accountability from the local authorities. It is not rocket science to understand that the mayor of a municipality is in a much better position to understand the problems the locals of his/her municipality are facing, and do something about it, than the lawmakers in the central government.

Local level elections will make sure that there is a link between people and politics, and between taxes paid and benefits received, by offering a check-and-balance mechanism. With the elected representative living right amongst them, it empowers the citizens to seek accountability and answerability from their representatives. The moment a mayor starts showing signs of shying away from his responsibilities, the locals can either vote him out and replace him with a more capable representative, or they can abandon the municipality altogether and go reside in some other municipality that has a better track record. Competition (thus arisen), just like in the realm of economics, can work in politics as well. It is this through this virtue of competition that local-level elections can create a link between democracy and development.

This article was originally published in Perspectives, The Himalayan Times, April 12, 2015, under the title “Linking Democracy with Development”. Click here for the original version.
Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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