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‘Special’ no more?

SEZIndustrial growth, has, for long been seen as a premise for development in Nepal. While many among us have shown concerns over the state of industrial relations in the country and the not-so-strong-hold of law over issues, the idea that once made it to the headlines and now watches from the sidelines has been the formation of Special Economic Zones (SEZs). There was a time when recommendations for the betterment of industries in the country resounded with the proposition of SEZs. Totally commercial areas, especially established for the promotion of foreign trade, SEZs are meant to have more liberal economic laws in comparison to the laws of the land. Specifically delineated enclaves treated as foreign territory for the purpose of industrial, service and trade operations, SEZs come with features like relaxation in customs duties, a more liberal regime in respect to other levies, foreign investments and other transactions. Overall, it provides for special tax subsidies, fully facilitated buildings and physical infrastructures with all necessary services, necessary procedural service systems through a one door system, establishment of an export oriented industry and bringing in of FDI and modern appropriate production technology.

Keeping this and the endless recommendations in mind, the Government of Nepal (GoN) adopted the concept of Special Economic Zone (SEZ) to attract foreign and national investments for the establishment of industrial and business units. It formed Special Economic Zone Project (SEZP) on 2060/10/15 under Ministry of Industry, Commerce and Supply (MOICS) to formulate laws, rules and regulation, implement planning, design and construction of Special Economic Zones throughout Nepal. Special Economic Zone Ordinance-2005 and related rules were also formulated in accordance. The Ministry of Industry has also identified 10 areas to be developed as Special Economic Zone.

Said to be the first one, SEZ in Bhairahawa initially brought much hope to the industrialists. It was supposed to be have been completed by February, 2014. Alas, it hasn’t been. The construction in Bhairahawa is in a limbo after the contractor refused to complete it citing that the project has yet to clear out the payment worth NRs. 20 million for the works already finished. Looks like even ‘special’ zones are forgotten with time in this country.

And then there is the bill on SEZ, long under consideration. The government last year had decided to operate SEZ issuing a formation order after efforts to formulate an act had failed. The bill was opposed by the ruling party when the then government had tabled it in the parliament in 2008. The bill includes provisions like ban on workers inside SEZ to get into politics, and strikes, mass meetings, and working as a cadre of any party, and will implement the system of No Work No Pay.  This adds to the already existent financial burden.

The delay in the implementation of the project, whatever the endless reasons are, has meant much despair to the industrialists. For now, the SEZs seem far from meeting their three-fold objectives of attracting FDI, increasing exports and accelerating the country’s economic growth; those seem secondary—they better be set up first. Or before long, like everything else, they won’t be the priority anymore

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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How you pay as much as the government wishes!

petroleum cross-subsidyWe know that government cannot give something to us unless it takes that something from somebody else. Somebody always pays the price. Reflecting upon some of the decisions made by Nepal Oil Corporation (NOC) regarding prices of petroleum products, whose NOC is the sole importer and supplier in Nepal, shows how government can completely disregard law in order to make this happen. Let us look at the case of one of the latest price hikes in petroleum products in Nepal.

March 14, 2014, Nepal Oil Corporation hiked the price of petroleum products in Nepal (reducing it again by some portion after a couple of days that followed). We will not delve into the numbers thus reached, but rather restrain ourselves to the mechanism by which this decision was made.

There are a few procedures that a Public Enterprise (PE) or the government has to follow before making a decision. The authority of decision-making must be allowed by an Act (a parliamentary legislation, setting out legal principles.) To our dismay, there is no such thing as Nepal Oil Corporation Act till date. Yes, a PE that does over Rs. 100 billion worth of business a year i.e. a fifth of the fiscal budget, is not guided by any Act.
But this is only the tip of the ice-berg. In cases like these, whenever a decision has to be made by the government or a public institution, it is done by publishing a notification in Nepal Gazette. But as it later unfolded upon digging into the archive of Government Gazettes, no such notification was published before the price hike. After some more research, it was found that the Board of Directors, under the chairmanship of the Secretary of Ministry of Commerce and Supplies forwarded a proposal to the cabinet asking for a permission to hike the prices of petroleum products. Cabinet approved! Prices rose!

Now here is the problem with that – Can the government then arbitrarily set any price for any service it provides? Of course, there was a rationale behind the move. The prices of petroleum products surged in the international market and NOC had to make some kind of adjustment. NOC bears huge loss on sale of LPGs and makes up for a portion of that loss through profits made on sale of petrol and kerosene (and sometimes, diesel.) But when a government monopoly cross subsidizes its loss to cover up for its inefficiency and lack of financial planning, it is the people that actually pay. It makes no economic sense when a government corporation controls price to run on loss worth hundreds of millions to billions of Rupees per month (see the table below). Besides, who gives the government the authority to put a fine on a person who rides to his office on a motor-cycle and cooks his food on electric cookers to pay for a hotel/restaurant or some other household’s consumption of LPGs? A few more things – when one allows the government to give it something, it also allows government to take something from the itself; who decides what is best for all? And on what basis? Wherein lies the limit of government discretion? These are some questions for ideological debate. But while the debate is on, no one can undermine the need for some reform measures.

NOC needs to adopt sound financial planning. Stealing from one to give to the other has to end. NOC should therefore switch to Automatic Pricing Mechanism in the distribution of petroleum products. Once price control is removed, there will be prospects of profit-making for the private sector as well. This will bring in competition in the industry and market will drive the prices. Then, it will be those who use a service that pay for the service. Drafting an Act that gives room for market forces to act freely would be a positive first move.

NOC’S Estimated Profit/Loss Position based on IOC Price, Effective from 01 July, 2014

NOC's monthly profit and loss position*Source: Nepal Oil Corporation

 

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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When being INFORMAL comes with incentives

faulty incentives' systemNepal’s economy is largely informal; informal sector here comprises of a group of production units that form part of the household sector as household enterprises or equivalently, unincorporated enterprises owned by households. Much likely, such units have limited capital investment and are a subsidiary activity of the owner. Their activities are not regulated under any legal provisions and/or they do not maintain any regular accounts. In Nepal, a good chunk of production and consumption is contributed through such informal sector activities. The sector also contributes to much of the income generation through employment thus providing means of livelihood to millions of Nepalese. Kirana Pasals that are small mom and pop shops selling groceries and fast moving consumer goods form a major segment of this informal economy in Nepal.

What makes these shops informal can be attributed to an endless list of reasons—a primary reason being that informality to these shops means a much better deal than choosing to formalize their operations. Given, the informal sector helps during economic crisis. But the fact that the benefits of informal employment may not be sufficient to achieve an acceptable standard of living as informal employment rarely comes with social protection, good working conditions and adequate wages cannot be ignored for long. But in our case, the scenario of choosing informal as opposed the formal begs to not be changed until a few things are set straight.

First in the list being the registration of these Kirana Pasals. Such shops are required to register at four different places; these fall under the jurisdiction of six major government agencies and they are subjected to 15 major laws and policies. Given their size and monetary weaknesses, these shops have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. When formalized, the government has rights to inspect them and close them down if regulations are violated—here regulations are manifold and are more often than not subjected to interpretation and discretion of the official thus allotted for the job. Generally, Kirana Pasal owners are aware of few of those laws that are applicable to their businesses but there always remain minuscule provisions and clauses which the businesses would not be in compliance with, simply because of the volume and scattered nature of those regulations, which keeps the business always on offence. And as De Soto rightfully said, “informal economy is a by-product of over regulation and bureaucracy in the formal economy” and unless we do away with such hurdles there seems to be not enough hope for such small ventures to grow or even formalize their operations.

Secondly, empirical results have demonstrated that firms rank taxation as among the most severe obstacles to the long-term success of their enterprises. Likely, the shops in Nepal (if formalized) face a disproportionate burden from tax in comparison to larger firms. Those with turn over greater than 2 million rupees or income greater than two hundred thousand rupees are eligible to pay VAT tax of 13% and Corporate tax rate for Private Limited Co., Limited Co., Partnership Firm in the retail sector – a total of 25%. In many cases, not having books or audited accounts may result into the amount of tax to be paid being established by the tax official based his judgment, making use of a variety of indicators, including the observed standard of living of the entrepreneur. This might result in very high tax rates for enterprises.

Thirdly, there are standards that shops have to abide by. As much as the shops would be willing to do so in the light of protection of consumer rights, here too, the inability to bring in efficient intervention leads to losses on the part of the shop owners.

With problems as such to be encountered in terms of wishing to bring the shop into the formal stream, it seems that it is in the light of their own well-being that most decide to cling to their informal operations. Until and unless the aforementioned hurdles are done away with, the shops will remain informal because being so has more incentives than choosing to be otherwise.

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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Re-thinking Public Enterprises in Nepal

When public enterprises were first introduced in Nepal during late fifties and early sixties the scenario was quiet different from what it is now.  The presence of private sector in the market was negligible and thus it made sense for the government to take control of the economy and establish several public enterprises. The government, in order to fulfill its duty of serving the people along with providing them essential goods and services, established one enterprise after other. The rate of establishment was such that at a point in time there existed 61 public enterprises–from water and food to cement and air services and everything in between–most of them monopolized the sector. Their number has been reduced to 37 today but their return in terms of goods and services to the people and profit-making for the government is questionable.

Almost six decades have passed us by and  instead of improving the services these enterprises have imposed an enormous burden on the taxpayers as well as the government. While the debate on public enterprises continues–some favor putting in more efforts and improving the management while others opt for a complete privatization. While this happens in the backdrop,  we bring to you facts on public enterprises that simply cannot be overlooked or neglected anymore. Since resources (esp. monetary) is already scarce in the country it would not be wrong for us to ask the government to use the resources in productive areas rather than pouring in taxpayers’ hard earned money into ineffective enterprises.

Public Entreprise Infograph

 

Koshish Acharya

About Koshish Acharya

Acharya is a student of social sciences and has been associated with Samriddhi, The Prosperity Foundation for the last three years.

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Taxi Troubles

taxi troublesIf there’s something that has been common across the urban streets of the world, it would sure have to be taxi troubles. From the joyous streets of New York to the bustling Melbourne corners to the chaotically maddening streets of Kathmandu—taxis have grabbed headlines many a times.

Like governments elsewhere around the world, the government of Nepal took it upon itself to correct the marketplace imperfection that would have been caused if private players were allowed to take over the taxi industry sans the much needed regulation. And hence, in May 2000 A.D., the government banned registration of new taxis in Kathmandu Valley. Prior to the halt, about 8,000 taxis were registered to run in Bagmati zone and this amounted to about 80% of the total taxis in the country. According to the most recent data from the Taxi Unit, Bureau of Standards and Meterology, 4,834 of these ply on the valley roads and these are over 15 years old. With quite a percentage of them being out of order and the existent ones being run down and battered over the decade, the halt on registration raises some serious issues.

For starters, the idea of restricting entry means that the interests of rent-seeking taxi industry incumbents were valued over taxi customers. Restricted entry meant that the cost of licenses went up (quite unnaturally) and few held those licenses for their own benefits in the shadows of this artificial shortage. Also, over the last decade, the population of the valley has gone up at unprecedented rates—people from all walks of life have been drawn to this epicenter of dreams, opportunities and possibilities. But with this growth, the number of taxis has only fallen down—the ones that remain are a witness to the wear and tear that comes over time of repeated usage. These reasons combined have led the customers to pay higher prices for services that do not meet the quality standards as they are left with no other choice—after all, an over paid ride in a battered taxi is better than having to walk back home after a long day at work.

Instead of letting the market forces be at play, the already regulated industry is further scrutinized by the government’s price control mechanisms. The government has a ready-made rationale behind it—taxis have been charging exorbitant rates from passengers and there have also been reports of tampering with the meters. So, on July 16th 2013, the government raised the fare by 15.6 percent. The meter starts from NRs. 14; the fare has been raised to NRs. 37 per kilometer from NRs. 32. In earlier years too government has been raising the taxi fares according to the rate of inflation, increasing fuel prices and changing wage rates for the drivers.

While the government tries to justify the regulation citing reasons as private players monopolizing the market and public safety, it is easy to understand how competitive taxi markets and unfettered entry and fares for taxi providers would mean lower fares, higher level of services to the customers and possibly service innovations. If nothing else, this would mean entrepreneurial opportunities for many interested. Because of their flexible services like 24 hour-a-day availability and capacity to provide door-to- door service taxis have become an added element of a modern-urban lifestyle and the regulations have not only restricted the much needed competition but have also killed whatever little incentive they might have had to innovate and provide better services at much cheaper rates.

 

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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