Sunday, April 22, 2012

Market manipulation by syndicates and cartels in Nepal

[Published in Republica, April 21, 2012, p.6]

Syndicated distortion

There are syndicates and cartels in pretty much all lucrative sectors. The most outrageous of all is the transport syndicate. The number of vehicles that ply on highways, and inter and intra district roads are dictated by syndicates, which in the veil of transport associations try to impose monopoly power over transport fares, quality and frequency of service. Following repeated requests from the private sector and realizing the cost of anticompetitive practices and distortions created by syndicates/cartels, the government officially banned them several years ago. Additionally, the Competition Promotion & Market Protection Act 2006 also barred syndicates, route monopoly and anti-competitive practices of all forms. The urgency to correct market distortions engendered by syndicates was such that various finance ministers even made a high pitch about its illegality in budget speeches. However, as with many other government’s decrees, the ban on syndicates was not fully implemented. Creative creation and creative destruction based on service delivery and consumer demand never applied in this sector. Consequently, consumers are compelled to pay high prices for substandard services, leading to limited choices and erosion of competitiveness of our industries.

Recently, Prithivi Highway Bus Entrepreneurs Committee (PHEBC), a syndicate of transporters operating in the Prithivi Highway, barred tourist coach services from operating between Pokhara and Chitwan. Given the increasing number of passengers and revenue, Pokhara-Chitwan route is becoming as lucrative a transportation route as Kathmandu-Pokhara. The tourism entrepreneurs want to tap that expanding market segment by operating a direct luxury bus service. However, the syndicates argue that adding luxury buses along the Pokhara-Chitwan route would divert the flow of domestic passengers from the existing bus services. This is a totally rubbish. First, if domestic passengers are willing and able to pay for the services enjoyed by tourists in Nepal, then nobody should bar them from legally enjoying the services. The syndicates do not have the right to dictate what services domestic passengers can avail and what they cannot in the market. Second, if the syndicates are so worried about diversion of domestic passengers to tourist coaches, then why can’t they offer services that match the ones offered in the latter one? [By the way, relenting to widespread pressure and after stinging reprimand, the PHEBC has finally agreed to operate tourist coaches along Pokhara-Chitwan route by itself.] Fundamentally, there is nothing wrong on the part of domestic travelers to opt for a luxury bus service if safety and comfort is guaranteed at comparable prices. By forcefully barring addition of new vehicles or bus services that could provide better facilities for the same amount of money to domestic passengers, the syndicates are violating not only the law, but also depriving passengers of the services they deserve and demand.

At the core of it the syndicates are no different than a tyrant who rules by suppressing any move—no matter how well-intentioned and welfare enhancing— that threatens his existence. They are extracting undeserved privileges by providing low-grade services at high prices. It is because of the syndicates—who argue that the main rationale for imposing monopoly is to check fall in profits due to excess supply of vehicles and to regulate the market—that passengers have no choice of road transport services. Furthermore, new enterprises willing to provide better services at the prevailing fares are not allowed to enter the market. For instance, though the cost of traveling along Kathmandu-Pokhara route is the same in both normal buses and tourist coaches, the services offered by the former is incomparable to the ones offered by the latter. The normal buses (including microbuses) ferry passengers in excess of the available number of seats. If you take microbus along Kathmandu-Pokhara route, then three passengers are forced to squeeze in a seat for two passengers (in the front row adjacent to the driver). Worse, a smooth ride with minimal stopover is a daydream. They stop at multiple locations in the highway and stack in more passengers than recommended. It has two disadvantages to passengers. First, they never reach destination in time and get substandard services despite high fares. Second, safety of passengers is compromised when more people are ferried in a bus than recommended by manufacturers and engineers. Scores of people have lost lives and are injured because of passenger overload. These abuses do not normally happen in tourist coaches.

The recent row between tourism entrepreneurs and bus syndicate in Pokhara is not a new phenomenon. Such incidents happen along all highways and intra and inter districts roads. Without the consent of syndicates, no one is allowed to add new vehicles in any route. This is happening even if entrepreneurs legally pay all the required fees to the government. At times, entrepreneurs have to cough up money equal to the cost of vehicle itself to add a new one in a particular route. Just imagine why new vehicles are not plying on the roads of Kathmandu for several years. The outdated, thick black smoke spewing Nepal Yatayat and micro and mini buses are ruling the roads, especially after Sajha Yatayat stopped operations. The lack of competition is fostering disincentives to enhance services delivery. Even when consumers are willing to pay for better managed buses and services, they do not have a choice, thanks to the syndicates.

Furthermore, syndicates are contributing to making our industrial sector uncompetitive. Without the consent of around 24 truck syndicates, no new trucks are allowed to ferry containers or goods to and from border areas and industrial corridors. The predetermined transport fares are astronomically high even for short routes (Kodari-Kathmandu or Birgunj-Kathmandu). Traders have complained that the cost of ferrying a container from Kolkata to Kathmandu is roughly two times higher than the cost of ferrying the same container from Singapore to Kolkata. Of course, sea transport is cheaper than road transport, but nothing justifies the huge cost differential. Similarly, the monopoly in truck business at the Inland Container Depot (ICD) in Sirsiya, Birgunj is increasing trading costs by a wide margin. Rough estimates show that the benefit of doing away with syndicates outweighs losses to transport operators by a factor ranging from 6 to 7.6. The cost of these anticompetitive practices is reflected in the final price of goods and services paid by consumers here and aboard. The price of imported goods would have been a bit cheaper if there were competition in trucking business. Importantly, our exports would have been a bit price competitive if syndicates/cartels were not allowed to charge high transportation fees and collect unrecorded charges.

Now, you might be wondering why these practices are happening openly even when they are illegal? Well, political party associates and affiliates control most of the syndicates. Some influential politicians or their relatives have major share in a number of bus services operating along the lucrative routes, including inside Kathmandu Valley. Though there is no solid evidence yet, it is beyond doubt that these syndicates are also one of the funding machines of the political parties. They are extractive institutions illegally existing under the protection of political leaders. Unless they are rooted out, passengers will always have to bear injustice and pay hefty amount for substandard services. Importantly, no new transport enterprises will be allowed to justly serve passengers and provide them with the services they deserve based on the prices they are willing to pay. Syndicates will never allow consumers to be kings in the market and will always stifle innovation and competition.