COMPETITION SCENARIO IN NEPAL* - CUTS Internationalcuts-international.org/7up2/7Up2_Nepal.pdf · to the Nepalese economy. It gives brief information on recent economic performance,

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CHAPTER VII

COMPETITION SCENARIO IN NEPAL*

IntroductionNepal has a long history of inward-looking economicand trade policies. It is only since the liberalisationprocess started in the mid 1980s that the private sectorhas been given a greater role. Prior to this, the publicsector played a major role on delivery of goods andservices. The priority then was only on the supplyside and the government did not ensure that there isenough competition in the market, leading to thepromotion of monopolies, some of which persist eventoday. This has also resulted in low priority tocompetition in the national policy sphere and a lackof competition culture among the different agents ofthe economy.

Realising this, South Asia Watch on Trade, Economics& Environment (SAWTEE) and the Nepal office of theDepartment for International Development (DFID), UKhave together started the Competition Advocacy andEducation Project (CAEP) with the objective ofbuilding competition culture among differentstakeholders in Nepal. A study on the “Status ofCompetition in the Nepalese Economy” was thusconducted in line with the research methodology ofthe CUTS 7Up2 project on “Advocacy and CapacityBuilding on Competition Policy and Law”, a greaterinitiative covering India, Bangladesh, Lao PDR,Vietnam, and Cambodia, of which CAEP has becomean integral part. It was felt that such a study wouldgreatly help in understanding different aspects ofcompetition in Nepal and would also be a valuabletool for advocacy.

This chapter is a shortened version of the above-mentioned study. Section One introduces the readerto the Nepalese economy. It gives brief information onrecent economic performance, agricultural sector,trade and industry; and highlights the industrial,trade, investment and privatisation policies adoptedby the government at various stages.

Section Two focuses on the nature of competition inthe Nepalese economy, in particular in sectors suchas manufacturing, utilities and services, and analysesthe entry and exit barriers and nature of competitionin these industries.

Section Three looks at the evolution of the regulatoryregimes in telecommunications, financial services, and

electricity sectors. All these sectors have their ownsectoral regulators and have seen changes in thepolicy and market structures in the last couple of years.

Consumer being the raison d’être of all businessactivities, any discussion on competition is incompletewithout an analysis of consumer policy andmovement. Hence, Section Four looks at the currentlaws and regulations that ensure consumer protectionin Nepal. The section also looks at thecomplementarities between consumer policy andcompetition policy.

Section Five documents the prevailing anti-competitive practices in Nepal.

Section Six presents the result of a survey conductedamong 50 consumers, 25 policy makers and 25business people on different aspects of competitionpolicy and law.

Section Seven looks at the various laws in Nepal thataffect competition. In this regard, the impact ofIndustrial Enterprises Act, the Foreign Investment,and Technology Transfer Act on competition has beenanalysed. While acquiring the WTO membership,Nepal made a voluntary commitment to enactCompetition Law. The salient features of the draft lawthat the government has prepared are also discussedin this section.

Section Eight includes some recommendations todevelop a competition culture in Nepal. Therecommendations are related to policy/legal changesand those related to capacity building requirementsof different stakeholders.

Economic Performanceand PoliciesWith an annual per capita income of US$269, Nepalis one of the poorest countries in the world. Nearlyhalf of its population lives below the poverty line andthere are large disparities among income groups,among socio-ethnic groups, and between urban andrural areas. Nepal still has a highly underdevelopedeconomy, with agriculture still accounting for 37percent of the GDP and 76 percent of the employment.

Nepal

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Economic PerformanceNepal’s macro economic trend shows a mixed picture,especially since the country saw a major shift ineconomic strategies towards greater marketorientation in the early 1990s. Following the economicreforms, Nepal made good progress initially inimproving macroeconomic stability and acceleratingeconomic growth in the early 1990s. However, theinitial favourable effect resulting from policy reformshas not been sustained. The economy has sloweddown starting in the later half of the 1990s.

Except for the fiscal year (FY) 2001/02, Nepal hashad positive GDP growth in the last decade. TheNepalese economy in FY 2003/04 was expected toregister a growth rate of 3.6 percent against 2.7 in2002/03. The average growth rate in the last decadewas approximately four percent. In the FY2003/04,share of the agriculture and non-agriculture sectorsto GDP was 39 percent and 61 percent respectively.

Structurally, the economy is highly dualistic, with abackward agricultural sector and a relatively modernnon-agricultural/urban sector. The agricultural sectoris still the backbone of the rural economy accountingfor about two fifths of the value added in the economy,with 80 percent of the economically active populationdependent on it.

Put together, industry and services (the non-agriculture sector) account for nearly 60 percent ofthe GDP. Prior to 1990, Nepal followed state-drivenindustrialisation, and the trade and industry sectorwas dominated by SOEs. Political instability andpolicy inconsistency following the first wave ofeconomic reforms, effects of an open border with India,high cost of capital borrowing, lack of infrastructureespecially power, and weak civil service delivery haveall obstructed a fuller growth potential of this sector.

Nepal’s integration into the global economy issteadily increasing and trade (export and import ofgoods and services) constitutes about 40 percent ofGDP. Nepal’s WTO membership and membership toregional trading arrangements like South Asian FreeTrade Area (SAFTA) and the Bay of Bengal Initiativefor Multi-Sectoral Technical and EconomicCooperation (BIMSTEC) are likely to help Nepal’sintegration with the rest of the world. Nepal also hasbilateral trade agreements with 17 countries.

Foreign exchange rate is decided by the market. Itsexchange rate system is presently free from restrictionson making payments and transfers for currentinternational transactions, except those on paymentfor personal travel. As far as capital transaction isconcerned, the Ban on Investment in Foreign CountriesAct, 1964, prohibits any form of investment includingpurchase of property, bank deposits, investments inshares and bonds by Nepalese citizens in foreign

countries. The repatriation of capital investments andprofits by foreigners is allowed in accordance withthe Foreign Investment and Technology Transfer Act1992.

Major Economic PoliciesThe autocratic Rana regime (1846-1951) had isolatedNepal from the rest of the world. With the end of thisregime in 1951, Nepal entered into the ‘modern era’without schools, roads, electricity, andtelecommunications, and also without any economicand industrial development. Industrialisation wastotally absent except for a few agro-processing units.

Influenced by the prevailing import-substitutingindustrial policy in the world, Nepal’s industrialdevelopment was also dominated by the establishmentof import-substituting public enterprises. Thegenerous helps from Russia and China, which helpedto establish industries, aided this process. The firstfive decades of modern Nepal saw the establishmentof government-owned industries that produced jute,sugar, cigarettes, cement, bricks, shoes etc. Thoughthe 1974 Industrial Enterprises Act shifted the focusof the government from the public to the private sector,the industrial sector remained dominated by publicsector enterprises till the early 1990s. In fact, the Stateis still involved in many public sector enterprises. Tillthe early 1990s the utilities area was completely inthe hands of the state and there was virtually noinvolvement of the private sector in areas such aspower, telecommunications, and water supply. Thegeneration of electricity power was opened to theprivate sector in the early 1990s and the private sectorwas allowed in the telecom sector in 2003.

The adoption of the Industrial Policy 1992, and theenactment of the Industrial Enterprises Act 1992, andthe Foreign Investment and Technology Transfer Act1992 were major steps in the liberalisation process.One of the goals of the Industrial Policy was “todevelop industries through healthy competition inorder to utilise the comparative advantage of thecountry”. The new policy also brought to an end thelicensing system in the country by liberalising andsimplifying the procedures for the establishment,expansion and modernisation of industries, exceptfor those related with defence, public health andenvironment.

Commensurate to the old industrial policy of State-led import substitution, prior to the liberalisationprocess, the objective of trade policy in Nepal wasexport promotion, import control and tradediversification. Before 1992, licensing was requiredfor most imported items, and the availability of foreignexchange were specified for each license. Effectively,the foreign exchange licensing system was tantamountto quantitative restrictions on imports. Thequantitative restriction on imports and the licensing

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system also provided more or less ‘monopolies’ tothose who were able to get the licenses throughauctions. Therefore, it can be said that Nepal’s importpolicy, prior to the initiation of liberalisation measuresin the mid-1980s, had a built-in anti-competitive bias.This system was found to be inconsistent with theeconomic liberalisation policies adopted by thegovernment in the early 1990s and necessary changeswere made to complement liberalisation in othersectors — industrial and financial.

The key measures of trade liberalisation includedreduction and restructuring of import duties,elimination of most quantitative restrictions andimport licensing requirements, and introduction offull convertibility for current account transactions.These measures have played an important role inenhancing competition in the domestic market. Dueto the reforms of the early 1990s, the un-weightedaverage tariff rate fell from nearly 40 percent in 1990to 14 percent in 2002. Most tariff rates now fall in therange of 5-25 percent while more than 70 percent ofthe rates exceeded 25 percent in 1990.

Also in line with the government’s ‘importsubstitution through public enterprises’ policy, agreat number of SOEs were established in Nepal bythe government in the ‘60s,‘70s, and ‘80s. Thedemocratically elected government, after therestoration of democracy in 1990, inherited these SOEsfrom the old regime. The enterprises produced goodsranging from shoes to cigarette and offered servicessuch as telecommunications and air transport. Theutilities sector was also dominated by the SOEs.

The government investment in SOEs stood at aboutUS$2bn in 1996-97, but the return on such investmentwas about one percent only. To withdraw fromproviding goods and services and to allow the privatesector to take the major role in the economy, thegovernment started privatising these enterprises in1992. Until the end of 2003, the government hadprivatised 23 enterprises, such as those producingpaper, brick, shoes, textile, jute, sugar, agriculturetools, etc. It is, however, difficult to ascertain why theseparticular SOEs were chosen for privatisation and notothers. The government seems to have given littleconsideration to competition aspects while choosingthe SOEs or the method of privatisation. The fact thatthe government has not re-entered into the sectorswhich have been privatised and also does not imposeany restriction on the opening of new enterprises inthese sectors can be taken as a positive step towardsensuring greater competition in the economy, at leastat the policy level.

Finally, the Industrial Policy 1992 of Nepal alsoidentified foreign investment promotion as animportant strategy in achieving the objectives ofincreasing industrial production. Commensurate to

this policy, the Industrial Enterprises Act, 1992, theForeign Investment and Technology Transfer Act,1992, and the One Window Policy of 1992 wereenacted. Foreign investment is open in all sectorsexcept a few such as cottage industries, arms andammunition, security printing, currencies and coins,retail business, travel and trekking agencies. Foreigninvestors are allowed to hold up to 100 percentownership in industries.

Likewise, the enactment of the Industrial EnterprisesAct, 1992 has created a better environment fordomestic private sector investment. The major thrustof these Acts lies in their openness, with emphasis onmarket-driven strategies, and dominant role forprivate initiatives and enterprises. Thetelecommunications and power sectors have also beenopened for private investment.

Nature of Market/CompetitionThe privatisation and liberalisation policies adoptedby governments that came to power after therestoration of multi-party democracy in 1990 resultedin fundamental changes to the economy. Several newpolicies have not only brought about significantchanges in the economic structure of Nepal, they alsoresulted in a major shift in the market structure ofmany sectors, namely that of manufacturing, utilityand/or services, as well as the nature of competitionin these industries.

Manufacturing SectorThe Industrial Enterprises Act, 1992, brought to anend the ‘licence raj’ and made the establishment ofindustries easier. It limited the list of industries thatrequired permission to those affecting nationalsecurity and public health, such as industries thatproduce explosives including arms, ammunition andgun powder, security printing, bank notes, coins,cigarettes, bidi, cigar, chewing tobacco and khaini orgoods of a similar nature utilising tobacco as a basicraw material, and alcohol or beer producingindustries.

The Foreign Investment and Technology Transfer Act,1992 prohibits foreign investment in cottageindustries, arms and ammunition industries,explosives and gunpowder industries, industriesrelated to radioactive materials, and currency andcoinage business.

Even though there are no policy-induced entry barriersin most of the manufacturing sectors, many factorssuch as Nepal’s small market and technologicalbackwardness make big investment in capital-intensive industries unattractive.

The following section describes the market situationin selected manufacturing industries. As the actual

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production figures were not available, installedcapacities have been used in the analysis. It should,however, be noted that the actual production mightbe lower than the installed capacity. In addition tocompetition from local enterprises, industries in mostselected sectors also face competition from imports aslow tariff and virtually no non-tariff barriers (NTBs)have resulted in a liberal import regime.

SugarThe sugar industry in Nepal has been historicallydominated by SOEs. After the liberalisation of theNepalese economy inthe early 1990s, licenceswere given to the privatesector in this industry.Table 7.1 gives a list ofmajor sugar industriesand their productioncapacities and marketshares.As shown by the tabledata, the combinedmarket share of the topthree firms is 45 percent.The liberalisation of thissector has, however, notresulted in optimalcompetition in themarket and consumersare often forced to buysugar at high prices dueto frequent shortages ofsugar in the market.

CementThe construction boomof the 1990s resulted in avery high growth ofdemand for cementresulting in

establishment of manycement industries, mainlyby the private sector. Thedata available tends toshow that this sector ishighly competitive, havingmany suppliers and not asingle dominant firm.

In addition to the liberalimport regime, competitionamong local manufacturersalso seems to be high. Thecombined market share ofthe top three firms is only38 percent and there is nodominant firm in theindustry.

Iron and SteelThis sector is dominated by the private sector; thegovernment has never been involved in this sector.Himal Iron and Steel industries with 29 percent marketshare is the market leader. The market share of the topthree companies is 62 percent, showing a considerablehigh level of concentration in the sector.

TextilesThe liberalisation measures adopted in the early 1990sresulted in the establishment of many small-scale

Table 7.1: Production of Sugar Industries and Their Market Share

S.N. Company Name Tonnes (crushed per day) Share (%)

1 Vashulinga Sugar Mill 1750 9

2 Sri Ram Sugar Mill 3000 15

3 Lumbini Sugar Mill 1250 6

4 Everest Sugar Mill 3000 15

5 Shree Mahalaxmi Sugar Mill 2500 13

6 Birgunj Sugar Mill 1250 7

7 Bagmati Sugar Mill 1250 7

8 Indushankar Sugar Mill 3000 15

9 Eastern Sugar Mill 2500 13

TOTAL 19500 100

Source: Department of Industry & Industry experts

Table 7.2: Production of Cement Industries and Their Market Share

S.N Company Name Annual Capacity (MT) % Share

1 Hetauda Cement 65666 10

2 Udaypur Cement 51636 7

3 Panch Ranta Cement Pvt. Ltd. 15000 2

4 Butawal Cement Mills Pvt.Ltd 30000 5

5 Dynasty Industry Nepal Pvt. Ltd. 30000 5

6 Mittal Cement Industry. Pvt. Ltd. 30000 5

7 Kosmos Cement Industries Pvt. Ltd 90000 14

8 Buddha Cement Pvt. Ltd. 15000 2

9 Pashupati Cement Pvt. Ltd. 20000 3

10 Vijaya Cement Pvt. Ltd. 90000 14

11 Chitwan Cement Udhyog Pvt. Ltd. 30000 5

12 Jagadamba Cement Ind. Pvt. Ltd. 66000 10

13 Narayani Cement Udhyog Pvt. Ltd. 15000 2

14 Brija Cement Ind. Pvt. Ltd. 60000 9

15 Bishwokarma Cement Pvt. Ltd. 30000 5

16 Suprim Cement Pvt. Ltd. 15000 2

TOTAL 653302 100

Source: Department of Industry & Discussion with industry experts

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textile-manufacturing industries in the country. Table7.4 gives a list of all textiles industries in Nepal, theirproduction capacities and market shares.

The private sector dominates this industry and marketshare of the top three enterprises is 40 percent. Thissector seems quite competitive as there are many firmswith small market shares and the sector is notdominated by one or two enterprises.

Vegetable GheeThe vegetable ghee marketin Nepal is export-oriented with most of theproduction being exportedto India. Favourable dutystructures on raw materialas compared to those inIndia have resulted in theestablishment of manyvegetable ghee industriesby the private sector.

This industry seems to befairly competitive with thetop three firms havingonly 28 percent marketshare.

DairyThe dairy industry isdominated by the publicsector. Milk processingwas a monopoly of thegovernment owned DairyDevelopment Corporation(DDC) and it still holds 63percent market share.Private sector investmentwas allowed in this

industry after theliberalisation of theearly 1990s.

The other privatesector enterprisesare still small andhold a very smallmarket share of theorganised milkindustry.

Utilities

ElectricityThe utilities sectorin Nepal is stilldominated by

SOEs. Nepal Electricity Authority (NEA), a 100percent government-owned enterprise, dominates theelectric power sector. It owns 79 percent of the installedgeneration capacity and has monopoly in thetransmission and distribution of electricity. Theopening up of the generation sector has resulted in agradual increase in the number of Independent PowerProducers (IPPs). NEA, nonetheless, is the only buyerfor the electricity generated by IPPs.

Table 7.3: Production of Iron and Steel Industries and Their Market Share

S.N Company Name Annual Capacity (MT) % Share

1 Swodeshi Iron & Steel Udyog Pvt. Ltd. 9000 9

2 Narayani Rolling Mills Pvt. Ltd. 7500 7

3 Himal Iron and Steel Industries 30000 29

4 Panchakanya 19000 18

5 Ashok Steel 16000 15

6 Maruti Nandan Rolling Mill 4700 5

7 J D Steel Mills 1200 1

8 Hama Iron Industries 2300 2

9 Jagdamba Steel Pvt. Ltd. 15000 14

TOTAL 104700 100

Source: Compiled from information from Department of Industry and other sources

Table 7.4: Production of Textile Industries and their Market Share

S.N Company Name Annual Capacity ‘000 mtr. Share (%)

1 Prabhat Textile 1599 4

2 Gopi Textile 1129 3

3 Ashok Textile 1632 4

4 Eastern Textile 1155 3

5 Himgiri Textile 1440 4

6 Olampia Textlie 1475 4

7 Aligent Textile 1140 3

8 RP Textile 1100 3

9 Star Processor 6000 15

10 Sabitri Textile 6000 15

11 Sutex Industries 4000 10

12 Rapti Kapda Udyog 1200 3

13 Bhagwati Textile 1100 3

14 Rinchin Rangi Kapda Udyog 1180 3

15 Himalay Terry Fabric 1250 3

16 Siddi Textile 3000 7

17 Others 5331 13

TOTAL 39731 100

Source: Department of Industry

Nepal


Despite the efforts of the government to encourageprivate sector participation, the consumers are payingvery high rates for electricity. Electricity rate in Nepalis one of the highest in the world, and the Nepalesepay 23 percent of their income on electricity. Accordingto a survey, out of 51 American states, the tariff ratesin 40 are lower than in Nepal.

TelecommunicationsThe telecom-munication sector is still dominated byNepal Telecom (NT), yet another 100 percentgovernment owned enterprise. Nepal has adopted

what can be referred toas ‘global bestpractices’ inlegislation. However,the gap between policyand practice remainsstark, as healthycompetition is still adistant realisation inthe telecom sector.

There are only twoproviders of basictelephone services (alegacy of the duopolyclause) in the country:NT and the UnitedTelecom Limited (UTL)which is a joint ventureof three Indiancompanies VideshSanchar NigamLimited (VSNL),

Mahanagar Telecom Nigam Limited (MTNL),Telecom Consultants India Limited (TCIL) and aNepali partner—Bishal Group. UTL only has a licencefor WLL technology and is dependent on the NTnetwork for all its trunk calls. Meanwhile, NT operatesV-SAT as well as WLL technology, GSM mobileservices, and many other value added services suchas e-mail and internet, voice data and telegraph leasedcircuits, international subscriber trunk diallingservices, Inmarsat Mini-M, international programmeTV, and home country direct dialling. A third operatorof basic telephones, STM Telecom Sanchar Private

Table 7.5: Production of Vegetable Ghee Industries and Their Market Share

S.N. Company Name Annual Capacity (MT) Share (%)

1. Narayani Vegetable Ind. Pvt. Ltd. 6000 5

2. Shree Ganesh Ghiu Udyog Pvt. Ltd. 14000 11

3. Narayani Oil Refinery Udyog Pvt. Ltd 4680 4

4. Nandan Ghee and Oil Ind. Pvt. Ltd 6000 5

5. Ganapati Banaspati Pvt. Ltd 12000 10

6. Nepal Banaspati Ghee Udhoyg 2362 2

7. Shiv Shakti Ghee Udhyog 7920 7

8. Annapurna Vegetable Products 8896 7

9. Shree Krishna Oil Refiner 6350 5

10. Arun Vanaspati Udhyog 5511 4

11. Sushil Banaspati Udhyog 6560 5

12. Others 43000 35

TOTAL 123279 100

Source: Department of Industry & Discussion with industry experts

Table 7.6: Production of Dairy Industries and their Market Share

S.N. Company Name Capacity Utilisation/Day Share (%)(‘000 litres)

1. Sita Ram Gokul Milk Pvt.Ltd 30 8

2. Integrated Dairies And Agro Products 14 3

3. Kabeli Daires Pvt.Ltd 4 1

4. Eastern Dairy Pvt. Ltd 3 1

5. Jaya Ganesh Dairy Pvt. Ltd 3 1

6. Nepal Dairy Pvt. Ltd. 1 0

7. G.S. Dairy Udhyog Pvt. Ltd. 3 1

8. Dairy Development Corporation 247 63

9. Kathmandu Dairy 4 1

10. Bhaktapur Dairy 5 1

11. Himalayan Dairy 35 9

12. Others 41 11

TOTAL 390 100

Source: National Milk Marketing and Strategy Study, National Dairy Development Board.

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Constellations Limited and AVCOoperate the GMPCS service. NT currentlyhas a monopoly in GSM services, as theSpice Network is yet to start its operation.Customers are currently facing immensenetwork problems as NT has wittinglydistributed more lines than the radiofrequency allowance and has neglectedthe outcome. Value added services seemto show relatively more competition,especially in the Internet Serviceproviders’ category, with a total of 27operators.

ServicesThe Foreign Investment and TechnologyTransfer Act, 1992, does not allow foreigninvestment in the following servicessectors: personal services business suchas hair cutting, beauty parlour, retail

business, travel agency, trekking agency, waterrafting, tourist lodging, and consultancy services suchas management, accounting, engineering and legalservices. However, during its accession to the WTO,Nepal has opened up most of the services sectors.

BankingThe two public banks Nepal Bank and RastriyaBanijya Bank still dominate the market with acombined market share of 32.95 percent in deposits

Table 7.8: Market Shares of Commercial Banks

Commercial Banks Deposit Market Credit Market

Share (in percent) Share (in percent)

Nepal Bank Limited 15.530 13.815Rastriya Banijya Bank 17.424 18.105NABIL 6.033 6.329Nepal Investment Bank Limited 5.009 5.261Standard Chartered Bank Limited 9.056 4.896Himalayan Bank Limited 9.740 9.441Nepal SBI Bank 3.095 4.007Nepal Bangladesh Bank Limited 5.455 7.400Everest Bank Limited 3.451 4.420Bank of Kathmandu 3.313 4.406Nepal Credit and Commerce Bank 2.550 3.202Lumbini Bank Limited 1.616 2.322Nepal Industries & Commerce Bank 2.202 2.704Machhapuchre Bank Limited 1.178 1.832Kumari Bank Limited 2.061 2.676Laxmi Bank 0.720 1.263Siddhartha Bank Limited 0.552 1.131Source: Research Department, Nepal Rastra Bank

Table 7.7: ICT Service Providers in Nepal

Service Quantities

Basic Telephone (fixed line) 1

Basic Telephone (WLL) 1

Mobile Telephone 2

Internet Service Providers 27

Cable Internet 2

Radio Paging 8

V-SAT Providers 10

Fax mail 6

Video Conferencing 1

GMPCS 2

Rural Telecommunication Services 1

Source: Nepal Telecommunication Authority

Limited has recently entered the sector with a WorldBank (WB) grant of US$22.56mn, but with a clear andlimited target market consisting of 535 VillageDevelopment Committees (VDCs) in the rural areasand with services confined to the usage of V-SATtechnology.

The mobile telephone service market also has onlytwo players for each type of service. NT and SpiceNetwork hold licences for GSM service, and the

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and 31.92 percent in loans. These two combined withthe third largest commercial bank, the HimalayanBank with a 9.74 deposit market share and a 9.44 creditmarket share monopolise almost half of the bankingsector, thus reducing competitiveness. In aggregate,the three largest banks possess 50.36 percent of totalassets of all commercial banks.

However, lending rates of commercial banks havebeen decreasing over the last decade, mainly afterliberalisation, from 15-21 percent to 8-13 percentindicating an increase in competition in the financialmarket. Interest on import loan, for example, wasbetween 14 -15 percent in 1998, but decreased to 11-13 percent in 2000. It is currently between 8-11.5percent. Likewise, rates against fixed deposits (FDR)have also decreased by about two percent on anaverage. Overall lending rates have shown adownward trend since the 1990s, while banks havediversified their service portfolios to attract newcustomers, for example, hire purchase loan services,insurance services, ATM facilities and e-bankingfacilities, indicating increased competition in themarket. However, as prescribed by theory, depositrates have not increased with the increase incompetition. This can be attributed to high liquidityin the economy as a result of increased remittances,lack of investment due to political instability, andincreased loans and grants. As a result, interest paidon deposits has also been decreasing from an averageof seven percent in 1997 to around four percent in2004. In addition, the spread rate quoted by the WBStudy ‘Financial Performance and SoundnessIndicators of South Asia’ is approximately 3.09percent, indicating a fair level of competition in themarket.

InsuranceThere are altogether 17 insurance companies inNepal. Among them two are composite companiestransacting life as well as general insurance business,three are Life Insurance Companies and 12 are GeneralInsurance Companies. They operate as per the normsand values of the Insurance Act, 1992, and InsuranceRules, 1993. The Beema Samiti, the regulator for theinsurance sector is responsible for issuing license tonew insurance companies. As the granting of licenceis subject to ‘economic needs test’, Beema Samiti hasconsiderable amount of discretionary power ingranting the licence. The paid-up capital for life insureris fixed at Rs 250 million and general insurer at Rs100 million according to the insurance regulationsamended in 2001. However, most of the generalinsurers are operating with a paid-up capital of Rs 30to 50 million.

Passenger AviationThe monopoly of the government-owned Royal NepalAirlines Corporation (RNAC) was broken after thegovernment adopted the open sky policy in the early

1990s. In the first phase, three private airlines—NeconAir, Everest Airlines and Nepal Airlines—wereallowed to operate in the domestic sector. By the year2000, around 30 companies were registered as airlinesand 15 were actually in business. Today there are 13airlines in the domestic sector and five in theinternational sector. It is, however, noteworthy thatthe airlines have, barring a few short-lived incidents,not competed on the basis of fare and all the airlinescharge identical fares for all the domestic sectors. Dueto this fact, the Airlines Operators Association hasalso been accused of being a cartel. However, the entrybarrier in this sector seems to be low, which is evidentfrom the high number of airlines that acquired licencefrom the government after the adoption of open skypolicy.

There are a high number of small operators in thesurface transportation sector. However, the entrybarrier is high in this sector due to the prevalence ofcartels. Operators have formed syndicates in almostall the sectors and only the syndicate members areallowed to ply on the designated routes, despite thefact that the Consumer Protection Act, 1997, hasoutlawed the syndicate system in delivery of anyservice.

Sectoral PoliciesSectoral regulators regulate the major sub-sectors ofthe Nepalese economy. Most of the regulators arepreoccupied with operational issues such as givinglicence to new operators, and ensuring faircompetition is not the objective of most regulators.

Telecommunications SectorThe telecommunications industry in Nepal has beenwithout any sign of healthy competition, till date. Theindustry is relatively young with the first telephoneexchange established only in 1960. Since then, themarket consisted of only one state-owned monopoly:Nepal Telecommunication Corporation (NTC), whichhad been dominating the market since its inceptionin 1975, principally by means of donor assistance forits operations and capital expansion. Following thedecision for privatisation in 1997, a few more playershave been able to enter the industry, which has a tinyfoothold in the market. As such, it has not made muchdifference in the competition scenario. The lack of acomprehensive competition legislation coupled withregulatory inefficiency contributes to some extent, tothis situation.

The first National Communications Policy wasadopted in 1992 and updated in 1999. The objectivesof the policy were to liberalise the telecommunicationsector, to increase private sector participation and topromote competition. A Telecommunication Act waspassed in 1998 leading to the privatisation of NTC,and the establishment of a regulatory body: Nepal

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Telecommunication Authority (NTA) and a RadioFrequency Determination Committee in order toensure that the efficiency gains were passed on toconsumers. The NTA was entrusted with grantinglicences, prescribing, fixing and approving quality oftelecom plant and equipment, inspecting andmonitoring services provided by operators, settlingdisputes between service providers and providingsuggestions to the government on policy and optimalstrategies to be adopted in the sector under the broadtheme of making telecom services reliable and easilyavailable to consumers, protecting the rights ofconsumers and promoting healthy competition in themarket. However, a major barrier to entry in this sectoris the ‘safeguard clause’ of the 1998 Telecom Actprohibiting more than one operator in a particularservice for a period of five years.

However, the policy was revised in April 2004 inaccordance with the government’s built-in agenda.The amended legislation could overrule the clause ofthe previous Act, depending upon whether NTA isable to pick up appropriate loopholes, for example, byshowing that the demand for telephone servicesclearly outstrips supply, and therefore the safeguardclause is hampering growth and development of thetelecom sector and needs to be annulled. The new draft,crafted with international assistance, is a morerigorous schedule for rapid liberalisation and aims toremove restrictions on investment and accelerate broadmarket opening. It defines a liberal regulatoryenvironment based on open licensing, widespreadcompetition, specific service obligations for licensedoperators, a proposed regime for non-compliance,reference to WTO obligations and a sketch of the NTCreforms — renamed NT in April 2004.

Selected recommendations specified in the new policyinclude1 :a) Opening of the telecom sector to new operators

without restrictions but limited by the amount ofradio spectrum frequency allowance.

b) Introduction of a multi-service and multi-operator system dependent upon the amount ofradio frequency allowance. Operators are alsoallowed to resell activities.

c) Introduction of an open licensing regime withnew and transparent licensing methods thatcreate a level playing field.

d) Restructuring of NT to reduce governmentownership.

e) Promotion of private sector participation, and ofthe role of the Ministry of Information andCommunications and NTA to keep the privatesector fully informed of sector reformdevelopments and licensing opportunities in atransparent manner.

f) Introduction of new operators of mobile servicethrough tenders on the basis of maximum ruralcoverage—defined as commercial coveragewithout subsidies.

g) Government to purchase services from severaloperators based on price and qualityassessments instead of the incumbent NT.

Although the new draft is a relatively more rigorousstep towards a progressive, liberal telecom sector, it isnevertheless plagued by vague clauses, whichundermine this objective. For example, although theopen licensing regime and multi-operator clausesshould serve to increase competition, the vague‘minimum requirements’ and non- transparentmechanism for allocation of radio frequency allowfor restrictive practices to prevail as well as createspace for rent seeking and other directly unproductiveprofit-seeking (DUPE) activities.

Efforts to bring about a competition regime seem tohave halted at the legislative level with poorinstitutions, weak checks and balances and vestedinterests hindering implementation of the legislation.Nepal has until January 1, 2009, under the WTOagreement to fully open up the telecommunicationmarket.

Financial SectorThe Nepali financial sector has undergone majorchanges in the last decade as a result of rigorousliberalisation policies enacted in the aftermath of therestoration of democracy. The sector consisted of onlytwo commercial banks until the mid 1980s, one thatwas fully government-owned (Rastriya Banijya Bank)and another, which comprised 51 percent governmentshare (Nepal Bank Limited). Today, there are a totalof 17 commercial banks, 57 finance companies and17 insurance companies—all jostling for a larger shareof the market. As of July 2003, the financial sector’sassets equalled NRs 289.8 billion (US$3.97bn) andcommercial banks dominated the sector accountingfor 73.18 percent of total assets2 .

The Nepal Rastra Bank (NRB), established in 1955,has been responsible for regulating all institutionswithin the financial sector, including commercialbanks. Chapter Three and Four of the NRB Act, 1955,states that all powers be vested to the NRB, includingthe power to approve establishment of banks, toprescribe conditions for accepting deposits, supplyingloans and issuing debentures, and to inspect,supervise and issue directives to all commercial banksand financial institutions. The NRB at the time alsohad the right to set interest rates and deal exclusivelywith foreign currency.

Initial efforts to introduce competition in the financialsector started in the mid 1980s under the government’sliberal economic policy, which was guided by theStructural Adjustment Programme of the BrettonWoods Institutions. Under this policy, the CommercialAct of 1984 was passed which removed most entryand exit barriers and allowed a 50 percent foreign

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investment in commercial banks in anticipation ofincreased foreign currency, technological know-how,modern banking skills and increased competition inthe market with overall efficiency gains for consumers.As a result, Nepal Arab Bank (currently known asNabil Bank) was established as the first joint venturebank. Subsequently, Nepal Indosuez Bank (currentlyNepal Investment Bank) and Nepal Grindlays Bank(currently known as Standard Chartered Bank) wereestablished in 1985 and 1987, respectively. Theseenterprises introduced modern banking practices andtechnical skills and brought about a fledglingcompetitive environment to the financial sector.

In July 1985, NRB further allowed commercial banksto accept current and fixed deposits in foreigncurrencies. And in May 1986 deregulated interest ratesand lowered the liquidity requirement of commercialbanks from 25 percent to nine percent. Commercialbanks were allowed to determine their interest ratesexcept for export lending and productive sector credits(priority sectors) for which a Credit InformationBureau was established in 1989. However, the prioritysector lending is currently being phased out underthe rationale that it is market distorting and shall beeliminated by the end of the FY 2006/7. Furthermore,the auction mechanism was introduced for the firsttime to sell treasury bills and the AgricultureDevelopment Bank of Nepal (ADB/N) and NepalIndustrial Development Corporation (NIDC) wereallowed to issue debentures to increase their financialresources.

The restoration of democracy in 1990 finally provideda major thrust towards increased private investment,and therefore increased competition in the financialsector. Accordingly, the Finance Company Act 1985was amended in 1992, which resulted in a tremendousincrease in the volume of financial transactions andfinancial markets. By 2000, the number of commercialbanks had reached 15 and the count now stands at 17.

The regulation department of NRB, as most otherpublic institutions of Nepal, is plagued with endemicproblems such as lack of incentives, lack ofindependence from vested interests and politicalpressures and the inability to effectively follow upafter monitoring commercial banks as a result of asystemic handicap. Hence, NRB has not been aseffective as mandated in bringing about a competitiveenvironment and anti-competitive practices stillprevail, for example, in the foreign exchange market.

Power SectorAt the end of FY 2003/04, a total of 549.201 MW ofhydropower was generated in the country (EconomicSurvey 2004), which is a fraction of the economicallyfeasible 44,000 MW hydropower potential. Inaddition, thermal plants of 56.7 MW capacity andimport of 50 MW from India are available to meet thepower demand of the country.

To facilitate the export of electricity, the governmentapproved a new Hydropower Development Policy in2002.

The Department of Electricity Development (DoED),previously known as Electricity Development Center,is responsible for licensing, promoting the privatesector and maintaining quality standard of electricitysupplied to consumers.

The Electricity Tariff Fixation Commission (ETFC) isresponsible for fixing electric tariff and other charges.

The Hydropower Development Policy, 2002, hassuggested major changes in institutional provisionsin this sector. The existing ETFC will be developedinto an independent regulatory body with the mandateto fix electricity tariff and wheeling charges, to monitorand supervise reliability and quality of electricityservices, to prepare grid code, to direct and supervisepower purchase agreements among public and privategenerators, and to protect consumer interest. DoEDwill be mandated to promote hydropowerdevelopment by the private sector, to encouragecompetition in project licensing, to develop a one-window policy to facilitate streamlined licensingprocess, to carry out high quality feasibility studiesfor hydropower and multi-purpose projects, tofacilitate private sector participation, and to provideassistance to private sector in operation andmonitoring of hydropower projects.

These guidelines aim to break the monopoly of NEAby ‘unbundling’ it and separating the generation,transmission and distribution of electricity. Theseguidelines are yet to be incorporated into thelegislation.

Consumer Policy and CompetitionConsumer policy is an essential element in aliberalised and free market economy. This is importantto ensure that the benefits of economic growth are notonly taken up by the business community but alsoshared by the majority of the population—theconsumers. Effective consumer policy allowsconsumers to purchase safe goods and services andalso obtain redress and compensation wheneverconsumers are victimised. In making efforts to protectconsumers, there is a need for governing bodies towork towards creating a healthy, efficient andcompetitive market mechanism and efficiently useregulatory tools for consumers’ protection. Consumerprotection is not an obstacle to development. Rather,it promotes fairness and equality in developmentstrategies.

An effective consumer protection policy not onlybenefits consumers but businesses as well, since ithelps reduce unfair competition. Competition in thedomestic arena will help businesses developcompetitiveness internationally, as well. Consumers

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need to be able to pressurise business establishmentsto become more competitive so that the latter can copewith foreign competition and they can provideimproved goods and services. This can benefit bothconsumers and businessmen.

For effective implementation of consumer policy theremust be a strong consumer movement. In the case ofNepal, the consumer movement is weak and consumerrepresentation in the decision making level regardingconsumer issues is still at its early stage. Due toincreased awareness, the consumer movement isslowly gathering momentum and there are someorganisations that have initiated work in this area.Although the existing consumer protection law isadequate to ensure that the Nepalese consumers areempowered, the lack of awareness, ambiguity inregulation and enforcement has made the lawineffective.

Prevailing Laws3

Given below is a brief description of some importantlaws that affect consumers in Nepal:

Consumer Protection ActIn Nepal, the Consumer Protection Act (CPA) cameinto effect only in 1999. The legal provisions availablefor consumer protection before this Act wereinadequate. The enactment of this Act was welcomedby everyone, and was thought to be the basis forprotecting the rights of consumers.

The Act guarantees six out of the eight universallyrecognised consumer rights. It protects the consumersagainst any irregularities regarding price, quality,quantity, health, choice, etc. and prevents anymonopoly and unfair trading practices of producers.The Act also ensures proper compensation forconsumers in case of damage because of unfair tradepractices or any other prohibited practices.

CPA was brought out to protect the interest of theconsumers and not to per se induce competition inthe market. The act addresses restrictive tradepractices and unfair trade practices. Unfair tradingpractices include the sale or supply of consumergoods or services by making false or misleading claimsabout their actual quality, quantity, price,measurement, design, make, etc., or the sale or supplyof consumer goods produced by others by affectingtheir quality, quantity, price, measurement, design,make, etc. The act also prohibits the sale of sub-standard goods or services.

As such, the Act mainly addresses “irregularitiesconcerning the quality, quantity and prices ofconsumer goods or services”. Having said this, theprovisions to ensure the benefits of consumers affectcompetition, as most unfair business practices affectboth consumers and competitors, though indirectly.

Particularly, the provisions in the Act that ensureconsumers the right “to choose goods and services atcompetitive prices” and those that prohibit “thecreation of circumstances to influence demand, supplyor price of any consumer good or service by fixing thequota of raw materials needed for any consumer good,or reducing the production of any consumer good, ortaking any other similar actions or by hoarding anyconsumer good or service or otherwise creating anartificial shortage, or selling and supplying such goodor service at specified times or places only, or takingany other similar actions in collusion with others”are likely to have positive impact on competition.

The effectiveness of the Act is very weak. It has notbeen able to empower the consumers or promotecompetition in the Nepalese economy.

Food Act, 1966The Food Act, 1966 ensures that consumers beprotected against the use of contaminated, harmfulsubstances not fit for consumption. Manufacturedconsumables must adhere to a certain minimumstandard of health and safety requirements andbusinesses must also provide certain criticalinformation on any such consumables and theirpacking that may have a direct relation to the qualityof the product being consumed.

Despite this Act, the availability of contaminated foodis very common in the Nepalese market. A reportpublished in the Nepalese English-language dailyThe Kathmandu Post on June 17, 2003, states that thishas been proved in the reports of the Department ofFood Technology and Quality Control (DoFTQC). Thedepartment has carried out sample tests of variousfood products that were available in the market andfound that they were of sub-standard quality and havevarious types of contamination. In the tests carriedout by DoFTQC, companies seemed to have ignoredthe practice of labelling their packages. This act notonly deprives consumers their right to know aboutthe ingredients, but also violates the Consumer Act.

Consumers have also remained silent on theavailability of sub-standard and contaminated goods.The only way they have been retaliating is by stoppingconsumption of these products. Although the FoodAct, Nepal Standards Act, as well as CPA ensurequality of products available, the government has beenunable to check the supply of substandard quality ofproducts in the market and to make suppliersaccountable. The implementation of the CPA is theresponsibility of the Ministry of Industry, Commerceand Supplies (MOICS), while the implementation ofthe Food Act is the duty of the Central Food ResearchLaboratory (CFRL), which comes under the Ministryof Agriculture. Similarly, CFRL and municipalities areresponsible for quality control of food grain suppliedin the market.

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Black Marketing and Certain Other SocialOffences Act, 1975This Act was brought out mainly to maintain thehealth, convenience and economic well being of thepublic and prohibits business practices such as blackmarketing, profiteering, deflection of commodities,hoarding and creation of artificial scarcity.

This Act is following in the footsteps of other Actsthat are there for consumer protection and can beconsidered a total failure. A burning example can begiven in the case of Nepal Telecoms (NT).

NT, in order to meet the demands for mobile phones,had opened up five distribution centres inKathmandu. However, due to limited availability ofSIM cards, the centres closed at three in the afternoonwhen it was supposed to be open till five. Surprisingly,the SIM cards could be purchased at a higher price atshops around the centres. When a complaint waslodged with the authority, they said that they wereunable to take actions against these people. This is anexample of black marketing, which is rampant in otherareas too.

Although there are provisions in the Act that prohibitsadulteration of drugs and sale of such drugs protectthe interest of consumers; the Act, as a whole, is veryweak in promoting competition in a market-basedliberal economy.

Essential Services Operation Act, 1957The government has enacted the Essential ServicesOperation Act in order to make necessary andappropriate arrangements for uninterrupted supplyof essential services and commodities so that lives ofordinary citizens are not affected. This Act ensuresthe rights of consumers to have access to extremelyimportant services like transportation, postal system,etc. The Act prohibits strikes in these sectors.Nepal Standards Act (Certification Mark) Act, 1980

This Act has been enacted to make arrangements fordetermining the standard of goods available to thepublic for their welfare. In order to achieve the objectiveof this Act, HMG has also established Nepal Bureauof Standards (NBS). It ensures certain quality in thegoods that are available to consumers, and that theyare protected against consuming any sub-standardgoods.

Complementarities Between CompetitionPolicy and Consumer ProtectionThe main objective of competition policy and law is topromote competitive markets and curb anti-competitive practices. In this process, they also protectand promote consumer welfare as these laws makethe market environment favourable from the consumer

perspective as well. Consumer policy also aims atcreating an environment for the protection ofconsumers.

Competition policy is more of a proactive policy thatattempts to promote consumer interest in themarketplace whereas consumer protection policy putsforward mainly a reactive agenda, such as protectingthe interest of consumers and providing access toredress against abuses.

Although on the surface, these two policies seem tohave different objectives, they complement each otherbecause the ultimate objective of both these policies isconsumer welfare. Competition policies enhance thecompetitiveness of firms and enable them to survivein the international market. The firms are then able togive consumers not only the best possible choice, butalso the lowest possible prices and adequate supplies.Thus, the ultimate beneficiaries of this policy are theconsumers.

In many countries, some of the issues like unfair andrestrictive trading practices are covered by bothConsumer Protection and Competition Act. Due to thesimilarity of the issues, some countries such asAustralia and Peru have only one institution to tackleboth consumer and competition issues.

The close linkage between competition and consumerpolicy has resulted in the inclusion of many consumerissues in the draft Competition Act. The preamble tothe draft of the Competition Act in Nepal states thatthe law would ensure the availability of qualityproducts in reasonable prices to the consumers byestablishing a healthy competitive environment in themarket. Various anti-competitive practices such as tiedselling, abuse of monopoly powers that would directlyaffect consumers have been covered by this law.Certain provisions like the one on misleadingadvertisements have been included in both the CPA1998 and the draft Competition Act.

Anti-competitive PracticesAnti-competitive practices are a set of unfair practices,which enterprises may use in order to distort oreliminate competition with the aim of acquiring andabusing monopoly power. The following paragraphsidentify and separately list all types of existing anti-competitive practices in the Nepalese economy withan inquiry into their raison d’être.

Collective Price FixingCollective price fixing is a type of horizontalagreement, whereby firms collectively fix prices ofprimary goods, intermediary goods, or finishedproducts. It may also involve agreements relating tospecific forms of price computation, including thegranting of discounts and rebates, drawing up of price

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lists and variations, and exchange of priceinformation.

This is the most prevalent collusive arrangement andhas been practiced by a number of business and tradeassociations such as the Colour PhotographersAssociation, the Association of Brick Industries, theAir Transporters Association of Nepal, NepalAssociation of Travel Agents and regional truck andbus syndicates.

During the monsoon season, heavy rainfall wipes outstocks of bricks causing losses to brick manufacturers.The Association of Brick Manufacturers fixes theminimum price during this season incorporating thelosses incurred by members in the price structure. Inthis manner, it is able to pass on the costs of its inabilityof proper storage to consumers. The price quoted isaround NRs 1700 per one thousand bricks instead ofthe regular NRs 1500 and the opportunity to bargainis also nil, as the association is able to throw out anymember that charges a lower price than the one quoted.

The airlines sector is another prominent example ofcollective price fixing. The price structures of mostappear curiously similar. Even in 1999, the prices ofall private airlines were identical, clearlydemonstrating a tacit cartel between them. Moreover,there was a significant difference between the fares ofprivate airlines and the government-owned RNAC,which further endorsed this belief. Fares were around15 percent higher than those of RNAC for theKathmandu-Nepalgunj flight, 22 percent higher forthe Kathmandu-Bharatpur flight, and 17 percenthigher for the Kathmandu-Biratnagar flight. However,it was difficult to officially levy charges against theAir Transporters’ Association of Nepal due to the lackof a comprehensive competition policy and law in thecountry. In the last couple of years, some airlinesstarted engaging in a price and promotion war, whichbrought about some optimism among consumers andother stakeholders. The recent decrease in the fare ofCosmic Air is another manifestation of this outbreak.If the past experience is any guide, this kind of pricewarfare will not last long, and the cartel will comeback on the track. Hence, the recent competitionbetween Cosmic Air and Yeti Airways and the lowprices offered by Cosmic Air do not rule out thepossibility of another relapse as experienced in thepast.

Similarly, in the telecom sector, there is evidence ofcollective price fixing between service providers, evenin services such as radio paging which is relativelymore moribund.

Lastly, the surface transportation sector has exploitedconsumers and deterred competitors by formingregional cartels called syndicates. In the last coupleof years, this sector witnessed tremendous growth as

the central bank identified it as a ‘priority sector’creating a glut in this sector. The operators have formedregional cartels. They tacitly agree on their respectiveareas of operation and frequency of circulation andvigorously deny entrance to new operators.Furthermore, their quality of service is appalling.However, the government, fearing a massive strike,and given the turbulence in the country because ofthe Maoist insurgency, has remained silent on theissue.

Collusive Bidding or TenderingIn such a scheme, the buyer, who invites competitiveoffers or quotations through a tendering procedure,will receive offers solely from cartel members who havesecretly arranged among themselves as to whichenterprise will make the lowest offer. The other cartelmembers will either decline to participate or make fakeoffers called ‘cover bids’ by inflating their prices.However, when an outsider makes a genuinelycompetitive offer, the cartel deals with it by quotinglower prices and incurring losses, but it is financedthrough reserves put aside each time a cartel isawarded an offer, precisely with the aim of combatingoutsiders.

In Nepal, collusive bidding is widespread in contractsfor infrastructure construction such as roads, bridgesand highways as well as in supply of raw materials.Producers of polythene pipes, for example, wereknown to collude while supplying pipes to NepalDrinking Water Corporation. In recent years, thispractice has fairly declined with the breaking up ofthe national cartel. The justification given by mostcompanies, however, is that they are compelled tocollude in order to survive in the already distortedmarket where government officials, instead of settingout a level playing field before the bidding process,seek bribery from companies and favour those whogive in. Hence, as a result, the firms are induced tocollude.

Tied-SellingUnder this practice, the supply of particular goods orservice is made dependent upon the purchase of othergoods or services from the supplier or his/herdesignate. The tied product may be totally unrelatedto the product requested or maybe complimentary orsimilar. Tying arrangements are normally imposedin order to promote the sale of slower movingproducts, and in particular those subject to greatercompetition from substitute products.

Tied-selling is rife in the education sector in Nepal.Students are forced to buy books, bags, and uniformssold by the schools in exorbitant prices without havingany other option. The regulatory authority, the Officeof the District Education Officer, under the Ministryof Education, turns a blind eye to this practice because

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of its lack of capacity or resource constraint toeffectively check the practice.

Hospitals are also widely engaged in tied-selling.Private hospitals require patients to conductpathological tests that are not required. For example,even if the patient has recent tests conducted in otherhospitals they are required to take the tests again. Eventhe proliferation of private hospitals and nursinghomes has not made much difference in the healthcosts borne by consumers.

Another sector involved in tied-selling is the cementsector where customers who demand Nepalesecement are forced to buy Indian cement as well. TheNepalese cement is known for its superior quality andfast setting attributes. However, the three major cementproducers of Nepal are SOEs with inefficientproduction systems and a low-level of capacityutilisation, thus leading to frequent scarcity ofNepalese cement in the market. At one time, customerswere required to purchase 25 sacks of Indian cementwhile purchasing 50 sacks of Nepalese cement.

Resale Price MaintenanceUnder this practice, the supplier (manufacturer ordealer) dictates the final downstream price quotingthe minimum amount to retailers for the resale ofgoods. The objective behind this unusual anti-competitive practice is firstly to prevent retailers fromcompeting with each other so that the selling price ofthe good does not go down. Secondly, although thecosts of production decrease for reasons such ascheaper raw material prices, technological efficiencyand hence increased productivity, the selling price iskept high by the producers out of fear that the ‘image’of good will become ‘inferior’ if the price of it goesdown. Thus, they set the minimum selling price forretailers and use the extra profit for other forms ofcompensation to consumers such as prize-winningschemes or lottery schemes as demonstrated by noodlemanufacturers of Mayo’s, Wai Wai and 2 PM brandsof noodles.

Creation of Artificial ScarcityThe creation of artificial scarcity denotes a situationwhereby the seller creates a shortage of a good in themarket in order to push prices up, resulting inincreased profits for the seller.

In Nepal, the creation of artificial scarcity has becomea common practice. Businessmen buy huge quantitiesof agricultural products, especially rice, wheat, andpulses from farmers who do not have the capacity tostock the output during peak season. Thebusinessmen collectively hold the food stock in theirwarehouses until the off-season arrives. Theysubsequently start releasing foodstuff in a manner thatcreates artificial scarcity. Sadly, even consumers areso accustomed to the idea of ‘shortage’ in the market

that they accept it without questioning the state ofaffairs.

The sugar industry is a case in point. In 1999, sugarproducers demanded a rise in import tariffs from 10percent to 40 percent with the rationale of protectinginfant industries. They asserted that they had nowdeveloped sufficient capacity to fulfil domesticdemand; hence there was no need for imports, but astrong need for protection from foreign competition.However, soon after the government blindly raisedtariffs, the producers started creating artificial scarcityand pressurising the government to increase theselling price of sugar. In November 2004, this incidentwas repeated when the price of sugar increased fromNRs 38 per kg to NRs 50 per kg after the producers ofsugar created an artificial shortage deliberatelyduring the festive season when demand is higher thanusual.

Price DiscriminationPrice discrimination is the charging of different pricesto consumers for the same good or service in order toextract maximum profits. There are three degrees ofprice discrimination. The first-degree pricediscrimination refers to a situation whereby producersextract the maximum amount that the consumer iswilling to pay. Hence, this applies to all situationswhere the buyer and seller engage in bargaining, andthis practice is prevalent in most developing countries,including Nepal.

The second-degree price discrimination occurs whenproducers try to sell the maximum amount of good orservice at the profit maximising point and then reducethe price for the remaining units. This is done, forexample, with cinema tickets, bus tickets, air ticketsetc.

The third-degree price discrimination is a situationin which there is a minimum of two markets for thesame good with two different elasticities of demand.Producers charge a higher price where the elasticityis low and a lower price where the elasticity is high.This can be observed in the banking sector in Nepalwhere loans are given according to the type ofconsumer classified as ‘prime’ and ‘others’ . Highlending rates are given to small borrowers with alower elasticity of demand and low rates are given tolarge borrowers with a high elasticity of demand. Thelending rate difference is on an average two to threepercent.

Predatory PricingThis refers to an action whereby a firm sets a price forits good or service below the cost price in order todrive out competitors from the market. A form of thispredatory behaviour, known as ‘dumping’, wasconducted in Nepal by the Indian subsidiary of the

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Nestle Limited which soldMaggi noodles much below theprices charged in some Indiancities. However, a competitiveenvironment has developed inthe noodle business to a greatextent in recent years as aresult of the establishment ofmany local producers.

A more eminent manifestationof predatory pricing occurred between Nepal’s twowidely sold English-language dailies: The HimalayanTimes, and The Kathmandu Post—part of the KantipurPublications. When the former cut down its prices toNRs 2 (possibly with predatory intent) and becamethe lowest selling paper, The Kathmandu Post slashedits newsstand price by 62 percent to Rs1.50 per copy(and 42 paisa per copy for subscribers of its sisterpublication the Kantipur daily) becoming the cheapestEnglish daily broadsheet overnight. The HimalayanTimes further reduced its price to NRs.1. With the costprice said to be at around Rs 15, many believe that theRs. 1.50 price offered by The Himalayan Times had apredatory intent.

Unreasonably High PriceCharging unreasonably high prices by takingadvantage of a dominant position in the market canbe observed in the telecom sector of Nepal. NT enjoysa dominant position in the market as a result of itsprevious existence as a government-owned monopoly.Hence, it owns most network lines and frequencycapacity, which it exploits to the fullest. The pricescharged for mobile services are exorbitant in light ofdecreasing mobile charges worldwide, includingneighbouring India. During peak hours calling frompost-paid and pre-paid mobile phone is seven andnine times higher than calling from landline.

It is due to various institutional reasons (legal, socialand cultural) that one can observe such anti-competitive practices in almost all major industriesin Nepal. Firstly, the lack of a comprehensivecompetition law has allowed businesses to engage inanti-competitive practices by exploiting the existingloopholes in sectoral legislation. Secondly, the highcapital requirement for starting business acts asformidable entry barrier for small- and medium-sizedfirms that could potentially challenge monopolyenterprises. Thirdly, given the weak checks andbalances in public institutions, the governmentapparatus remains hostage to active lobbying frominterest groups that are often aligned to politicalparties. This, together with other inefficiencies ofregulating agencies such as lack of incentives toperform, apathy et al. results in rent seeking andcorruption. Finally, an overall lack of consumerawareness on the need for a participatory approach

Table 7.9: Call Charges of Landline and Mobile Phones (NRs)

Type of Call (From) 8AM - 6PM 6 – 10 PM &

6 – 8 AM

Landline 1.27 per 2 minutes 0.635 per 2 minutes

Post Paid Mobile 9.16 per 2 minutes 4.572 per 2 minutes

Prepaid Mobile 11.88 per 2 minutes 11.88 per 2 minutes

Source: Calculated on the basis of published tariffs of NT

in eliminating such practices as well as the inability,on the part of consumers, to form alliances around acommon theme and to voice their collective concernshas aided the continuation of anti-competitivepractices.

Perspective on CompetitionPolicy and LawThis section presents the findings of a questionnairesurvey that involved 100 respondents. Twenty-fiverespondents representing the business community,an equal number of policymakers, mostly governmentofficials, and 50 consumers, including economicjournalists, academicians, civil society activists andlawyers were interviewed during the course of thesurvey.

Background and MethodologyThree separate sets of questionnaire with 30 multiplequestions each were used, each for businesscommunity, policymakers and consumers. Nosubjective questions were asked though additionalinformation provided by the respondents, particularlycases of anti-competitive practices prevalent in Nepal,were recorded.

The initial focus was on probing the extent of publicawareness regarding competition-related issues. Butgiven the relatively small size of the sample, it wasrealised that the outcome could not be representativeand also that many did not have a soundunderstanding and knowledge on competition-relatedissues.

The focus of the survey was thus changed to includeonly the educated and the more aware class inKathmandu Valley. The questionnaires were alsoslightly changed with more technical issues included.A list of potential respondents was prepared bySAWTEE on the basis of the perceived extent of his/her knowledge on competition. Some of the identified,potential respondents were not interviewed; as theywere not available or acknowledged that they had noknowledge on competition-related issues. Even in thecase of the more aware respondent, a lot ofexplanation had to be made before he/she couldrespond to some of the questions. In many instances,

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responses to earlier questions had to be changed asthe respondents understood issues clearly only asquestions unfolded.

Besides, respondents were allowed to make multipleresponses to some questions. In such cases, an ordinalapproach to the ‘multiple choice’ answers was used,i.e. respondents were asked to assign ranks to differentchoices he/she made. The interviewer then assignedpriority ranking instead of mere “yes-yes” or “no-no”type response. As already noted, subjectiveinformation provided by the respondents wererecorded in a separate sheet attached with each set ofquestionnaire.

Field Survey ResultsIn general, a large number of respondents from allthree groups did not have clear concepts ofcompetition. Nonetheless, they were aware of ‘unfair’practices. All respondents were aware of anti-competitive practices prevailing in Nepal and couldalso point out a handful of areas. They were also awareof the fact that concerned departments or ministrieshave done very little to put a stop to such practices.

Likewise, majority of the respondents believed thateffective implementation of legislation that seek tocheck anti-competitive practices, even if only to someextent, could go a long way in benefiting all sectionsof society, including consumers and business. Inaddition, an overwhelming majority was also infavour of a comprehensive competition law. Theypointed out the need for exemptions and exceptionswithin the legal framework on grounds of publicinterest or general welfare. The following sectionspresent a detailed explanation of the field surveyresults.

The Extent of Anti-Competitive Practicesin NepalAn overwhelming number that is 90 out of 100respondents among the consumers, policy makers andbusiness community opined that anti-competitivepractices are prevalent in Nepal. While 88 percent ofthe consumers and 64 percent of policy-makers statedthat the extent of anti-competitive practices weresignificant, only 36 percent from the businesscommunity stated that anti-competitive practices weresignificant. 44 percent of the respondents from thebusiness community, 10 percent of the consumers andonly 20 percent viewed that moderate anti-competitivepractices did prevail. None of the respondents saidthat anti-competitive practices did not prevail orprevailed only insignificantly.

Monopoly of firms and entry barriers for new ventureswere termed as the most common forms of anti-competitive practices prevalent in the country.However, the majority of respondents could not giveconcrete examples to support their claims, arguingthat their choice was just an ‘informed response’ .Only in the case of ‘entry barriers’ was the exampleof syndicate system in the surface transportationsector cited. In addition to the already mentioned twotypes of anti-competitive practices, respondentsviewed that tied selling, collective price fixing andresale price maintenance were also common in Nepal.

A large number of respondents under the consumerand business community groups pointed out thatsectors having significant state interest and controlare substantially plagued by anti-competitivepractices. Lawyers and journalists interviewed duringthe course of study were very critical of the state’sengagement in commercial activities, arguing that thestate is promoting anti-competition in sectors like

0%

20%

40%

60%

80%

100%

ConsumersPolicymakersBusiness Community

Figure 7.1: Anti-competitive Practices in Nepal

Predatory Pricing

Entry Barriers

Resale PriceM aintenance

Tied Selling

Bid Rigging

M arket Sharing

Collect ive PriceFixing

M onopoly

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petroleum, mobile telecommunications, and electricitydistribution. Other sectors perceived to besubstantially affected by anti-competitive practices arebanking, insurance, public transportation, aviation,etc. Apart from journalists and lawyers, the majorityof respondents could not cite specific examples tosupport their response4 .

Action Taken While Faced With Anti-Competitive PracticesWhen the respondents were asked as to what actionthey took when faced with anti-competitive practices,50 percent of the consumers chose to “ignore anddeal”, 24 percent of them chose to “go to anothersupplier” (who supposedly adopts fair practice),while 18 percent chose to ‘argue and deal’ with theanti-competitive practitioner. Only six percent of theconsumers, one journalist and two lawyers chose tocomplain to government authorities.

Most consumers chose not to complain to governmentauthorities, since they viewed that it would not invokeany action from the government’s side. Among theconsumers harbouring such views were lawyers andjournalists. Even those consumers who chose to lodgeformal complaints with the government opined thatthey did not expect any action from the government’sside whatsoever. Apart from most policymakers,lawyers and a majority of journalists, most consumersand businesspersons, were unaware that there existedlaws containing provisions relating to anti-competitive practices.

Similarly, the respondents from the business sectorwere asked what they did when faced with unfairbusiness practice in their industry/sector. Themajority of them chose to deal with cases of anti-competitive practices amongst themselves and nonefrom this group chose to make formal complaints tothe government. From among the 20 respondentsunder this group who viewed that anti-competitivepractices did prevail in Nepal, 35 percent stated thatthey matched the move of the anti-competitivepractitioner while an equal proportion stated thatthey talked to other business peers to settle the issuemutually. Another 25 percent chose to negotiatedirectly with the anti-competitive practitioner, whilethe remaining five percent complained to relevantbusiness organisations/associations.

Extent of Awareness Regarding RelevantLegislative FrameworkThough there are a number of laws in Nepal thatcontain provisions relating to various anti-competitive practices, references to only a few ofthem were made during the course of interviews.Many respondents though aware of the laws werenot able to relate them to anti-competitive practices.

The most referred to law was the CPA. Forty-fourpercent of the 100 respondents were aware that CPAcontained provisions relating to anti-competitivepractices, with the policymakers’ group having thehighest level of awareness.

About 66 percent of consumers, i.e. 33 consumerrespondents, were not aware of laws that containprovisions relating to anti-competitive practices. Thosewho were aware of the laws were mostly journalistsor lawyers. Besides, even amongst the journalists, onlya few knew which department or ministry or agencyof the government was responsible for theimplementation of such laws.

On the other hand, 76 percent of policymakers knewabout at least one of such laws. Only 44 percent ofbusinesspersons interviewed were aware that lawssuch as the CPA and the Black Marketing and CertainOther Social Crimes and Punishment Act containedprovisions relating to anti-competitive practices.However, policymakers and businesspersonsconceded that the implementation of laws, not limitedto anti-competitive practices, by the governmentauthorities concerned were very poor. All groups ofrespondents, including policymakers, also assertedthat proper implementation of laws aimed atprotecting general interest of businesses andconsumers would be to the benefit of all.

Table 7.10 summarises the response of consumers,policymakers and businesspersons about theirawareness regarding laws that contain provisionsaimed at curbing one or more anti-competitivepractices.

The Necessity for a ComprehensiveCompetition LegislationAn overwhelming number of the total respondents(92 percent) viewed that comprehensive law dealingexclusively with anti-competition issues should beenacted in Nepal. Only eight consumers were not sure

Figure 7.2: Action Taken by Consumers While Faced With Anti-competitive Practices

Ignore and deal

Argue and deal

Complain to business

associations

Complain to government authorities

No deal/Go to another supplier

Nepal


if such a law would be needed. All the policymakersand businesspersons interviewed responded that aCompetition Act is the need of the hour. Besides, allrespondents who were in favour of competition lawviewed that the law, if properly implemented, wouldbenefit consumers and businesses alike. Manyrespondents, including those from the businesscommunity, even stated that the government shouldhave realised the need for a Competition Act, followingits decision to deregulate the national economy backin the 1990s.

Ironically, most policymakers believe that the businesscommunity will oppose any strong competitionlegislation. Of the 25 policymakers interviewed, 20opined that the business community would not favoura strong competition law in the country since the lawbasically aims at curbing anti-competitive activitiesof the business community. Nonetheless,policymakers also view that a strong competitionregime will help to increase the competitiveness ofbusiness enterprises in Nepal, which is very importantin the context of the country’s recent accession to theWTO. They were of the view that by putting a checkon anti-competitive practices, a strong legislation willforce Nepalese firms to be better equipped to deal withthe onslaught of any foreign competition in thedomestic market.

Objectives of Competition Law

The response of the business community andconsumers differed slightly on the question as to whatthe objectives of a competition law should be. Whilean overwhelming majority of consumers, the usualvictims of anti-competitive practices, said that theobjectives should be to ‘regulate business enterprises’

and ‘promote consumer welfare’, respondentsfrom among the business community opinedthat the objective of the competition law shouldbe to promote business efficiency. Mostpolicymakers stated that all three objectives—regulation of business, promotion of businessefficiency and consumer welfare—areimportant for a good competition regime.

Furthermore, many businesspersonsinterviewed argued that regulation ofbusinesses is not a philosophy that should beadopted under a liberal market economy. Onthe other hand, consumers view that unlessbusinesses in Nepal are regulated, the

widespread anti-competitive actions of the businesscommunity will not stop. Table 7.11 summarises theresponses of the business community, consumers andpolicymakers with regard as to what the objectives ofa competition law in Nepal should be.

Scope and Coverage of Competition LawThe majority of respondents unanimously said thatcompetition law should cover private as well asgovernment enterprises. All businesspersons and 76percent of consumers opined that both private andgovernment-owned entities should fall under thepurview of the competition law. However, sixpolicymakers opined that the law should not have itsjurisprudence over government entities. Some of themargued that government entities exist with a socialmandate, and hence they should not be treated on apar with private business houses and firms.

In response to the question as to whether competitionlaw should cover all areas of commercial activities,an overwhelming majority of respondents—76 percentof consumers, 80 percent of businesspersons and 72percent of policymakers—said that all areas ofcommercial activities must be included in thecompetition law. A number of respondents cited theexample of tied-selling (forcing parents to buy schooluniforms, stationery, ties, etc from school at higherprices) as an anti-competitive practice prevalent inthe education sector.

The issue of inclusion of specific sectors such astelecommunications, civil aviation, insurance andelectricity, which have separate sectoral regulators,under the jurisdiction of competition law proved trickyto many respondents. About 62 percent of consumerswere not sure how sectoral regulators and competition

Figure 7.3: Action Taken by Businesspersons While Faced With Anti-competitive Practices

Negotiate with the practionerTalk to other business peersMatch the move of competitorComplain to business organisationsIgnore

Table 7.10: Extent of Awareness Regarding Laws Relating to Anti-competitive Practices

Awareness about Consumers Policymakers Businesspersons

competition related laws Number Percent Number Percent Number Percent

Yes 14 28 19 76 11 44

No 36 72 6 24 14 56

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independent body is necessary in thecontext of Nepal’s WTO membership.Their support for an independent bodylargely rested on the fact that biggerglobal players could dominate Nepal’sdomestic market in the future, and that aweak competition authority would notbe in a position to prevent the onslaughtof unfair foreign competition, whichcould prove fatal to many domesticindustries. However, the businesscommunity in general did express fearsthat competition officials could misusetheir powers and a proper check and

balance mechanism is necessary to prevent abuse ofpower.

The policymakers were divided on the issue of thecompetition authority’s autonomy and independence.While 40 percent of them stated that the authorityshould be autonomous and free from politicalinterference, 60 percent argued that it should beformed under a ministry or department. Those againstthe authority’s independence and autonomy cited costfactor and legal implications as the main obstacles.However, they did acknowledge that a strong humanresource base is required to deal with competitionissues, and that such personnel may be lacking withinthe government structure.

Powers of Competition AuthorityIrrespective of the structure of the competitionauthority, whether independent and autonomous orunder some ministry or department, a large proportionof respondents viewed that the competition authorityshould have both investigative and adjudicativepowers with provisions for appeal. However 76percent of the consumers, 72 percent of thepolicymakers and 64 percent of the businesspersonsopined that the competition authority should haveboth investigative and adjudicative powers with clearprovisions for appeal. Almost 36 percent of theinterviewed businesspersons viewed that theauthority should be allowed only to investigate whilethe courts discharge the adjudicative functions.

On the question of whether thecompetition authority should beempowered by the law to even initiatecriminal proceedings againstpractitioners of anti-competition,majority of the consumers supported theidea. While 70 percent of the consumersviewed that criminal penalty isnecessary for violation of law in all cases,25 percent reasoned that criminalcharges should be initiated only on acase-to-case basis. Policymakers toosupported the idea of criminal penalty,but all viewed that it should depend on

Figure 7.4: Should A Competition Law Be Enacted?

92%

8%0%

Yes

No

Don'tKnow

authority would interface. Likewise, 36 percent ofpolicymakers too remained undecided on this issue,while 48 percent of the businesspersons interviewedopined that all sectoral regulators should functionunder the legal framework of competition law.

One of the questions in each of the three sets ofquestionnaires was related to the inclusion of IPRsissues under the gamut of competition law.Interviewers had to first explain the concept of IPRsto almost all consumers, businesspersons andpolicymakers. All respondents opined that IPR issuesshould be addressed in the competition law, and thatthe law should deal with the abuse of IPRs in thegeneral welfare of the stakeholders concerned.

Favoured Structure of CompetitionAuthorityAn overwhelming majority of the respondents arguedthat a strong and competent competition authority isnecessary to discharge all responsibilities as will belaid down by a competition law. Of the 50 consumersinterviewed, 47 stated that an autonomous andindependent competition authority is necessary.Justifying the need for such a structure to handlecompetition related issues some of the more awareconsumers cited the example of the CPA, theimplementation of which has been unsatisfactory.

About 64 percent of the respondents from the businesscommunity stated that an autonomous and

0 5 10 15 20 25 30 35 40 45 50

Consumers

Policymakers

Businesspersons

Figure 7.5: Type of Competition Authority Favoured

Autonomous and Independent Under Ministry or Department

Nepal


the gravity of the violation. On the other hand, thebusiness community opposed the idea of criminalpenalty arguing that it would be unfair to initiatecriminal penalty for violations of law that might takeplace without knowledge.

Implementation of Competition LawAlmost all respondents, except some consumers, havefavoured the implementation of competition law in aphase-wise and calibrated manner. All policymakersfavoured a soft launching of the law to ensure that thebusiness community gets enough time to adjust itsoperations to comply with the provisions as set out inthe competition law. Businesspersons too viewed thatunless the law is enacted in a calibrated manner, therecan be no way in which Nepalese businesses wouldbe able to comply with the provisions of the lawbecause operations cannot be changed overnight.However, some consumers were of the view thatunless the law is implemented fully from day one,there will be the danger of the law being unenforceablein the long run due to resistance from the businesscommunity.

Despite the convergence in the views of majority ofrespondents with regard to a calibrated approach toimplementation, their views differed on the issue ofwhether the law should adopt a ‘rule of reason’ or‘per se’ approach. Most policymakers opined that‘per se’ approach could not be adopted in the Nepalesecontext, with some explaining that given the relativelyweak legal structure, it would be difficult to identifyall possible circumstances prior to the enactment ofthe law. Likewise, even businesspersons viewed thata ‘rule of reason’ approach would be a better way toimplement competition law. However, the majority ofthe consumers opined that ‘per se’ approach is neededas businesses would under the ‘rule of reason’approach try to take undue advantage of the flexibilityprovided. Consumers’ insistence for a ‘per se’approach is to ensure ‘black and white’implementation of the law. Interestingly, even mostlawyers opined that the per se approach toimplementing competition law would be a betteroption.

Despite the admission by the majority of respondentsthat anti-competitive practices do prevail unchecked,some respondents argued that an outright ban on allforms of anti-competitive practices would not be goodfor the general economy and social welfare.Consumers, businesspersons and policymakersargued that there must be exemptions on the groundof efficiency, public welfare, larger domestic interests,etc. Besides, 84 percent of the total respondents statedthat being in a position to abuse power should notautomatically invoke anti-competition provisions.Monopoly or market dominance per se is not anti-competitive.

However, 73 percent of the respondents, mostlycomprising consumers and policymakers, did suggestthat mergers or acquisitions involving two or morebig players should be reviewed and monitored to checksubstantial lessening of competitive in the market.Even respondents from the business community onthis issue viewed that mergers and acquisitionsinvolving big firms should be monitored, but notstopped.

In addition, all respondents viewed that theimplementation of the competition law should not bethe responsibility of the government agency only.They opined that stakeholders should be consultedin various stages of implementation as well as in thefunctioning of the competition authority. Over three-fourths of the respondents viewed that the competitionauthority should discharge its functions in close co-ordination with a well-structured committee that hasthe representation of all stakeholders.

Competition LawAlthough domestic enterprises have been exposed tointernational competition due to the liberal investmentand import regimes, Nepal does not have acompetition law to ensure competition in the market.As Nepal made a voluntary commitment to enactcompetition law during its accession to WTO, it is inthe process of enacting the law. This section dealswith two Acts that affect competition and some salientfeatures of the draft competition law.

Table 7.11: Objectives of Competition Law6

Objectives/Responses Consumers Policymakers Businesspersons

Number Percent Number Percent Number Percent

Regulate Business

Enterprises 21 42 25 100 6 24

Promote Consumer

Welfare 40 80 25 100 12 48

Promote Business

Efficiency 32 64 25 100 23 92

figure 7.6

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Various Acts that Affect Competition8

The Industrial Enterprises Act, 1992The Industrial Enterprises Act, 1992 marked asignificant shift in the industrial policy of Nepal. Itheralded the end of the ‘licence regime’ and wascatalytic in infusing competition in the market.

The preamble to the Act states: “Whereas, for theoverall economic development of the country, it isexpedient to make arrangements for fosteringindustrial enterprises in a competitive mannerthrough the increment in the productivity by makingthe environment of industrial investment morecongenial, straightforward and encouraging”. Thisprobably was the first time that competition wasmentioned in a government act concerning theindustrial sector.

One of the important competition enhancing majorsin the Act was section 9 (1) regarding permission foropening industry. Section 9 (1) states, “Industries otherthan those as set forth in Annex 2 which maysignificantly cause adverse effect on the security,public health and environment, shall not be requiredto obtain permission for their establishment, extensionand diversification”. This Act thus opened up themarket to almost all industries.

Similarly, no permission is required to openindustries other than those producingexplosives, including arms, ammunition andgunpowder, security printing, bank notes,coins, cigarettes, bidi, cigar, chewing tobacco,khaini or goods of a similar nature, usingtobacco as the basic raw material, and alcoholand beer.

The Foreign Investment andTechnology Transfer Act, 1992This Act, concomitant of the IndustrialEnterprises Act, 1992, as stated in its preamble

was brought out “to promote foreign investment andtechnology transfer for making the economy viable,dynamic and competitive through the maximummobilisation of the limited capital, human and theother natural resources”. The act has opened foreigninvestment in all sectors barring few such as cottageindustries, real state and those affecting nationalsecurity. By promising permission within 30 days of

application, the Act tries to facilitateforeign investment in Nepal. Foreigninvestors are allowed to hold 100percent ownership in industries. Theopening up of the economy to foreigninvestment is a major policy shift ofthe government of Nepal and inprinciple is likely to enhancecompetition in the market.

Competition LawDuring its negotiation for accession toWTO, Nepal made a voluntarycommitment to enact competition lawby July 2004. Accordingly, the MOICS

prepared a draft competition law. The salient featuresof the draft law are discussed below.

The draft competition law highlights the followingmajor objectives in its preamble:l To make the national economy competitive through

open and liberal measures;l To develop an independent market in the country

through optimal and equitable distribution andutilisation of national resources;

l To benefit the consumer by ensuring healthycompetition in the goods and services sector; and

l To control anti-competitive practices.

The draft law mainly focuses on the following coreareas:

Anti-competitive AgreementsThe draft competition law prohibits written or oralagreements that have the potential to restrictcompetition. The following types of agreementsbetween enterprises involved in the manufacturing,trading of ‘like’ goods and services are presumed to

Figure 7.7: Mode of Implementing Competition Law

0 10 20 30 40 50 60

consumers

businessmen

policymakers Rule of Reason

Per se

Don't Know

Figure 7.6: Powers of Competition Authority

38

18

16

75

7

90

0

Consumers

Policymakers

BusinesspersonsInvestigative (Courts toUndertake Adjudication)

Investigative &Adjudicative (With NoAppeal Provision)

Investigative &Adjudicative (With AppealProvision)

Nepal


have negative impact on competition and are deemedper se illegal from the date on which the partiesentered such agreements:l Putting conditions that have negative impact on

competition and consumer welfare while sellinggoods and services;

l Market allocation;l Restriction on output, technical development or

investment;l Price fixing;l Collusive bidding; andl Syndicates and cartels.

Abuse of DominanceA dominant position has been defined in the draftlaw in terms of a firm on its own or in collusion withanother firm (s) that is capable of influencing themarket. The draft also requires that a firm have theminimum of 40 percent market share in the relevantmarket to be deemed having a ‘dominant position’ .The draft recognises that all dominant positions arenot necessarily ‘anti-competitive’ and requires thatfirms have control of the market and are able toimplement their decisions unilaterally in the marketto be deemed ‘dominant’ . The relevant market can bea product market or a geographical market. Thefollowing actions, taken independently or in collusionwith other firm(s), can be deemed ‘abuse of dominantposition’:l Buying and selling price fixing;l Restriction on output, technical development or

investment;l Use of discriminatory terms and conditions to select

enterprises/firms; andl Predatory pricing.

Mergers and AcquisitionsThe draft law makes it mandatory for firms to informthe Competition Promotion Commission (CPC) beforeentering into M&A agreements. The CPC can denysuch agreements if it has substantial reasons to believethat the new entity will abuse its dominant positionand such an agreement will lead to reducedcompetition in any part of the country.

Any M&A agreement entered without consulting CPCwill be declared null and void from the date on whichsuch an agreement is made. In addition, the partiesthat enter such an agreement are liable for any negativeimpact on consumers and competitors by suchagreements.

MonopoliesThe draft law is very cautious of the negative impactsof monopoly power and has various provisions torestrict the abuse of monopoly power. It definesmonopoly as an ability of a person or a firm tocompletely control the market of a good or service andimplement its decisions unilaterally.

Restrictive Business PracticesIn addition to addressing anti-competitive practices,the draft also prohibits restrictive business practices.It has made exclusive dealing and refusal to deal perse illegal. It also prohibits any person or firm fromrestricting its market and any horizontal agreementto restrict the sale or selling of any product or serviceto a particular geographical market. Tied-selling, theselling of a product or a service with a condition tobuy another product or service from the same supplieror a person/firm specified by the supplier, is alsodeemed per se illegal.

The draft also prohibits misleading advertisements.It makes any advertisement that gives misleading orincorrect information regarding the quality, quantity,type, utility, and price of own or competitor’s productor service per se illegal.

The draft law also makes collusive bidding for tendersper se illegal. This includes agreement betweenpersons or firms not to bid or to submit similar bids, toshare information on the quotation or any otheragreement to influence the tender in their favour.

Competition Promotion CommissionThe draft law has a provision of an independentauthority to implement the competition act. Article 15provisions for the establishment of a three-memberCPC. To minimise political interferences in its work,CPC has been made accountable directly to theCabinet/Council of Ministers. The draft has given theCouncil the freedom to directly raise funds fromdonors. This is likely to give more independence toCPC and reduce undue government intervention.

A clear demarcation of investigative and adjudicativefunctions has been made in the draft. CPC has onlyinvestigative power, and the adjudicative power willbe with the court designated by His Majesty’sGovernment. Any person or firm can file a complaintwith the Council with sufficient proof. However, firmsinvolved in a similar trade will have to deposit a sumas stipulated by the Council. There is also a provisionto appeal against the decisions made by the Council.

The draft has proposed extra-territorial jurisdiction.Acts of firms outside Nepal that affect competition inNepal will also come under the purview of the law.The draft also has a ‘whistle blower’ provision totackle hard-core cartels. The ‘whistle blower’ can berewarded with a smaller fine, shorter sentence or acomplete amnesty. This will apply if a person or afirm gives information to the Council before the startof an investigation, if the person or a firm is the first togive important information to the council, if the personor firm has discontinued from cartel and if the personor firm gives important evidence to the Council.

w 23

Other Important FeaturesThe draft covers all governmental, non-governmentaland private entities.

Notwithstanding the various provisions of the draft,the government of Nepal, if deemed necessary, canexempt any goods or service sector from the purviewof this law.

All business associations also have to list themselvesin the CPC. This will help CPC keep tabs on activitiesof such associations.

This draft law also has measures to address the misuseof IPR by any person or firm. If CPC feels that suchprovisions are detrimental to the interest of consumersand competition, it can recommend the governmentauthority concerned to ask an IPR holder to issuecompulsory licence or make arrangements for parallelimport.

The draft law also empowers the CPC to docompetition advocacy. CPC has the mandate to makethe private sector and civil society aware of thenegative impact of not having healthy competition inthe economy and the positive impact of having healthycompetition. It is also responsible for organisingmeetings, workshops for competition advocacy. It isalso required to educate the public on competitionissues through publications and media.

ExemptionsThe draft law has exempted certain sectors of theeconomy with a view to giving them space to competewith larger and stronger competitors. Cottage, andsmall industries, agriculture and agricultural co-operatives, joint procurement of raw material,collection of statistics, export cartels, research anddevelopment activities, joint efforts to enhancecompetitiveness and quality, logistic management thatdo not affect the supply and price of goods and servicesand collective bargaining power of labour are notcovered by the Competition Act.

The Way ForwardIn addition to the Competition law and the ConsumerProtection Laws, policies like the Industrial Policy,Trade policy, Foreign Investment Policy, ExchangeRate Policy directly and indirectly affect the level ofcompetition in the economy. However, no attempt hasbeen made so far to analyse the impact of these andother related government policies and laws oncompetition. Hence, there is a need for assessingrelated laws and policies on the touchstone ofcompetition. In addition, all future governmentpolicies and laws that directly or indirectly impactcompetition should have an explicit statement on thelikely impact of policy or law on competition.

Competition is still a relatively new concept in Nepaland different stakeholders have different views on itsrole in economic growth and enhancing thecompetitiveness of enterprises. It is indeeddisheartening to note that the captains of the Nepaleseeconomy — the policy makers — are not tooenthusiastic on the role an effective competition regimecan play.

For most sectoral regulators, ensuring competition isnot a priority and they are engaged more inoperational aspects and in most cases lack the legalmandate and human resources to ensure competitionin their respective sectors. Hence, there is a need formaking necessary changes in related laws to ensurethat regulators give priority to ensuring faircompetition in their respective sectors. There is also aneed for training human resources to enable them tohandle competition issues more effectively. Finally, amechanism to co-ordinate the activities of CPC andsectoral regulators, including a clear demarcation ofthe hierarchies, also need to be put in place.

Many years of intrusive and restrictive governmentintervention in the industrial and trade sectors haveresulted in a serious lack of competition culture inNepal. This means that building a strong competitionculture is the first step towards ensuring thatcompetition starts to play a more important role in theNepalese economy. Building a competition culture isa difficult task and the government alone is not capableto do this.

The government thus must recognise this and assignappropriate roles to different stakeholders viz. thebusiness community, the media and civil society. Itshould actively support organisations working onconsumer and competition issues and should alsotry to enhance their roles in decision-makingregarding policies and laws affecting competition.

The consumers can play an important role to developa competition culture. But, given the low level ofawareness of consumers and complicated litigationprocedures, the consumer movement can be lacklustre.Hence, information dissemination and consumereducation, simplification of litigation procedures andestablishment of a special tribunal court dealing withconsumer issues are required to strengthen theconsumer movement. In addition to this, effectivemechanism should be put in place for consumerrepresentation on competition-related issues.

The business community, one of the mainstakeholders, seems to be apprehensive of a strongcompetition regime. Many business people argue thata strong competition regime will restrict their growthand the Nepalese economy is not at the stage to havesuch a regime. It seems clear that the businesscommunity needs to be made aware that they too are

Nepal


going to gain through enhanced efficiency, if there isan appropriate level of competition in the economy.The proposed CPC should thus engage in anadvocacy campaign to increase the awareness of thebusiness community on competition issues.

It is beyond doubt that the future of competition in theNepalese economy depends on the shape of theCompetition Law. The provisions of the law, no matterhow prudent, will be meaningless if they are notimplemented properly. The experience of the CPA hasshown that an independent commission to overseecompetition issue will be required to ensure that thecountry does benefit from Competition Law.

The ability of the three main stakeholders ofconsumers, businesspersons, and policymakers reacha common consensus on various issues relating tocompetition is key to effective implementation ofcompetition law. The results from the field surveyindicate that the views of the stakeholders largely

Notes:

* This chapter has been researched and written by Navin Dahal, Bhaskar Sharma, Diksya Thapa and Neelu Thapa ofthe South Asia Watch on Trade, Economics & Envirnment (SAWTEE), Nepal. The authors acknowledge the supportreceived from Nitya Nanda and Alice Pham of CUTS C-CIER in designing the study and their comments andsuggestions on the draft. Comments and suggestions were also received from the members of the Project AdvisoryCommittee. The authors would also like to acknowledge the valuable guidance and support provided by RatnakarAdhikari and Dhrubesh Chandra Regmi.

1 Zita, Ken. Nepal Briefing Paper, USTDA South Asia Communication Infrastructure Conference, New Delhi, India.2004.<www.nadventures.com>

2 See “Finance Performance and Soundness of Indicators of South Asia,” Finance and Private Sector Unit, South AsiaRegion, The World Bank, May 2004

3 This is not an exhaustive list of laws that affect consumers.4 The total does not add up to 100 in the case of consumers and 25 in the case of policymakers and businesspersons

since the interviewees on some occasions have made multiple responses5 It should be noted that many respondents were aware of laws such as Consumer-Protection Act. However, they

were unaware that the law contained provisions related to anti-competitive practices.6 The total number of consumers does not add up to 50 since multiple responses were made. The same holds to policy

makers and businesspersons. It should be noted that some consumers who expressed their ignorance over the needfor the enactment of competition law too have their response with regard to objectives of competition law.

7 Though one of the multiple choice response to this question was ‘don’t know or can’t say,’ the respondents wereexplained the concept of IPRs with the dual purpose of raising awareness as well as collecting better informationinstead of mere ‘don’t know or can’t say’ response. It was earlier decided to use the ‘don’t know or can’t say,response only if respondents remained undecided even after the relevant issues were explained to them.

8 This is not an exhaustive list of acts that affect competition. SAWTEE is conducting a separate and in-depth researchto identify laws that affect competition.

converge on most issues. But there are several aspectson which their views differ. It is on such issues that acommon consensus is needed. Consensus can bereached by involving all parties in constructive debatesand open discussions. But all the parties concernedshould have the capacity to understand the issue andput forward their concerns. Thus, capacity buildingof different stakeholders viz., the business community,the consumers and civil society at large will form anintegral part of developing a competition culture inNepal.

Given the overlapping nature of competition andconsumer issues and the lack of financial and humanresources to deal with them, many small economieshave adopted a hybrid approach by couplingconsumer and competition policies. They have onlyone organisation dealing on both issues. This willprobably be the right approach in the case of Nepal,considering its resources and human capacity, andthe novelty of the issue.

COMPETITION SCENARIO IN NEPAL* - CUTS Internationalcuts-international.org/7up2/7Up2_Nepal.pdf · to the Nepalese economy. It gives brief information on recent economic performance,

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