South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Private sector and competition law
Published: The Kathmandu Post, 20 August 2004
By: Ratnakar Adhikari

Having missed the deadline of the voluntary commitment made at the WTO for enacting a competition law by 31 July 2004, His Majesty's Government remains conspicuously silent over when and how the legislation is going to be enacted. Apparently, the government is in the process of consulting a wide range of stakeholders before finalising the competition law. Therefore, it is important that we understand the perspectives of different stakeholders on competition law.

While one of the key stakeholders of the competition law, i.e. consumer group is already on board, the private sector seems to be in dilemma on what the contours of competition law should be. The president of Nepal Chamber of Commerce has pledged support to the draft competition law as it stands today, but other leaders from the business community are yet to voice in similar line. I sincerely hope that the whole private sector will come on board and create a bottom up pressure on the government to enact the law sooner than later due to the reasons I explain in the forgoing paragraphs.

Now that Nepal has become a member of the WTO, our domestic industries and services sectors are likely to be exposed to foreign competition to a greater extent. Due to predictability of business environment emanating from policy lock-in induced by WTO membership, foreign investment is likely to increase. Moreover, due to liberal commitments we have made on the mode 3 of services supply, i.e., foreign direct investment (FDI), we are likely to receive higher amount of FDI from multinational corporations (MNCs) offering formidable competition to our private sector.

As long as MNCs play fair game there is no need for our private sector to worry. However, history being replete with examples of MNCs making use of host of anti-competitive practices in order to maximise their profits, there is little reason to believe they will treat Nepal differently. For example, taking advantage of their deep pockets, they are likely to take recourse to predatory pricing (i.e. selling below costs) in order to drive away local competitors with a view to establishing monopoly position in the market. Likewise, they could resort to takeover of the domestic enterprises to eliminate competition. Similarly, they could create entry barriers for domestic firms in certain sectors through huge investment in advertising and market promotion, thereby creating a brand image.

At the same time, we are boasting that we have achieved additional market access opportunity due to WTO membership. However, in order to convert this opportunity into market entry, our private sector needs to enhance its competitiveness. Examples of other countries have shown us that an effective competition law coupled with its sincere and effective implementation is the surest way to enhance the competitiveness of domestic enterprises.

Furthermore, development dimension has become one of the major issues in the process of drafting the competition law in most countries. The idea essentially is to make use of competition law as a means to promote the development objective of each country. A cursory glance of the competition laws around the world suggests that they have made the following 'carve outs' in the form of 'exemptions and exceptions':

First, almost all countries have exempted export cartels from the purview of their competition laws. There is a wide body of literature that suggests export cartels, unlike domestic cartels, have positive impact on efficiency, trade and competition of the country concerned. This is more so for an economy like Nepal, which mostly comprise of small and medium sized firms. For example, if one of the sugar factories in Nepal receives an order from the European Union (EU) to supply 50,000 MT of sugar under the 'Everything but Arms' scheme, it would be impossible for it to meet such a demand alone. In such a situation, allowing our private sector to form an export cartel is not only practical but also a desirable option. This holds true with import cartel as well provided they are restricted to import of raw materials only.

Second, if the government chooses to promote active industrial policy and designate some industries as 'national champions' in the future, which would spur exports earning of the economy, it should be allowed to do so. We have an interesting precedence from Korea where the industrial policy took precedence over competition policy and automobile and semi-conductor industries were sheltered by the government from the ambit of competition law. This policy worked well – it did not only enhance and expand the Korean exports, but also made them major global players in these sectors.

Third, it is also possible not to apply competition law to certain sectors of the economy because they would not have much impact on the national economy even if they engage in anti-competitive conducts. For example, even if small farmers, farmers' cooperatives and cottage and small scale industries are allowed to form a cartel, they would not produce much negative impact on the national welfare.

Fourth, there is no need to frown upon all business associations, provided they are formed for efficiency enhancing objective. For example, if a business association is involved in sharing of data and information on market opportunities, pooling of resources for conducting research and development, they should not be brought under the regulatory ambit of competition authority.

Fifth, it has to be understood clearly that dominant position per se is not anti-competitive; it is the abuse of the same that is considered welfare reducing. At times, dominant position could be efficiency (and hence national welfare) enhancing overall and they should be permitted, even if they have some downside in terms of consumer welfare.

Sixth, it may be necessary to protect some segments of the country – such as indigenous communities and the sectors in which they are engaged – from the 'onslaught' of competition. South Africa has explicitly mentioned in its competition law that one of its objective is 'to empower the black community'. Another precedence has been set by the Foreign Investment and Technology Transfer Act, 1992 in which a negative list of sectors have been specifically mentioned where foreign investment is not permitted. Some of these sectors (e.g., trekking, pony riding, tourist guide etc.) engage indigenous communities. When we have not included these sectors at the time of accession to the WTO, despite all the pressure, no power on earth could prevent us from including these sectors in the exception and exemption category.

Finally, there are certain rights of certain groups, which need to be protected because of our other international commitments. For example, after having signed the Core Labor Standards of the International Labor Organisation, one of which is the right to collective bargaining of laborers, we need not turn our back to this commitment at the time of preparing our competition law. We have a Zambian precedence to follow on this issue.

To conclude, the Nepalese private sector should rise to the challenge and support the enactment of a strong competition law. This will not only help prevent MNCs from distorting or eliminating competition, but also create a predictable business environment. It would help in the promotion of fair play in the domestic market and enhance the competitiveness of domestic enterprises. Importantly, competition law should also underpin development dimension so that it acts as a building bloc for achieving the economic development objectives.

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