Political Economy of Syndicate System

Published: The Kathmandu Post, 31 July 2008
By: Ratnakar Adhikari

The ongoing dispute between the local chamber of commerce and industry and truck operators in the Far-western region has cruelly exposed how vested interests could jeopardise the very unity of purpose among the business associations. The condition was so precarious that last week the apex chamber of commerce -- Federation of Chamber of Commerce and Industry (FNCCI) -- had to put its weight behind the local chamber and unveil protest programme to put an end to the syndicate system.

Any collusion among the business enterprises with the objective of reducing or eliminating competition and ensuring collective maximization of profit at the victimisation of consumer is considered the worst possible economic crime not only in the developed countries, but also in developing ones. Be it a price fixing cartel, or territorial allocation, or bid rigging -- all of them tend to create market power in favour of the participating organized enterprises, which exploit the consumers -- who are left with no bargaining power.

Fortunately the word "consumers" has a broader connotation -- it does not only include the ultimate consumers of goods and services, but a whole range of intermediaries including the industrial users. If a cartel is formed among the suppliers of textiles products, this does not only affect the households, but also the firms which are involved in producing or exporting readymade garments.

Theory of political economy tells us that it is only the organized and vocal segment of the society that can protect their vested interests, and those who fail to organize themselves feel the brunt of any adverse actions against them. This is exactly what has happened in the present context. Ultimate consumers, being a heterogeneous lot, can seldom get organized.  Therefore, they would continue to tolerate unscrupulous business practices. However, this time around, the truckers are facing the wrong enemy -- the entrepreneurs themselves who are organized for their collective interests and who have seen their profitability being eroded by the truckers syndicate.

The truck operators seem to be simultaneously committing twin offenses. The first one relates to the violation of a series of legal provisions contained in a decade-old Consumer Protection Act and recently enacted Promotion of Competition and Market Protection Act. The second offense concerns the threats and intimidation of the entrepreneurs who are opposing the syndicate system.

At a forum organized by three like-minded organizations on this issue with the objective of generating a boarder consensus among the stakeholders to promote healthy competition within public transportation sector on 29 July 2008, the office bearers of the Nepal Federation of Transport Entrepreneurs refused to participate. However, a cross-section of stakeholders including some disgruntled transport entrepreneurs, private sector, consumer groups, governmental regulators, academia and media participated at the event. 

It was revealed during the forum that truck operators of Seti and Mahakali zone, which collectively own around 900 trucks, have not only created a syndicate system which charges a mandatory fee of Rs. 200,000 for membership alone, but also charges 2,000 per trip before each loading of truck. Since these costs are passed on to the consumers, it is quite natural that the prices charged by truck operators are exorbitant. Should a truck arrive from outside the region, the goods carried have to be off-loaded at the regional border and on-loaded into one of the above mentioned 900, which will then transport the goods to the final destination. This system is ridiculous not only because of its peculiarity, but also because it a sheer wastage of scarce resources which contributes to increasing the cost of doing business within the region.

It is necessary to take cognisance of the fact that this is happening at a time when the domestic enterprises need to become more competitive in order to meet the challenges of various multilateral, regional and bilateral trade agreements that the government had entered into over the past few years. At the same time, due to increased prices of fuels, foods and other essential items, this tendency will only contribute to the owes of the already impoverished consumers of one the most disadvantaged regions in the country. 

The question that arises is who is providing protection to this syndicate system, which openly flout the legal provisions with absolute impunity? This too was revealed during the discussion at the same forum. Vice-president of FNCCI blamed an "invisible power" for providing protection to these members of the syndicate. He even recounted how a successful negotiation leading to an agreement between the transport entrepreneurs and local business chamber fell by the way side once the "invisible power" flexed its muscle the very next day. Later other participants of the forum asserted that the syndicate is afforded political protection. In a business where 100 of millions of rupees are at stake, it is natural that the vested interest would make every possible effort to thwart any attempt to alter the status quo. The fluid political situation of the country means that challenges remain insurmountable.

Operation of the syndicate system is in no way a localized phenomenon; it is omnipresent cutting across various regions and means of transportation. The media attention generated by the current episode in the far western region notwithstanding, the impact of the notorious bus operators' syndicates operating throughout the country is non-trivial. They thrive primarily on the illegal system that provides monopoly power of recommending for the issuance route permits to the transporters' federation.

This has three major implications. First, it has created an entry barrier for the new entrepreneurs to venture into the sector. Second, it has not only prevented investment in an otherwise profitable sector, but also prevented the creation of employment opportunities for the transport workers. Third, it has created an incentive for the incumbent entrepreneurs not to invest in timely repair and maintenance of buses and ungradation of facilities due the presence of the captive market, thereby restricting consumers' choices. Moreover, the entrenched vested interest of the bus operators means that they are prepared to use muscle power as well as familiar tactics of chakka jam and bandh to bend the rules in their favour.  

The irony is that the head of the regulatory institutions, namely, Department of Transport Management and Department of Commerce, who spoke at the forum, not only showed their inability to curb such malpractices mainly because they do not have the courage to "rock the boat".

Given this reality, the problem can only be resolved if there is a political will at the higher echelons of the government to reform the system. This is a challenge the new government should confront head-on and resolve once and for all. This will be a first gift of the government to the consumers which are feeling the pinch of inflationary pressure as well as industrial sectors that is reeling under the pressure to survive.