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Chapter 5
POLITICAL ENVIRONMENT
Lecturer: Binod Lingden Subba

Concept of political environment Significance of political environment for business

The political environment refers to the actions taken (Impact/importance) Running a business comfortably depends
by the government, which potentially affect the on a number of factors including political environment in a
daily business activities of any business or company. country. Therefore, as a business person, it is imperative to
understand political environment. It enables to adapt to it and
The political environment in business consists of a run operations smoothly and successfully. This is because
set of political factors and government activities in a political environment can determine whether businessman will
market that can either facilitate or hinder a business' run his/her business successfully or not.
ability to conduct business activities in the market.
When a political institution passes a new law, a) Political stability: The degree of political stability in a
businesses must consider the impact it will have on country affects business operations. Political instability
their operations. In some instances, companies may causes ample of business risks. For instance, Nepalese
need to develop new strategies or processes in order business sector has been adversely affected due to political
to comply with initiatives imposed through instability over the years.
legislative laws.
b) Increase or decrease in tax: The decision of d) Diplomatic events: Diplomatic events happen in a
the government determines taxes which country also play a crucial role in determining the success
ultimately affect the economy. Government or downfall of a business. There are diplomatic events that
might increase taxes for some companies and promote businesses especially in developing countries.
lower it for others. The decision will have a The events also can change the current and future trends
direct effect on businesses. So, businessman of a business.
must always stay up-to-date with such political
factors. Government interventions like shifts in e) Influenced by international political environment:
interest rate can have an effect on the demand Business firms are not only influenced by the national
patterns of company. political system, they are also influenced considerably by
the international political events. The external political
c) Economic policy: The government formulates influences constitute the environment in which the
and amends economic policies that may domestic government policies as well as business
positively or negatively affect the operations and activities are affected.
performance of business sector. Thus, it is
essential to understand government policies in
place and determine whether it favors the
business you are running or not.
Nepalese political system
Political system is the system of government in a
nation. A political system integrates the parts of a There are two types of political system:
society into a viable, functioning unit. It is basically  Democratic system
the system of politics and government in a country.  Totalitarian system
It governs a complete set of rules, regulations,
institutions, and attitudes. A country‘s political
system influence how business is conducted
domestically and internationally. The economic and
legal systems of a country people, exercised either
directly or through elected representatives. It is
a form of government in which all eligible
citizens participate equally either directly or
indirectly through elected representatives in the
proposal, development, and creation of laws. It
encompasses social, religious, cultural, ethnic and
racial equality, justice, and liberty. It involves wide
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participation are often shaped by its political system.

a) Democratic system: Democracy, which derives b) Totalitarian system: Totalitarianism is a form of
from the Greek word ―demos,‖ or ―people,‖ is government in which one person or political party
defined, basically, as government in which exercises absolute control over all spheres of human life
supreme power is vested in the people. and opposing political parties are prohibited. In other
Democracy refers to a political system in which word, totalitarianism refers to a political system that
government is by the by citizens in decision relates to governance by an absolute power. In totalitarian,
making process. also called authoritarian, individual freedom is completely
sub-ordinated to the power of the authority of state and
According to Abraham Lincoln ―Democracy is concentrated in the hands of one person or in a small
by the people, of the people, for the people‖. It group, which is not constitutionally accountable to the
has the principles of social equality and respect f people. Totalitarian, a more extreme form of
or the individual within a community. In other authoritarianism, occurs when an authoritarian leadership
words, democracy is is motivated by a distinct ideology, such as communism.
a form of government in which sovereign power
resides in the people and In this political system, the ruling power exercises
is exercised by them or by officers they elect to r complete control over the nation's economy, and law and
epresent them. Democracy is the order. Societies ruled by pressure clique-political,
institutionalization of freedom. In a democracy a economic or military or by a dictator, plus most
free market is established which allows people oligarchies and monarchies – belong to this category.
to do business as their wish. Restrictions on the freedom of speech and assembly, and
the extensive use of mass surveillance aides the political
power, mostly self-proclaimed, to set free state-terrorism.
Nepal has a federal democratic political system. Poverty, regional imbalance and unemployment still remained
The political system was based on the Interim as major problem of the country. Therefore, federalism was
Constitution of Nepal 2063 (2007), with a prime raised as political agenda against unitary system after the
minister as the chief executive and a 601-member success of people‘s movement II, 2062/063. The second
Constituent Assembly, which was responsible for amendment of the Interim constitution of Nepal 2063
drafting a new constitution. endorsed the concern of Nepalese people through different
political parties to make Nepal a federal country. The first
We elected a ‗Constituent Assembly‘ to write a new meeting of the first Constituent Assembly, which was held
constitution on this concept on 28th Chaitra 2064 BS. on 15th Jestha 2065 declared Nepal as “Federal Democratic
But it was failed due to various reasons in its Republic Country”. However, the Constituent Assembly
mission and got dissolved after four years. The (Jestha 2065-2069) could not settle the various issues
election for the Constituent Assembly-II was regarding the determination of federal units in Nepal. So,
successfully conducted on 4th Marga 2070 BS. One federal system is not yet implemented in Nepal.
hundred and twenty-two (121) political parties
participated in this election, and 30 of them got What is the federal system?
representation in the Constituent Assembly-II. This The federal system is a political system where a country is
Constituent Assembly has owned the fundamental divided into different autonomous (independent/self-
governing स्वायत्त) states or provinces. Each state or province
concepts adopted by the Constituent Assembly-I and
worked to promulgate a new constitution of Nepal.
has a separate government along with its federal government
सङ्हिय ऱोक्तान्तक ृ गनातान्र नेऩाऱ
in the centre. Generally, there are three administrative units
under the federal system. They are central government, state
government, and local bodies.

At present about 28 countries of the world are having the

federal system. This system is in practice in India, the USA,
Canada, Belgium, Spain, Australia, Ethiopia, South Africa,
etc. In this system, states are formed on the basis of
geographical structure, race and language, population, natural
and human resources, etc.
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Important players (Political parties)
The name lists of political parties in Nepal are
registered in Election Commission of Nepal. There
were 121 parties registered and participated in
Constituent Assembly (CA) election in 2013 and
succeed to following position with their respective
seats:
1. Nepali Congress Party [105 seats]
2. Communist Party of Nepal- United Marxist
Leninist (CPN-UML) [91 seats]
3. Unified Communist Party of Nepal (Maoist)
[26 seats]
4. Madhesi Janadhikar Forum (Loktantrik) [4
seats]
5. Rastriya Prajatantra Party [3 seats]
6. Tarai-Madhesh Loktantrik Party [2]
7. Madhesi Janadhikar Forum, Nepal [2 seats]
8. Swatantra [2 seats]
9. Nepal Majdur Kishan Party [2 seats]
10. Sadbhawana Party [1]
Nepali Congress Party:
 Nepali Congress Party is the largest party (105
seats) in Nepal according to CA election in Madhesi Janadhikar Forum (Loktantrik)
2013.
 It was founded in 1947 as a member of the
Socialist International.
 It embraces democratic socialism through the
protection and promotion of nationalism.
 Its foreign policy orientation is non-alignment
and good relations with the neighbors.
Communist Party of Nepal- United Marxist Leninist
(CPN-UML) :
 It is the second largest party of Nepal.
 It was founded in January 6, 1991 through the unification
of the Communist Party of Nepal (Marxist) and the
Communist Party of Nepal (Marxist-Leninist).
 It has embraces the ‗Peoples‘ multi-party democracy.
Unified Communist Party of Nepal (Maoist
 Unified Communist Party of Nepal (Maoist) was
previously known as Communist Party of Nepal (Maoist).
The party is currently known as Communist Party of
Nepal (Maoist Center).
 It is the third largest party of Nepal.
 It was established in 2052 B.S.
Rastriya Prajatantra Party (RPP)
 Rastriya Prajatantra Party was established in 1990.
 It holds 4th position in CA election.
 Nationalism, democracy and liberalism have remained the
three main ideological pillars of the party.
 It supports the restoration of the Hindu kingdom of Nepal.
 Madhesi Janadhikar Forum (Loktantrik) is one of the
parties representing the Madhesi population from Terai in
Southern Nepal.
 It holds fifth position in CA election.

Government and constitutional bodies

Fairness, transparency, and accountability are some of the qualities required to run a state. Only then a state
can run in a proper way. In order to run a state body other than the Executive, Legislative, and Judicial
institutions are also required. Therefore, a constitution generally mentions about these bodies. If any bodies
are mentioned in the constitution itself then, they are called constitutional bodies.

A constitutional body is created by passing a constitutional amendment bill, rather than by a regular,
government or private bill. These are the bodies which are mentioned in constitution and so considered as
more powerful and independent.

In Nepal constitutional bodies are as follows:

1. Commission for the Investigation of Abuse of Authority (CIAA)
2. Office of Auditor General
3. Public Service Commission
4. Election Commission
5. National Human Rights Commission
6. Office of Attorney General
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Commission for the Investigation of Abuse of Authority (CIAA) (अख्ततयार दरु ु ऩयोग तथा अनश ु न्धान आयोग):
Commission for the Investigation of Abuse of Authority (CIAA) is an apex constitutional body for corruption control
for the Government of Nepal. Interim constitution of Nepal 2007 has empowered CIAA to investigate and probe
cases against the persons holding any public office and their associates who are indulged in the abuse of authority by
way of corruption and/or improper conduct. CIAA is a constitutional body mandated with controlling corruption
and investigating financial irregularities and corruption involving public officials. Its main function is to conduct
inquiries and investigation of improper conduct or corruption by a person holding any public office. Its main
objective is to minimize and remove corruption and abuse of authority by the people holding public positions.

CIAA is the distinctive anti-corruption agency in South-Asia, which plays the role of an ombudsman, investigator and
prosecutor as well. It aims to crack down the corruption issues at a national level with system-based approach. It also
focuses on detection and punishment of corrupt acts on the one hand and social, cultural and institutional reform on
the other.

Deep Basnyat, Commissioner of the Commission for the Investigation of Abuse of Authority (CIAA), now works as
the Acting Chief Commissioner, following the registration of an impeachment motion against its Chief Lokman Singh
Karki at the Legislature-Parliament. CIAA Chief Karki was suspended from the duty after 157 lawmakers from the
CPN (Maoist Centre) and CPN (UML) registered an impeachment against him at the Legislature-Parliament.

Office of the Auditor General:

The Office of the Auditor General (OAG) was established with the appointment of the first Auditor General as per the
Constitution of the Kingdom of Nepal, 1958. Prior to establishment of OAG, the institution named Kumari Chowk
Adda used to review the government accounts. It is assumed that Kumari Chowk was established in the year 1769
with the aim of strengthening administrative system after the unification of Nepal. It is also anticipated that there was
also existence of audit institution prior to unification.

Today, Auditor general audits the accounts of all Federal and State Government Offices including the Office of the
President, Office of the Vice-President, Supreme Court, Federal Parliament, State Assembly, State Government,
Local level, Constitutional Bodies and Offices thereof, Courts, Office of the Attorney General, Nepal Army, Nepal
Police and Armed Police Force Nepal. Auditing is done by Auditor-General in accordance with law, having regard
to, inter alia, the regularity, economy, efficiency, effectiveness and the propriety thereof.

According to the Constitution of Nepal, on the recommendation of the Constitutional Council, the President appoints
the Auditor General. The functions, duties and powers of the Auditor General are specified in the Constitution (Part
22 ).

Vision of CIAA is to strive to be a credible institution in promoting accountability, transparency and integrity for the
benefit of the people. The mission is to provide independent and quality audit service to assure our stakeholders that
the public funds are efficiently used.

Public Service Commission

Established on 15 June 1951 AD in Nepal, Public Service Commission (PSC), locally known as Lok Sewa Aayog, is
involved in selecting meritorious candidates required by the Government of Nepal for various vacancies in the civil
service sector. It has continued its process without any hindrance since its establishment and it was declared as an
independent constitutional body by The Interim Constitution of Nepal 2007.

The article 125 of the Constitution states that there shall be a Public Service Commission Nepal. The commission
consists of a Chairman and Members (as required) who are appointed for six years and they may be removed from
their offices on the same grounds and in same manner that has been set for removal of a judge of the Supreme Court.

The functions, duties and powers of Public Service Commission are mentioned below:
a) To conduct examinations for the selection of suitable candidates to be appointed to various civil service posts.
b) Permanent appointment to any position in the civil service which carries the benefit of pension shall not be
made except in consultation with the PSC
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c) The Government of Nepal is required to consult the PSC on the following subjects: matters concerning the
laws relating to the conditions of service of the civil service, the general principles to be followed in the course of
appointment to, promotion to and departmental action concerning the civil services or positions, matters
concerning the sustainability of any candidate for appointment to a civil service position for a period of more than
six months, matters concerning the suitability of any candidate for transfer or promotion from one service to
another within the civil service or any other government service to the civil service, matters concerning the
permanent transfer or promotion of any employee, working in any position of an organization which is not
required to consult with the Commission on the matters of appointment, to any position for which consultation
with the Commission is required, and matters relating to departmental actions proposed against any civil servant.
d) Subject to the Constitution, other functions, duties and working procedures of the PSC shall be as regulated by
law.
e) Every year it is required to submit annual report on the works it has performed to the Prime Minister who shall
present the report before the Parliament.

There is a certain procedure to be followed for the selection of candidates by the Public Service Commission which
consists of series of examinations. The methods of selections based on the Public Service Commission (Procedure)
Act, 2048 BS include taking open competitive written examination which is followed by open competitive practical
examination. Keeping in mind the results of these examinations, the candidates are selected for interview. And any
other methods for selection could also be adopted by the Commission.

National Human Rights Commission (NHRC)

The National Human Rights Commission (NHRC) of Nepal is an independent and autonomous constitutional body. It
was established in the year 2000 as a statutory body under the Human Rights Commission Act 1997 (2053 BS). The
Interim Constitution of Nepal 2007 (2063 BS) has made the NHRC a constitutional body. It has a separate sphere of
responsibilities in the constitutional legal system of the country. The duties of NHRC are to ensure the respect for,
protection and promotion of human rights and their effective implementation.

The Commission is created in response to 1991 UN-sponsored meeting of representatives of national institutions held
in Paris, which laid down a detailed set of principles on the status of national institutions - commonly known as the
Paris Principles. These principles, subsequently endorsed by the UN Commission on Human Rights (Resolution
1992/54 of 3 March 1992) and the UN General Assembly (Resolution 48/134 of 20 December 1993, annex) have
become the foundation and reference point for the establishment and operation of the National Human rights
Commission of Nepal as well.

The establishment and constitution of the Commission complies with the minimum standards set out in the 'Paris
Principles'. To name a few, they are independence guaranteed by statute or constitution; autonomy from executive,
pluralism, including in membership; a broad mandate based on universal human rights standards; and adequate
powers of investigation. Article 132 of the Interim Constitution of Nepal vests primary responsibility in the
Commission to protect and promote the human rights of Nepalese people. In order to perform this responsibility, the
Commission can conduct inquiries and investigations, on its own or upon a petition or complaint files to it on
violation of human rights and abetment thereon, and carelessness and negligence in the prevention of violations of
the human rights by any person, organization or authority concerned. It can also inquire into a matter with the
permission of the court in respect of any claim on violations of human rights, which is sub-judice in the court. The
Commission can visit and observe any authority, jail or any organization under the Government of Nepal and to
submit necessary recommendations to it on the reform to be made on the functions, procedures and physical facilities
which may be made necessary for such an organization for the protection of human rights.

The Commission has one chairperson and four other members; all of them are full-time appointees, who are
appointed by the prime minister upon the recommendation of the Constitutional Council. The Commission has power
to appoint employees as may be required to carry out its functions. In case the Commission requests any government
office for assistance in the performance of its functions, the office so requested must provide the required assistance.

The budget of the Commission comes from the Government of Nepal, but may also obtain such means and resources
from different agencies by way of grants as are required for the performance of its functions.
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Election Commission
The first Election Commission was first established in 1950 in Nepal. After the end of 104 years of the autocratic
Rana regime in 1950, the Nepal Interim Governance Bill was introduced. It was Nepal's second constitution in
writing, prepared by the erstwhile ministerial cabinet. (The populist document, Government of Nepal Act, 1994
promulgated by Rana Prime Minister Padhma Shamsher, may be called the first constitution of Nepal.) It was the
responsibility of the 1950 interim government to hold the parliamentary election at the earliest and in a conducive
atmosphere. To fulfill the objective, the Election

Election commission conducts, supervises, directs, and controls the election of president, Vice-president, house of
representatives, National Assembly, State Assemblies and local units and referendum.

Commission was formed, vesting it with the rights to carry out certain responsibilities:
 Preparing the voters' list
 Control and supervision of the election related activities
 Conduction of Elections
 Settle Election related disputes
Office of Attorney General
Auditor General is one of the constitutional body or organs of Nepal. Attorney General’s work is to function as the
government’s main legal advisor and give necessary legal advice to the government or any other officer appointed by
the President on the recommendation of the Prime Minister. While performing his/her duty he/she can stand before
any courts, offices or government officials in the country. He/she can make this work done by an officer working for
him/ her too.

To provide, without fear or favour, hatred or ill-will, to the Government sound and independent legal advice, and
representation as well as to contribute in the development of a fair and just legal system and the promotion of the rule
of law, in the interest of the State and the people.

Role of government in business  Regulating role: Government controls the business

 Facilitating role: Government assists the
business by providing incentives, grants,
subsidies, build infrastructure and builds
industrial districts.
 Government support the business sector by
providing different incentives such as tax
reduction, excise duty rebate etc.
 Government support the business sector by
providing grants such as Agriculture
Development Bank conducts various programs
through government grants.
 Government supports the business by providing
subsidies dealing with essential goods and
services. It helps the business operate smoothly
and get their objectives.
 Government develops fundamental
infrastructures for the development of trade and
industry in the country. These include
transportation, water, electricity, and
hydropower.
 Government establish Industrial Districts with
full of facilities like, Balaju Industrial district
(BID), Hetauda industrial district (HID),
Pokhara industrial district (PID) etc. Altogether
there are 11 industrial districts in Nepal
organization by formulating acts, rules and policies,
forming different regulating authorities (Eg. Nepal Rastra
Bank, Securities Board of Nepal, Insurance Board, Office
of the Company Registrar etc.) for the development and
smooth operation of business sector in the country. It
provides constitutional and legal framework for the
conduct of business.
Some regulations relating to business in Nepal are:
 Company registration Act
 Partnership Act
 Labour Act
 Value Added Tax Act
 Entrepreneurial role: Government can set up business
enterprises (PEs) and deliver service like public utilities
and public enterprises to the society in an affordable price.
The government act as an entrepreneur to enhance
national economy, mobilize public saving, create
employment opportunities, help control private sector‘s
monopoly etc. e.g.. Nepal Food Corporation, Nepal Oil
Corporation, Nepal Airlines Corporation etc. Nepal Bank
Limited is first State Owned Bank in Nepal( B S 1994).
RBB is 100% government owned bank. Total 75 PEs were
established during Panchayat regime.
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Basic issues in business-government relations 5. Issue of employers’ association: Employers‘ associations

1. Issue such as the level of corporate tax affects
all business firms.
2. Regulation to limit dust and fumes in the
workplace considered by the Department of
Labor, would affect so many manufacturing
firms that again there can be a common front on
the issue.
are the organized body of business sector. They influence
the government rules, policies and decisions through
lobbying. They represent the private sector and provide
constructive information and advice to the government.
However, the employers’ associations of Nepal are found
to be influenced by politics. They are not able to create a
close relationship with the labour unions, employees and
the government.

3. Issue such as exchange rate policy affects 6. Issue of governance: Poor governance has been
primarily export-oriented industries. traditional problem in Nepal. According to transparency
international (2015), Nepal ranks 130th out of 168
4. There are three different types of business likely countries in corruption perception index. It shows the low
to have political impact i.e. [i] financial level of governance in Nepal. This consequences difficulty
institutions (such as banks, insurance companies to operate business because most of the official tasks need
and other investing institution), [ii] to be done by paying bribe.
Manufacturing and mining firms, and [iii] Small
business (from restaurants to workshops). The
policies of the government sometimes may
have favorable impact on one type of business
and may not have favored equally.

Risk assessment of political environment Political Risk in Business: Sources of political risks:
particularly with reference to business sector
 Unstable Political System
Political risk is a type of risk faced  Political involvement of religious or military leader
by investors, corporations, and governments. It  Frequent changes in government
is a risk that can be understood and managed  Corrupt or poor leadership
with reasoned foresight and investment.  Civil disorder due to:
o Economic conditions
Political risk refers to the complications
o Human rights violations
businesses and governments may face as a
o Conflict among races, religions & ethnics
result of what are commonly referred to as o Group animosity
political decisions—or ―any political change
that alters the expected outcome and value of a
given economic action by changing the
probability of achieving business objectives‖
Type of Political Risk: Due to the instability in the
political system of Nepal there are various risk exist.
 Transfer risk: Transfer risk refer to barriers to transfer of
 Ownership risk: When operations are the fund from one country to another country. When a
threatened by government takeover or company creates wealth in another country, it may be
expropriation, owners may lose their business forced to return a considerable amount to the country‘s
property. This is referred to as a protectionism government. It affects the country‘s ability to transfer
and nationalization of business. capital out of the host country.

 Operation risk: Government policies that may
obstruct business operations such as finance,
marketing, or property. These risks are known
as operation risk.
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Political Risk assessment/Analysis: There are four  Delphi technique: Delphi technique is used to identify
basic methods for a business firm to judge and selective elements influencing a nation‘s political destiny:
assess the political risks, besides analyzing available the size and composition of armed forces, delay
information and news reports. experienced by industries and political kidnapping. Next
 Grand tour: An executive or a team of expert weigh the importance of these factors and put them
executive can visit the place after some into a checklist. The checklist is often transferred into an
preliminary market research. The information index so nations can be compared. This can be both
from these visitors often is selective. Even with quantitative and qualitative.
the limited information, it is beneficial to have
the executives get a feel for the political climate  Quantitative method: Tools and techniques can be
in person. employed that involve multivariate analysis, which uses a
number of mathematical variables, use to predict trends
 Expert hands: The business firm can acquire using historical data or to understand more fully the
expert opinion from seasoned educators, underlying relationship affecting a nation.
diplomats, journalists or businessman hired as
consultant. its disadvantages is that firm is
putting too much faith on the judgment of
outsiders.
Issues in Nepalese political environment d) Lack of democratic thought: In democracy, the supreme
power is vested in people and exercised directly by them
a) Political instability: Political instability in the or by their elected representatives under the free and fair
country has led to different economic policies electoral system. However, political parties are found very
along with the change in the Government. It weak in developing democratic norms, values, and
creates policy instability which adversely affects thoughts within them. Hence, democracy is limited in
the development of business sectors. The paper only in many instances. This has adversely affected
political instability has been a major reason of the business in Nepal.
poor and order conditions in the country.
e) Lack of god governance: Politicization and lack of good
b) Lack of broader vision on political parties: governance has resulted in the amassment of the
Erosion of ideology, exclusion of people‘s misappropriate funds misusing the authority.
interest and internal factionalism remain the
dominant trends among the political parties in f) Other issues include:
Nepal. They suffer from the lack of broader  Lack of transparency and accountability particularly in
vision, policy and programs which are essential context of state and economic activities
for good governance, political stability and  Lack of employment opportunity led the workforce to go
economic development of the country. Due to abroad resulting in lack of skilled workers in the country.
this, the confidence of private sector is at low  More centralized development more Kathmandu centric
level. development
 Unequal distribution of wealth and gap between rich and
c) Poor understanding among the political poor widened
parties: In Nepal, the level of understanding  In today`s changed context of national politics all works
and trust among the political parties is very low. of life in along with business community expecting for
The political parties do not have uniform better situation (sustainable and lasting peace).
opinion regarding the development of the
country. Coalition culture is very weak. No
coalition governments have completed their full
tenure. It creates political instability in the
country and weakens the democracy. This has
adversely affected the business sector in Nepal.

Note:
1. http://www.slideserve.com/manton/nepalese-business-environment
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2. http://attorneygeneral.govmu.org/English/Pages/default.aspx
3. https://nepalconstitution.wordpress.com/2015/11/09/part-12-attorney-general/
4. https://nepalconstitution.wordpress.com/
5. http://bossnepal.com/public-service-commission/
6. http://hsebnotes4u.blogspot.com/2013/04/Introduction-to-public-service-commission-psc-nepal-lok-sewa-ayog.html