Bad parenting- Nepali Times

BIKRAM RAI

CASHING IN: Customers wait to deposit payments at the Nepal Telecom (NT) office in Jawlakhel on Thursday. NT is one of the few public enterprises which yields profit, with a net gain of Rs 12.12 billion in the last fiscal year.

Last week, the government decided to hand out Rs 160 million to three loss-incurring public enterprises (PEs) in a bid to kick start their operations and rescue them from their debts. The recipients are Gorakhkali Rubber Industry, Nepal Drugs and Janakpur Cigarette Factory (despite the government's anti-smoking campaign).

Although the bailout is conditional with restrictions on how the money should be used, it is not the best way to save these corporations. In spite of the growth in numbers, roles and scope of public enterprises in Nepal, their financial and other performances have been far from competitive.

There are 36 public enterprises under the government's control at present, and except for financial institutions, a majority of them are incurring losses that now amount to billions. And we are not talking about welfare centric corporations like Nepal Food Corporation, which has a loss of Rs 1.11 billion. Even commercial ventures like Janakpur Cigarette Factory has recorded a loss of Rs 800 million. Some of these companies are suffering losses despite having a monopoly in their sector, which can be minimised simply through administrative reforms.

Political interference in business is largely to be blamed for the state of the state's enterprises. Public corporations have turned into a playground for political appointees and nepotism, with unqualified candidates occupying even technical posts such as accountants or financial analysts. Such practices have not only deprived enterprises of capable and qualified leaders, but are also increasing the operating costs and leading to huge losses.

The Drinking Water Corporation has over 1,000 staff and bears a loss of Rs 180 million. Using their leverage as state-run enterprises to accumulate bad debts at state controlled commercial banks, public enterprises have become symbols of mismanagement and unaccountability. The Nepal Airlines is a clear example of how too many crooks spoil the broth.

According to the Finance Ministry, about half a dozen PEs including Nepal Electricity Authority, Employees Provident Fund, Nepal Insurance Corporation, Nepal Oil Corporation, Hydroelectricity Investment and Development Company, Nepal Timber Corporation and Gorakhkali Rubber Factory are functioning without a chief executive.

The tendency of public enterprises to cry out to the Ministry of Finance for rescue during financial distress is not new. But a bailout which does not include business-sensible strategies will only be a temporary fix. Privatisation is thought to be the obvious long-term solution, but Nepal's privatisation drive, which changed ownership of more than 15 public enterprises in the last two decades, has left more companies inefficient and corrupt.

The government should now look into other alternatives to save the face of public enterprises. It is possible to use the co-operative model to reform these companies. The state can also contract out the management to private companies.

If the government intends to continue running public enterprises on its own, changes will have to be made. The establishment of Public Enterprise Management Board (PEMB), a semi-autonomous umbrella body which aims to regulate and oversee management of all state-owned ventures is definitely a step in the right direction.

PEMB is now in the process of appointing executive heads for the seven public institutions through a competitive application process. It should now seek to train public enterprises in the basics of prudent business strategies which focus on resource utilisation and wealth maximisation.

There is no reason why public enterprises should not be operated as businesses that are financially sustainable.

1. Bidur Singh
"Nepal's privatisation drive, which changed ownership of more than 15 public enterprises in the last two decades, has left more companies inefficient and corrupt."

This is a completely inaccurate statement. Yes, some of the companies that was privatized have closed down and their machines sold elsewhere. But, how can you expect 1950s technology Basbari Chala Jutta Karkhana to compete with efficient and modern foreign and local manufacturers? They have closed down not because of privatgaiization but because of its own weakness, and they would have closed down long ago without government bailouts.

Further, labor problems, old machines, and inefficient M&A tax law provisions decrease the price of the privatized PE, and sometimes even make it foolish to acquire them. Any buyers will likely to value the land belonging to PE more than its real enterprise value.

Therefore, solution is not PEMB, which is the continuation of status quo. But, selling of 100% of all PE, and if you cannot get good price, then liquidate it and lay off the employees. Dudh na dine tara ghas khane bhaisi ko k kaam?

Also you have said "There is no reason why public enterprises should not be operated as businesses that are financially sustainable."

Yes there is, because the private sector can do the same thing efficiently, effectively, provide better service to people, provide services cheaper, and do not need taxpayer bailouts.

Posted on: 30 MARCH 2012 | 4:44 PM NST

2. Thomas

Bidurji's response (1.) above is spot-on. Nepal's government has no business being in business in competition with the private sector. Any discussion on the future of PEs should be regarding the terms of sale, not on management reform. A PE with the explicit or implicit backing of the the state operates in the market without fear of failure, and therefore is inherently deaf to the voice of the customer, so guaranteeing that it will be out of step with customer needs and generate losses. A PEMB would merely be putting lipstick on a pig; underneath, it is still a pig.

I can already hear the whines that privitizing Gorakhkali Rubber or a cigarette factory will lead to layoffs and possibly closure. But the question to ask should be, why were those industries created in the first place? Some minister in Kathmandu decided it was in the national interest to have domestic production of a certain commodity, and the plant was built, but why that plant, in that industry? Doubtlessly Nepalis are sending more rupees abroad these days buying shoes and mobile phones than tires, so should the government get into the business of setting up shoe and phone factories? I hope you're laughing at the idea of what a Nepal-government developed mobile phone would look like, but it's no less ridiculous to have the government in the business of making tires, cigarettes, or cement. Not a single imported product on the premises of any store in Nepal, from the car and motorcycle dealerships to the Apple store to the shops full of Japanese electronics have any goods that came from government factories. To suggest there is reason why PEs make sense in Nepal but not elsewhere is to not understand the way the modern world works. The only reason PEs could appear to make any sense at all in the Nepali context is because the barriers to entry for job-creating domestic and foreign firms is so high, but the answer is not to create or support PEs, but is to remove the barriers and make Nepal a reasonable investment destination.

Posted on: 30 MARCH 2012 | 10:04 PM NST