Privatisation sounds great in theory. But Nepal's experience with handing over sick state-owned enterprises to private business has not guaranteed recovery. In fact, controversial privatisation deals over the past decade have reeked of malpractice.

Many public enterprises are now so far gone, there are no buyers, and the trend is towards liquidation. Soon after being appointed finance minister two months ago, Badri Prasad Shrestha unveiled his Economic Reform Program which included the privatisation of eight state-owned enterprises this fiscal year.

Ministry officials say they are fast-tracking proposals put in the deep freezer by previous governments. But many of these enterprises are so sick that there are no private-sector takers and will likely be put out their misery. The government has already decided to liquidate Nepal Coal, Cottage Industrial and Handicraft Emporium and Hetauda Textiles, government sources told us.

But five others, including Himal Cement, Hetauda Cement, Birgunj Sugar, Bhaktapur Brick and Tiles and Butwal Power are on the anvil for privatisation. The most time consuming has been the handover of Butwal Power Company (See Economy).

"We have given top priority to Butwal Power Company," finance secretary Bhanu Prasad Acharya told us. The cabinet is expected to decide late Thursday on a Norwegian-funded compensation package following the Maoist damage of the Jhimruk powerplant that is delaying the process.

After identifying seven ailing public enterprises for privatisation in 1997, the government has only managed to split the Agriculture Inputs Corporation into two separate private companies, and carry off a torturous sale of the National Tea Development Corporation.

Privatisation of non-performing state-owned enterprises is high up on the economic reform agenda being pushed by bilateral and multilateral donors and lenders. In its 1999-2001 Country Assistance Strategy (CAS), The World Bank tied the bank's future lending with privatisation. The government's privatisation plans are also linked to the IMF-backed Poverty Reduction and Growth Facility (PRGF).

Tangible progress in the handover of Royal Nepal Airlines Corporation (RNAC) and Nepal Telecommunications Corporation (NTC) were in fact among the main conditions for Nepal qualifying for the World Bank's high-case loan scenario.

The new tourism minister, Kuber Sharma statement last month, that he was willing to hand over the management contract of the loss-making RNAC to anyone local or foreign who could fork out Rs 1.5 billion, proved controversial. Sharma's deputy, Ravi Bhakta Shrestha, clarified to us last week that what the minister actually meant was that RNAC would be turned into a public limited company and its shares floated. But for this to happen, the national airline needs to streamline management and curb its annual losses of Rs 1 billion.

Ever since privatisation was launched by the Nepali Congress government in 1992, 18 companies have been handed over, but there are over two dozen in various stages of sickness still left. They are haemmoraging Rs 2.4 billion a year, and the government is just not able to pick up the tabs anymore. Just RNAC makes up nearly half the losses.

According to a recent Finance Ministry report, only 14 enterprises have completed their audited reports. It adds: "The performance indicators of public enterprises show that the financial efficiency and physical achievements are worsening day by day." The government has only received Rs 245.7 million from state enterprises, 1.27 percent of its total share investment.

Officials say the major objectives of Nepal's largely donor-driven privatisation program have been reducing the role of government in business-related activities, enhancing private sector participation in the economy, and attracting private "shy" capital in business ventures. But critics say the forthcoming liquidations prove the failure of the privatisation process. Asks state sector expert Narayan Manandhar: "How can you call liquidation of companies on the verge of death privatisation?"

Ratnakar Adhikari, co-author of the book, Privatisation: Expectation and Reality, also argues that privatisation, by definition, should increase competition and efficiency in the market. "But most of the privatised enterprises have turned into sick units and the country hasn't gained much from the privatisation in the past. It seems to have been directed out of donor pressure," he added.

Officials deny that the process is donor-driven, and say privatisation has now become a question of the survival of the treasury. They cite the example of the Soviet-era Janakpur Cigarette Factory which has 1,200 employees, but occupies only 29 percent of the tobacco market in the country while the foreign joint-venture Surya Tobacco has 59 percent market share with just 400 staff. Balananda Poudel of the Corporation Coordination Division at the Finance Ministry told us simply: "The liabilities of most state-owned enterprises are so high that the government can no longer sustain them."

The situation is so bad that the government is scrounging just to lay off employees of the companies to be liquidated. "We had asked for over Rs 220 million to pay off the staff of the Sajha Yatayat, out of which the government made available only Rs 50 million," said Shyam Sunder Sharma, Registrar at the Company Registrar's Office, who is also serving as liquidator to the public transport enterprise based in Pulchowk. Some employees have sued the government challenging the liquidation of both Sajha and Himal Cement.

Even companies that were privatised relatively smoothly have gripes against the government. Says Diwakar Golchha, whose conglomerate took over the Nawalparasi-based Bhrikuti Pulp and Paper ten years ago: "We have enhanced the factory's capacity eight-fold, improved productivity and quality, but we have got zero support from the government after privatisation." Golchha complains that he pays taxes worth Rs 6,000 per tonne of paper, whereas cheap paper is being imported from international market at zero duty. "How can we survive in such a situation?" he asks.

The privatisation process has been bungled mainly because of political interference and corruption, even though the rules and procedures are in place. The new government needs to not just redress past wrongs, but also meet fresh targets. Donors supporting privatisation realise this is big challenge for the government, but say it has to bite the bullet.

"State-owned enterprises are a major burden on the treasury and have a history of mismanagement and inefficiency and they add a further financial burden to a government budget already under severe pressure," says Chris Jackson, economic adviser at the British aid group, DfID. "Privatisation is a difficult reform area. However, we hope to see evidence of renewed political commitment in pursuing reform driven by the current fiscal crisis."

DfID had no plans to provide further support to public enterprise reform, but Jackson says it would consider future support if there was evidence of commitment from the government. Under a DfID grant totalling $4.5 million, the Adam Smith Institute advised the Privatisation Cell at the Finance Ministry from 1997-2001.

The process is now at the crossroads, and some say it needs a serious re-think. Says Dilli Raj Khanal, economist and former UML MP. "Questions have been raised on the credibility of the whole process of privatisation, we had also supported it on a merit basis. There is a need to make the entire process more transparent and credible."