Privatising Royal Nepal Airlines
Is It A Good Option?

By Manohar Rana

THE issues of privatising the state owned Royal Nepal Airlines had been in the media for quite a long time. The media recently, has flashed news that the council of Ministers has decided to convert RNAC into a public limited company. That means, 51 per cent shares retained by the government and the rest going to the people (private sector).

Report

In fact, the decision of the government to convert Royal Nepal Airlines into a public limited company is based on the report of a high level committee formed by the then government more than a year ago under the chairmanship of Mr. Damodar Prasad Gautam, Ex-chief Secretary, HMG/N. The committee was entrusted to find out the ways and means of improving the deteriorating state of Royal Nepal Airlines and running it profitably in the context of the national and global aviation scenario.
Nearly eight months ago, the Ministry of Tourism, Culture and Civil Aviation had formed a Committee under the convenorship of Dr. Shankar Sharma, the then member of the Planning Commission (presently the Vice-chairman), with the Secretary in the Ministry, Ms. Ridhi Baba Pradhan, as the Member-Secretary to suggest procedures/ modalities for implementing the suggestions submitted by the High Level Commission. This Committee had also submitted its report to the Ministry with two options. The first one is to initiate process of privatisation and hand over the responsibilities to the Privatisation Cell, Ministry of Finance. The second one is to divide Royal Nepal Airlines into two separate companies, one operating domestic service and the other, international services.
The airline was facing a high degree of interference from the previous governments till recently. These governments used to regard appointments of Board Directors and senior managers as their prerogative.Besies, they sere using such appointments as a reward for political patronage or as the gift of the government ministers. Such appointments have deprived Royal Nepal Airlines of competent management professionals at senior management levels. So much so, such interference also penetrated deeper into matters related to inter-and intra-departmental transfers, staff promotion, out-station posting etc. Such practices on the part of the governments have made disastrous impact on the airline. The accumulated operating loss (loans and dues) of more than 200 crores was enough as an evidence.

Because of the growing unpopularity of the government’s control of the airline industry, the move towards reduction of the state ownership started taking place globally. However, the privatisation trend took great speed only after 1980s. By 1990, formerly state-owned airlines such as Japan Airlines. British Airways, Air Canada and Air New Zealand were completely privatised. Airlines like KLM (Royal Dutch Airlines) have reduced the state shareholding to less than 50 per cent. The proportion of private shareholdings in Singapore Airlines and Malaysian Airlines has been increasing in spite of the fact that they were doing well under state control as well.

Royal Nepal Airlines is undercapitalised. Besides, it has to clear the dues and loans by itself, as the government has not expressed its commitments to inject further capital. On the other hand, it also needs to introduce a wide-body aircraft in its fleet in order to be able to meet the competition of the international operations. The DHC-6/300s. Twin-otters which it has been using for domestic operations, now need to be replaced by modern age aircraft. Moreover, it should also introduce one or two, 40 to 60 seater aircraft to compete in the domestic markets.

The main objectives of the privatisation are to increase efficiency and economy in operation, make the management accountable to the shareholders and to generate resources, both human and financial from the market to improve the operation of the enterprises. In line with these objectives, the previous governments planned to privatise, the line owned enterprises in different phases. In the first phase, they put about three state-owned enterprises under private ownership through divestiture. In the second phase, it privatised five more public enterprises by selling block shares to the private sector. Since then the government has been carrying out this process.

In fact, neither of the undertaking-Public or Privatise-is good or bad. It becomes good when the plans, programmes and goals of the undertaking are successfully met as expected and the overall objectives achieved as planned. On the contrary, if the outcome/result from its operation deviates from the plans or goals, the undertaking will then be termed as bad.

Thus, running state-owned enterprises under the banner of the private sector is not the solution for improving the affairs of an enterprise. What counts most is the ways in which an enterprises is being run and the expertise it has. Thus, privatising a state owned enterprise does not guarantee operational success.

However, experience shows that the state-owned airlines have become more efficient after privatisation as a result of being able to attract capable senior managers from the private sector. They have also been able to finance huge reequipment programmes without direct state subsidy or equity injections. Moreover, they have been able to get private loans on preferential interest rates without guarantee from their sponsoring government. The example of the British Airways will be instructive. In 1981, it was technically bankrupt because of its inefficiencies. But after privatisation, it has become financially strong and is being widely recognised as a formidable competitor these days.

Thus, looking at the present state in which Royal Nepal Airlines is going through and the level of managerial expertise it has, it will be wise to privatise the airline in order to give it continuity and to run it successfully in the coming years. But, outright sale of ownership to some individual/organisation will neither be in the interests of the country nor of its people. Therefore, the share of ownership should be allocated approximately in the ratio of 3.52.

That is, 30 per cent to the promoters (those who manage), 50 per cent to the general public and 20 per cent to the airline employees, so that a large number of people can participate in its management. If the government opts for some control, it may retain approximately one-fourth of the shares and allocate about the same percentage to the Promoters and the rest to the employees and the general public. But, if it wants to retain a stake of 51 per cent, the private entrepreneurs may not be willing or may shy away from investment. Because with 51 per cent of shares, the government would again have say in its management and may influence the activities in the same manner as in the case of state-owned enterprises. Our experience shows that the performance of such pubic limited companies has also been very unsatisfactory. Therefore, the government should initiate full privatisation by selling all its shares to the private investors approximately in the ratio as mentioned above or its should reduce its control to the minimal.

Priority

The local entrepreneurs also have the expertise and are competent enough to run business enterprises in a successful manner. Therefore, the government should give priority to the private entrepreneurs or business community of the country for a stake in the national flag carrier. It should design the processes modalities of privatisation in a way that encourages investment from the local/national entrepreneurs, rather than with the intentions of handing it over to the foreign parties (investors). By doing so, the government will not only provide the private entrepreneurs will an opportunity to prove their competence but will also help to run the airlines with the participation of its own people.

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