Cover Feature

Privatization Process in Nepal

With the experience of privatizing some 16 enterprises during the last decade, Nepal may seem quite experienced in this field. However, the last couple of years not only went without a single public enterprise (PE) going to the private sector, but one of the 16 enterprises privatized was even handed back to the government. Though the authorities also attempted to privatize three other PEs during this period, the process had to be cancelled in case of one – Butwal Power Company (BPC) – at the last moment. While negotiations are still going on in Nepal Tea Development Corporation (NTDC) even after a year of first opening the bid documents, bidders for the management shares in Himal Cement Factory (HCF) are asked to revise the bid upward.

It may indicate that the decade long experiment with privatization in Nepal was a failure as claimed by the opponents of this program. As a rejoinder to the opponents, a monitoring report about the performance of privatized enterprises was brought out early December, and the Ministry of Finance (MOF) claimed that the program has been an overall success in Nepal. Taking production, sales, employment, profitability, borrowings and tax paid to the government as the indicators, the report entitled "Monitoring Privatized Enterprises" shows that the former PEs have recorded an overall positive result. The findings are however based on information from only 10 of the 16 enterprises. Excluded from the study were two liquidated units, one closed down after privatization, and three only recently privatized. Among the ten PEs, the report showed, investments have increased in nine, production has increased in six, sales have increased in seven and profits have increased in five.

Meanwhile, British Department for International Development (DFID), one of the agencies funding Nepal’s privatization program is reported to have carried out its own study on the effects of privatization in Nepal. It is DFID itself which has appointed Britain’s consulting firm, Adam Smith Institute (ASI), to advise Nepal on its privatization program since 1998.

Though the findings of DFID report are not made public as yet, the MOF report also has brought to fore some inherent problems in the system that pose hurdles in speedy implementations of this program in this country.

The major problem seems to be related with lack of awareness. Recently, a parliamentary committee strongly advised the government against privatizing Royal Nepal Airlines Corporation (RNAC), a PE that has still not been considered by government for immediate privatization. According to TN Khanal, the Chief of Nepal’s Privatization Program, BPC, NTDC, HCF and Rastriya Banijya Bank (RBB) are at the final stage of privatization. Others selected for privatization include Nepal Rosin and Turpentine Ltd., Herbs Production and Processing Co. Ltd., Janakpur Cigarette Factory Ltd. and Gorkhapatra Corporation, but not RNAC. This shows how opponents in Nepal oppose this program. However, this also shows how the government has failed in educating the public.

There also are views that privatization is drawing energy and efforts out of proportion. Dr. Chaitanya Misra of Nepal South Asia Centre says, the very objective of privatization seems to be lost in Nepal. "Since Nepal already has a very big private sector with the some 94% of the economic activities, privatization should not be a very big issue here," Dr. Misra opines.

Khanal terms the opposition to privatization as a "non-responsible stance of responsible people", indicating that, by opposing privatization, some political parties are trying to gain some political mileage. But opposition is coming not only from the political parties. Academics and trade unions and even general people are voicing their opposition to privatization. Clearly, the authorities have not carried out sufficient marketing drive promoting privatization among different group of people. Elsewhere, such as in Ghana, radio and TV programs including dramatizations and documentaries are used, and regular advertisements of companies privatized are published in print media and aired over radio and TV showing name of the investor to whom it was sold and how much money the company is sold for. Similarly in India, the families of the employees are contacted and informed about how the PE is being privatized and what benefits the employees can expect from this. In Thailand also radio and TV programs are used to make the people aware about economic liberalization. Nothing nearing such programs are conducted in Nepal.

The government also has been going along with the program in a lackadaisical manner. In fact, BPC, NTDC and HCC along with another PE – Salt Trading Corporation (STC) – were scheduled to be privatized during the Eight Plan period itself. The current Ninth Plan, of which less than two and a half years are left, has a target to privatize 30 PEs. And the 36th annual report of the Auditor General has listed down 12 PEs for which the last date scheduled by Privatization Committee for handing over to the private sector was mid-July 1999. These indicate the sluggish pace with which the privatization program is implemented in Nepal and why the Ninth Plan target is difficult to be met.

Political instability in the last several years is blamed for the sluggish pace. Now more than seven months have passed since this problem was removed by the last general elections. Still, it was during this period that BPC’s privatization program had to be cancelled amidst controversies and no additional PE is put up for privatization. Political leadership is in fact to be blamed if there is a failure in privatization, as examples of success or failures of this program in neighboring countries – India, Pakistan, Sri Lanka and Bangladesh – show. During the Privatization Summit organized by ASI in the capital very next day the MOF report was out, instances of how strong political leadership influenced the positive outcome of privatization program in various countries were put forth by participants from the respective countries. The present political leadership in Nepal is yet to prove its similarly strong political will to go along with this program.

One of the problems in Nepal’s privatization is that of delayed implementation – a malaise that has affected every other program in the country. The December report of MOF and annual report of Auditor General have both pointed it out as the most grave problem in this program. Because of delays, the PEs selected for privatization develop several problems leading to further sickness in the already sick PE, and the expenses of the privatization program soar up. The result is less revenue to the government. As the Auditor General’s report shows, in some of the enterprises privatized, the liabilities borne out by the government on account of them have been higher than the proceeds realized from the sale of the management shares in them.

MOF report has also pointed out that the delay is because of some inherent problems in the system itself. Khanal says, it takes between six to nine months for completing the process once a PE is selected for privatization. But in practice, it has been taking even longer as evidenced by BPC and NTDC cases. According to the MOF report, formation of the privatization committee itself is responsible for the lengthy delay. "Some members of the committee try to escape from taking decision or prefer to delay the process", says the report indicating to timid bureaucrats and opposition political party MPs who are ex-officio or nominated members in the committee. An opposition MP resorts to stalling tactics because the ideology of the party he/she represents is against the principle itself of privatization, while bureaucrats simply try to pass the buck because "everybody is suspecting malpractices in privatization deal", to quote the report. All the political parties in their manifestos during the last general elections have mentioned differing views on privatizations modalities or on the use of the privatization proceeds. CPN-UML has even gone to the extent of announcing that it would review all the past privatizations, while RPP has ‘denounced" the past privatizations (see box).

The vague regulatory framework governing the process is another factor blamed for the delay and controversies related to every case of privatization. Take for example two provisions of the Privatization Act. Though there are a number of criteria for selecting the best bid offer (see box), there is no system for giving weight to each criterion. This is because the rules and guidelines under the Act are not prepared. As a result the one with the highest price offered is selected. This has been identified as one of the main reasons for the failure in Agricultural Tools Factory (ATF). (The party selected for ATF had no track record of managing a big industrial enterprise.) Enriched with the experience, the government started to adopt a two envelope system recently from the case of BPC. Under this system only after the technical proposal is evaluated and found acceptable, is the financial bid of the party opened.

The Act has fixed six modalities for privatization of which one is totally vague (see box). So far, four modalities, including sale of shares, sale of assets, leasing of assets and management contract, have been tried. And the experience has shown that assets lease and management contract have failed (Bhaktapur Bricks & Biratnager Jute Mills). Under these modalities, the actual ownership over assets lies with the government. The management is capable to only operate the assets. It can neither pledge the assets to raise loan nor sell the assets to improve liquidity. Thus they use the assets as much as possible, but spend as little as possible for maintenance. Therefore, the MOF report has said that leasing and management contract cannot be considered as appropriate modalities for privatization.

The modality of asset and business sale also have not worked well, the report has pointed out. In this modality, the company is not sold, so it has to be liquidated. But after selling the assets of the companies privatized in the first lot of the program as early as 1992, the liquidation process in them is still going on, increasing the cost of privatization. In this context sale of shares would be a better alternative, but the underdeveloped stock exchange and the need to select a strategic investor pose serious hurdle in effectively implementing this modality in Nepal.

Some problems in privatization are related with the low number of interested investors who participate in the bidding process. This has been limiting the choice of the decision-makers, and consequently the opponents find points to raise. This again is a case to show that marketing aspect of the Nepali privatization program is seriously weak. The MOF report blames small number of bidders to the low level of investment capabilities of Nepali investors and the poor condition of the PEs which have lost their value in the present circumstances. But even in those units in sectors where Nepal has tremendous potentials to develop – such as BPC – the number of bidders has been ridiculously low.

Another thorny issue in Nepal’s privatization program is related with the question: Where should the privatization proceeds go? Khanal says, logically they should be used in retiring debt and other long-term liabilities. "And we are doing exactly that", he adds. While Nepali Congress in its manifesto for the last general elections kept silent about how to use privatization proceeds, RPP and CPN-UML both promised to use it for debt retirement. Under the existing practice, the money received from sale of the PEs is being deposited in a privatization fund with the MOF, and the money is used in meeting various requirements related with privatization. The Auditor General’s report has objected to it and suggested to deposit the proceeds in the consolidated fund of HMG, because, by law, all the money received by HMG must be deposited in the consolidated fund.

Also in the use of the money deposited in the privatization fund, the Auditor General’s report has shown various objections. Some of the money is being lent, at an interest rate as low as 5%, to privatized enterprises or to PEs selected for privatization. Biratnager Jute Mills alone received Rs. 45.3 million loan from this fund at 5% interest in FY 1996-97 and Rs. 15.0 million in 1997-98.

Opponents of privatization point out that foreigners are being handed over key enterprises that were set up with assistance from friendly countries. This agrument was much in circulation during the first phase of privatization when three PEs, Bhrikuti Paper, Bansbari Leather and Harisiddhi Brick (all established with Chinese assistance), were offered to the private sector. Authorities say, all those who have taken over the privatized enterprises are not foreign individuals but companies lawfully registered in Nepal. One objective of privatization program is to attract foreign investment in the country, but no foreign investment has entered Nepal through privatized enterprises except in Bhrikuti Paper and Bansbari Leather – both are still unable to record a profit. Still the initial opposition from some quarters to foreigners taking over PEs cannot be regarded as reason for this failure to attract foreign invertent. A foreigner had actually been selected to take over NTDC (though he backed off later for dubious reasons) and both of the bidder groups for BPC had foreign partners in them. One of the points raised by the opponents of BPC privatization was that the bid conditions deliberately had excluded only Nepali groups from taking part in the process.

As the MOF report says, foreigners show little interest in acquiring Nepali PEs because the size of the market in Nepal is very small and the volume of profits expected is not attractive. This can be compared with the experience of Sri Lanka where the success of privatization is attributed to the success in attracting reputed MNCs (see the box interview). But in Nepali PEs, it may not always be necessary to bring in MNCs. Bank of Kathmandu, a joint-venture commercial bank, is doing better now with Nepali management compared to the period under a foreign management. This may be an indication that Nepali private sector has sufficient capability to turn around a sick unit. The cases of enterprises successfully turned around after privatization, as listed down in the MOF report, are there to support this argument. All of them have Nepali management.

Another criticism against privatization in Nepal stems from the fact that the government has been selling PEs as a street vendor sells his wares. The after-sales service is seriously lacking, as the MOF report also points out.

Despite a decade-long experience in this field, Nepal’s privatization still seems to be in a stage of experiment. One gets baffled when trying to find symmetry in HMG’s privatization program. Of the two brick making PEs, Harisiddhi Bricks & Tiles was fully privatized, while only the management of Bhaktapur Bricks was handed over to the private sector. Similarly, while Balaju Textiles and Raghupati Jute mills are privatized, Hetauda Textiles and Biratnagar Jute Mills are still ‘sapping the taxpayers money’.

As FNCCI president Pradeep K. Shrestha says, privatization in Nepal has been supply-driven, with the government choosing a unit it wants to privatize. He suggests, it should be made demand-driven – i.e. selecting those units for privatization that the private sector is willing to acquire. That may help to attract more bidders and chances of the government receiving better price would be higher. Since most of the industries in Nepal are still at the growth stage, the investor would be willing to pay a premium to acquire a running unit even with absolute machines, as long as the prospects for the industry sector are good.

"Ensure something for very body in

every privatization package"

-Madsen Pirie
President & Founder, Adam Smith Institute, Britain

Questions are often raised about the modalities followed in the privatization of Nepal’s state-owned enterprises. What is your comment?

Well, it’s very important while privatizing to do it openly and honestly. It must not be done in such a way that people think it might be corrupt. They must not think that rich people have paid a price in order to be allowed to take over state enterprise cheaply. And the only way to avoid that is to do it openly, to insist the whole process takes place under the full scrutiny of the press and in public.

Nepal still lacks anti-monopoly laws. Don’t you think it would be better to have such law before speeding along with privatization?

No. Curiously, it is not the law that needs to be anti-monopoly. What you need is the presence of competition. So when you privatize a state monopoly, wherever you can, introduce competition. When we first did it, it was not done by the facts of competition. And what actually happens in practice is more important than what is written in the acts of parliament. So you could spend many years trying to get the anti-monopoly law right. The competition in practice is far better than anti-monopoly law in theory.

Do you see a need for Nepal to set up a senior high-level privatization authority like in other countries?

Yes, I think it is very important to have a clear political need for privatization program, to have a government committed to it with a powerful agency which enjoys the full backing of the prime minister and the cabinet, and to be seen to have that authority and to have the program and to carry it out systematically. So my answer is a most emphatic ‘yes’.

None of the stake-holders seem to be happy about how privatization has been going on in Nepal. What steps would you suggest so that the stakeholders can be taken into confidence?

Well, its very important when privatizing to try and make sure that there is something in it for everybody. The workers should be given either assurances or some stake in the enterprise. The customers should be assured that prices will not increase and that service quality will improve.

The government should be assured that this would create a profitable company, which can pay tax into the treasury instead of drawing subsidies out of the treasury. And so, systematically try to make sure that all of the groups involved get some benefit out of the process.

The general sentiment in Nepal is against privatization. It is not a nationally accepted agenda. In this background, how do you see the future of Nepal’s privatization?

Well, the same is true in nearly all the countries. Privatization, when it is first proposed, is something new. And therefore there is no popular support at that stage. It requires leadership from government and they must pursue a campaign to educate and inform the public so that they will begin to see the benefits. Even in Britain, which started this process 20 years ago, there was no popular support for privatization. Mrs. Thatcher took the lead. She said this is a good thing and will benefit the country and the people. A campaign of education took place and the success of the first few privatizations convinced people of the benefits for more. Nepal is not different from other countries. The same type of exercise here could be successful as in other countries.

How do you see the attitude of the government and bureaucrats in relation with the process of privatization?

The government and the bureaucrats start with reluctance on privatization because they see it as a threat to their power. They think that if a state-owned enterprise becomes independent, they lose control over it, they lose their ability to put people into jobs. It is only when they realize that privatization brings in benefits that they overcome the initial reluctance. You have to educate them and they have to learn from experience that privatization brings benefits to them for it increases the GDP, the general wealth of the country, and it increases the number of profitable business which pay taxes so that it makes it easier for the state treasury to finance improvement in services. And this is what the politician and the beurocrats usually want to do because it makes them popular.

"Assess what they are, not what they offer"

-Diwakar Golchha
Vice-Chairman, Golchha Organization

What is your experience in running former State Owned Enterprises (SOEs)?

In Bhrikuti Pulp and Paper Nepal Ltd. (BP & PNL) there was tremendous resistance from the old management. There were lots of damaged equipment. We had to send a major part for refurbishing to different places like Delhi and Bombay. For four or five months, the factory was not in any condition to start production. And there was more than a thousand trucks of debri to be thrown out of the factory. So, a lot of our time was consumed in clearing the site. The entire terms and conditions of the employees were as per the rules for the public servants, the facilities and holidays were not at par with the private sector norms and the Labour Act. We had to go into several lengthy negotiations to convince the employees to look at the issues from the Labour Act angle. And there were a lot of persuasions from our side. The wage was increased by 25 or 30 percent. I also started numerous green field operations where we set management style as per our norms. But to change that mind-set here was a very very difficult process. Still I can not say very confidently whether the mind-set has actually been transformed as per the need of a private organization.

Secondly, the company’s total capacity was 10 tons per day, but there were more than 550 employees and the capacity was never going to sustain the number. So we had to improve the plant and technology and we upgraded the plant to 80 tons per day capacity. The boiler used to run on coal which is very expensive and it is now replaced by rice husk. Prior to privatization, the company was artificially shown as earning profit. There was no liability at that time, and on the contrary there was a cash deposit of Rs. 80 million made by the government. Though the company was in fact losing money (it was never in profit), the interest earned on that deposit showed the company as making profit. After privatization that money went to the government.

Second unit that we took over was Shree Raghupati Jute Mills (SRJM) and it was almost logged off for two and a half year before privatization. Not a single machine was in operating condition. It was a really challenging task for us to bring the company into production. We had received the company without any past liabilities and past employees. So we could start afresh. In the history of SRJM, the production had never crossed 15 or 16 tons per day on average. It never produced more that 4000 tons in a year. Whereas now we are producing almost 26-27 tons per day, and annually over 10,000 tons. And that was possible because there was no delay in implementation of our plan in this unit.

What other measures did you take to gain confidence of the labourers in BP & PNL?

First of all, we explained to them that this is going to be a totally professionalized-management company. And we explained to them what the situation was previously and in that continues, we asked them, how long they thought the company would last. So unless we brought in the right technology, modification and improvement, the company was not going to operate for long. We did exactly that. The employees also understood what was good for the company’s future. I feel now that the employees are really concerned and cooperative.

But both of the units are still incurring losses.

In case of SRJM, last year it made a profit of around four hundred thousand. This year again I think it will make a profit after interest and depreciation. It is a good sign. So far as the parameters are concerned, I think BP & PNL has all that a good paper manufacturing mill requires and it has been professionalised. But as soon as our expansion and everything was complete there was a tremendous crash in market price. Paper is such a product that there is no protection, rather there is a negative protection. If somebody wants to import printed material or books, that comes free of VAT or customs duty. So is the case in newsprint or raw material for the paper industry. They carry a 5% customs duty, but there is no VAT. And we have to pay VAT on the entire production. The user is exempted but we are not. There are a lot of anomalies in the tax system which need to be corrected. The company began getting into financial troubles in the last two years. But now we are beginning to see day-light and I hope the government will make correction in the tax anomalies.

Some of the privatized enterprises are not doing well. Does not it indicate that the private sector in Nepal is not capable as yet to take up such big enterprises?

I don’t think that is right. Yes, the private sector does not have a magic wand. When the unit is already in trouble and the government is pumping in millions of rupees, they think that once the unit is privatized, they will be freed from a burden. The person who has taken over the unit has no one to help him in different odd situations. He does not have any exchequer from where he can keep on drawing funds to run the company. And it is not necessary that any private sector party has the capacity to run any type of operation. The private sector has developed knowledge and capacity in the last twenty or thirty years. I don’t say that the our private sector is at par with international standards. But one thing is definite; the private sector is at least bringing in money and risking its neck in the operation. At least someone is making an effort to improve the operation. Privatization is no more discretion. It is a compulsion for every country. It has been evident that if the government drags on for too long, neither the private sector nor the government will be able to improve the situation. What is given top consideration now is related to who has bid the highest price. If that is the only consideration, then definitely the government will make mistakes. The background and capability of the entrepreneur must also be examined properly before privatization. The people who bid, do not necessarily understand the operation correctly and know all the industrial problems. Because different operations have been handed over to different types of people – some are from the industrial background while some may not have seen an industry is their lives. When the latter type go into the industry only then do they realize that there are thousand and one problems. There are labour problems, there are other negotiations that have to be done. Their background may not be sound enough to enable them to handle the situation. This may then lead to closing down the unit. There might also be external problems. The company might be volatile. For privatized units that have gone into the right hands, productivity wise or employment wise, the situation must have improved.

What weaknesses do you see in Nepal’s privatization program?

I think that the privatization should not be only price-oriented. Whether or not the entrepreneur has the capacity to run the operation should be analyzed. And there should be some marking system on what basis the unit is to be handed over. For example, the bidder’s background, his capacity, business plans, whether it is relevant to the industry or not, and all should be taken into consideration. This will ensure that the privatized unit goes into operation and that it does not get into trouble in the first year itself.

-Aneela De Soysa
Director, Public Enterprises Reform Commission, Sri Lanka

How do you evaluate the results of privatization in Sri Lanka?

I think we have had successful privatization of some of our companies. Of course in some companies it is too early to come to a conclusion. But despite various teasing problems in different areas, I think it has been successful.

How are the enterprises doing after privatization?

Well, it depends on the units because each one performs differently. And overall, the results are good. There have been new investments, there has been new orientation of the companies, new strategies coming in with the new management, and new scales being brought into the companies. We are pleased with what is happening.

What do you attribute the success to?

I think part of the success is due to the kind of investors we have been able to attract. We have managed to bring in some fairly big multi-national companies. For instance in telecom, we attracted NCC of Japan, which is an international telecom provider. Into Air Lanka we attracted Emirates, which is the national airlines of the Emirates. For the steel company we attracted Hanjung which is a large producer of steel in Korea. For the Gas Company we managed to attract Shell, which is an international petroleum company. And I think being able to attract these big multi-national players and people who are seriously interested in growing and developing these companies has played a large part in the success of these companies.

One of the serious problems encountered before privatization is related with labour. How was the experience in Sir Lanka and how were the trade unions taken into confidence?

Well, at the beginning the government gave an assurance to the trade unions that the investor will not ask anyone to leave the company for a period of two years. So their jobs were guaranteed for two years. And also that they would be employed on the same terms and conditions as before. As time went on, the unions themselves came to the government and asked that retrenchment packages be provided for them to leave, sometimes because they found that it was difficult to work under the new management. A number of them took the retrenchment package. I think that in a large way prevented further problems because the people who were unhappy, left. During the process of privatization, there had been different methods used to deal with the unions. There had been consultations with the unions over a period of time before the privatization to tell them what is happening. Also, letters are sometimes written to the families of the workers to inform them on what is happening and what privatization will mean to them. And I think the fact that a company would have a strong union sometimes helps in the process because they negotiate well with the government and come to an acceptable result.

In Nepal, questions are often raised about the modalities adopted in privatization. What do you suggest?

Well in Sri Lanka, the government is determined to have a fully transparent process that leads to the privatization in the sense that privatization is publicly announced, the documentation is freely available to anyone who wants it and the advertisements are put in newspapers calling for bidders for everyone to see and there is open information about what kind of bids were put in. And they do try to maintain a transparent process during privatization.

People think that the loss-making enterprises should be privatized, not the profit-making ones. What do you think?

I think the reason why you privatize is not because a unit is making a profit or loss but because in the hands of a private sector owner the company has a better chance to grow, becomes more efficient and contributes to the development of the economy. And I think that should be the prime reason for privatization. And as to whether the enterprise in making a profit or a loss, it is really not relevant. When an investor comes and puts in a bid for the company, what he will first do is look at what the company’s assets are, what does it contain, the kind of land, buildings, machineries, people, skill. And then he will work out roughly how much money he can generate in the foreseeable future out of the company and what profits he thinks he can make. What the government did is actually not relevant to him now. What he sees is how much profit he can generate in his hands. Then he works out a net present value of the cash flow he can generate over the years. And that is really his evaluation of the company. So whether it is making a profit or loss in government hands really is not the relevant criteria in putting the bid in.

"Government is not appropriate to conduct business"

-T. N. Khanal
Chief, Privatization Cell, MOF, HMG

It is said that Nepal’s privatization is suffering from delays? Why are these delays?

Privatization process takes at least six months. We have to carry out various studies. For example, we have to carry out the business evaluations, redundancies, analysis, we have to carry out studies on what will be the best modalities and so on. While preparing the report sometimes it will take two to four months and then we will also have to prepare internal work, the relevant information on procedures of bidding and all that. And then we have to give investors sufficient time to submit their bids – sometimes 60 days and sometimes 90 days. And then we have the evaluating process, the negotiating process and then the decision–making process. The whole process will take 6 to 9 months. We have to be very sensitive on the employee’s issue. And if the issue of employment is not settled then the whole process will definitely be delayed.

How are you planning to cut down the delays?

We can reduce the delays if we can standardize it. For example, if we can develop certain mechanism, which addresses most of the issues beforehand, then the process may be shortened. But it is not that easy to standardise the whole process. The problems are sometimes specific and finding specific solutions takes time. Also, we have an institutional set up where we have a very large comprehensive representative privatization committee and we have to listen to various opinions of the various representatives there. So it is better to have more discussions and come to a conclusion having a more detailed discussion. I agree that the process is long and we have to make it a shorter one.

Is there any change being considered for privatization modalities?

Modalities depend on various factors. It is a question of whether the industry needs further capital injection, introduction of new technology, restructuring in the form of releasing the manpower or what are the business prospects. If the business does not have a long life then it will affect the modalities. Modalities also depends on whether or not the market environment for the particular business is competitive. These are the main issues that have to be decided on before adopting a particular modality. During the last seven or eight years, we have tried several modalities – sell of shares, sell of business and assets, leasing and management contract. On one occasion we also tried to have employees participate in the process. The one which we have not tried is cooperatisation. In the Pokhara Dairy we are looking to adopt that. But a single modality will not be applicable in all of the enterprises. It depends on the nature and requirement of the enterprise.

Privatization is being criticized by the entire society and also political parties, business community and professionals. What do you say about it?

First of all, the oppositions and the criticisms are coming up not because privatization is good or bad for the general public but it is because of vested interest of the different stake–holders. We wish to call it the non–responsible stance of the responsible ones–political parties are politicizing it. People want to put their own perspective of things into the press. So this has created some confusion in the media and also in the public.

There are reports of arrears in realizing the privatization proceeds from various parties. How is the status at present?

The government and investors enter into agreement for scheduling payments. There are certain conditions attached to the whole process. For example, if the investor, for one reason or the other, fails to pay the amount the government will have to extend the time. And sometimes, because of the disputes between the party and the government, the case goes to the court. Until the court decides, one cannot realize the money. So there are certain dues, but it does not mean that we have over dues or long dues. It is because of the agreement. After the settlement of the disputes, the government will realize the dues. And there are guarantees from the investor’s side as well, which can be invoked.

It is said that privatization proceeds are income for the government, which should be deposited in the consolidated fund. Where should the privatization process go logically?

Logically they should go for reducing government debts. Because the proceed are realized by selling capital assets, this should be used for reducing capital liability, that is long–term liability. In our case also we have used the money for meeting these liabilities. Whichever way the money is used, at the end of the day, the government should settle down the liabilities. So we have used the money to settle the liabilities of employees of privatized enterprises or in settling the liabilities of financial institutions or settling liabilities of other suppliers and the like. We have not included that money in the national budget or the treasury. We have set aside a special fund and from that fund we are utilizing that money. And we still have some balance in that fund. And if no fund is required for other purpose, we deposit it into the treasury. We are continuing with this practice.

Privatization & Political Parties

What is sought in bid proposals for privatization?

• Attractive Price

• Management of the enterprise without changing its nature

• Retention of existing workers and employees

• Enhancement in employment opportunities

• managerial experience

• Good business plan for expansion

Modalities for privatization

1. Sale of shares

2. Cooperatization

3. Sale of assets

4. Leasing of assets

5. Management contractOther depending upon the recommendation of the privatization committee and decision of the government

Privatization Committee

Chairman

Minister or Minister of State for Finance

Members

Chairman of Public Accounts Committee of House of Representatives, Two MPs, One member of National Planning Commission, Secretaries of The Ministries of Finance, Law, Justice & Parliamentary Affairs, Labour, and the ministry concerned with the unit to be privatized, and president of FNCCI.

Member Secretary

Privatization Liabilities

Privatization proceeds

Privatization and Social Effects

-By Dr. Narayan Manandhar*

Backdrop

The history of public enterprises in Nepal is marked first by expansion and then by contraction. Till the early eighties, public enterprises sector expanded in the country. This had to do with easy availability of foreign aid, lack of private sector development and finally, the prevailing economic dogma of state intervention. However, widespread poor performance of the public enterprise sector led the government to rethink the need to establish and run public enterprises.

With the reinstitution of multi-party democracy in the country and subsequent ascent of the Nepali Congress Government in 1992, a period of economic liberalization and privatization began in the country. The Nepali Congress Government brought out a five - phased privatization programme to privatize as many as 51 public enterprises from a total of around 60 enterprises. By 1994, the government had privatized eight units and liquidated two more and also enacted a Privatization Act. The mid-term poll in November 1994 and the subsequent formation of coalition governments put a drag on the privatization movement. Yet, during the Nepali Congress led coalition Government in 1996-97, five more units were privatized. The ascent of Nepali Congress Government in 1999 marked another beginning in the front of privatization. However, there has been serious set back in the process of privatization, particularly, with the controversy in the privatization of Nepal Tea Development Corporation and Butwal Power Company. It is envisaged to privatize as many as 30 units in the Ninth Plan Period (1997-2002). So far the government has not been able to privatize a single unit.

Policy Objectives and Safety Nets

Three broad policy goals have been attached to the privatization programme: (a) reduction of financial and administrative burden on the government, (b) improving the operational efficiency of public enterprises, and (c) involving public participation in the management and ownership of public enterprises. Of late, mention has also been made of using privatization as a tool for promoting foreign direct investment.

In order to assure and protect the interests of employees, the government has made three provisions in the Privatization Act. They are: (a) no redundancy due to privatization; where employees have to be made redundant they will be adequately compensated (b) guarantee of accrued salaries and benefits and (c) issue of enterprise shares (five percent) at a discounted price (25 percent).

Modalities of Privatization

The government has defined privatization modalities in the broadest terms to include sale of assets, and shares to the general public, employees, and other persons or company interested in the management of the enterprise, the management contract, the formation of cooperatives and asset lease out. The government has also used liquidation as a privatization measure. However, so far, five privatization options have been tried: (a) sale of assets and business in three units (b) sale of shares in nine units (c) liquidation in two units (d) lease out in one unit and (e) management contract in one unit. Except for the liquidation method, in all privatized units the government’s motive is primarily driven by commercial rather than distributional goals. That is, to hand over the controlling interest of the enterprise to a nucleus of private parties so that they can inject further capital, improve productivity and bring in new technology and management. The performance results of these options are varying: lease outs and management contracts have failed, of the nine units where shares were sold, two units have been closed down, even the privatization euphoria generated by the paper mill (Bhrikuti Paper and Pulp Ltd.) was short lived due to its continuing sick condition.

The total impact of privatization on the Nepali economy is expected to be minimal as the number of enterprises that have been privatized constitute only a small fraction of the government’s total investment in the public enterprise sector. Yet there is growing outcry and criticism on privatization. This is because public enterprises are the organized sectors of the economy where vested interest groups like trade unions, management, bureaucracy and political parties are more vocal, organized and have high stakes. We will briefly sketch out the economic and social effects of privatization in the sections below.

Economic Effects

There are some positive gains of privatization in the economic fronts. There is perceptible increase in investment in the privatized units – capacity level and outputs have gone up in some of them. However, the increase in productivity is mixed, there are cases of increase as well as decline. Privatized units have been able to increase profits and where there are no profits they are able to reduce losses. One significant achievement is the development of capital markets. Privatization has contributed to increased number of shareholders in the economy. On the negative side, privatization has not been able to contribute anything on deficit reduction although the government claims that it has lessened the burden of having to carry loss making units. Now, the burden has been passed on to the private sector. In almost all the cases, the price of the outputs of privatized units have increased after privatization. This has to do with subsidization or artificial suppression of prices during the public ownership regime.

Social Effects

In the social front, privatization seems to have taken its first toll on employment. In spite of government’s protective measures, there has been a dramatic reduction in employment level after privatization. However, the employment level is gaining, albeit at a slow pace, after privatization. There are far more interesting changes in the qualitative rather than quantitative aspects of employment. Despite the no redundancy clause, a large majority of employees have opted for voluntary retirement. The exit of senior and experienced staff members have further burdened the privatized units because they have to carry on with redundant staff members. There is apparent conflict between the "old timers" and "new comers" in privatized units. Some trade unions perceive "no redundancy clause" as a mask to the problems of government’s inability to pay separation benefits to employees. New investors feel "no redundancy clause" as something that ties up the management’s hands. There had been some increase in the salaries and benefits in the post privatization period but this has been accompanied by increase in working hours and/or reduction in leaves and other facilities. In order to avoid long term liability of having to carry on with permanent staff, the new management prefers contractual employment. Such contracts often entail higher salaries and benefits. The private management of units also entails a degree of nepotism in personnel matters. Although labour disturbances are prominent features of privatization in Nepal, trade union activities have been streamlined after privatization. A number of factors account for this. First, there is less politicization of the labor force under privatized units. Second, even labor unions need to be realistic and think twice before initiating labor agitation. Third, with privatization taking a toll on jobs, employment security rather than wage increase has been the primary concern of trade unions. Fourth, new management is not, at least, lax in dealing with trade unions as is often found in public sector management.

The general perception of trade union activists and employees of the privatized units is very antagonistic toward privatization. However, a number of trade union leaders and workers still hold the view that privatization could be a solution to curtail corruption, inefficiency and lethargy in public enterprises. Job security featured as the most important agenda for them. They blame government for the lack of employee involvement, consultation and participation in the privatization program. Lack of social dialogue may have generated this situation.

There is dearth of post privatization actions in Nepal. Review works on privatization policy have been carried mostly at the non-governmental rather than at the governmental level. Only after a lapse of eight years after privatization, the government has published a post privatization monitoring report. This report is again heavily criticized by the trade unions on the ground of giving a misleading picture. Even DFID, the main donor agency in the field of privatization in Nepal has gone out to do its own independent verification and evaluation of the privatization program. The most vocal criticism on privatization comes from the Auditor General’s Office, which had undertaken privatization audits in 1998 and 1999. Criticisms have been labelled on the valuation of privatized units, laxity in collecting and using privatization dues and the lack of post privatization monitoring actions.

Some suggestions

The following suggestions could be made to mitigate the problems of social effects of privatization in Nepal: (i) Give new owners an option to carry on with the existing staff members instead of a "no redundancy clause" to protect the job security of employees. (ii) Train and reintegrate employees so that they can be absorbed rather than retired under the voluntary retirement scheme and "golden handshakes" (iii) Inform, consult and educate employees and trade unions prior to privatization. Build, and where possible buy, their confidence in privatization. (iv) Train/orient the new management to give an impression that the government is committed to privatization for private sector development rather than to shift the burden. (v) Across the board distribution of five percent shares at discount price needs to be quashed; where it is viable employees may be asked to run the enterprise themselves. (vi) Adequate restructuring program should precede privatization, this may include freezing recruitment, internal transfers and adjustment, de-linking jobs in the public and private sector. (vii) Install proper regulation and monitoring mechanism. Creation of more jobs is the only and the best option to mitigate the problems of social effects of privatization in Nepal.

*Dr Manandhar is the Executive Director of Industrial Relations Forum. The writing is based on the much more detail country paper presented at the ILO sponsored south Asian regional seminar on privatization held in Kathmandu from November 24-26, 1999. The paper was jointly presented by Dr Manandhar and Dr Puskar Bajracharya.

Nepal’s Privatization A Confused & Unrealized Policy

-By Rishi Lal Shrestha

About a decade ago when the performance of public enterprises was evaluated, they were found to be inefficient and ineffective, and thus Nepal embanked upon privatization. The PEs were a constant drain on the government budget, wasteful of scarce resources and overmanned at every level. To overcome all these deficiencies in the public sector, the government decided to privatize PEs and sought active participation of private sector for dynamic economic change in the national economy. A ‘Liberal Economic Policy’ was also introduced with drastic changes in policies relating to trade, industry, monetary system etc. The new Economic Policy of the then newly elected government was taken positively by all concerned with acceptance and appreciation.

Nepal’s private sector economy has considerably changed now compared to the sixties, when this sector was not as active as today and capital accumulation was not in existence to establish large-scale industries. As a result, many PEs were established and expanded through bilateral or multilateral grant or aid. These enterprises were expected to deliver goods and services to the people and to increase investment. But because of many factors, the public enterprises could not operate efficiently to achieve their objectives, and on the contrary, in recent years these have become burden on the government. Privatization is not only expected to increase the efficiency and output of the enterprise and to save scarce public fund from being drained out so that it could be put into better uses on social and economical services. It also provides an opportunity to the private sector to play a more active role to establish a more open and dynamic economy.

In the year 1991/92, a time table was set for privatizing forty-nine public enterprises within four years and liquidating or restructuring most of the others within five years. But the process floundered due to political situation of the past couple of years though all the governments of those days expressed their commitment for encouraging more active participation of private sector in the national economy and for privatization. But the real life situations is different.

Reviewing one decade of progress in privatization does not give an encouraging indication. The total gross operating loss of PEs, which in 1991-92 stood at Rs. 1145.5 million, reached Rs. 1317.6 million in 1997/98. This year (1999/2000) it was expected to privatize Butwal Power Company, and Nepal Tea Development Corporation. But they are still in process. Similarly the privatization process for Rastriya Banijya Bank and Himal Cement Company are pending. The strong will of the government seen in 1990 is now lost.

In trading business, private sector has always been active in Nepal. PEs in trading activities are the major drains for public funds. In the year 1997/98, total capital employed in such corporations was Rs. 1227.5 million (Rs. 500 million in 1991/92) and gross loss was Rs. 1383.3 million. HMG/Nepal had identified them as needing to be privatized at the earliest as they were having negative gross profit every year. In the same way, service related utility corporations were targeted for restructuring. But that has not been achieved yet, rather more capital is being pumped into them. Capital employed in this sector was Rs. 27585.50 million in 1991/92 and Rs. 72899.00 million is estimated for 1998/99 - an increase of a hefty 164%. The impact of past privatizations on production, price, employment, etc are not seen considered since no remedial measures are being taken as many privatized manufacturing enterprises are still, either not operating or very poorly operating.

In a decade of privatization, HMG/Nepal has been able to decrease Rs. 11442 million capital employed in public enterprises operating in manufacturing and service sector. Hydropower projects like Khimti and Bhote Koshi are nearing completion through private and foreign investment. But privatization and liberal economic policy have not yet been able to attract significant investment into Nepal from foreign or domestic investors as has been the case in other countries. In Asian context of privatization, the year 1999 was a record year. It is expected that the year 2000 will be more aggressive. Companies requiring capital for technology and energy sector are on the block of privatization. Thailand, Korea, Philippines and Indonesia are targeting privatization proceeds of 10 billion dollors whereas Nepal has not even drawn a privatization timetable with a target.

In Nepal, the stock market has shown tremendous improvement in recent days. A public offer of a private bank’s shares was fifteen times oversubscribed. But the public’s inclination to invest in financial institution and the liquidity available in the stock market are neglected by the government in privatization process.

The public utilities and service enterprises under the restructuring category have added more capital from the government fund without any restructuring and change. Nepal Electricity Authority (NEA) has now been made a customer of independent power producers (IPPs). However, the benefits of less project and generation costs are not going to be enjoyed by the consumers, as they still have to depend on NEA’s inefficient distribution system. High distribution cost caused by this organization’s inefficiency and bureaucracy cannot be expected to go down under the existing structure of NEA. Private or foreign investment cannot be expected to be forthcoming in such a situation.

In recent months, HMG/Nepal has permitted private participation in telecommunication sector also. Five paging companies are competing in the market. This has created additional employment and has resulted in introduction of high technology, which could have been possible only with foreign grant or loan in case of a public enterprise. At the same time there also are indications of attempts from some players to gain monopoly position, as can be seen from the cut-throat competition going on by offering free pagers and free subscription. Liberalization must not be allowed to be a means to transfer monopoly powers from the public sector to the private sector.

Nepal’s economic activity is still dominated by public sector. After a decade of introduction of privatization and liberal economic policy in Nepal, signs of remarkable change are not yet visible. In such a situation ‘Privatization’ should not only be considered as a source of government revenue through proceeds, licenses, royalties, duties etc. General people are overridden by high tariff of public utility service sector. Consciousness is required to check tendencies towards monopoly, which should not be left unacted blaming inadequate law. Results of a confused and unrealized program will be troublesome, and can not he overcome by repentance.

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