Vol. 3 :: No. 3 February, 2001 (Magh-Falgun)

Inner-view

"Hand it over to younger generation"

One may call him the doyen of Nepal’s hotel industry. After steering Soaltee Hotel Limited through nearly four decades into a conglomerate which presently has interests in tea, hydropower and tobacco, and also in trading of vehicles and chemicals, Chairman Prabhakar SJB Rana is to retire later this year. Before he could do that, Management Association of Nepal (MAN) honoured him by awarding him the "Outstanding Management Award". Talking to Business Age, Rana shared his views on various contemporary issues including the hotel workers' demand for 10% service charge and on the likely ripples that his retirement would send across the country’s business community. Excerpts

It is rumoured that you are planning a retirement. Is that true?

That is a fact, not a rumour. Our company’s rule says that one must retire at 60 years of age. My term was extended on special request of the Board. So I will stay there till the end of 2001 when I will retire as Chairman and CEO of Soaltee Hotel Limited. But I may remain as Chairman of other companies of the Group, retiring one at a time.

If we have to go forward, the actual power must shift to the younger generation. You cannot bring change just by wishing for it. There has to be a structural change, to borrow a term from the World Bank, and it has to be real – not only in name. This will send two signals to the business community, I think, though they may not be accepted. One is that it is time the younger generation is given the power, authority and responsibility that they deserve. This will also give some sort of opening that if Nepal is to compete in the globalized market, in the free world market system, the family-controlled concept should slowly disappear. There has to be a professional growth. I firmly believe that in today’s globalized world, ownership and management should be separated. One’s returns would be better if the business is properly managed. These are the two likely messages that may come out.

I would not be presumptuous to offer any advice. Having been involved in the business I would say that there is nothing wrong in a family business as such. But does a family business mean that an owner automatically makes a good manager? If you train your sons and relations and by sheer merit they succeed, there is nothing wrong with that. I will cite an example. The Birla family concerns divided their businesses and Aditya Birla’s group was considered to be doing better than most. That was because Aditya Birla initiated, perhaps for the first time in India, the concept of difference between ownership and management. He began to professionalise his companies. Unfortunately, he died at a very young age and everyone thought that this group would suffer. But in five or six years, his son, Kumaramagalam, has taken his group to even higher scales, not because he was the son but because he was already trained for that. So if you train your relations, they should not be barred from coming into management. But they should come to the management level on sheer merit, not because they own the business.

To my mind, it will still take more than 15 years before a Nepali can manage, a five-star hotel. Look at the situation in India. How long did it take for an Indian to be able to manage a five-start hotel? India was much ahead of us in the hotel industry. Hotels like the Oberoi and Taj accepted Indian managers perhaps reluctantly, after a long time when the Indian government barred these hotels from importing manpower from abroad. These hotels were also given limited foreign exchange, so they had to make a choice. But then they did it and some were successful. Hotel Oberoi was one of them while maintaining its lead in the Sub-Continent. Other hotels too were doing all right, but that was because they had no choice. As soon as the restriction was withdrawn, the major hotels, including Oberoi, began bringing manpower from outside. Now does that mean that the Indian managers were not competent? It is a matter of competition and choice. When the government says, "I am allowing a free market’’, the government’s role is to facilitate, not to control and dictate. The businessman has a choice, and he will choose the best. In Nepal, the hoteliering concept came quite late. When Boris Lisanovich first started it here, his concept of hotel was different from what the hotel industry became later. For Boris, his restaurant, which was his strength, was more important than the totality of the hotel. Therefore, he concentrated on producing excellent food. Though it was he who gave the impetus to the hotel industry and tourism, his concept was related more to running an inn. By the time tourists began to flow, the hotel business converted from an inn to an industry. The difference is that when you need to borrow money from the bank, you have to present documents to obtain the loan, and then you are recognised as an industry. Compared to Europe and developed countries, hoteliering came very late here. Therefore, the idea of training for a general manager with the concept of industry took time to emerge. Secondly, if you go through various reports on tourism, you will find that one strong reason for tourists coming to Nepal is that they find the Nepali people very friendly. That very strength of a Nepali has negativity for management. Management has to have both stick and carrot. But Nepalis as managers cannot wield the stick when required.

We brought MARG, which later became ORG-MARG, because we felt that Nepal lacked a proper, scientific way of research. And without that, there can be no marketing. Although Nepal Tourism Board has the money, it has not been able to do what was expected of it due to a lack of proper records. So, when I was a member of the Board, I felt the need for such an institution. And we decided that it was the right time to bring such an enterprise. And because the market was not that big, we decided to bring 10 or 15 business houses together to create the market volume necessary for ORG-MARG. We began with a small stake of Rs 50,000. We thought it would help generate business. But the move went the wrong way. Business houses were not willing to cooperate for various reasons. So the concept was not successful. ORG-MARG was very unhappy because they found the whole environment not correct. So I offered my partners in Nepal that we would buy them. And after we took it, it was doing well. But during the restructuring, we found that we did not fit in. We had started it and it was doing well and could go on its own. However, we felt that this was not the area we should be in. Basically, Soaltee Group will be investing in three areas - tourism, agriculture related and hydropower. Then of course, we have a small trading company, which will continue. So the research concept did not fit in. We continued with the company for a year and a half until MARG could find the right partner. And it is only recently that they have felt confident to go on their own.

I wouldn’t say we have restrained, I would say we have been more cautious. One reason is that in today’s world, we could not go into every sector. So we made a conscious decision that we would only enter sectors within the three parameters that I talked about earlier. We did the shoe factory and other things but they weren’t successful because we did not have our strength in those areas. Secondly, we had to pump a lot of money into the power project. Our financial capability was limited and so we had to stop. The third reason is that the business and investment climate today is not investment friendly.

The reason is simple. Our knowledge in this field is basically in the five-star category, the top of the market. If you look at the growth of tourism in Nepal, the top-of-the-market growth is not there. Meanwhile, other five-star hotels also have come up. Therefore, for that category of business there is a limitation already. As a public company and a custodian of public fund, we will not go where there is no reasonable return. We are a transparent company and we must make money out of the operations of the hotel genuinely. Also, in the first three years after multi-party system when the market was open and the government really moved on with things, we felt that industrial cities like Biratnagar, Nepalgunj, Birganj were lacking proper hotels. And we felt that a multi-brand chain like Bass Hotels & Resorts would be the right choice for these places. We purchased a plot of land in Biratnagar in preparation to open a hotel there as it looked very viable because of the Arun III project. Our calculation was that out of the 80 proposed rooms in the hotel, 50% of the rooms would have been constantly utilised by the project. The premature end of the project killed the viability of hotels. Now purely on the basis of Nepali business, not even a 60 room Holiday Inn will survive. But if the opportunity comes, we will be very interested.

I don’t understand why people go into the hotel business, particularly large and expensive hotels. The return is very poor in this sector. And that is why we said that the 10 percent service charge is not the right time to be levied. We are not saying ‘no’ to the service charge, just that it is not the right time. We made a study and found out that out of every Re 1 of revenue, 22 paisa goes into the salary and welfare of the staff and 14 paisa goes to the government. The owners of the hotel only get 9 paisa. Now why would anyone be in this business? To my mind, labour is as important as other stakeholders are, because without the labour the business cannot be run. But the situation here is lop-sided. It must always be a win-win situation. If one side loses, then there is a problem. Soaltee will be debt-free soon, but think of those big hotels that have borrowed heavily and have raised money from the public. The ten percent service charge levied now would affect the banking sector. The second part of the picture is about return. The replacement value of Soaltee has been evaluated by an internationally reputed evaluator at around Rs 2500 million. The net profit is around Rs. 40 million. So the internal rate of return (IRR) is not even 3 percent. Here the people get carried away by the amount of dividend the company gives. But the long-term investor will look at the IRR. Compare the IRR of my hotel with that of other companies within the Group, the return can not be considered as satisfactory.

The dispute is totally unnecessary. Tourism has dropped 11 percent. Even if you have a really aggressive marketing policy like Thailand along with the resources at hand, it will take two years to bring the growth up. If you look at the tourism growth in Nepal throughout its existence, the highest rate achieved is 7 percent. So it will take us between 2 to 3 1/2 years to attain the previous level again. Regarding the service charge, like I said earlier, we never said ‘no’. But the unions went in the wrong direction putting a sword over our head and threatening to go on an indefinite period of strike. The problem can be solved very easily if they withdraw that sword. Also, it is now a question of ego and face-saving since they have come this far. They know that they will be ruined if the hotels decide to close again. And this time it will not be for a day, if we close now we will forget this year. We will close indefinitely, until the problem is resolved. But I am apprehensive that if the hotels close down for seven days, even the government will fall. On the other side, if the unions change their stance, I think the hoteliers will agree to their demand in principle, but not implement it right now. We will first look at the time the tourism takes to come back on the track. And also, with it, the government and the unions must act to turn the Labour Act from its present form of Act for Labour. That is also one major reason for investments not coming into Nepal. One of the principle problems faced from the very beginning is that of labour. The cash effect of the one-day closure came to US$ 1.8 billion. Now taking the multiplier effect of 4, the figure comes to US$ 7.2 billion. The American Ambassador said very recently that the annual bandhs in Nepal wipe away the effect of the aid amount that USA provides to Nepal in a year. So we have been losing US$ 14 billion in bandhs every year. And perhaps he is hinting that, if that is the case, why should USA provide the aid? The contribution of the tourism sector to the country’s GDP is 3 percent, which, if the threat of strike continues, will drop down by 2 percent. Talking about the labour law, it says that the labour must be given 10 percent bonus and 5 percent for housing irrespective of the condition of the company. So the man who puts in the money may not get anything but the staff will still get their share of benefits. How can that be justifiable?

Not at all. Who threatened to strike? The hotels closed down for a day, but why did that happen? There is also something called the Consumer Protection Act. The closure would see the travel agencies being hit first here and abroad . If you fail to provide what you promised, the consumer will file a case against you. And what will be the loss? Therefore, the travel agencies were demanding to know whether we would shut down or not. So where is the question of moratorium?

This is where the government will have to come in. As the government is a facilitator, it will have to bring in the proper policy. But I think it will take some time to bring in quality tourism. We made the first mistake by always going for quantity, never for quality. Hotels like the Fulbari and Hyatt, and even other five-star category hotels, are second to none in the world. In fact, we are better from the service point of view. For a similar hotel in Europe or USA, I will have to pay around US$ 200 and for a personal service not up to our level. But quality cannot be achieved through efforts of one sector. Look at RNAC. It is not bothered to fly in time and even cancellations are not announced in time. For quality, everything will have to be put together. Nepal was a quality market earlier. Bhutan is a quality market now. And I take my hat off to them. They made sure that the mistakes Nepal made were not repeated. Looking at the investment Bhutan made in comparison to Nepal, they probably get 10 times more return. Bhutan is not as big as we are but they look at tourism as a purely economic activity, from cost and return perspective. From the hoteliers point of view, there is an over-supply of hotels here. Despite being a debt-free company, my ability to give dividend might go down from about 40 percent this year to 20 or 25 percent next year. So, am I serving the country’s economy? No. Also, our main attractions, apart from mountains, are the historic cities and monuments. But we have not been able to maintain them. When you look at the supply and demand factors in other countries like Singapore, Thailand, Hong Kong and Malaysia, first the demand was created and then there was supply to meet that demand. More demand was created and more supply came in. However in our case, the demand did not rise but we flooded the market with supply and more supply. And that was not the case with only five-star hotels but all other sectors, like trekking.

The next one will be Middle Bhote Koshi because it makes sense to us since it is the same project. But you see, Soaltee Group alone cannot bring in these power projects. We need partners from outside. Power development in today’s situation is difficult.

It was not only me. Rather, it was a team effort. We did our homework well. CII was there to support us. The whole atmosphere in both countries was opening up, politically and bureaucratically. At that time, in both the countries, the politicians were masters and the bureaucrats were servants. There are many factors. Regarding the opinion of some of the businessmen in India that they are hurt by the free access to Nepali exports in the Indian market, we have to look at this on a micro and macro level. On the macro level, we will point out that considering the total production and consumption of India, our products merely amount to 1 percent or even less. They might argue that Bihar and northern Utter Pradesh are getting affected. But my argument is: Are we dealing with the Indian government or do we need to deal with state governments? We have a genuine reason to say, "although our exports rose nearly 300 times, and though yours didn’t on the same scale, because you already had very large exports, the gap in balance of payments has not narrowed down". But isn’t that what free market is all about? We are both gaining. If some of the businessmen in Bihar and UP cannot compete with Nepal, what will happen when Belgium ghee comes in? With economic right, the people will want the best quality at a competitive price. Another genuine point is that of tariff. Nepal’s tariff is lower than India’s. In copper wire, for example. Now when both countries are moving towards WTO, India lowering its tariff can only solve this problem. So both Nepal’s and India’s tariff must come to zero level. Yes, India helped us by offering unilateral concession, so Nepali government should look into the Indian concern. And it in fact has looked into it. It increased export tariff on ghee. Here, I would also like to make a point on the role of the media. Media has every right to talk about the macro. But leave the micro to the business itself. Even the government should leave the micro to us. We know the problems better and can solve them in due course of time.

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