Nepali government’s agenda. And as it seems both the government and the labor have grown some wisdom teeth over the last ten or so years of the country’s experiment with privatization.

One such new wisdom on the part of the government is that it would be better to bring down the number of employees to zero before sending a public enterprise to the block. And this learning seems to be derived from the steady improvement in the business of former PEs privatized after jettisoning all the employees. This new principle is applied most recently in Hetauda Textile Factory Ltd. (HTFL) for which bids are now being collected. The same interpretation holds true also in case of the four PEs closed down more recently - Nepal Transport Corporation, Nepal Orind Magnesite Industry, Cottage and Handicraft Emporium and The Timber Corporation of Nepal. The employees in all of these units are now being sent home paying some severance allowance. That is to be followed by sale of the assets of the units concerned.

And the learning is being extended also in case of factory relocation as seen in the government’s decision to shift the factory of Himal Cement Company somewhere outside the Kathmandu valley. Though the employees of the factory are trying to preempt the government’s move by a writ petition filed with the Supreme Court, there seems to be fundamental difference between the stance taken by the Himal Cement employees now and that taken by the employees of Bansbari Leather and Shoe factory in 1990s. Whereas the Bansbari workers had successfully stalled the relocation of the factory and squeezed out a handsome retrenchment package for themselves before the new owners could shift the factory out, the Himal Cement workers now want job security and are ready to go anywhere their employers would like to take them as long as they are given the job. Those in Bansbari had insisted that as they were originally hired for a work in Kathmandu valley they were to be given a job within the valley itself.

This means the newly acquired wisdom on the part of the labor is that as privatization is the new wave and therefore cannot be warded off altogether, it is better to concentrate on mitigating the possible adverse effects on labor from privatization, rather than opposing the privatization process itself. Views on those very lines were expressed by the trade union leaders in a recently held workshop in Kathmandu on "privatization and role of trade unions". Though the labor leaders said that they "oppose blind privatization", they also said that they were not against "selective privatization".

Privatization in Nepal has been causing much hue and cry that it does not deserve. So far the number of employees rendered unemployed owing to privatization may not have exceeded 5000, as presented in the seminar by Khilanath Dahal, the General Secretary of DECONT, one of the three largest trade unions of the country. And this is quite insignificant when compared to the total labor force of the country (9.4 million, according to the Nepal Labor Force Survey 1999). Similar is the situation when it is compared in terms of total value of the asset privatized. The total volume of privatized assets so far has been about one billion rupees only whereas the net value (gross value minus accumulated depreciation) of the fixed assets in 39 of the PEs still to be privatized was Rs. 50.871 billion as of mid-July 2000, according to the latest annual report published by the finance ministry. This fact together with the powers it derives from the emergency rule seems to have emboldened the government to pursue the privatization program in the recent days with added vigour.

About the recently closed down PEs, people generally think that they are closed down for privatization. But experts point out that it is in fact the other way round. "PEs will have to close down if they are not privatized", says Dr. Narayan Manandhar, the Executive Director of Industrial Relations Forum (IRF), a unit of FNCCI specialized in labor relations.

And officers in the PEs also agree. When asked to estimate how long their respective PE would remain as a government organization, the officers in units like Gorkhapatra Corporation, Hetauda Cement, Royal Drugs and Nepal Drinking Water Corporation put it below five years in average while those in Nepal Telecommunication Corporation, Nepal Electricity Authority and Nepal Television expect it to be longer but put it below 10 years. After that timeframe, it is feared that either the enterprise will be privatized or it will be closed down in the same manner as the four units were closed down recently. And if the recent trend is any guide, the government is going to close them down as early as possible, retrench the workers and put the assets up for sale.

This strategy is likely to be more effective than the others, a study has shown comparing the performance of two large and labor intensive units privatized – Raghupati Jute Mills Ltd. (RJM) and Harisiddhi Brick & Tile Factory Ltd. (HBTF). According to the findings of a report prepared by Dr. Manadhar for ILO and presented in the workshop, RJM was an almost dead unit and has been made alive and vibrant after privatization, whereas HBTF that was operating in a break-even situation and had a very good potential, is now turned into a sick unit after privatization. And the distinguishing feature in RJM and HBTF was that while RJM was privatized after retrenching all the employees (except some security personnel), in HBTF all the employees were handed over to the private party with condition that they could not be fired by the new owners.

The last three years were spent without significant privatization deals though Nepal Tea Development Corporation (NTDC) was finally handed over to a private party as a rare example of privatization during this period and Agriculture Project Service Centre (APROSC) sold to National Agriculture Research Council (NARC). The major failure of the period was in Butwal Power Company Ltd. in which yet another bidding process is going on after the failure of several such attempts in the last two years. Another example is the returning back of Bhaktapur Brick Factory to the government after the private party tried in vain for sometime to run it profitably. More interesting perhaps is the case of Biratnagar Jute Mills in which each of the several efforts of the government to entrust the management to a private party has ended up in one or the other scandal.

Still experts say, delay does not necessarily mean failure of privatization. They give the example of Britain, which took eight years to privatize 14 enterprises and of Malaysia, which took three years to privatize a container terminal. The point is, the success or failure of the privatization process should be judged not by the time taken to effect the ownership transfer but by the post-privatization success of the enterprises in terms of operational expansion, efficiency, employment generation, industrial peace and the like. Though both of RJM and HBTF have expanded production capacity and increased employment RJM has also increased efficiency as reflected in profitability, but HBTF has failed in efficiency.

The phenomenon also calls for specialized agencies for the privatizing each PE. The same readymade method may not fit all. This also calls for efficient selection of the private party best suited to take over the enterprise. Similarly, it also requires proper "social dialogue", as ILO calls it, among all the stakeholders, including the labor.

Now that the labor has started being more flexible and less belligerent than in the past, may be the government will hear more to what the labor says about the privatization of the enterprise concerned. But the trade union demand for an active role right since the beginning of the privatization process may not be as acceptable to the government given the inclination of the trade unions to particular political parties.

RJM & HBTF Cases Lessons for Privatization & Labor

Though their comparison may be out of order, there are similarities and differences in the two privatized units sampled for this study – Raghupati Jute Mills (RJM) and Harisiddhi Brick & Tile Factory (HBTF). Both units are old and large manufacturing units with high labor intensity. RJM is a case of sick and dying industry, virtually closed at the time of privatization. HBTF is a case of a potential unit made to operate as a sick unit. HBTF has passed a life span of nine years since its privatization in the hands of new owners. This is a substantial period for an enterprise to make necessary adjustment for changes. However, the track record of post-privatization performance does in no way show good financial health of the company. With high debt ratio, the company is technically an insolvent company. Unless it changes its future course, the company has little chance to survive.

Compared to this, RJM is still at an early stage of privatization. It has just passed five years in the hands of new owners. The government has imposed a five-year ban on the sale of assets and issue of shares. Therefore, it is difficult to say what will happen to the company in the near future. Yet, going by performance track records, we can say that, compared to HBTF, RJM is a success story. The new owners have, at least, put the company back on track, though the future of the company rests largely on the state of international jute market, possibly the import and export prices of jute. As the company has transformed itself from an import substitution unit to an export oriented unit, that too, primarily by processing of imported raw jute, cost efficiency will be a critical factor for the company’s survival.

Production of HBTF (in millions)

Total Production of Bricks Per Staff in HBTF

Apart from privatization, a large number of factors must have accounted for this performance difference. In both cases, apart from the ownership change, market changes have also taken place. Both companies now operate in a kind of competitive environment or without any kind of government support or protection that they used to enjoy during government ownership. Therefore, it could be illusive to conclude anything on the performance of these two companies solely on the basis of "before-after" comparison. One has to take into consideration the changes in the context within which the performance took place.

In spite of these difficulties in arriving at a point of consensus, some definite learning points do emerge from a study of these two units.

1. The concept of social dialogue

In the cases of HBTF, it was possible for the government to go for privatization only after the workers were lured to "improved conditions" after privatization and "guaranteed jobs". The unfounded assurance of better wages and working conditions have generated a kind of frustration and dissatisfaction among workers. In the case of RJM, it was the panic factor, of the company going in to liquidation, that led to mass resignation of employees and workers.

The need to "sell" the idea of privatization to employees and workers is far more important in those units where the intensity of labor is high or the labor is a critical factor in the production process. In future, it is suggested that the government should run workers’ education campaign to impart knowledge about privatization to workers and employees in those companies listed for privatization.

2. Employee retrenchment is better than job guarantee scheme

One important lesson is that it is better to retrench employees and workers than to transfer them to new owners in the name of the job guarantee scheme. The two cases present opposite case of job guarantee scheme. In the case of HBTF, employees and workers were assured of their jobs and facilities in the new company. While in the case of RJM, except some security staff, all employees and workers were retrenched before the company could be handed over to the private management. The steady contrac-tualization and casualization of jobs in HBTF indicates that the new owners were reluctant to take employees, at least, on the same terms and conditions of employment that prevailed at the time of government ownership. Even after nine years in operation, the management has to ruminate on "deadwood" and the "public sector hangover" of its staff members. The management of RJM has, at least, had no such excuses though the feeling of job insecurity runs high among staff members.

The no redundancy clause has been found to be totally ineffective in Nepal. Irrespective of the redundancy clause, downsizing has taken place in almost all enterprises. The widespread feeling of job insecurity among staff members has also nullified the effectiveness of the no redundancy clause. The management too feels that the clause has effectively tied its hands when it comes to personnel management.

Instead of having a job guarantee scheme and forcing new owners to take in employees, it is far better for stakeholders to shed all employee liability and give new owners a fresh chance to begin from the beginning. Only after new owners have agreed to take "old timers" will it be better to invoke the no redundancy clause. Alternatively, the clause can again be made flexible by adding time margin for retrenchment, say, the retrenchment could take place only after three or five years from the date of privatization. This would provide enough time for workers to make up their mind to quit or hold on to their jobs.

3. Employee retraining and redeployment

Once new owners refuse to take "old timers" employee retraining and redeployment scheme appears in the government’s agenda of privatization. However, apart from some in-house training provided to workers by the new management, retraining and redeployment are relatively untouched areas in Nepal. Only a small number have opted for voluntary retirement scheme and joined the self-employment scheme. Many had opted for wage employment and this has often been in the same enterprise. Instead of job guarantee scheme, job creation scheme could be a far better option in privatization. This can be effected by giving incentives to new owners for creating new jobs. Unless people have the security they need to adapt to the future, they will seek security by trying to preserve the past. Obviously, the answer to this problem is retraining and redeployment.

4. Post privatization policy measure

The traditional business concept of "good once sold are not refundable" cannot and should not apply in the case of privatization of state-owned enterprises. The government does hold responsibility even after privatization. This has been amply demonstrated by the case of labor disputes arising out of relocation decision of Bansbari Leather and Shoe Factory. Though a similar situation may not happen with these two cases, the government needs to be proactive in its approach. If the new management decided to change the form and structure of the company, what would be the implications on the whole process of privatization? Suppose, the new management of HBTF, sensing the non-viability of brick production business, diversified or went into real estate business, can the government intervene in such a situation and force the company to remain in the brick production business? A privatized textile unit is already transforming itself into a hospital business. This can happen in other enterprises as well. There is a clear need for post privatization liability both from the government and new owners.

5. The background of the investors is a crucial determinant

The experience and background of new owners together with their access to market, raw materials or technology seems to be an important factor in post privatization performance of privatized units. This is a plausible factor behind the successful turn around of RJM. Post privatization performance evaluation becomes immaterial if raising revenue is the only factor behind privatization.

6. Employee compensation policy

So far, the bargaining power of workers has been the only factor determining compensation rates for employees who have been terminated from the company before or after privatization. Because of this, varying rates have been applied. In the case of HBTF, at first the employees were given one months’ salary for every year of service while this was reduced to 20 days salary for the deal introduced later. There is a lack of policy. Excessive reliance on bargaining strength of the unions may generate adverse effects. For example, the one shot victory of workers to extract maximum benefits from the government in Sri Lanka had led to a bad precedence in managing labor relations in the privatization program. The question of equity also appears in the agenda. If bargaining power is the determining factor for employee compensation, then the state should effectively promote trade unionism in SOEs.

7. Employee share ownership

In all the cases of privatization, the government has allocated five percent shares at 25% discount to employees and workers. In the case of HBTF, 5% shares were equally distributed among all staff members. Since the market price of the share has come down considerably and the company is incurring huge losses, there is little to gain from holding the shares. As per the condition in the privatization agreement in the case of RJM, the shares will be issued only after five years of operation. The introduction of employee share ownership plan has not brought any significant change in the operation of the company, nor has the attitude of the workers changed. It is therefore, no more than a symbolic gesture toward employees from the government.

8. Trade unions

New owners have a different approach toward unions. Unlike in the time of government ownership the unions are now cautious while dealing with the management. Thus privatization does contribute toward a new kind of labor relations in the company.

Excerpted from "Privatization in Nepal, A Study of Two Cases", by Narayan Manandhar for ILO Office, Nepal. All the charts used in this and previous section are based on data from the same report.

"We had problems, but not of labor"

Diwakar Golchha, Director, RJM

How is your experience with RJM privatization?

We had a sentimental value attached to that mill because it was originally started by our founding Chairman late Ram Lal Golchha. It was a closed mill and we could not inspect it before taking it over. After we took it over we found the mill heavily cannibalised. Many parts of the machines were missing. We had to carry out an overhauling exercise that stretched over three months. Still it took two years for us to reach the capacity of 10 ton, the maximum capacity that HMG management had ever attained. There were imbalances in the capacity of various sections. So we had to make heavy investments. We also diversified the product line and added jute carpet. Now we are fully geared to produce 32 tons per day. We’re employing almost 2000 plus workers. One of our biggest decisions was to accept all the old workers under our management. Even those older than 60 years were give chance to show their performance. So you will find in the mill now workers who are even over 65. The children of retired workers are given second priority in employment. That gave a very strong psychological impact which helped in efficiency enhancement.

What other major steps have you taken to improve employee performance?

Jute industry in the past was managed in traditional way. Now RJM is highly computerized. The employee performance is recorded at each moment. Thus there is a very meticulous monitoring system for performance evaluation.

Do you think the RJM model of privatization, in which the buyers did not have to accept the employees, will be good for all future privatization?

Yes. If employees are retrenched before privatization, there will be no psychological problem of transformation from one style of labor relations under the government sector to another under the private sector.

What were the major problem you faced in the mill after you took over?

We faced a lot of problems, but they were in the technical and financial field, rather than in labor relation. As per the agreement, the property was supposed to be allowed for hypothecation to get working capital loans. But later we were not allowed to do so. It created liquidity problems for us. Now that we have paid the full amount of the value agreed for the property, the government should release the property.

Are you meeting the targets you had set in the beginning?

Most of the industries in Nepal are running at 65% or around of efficiency level, and in RJM I think we are at almost 80 or 85%. Still we have not achieved the international standards. We use almost 65 to 70 hands per ton of output whereas in Bangladesh they use 40 hands and in India 38 hands. Per spinning frame we use two workers whereas the rate abroad is one worker for two spinning frame.

What about raw material?

Fifty percent is available at home, the rest we have to import. There are several reasons for this. One is the lack of jute seeds. After the closure of Jute Development Company, there is no agency producing jute seeds in Nepal. Farmers have to arrange for the seed on their own. The technicality is such that if they want to produce seeds, they cannot sell the fibre. To import seeds from Bangladesh or India has its own problems, e.g. of quarantine. The farmers want to grow jute because it is a very good cash crop and the price is remunerative. But they are constrained by the unavailability of seeds.

What about the market?

There is not much market at home, because polyethene is freely used as the cheap substitute. We export 95% of our products to India. Both India and Bangladesh have banned polyethene.

"We’re trying for diversification"

Kishor Bhakta Mathema MD, HBTF

How is your comment on the experience of HBTF privatization?

It is a company privatized nine years ago, when privatization was a quite new concept, about which almost nobody, neither in the government nor in the private sector, was so familiar. People had an impression that privatization meant simply the government handing over the property to a private party. Though foreign consultants were there the government was not clear about the modalities. In HBTF case, as in the other two enterprises privatized with it, the government followed the "sale of assets and business" modality. They also adopted other modalities in case of other units privatized later. But none of them have given any better results. Some people generalize and blame the overall economic situation of the country for the unsatisfactory results. But talking about HBTF, I say, the modality of privatization adopted in this case was not appropriate. It was a highly valued unit because of the highly valued land as its property. Its turnover was however only around Rs. 45 million. It was an unbalanced unit: low volume of business but huge capital investment. It was like a huge buffalo that yields little milk but eats a lot of fodder.

Was that the only reason for the failure of the company to post profit?

There also were three other reasons. The geological report made available to us with the tender document showed that the clay available was enough to meet the requirement for the coming 37 years. But that conclusion, as it turned out later, was based on the land of the farmers, not on the land of the company. We could not force the farmers, as the government used to do, to vacate their land for the factory to take out the clay. There also was politicization. The political party that was in the opposition then was in control of the local situation and tried to prove privatization policy of the government a failure. And the third reason was the labor. We had taken about 600 laborers as part of the privatization deal. They could not adjust to private sector style. As most of them were quite aged they were at the declining phase of productivity.

What about the future?

We waited several years and also experimented with clay brought from other places. But unfortunately, the market also declined in the meanwhile as the construction business declined in Kathmandu valley.

So, we proposed at the AGM in May 2002 for diversification of business from making ordinary brick and tiles to ceramics so as to achieve higher turnover with the same quantity of clay. Now we have already been producing such products and thus we have been reducing dependency on imported tiles to some extent. Now we are thinking also about ways to utilize the idle land owned by the company that is lying around the factory premises. One such project under consideration is a hospital in joint venture with a foreign investor. We are also thinking of partial relocation to a place nearby but outside of Kathmandu valley.

What do you say about the allegation that while HBTF is running in loss, the NB Group is gaining handsomely?

NB Group owns 72% in this company. So 72% of the profit, if it is there, is to go to NB Group. In such a situation, there is no incentive to hide the business. Moreover, it is a transparent company. Its accounts are properly audited.

Based on your experience what is your suggestion about the modality to be followed in future privatization?

In case of small units, even outright sale of assets and/or business may be alright. However in big projects where the scale of operation is very low compared to the capital investment, it is better leased out. This is for the benefit to the government as it will be earning steady flow of revenue while the lessee will not have to bear the burden of idle assets.