NATIONAL10 [RELIGION (Spotlight Weelky)]

Government And Business Private Ventures And Public Vigilance

By Madan Lamsal

Finance Minister Mahesh Acharya believes it is not the government’s job to produce and sell cigarettes and bricks. However, the government has been doing precisely that — and other similar activities — through about 40 state-owned enterprises and some government departments. Obviously, Mr. Acharya has not been able to convince his party members about his conviction. Moreover, the main opposition CPN-UML party is known for its anti-privatization stance.

Privatization opponents think the government must be an omniscient entity able to pass judgment on what is right and wrong for the people. In their opinion, the private sector is wasteful and inefficient in allocating resources and tends to exploit the consumers by charging exorbitant prices for their products and services.

In contrast, privatization proponents argue that the government should limit itself to fields that naturally belong to it, and leave everything else to the private sector. The more the government leaves for the private sector the better, because, in their view, the private sector is always more efficient.

Nepal has gained enough experience to evaluate both arguments. Let us first take the examples of public and private enterprises in the same area. All banking and financial services companies in the private sector are reporting higher profits every year, while those in the government sector are accumulating losses. The same is the case in the cigarette and sugar, airline industries. To take another example, Gorkhapatra Sansthan, which used to make huge profits, is now going through a phase of rising losses, while private-sector newspaper companies are reporting profits. Those that are not making profits are working to improve their business, while the government-owned Gorkhapatra Corporation is doing nothing.

Perhaps profit alone would not be sufficient to judge the efficiency of an enterprise from the social perspective. This is exactly what the opponents of privatization argue. In their view, a loss-making enterprise could be providing some valuable service to the people. This is very hard to prove in view of the services Nepal’s public-sector enterprises are providing. Nobody believes Janakpur Cigarette Factory is serving some higher national interest while running losses. It imports tobacco, turns it into cigarettes and sells them to the Nepalese people at prices not lower than those of its competitors in Nepal. Neither the farmers nor the consumers are being served.

Let us now take the cement industry sector. While the state-owned cement factories are utilizing less and less of their installed capacities, cement imports are rising every year. The cement produced by these state-owned enterprises is not better than imports. Major infrastructure projects in Nepal, such as Kali Gandaki 'A', are using imported cement. Moreover, the government has not said the project has harmed the nation by using imported cement. Obviously, the imported cement is being used not only because it is cheaper, but also because it is available easily and meets the required quality standards.

According to the Finance Ministry’s annual report on public enterprises, the government had invested Rs. 17011.2 million as equity in 42 public enterprises as of July 15, 1999. The return from them as dividend in that year was Rs. 345.2, which gives a rate of return of only 2.03% on equity. Had that money been deposited in a fixed account with a commercial bank, the government would have received about 6% as interest going by the rate of interest offered by most commercial banks. If the amount so received in interest had been distributed among the people, the net benefit to the economy would have been higher, because people would then have a wider range of goods and services that they would be able to choose from with the additional money. This is a case of inefficiency in resource allocation.

Leaving everything to the private sector is considered by many as avoidance of responsibility by the government. But this is a wrong notion. In today's world, the government has another role to play – that of a regulator. The private sector can be entrusted with running a business, but it cannot be entrusted with the tasks of a regulator.

The Nepalese government has been performing the functions of a regulator of businesses, but it is also functioning as a businessman. By trying to play both roles, the government has been able to fulfil neither of its responsibilities effectively.

The case of the government being both the businessman and the regulator is analogous to a football umpire who is also a member of one of the competing teams. Private-sector parties hesitate to enter businesses in which the government is one of the players. Those who have already entered such fields in Nepal are complaining of being discriminated against. A case in point is the private-sector banks. If a government-owned bank fails to comply with existing regulations, they can escape penalties. If the same dereliction is noticed in case of a private-sector bank, it is liable for punishment. This gives the government banks an undue competitive edge over the private-sector banks.

Another effect of the government being both player as well as regulator is seen in the prices prevailing in various products and services. Despite the private-sector’s participation, consumers of milk products are not getting the benefit of lower prices and better quality products. Farmers who supply milk to the dairies are not getting remunerative price for their product. This is because the private sector bases its prices on those of the public enterprise. This is precisely what is happening in airline services. Had there been no public enterprise, the natural competition among the private-sector players would have reduced or increased the price to a natural level that would better reflect market conditions.

If we look at the history of these public enterprises, they were first set up with foreign assistance, mostly from governments that were against private-sector participation. Now that these countries have been privatizing their own state enterprises, the argument for the government running a business is no longer valid. Moreover, even if those enterprises were relevant when they were established, today’s realities demand that they be privatized. By remaining purely a regulator, the government will still retain its power to nudge the private sector to move in a socially beneficial manner.