FORUM (Spotlight Weekly)

‘Attitude To Privatization Has Changed According To The Party In Power’

— DR. DOUGLAS CLARKE

Resident advisor to the Privatization Cell at the Ministry of Finance, DR. DOUGLAS CLARKE has gathered first-hand experience of how the privatization process would come across bottlenecks, one after another, in a country like Nepal. He saw the environment deteriorate with prolonged political instability and expanding insurgency. But he has not given up hope. Before leaving Nepal at the conclusion of his five-year long DFID-sponsored assignment, professor at the London-based Adam Smith Institute (ASI) spoke to BHAGIRATH YOGI about his experiences and lessons for the future. Excerpts:

How do you see the present state of the privatization program in Nepal? What have been the major bottlenecks?

Currently, privatization appears to have become more acceptable to the government. In the past three months, there has been more positive action towards privatization to the point where on one occasion the Minister of Finance "by-passed" the necessity of acquiring the Privatization Committee's approval, some 6-7 State Owned Enterprises which were presented to the cabinet by the minister direct in view of the constant drain on the financial resources by these SOE's. Procedural matters in the privatization process have been, and still are to an extent, cumbersome and time consuming, but the process and the procedures have been modified to assist in "speeding up the process". One of the main reasons for the lengthy process was being able to obtain decisions, and the non-availability of some members of those committees to attend meetings where those required decisions were needed.

How do you see the government's recent decision to close down four public enterprises? What needs to be done further?

The government's decision to close down a number of perpetual loss-making SOE's should have been done much earlier. However, the government has never had the required financial resources to "pay-off" all these workers prior to privatization. No potential Investor would contemplate investing in an over-manned, continually loss-making operation. An investor would, however, soon assess as to whether the SOE to be privatized, when relieved of its excess labour and with the introduction of good management and good governance, would see the real potential of the enterprise. With the hoped financial assistance that donors had promised to assist in meeting the government's liability in respect of the redundancy payments, the government would be able to dispense with these "sick & ailing" enterprises. If such financial assistance were given, the government would be expected to pay into the "revolving fund" the proceeds of the sale of the assets of the SOE being privatised.

What is the state of privatization of Butwal Power Company (BPC) ó which would be the biggest privatization in the country? Who should be blamed for the unnecessary delay?

BPC is now currently in the advanced stage of privatisation for the third time. The technical evaluation of the bidder who had failed to "pre-qualify" in the previous bid has now been completed, and the final report of the evaluation sub-committee given to the chairman of the main evaluation committee for acceptance. If this is so, then the chairman will present that Report to the two concerned ministers to seek approval to proceed to the opening of the financial Bids. It would then be required to evaluate those bids taking into account the amount of the bid, whether payment is to be up-front or by deferred terms. Also, the currency in which payment is to be made would also have to be taken into account. If payment is to be deferred, then a DCF calculation would be necessary. This process of evaluation would take approximately five days and the report presented to the minister. The report would then go to the Privatization Committee and then the cabinet for approval to commence negotiations with the preferred bidder. The sale and purchase agreement would then be negotiated between the preferred bidder and the government. There would then be a period of two weeks from the conclusion of negotiations and the "completion date". Anticipated conclusion is by end of February. The unnecessary delay as you have termed it, was not intentional but was forced by circumstances. On the first occasion, one bidder accused the government of favoring the bid of the other. The government had no other option than to declare the bids null and void. On the second occasion, one bidder failed to pre-qualify in his technical bid, and the other failed to give the correct number of shares for which he was bidding and therefore had to be declared "non-compliant". We are now on the third and, hopefully, the last time BPC will have to go through the privatization process. At least things appear to be more positive now on all sides, and it will be a good thing for Nepal. In the private sector the consumer will eventually benefit when the time comes for the company in the private sector, can supply power direct to the consumer and not through an intermediary, NEC, for then power will be cheaper, the service better than when it was in government control.

How do you see the government's commitment to privatization? Is the Privatization Cell well equipped/authorized to push forward this process?

I believe that the government has improved its commitment to privatisation, but this will obviously depend on the government in power at the time. Unfortunately, the attitude to privatization has changed according to the party in power. One has to accept that there have been many other factors, which have made the privatization process lengthy, particularly concerning the "self interest factor". Privatization is in itself a time-consuming exercise and should not be rushed if one is to do the job properly and a great deal of work is involved. It is an exercise, which is an important element to an improvement in the economy, and it requires a great deal of experience and understanding to make the privatisation program successful. Unfortunately the Privatization Cell has not had the opportunity to be involved in many foreign interest bids and it is important that the training process through working with experienced consultants in the privatisation process. The cell has the nucleus of making a competent team, but they will still require some technical assistance for a few more years. Progress has been noticed since some recent incumbents to the cell have arrived, who are dedicated to making a success of privatization.

It seems that none of the entities privatized in the past are doing well now. How can the government justify privatization in such a situation?

Some of the earlier privatizations have not been successful due to inadvisable modalities being applied and to method of selecting to the preferred bidder. The earlier privatizations were concluded with the obligation on the investor to retain all the employees. As one knows, the vast majority of SOE's were over-manned, so any serious would-be investor, naturally declined. Of a more serious problem was the preference to take the highest bidder, irrespective of if they had any previous experience in operating such an industry or operation. The problem lay with those who were advising the government on privatization at that particular time in the Privatization Cell.

How do you see your involvement in Nepal's privatization process? What lessons has the country gained in the last decade?

All who have been involved in the privatization process know by sheer experience that the previous methodology's practices were totally wrong, without real thought and indeed lack of experience.