 |
||
|
||
COVER STORY |
|
||
|
||
COVER STORY |
PUBLIC
ENTERPRISES Burdened by excessive
politicization and poor management, public enterprises (PEs) are on the verge of ruin. In
a country like Nepal, where the private sector lacks the massive funds needed to establish
and manage vital industries, PEs filled the vacuum in the early 1960s to accelerate the
production of goods and services and to develop human resources. What were assets in the
country's early development process are now turning into liabilities. Even profit-making
PEs are gradually transforming into sick units today, consuming funds the government
collected through previous phases of privatization. If policy makers continue interfering
in the appointment of boards and managers, most of the remaining PEs would be forced to
close down, pushing the economy into deeper chaos By KESHAB POUDEL A few days after Prime Minister Lokendra
Bahadur Chand assumed office in October last year, the government dismissed all the heads
and board members of public enterprises (PEs) appointed by its predecessor, saying they
had brought little more than political connections to their jobs.
The process continued after the
expansion of the cabinet. Another seven general managers of corporations, most of them
professional employees, were removed. The vacancies on the Nepal Electricity Authority
(NEC) and Gorkhapatra Corporation boards were filled by another set of
"professionals". In the 12 years since the restoration of
multiparty democracy, successive elected governments were accused of massively misusing
public funds and manipulating PEs for political ends. The Chand administration, which
assumed office amid widespread public hopes of a fresh start, has hardly proved different
in terms of handling PEs. With more than 300 lucrative positions
vacant in various PEs, the concerned ministers are said to be preparing to recruit new
sets of professional board members and managers. However, the abrupt dismissal of existing
managers, some of them efficient and capable, has created a leadership vacuum in many
units, threatening to worsen an already forbidding situation. Some profit-making
organizations are projected to lose money next fiscal year. Under the 30-year Panchayat regime, 12
years of party government and the Chand administration alike, PEs have been the proverbial
goose laying the golden egg for politicians and their henchmen. "When Dr. Bal Gopal
Vaidya, a renowned economist, was dismissed to pave the way for another appointment to the
board of the NEA, there was confusion as to the definition of the professionals,"
says an analyst. "Regardless of who comes to power, the problem is one of
attitude." Be it the May 1987 study conducted by the
Integrated Development System (IDS) on financing public-sector expenditure or the findings
of the Corporation Reform Recommendation Committee led by then-National Planning
Commission (NPC) member Dr. Shanker Sharma in 2000, experts have drawn much of the same
conclusions on what ails Nepal's PEs. The diagnosis: overstaffing, political intervention
and lack of clarity in objectives.
"Most chief executives belonging
to the bureaucratic cadre lack both managerial training and professionalism. Since they
are hardly held accountable for results and since their career development does not depend
upon their performance in the enterprise, their loyalty is not so much to their
institutions as to their mentors in their parent institutions," said the IDS report.
"They are, thus, unable to resist political pressure. Many chief executives have been
known to appease power brokers in various ways, e.g., by offering employment to their
cronies and even by driving funds from their enterprises for unknown and possibly shady
purposes. The public enterprises are also regarded by the ministries and departments
funded by resources from the public enterprises." Dr. Sharma, who presented his findings 13
years after the IDS did, drew similar conclusions concerning the process of appointment of
PE managers. "We have changed the system but the attitude remains similar to that of
past in the appointment of managerial position in PEs," said Dr. Sharma, who
currently serves as vice-chairman of the NPC. The Ministry of Finance yellow book,
"Targets and Performance of Public Enterprises (FY 2000/2001-2002/2003)", backs
Dr. Sharma's conclusions. Weak political commitment and determination, political
interference in day-to-day management decisions and activities, selection of unskilled,
inexperienced people in top-ranking positions, lack of professional management skills in
board chairmen, directors and general managers, frequent changes in chief executives and
board of directors and overstaffing are among the major factors that have stood in the way
of efficiency in PEs. The Auditor-General's annual reports have
been pointing out instances of irregularities and mismanagement in PEs for the last 15
years, but hardly any effort has been made to institutionalize the organizations and boost
efficiency. "We have produced voluminous reports pointing out irregularities, but no
one is seriously concerned about correcting them," Auditor-General Bishnu Bahadur KC
told SPOTLIGHT.
PEs have played a very important role
in the process of industrialization and commercialization in various sectors. Although the
state has incurred heavy losses in operating PEs, the indirect benefits have been immense. Thirty-seven PEs currently operating in the
country employ more than 65,000 people. Some units are producing cement, sugar and other
vital materials, partially substituting imports and saving precious foreign currency. PEs' Contribution to Revenue According to the Ministry of Finance yellow
book, the returns from government share and loan investment in PEs are not satisfactory.
The government had invested Rs.76604.1 million in 40 units up to fiscal year 2000/01, of
which share and loan investment represented Rs.19339.4 million and Rs.57264.7
respectively. But it received only Rs.245.7 million in dividends during the year,
representing a mere 1.27 percent of total share investment. The government received Rs.7452.8 million
from various PEs in 2001\2002, including Rs.1102.8 million in income tax, Rs.2,400 million
in dividends, Rs.1,750 million in interest, and Rs.2,200 million in paid principal.
According to the Economic Survey 2002/2003, the government's net cash flow to PEs was
Rs.1772.2 million. In fiscal 2000\2001, the government
received Rs.8,784.3 million from the PEs in dividends, interest, tax and other forms. It
drew Rs.2,928 million in income tax alone. Since the government closed down four PEs
during the year and annual production of others declined, there was a fall in income tax
receipts in 2001\02 over the previous year. According to the Economic Survey 2002/03,
capacity utilization of many industries like Birgunj Sugar Factory, Lumbini Sugar Factory,
and Himal Cement Factory plummeted compared to previous years. Despite mismanagement and over-utilization
of capacity in PEs, the private sector is yet to rival their income tax contributions.
According to the Economic Survey, the private sector paid Rs.1,571 million and Rs.2331.7
million in income tax to the government in fiscal 2000/01 and 2001/02 respectively. Of the 17 privatized PEs, more than half
have closed down. The remainder have demanded they be declared sick industries in order to
avoid income tax. This situation mirrors the harsh reality of both the political misuse of
PEs and the private sector's deficiencies. Although the government-owned cement,
sugar, brick and cigarette industries are incurring losses, they continue to pay the
largest amount of direct and indirect taxes to the state. The contribution of PEs in the
government's annual revenue ranges between 18 to 20 percent, of which 14 percent
constitutes tax revenue, including import duties. According to studies, tax revenue
collection from PEs was more or less constant (between 14 and 17 percent) throughout the
1980s. According to the Economic Survey 1987/88,
the flow of funds between the government and PEs during the previous fiscal year was
healthy. Net flow of funds from PEs to the government in terms of taxes, principal
interest and dividends exceeded by nearly Rs.750 million those heading in the other
direction in terms of share capital, loan capital and subsidies. Amid continual government instability
following the change in the political system in 1990, the PEs' performance has suffered
sharply. Although inefficient management, politicization of employees and uncertainty
remain a major hindrance to the future of Nepalese PEs, few see the situation in its
proper perspective. The restoration of democracy has virtually turned the PEs into
institutions of trade-union anarchy. Some monopoly PEs have called strikes demanding an
increase in pay scales, bonus and other facilities. Despite losses in real terms, though, the
PEs' direct and indirect revenue contributions to the state are still larger than the
private sector's. In the last 10 years, the government has gained by shedding financial
liability for the privatized PEs. But it has lost millions of rupees in terms of income
tax and other revenue from those units. Despite incurring losses each year,
Janakpur Cigarette Factory (JCF) pays more in income tax and other revenue to the state
than does the privately owned largest cigarette producer, Surya Tobacco. The JCF paid
Rs.118.1 million in VAT, Rs.408.1 million in excise duty and Rs.47.3 million in other
forms of revenue, according to the Ministry of Finance yellow book. Lumbini Sugar Factory met only 46.84
percent of its annual production target, producing 62,491 metric tons of sugar, 4,700
liters of spirit and 28,780 molasses. However, it paid Rs.49 million to the government in
income tax, VAT, excise and other duties. Although the PEs' total revenue contributions to
the national economy have declined over the years, they remain a major source of
government earnings. Changing Situation Ever since the political change of 1990,
the PEs' contribution to the national economy has seen many ups and downs. Because of
indiscipline, politicization and misuse of funds, some PEs have incurred heavy losses,
becoming a liability to the government. In many cases, rumors of privatization have
created uncertainty and panic in PEs. Although the government listed more than two dozen
PEs for privatization during the Ninth Plan (1997-2002), only one was privatized. Because
of rumors and uncertainty, some PEs like Himal Cement Company, Trolley Bus, Sajha Yatayat
and Birgunj Sugar Factory incurred losses on such a scale that the government finally had
to close them down. The closures shifted the burden of employee
facilities and retirement benefits to the government. The state is forced to spend
millions of additional rupees to pay salaries and other benefits of such employees. The
closures have yielded further losses in terms of lost revenue and funds that would have
accrued from privatization. "This is a very unwise policy on the part of the
government. If it wants to privatize corporations and industries, it must list them and
announce the modalities of ownership transfer," says an analyst. "Had the government privatized
industries in proper running condition, the nation would not have to bear heavy losses or
sell them at throwaway prices," the analyst said. "By closing industries, the
government loses annual revenue worth millions of rupees. If government wants to privatize
them, it must start proper procedures before it is too late." Since Udayapur Cement Factory, Hetauda
Cement Factory and Lumbini Sugar Factory are faring badly, the government must determine
how it intends to continue operating them. If it is willing to privatize the units, it
must go for that in full force. "It took five decades to establish such industries
and infrastructure, but successive governments have been destroying public property within
a few months," says a political analyst. History Of PEs PEs have a nearly half-century-long history
in Nepal. The first one emerged in 1953 with the partial nationalization of Nepal Bank
Lid, the first commercial bank established in the private sector in 1937. There has been a
rapid growth in the number of PEs after 1956. The number crossed the 60 mark in 1989/90,
including 51 non-financial and nine financial enterprises. Most of the country's PEs were
built as turnkey projects under bilateral agreements and with the help of international
donors. Nepal Electricity Authority (NEA), Nepal
Telecommunication Corporation (NTC) and Nepal Water Supply Corporation (NWSC) fall under
the public utility sector. Equity investment of the government in these three enterprises
reached Rs.11,321.8 million up to fiscal 2001\02, which was 58.5 percent of the total
government investment of Rs.19339.4 million in PEs as a whole. These three units have always been
lucrative for ministers and politicians under all political systems, ostensibly because of
the potential for patronage, manipulation and abuse. According to the Auditor-General's
annual report, more than 100 vehicles of the NEA and dozens more belonging to the NWSC and
the NTC, apart from other property, remain unaccounted for. The saga of Nepal's PEs has its own
features. "Unlike in other countries, where nationalization was primarily responsible
for state ownership of business and industries, Nepal's experience presents a different
story. The lack of development of the private sector, the prevailing economic dogma of
state intervention and the availability of foreign aid in the form of non-key projects
have contributed to state-ownership of business and industries in Nepal," says
Narayan Manandhar, executive director of the Industrial Relations Forum. A PE has been defined as a productive
entity/organization owned or controlled by public authorities, which sells its output in
the market. In some cases, these tended to be capital- and/or technology-intensive
operations that were regarded as essential to economic progress or to national security,
such as mining, hydropower and petroleum products. When Nepal was opening up to the world, the
private sector had neither the capital nor the technical and managerial skills to
establish new industries, especially in areas where they were designed for import
substitution. The cement, diary, sugar, cotton and cigarette industries emerged as part of
such a program. At one point, Nepal's three cement industries fulfilled over 80 percent of
internal demand. The two sugar factories supplied over 50 percent of market requirements
and the nation had attained self-sufficiency in cigarettes. In such areas as banking and heavy
industry, the failure of the private sector to respond to what the government felt were
good investment opportunities was not perceived for what it really was - lack of interest
because of too little profit potential and too high an investment risk. From the 1960s to
the early 1980s, there was a surge in the establishment of PEs. Contribution of PEs PEs have played a very important role in
developing the country's human resources, upgrading technology, offering new techniques
and formalizing a corporate culture. In the media sector, the contribution of the
Gorkhapatra Corporation is immense. Royal Nepal Airlines Corporation contributed to the
emergence of private airlines, making available pilots, ground staff and marketing
professionals. Public banks provided much of the manpower
the new private banks required. Moreover, they inculcated the culture of commercial
banking and reinforced the importance of deposits that went on to support private-sector
banking. The National Construction Company, for its part, paved the way for the emergence
of private construction firms. Had PEs not opened in such diverse areas, the private
sector would not have had such easy access to the trained pool of manpower it has
benefited from. Bansbari Shoes and Leather Factory
transformed the traditional method of shoe-making. It helped to improve caste-based
shoemakers of the valley to come out with competitive and new technology. Likewise, the
Harisiddhi Brick and Tile Factory changed the face of construction. Cement factories and
sugar mills reduced dependency on imports. The Diary Development Corporation has played
important role in enthusing farmers to go for milk production. Reform or Privatization The time has come to seriously think about
the future of the remaining PEs. If they appear to be ineffectual in the government hands,
would they fare any better in the private sector's? The longer the country remains mired
in a heated debate over the future of PEs, the greater will be the economic and other
losses. If the government really wants to privatize
the remaining PEs, it must go for immediate and prudent action. If not, it should come up
with alternative arrangements. The way managers and boards are being hired and fired
leaves little room for optimism. It looks like many more PEs would go the way of Himal
Cement, Trolley Bus and Sajha Yatayat - closure without knowing what to do about them. With Birgunj Sugar Factory unable to find
funds to start operations, it seems inevitable that the country's second modern sugar mill
would be sold at throwaway prices. In the absence of proper nourishment, the goose may end
up dead before we know it. |
Send your feedback to the
editor: spotligh@mos.com.np |
