National 4 (Spotlight Weekly)

‘The Government Must Privatize Almost All PEs’

— BISHNU BAHADUR K.C

Auditor-General BISHNU BAHADUR K.C has spent almost his entire career in the Auditor-General's Office. He spoke to KESHAB POUDEL at his office on Monday afternoon on the financial position and other aspects of public enterprises. Excerpts:

Your last annual report painted a bleak scenario in public enterprises (PEs). Do you think things can change for the better ?

Of course, the situation of most of the PEs is bad, but it is not beyond control. There is a need for several initiatives. Such initiatives are required, first of all, from within the management. The situation of Nepal Electricity Authority will improve only through initiatives taken from within. The government, too, needs to monitor the activities of PEs like the NEA. This does not mean intervention in day-to-day activities of such enterprises. Frankly speaking, one has to take vigorous efforts to bring normalcy in the PEs.

How do you see the state of PEs and government undertakings?

The state of PEs is very pathetic, as most are incurring huge losses. Annual auditing is a way to judge the performance and status of any institution. A large number of PEs are yet to show their auditing results. In the last four years, we have seen some progress, as more than two dozen PEs have started auditing. This is a good beginning. For example, our annual report 2055 found that 16 PEs had completed up-to-date auditing. Among the 16, nine had prepared the final report, while seven had drawn up the preliminary report. In 2056, 19 PEs initiated auditing and 12 prepared a final audit. In 2057, 20 PEs initiated auditing, but only nine completed the final auditing. In 2058, 23 PEs did the up-to-date auditing and 12 prepared the final report, with 11 having reached the preliminary stage. Twenty-seven PEs have completed up-to-date auditing. Of them 13 have final auditing. Annual auditing is the primary responsibility of any business, trading company or industry. It is a matter of pride to see this increase in the number of agencies with up-to-date auditing. The trend has changed, but there still are chronic organizations with bad record of annual auditing. Nepal Transport Corporation, for instance, has already privatized. The Timber Corporation of Nepal, which does not have funds to pay salaries, has expressed its inability to pay auditors. But we have seen some progress.

Do you see any room for hope?

There may be many reasons to keep PEs. Some may require enhancing the service to the people. Frankly speaking, the majority of them are institutions with monopoly business, while some PEs are competing with the private sector. I don't see any reason why monopoly organizations should lose money. Nepal Rastra Bank, Nepal Telecommunication Corporation (NTC), Nepal Electricity Authority (NEA), National Trading Ltd, Nepal Oil Corporation and Nepal Water Corporation have monopoly business in their respective fields. There is no question of loss. The NTC and the NEA are sole organizations in the telephone and electricity sectors. Janak Educational Materials Center, too, has a monopoly market in the distribution of textbooks. The government is providing all kinds of facilities to them. Janakpur Cigarette Factory was a huge profit-making body with monopoly market. As soon as it faced competition from the private sector, it incurred loss. Whatever the objectives of these institutions, loss and profit are the measure of their performance. Auditing is important tool of evaluating the performance of such organizations. We can see loss and profit only through the final auditing. I have not seen any reason to be satisfied with the performance of PEs.

How do you evaluate PEs?

If we see the annual auditing reports of PEs, we can see how seriously deficient their financial and other performance has been. We have seen some major disasters in the public sector. For example, Rastriya Banijya Bank is in virtual bankruptcy. It may collapse any day. I am doubtful whether handing over the management to an American company will be enough to rescue the organization. Unless we change our attitude, behavior and character, outsiders cannot do anything to improve the situation. The government must consider what will happen to the country in case the RBB collapses. Who will pay the money to poor people with small savings? If the condition of the NEA deteriorates further, what will happen to our power supply? The government must consider the future of such PEs.

How much money has the government invested in them?

The government has invested in 101 corporate bodies. Among them, 36 is fully owned by the government, while the remaining are under partial and majority control. The government holds shares in 101 corporate bodies but it does not have any record to show how much has it invested in them. The differences in share amount investment in billions. It may be tolerable if it is million rupees. When we verify the record available by the Finance Ministry with concerned institutions, the difference of amount is in billions of rupees. According to record provided to us by Finance Ministry, the amount of share investment is Rs.218.8 million. Our report compiled through various channels showed that the government has invested Rs.325.5 million in shares. The government doesn't have exact records on its share investment. There is no unit for monitoring, evaluation and utilization of such share. The government even does not bother to monitor whether PEs audit their annual expenditure, pay taxes, dividends and other bank loans. In another words, PEs are discarded institutions. The government has put in share in PEs but nobody is there to evaluate how such institutions are functioning. The funding is allocated for some institutions that do not exist. Even a decade after the liquidation of certain PEs, the government is still allocating the money for them. The liquidation process is incomplete. There is no time limit for liquidator. Even after seven years, the liquidation of the Tobacco Development Company is yet to be completed. Some Koshi-Mechi and Seti Mahhkali Rice Export Companies were sent to liquidation nearly two decades ago, but the process is yet to be completed. Although Harisiddhi Brick and Tile Factory was privatized many years ago, the liquidator is yet to formally complete his task.

How do you judge the performance of PEs?

The performance of any business organization is judged on the basis of profitability and rate of return. If we look on the basis of final auditing, the situation is dismal. On the basis of annual report of 2055, we completed auditing of 26 PEs. According to the report, the government has invested Rs.4.78 billion as a share capital, with Rs.3.87 billion in loss. It was an 81 percent loss. In the final report of 2057/58, we had completed auditing in 18 PEs, the government has share capital of Rs.9.22 billion and loss is 10.97 billion. This is a 110 percent loss. These figures are enough to show you what position the PEs are in.

What is the rate of return from profit-making PEs?

Some PEs have been making good profits. In 2055, we completed auditing of 12 units, including Nepal Rastra Bank and Nepal Telecommunication Corporation. The share capital of these institutions was Rs.3.87 billion and total profit was Rs.4.51 billion. In fiscal year 2057/58, the share capital of 12 organizations was Rs.4.13 billion and profit was Rs.6.38 billion. This is a good position. But the question is, how much money do these institutions return as dividend to the government? If we consider dividend, the government got a total return of 0.22 percent on its share, excluding the amount of Nepal Rastra Bank. The government's record shows that it has share in 99 PEs and government undertakings but Nepal Rastra Bank alone returned 1.10 billion as a dividend. Other 98 PEs returned just Rs.342 million as a dividend. This amount was 0.22 percent of total investment. It is even lower than half percent. When we analyze the entire phenomenon, one can see the gross violation of PEs. The situation of 2057/58 is somehow satisfactory, since the profit margins were 1.22 percent excluding the return given by Nepal Rastra Bank. If we add the return of Nepal Rastra Bank, the profit may go up to 9 percent. Some PEs have been operating in loss and the government continues to bail out them by investing money to feed employees as share, subsidy. On the other hand, profit-making PEs are not sharing the profits. The NTC makes profit but it pays a very nominal amount as dividend. Nepal Rastra Bank makes profit but it, too, is using it to establish Employees Relief Fund and other purses. It returns a very nominal amount. This is the overall situation.

The Auditor-General's Office has been pointing out gross misuse of funds in PEs. Whose responsibility is to monitor them?

It is the responsibility of Ministry of Finance to see the overall performance of PEs, but there are line ministries which appoint board members and general managers have also bigger role to monitor how PEs are functioning and what their financial status is. The Ministry of Industry should monitor the activities of the industries under it. For instance, the secretary of Information and Communication is the chairman of NTC and likewise finance secretary is the board member of Nepal Rastra Bank. Minister of Water Resources is a chairman of the board of Nepal Electricity Authority. They must monitor what has been going on and what is the status of their concerned PEs. The board members representing the concerned line ministry and Finance Ministry should monitor and take responsibility for the good and bad that happens. The board of any PE is like a super cabinet that can take decisions about its future. The board members must follow how the PE is functioning and what the financial position is.

How do you see the role of board members?

I think the board members have not played the role they are supposed to. The Ministry of Finance's role is not just to invest but also to seek returns. The situation is worsening. It shows that the government cannot make any profit by operating the corporate bodies. If the government continues to control the PEs, they will have to face more problems. I don't see any possibility of rate of return when the government has to pay for salaries and other benefits of PE employees. We have already listened to enough rhetoric about privatization and also privatized some PEs, but we have also seen how privatized PEs are functioning and how much loan they acquired. The government must disassociate from almost all PEs and privatize them.

What is the revenue contribution of PEs?

In 2055, the PEs returned Rs.1.13 billion to government and Rs.2.33 billion in 2058 dividend. PEs also pay other indirect revenues in the forms of income tax, contract tax, excise duties and Value Added Tax. We don't have any system of evaluating the revenue. Many PEs use money collected under various revenue heads. The board members have to evaluate all kinds of expenditures. Had all the PEs completed their auditing in a timely fashion, the government would have received additional revenue. In many profit-making PEs, the profit margin is inflated. They show profit by adjusting property. Many PEs have the tendency to overlook the reality. Even financially weak PEs are not fair about their expenditure. When we find such tendencies, we use remarks like unqualified, qualified, adverse opinion and disclaim. In the case of the NEA, we disclaimed their auditing. Disclaim remark is given to those PEs whose transactions and expenditures are exaggerated. Despite our remarks, the NEA has not improved its position. We did a similar thing to the NTC and the RBB. But we have not found seriousness on the part of the government. For example, the RBB has shown a profit of about Rs.20 million in its audit, but our report has found that the bank was actually losing the money in the billions. We cannot do anything when nobody is serious about our remarks.

Do you see any possibility of improvement?

I don't see any possibility of improvement of the performance of RBB just by handing over its management to foreigners. Unless Nepalese change our behavior, improvement will be impossible. We need experts from foreign countries, but they cannot guarantee that the situation will improve. Nobody has a magic wand. The government should consider how long it would keep such an economic mess in its hands. We use money received from privatization to feed employees of other PEs. I think the government has no alternative to going in for privatization. We don't recommend privatizing Nepal Rastra Bank, but the government has to hand over other PEs where private money can come in. The government cannot make profit by working in the way it has been.