The yellow book released by government for the fiscal year 2010-11 in the last week of July, 2011 reveals the disappointing performance of public enterprises (PEs) that seem adrift due to the lack of a clear and comprehensive policy.
Broadly, public enterprises are business entities established by the government—which is the major shareholder—with the objective of providing goods and services to people at reasonable rates. They, however, operate as autonomous bodies. The establishment of state owned enterprises gained momentum when the ‘invisible hand of the market’ failed to decipher the Great Depression of the 1930s. At that time, PEs were used as an instrument by the state to intervene in the market, and the PEs were successful in correcting distortions created by market failure, at least to some extent. Since then, all forms of government have been giving place to PEs in their economy in one way or another.
The yellow book clearly shows that all financial indicators for PEs in Nepal are below the satisfactory level of performance. The aggregate operating profit plummeted to Rs. 6.68 billion in 2010-2011 from 10.56 billion in the previous fiscal year. Fourteen PEs have fallen short of generating enough revenue to meet their regular expenditure. Of these, the Nepal Electricity Authority (NEA) and Nepal Oil Corporation (NOC) have incurred heavy losses of Rs. 6.09 billion and Rs. 5.11 billion respectively. Data also shows that while investment in PEs is going up, the rate of return is dwindling.
A huge proportion of public fund granted to these PEs has been wasteful expenditure. Many PEs have misused their debt from the government to meet unproductive regular expenses like salary and allowances. This practice violates the very principle of lending for capital formation to ensure sustainable future earnings.
The unchecked rise of unfunded liabilities touched Rs. 16.84 billion in 2010-11, an increase of 13 percent compared to the previous year. Other contingent liabilities, including retirement benefits, also seem enormous. If PEs fail to meet such liabilities, the entire burden will ultimately be transferred to government, thus reducing the budget available for other developmental activities.
The human resources management in government controlled enterprises is dismal, to say the least. The selection process is not transparent or fair, leading to incompetent employees being hired. Line ministers determine the Chief Executive Officers (CEOs), whose competency is tested on the basis of loyalty towards the respective political party, illicit financial incentives to party members and commitment to recruiting their cadres.
Each big political party has separate trade unions who regard themselves as directors of the company. Trade union members often pressurize the management to transfer and promote their favored employees. The demand for increasing remuneration and facilities is made without considering the financial capability of these undertakings. Peaceful methods of conflict management such as collective bargaining and social discussions, periodic interaction and dialogue are rarely followed. Instead, strikes, protests and mass resignation threats have become common practice. The CEO appointed on the basis of an open competition in Nepal Electricity Authority was compelled to resign due to the untenable and intense pressure from trade unions. No trade union really cares about improving the performance and well being of the enterprise.
Yet, as the book narrates, the contribution of public undertakings cannot be undermined. Public owned enterprises contribute nearly10 percent of the GDP (Gross Domestic Product). Among the 37 PEs, 21 are able to earn more than their expenditure. Around 32,383 Nepalis are directly employed by such enterprises. When the private sector in Nepal was in its very nascent stages and did not have the necessary technology and capital to produce the goods and services of national need, the PEs served as the bellwether of Nepal’s industrial sector. And even today, despite deteriorating financial conditions, many public undertakings are producing goods and services of public importance at comparatively low rates.
In Nepal, the establishment of state owned enterprises started after the dawn of democracy in 1950 and since then, the establishment of these enterprises has accelerated. After the restoration of democracy in 1990, the Nepali Congress-led government tried to adopt policies to be in tune with globalization, liberalization, deregulation and privatization. The Privatization Act, 1994 was enacted in order to privatize state-owned enterprises of Nepal so as to enhance their productivity by increasing their efficiency, and thereby, mitigating the financial and administrative burden on the government. After thirty public enterprises had already been privatized, the privatization policy failed abruptly because of the instability in the economic and political environment, and the process has now been halted.
However, public enterprises still have a significant stake in employment generation, infrastructure development, revenue mobilization and import substitution of the country, and therefore, a clear PEs policy needs to be formulated. The recent decision of the government to establish a Public Enterprises Directive board is welcome. It, inter alia, has the provision to recommend chief executive officers in enterprises through open competition but it alone can’t work and we need a broader policy.
As PEs benefit neither the socialist nor capitalist sectors specifically, political parties should keep away ideological biases and try to forge a consensus regarding the operation of public enterprises. The government, however, should stay clear of trying to increase its involvement in PEs, as some of its recent decisions show, so as to limit its role to that of a facilitator, promoter and regulator, but not operator.
As PEs still have great stake in job growth, infrastructure development and revenue mobilization, a clear PEs policy is needed.
Meaningless decisions like reviving the extinct Pes—the announcement to resurrect Hetauda Textiles and Krishi Aaujar Karkahana in the 2008-09—will only further erode the government’s budget. Instead, the privatization process should be resumed, with a fresh perspective after having taken into account lessons from past failures.
Only a few enterprises should be run by the state, mainly in areas of natural monopolies. The area where the private sector is capable, divestment will deliver promising results. In this regard, all the industrial sector enterprises and most of the financial sector enterprises including Nepal Banijya Bank, Nepal bank limited and Nepal Agriculture Bank should be privatized through disinvestment. NEA and NOC need immediate reform that will help them sustain themselves. After all, how long can the government bailout such inefficient companies by misusing the taxpayer’s money?
The author is section officer at the Ministry of Finance. Views are strictly personal