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KATHMANDU -- The privatization process in Nepal is at
a crossroads. Last December, one of the two international bidders
for the state-owned Butwal Power Company (BPC) withdrew its
application blaming the government for not maintaining
transparency in the tender procedures and favoring its competitor.
Now, Independent Power Corporation (IPC), a British-American joint
venture, has also decided to withdraw its
application as the Nepal government had allegedly favored
Interkraft, its competitor and a Norwegian Company.
Nepali officials were prompt to refute the
allegations. "There is no question of any favoritism on the
part of the government," said the Ministry of Finance in a
press note. "We are committed to maintain transparency in all
the present and future procedures of privatization." As a
damage control measure, officials said they were considering
calling re-bidding for selling the majority stakes in BPC. But,
the Interkraft warned that it would not take part in any such
bidding. The ministry is yet to decide whether to negotiate with
Interkraft or call re-bidding.
"We cannot continue with a process where Nepal
ignores its own rules by favoring one bidder at the expense of
another," said Lord Moynihan, joint managing director of IPC.
Finance Minister Mahesh Acharya, however, said there had been no
irregularities as claimed by the IPC in what would be the biggest
privatization offer by the country.
The government had selected IPC and Interkraft for the
final negotiations to sell 75 percent shares of BPC with an
estimated total saleable asset worth Rs 830 million (approx. 11
million US dollars).
This was the first time the government was selling a
profitable company to the private sector. In the fiscal year
1997-98, the company made a profit of nearly Rs 220 million
(inclusive of tax and bonus). The BPC operates two power projects
generating a total of 17 MW of power.
Not only the BPC, the entire process of privatization
in Nepal is passing through a phase of confusion and uncertainty.
Right from the mid-1980s privatization has remained a matter of
controversy even within the government and among the major
political parties.
History of
Privatization:
Nepal's history of privatization is about a decade old. The Sixth
Plan(1980-85) provided for "selling" of unprofitable
public enterprises. The achievement was unremarkable except
selling of Chandeshwari Textile Factory and Nepal Chyuri Ghee
(Vegetable Ghee) Plant to the private sector.
In 1985, the then government came up with an
ambitious plan to sell 12 public enterprises in 12 months. But
this plan was never implemented. However, shares of Rastriya
Banijya Bank, Nepal Industrial Development Corporation and
Rastriya Beema Sansthan were offered to the public at premium
prices. The public response was very poor.
Donors’ pressure especially from the World Bank,
UNDP and USAID, has been instrumental in accelerating Nepal's
privatization program since 1988. UNDP, in cooperation with the
World Bank, assisted the Ministry of Finance in formulating
privatization strategy for Nepal. A privatization cell was
established in the Ministry of Finance in December 1989 to plan
and implement the privatization program. In 1991, the government
issued a document, which laid down the policies, modalities and
administrative mechanism for privatization of public enterprises.
In January 1994, the Privatization Act came into force. A total of
16 small and medium-sized enterprises have so far been privatized.
The main objective of the privatization program, as
set forth in the Ninth Five Year Plan (1997-2002), is to promote
the private sector participation in the economy with the role of
the government as facilitator and supporter of private sector
activities and to reduce the financial burden on the state.
The Privatization Act was passed in 1994 to provide
legal basis and institutional framework for the privatization
program. Ten public enterprises had already been privatized by the
time the law was passed. By the end of 1997, a further six
enterprises were privatized. The program has to date focused on
small losing enterprises and privatization has not contributed to
the broader objective of improving efficiency and economic
performance.
Political
Instability:
Since 1997, economic development in Nepal has suffered from
political instability. In May 1999, the Nepal Congress regained a
clear majority and reaffirmed its commitment to economic
development. Since then, however, there has been little change in
the development process and the privatization program has come to
a virtual standstill. The government had said that one enterprise
was expected to be privatized by February 2000.
Both the government officials and experts in Nepal
say that Bhrikuti Paper Mill which was privatized in 1992 is a
success story. Since its privatization, the joint Nepali-Singapore
consortium has doubled its work force and workers’
compensations, quadrupled its capacity and output and begun
exporting its products to Japan and India besides meeting the
rapidly expanding domestic demand at competitive prices.
But the case is not as satisfactory as Bhrikuti Paper
Mill with rest of the companies now under private ownership. A
study commissioned by National Planning Commission in 1998
revealed that the rate of return on capital investment from public
enterprises was negative from 1989 to 1992. Though there had been
a shift in the rate of return in recent years, it was little more
than two percent between 1995-96 and 1996-97.
Annual Report:
According to an annual report titled "Targets and
Performances of Public Enterprises FY1997/98-1999/2000,"
published by the Ministry of Finance recently, most of the 43 SOEs
evaluated were performing very badly. "This poor performance
is due mainly to poor management systems, lack of competitiveness
vis-a-vis the private sector, and undue political intervention in
the operation and management of the enterprises."
Unsuccessful privatization have been due mainly to the failure on
the part of government to adequately evaluate the technical
expertise of potential investors and their ability to meet there
proposed financial commitments. The raising of the cash has been
the primary factor in most cases, said the ministry report.
So, what is the root cause of the problem? It is the
lack of a clear vision on the part of the government, say
analysts. "In our case, PEs are only an extension of the
government bureaucracy. They don't want to take risks by standing
up to the pressure from the senior bureaucrats," said Nanda
Lal Joshi, a retired bureaucrat. "The most crucial thing is
how to strike a balance between the autonomy of PEs and the
authority of the government."
A study commissioned by the Department for
International Development of the British government early this
year (conducted by Gopal Ghimire, L. Kinley and Dr. Rabindra K.
Shakya) concluded that the Government is not committed to
privatization, nor is there consensus among the leaderships. The
study has identified two major reasons: First, public perception
is far from positive. Although there is broad consensus for
privatization as a policy, there is criticism about its
implementation. Second, protracted decision-making and a lack of
clear authority contribute to delay, and in turn, undermine the
confidence in the process. Potential investors become less
inclined to participate and enterprises suffer from uncertainty
about their future status.
Experience from the developing countries suggests
that the benefits of privatization are only reaped in the
long-term. And the governments have to undertake the process in a
difficult environment where it is hard to gain public support and
consensus, mainly because of the immediate hardships experienced
for restructuring public enterprises.
The government therefore has to be convinced that the
policy will contribute to future economic development and then it
has to be determined to carry forward the process of
privatization, often in the face
of strong criticism. Without political will, the consensus
among the leaders and champions, privatization will either fail or
experience protracted delays. As it has been the case in Nepal.
The government policies and procedures should be designed
to ensure that they are transparent, and there is accountability
and justification for its decisions and actions. The government
should also undertake a more consultative and open approach in the
future.
Privatization
Procedures:
Based on recommendations from the Privatization Committee, chaired
by the Finance Minister, the government sets privatization
policies. The Privatization Cell in the Ministry of Finance
functions as a secretariat to the Privatization Committee. The
London-based Adam Smith Institute (ASI) of the U.K. is serving as
adviser to the Cell. Though the procedures may vary from case to
case, generally the process of privatization involves inviting
bids, normally offering all, or a large, controlling share of the
enterprises to the investors. Once a SOE is approved for
privatization, the Privatization Cell undertakes a thorough
investigation and analysis of its operations employing services of
domestic and expatriate consultants with high-level expertise in
each relevant sector. Its recommendations are screened and
endorsed by the Privatization Committee and they come into effect
only after the Council of Ministers approves them.
The most preferred method in Nepal has been a complete sale
of assets, or the sale of a controlling majority shareholdings.
Following an evaluation process, the preferred bidder is invited to complete the
transaction by signing the sale and purchase agreement.
Critics say that lack of clear objectives
and lack of transparency mar Nepal's privatization initiative.
"Privatization as a policy tool has been used primarily with
an eye on the short term liquidity gains rather than a genuine
concern to enhance operational efficiency of the privatized
enterprises," said Dr. Narayan Manandhar, a management expert
who has done research on Nepali SOEs. "The state may have
been able to lessen its financial burden by liquidating or
shedding some of the loss incurring PEs. But the consumers are yet
to reap benefits of privatization in terms of reduced prices,
service quality and better choice and competition."
Officials say they have learned from the past and
will pursue the privatization program in a much transparent way.
Addressing the Nepal Development Forum (NDF) meeting in Paris in
April this year, Finance Minister Mahesh Acharya pledged that
privatization of public enterprises will continue. For the
enterprises that remain in the public sector, transitory measures
to improve their governance and management effectiveness will be
immediately implemented. “ Such measures will help control
further deterioration in their standings and make them attractive
for private sector takeover," said the Minister.
Within a month, the government announced
that there would be no more political appointments at the
management level in the SOEs. The Council of Ministers said in May
that it would immediately dismiss all employees other than those
appointed to the duly created posts in the government bodies and
state-owned organizations.
Benefit of
Privatization:
Experts say that a resource-poor country like Nepal could benefit
a lot by vigorously pursuing the privatization program.
"Privatization is not a "magic pill" that cures all ailments, but
it can save the government millions of dollars which it could usefully
divert to important and essential services, such as education and
medical facilities. It would change weak, tax-consuming
enterprises into stronger tax-paying enterprises, attract foreign
investments and international management expertise, " said
Douglas Clark, an expert with the Adam Smith Institute who is
serving as resident advisor at the Privatization Cell. "It is
not the complete cure, but it is a major ingredient to a
cure."
According to Clark, government attempts to
restructure SOE's usually fail, and delay the inevitable result.
What is missing is that they never provide the most essential
commodity, the all-important factor of personal responsibility.
Private sector leaders, too, insist that the government must show
what it wants to do. " There must be a transparent policy on
privatization. It should not seem that the government is only
shifting its problem," said Pradip Kumar Shrestha, President
of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).
"Currently the government is privatizing sick industries only
but it should also privatize the profitable units. At present, the
delay in the process of privatization has cost our economy very
much. We are not happy with the way the process of privatization
is getting delayed. The government is not only losing private
sector's confidence; it is also sending wrong signals to
international investors."
The officials have said they will privatize some two
dozen more SOEs--ranging from the controversy-ridden Royal Nepal
Airlines Corporation to profit-making monopoly Nepal
Telecommunications Corporation -- within the next three years. But
recent trends are not encouraging as the officials have failed to
reach the much-needed consensus among political parties,
intelligentsia and workers community. Recent cases like that of
BPC has even emerged as spoilsport. Failing to win confidence of
investors, both foreign and domestic, will be costly for Nepali
officials.
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