Fixing leaks in NAC’s financial pipeline

Nepal’s economic structure is an amalgamation of various combinations of public and private ventures forming a mixed economy. Besides the private and the public sector, inter-relationships also exist with cooperatives, PPPs etc. which produce a diverse range of actors working together in an economic system. A closer look at the players operating in each of these sectors reveals a wide variety of rules under which each are governed, thereby, giving each a distinct comparative advantage against the other.

At a time when Nepal’s private sector was non-existent (in some industries) or at a nascent stage (in others), the Government of Nepal established State-Owned Enterprises (SOEs) with an aim to create employment, provide affordable goods and services, and enhance national economy. However, over the years now, private sector has seen an impressive growth while some SOEs, or ‘public’ enterprises, have been consuming billions of rupees in capital, weakening the government finances, burdening the budget and undermining the national savings. Additionally, they account for the biggest proportion of non-performing loans on the books of the country’s banks. Nonetheless, these sick enterprises have been functioning, courtesy of government guarantees or bailouts, year after year.

Consider the aviation sector, for instance. The national flag carrier – Nepal Airline Corporation (NAC), previously Royal Nepal Airlines Corporation—is a visible example of an SOE mollycoddled by the government of the day. NAC has been a regular recipient of government support as the national carrier is drowned in debt. The carrier has managed to reap modest profits in the recent years, mainly because it has a monopoly on the ground handling services, especially for international flights, at Tribhuvan International Airport that enables the debt laden airline obtain a major share of revenue. Nevertheless, the carrier has a NRs. 781-million-loan amount to repay to the Government of Nepal and an even larger NRs. 11.59-billion loan to repay to other banks and financial institutions. As of today, the company is sitting at Rs. one hundred million worth of unfunded liabilities, i.e. liabilities that it has no fund to pay for.

The abysmal record of the state-owned NAC and the need to inject public funds to it over the years (in the form of loans) or potentially even in future (as evidenced by the massive unfunded liabilities) prove that the state ownership in aviation is failing. Additionally, the protection and support provided by the government serves only to distort any prospect of a level playing field, preventing privately owned carriers from competing effectively. The public interest can perhaps be better served by trying to access the efficiency of a properly regulated market through exploring other options of running the sector more effectively.

Since Nepal is not the only country that faces this dilemma, it might be helpful to see how other countries have tried solving the massive debts incurred by state-owned enterprises, especially concerning the aviation sector. Realising the need to remodel the financial structure their national flag carriers, and seeing privatisation as the effective means to do so, British Airways (United Kingdom) and Qantas Airways (Australia) were privatised in 1987 and 1995 respectively. Likewise, Air Canada, was privatised in 1988 due to surging financial difficulties and soaring competition from its private counterparts.

More recently, Saudi Arabian Airlines (2006), Aeroméxico (2007), Austrian Airlines (2008), Olympic Airlines (2009) have been privatised. Alitalia (2013) and Air Serbia (2013), have seen partial privatisation. The plan behind taking away all these airlines from direct state control has been to improve their financial performance alongside their service.

Sri Lankan Airlines (40% controlled by the Emirates Group) has had a unique experience to offer that provides a comparative study. Emirates was given absolute control over investment and management decisions. In the 10-year period Emirates held stake in Sri Lankan Airlines, the accumulated profit of Sri Lankan Airlines was around $60 million. In a turnaround of events, Emirates pulled out of the deal in 2008 after a row with the government. The performance plummeted and the airlines reported losses of over US$ 840 million in just 7 years under government administration.

The Indian Maharaja – Air India – is yet another example facing dire consequences in its financial statements. In order to revive the loss making national carrier, neighbouring India has recently announced to privatize its bleeding airline by the end of this year.

As with other industries, airline privatisation tends to be motivated broadly by the desire to access private sector capital, private sector management or both. Working against privatization is the desire of governments to retain ownership of their national airline as an extension of economic policy, whether for reasons of mere national pride or for less defined reasons of government’s vested interest.

Nepal has 18 private airlines, operating an average of 130 flights every day. In some respects, more than the national carrier. They operate under stricter laws than the NAC with no hope of any government bailout in case they plunge into financial ruin. NAC does not have to worry about such a scenario as it is tended for by the government that goes to explain its substandard performance. Things may have been very different if profit generation were a concern for NAC. However, with a stable government in place after two decades of political instability, we hope to get better returns of the tax money we pay.