Overhauling NAC: Alternative courses of action

– This article was originally published by Bidhyalaxmi Maharjan in the Himalayan Times on the July 14, 2019.

State-owned enterprises (SOE) in Nepal started with an aim to provide quality services and products at an affordable price. But in the long run, these enterprises have proven to be a drain on public funds. According to the Annual Performance Report of Public Enterprises 2018, 11 out of 39 SOEs have recorded a net loss. Nepal Airlines Corporation (NAC) could have been one of such entities making a loss, had it not have a monopoly over Ground Handling Services (GHS) at Tribhuvan International Airport, which generates an annual revenue of over Rs. 3 billion to NAC.

Frustrated with the dismal performance of the national flag carrier, Prime Minister KP Oli recently warned NAC of intervention by the government if it continues to make losses. The remarks made by the PM are reflective of the government’s recurrent talk of divestment from the SOE.

Although the government has bailed out NAC time and again, its performance has not improved in the slightest. Its cumulative loss stands at nearly Rs.3.37 billion and its unfunded liabilities are worth Rs.1.62 billion. The receipt from flight services and GHS is barely enough to maintain its day to day operation. Instead, NAC is headed towards bankruptcy. The failing enterprise has already defaulted on its payments to the Employees Provident Fund and the Citizens Investment Trust. Thus, it is high time the government overhauled NAC’s current structure as an SOE.

Here are two alternatives the government can undertake in order to reform NAC, without drying the state coffers to the bone:

Option 1: Bring in a strategic partner
Inducting a strategic partner is an alternative the government has considered for some time now. In 2016, the Ministry of Culture, Tourism and Civil Aviation (MoCTCA) had sought closed request for proposals (RFPs) from international airlines. Later Lufthansa Consulting had submitted a proposal to become a strategic management partner. But, without the green light from the Ministry of Finance, MoCTCA did not go ahead with Lufthansa Consulting.

As Visit Nepal 2020, with an aim to welcome two million tourists, approaches MoCTCA has shown urgency in its search for a strategic partner. In order to bring in a strategic partner, MoCTCA first needs to make changes to the regulatory policy of NAC. As per the Nepal Airlines Corporation Act 1963, NAC is a wholly state-owned enterprise, and the government controls the governance structure, enabling it to influence the management. NAC’s liabilities are solely borne by the government, so are its profits. Thus, either NAC has to be registered as a company under Company Act 2007 with the annulment of Nepal Airlines Corporation Act 1936 or the Act has to be amended to include a strategic partner.

MoCTCA can invite a strategic partner through global competition or through other means (Ethiopia Airlines expressed interest to become a strategic partner through government-to-government agreement.) But before that, the ministry needs to hash out details on equity sales, a new modality of management, and cost and benefit sharing, and so on. The partnership should be established in such a manner that NAC’s international reputation is enhanced, while the strategic partner can reap benefits from two new international airports in Pokhara and Bhairahawa, eventually transforming Nepal into a regional hub.

Option 2: Sell shares
Another alternative available to the government is to distribute shares to the public. As in the earlier option, Nepal Airlines Corporation Act 1936 must be repealed, and NAC brought under the Company Act 2007 as a public limited company. However, little will change if the government lists only 20% or 30% shares. The goal of the government is to bring about structural reform at NAC, which will only be possible when the government’s stake drops to the minimum. Otherwise, the government will continue to hold sway in the NAC board of directors, and management selection, thus inefficiency will continue.

Once NAC becomes a company with a majority stake with the private investor or the general public, procurement will also become easier. Public Procurement Act 2007 has posed a nuisance in the acquisition of aircraft in the past. The act caused issues with international bidding, variations in terms of proposed costs and actual costs, etc. resulting in delayed decision making in state-owned enterprises, such as NAC.

Equity selling will also provide a solution for the existing liabilities of NAC, which can either be swapped into shares for creditors. Or investment received through share distribution can help NAC relieve itself of its liabilities.

What is certain is that once NAC becomes a company it will take on commercial orientation and its performance can be directed towards profit making. In a field as competitive as aviation, NAC will be motivated to serve its customers better and be accountable to its shareholders.

It has been over a decade since the government talked about revamping NAC, but none of its plans ever materialized. NAC has been allowed to carry on its downward spiral at the expense of taxpayers. With NAC on the verge of bankruptcy, the time has come for the government to follow through its rhetoric and introduce structural reforms at NAC.