Privatisation of NAC: Learn from other airlines

State-owned enterprises (SOEs) have a history of unsatisfactory performance in Nepal. To overcome the inefficiencies of SOEs, Nepal has opted for privatisation measures a great many times in the past. In a similar vein, there have been numerous attempts to structurally reform Nepal Airlines Corporation (NAC), a fully stateowned enterprise, which has time and again failed to display adequate performance and is mired in multiple controversies regarding corruption and mismanagement, but to no avail.

With NAC being unable to make significant progress in recent years, attempts to reform the national flag carrier have once again been rejuvenated, and privatisation is the cynosure.

As aforementioned, the idea of privatising NAC is not completely new. In light of the embezzlement of funds to purchase new aircraft, political interventions in new appointments, being blacklisted by the European Union citing safety concerns, and the market competition from new entrants pushing NAC to the current low, numerous suggestions concerning reforms in its current management structure had been made in the past.

The suggestions largely loomed around privatisation of the SOE by either appointing new management with a better experience of handling airlines or by selling 51 percent of its shares to a strategic partner.

Such measures were proposed with the hope that the new management structure would assist in revitalising the financially ailing SOE. However, neither of the suggestions were implemented by the government despite receiving a letter of intent from prestigious organisations.

The inaction towards this overriding problem has instead fueled the inefficiency of NAC. As per the Annual Status Review of Public Enterprises, 2021, at present, the NAC owes the government Rs. 3.6 billion and Rs. 35.35 billion to the banks and financial institutions.

Similarly, the review also reveals that, in the fiscal year 2019/20 alone, the corporation faced a loss of Rs. 3.8 billion while its cumulative loss and unfunded liability totaled Rs. 9.5 billion and Rs. 1.1 billion respectively.

This acts as an exemplar for the government regarding the imperativeness of addressing the issue. Bailing out an enterprise that displays substandard performance every year not only reflects poorly on the accountability of the government but also signals sheer misuse of taxpayers’ money. It is thus high time for the government to take a stance in privatising the national flag carrier.

A privatised NAC could result in better efficiency and better management of the enterprise. With the shares of the national flag carrier sold, the enterprise will be required to be more transparent with the utilisation of the funds, one which the state-owned enterprise is notorious for.

The major controversies of the NAC involve buying aircraft on the premise of making the corporation profitable, which has failed miserably. Similarly, the privatisation of NAC could mean better profits for the government. Similarly, with the NAC privatised, the government can ensure the taxpayers that their funds are no longer being utilised to bail out a company on the verge of bankruptcy.

However, given the previous failed attempts in privatising NAC, the government should move ahead with a well-structured and bona fide plan.

Based on Nepal’s own experience of privatisation of state-owned enterprises, four different methods have been used, which are sale of business and assets, sale of share, management contract, and assets sale and lease. Out of 18 privatised enterprises, three enterprises whose businesses and assets had been sold are currently out of operation, three enterprises which had their assets sold and are leased are still in operation, with only one operating in profit, and one enterprise whose management was contracted is currently operating in loss.

On the contrary, only three out of 11 enterprises whose shares were sold are closed, but the rest are operating in profit.

Judging by the fruits of history, for Nepal, selling of shares seems to be the best method for privatisation of state-owned enterprises, and this could seem a plausible option for NAC as well. The global experience also validates the claim.

Throughout the world, two methods of airline privatisation are considered best among others – bringing in a strategic partner and selling the shares of the government to the public.

Having said that, it is also not easy to privatise a stateowned enterprise that has been providing services to the general public at a subsidised rate. Privatisation comes at a cost, and in the case of NAC, it will mainly come with friction from the labour unions. However, the government can make sure that such friction is as little as possible by offering lucrative deals to the employees, such as voluntary retirement as well as an opportunity to move to a different institution. Before privatising the national flag carrier, the government must conduct a proper study and finalise the most effective method and ensure that no interference will take place once the job is done.

The government can also assimilate a plethora of examples concerning privatisation of state-owned airlines throughout the world that have proved to be highly beneficial for the respective countries. Two of the most celebrated ones are the privatisation of British Airways of the United Kingdom and Qantas Airways of Australia. Both of these airlines were initially state-owned airline enterprises which after privatisation were considered as the best in their line of business. Scrutinising these examples, Nepal can draw privatisation lessons for NAC.

NAC’s privatisation has long been due and has cost too much for the government, the taxpayers, and the country, and with the onset of the new government, one can only hope the initiation gets through this time.

This article was originally published in The Himalayan Times by Prakash Maharjan on August 03, 2021.