Public enterprises in Nepal: A burden on taxpayers

This article was originally published in on April 26, 2023 by Sindhuj Thapa. Ms. Thapa is a researcher at Samriddhi Foundation. Views expressed in this article are the author’s own, and do not reflect the views of the organization. She can be reached at [email protected]

The establishment of public enterprises dates back to the early 19th century during the Industrial Revolution. During that time, in some countries private companies had monopolized critical industries, leading to high prices, and goods and services of poor quality. Whereas in some developing countries like Nepal, there was a lack of infrastructure, not many industries, and less investment capacity of the private sector.  So, like the rest of the world, Nepal too wholeheartedly welcomed public enterprises with the establishment of Biratnagar Jute Mill in 1950.

Over the past decade, public enterprises (PE) all over the world have faced numerous economic, financial, and political crises. Some of the main reasons being government interference, mismanagement, and corruption. Political interference can lead to decisions that prioritize political goals over economic efficiency and effectiveness, which can cause financial losses and operational inefficiencies. Public enterprises around the world such as Air India, Petrobras, a state-owned oil company in Brazil, Indian Railways, British Leyland, etc started facing numerous financial crises,  leading to multiple bailouts by the respective governments. A similar path was followed by public enterprises in Nepal where public enterprises were a burden on taxpayers.

The fall of state-led planning and the adoption of market-based systems which started in the mid-20th century was driven by economic stagnation, high inflation, and mounting debt. The shift toward market-based approaches was particularly pronounced in the former Soviet Union and Eastern Europe, where the collapse of communism led to privatization and market-oriented reforms. The belief that market-based approaches are more efficient, flexible, and responsive to changing economic conditions than state-led planning drove this change. Nepal too was a part of the wave and the restoration of multi-party system in Nepal in 1990 marked a significant turning point in the country’s political and economic history as the new democratic government in Nepal recognized this problem. Privatization and liberalization became key strategies for eradicating these problems. The government then enacted the Privatization Act 1994 which provides answers to all the arguments dwelling around privatization. Major reasons to enact the Privatization Act 1994 were, the falling productivity of the enterprises, the inability of the government to bear any additional financial burden, and the promotion of the private sector to boost the economy. The government, however, has displayed a reluctance to fully embrace the important tenets of the reforms that were deemed crucial at the time, which can be perceived as a double standard approach. Notably, there have been instances of the government introducing private-public partnership arrangements, which have failed to fully privatize public companies.

Despite the degrading performance of public companies starting from 1994 Nepal has been according high priority to public enterprises ever since the Second Plan of the National Planning Commission (NPC). They are considered the “Vehicle for Development”. There are 44 total public enterprises in Nepal among which  22 are profit-making, 19 are loss-making and  three are closed. More importantly, according to the fiscal year 2020/2021, even for profit-making public enterprises, their profits are going down significantly by 40.3%, of those loss-making public enterprises, their losses continue to rise by 3.6% and administrative expenses tend to go up in all of them. Regardless, in the fiscal year, 2022/2023 government spent a total of Rs. 96.7 billion budget on public enterprises including Rs. 62.3 billion as foreign assistance. On top of that, the government gave an additional subsidy of Rs. 8.1 billion in the same year. They were envisaged as an instrument for production and the execution of socioeconomic policies in the country. The budget speech for the fiscal year 2022/2023 states “The Janakpur Cigarette Factory, Agricultural Tools Factory, Gorakhkali Rubber Industry, Orient and Magnesite, Nepal Metal Company, Biratnagar Jute Mill, Birgunj Sugar Mill, Hetauda Textile Industry and Butwal Spinning Mills, will be brought into operation in a systematic way.” The promises made by government ministers regarding the revival of public enterprises are often unfounded and lack a solid strategy for achieving long-term success. We will further discuss why running public enterprises are ineffective in Nepal and should be privatized immediately.

Stakeholders as Risk Averters
To successfully run a business, the management must possess a significant risk-taking capacity. However, this is a quality that public sector entities often lack due to their prioritization of procedures over outcomes. In these sectors, stakeholders are primarily concerned with safeguarding their reputations, as any deviation from established protocols can result in scrutiny from anti-graft bodies such as the Commission for Investigation of Abuse of Authority (CIAA). This can be illustrated by the preference for private sector banks over government-run banks when seeking loans, as private banks offer greater flexibility in considering factors such as start-up ideas or company stocks, whereas government banks are limited to collateral as the sole determinant of loan eligibility. In light of the potential consequences for stakeholders who take risks beyond established protocols, it is understandable that they tend to incline on the side of caution.

Non-Value Adding Protocols
Similarly, having to follow protocols that do not add any value also stretches the decision-making process in the public sector as it often results in a huge opportunity cost. One example would be the comparison between Maruti Cement and Udaipur Cement. Both companies are situated in the same location with the same proximity to resources and the neighboring country India. Even the ores of both the companies are same in Sindhali, but despite that in the fiscal year 2020/2021 Maruti Cement incurred a profit of Rs 5.631 billion whereas Udaipur Cement incurred a loss of Rs 3.3 bn. This is because when these companies need to buy machinery for their operation Maruti Cement can instantly purchase from its supplier at the best price and deal, whereas for Udaipur Cement its procedure requires it to open a long tender process costing the company millions of opportunity cost. Although the bidding process is usually fair, tenders often do not fall below a certain amount set by the government, leaving the company with less bargaining power. Apart from this where Maruti Cement has to transport its raw materials in trucks which is a relatively expensive medium for transportation, Udaipur Cement is leveraged with its own 13.8-km cable ropeway to transport limestone from Sindhali-hill to the factory cutting its cost significantly. Despite this advantage, Udaipur Cement’s loss indicates its inability to compete effectively, highlighting the need for the company to be privatized.

Lack of Accountability
Likewise, the issue of lack of accountability within public enterprises in Nepal is a well-documented problem that has contributed to their poor performance and financial losses as the government bails out the public enterprises regardless of the outcome leaving the stakeholders with no incentive to maximize the profit. Four months after the Royal Nepal Airlines made the biggest purchase in Nepali aviation history, acquiring two Airbus A330-200s for Rs. 2.75 billion the corporation said that it was on the verge of bankruptcy, and asked for a bailout of Rs 20 billion, declaring itself crisis-ridden which was provided by the government as subsidy. Additionally, the stakeholders of the public enterprises are designated on the basis of monthly payroll. Hence regardless of the loss made by their company they are entitled to their share of the salary and are entitled to an appraisal every five years regardless of their performance again leaving them with no incentive to maximize the profit.

Political Interference
Furthermore, political interference is another factor contributing to the inefficiency of public enterprises in Nepal. The government often appoints unqualified or under-qualified individuals to top positions in public enterprises based on political connections rather than merit, resulting in poor decision-making, lack of accountability, and a culture of corruption within public enterprises. One example is the case of Nepal Oil Corporation (NOC) where in 2018, a parliamentary committee found that the NOC had incurred a loss of Rs 1.7 billion due to irregularities in the procurement of petroleum products. The committee’s report stated that political interference was the primary cause of the irregularities, as senior officials in the NOC were appointed based on political connections. The report also stated that the NOC had paid Rs 650 million to a private company without conducting a proper tender process, which was again attributed to political interference. It was also revealed that the NOC had paid up to Rs 1.3 million per kattha of land on the banks of the Rohani River in Bhairahawa while the actual value of the land was less than Rs 500,000.

Then Why this Affinity Toward Public Enterprise?
Despite this, people often fail to understand that the loss incurred by public enterprises is a loss incurred by the general public. Additionally, there is often socialist propaganda against privatization, especially in developing countries, perpetuated by interest groups and politicians who argue that private companies are solely motivated by profit, which only benefits the rich and evades taxes. However, these accusations are often baseless as private companies do contribute to the country’s economy through taxes. While it is true that some private companies evade taxes, it is unfair to blame privatization as a concept rather than the individuals responsible for that. Moreover, the issue of tax evasion often involves collusion between government employees and the private sector. This problem can be addressed if the government body is strong and accountable. This propaganda can also be explained by an economic term called “The Public Choice Theory” which suggests that politicians are self-interested and motivated by their own goals, including gaining votes and maintaining their power. In the case of public companies in Nepal, politicians often prioritize them and splurge huge budgets on them, even though they may incur significant losses. This can be attributed to the fact that public companies provide opportunities for politicians to gain support and votes from a major voting pool, which includes employees of these companies, their families, and their communities. By investing in public companies, politicians can gain the loyalty and support of these groups, which can translate into votes during elections. Furthermore, politicians often use public companies as a means of redistributing wealth and resources, particularly to their constituencies, thereby consolidating their power and influence. However, this focus on public companies often leads to inefficient resource allocation, as resources are directed toward companies that may not be financially viable, rather than toward more productive uses. This can result in significant losses for these companies and ultimately affect the overall economic performance of the country.

Undeniably, there may be situations where private companies are not financially viable or efficient. Ultimately, the question of who is most capable of successfully running business operations within a country must be considered, and it is clear that in case of Nepal, the government is not the most adept entity for this task. Over the years, public enterprises have faced challenges such as inefficiency, corruption, and mismanagement, leading to financial losses and a decline in service quality. The government’s reluctance to fully embrace privatization and liberalization has made the situation worse, as public enterprises are now unsustainable and a burden on taxpayers. The poor performance of public enterprises each year indicates the need for immediate privatization. On the brighter side, the government on April 22 formed a Public Institutions Suggestion Committee after billions of investments made in public enterprises failed to yield any returns. The committee needs to consider all the above aspects and fully embrace privatization to contain any more avoidable burden to the economy which is already in a critical state.