The myth behind state-owned enterprises

-This article was originally published by Jyotika Rimal in The Himalayan Times on June 25, 2017.


While formulating any new policy, it is very important to look at both positive and negative implications of the policy. Some policies that look impactful in the short-run might not necessarily be correct for the long-run. Thomas E. Hall’s “Aftermath: The Unintended Consequences of Public Policies” provides a brief outlook on how certain policies resulted in unforeseen circumstances and unpredictable outcomes in the United States. Hall explains his idea by giving four profound case studies, their short-term impacts—which were intended interventions—and their mid-to-long-term implications (which were completely unforeseen negative consequences.

Similarly, if Hall’s idea is taken in the Nepali context, one can find many policies that have not made positive impacts, or even led to negative unintended consequences in the long-run. State-owned enterprises are one case in point. In case of petroleum and fertilizers trade, imprudent government policies have created a lot of hassle for a while now.


Monopolistic Approach

In 2009, Government of Nepal re-introduced the subsidy scheme in chemical fertilizers. Since then, the fertilizers have been supplied by state-owned entities under government subsidies. This has not only failed in keeping up with the demands of the farmers, most fertilizers have even been supplied from the black market. Similarly, if we look at Nepal Oil Corporation, it is the only oil importer in the country with over a hundred billion rupees worth of annual transactions, and yet, operating without any governing Act—one which plays by its own rules.

Monopolies of certain state-owned enterprises have directly or indirectly made consumers to suffer in the end. In both cases, since there is only one entity and no competition, consumers and taxpayers have to agree upon any decision made by them, even when they compromise the well-being of many of these consumers and taxpayers themselves. From lack of any competition whatsoever and the resulting lack of innovation to price manipulation to inefficiency in service delivery, this monopolistic approach has acted as a halt in economic growth.

Faulty Pricing

In the case of fertilizers, due to lack of a proper and effective monitoring system, it becomes very difficult for the state owned enterprise to know the allocation of fertilizers and its results. Since this has been the case, subsidized fertilizers are used by farmers who are able to pay the actual price. The poor farmers are once again ignored, and it becomes difficult for them to acquire these fertilisers at market price.

Similarly, if we look at the NOC, the burden of their price manipulation has been long borne by consumers and taxpayers. Once petroleum products enter Nepal, heavy taxes and “development fees” are levied upon them, yet to no visible avail. Given the fact that NOC has been charging customers as per their interest, the whole pricing system becomes questionable too.

Since both these organizations are state-owned and there are no market interventions on what they do, there is an easy leverage on doing whatever they wish to without factoring for their potential unintended consequences. NOC’s recent bonus distribution to its employees is one such example. While it looks nice that a government-owned institution is distributing bonus to its employees, what many consumers are unaware of is the fact that it has effectively been robbing the consumers to inflate its financial health, and consider paying off its employees.

Possible Solution     

Creating space for Private Sector and Competition

Competition in the market and involvement of private sector is very important in any economy. Firstly, private players have to depend on investors to even start off, and then maintain an army of satisfied customers to make profits to pay off its investors. The same does not apply to state-owned entities, which means that there is no pressure for continuous innovation and improvement in quality of goods and services at lower prices. This only compromises the growth of the economy.

Secondly, as Nepal has adopted economic liberalization, there is a principle agreement in letting the private sector take charge of and steer the economy, while the government plays the role of a facilitator to make this happen. Operating monopoly state-owned entities is a direct breach of this agreement, irrespective of the purported “best interest of the citizens” argument. Given the fact that these entities do not have to compete with anyone, it is highly unlikely that these entities would work effectively and efficiently.

Along this line, if private sector came as competitors to the state-owned enterprises, this would create pressure for these state-owned entities to improve their operations and management to compete with these private actors and to retain customers.

Ultimately, it is the consumers who face difficulties at times of petroleum shortages and fertilizers adulterations. Until the private sector is given an opportunity to step-in, and unless competition prevails, these problems will continue even in the future too.