By Koshish Acharya
Every year the Government subsidizes, provides loans, incurs bad debts and hence manages to save public enterprises from going out of business. Every year citizens pay a good amount of their hard earned money in the name of taxes only to have it cover losses these public enterprises incur. An important question that arises: Is it fair for the people to bear the cost of the failure of the public enterprises?
The prelude
The government of Nepal provided a loan of Rs. 10.25 billion to the public enterprises in the fiscal year 2010/11 amounting to a total of Rs. 95.16 billion of government loan to public enterprises in totality.
This loan could have been utilized otherwise. According to Independent Power Producers Association Nepal, the production of 1 MW of electricity costs Rs. 150 million which means 634.4 MW of electricity would have been produced with 95.16 billion solving 70 % of electricity crisis in the country. Similarly, establishing a school would cost around Rs. 10 million approximately and with the total loan amount 9516 schools would have been built in Nepal.
The government, however, continues to pour money into the 37 public enterprises out of which 21 have earned net profit whereas 14 are at net loss and Nepal Engineering Consultancy Service Center Ltd. and Hydropower Investment and Development Company Ltd. did not have any business transaction.
The public enterprises are categorized under different sectors:Manufacturing (7), Trade (6), Service (7) Social (5) Public Utility (3) and Financial (9). Out of these six sectors, only three sectors namely service, public utility and financial sectors have been able to make a net profit in the last three years. The total net profit of all the public enterprises dropped down to Rs. 6.38 billion in the year 2010/11 which was Rs. 10.56 billion in the year 2009/10.
The scenario
Given the no. of public enterprises in the country the average profit amounts to Rs. 172.43 million per public enterprise. The total administrative expenses of all the public enterprise is Rs. 24.22 billion only in fiscal year 2010/11 which means Rs. 654 million administrative expense in average for one public enterprise. If we compare the average profit with the average administrative expense of the public enterprises it is quite evident that the profit they make every fiscal year reduces drastically due to enormous expense incurred.
Amongst all the public enterprises only Nepal Doorsanchar Company Ltd (Nepal Telecom) has been able to generate substantial profit over the last three years with the current fiscal years profit amounting to Rs. 13.07 billion. Nepal Telecom, Civil Aviation Authority of Nepal made a profit of Rs. 492.2 million in this fiscal year. The highest lost incurring public enterprises were Nepal Electricity Authority and Nepal Oil Corporation with a total loss of 18.27 billion amongst themselves.
The current situation of 45 hours of load shedding every week has certainly made life difficult for general public but most affected are industries which rely on the electricity for their operations. Nepal Electricity Authority is far from addressing its problem and yet the government continues to provide loans that have now amounted to Rs. 62.63 billion in total. The loss could easily have been reduced if electricity prices were raised in par with inflation but because of political reasons the price hike has never been considered an alternative. Similarly, Nepal Oil Corporation (NOC) has an outstanding debt of Rs. 16.52 billion that it owes the government.
Another issue of concern is over staffing in public enterprises (32, 383 employees in 37 enterprises). With a total negative operating profit amounting to 613.7 million, the ration of operating profit per employee (Employee Contribution in terms of Operating Profit) comes to 0.19. In this regard, the public enterprises in financial sector (Agriculture Development Bank, Rastriya Banijya Bank and others) have the operating profit per employee ratio of 3.08 in contrast to the public enterprises in trading sector (Nepal Oil Corporation)have the operating profit per employee ratio of negative 21.92. As public enterprises do not function on the principle of demand and supply and are guided by bureaucratic laws and regulation they tend to be ineffective. As a matter of fact, public enterprises are established with taxpayers money, the products and services they provide are also consumed by general public and when these enterprises do not function accordingly they are bailed out by government with taxpayers money again. Eventually, it is the general public being forced to pay for the losses.
Other issues like corruption, inefficiency, low productivity, trade union issues, political appointments and political manipulation in the management of the public enterprises have hampered the public enterprise excessively.
What can be done?
Looking at the total profit of the 37 public enterprises in the country and the total profit of the Nepal Doorsanchar Company Ltd. it can be clearly seen that it is the only public enterprise that has actually made a substantial amount of profit. It has been able to perform much better than other public enterprises because it played by the values of proper management and open competition. On the other hand, Nepal Electricity Authority and Nepal Oil Corporation (both incurring high loss) have absolute monopoly in the market making them less productive and less innovative.
One of the best possible solutions could be to liquidate the enterprises that are running in loss and shut them down completely. Similarly, privatization could be another solution to make them more effective but merely privatizing these enterprises without policies for ensuring transparency could lead to a disaster like that of the Harisiddhi Brick and Tile factory , Bhrikuti paper Mills , Biratnagar Jute Mill. Privatization brings in the sense of ownership, which significantly increases enterprise performance as it helps reduce political interference and also brings about competition.
Another way to deal with this problem is by handing over the management to private management /firms requiring transparency in competitive bidding procedure, accounts details, audits and the bureaucratic process.
The main questions that arise are: Should the government run public enterprises at all? Why not leave it to the market which does not use public money, ensures competition and is constantly innovating to provide better quality products and services at competitive prices? Shouldnt the government rather focus on issues like rule of law, defense and foreign policyissues that market forces cannot deal with?
In the name of subsidies the taxpayers eventually end up paying more than necessary for products and services that are largely monopolized by public enterprises. A win-win situation may lie in having the general public pay market prices for what they use without promoting a culture of misuse of taxes.