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Jan 9, 2011

Privatization: The way of the future

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The recent report presented by a high level commission formed by the government to study about the performance of the state owned enterprises presents the dire state of these enterprises.  Majority of our public enterprises are running on losses and are burdensome for the state. This state of affairs is an irony to the very objective of establishing such enterprises i.e. provide public with the goods and services at affordable prices and contribute in the economic growth of the nation. Not only these state owned enterprises running on losses are having negative impact on nation’s growth but the goods and services they are producing are far from satisfying consumer needs. The commission has rightly advised for different measures for the improvement of these enterprises ranging from selling shares to adapting the private public partnership management to closing down some of them.

Once upon a time

Once upon a time, people all over the world, mostly in the communist countries and the Third world countries used to think, state operated enterprises are the panacea to all the needs of the society. The advent of the cold war saw a massive wave of creation of huge state owned and operated enterprises as well as nationalization of major industries all over the world. However, these ventures disregarded some basic principles of markets and human behaviors and were bound to fail. The basic human nature that says people are self-interested, they care for what they own and whatever belongs to no one falls into disrepair was violated when tax payers' money was used to establish these ventures. As for the people who worked in them, had little or no incentive at all to sustain and grow these enterprises.

Another violation was the principle of markets - for an enterprise to be profitable or sustainable for that matter, it has to work under the law of supply and demand. It has to respond to the signals of the various market forces. Failing to heed to market forces would eventually result in losses and shifting of resources to more efficient sectors. State owned enterprises violated this principle because they were supposed to run on bureaucratic codes and regulations rather than by responding to market signals.

Another major principle violated was the natural tendency of corruption to breed wherever political affairs are involved. State owned enterprises being under the political control no wonder became the breeding grounds for corruption. The result, SOEs all over the world became the breeding ground for corruption and epitome of inefficiency, financial disasters.

However, during the 1980s, under the leaderships of Margaret Thatcher in the UK and Ronald Reagan in the USA, privatization of state owned enterprises gained worldwide momentum. After the fall of Soviet empire and end of cold war in the 1990s, when capitalism emerged as the only practical way of organizing a society, nations all over the world started deregulating industries and privatizing or disinvesting their public enterprises with much success. The general trend over a period of time has been lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery of services.  The general trend all over the world has been of liberalization and privatization of most of the public enterprises.

Once in a place

Nepal had its own fair share of public enterprises established during the Panchayat era. During the mid sixties to early eighties, the government invested large sums of money in the establishment and expansion of public enterprises (PE’s) in all sector of the economy from banking to trading, public utilities to manufacturing and social service. The concept of privatization came into focus in the sixth plan review on PE’s which showed a bleak picture of the return on the investments done on public enterprises leading to the decision of selling some of the public enterprises. During the 1990s a limited liberalization was done and a number of public enterprises privatized.

Some of the results were increase in choice and living standard of consumers, cheaper and better airlines, better banking services and spurts of various private endeavors. Behind the scene too, the administrative and fiscal burden of the government was reduced to some extent.  However, the privatization of some public enterprises such as Raghupati jute mills, Bansbari Tannary Industry, Bhrikuti Paper factory were marred with political controversy generated mostly due to ideological conflict and misinforming propagandas. The too often quoted case of “Bansbari Tannary privatization” that resulted in closure of the business is more of propaganda than a fact. Contrary to the rumors, the factory was shut down because it could not compete anymore with the cheap imported Chinese shoes and the machinery of the tannery was too old that it had become obsolete.

The failure of the then proponents of liberalization to highlight the gains of privatization and the politically controversy made the process come to a halt and hasn’t been able to move very far since then.

Current time

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More than half of the 36 public enterprises that we have now are operating under losses and the amount of accumulated loss is alarming. Except for a few of them, public enterprises are epitome of corruption, inefficiency and financial disasters. More than 30 percent of the government’s initial investment of 86 billion rupees has already been lost.  In the fiscal year 065/066 alone, only 4 of the public enterprises paid dividend of Rs. 3 billion and 470 millions to the government which is just about 4.3 percent return on the investment. Some of the public enterprises have even negative net worth owing to the continuous losses over a long period of time. The scenario is a kick on the face of any fiscal prudence.

As most of the functions of these enterprises are being taken up by private sector which is performing pretty well, the dire state of public enterprises is surfacing even more clearly due to the contrast effect. Take for example the case of state run Janakpur cigarette factory versus private Surya tobacco. Janakpur Cigarette Factory has an accumulated loss of more than a billion rupees and has been operating on loss for almost two decades now. It has more than 1100 staffs. Compare it to Surya tobacco which is one of the largest taxpayer of the country which has about 900 staffs. The scenario is not very different in the case of many of our public enterprises.

The future

As suggested by the Public Enterprises evaluation commission, privatizing and changing the ownership of the ailing public enterprises is the only practical solution for the government. With all the political instability going on and the ineffectiveness of the state being heightened in crucial areas like law and order , justice administration and infrastructure development , reducing the administrative burden of the government is a must for proper functioning of the government. Similarly, reducing the economic burden of public enterprises from the ailing economy of ours could be an important step towards reviving our economy.

As the commission has advised different ways to improve the performances of public enterprises including privatization, public private ownership, cooperative ownership, merging of two or more public enterprises and introducing them to PPP and shutting down, it’s very important that the government act on the suggestion quickly and effectively. If the government decides to keep owning and running them based on some dogmatic ideological principles or pressurized by the vested interest of the group that benefits from the poor performing public enterprises, they will continue to be a drain on our economy.

-Surath Giri
(Published in The Himalayan Times of 30th Jan 2011-Perspectives Page 3)