The middling way

  • Investment in failing public enterprises has continued unabated even as their number has decreased
- Narayan Manandhar
The middling way

Dec 25, 2014-

In order to manage Nepal’s woeful public enterprise sector, ex-prime minister and Maoist ideologue Baburam Bhattarai created another supervising body, called the Public Enterprise Directive Board (PEDB), in 2011. One of the primary tasks entrusted to the Board was to appoint professional CEOs to State-Owned Enterprises (SOEs). Interestingly, the Board is now preoccupied with defending seven out of a dozen of its appointments made to public enterprises at the Supreme Court. Bhattarai’s other miscalculation included the flogging of a dead horse called the Hetauda Textile Industry. One can only revive a sick industry, not a dead one. Bhattarai would have made a greater contribution to Nepal’s ailing and failing public enterprises if he had just ordered his Young Communist League to vacate the premises of the Hetauda Textile Industry.

Unplanned industries

In the West, SOEs are often dubbed SOBs. In Nepal, PEs stand for Public Enemies. During 1970s, public enterprises in Nepal were often called ‘babies born out of unplanned parenthood’. In line with the old adage that ‘beggars cannot be choosers’, we ended up opening all sorts of public enterprises, established primarily with generous support from the then Soviet Union and the People’s Republic of China in the 1960s and 1970s.

There are a number of theories—both normative and descriptive—that explain the behaviour of public enterprises. One such theory, originating from Britain  and credited to Herbert Morrison, explains that governments create them neither to skim ‘capitalistic profits’ nor to face ‘socialistic losses’. That is, they operate at a break-even level, carefully trading off or balancing one year’s losses with another year’s profits. A highly complicated marginal cost pricing theory in economics is meant to attend exactly this goal. Economist John Maynard Keynes, who is credited for propounding state interventions in the economy, once quipped, “In the long run, we all are dead”, as the theory of marginal cost pricing is based on long-term calculations. The problem with the ‘neither profit nor loss’ break-even analysis is that it brings in problems of mediocrity in public enterprises. This invariably leads public enterprises to perform poorly.

Historical perspective

While undertaking a small research on public enterprises in Nepal, this scribe had a chance to revisit historical data on PE performance. The information is worth sharing with readers. Before I do that, let me set here a scene, once again archived from historical documents.

In 2012, I shared with readers observations made by a British consultant, Sir Eric Franklin, Commander of the Most Excellent Order of the British Empire (CBE), hired by the government in 1966 to do a study on relationships between the government and public enterprises in Nepal. In spite of constraints and pressures, Franklin painted a positive picture of PE managers. He wrote, “I do not claim that all mangers are selfless, dedicated, honest and courageous but I believe that the majority of them fully alive to the responsibilities of their positions and acutely aware of the circumstances of their authority, and are doing good job in situations that would daunt and dishearten men of lesser spirit.”

He enlivens his assertion further saying, “Royal Nepal Airlines Corporation is undoubtedly making progress in the face of many difficulties, National Trading Ltd. is doing well with a handful of keen and intelligent young officials what in some other developing countries a veritable army of highly-paid officials would be doing, the Electricity Corporation continues to answer more and more calls for domestic current despite the increasing demand of road and street lighting, while the Ropeways Section of Nepal Transport Corporation is functioning no less effectively than when it was advised and assisted by foreign technicians. Such headway would have been impossible if the managements of these concerns had been slack, inefficient and unreliable.” In 1966, Franklin found these “lesser spirits” working for less wages and longer working hours than their counterparts in the civil service. Unlike today, there were no unions in public enterprises; therefore, management had a freer hand.

Money for nothing

With this little backdrop information, let me paint a fuller picture. Chart 1 presents historical data on the average rate of return on capital invested in public enterprises in Nepal spanning a period of fifty years (1963-2013). A simple trend line is also fitted into the picture, indicating a general pattern of the data. Please note that the data for 1981 is missing. This is because the then Corporation Coordination Council, the present day avatar of PEDB mentioned above, was converted into the Corporation Coordination Division within the Ministry of Finance after the national referendum in 1980. Data must have gone missing in the process.

A couple of interesting inferences can be made from the chart. First, the average rate of returns for the last 50 years turns out to be 1.4 percent per year. The good news is that this is still positive. However, the bad news is that there is a declining trend. Lots of swings or a random variation in the chart tends to prove the ‘mediocre hypothesis’ of public enterprises—ie, they are destined to perform at a middling level. The abrupt rise and fall (high standard deviation of 2.5) in the rate of returns give an indication of the PEs balancing one-year profits and losses with next year’s losses and profits.

Second, political events in Nepal seem to have a direct toll on the performance of public enterprises. The  performance of PEs was better during the one-party authoritarian Panchayat days than during multiparty democracy. These events are noted in the chart. In the hand of new political masters, public enterprises were literally turned into ‘political enterprises’. Third, averages definitely mask good performers from the bad ones and vice versa. The Economic Survey 2013/14 noted that among 37 fully or partially state-owned public enterprises,

19 were operating at a net profit while 16 were making losses, and one enterprise was literally found to be doing nothing (Nepal Engineering Consultancy). If the above data reveals anything, let us predict a timeline when the trend touches a point of zero rate of return. Hopefully, at that point, our policymakers will wake from their slumber.

By the fiscal year 2012/13, government investment in the 37 public enterprises accounted for over Rs 200 billion—nearly half is accounted by equity capital and another half by external and internal loans. Readers are warned of a huge difference in investment figures coming from public enterprises and the Office of the Finance Comptroller General. This is another indication of the gross mismanagement of our public enterprises. The privatisation onslaught in early 1990s may have halved the number of public enterprises from 60 plus to 37 now, but actual investment has increased unabated.

Manandhar is a freelance consultant with an interest in corruption and governance issues

Published: 26-12-2014 09:19

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