The inefficiency with which PEs are being run—essentially a firm-level problem—is made out to be a compelling reason for the state to wash its active hands of the economic sphere, on the assumption that the private sector is intrinsically more efficient and productive. Such firm-level problem can be corrected by improving incentive and governance structures in the PEs and shielding them from political interference so that they are professionally run. To say that PEs cannot be run efficiently is a lie. South Korea’s POSCO was one of the world’s most efficient steel companies even when it was in government hands. Thai Airways, with its world class service, was nurtured by the state.
ONCE UPON A TIME
Some would argue that we just don’t have the sort of “institutions” that exist in those countries. The relevant institution is the political actors. If the PEs were allowed to be run professionally, they would likely share the South Korean or Thai experience. Wasn’t the then Royal Nepal Airlines Corporation (now NAC) in profit once upon a time? Handing over PEs, some of strategic importance, to the private sector prematurely just because politicians don’t allow them to be run efficiently is illogical. It is akin to throwing the baby along with the bathwater. It also raises a fundamental question: Would politicians and bureaucrats who cannot ensure the proper management of PEs be able to make the right decision, in terms of national welfare, as regards transferring the ownership of the same enterprises? Remember how profit-making and strategically important industries were targeted for privatization in the post-1990 exuberance? Privatization was a rent-seeking exercise and worse back then.
Bansbari Leather Shoe Factory, set up with Chinese assistance, was neither a loss-making entity nor a monopoly. Rather, its success had enticed the private sector into the business. The result was that raw hides and skins that would otherwise be exported as primary products stayed inside the country for value addition. Bansbari was also symbolic of Nepal’s bilateral relationship with its northern neighbor. Clearly, putting it on the auction block to be sold off at a throwaway price (Rs 29 million in 1992) was not just driven by the greed for kickbacks and the mantra of market fundamentalism embraced by half-baked economic decision makers uncritically lapping up the received economic wisdom of the day. It was also a result of behind-the-scene machinations aimed at undermining Nepal’s longstanding foreign policy based on equidistance between its two giant neighbors. There were no efficiency gains from that privatization: The factory was closed and its machinery ended up somewhere across the southern border. When Bansbari was sold off, the intelligentsia close or itching to be close to the then ruling party barely squeaked a word against the deal in public. They still don’t have the guts to speak out against what was fundamentally wrong with the deal. Some fear that speaking out against privatization per se will attract the label “communists” or “socialists”. Even two decades later, they at best manage to muster just enough courage to criticize the way privatization was implemented but giving the impression that if done under complete transparency, all PEs should be privatized.
Handing over PEs, some of strategic importance, to the private sector prematurely just because politicians don’t allow them to be run efficiently is illogical. It is akin to throwing the baby along with the bathwater.
But, as pointed out by the great English bard 400 years ago, what’s in a name? If appreciating the potential role and importance of PEs in this landlocked least-developed country is supposedly the pastime of communists, then one might as well call the Panchayat rulers communists. PEs back then were a must, and it would be naïve to attribute the government policy of establishing PEs beginning the early 1960s merely to the import-substitution industrialization strategy in currency in the world at that time. It was something that the level of Nepal’s development warranted; the external prevailing economic thought only proved conducive. The PEs were a trigger for industrialization, and a means to supply essential goods and services at fair prices, and safeguard strategic interests. Would private enterprises have cropped up if PEs were not there? It was only after the state entered the cement production business cashing in on domestic limestone reserves that the private sector realized that cement production was a viable business. The Dairy Development Corporation fostered backward linkages, promoting commercial livestock farming. Were it not for DDC, private milk companies would be charging a much higher price.
COMPETITIVE COEXISTENCE
The entry of the public sector into brick kilns introduced new technology in the business that the existing private sector had not used. The National Trading Limited coexisted with private traders but did what the latter did not: Attempt to reduce Nepal’s trade dependence on any single country. When it is difficult to curb anti-competitive practices by private traders directly, a state-owned trading agency can be an effective means to neutralize such practices by ensuring supplies at fair prices. The annual shortage of sugar during the festive season of Dashain and Tihar is not just a result of insufficient domestic production; it is also explained by domestic sugar cartel. A state-owned trading enterprise, if allowed to do its job without political interference, can make a difference, but the observed trend has been the private sugar cartel bribing supply authorities to delay imports of sugar so that it can profiteer on the artificial shortage. Janak Education Materials Center was set up to publish and distribute school textbooks at fair prices. It was to prevent what is happening now: Private schools in cahoots with private book publishers and dealers fleecing parents with impunity. Another example: Would the efficient operation of Sajha Yatayat or Trolley Bus have prevented the private sector from entering the transport business? Rather, it would have helped check the anti-competitive practices of the private sector.
For all the infatuation with privatization, nobody seems to be suggesting privatizing the Nepal Food Corporation. It is surely in need of reforms, just as most PEs are. And it has not been able to solve food deficit. Will food deficit be solved if the Corporation is privatized or liquidated? No. Rather, the people in far-flung districts facing severe chronic food shortage will not even get the subsidized food grains that they have been receiving now, albeit far from adequate. The private sector is not going to make any grand entry in this area.
Consider another example. Would private airlines operate flights to all the remote areas where NAC flew or potentially could fly? Doing so would not be profitable. But being unprofitable does not mean it is not necessary, from the standpoint of long-term interests or welfare. Only the state can meet that need. If market forces always bring about an optimal result, then why not stop NAC’s foreign flights and wait for international airlines to fly in tourists in huge numbers, since if there is a profit to be made, they will surely not miss the opportunity? Note how crucial the role of a national flag carrier has been in Thailand’s tourism development. Initially, a sector may not be profitable to operate on in the short run, but it is only a national flag carrier that usually can and does operate for long-term national interests. Instead of adding badly needed jets to NAC fleet, decision makers are busy bickering over whether it should be a Boeing or an Airbus in a rather belated fit of anti-corruption zeal even as Visit Nepal Year 2011 is fast approaching.
The problem with PEs in the Nepali context is not that they stifle the private sector. If managed properly, most of them still have a potential to serve national interests, some beyond the realm of monetary profits and losses. Privatization may be an optimal solution when a critical stage of maturity is reached, as in the case of South Korea’s POSCO, which was completely privatized in 2000. It is alive and kicking, unlike our privatized PEs. The vision with which Nepal’s PEs were set up finds some resonance with what Dani Rodrik—one of today’s well-known economists who has helped restore the intellectual legitimacy of industrial policy—cites as rationales for industrial policy: Technological externalities, information externalities entailed in discovering the cost structure of an economy, and coordination externalities in the presence of scale economies. Whatever micro-level problem there is—in terms of efficiency of operation—can be addressed through improved management. For that, political interference must be curbed. To say that is not possible only reflects poorly on the prevailing political order. After all, why is it not possible now, when PEs were better managed even during the bad ol’ Panchayat days?
kharelparas@yahoo.com
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