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Reforming NAC through strategic partnership

Lufthansa Group has been the cynosure for a few days now, for it has offered to partner with the currently state-run Nepal Airlines Corporation (NAC). On one hand, we have one of the largest carriers in Europe and on the other, there is a sick State Owned Enterprise that has been running on over a billion rupees worth of cumulative loss and if not for the Ground Handling Services (GHS) at Tribhuwan International Airport (TIA), would go on another millions of rupees worth of net loss every year. One of the first questions in a Nepalese’s head would be, “Why NAC?” Maybe the German group wants to create a new hub in South Asia. If so, why prefer Kathmandu over Delhi or Mumbai? Maybe it is all in the best interests of NAC, but should NAC be entertaining such unsolicited proposal (boycotting competitive bidding?) As per the information from the Ministry of Civil Aviation in Nepal, the matter is still pre-mature and we still do not have answers to lots of similar questions.

However, whether or not Nepal entertains this proposal from Lufthansa, this is very much the right time to talk about reforming NAC. Therefore, we will keep this discussion very specific and just focus on why NAC needs a strategic partner and what benefits can we derive from such a partnership.

Why a strategic partner?

Nepal Airlines Corporation is no more the same “national-pride” enterprise. As it stood only a couple of months ago, it came down from a fleet of 19 planes, serving 38 domestic and 10 international destinations in the mid 80s to a fleet of two Boeing 757s, serving 5 destinations and no operational twin otters for domestic service. Thanks to GHS, it brings in Rs. 2 billion annually for NAC. If it weren’t there, NAC very well faces a risk of bankruptcy. It bears heavy cumulative loss and unfunded liabilities. Complete government ownership means that all losses are borne by the government which is ultimately transferred to the taxpayers.

To add to this financial plight, there have been frequent cases of corruption, political intervention, nepotism, impunity, labor issue and operational inefficiency. As it stands today, Nepalese planes are banned in the European skies, which has greatly tarnished their reputation in the international arena.

Despite costly air-fares, insufficient Nepalese carriers and poor services, a great number of tourists fly in to Nepal every year. NAC has been unable to tap in on the prospects that these numbers offer. Now if you thought expanding the fleet again would do the trick in terms of tapping in, wait on just a second. Public Procurement Act (PPA), 2007 plays another nuisance in procurement of new planes and fleet expansion.

So what benefits will strategic partnership offer?

Interestingly, if done right, strategic partnership bears solutions to all problems we’ve just talked about; and even more benefits.

– Procurement decisions will be guided by the terms of agreement between NAC and its partner and not PPA, 2007. This will ease up procurement.

– Nepal can be transformed into an aviation hub from the current status of being a mere end-destination. This can increase traffic in the Nepalese skies. This will open up more employment opportunities as well.

– With business-driven partner, NAC will have a commercial orientation and will be directed towards a profit-driven modality.

– Code-sharing, which is a major practice in international aviation, will allow NAC to expand its service. It will one, market the services of NAC and two, generate additional revenue for NAC.

– Consumer benefits will also increase, due to greater network access and other benefits of strategic partnership like seamless travel via code-sharing, transferable priority status and more.

– NAC can acquire modern scientific technological and manual skill sets.

– With business-driven management, strategic partnership will also foster competition in the rural domestic destinations.

Of course, strategic partnership is not as easy in practice. There are important decisions to be made, in the process. What will the partnership look like? Maybe NAC board can play the role of a monitor while this partner takes care of the business side. Do we want a practicing airliner as a partner or just a management firm? How do we share risks and rewards? How much equity ownership do we hand-over? How do we deal with the employees that might have to be laid-off? These are some of the areas where Ministry of Culture, Tourism and Civil Aviation (MoCTCA) should take the lead and get the discussions going already.

To learn more about the costs and benefits of reforming NAC through strategic partnership, click here
Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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Economic Policies in Emerging Markets

Samriddhi, The Prosperity Foundation organized a Nepal Leaders’ Circle meet on the topic “Economic Policies in Emerging Markets.” Rt. Hon. Hugo Swire, MP, MInister of State, Foreign and Commonwealth Office, UK was the speaker for the event. While Nepal is looking to graduate into the status of Developing Country by the year 2022, this program sought to bring out valuable inputs from the participants on how Nepal can benefit from the global trends of cross-border investments by setting the right kind of policy environment that offers profitable prospects to the investors.

Attendees discussing Economic Policies for Nepal

Attendees discussing Economic Policies for Nepal

The event was organized at Hotel Himalaya, Kupondole on the 3rd of June, 2014. The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The following is a summary of the entire session:

Rt. Hon. Hugo Swire

Rt. Hon. Hugo Swire commenced the session by talking about why, despite all natural, geographical and human endowments, Nepal has not been able to transform itself into one of the major players in the global economy. He acknowledged how Nepal has been a land of peace in the past and reinstated the same peace in the present, albeit having gone through a period of insurgency in the last decade. He then went on to iterating how Nepal cannot afford to be complacent in being a least developed country in the pretext of the same old civil war and waste its resources like hydropower and tourism, and killing the entrepreneurial spirit in the people in the meantime. He expressed how Nepal needs to acknowledge the need of FDI to uplift itself from the Least Developed Country status. There seems to have been discussions over whether Nepal intends to be under aid and assistance all the time, or change it and shift its focus towards bringing in investments. However, not much action has been done in this regard. Similarly, constitution drafting has taken too long a time already. While Nepal is spending much of its time debating and discussing its political and economic agendas, Nepal has utterly failed to reap the benefits of it resources; the opportunities they provide for attaining Nepal’s economic transformation.

The speaker then went on to justifying his statements by giving examples from international experiences. In India, BJP overthrew the ten-year reign of Congress and UPA by selling hopes of economic reforms. Narendra Modi’s Gujarat reforms were the building blocks of BJP coming to power. In China, despite the communist roots, they have liberalized their economy because they realize that they have to allow economic freedom to the people to protect their own political dominance. Currently, they are planning building hundreds of newer cities. Similarly, in the UK itself, they have acknowledged the fact that in order to keep the pace with globalization and international investments, they have to become more and more inward investment friendly. They need to revamp their infrastructures like the airports, the energy sector and more. For this they need capital investments and they are turning to more international investments in these regards.

The speaker concluded his opening remarks by reiterating how there is no alternative to being open to foreign investments to boost the Nepalese economy. The private steers the market while the public sector caters to the needs of the most vulnerable groups in the society. But he also mentioned that foreigners will not come in just by debating in favor of Foreign Investments (FIs). Investors are mobile these days. They create job opportunities and contribute to economic growth; but in the mean time they look for certain pre-conditions before making investments abroad. Some of such necessary pre-conditions that Nepal needs to be guarantee the foreign investors, as highlighted by Rt. Hon. Hugo Swire were,

  • Clarity in economic polices
  • Certainty in terms of being free of risks that a host country can impose; like nationalization, change in rules of engagement in a retrospective manner
  • Accountability in government
  • Transparency
  • Predictability in the markets
  • Rule of law
  • Fair tax environment

General Discussion

After the speaker concluded his deliberation, the floor was set open for interaction among the participants. Some of the key issues discussed during the interaction session are:

  • A functioning government is a must for allowing the private sector to grow. Government should encourage private sector. When there is wealth creation, that is which can then be redistributed by the government by delivering public services. But if the government hamstrings the private sector, it is not beneficial for any group.
  • Capitalism is being redefined globally. After the 2007/08 economic recession, capitalism has had a bad reputation. The key issue is to get the right balance between regulation and promotion of private sector.
  • The domestic market of Nepal is being over-protected in the fear of its resources being exploited by foreigners and Nepal being converted into a dumping-ground. But the reality is that with foreign investments, the economic sectors of Nepal will be modernized, made more productive and will create more job opportunities. Then Nepal will in fact be able to supply its goods and services to the international market.
  • Nepal needs to send out signals to the rest of the world that it is welcoming FDI. International giants already have lots of places to go to. So Nepal should go to other countries and promote its own market. The foreigners need to be convinced that there is a demand and substantial market for foreign products in Nepal. For example, Oxford University could be lured by selling the prospects of great market by selling the idea of Nepal’s geographical proximity with India and China, both of which are going out for higher studies.
  • Nepal has a minimum threshold on the amount of permissible FDI. Then there is corruption, which in turn creates unpredictability for investors. Things like these discourage investors. Peru, Chile, Brazil, they are all going to London, promoting their markets and negotiating terms of doing business in their respective countries.
  • In the UK, government tries to make sure that the taxpayers’ money is used wisely and optimally. If there is something that the private sector can do better than the government can, the government pulls out.
  • The presence of donor agencies like USAID, DFID, Gtz and many more have turned Neal into a welfare state itself. There seems to be no shame in asking for aids and assistance when seeking the same to support the people who need help, but the idea of FDI is suddenly perceived as a threat to national sovereignty. This needs to change. No country will colonize Nepal. Nepal should open up its markets.
  • Nepal faces severe challenges in terms of having high numbers of rural population and low human capital. But this is not a unique problem in the world. Mongolia a faced similar challenge. But they have found a way around it by using there mineral resources. In Nepal, there is high potential of hydropower generation. This should be tapped in.
  • Political parties need to come together for a economic transformation of Nepal.

Hon. Minendra Rijal, Minister of Information and Communication, GoN

After general discussions Minister of Information and Communication, Hon. Minendra Rijal delivered concluding remarks to formally end the session. Some of the highlights of his deliberation were:

  • Competition is the pre-requisite for economic growth. He used the example of NTC and NCell, one 92% government owned company while the other, an over 80% foreign investment have been competing with each other, delivering better and cheaper services to the consumers than in the days when NTC had a monopoly in the telecommunication sector of Nepal. NTC is even looking for foreign strategic partner and a process of divesting 30% of government ownership has already begun. These activities, he believes, will serve the Nepalese consumers even better in the days to come.
  • Investment Board of Nepal (IBN) is working with foreign investors in the hydropower sector of Nepal.
  • Nepal Telecom, Nepal Army Welfare Fund, Pension Fund and others have huge pools of unused funds. Nepal still needs to work on creating an investment-friendly climate for these domestic institutions. These funds can then be mobilized as investments.
  • Overall, government should realize that there might be times when certain sectors need to be protected from foreign investors, but Nepal should never protect inefficiency.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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