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While Nepal Airlines Corporation is thinking of expanding its fleet

News has recently surfaced that Nepal Airlines Corporation (NAC) is trying to find some Rs. 26 billion to add two wide-body jets to its existing fleet. Given it already owes Rs. 14 billion and all its assets have already been used up as collateral, the Ministry of Finance (MoF) looks like the most probable source of funding for these new jets for the NAC. The NAC thus is working on a sellable business plan to securequote these funds.

While it is pretty self explanatory that having more aircrafts on the fleet will help the NAC cater to more international destinations and expand the volume of its business, what is a more important question is ‘how is the NAC going to transform its management in light of all the expansions and its history of severe mismanagement and political interference?’ NAC cannot overlook the fact that it came down from a fleet of 19 planes in the mid 1980s and doing 21 international destinations only a decade ago to a fleet of only two operational planes and doing mere five international destinations in mid-2014. So, fleet expansion is definitely not the magic wand.

The operational inefficiencies, the political interferences and the managerial-level incompetence have rendered the NAC a failure as an enterprise. However, on the other hand, there are no domestic private airliners of a scale that renders them capable of bearing the load of all the international passengers coming into Nepal and competing with the big international players that fly to Nepal. With its scale and government backing, the NAC can be transformed into a company that can bear this load and tap in on all the financial prospects that these inbound international travelers bring along. It is in light of all these prospects and challenges that NAC needs a strategic partner to become a competitive airliner in the market.

Bringing in a reputed operational airliner as a strategic partner has a number of benefits in store for the NAC.

So how do we go about bringing in a strategic partner at the NAC?

  • First of all, since the NAC is regulated by the Nepal Airlines Corporation Act, 1963. Government of Nepal controls the structure and has the power to influence the management. Therefore, in order to make room for strategic partnership and hence run the NAC as a profit-oriented enterprise, the Nepal Airlines Corporation Act, 1963 needs to be repealed and the NAC should be brought under the domain of the Company Act.
  • The idea of going for a strategic partnership can be confronted with a serious resistance from labor unions. Therefore, any reform process that is initiated at the NAC will require strong communications and buy in of the labor unions. The union leaders need to be convinced of a better outcome for all their members. Ministry of Culture, Tourism and Civil Aviation (MoCTCA), as the governing ministry could therefore intervene. MoCTCA could form a committee that will hold talks with labor unions, heed their grievances and act accordingly. Laying off employees wherever necessary could have to be achieved by providing them several lucrative severance packages or by providing job placements in other companies.
  • Given the high degree of political interference at the NAC, there will also be strong opposition from the political community. MoCTCA will have to play an active role on this front as well. Before embarking on organizational restructuring, one of the crucial steps would be to garner political support for this reform. MoCTCA could take up this responsibility of garnering political consensus.
  • MoCTCA, could then form a competent team that can handle the task of bringing in a strategic partner at NAC. Strategic partnerships require dealing with critical issues like how much equity to sell, what new management model to set up, how to share the risks and rewards, and more. The credibility, reputation and capacity of the strategic partner should be such that a partnership with it enhances the NAC’s own credibility. These are some of the issues where the knowledge of an ex-officio team (which GoN usually formulates to look into any new matter) might not suffice.
  • The NAC currently operates in both domestic and international markets. This function could be unbundled into two. The strategic partner can then concentrate on competing in the international market and doing the necessary home-works therein. On domestic front, the strategic partner would not be active, but the domestic airliner would still function under competitive model. In case the NAC needs to subsidize its fares to the people in rural parts of Nepal as it has been doing at present, these subsidies could be provided by the MoCTCA by drafting a cheque in the name of the passenger who is subsidized, instead of having the NAC sell tickets at discounted rates. By doing so, the burden of subsidy would be transferred into the state from the NAC, an enterprise. The NAC could then concentrate on competition on both domestic and international ends.

For more on reforming Nepal Airlines Corporation, please 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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The Yellow Book and accounting jokes – somehow the administrative costs don’t administer!

I started my research by going through the Yellow Book produced by the Ministry of Finance. The Yellow Book is the accounting performance review of public enterprises in Nepal. If there is any doubt on financial matters or anyone wants to know how tax payers’ money is being used in the public enterprises in Nepal, this is the go-to book.

When it’s a work of the government (publishing the Yellow Book!), somehow, I had this notion of absoluteness – soon to realize most of the figures were manipulated – manipulated to the extent that there were mistakes; blunders –  some so shameless that an elementary school student could spot out! But hey, some of those could have also been human errors – we all make them. Nevertheless, if you spotted only one error in such an important document, that reason might be validated; if there are mistakes in almost every section of the book – to the extent that you could write 20 blog posts on it, now that’s a different story.

Let’s look at a few of those which are the simplest and funniest:

1. The basic Profit calculation.

This can be done by any layman. We know that Profits in the simplest form is Cost subtracted from Revenue. Profits (π) =Revenue (p (q)*q)-Cost(c(q) ).

Pic 1

This picture is from the 90th page in the Yellow Book, 2070 (2013 A.D). If you see the fourth column, it signifies the actual operating profit calculation in the year 2068/69; the profit is calculated to be negative NRs. 323 Lakh.  You do the basic math now.

Subtract NRs. 30675 Lakh (Operating Cost) from NRs. 33123 Lakh (Operating Revenue)- you must get +NRs.2448 Lakh provided you do it correctly.  The calculation published by the Ministry of Finance says this figure is a negative NRs. 323 lakh. This is a difference of NRs. 277100000!

The other years are correct, provided you do the same; you could subtract and see for yourself.

The story behind this manipulation (assuming this is not one of the hundred human errors in the Yellow Book): The above table is about Agricultural Inputs Corporation Limited (AICL). This is the government body in Nepal which distributes chemical fertilizers throughout the country, with transactions worth billions as you can see from the table itself.

During the year for which the figure was manipulated, or rather deliberately shown as a loss, there was a shortage of chemical fertilizers in the Nepalese market. During the past two consecutive years there was a shortage due to limited subsidy.This created a big black market.

I really cannot pin point why AICL wanted to show this figure as a loss on their assumption that the people were so foolish that they could not subtract and see for themselves. But one guess I have is because they wanted to show that they worked to the extent of loss. You judge it for yourself.

Pic2

You could do the same for the 95th page. All calculations here for the operational profits are erroneous.

The joke is that with the administrative staff that makes such erroneous calculations, gets paid in millions of rupees, as you can see in the above table.

Pic3

The same errors on the 110th page of the Yellow Book, the same argument for administrative costs hold!

2. Formulae given in the end – they forgot to follow themselves!

pic 4

This can be found in the last page (302nd) of the yellow book. I want you to notice the last formula conveying the debt to equity ratio.

pic 5

Notice the debt to equity given for the year 68/69 is 305:1.

pic 6

From the table above

  • Long term loans are: NRs. 247710 Lakhs ( Sn: 27)
  • Loans that exceeded the durations are: NRs. 70610 Lakhs (Sn: 29)
  • Current Liabilities are: NRs. 47321 Lakhs (Sn. 16)
  • Share holder’s funds  are: NRs. 967 Lakhs (Sn 22)

If we follow the formula, the considered loans are all the loans except for current liabilities. This amounts to NRs.318,320 Lakhs (27+29). If you follow the formulae and divide this amount by the share holders fund you should get the figure 329.18, the mentioned debt equity is 305.

These are only few of the many errors that one finds in the yellow book. Print mistake, tabulation mistake, human error has it place, but the amount of mistakes in the book baffles the reader and gives them a clear impression of carelessness and even arbitrariness in coming up with the mentioned figures. Somehow the administrative costs don’t administer when it comes to the government.

Serene Khatiwada

About Serene Khatiwada

Serene Khatiwada is a Research Intern at Samriddhi, The Prosperity Foundation. He did his Economics Honors from Hansraj College, University of Delhi.

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Re-thinking Public Enterprises in Nepal

When public enterprises were first introduced in Nepal during late fifties and early sixties the scenario was quiet different from what it is now.  The presence of private sector in the market was negligible and thus it made sense for the government to take control of the economy and establish several public enterprises. The government, in order to fulfill its duty of serving the people along with providing them essential goods and services, established one enterprise after other. The rate of establishment was such that at a point in time there existed 61 public enterprises–from water and food to cement and air services and everything in between–most of them monopolized the sector. Their number has been reduced to 37 today but their return in terms of goods and services to the people and profit-making for the government is questionable.

Almost six decades have passed us by and  instead of improving the services these enterprises have imposed an enormous burden on the taxpayers as well as the government. While the debate on public enterprises continues–some favor putting in more efforts and improving the management while others opt for a complete privatization. While this happens in the backdrop,  we bring to you facts on public enterprises that simply cannot be overlooked or neglected anymore. Since resources (esp. monetary) is already scarce in the country it would not be wrong for us to ask the government to use the resources in productive areas rather than pouring in taxpayers’ hard earned money into ineffective enterprises.

Public Entreprise Infograph

 

Koshish Acharya

About Koshish Acharya

Acharya is a student of social sciences and has been associated with Samriddhi, The Prosperity Foundation for the last three years.

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HPPCL owes us all

sancho-550x550Established in 1981 by Government of Nepal with an objective of utilizing the immense range of herbs found in the country while also creating employment, Herbs Production & Processing Co. Ltd. (HPPCL) is well known among consumers for the production of Sancho, a herbal oil used for curing common cold, cough, rheumatism, fatigue, body ache, headache, neuralgia, sprain, and itching.

Annual Performance Review of Public Enterprises, 2070 published by Ministry of Finance indicates that HPPLC has a net worth of negative NRs. 1494.95 lakhs. Similarly it owes the government a total of NRs. 6421.06 lakhs as loan. The enterprise employs a total of 204 staffs and has unfunded liability of employees benefit worth NRs. 1035.76 lakhs. HPPLC has been unable to perform financially since its establishment for various reasons and has accumulated cumulative loss of NRs. 1775.26 lakhs until the year 2068/69. It also incurred a loss of NRs. 393.37 lakhs in 2068/69.

Recent news published in a national daily indicates that HPPLC is planning to sell off its property to pay its employees’ salaries. The Ministry of Finance has given it the permission to sell off the land on conditions that employees are to be laid off and commercial production is to be started. The Head of Privatization Cell in the ministry, Mr. Bashudev Sharma is skeptic of the whole idea and believes the enterprise can only perform post privatization.

While HPPLC, Ministry of Finance, and the Privatization cell all have their own agendas, the most important stakeholders i.e. the citizens are completely sidelined and forgotten. Since government and other government institutions are the major shareholders of the enterprise, it directly or indirectly implies that “we the people” own HPPLC and it is us who are losing our hard earned (taxed) money to an inefficient enterprise which essentially sells us products that private players are selling more effectively.  Sancho and other products that HPPLC produces are not even essentials like petroleum and electricity. Then the question arises as to why the government needs to play “god” and poke its nose in every other business.

The intentions of the government were well and good during the 50’s and 60’s when the private sector was not contributing much to the economy. With time and with changes in the system we have experienced a growing private sector capable of producing goods and services for the people at affordable rates while also creating much more employment opportunities than the public sector could possibly imagine.

Most of the public enterprises in Nepal along with HPPLC suffer from the phenomenon that is most encapsulated in the form of “tragedy of the commons”. In simpler terms what belongs to everyone does not belong to anyone. Take for example our own Ratna Park, a governmental park which is free and open for everyone. The park is in a very sorry state while Garden of Dreams, a privately run park where an entry fee is required has been doing way better.

Coming to the point, although the amount of loss incurred by HPPLC when divided among the citizens comes up to being a very small sum adding up losses of all the PEs is a very alarming issue for the taxpaying citizens. The taxpayers neither have the time nor have intentions to question the government on the viability of running HPPLC and other PEs. Keeping tracks of 37 enterprises run by the government is not going to be an important agenda for the taxpayers when they are busy running their own lives and paying taxes to fund government’s businesses. While few of us are concerned we are merely small fishes in a big ocean and such issues raised by concerned citizens like you and me never reaches the concerned authorities and even if they do it does not fall under priority issue when we all are more focused on constitution and politics. They will ignore you once, they will ignore you again and again but they cannot ignore you forever so it is time we ask questions and demand satisfactory answers from the concerned authorities.

Koshish Acharya

About Koshish Acharya

Acharya is a student of social sciences and has been associated with Samriddhi, The Prosperity Foundation for the last three years.

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