Most public enterprises (PEs) were established beginning from the Second to the Seventh Five Year Plan periods as a vehicle of development. These units were created as instruments for production and for achieving socio-economic policies of the government. This initiative of the government was essential and justified at a time when private sector investment was not forth coming in the provision of basic social and economic services.
The number of such enterprises in the industry, business, service, social and public utility sector exceeded. Many of them were established with the assistance of donor countries. From these public sector organizations, it was expected that they would create an industrial base in the country, enhance domestic production, substitute imports, generate employment opportunities, and contribute to the national treasury.
But most PEs characterized by operating deficits, overstaffing, heavy dependence credit, and inefficient management and low capacity utilization/sub-optimal use of resources etc. incurred losses. The performances of public enterprises, particularly those involved in industry and trade sector, public enterprises, particularly those involved in industry and trade sector, turned out to be very poor. On the basis of analysis and evaluation of the roles and performance of these enterprises, the elected government which assumed power after the restoration of democracy in 1990, concluded that the economic conditions and financial efficiency of the government corporations were unsatisfactory. Lack of basic elements contributing to the development of professional culture in their inherent structure and operating procedures was singled out as the main cause for their poor performance.
Public enterprises confronted with various problems and hindrances such as lack of managerial autonomy, inefficient use of means and resources, shortsightedness and weakness on the part of political leadership, production of low quality goods and services, uncontrolled administrative expenses, lack of competitive ability, lack of motivation in incumbent human resources, adoption of traditional technology and minimum use of professionalism. All the factors brought about a progressive decline in their output and made the vast amount of government investment unproductive.
Thus, these public corporations have not only failed to achieve their objectives but also become a heavy burden on the national economy.
According to the observation of the World bank, “Their performance has been deteriorating steadily since the 1980s, while no attempts have been made to eliminate shortfalls in spending for operation and maintenance as such by public corporations, a review of their operation suggests not only that their operation and maintenance function is seriously deficient but furthermore many of these corporations are becoming a serious drain on fiscal resources.”
Nepal implemented Structural Adjustment Programme (SAP) as early as in 1985 which included tariff rationalization, reduction of fiscal deficits and privatization of PEs. But the efforts at privatization were not materialized until the political change in the country in 1990.
The privatization process went smoothly and could get active participation of private sector at the initial phase; however, the slow down in the economy experienced in latter part of last decade has plagued in momentum. Replacing public monopolies with competition, particularly in utilities sector, under appropriate regulatory rearrangements would further improve the environment for promoting the private sector.
Challenges in the Privatization of Public Enterprises
i) Most of the public enterprises have been unable to meet their targets of producing goods and provisions of effective service delivery. Government’s investment in the forms of share capital and loans has been on rise due to lack of capital management and capital formation of public enterprises.
ii) Most of the public enterprises are overstaffed and there exists absence of uniformity in the provision of facilities to their staff. These enterprises have created large liability as a result of their inability to manage their funds properly making it difficult to ascertain the extent of their liability. Therefore to create congenial environment to establish these enterprises as viable entities with the improvement in their efficiency has been a challenge of this time. Moreover, overstaffing and settlement of unlimited liability of these enterprises has been an obstacle on the way of privatization and their restructuring.
iii) The government decided to sell some of its shares in the market, so that the private sector could become the majority shareholder. So it floated 10% of the shares in the share market. Now the government is a minority shareholder, i.e. it holds on 39% of the total shares was taken back by the government and again leased out in December 2003.
iv) Political instability, deteriorating law and order situation/security environment have eroded business confidence; the poor implementation of policies governing the private sector continues to be an important constraint on private investment. A survey of private sector firms carried out in 1999 identified several such impediments including, among others, excessive bureaucratic delays in the provision of government services, lack of clarity of laws and unpredictability in the enforcement of government policies discretionary implementation of tax laws, excessive documentation requirements, and labour laws that prevent retrenchment of workers. To address this situation a regulatory framework reflecting clarity of laws and predictability of government policies, procedural simplification and reduction in discretionary powers of the authorities will be made that basis for making the private sector vibrant and dynamic.
However, the present Government in power is trying to make amicable policy to develop the private sector in the country.
Along with the adverse investment climate, low competitiveness and productivity are other bottlenecks for the private sector development in Nepal. Before embarking upon problems identification and coming up with remedial measures/implementation strategies in the private sector development, it will be quite relevant to examine the key issues such as competitiveness and productivity, and investment climate in Nepal. In this regard, various studies have been carried out and the government is in the process to implement findings of the reports as and when necessary.