In his work plan concerning industrial sector reform, the newly appointed Minister for Industries Rabindra Raj Joshi announced that the government owned industries that have been shut for several years will be reopened. The method that the government is adopting for this is dangerous for the country’s business environment. Yes, the fact that industries that have been closed are now reopening sounds like good news. It will create job opportunities. But, before reopening these industries, it should be asked why they were closed in the first place and whether there are any negative impacts to come by reopening them.
The minister clearly stated that though some of the state-owned industries will be given to the private sector for management under the so called “Public Private Partnership” (PPP) model, the ownership will not be handed over to the private sector. But PPP is suitable only for some specific cases. PPP may be useful for such projects which are not feasible for the private sector alone to invest in. This is the case in which the public benefits are much more than the benefits that the private sector investor can appropriate for himself. PPP is suitable also in projects in which the main resource is a public property, such as a natural resource, which cannot be sold to the private sector.
The concept of PPP can be useful in the initial stages of a transition from a fully state-controlled economy to a market economy. That is why PPP was very popular in the early days of the former Soviet Union and East European economies’ transformation into market economies. Nepal’s case is clearly not that. It already has a thriving private sector. The government has already decided to hand over the management of Nepal Drugs to the private sector and provide such private party a loan to operate the company. Must Nepal Drugs remain under government ownership? The private sector pharmaceuticals industry is quite mature now. If the private industries can flourish like this despite innumerable hardships posed by the government, why did Nepal Drugs, a government-owned company enjoying government pampering, close down? If private sector Surya Nepal’s cigarette factory can go on making mighty progress year after year, why was the state-owned Janakpur Cigerette Factory closed down? Similarly, private sector airlines like Buddha Air and Yeti Air are operating with good profits and foreign airlines such as Qatar, Thai, Indian Air, Jet Air etc. are making a profit flying to and from Tribhuvan International Airport. But why can’t the government-owned Nepal Airlines achieve the same results?
Since government owned firms enjoy access to unlimited resources, they have undue advantage over the private sector firms. They can survive even when their products are priced below cost. This makes the private firms uncompetitive. Or, the government firms can provide benefits to one or two private firms through some underhand practices by senior officials with the private firms. This distorts the market. Though there are laws and regulators supposed to control such activities, their effectiveness is questionable. That is one of the differences in Nepal and many other countries where government-owned firms are doing well without distorting the market.
One frequently cited reason as to why state-owned firms close down, is simple: political interference. And almost everyone agrees on this. What arrangements has the government made to ensure that a similar problem will not occur in the future?