Privatizing State-Owned Enterprises in Nepal

August 11, 2014

The country of Nepal has 36 public enterprises. Researchers at Sammriddhi, The Prosperity Foundation, analyzed two of them, including the Hetauda Cement Industry, Ltd. (HCIL). The public enterprise has suffered losses and, in addition to unfunded liabilities, has wide-ranging problems, from operational inefficiencies to labor issues.

HCIL was established in 1976, and while it has the capacity to produce 5.2 million sacks of cement each year, it consistently produces below production targets. In 2012, it produced at just 37.91 percent of its capacity, and its capacity utilization is below the industry average.

Public enterprises are government entities, so HCIL losses are borne by taxpayers. As a result, the researchers addressed two ways to reform the enterprises:

  • Improving governance.
  • Restructuring the institution entirely (through privatization or public-private partnerships).

The second option, privatization, comes with a number of benefits:

  • One study on privatization in Nepal found that nine of 10 examined enterprises increased their productivity after privatization from 4.5 percent to 508 percent. The tenth did not lose productivity, rather its productivity remained constant.
  • Private firms tend to have more effective management structures, increasing the productivity of their enterprises. A study of privatization in Bangladesh indicated that sales efficiency and income efficiency increased 73 percent and 78 percent respectively after privatization.
  • Technology use tends to improve after privatization. A previous study of Nepalese privatization found that 9 of 10 studied businesses improved their technologies after going private.
  • The quality of goods and services produced increase, because private companies are not plagued by government intervention and political interference.

The authors recommend privatizing HCIL. Privatization would end the risk of political interference with the operation of the enterprise. A mere management change, they explain, would do nothing to change the bureaucratic problems that plague HCIL, and taxpayers would remain financially burdened.

They recommend full privatization over partnership with a private organization, because the success and growth of private sector cement enterprises make clear that the private sector can fully handle its operations. The private sector can do everything that HCIL does, but with greater efficiency and profitability.

Source: Bimal Wagle, Akash Shrestha and Koshish Acharya, "Policy Options for Public Enterprises Reform in Nepal: A look at two public enterprises," Sammriddhi, The Prosperity Foundation, August 5, 2014. 

 

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