Do we really need public enterprises?

In Nepal, public enterprises were regarded as a vehicle for development. They were taken as an instrument for the production and for the execution of socio-economic policies.

Anjila Shrestha

  • Read Time 4 min.

Going against the very spirit of a free market, Finance Minister Janardan Sharma in his budget speech announced plans to breathe life back into nine sick industries—Janakpur Cigarette Factory, Agricultural Tools Factory, Gorkhali Rubber Industry, Nepal Orind Magnesite, Nepal Metal Company, Biratnagar Jute Mill, Birgunj Sugar Factory, Hetauda Textile Industry and Butwal Yarn Factory. 

Bringing such sick public enterprises back smacks of the invisible hand (the invisible hand is an economic concept that explains how individual choices, acting on their own self-interests, lead to better public goods and bring social benefits) rejecting its handshake. The invisible hand is what drives the free market economy. 

Why do public enterprises exist in the first place?  

The notion of public enterprises gained prominence after the World War I to solve market deficits and capital short-falls, promote economic development, ensure national control of the economy, reduce mass unemployment, cover areas where the private sector couldn’t reach either due to lack of capital or it shied away, produce essential goods at lower rates and have a positive impact of the development of the state (Khan M. Adil ,2007). 

Fernandes et.al. (1982) added reasons such as adopting the socialist model of development, controlling strategic sectors of the economy, developing economic infrastructure, managing “essential services”, controlling “commanding heights of the economy”, controlling “natural monopolies”, developing backward areas, providing a competitive element to the private sector, generating income and employment, developing technology, utilizing economic resources and discouraging concentration of economic power among others. 

When we tunnel vision the rationale behind the establishment of PEs in Nepal, we see that PEs were regarded as a vehicle for development. They were taken as an instrument for the production and for the execution of socio-economic policies in the country. Hence, wholly or partly owned state enterprises exist with the objective to ensure the supply of essential goods and services at affordable prices, create employment opportunities, ensure sources for government revenue, create a self-sufficient economy and ensure fairness and equity. Thus, Nepal highly prioritized establishing PEs from the Second Plan.

How is the government supposed to fulfill the goal of collecting Rs 1.24 trillion in revenue when all it does is keep incurring losses in anything it invests in?

But the private sector is providing the same goods at competitive prices. The private dairy industry is even making profits while the state-owned Dairy Development Corporation (DDC) is operating at a loss. Similarly, Hetauda Cement and Udaypur Cement are also at a loss while private cement enterprises are issuing Initial Public Offerings (IPOs) and transforming into public companies with high-profit margins with a good capital base. Losses incurred by state-owned companies like Nepal Drugs Limited, Food Management and Trade Company, Nepal Oil Corporation, Nepal Airlines Corporation, Gorkhapatra Sansthan, Nepal Television and Nepal Railway Company, to name a few, are also at a loss and have subsequently increased the liabilities of the government. This disproves the “ensuring the supply of essential goods and services at affordable prices” argument. 

But even if you were to give the benefit of the doubt, and we were to believe that the 2078/79 budget is focused on employment generation, the public enterprises employ 28,000 individuals only (it has been so for the last five years). In a market where 5,00,000 graduates enter the job market annually, (not counting unskilled laborers), this mediocrity does not justify the billions of rupees’ worth of taxpayers’ hard-earned money that is required to keep these PEs around, disproving the “generation of employment” argument. 

When the country has given enough reasons to its citizens to believe that history repeats itself, they are forced to believe the past statistics. In the F/Y 2077/78, State-Owned Enterprises (SOEs) suffered a 45.42 percent decline in profits on a year-on-year basis. What may seem as though Public Enterprises can take a hit and can operate on losses, as long as the people don’t have to take the financial burden, has also been proven to be false as the rates of commodities have ever only increased due to inflation. 

So how is the government supposed to fulfill the goal of collecting Rs 1.24 trillion in revenue when all it does is keep incurring losses in anything it invests in? So, is the solution to just increase taxes, and yet again increase the financial burden of the citizens to keep up with the ridiculous 1.79 trillion budget? This questions the “generation of government revenue” argument. 

Even if PEs provide goods at a cheaper rate, PEs need huge capital. Usually, in private enterprises, they have shareholders, and to retain such shareholders, they have to earn profit and function well. PEs don’t have that motivating factor that ultimately affects how the enterprise is being run. This shows how PEs and private sectors don’t have equal footing. Hence from a quality and profitability perspective, PEs have an unfair advantage, making it difficult for the private sector to survive disproving the “fair and equitable” argument.  

Questioning the “self-sufficiency” argument, it makes more sense if we focus on the products that we are most profited by/excel at. Thanks to globalization, we have improved standards of living through specialization and trade.

To take an example, before oil was discovered and successfully exploited, Saudi Arabia was a poor land. The country has been transformed from a desert land into one of the world’s key nations in both economic and international affairs. Saudi Arabia did not have to focus on all areas of developmental infrastructures and industries. Once they unlocked the full potential of extracting oil and trading it, prosperity followed. 

To give credit where it is due, out of 44 PEs, 22 PEs have generated profit while 19 PEs have incurred losses and 2 PEs had shut down in 2077/78. But even if 22 industries ran in profit and we are to believe that bringing sick industries back to life would be beneficial in the long run, the industries still need time to get set for production, it would possibly take years just to reach breakeven and have a smooth production line set up—let alone profitability. There is no way we are to believe that the new (although bloated and highly ambitious) budget that aims to reduce 20 percent imports by increasing self-reliance on domestic products is in any way an attainable goal. 

Charles Wheelan said it best: “A market economy is to economics what democracy is to government: a decent, if flawed, choice among many bad alternatives.” If the government is busy running enterprises and trying to “fix” the economy, when will it find the time to focus on executive functions that need its urgent attention, like focusing on delivering key services effectively and efficiently, like providing licenses, National Identity Card of Nepal (NIN) and many others?

Anjila Shrestha ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. [email protected]

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