Nepal - Nonfinancial public enterprises sector report (Vol. 1 of 2) : Main report

Report No. 9076-NEP Nepal Nonfinancial Public Enterprises Sector Report (In Iwo V\Iunes) Volinie 1 -Mairn Report January 16, 1991 A~sia CoMnr11V D)epa)rtment I Asia Techn (l I)epartmunt FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents nmay not otherwise be disclosed wi ithout WVorld Banki authorization.  CURRENCY EQUIVALENTS (As of March 1990) Currency Unit - Nepalese Rupee (NR$) US$1.00 - NR$28.90 NR$1.00 - US$0.035 FISCAL YEAR (FY) Mid June - Mid July WEIGHTS AND MEASURES Metric System  FOR OFFICIAL USE ONLY LIST OF ACRONYMS ADB Asian Development Bank AIC Agricultural Inputs Corporation ATF Agriculture Tools Factory BBF Bhaktkapur Brick Factory BJM Biratnagar Jute Mills BISF Bansbari Leather and Shoe Factory BOD Board of Directors CCD Corporations Coordination Division CE Chief Executive DDC Dairy Development Corporation EC Executive Chairman GM General Manager HCC Himal Cement Company HCIL Hetauda Cement Industry Limited HMG His Majesty's Government HTI Hetauda Textile Industry IFC International Finance Corporation JCF Janakpur Cigarette Factory MIS Management Information System MOA Ministry of Agriculture MOF Ministry of Finance MOI Ministry of Industry NFC Nepal Food Corporation NIDC Nepal Industrial Development Corporation NPC National Planning Commission NRB Nepal Rastra Bank NTL National Trading Limited PE Public Enterprise (nonfinancial) PSC Public Service Commission QC : Quality Control RDL Royal Drugs Limited RJM Raghupati Jute Mills STC Surya Tobacco Company T&T Trade and Transit This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization.  NEPAL NONFINANCIAL PUBLIC ENTERPRISES SECTOR REPORT Table of Contents Page No. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . i I. PE ROLE AND PERFORMANCE . . . . . . . . . . . . . . . . . 1 A. Introduction and Background . . . . . . . . . . . . . 1 B. PE Performance . . . . . . . . . . . . . . . . . . . . 4 C. Financing of the PEs ... . . . . . . . . . . . . . . 11 D. Discussion and Core Issues . . . . . . . . . . . . . . 13 II. THE POLICY AND REGULATORY FRAMEWORK . . . . . . . . . . . 14 A. Investments and the Regulatory Environment . . . . . . 15 B. Administration of Regulations . . . . . . . . . . . . 19 C. The Pricing Regime . . . . . . . . . . . . . . . . . . 21 III. GOVERNMENT SUPERVISION, CONTROL AND PERFORMANCE MONITORING ... . . . . . . . . . . . . . . . 26 A. Introduction and Summary . . . . . . . . . . . . . . . 26 B. Government Oversight Agencies . . . . . . . . . . . . 28 C. Existing Monitoring and Reporting Systems . . . . . . 31 D. Options for Reform ... . . . . . . . . . . . . . . . 32 IV. INTERNAL MANAGEMENT . . . . . . . . . . . . . . . . . . . 36 A. Introduction and Summary . . . . . . . . . . . . . . . 36 B. Managerial Capability ... . . . . . . . . . . . . . 38 C. Functional Areas ... . . . . . . . . . . . . . . . . 39 D. Financial Management ... . . . . . . . . . . . . . . 42 E. Options for Reform ... . . . . . . . . . . . . . . . 44 V. EMPLOYMENT, COMPENSATION AND LABOR RELATIONS . . . . . . . 49 A. Introduction and Summary . . . . . . . . . . . . . . . 49 B. Employment Regulations ... . . . . . . . . . . . . . 50 C. Salary and Wage Structure . . . . . . . . . . . . . . 55 D. Labor Relations .... . . . . . . . . . . . . . . . 57 E. Options for Reform ... . . . . . . . . . . . . . . . 60 This report is based on the findings of a World Bank mission to Nepal in March/April 1990, comprising C. Ramsay (Mission Leader), A. Agbonyitor, P. Thuyet, S. Paul, S. Torabi, J. Baker (Consultant), J. Plummer (Consultant), K. Koirala (Consultant), and P. Pant (Consultant).  -ii- Table of Contents (Cont'd) Page No. VI. PRIVATIZATION AND DIVESTITURE . . . . . . . . . . . . . . 64 A. Introduction .... . . . . . . . . . . . . . . . . . 64 B. Constraints and Issues ... . . . . . . . . . . . . . 66 C. Strategy for Privatization and Divestiture . . . . . . 69 VII. STRATEGY FOR PE REFORM ..76 A. Overview .76 B. Implementation P.E. Reform . . . . . . . . . . . . . . 78 C. Implementation Plan ... . . . . . . . . . . . . . . 81 ANNEXES 1.1 Official List of PEs I.2 Legal Status of PEs 1.3 Capacity Utilization of Selected PEs I.4 PEs Dividend Distribution Statement T.5 Commercial Bank Loan to PEs Under HMG/Nepal Guarantee 1I.1 Ministry of Supplies: Role of Government in Pricing, Distribution and Marketing of Essential Commodities IV. Enterprise Profiles (Volume II) V.1 Comparison of PE and Civil Service Pay Scales V.2 Salary Analysis: Public Enterprises and Private Sector V.3 Salary Analysis: Joint Ventures V.4 Output Per Employee in Public and Private Sectors V.5 Supply and Demand for Skilled and Qualified Manpower VI.1 Company Valuation  EXECUTIVE SUMMARY Background i. In the 1960s and 1970s Nepal relied heavily on piblic sector enterprises to promote economic growth. By the mid-1970s, more than 60 public enterprises had been established, in many instances with substantial financial and technical assistance from multilateral and bilateral donors. Although support for creating new public enterprises diminished subsequently because of existing units' poor performance, public enterprises still play a major role in economic activity in Nepal. Currently, the 64 officially listed public enterprises control major sectors of the economy. In the financial sector, two state banks, Nepal Bank Limited and Rastriya Banijya Bank, account for about 80Z of commercial bank assets. Nonfinancial public enterprises have virtual monopolies in commercial energy (including oil, electricity and coal), domestic air transportation, basic utilities such as telecommunications and water, and the importation of basic inputs such as chemical fertilizers. Manufacturing PEs (M.PEs) account for over 70Z of the domestic market for tobacco products, 62Z for cement, 55Z for sugar and 45Z for leather goods, in addition to substantial production of beverages, agricultural tools, textiles and drugs. Although they constitute numerically less than 3Z of the total number of manufacturing establishments relative to the private sector, MPEs represent a disproportionate share of fixed assets (36Z), value added (29Z) and employment (25Z). ii. Given the importance of the public enterprises, their current poor performance constrains the growth and efficiency of economic activity in Nepal. This report examines the performance of Nepal's nonfinancial public enterprises (referred to subsequently as PEs), with emphasis on the manufacturing PEs on which relatively little systematic analysis has been done and the trading PEs, which are the primary recipients of government subsidies. The report examines the budgetary impact of PE under-performance, assesses the factors, both external and internal to the PEs, which have contributed to their poor performance, and, taking into account existing social, political and economic constraints, recommends short-, medium- and long-term reform strategies. The analysis draws extensively on the results of a survey of ten manufacturing and two trading PEs. Volume Two contains detailed enterprise profiles based on this survey. Preparation of this report was coordinated with an IMF report on PE pricing and subsidy issues; recommendations in both reports on these issues are consistent. iii. The report concludes that PEs are likely to become an increasing burden on Government because of their poor financial performance. The PEs absorbed over 20Z of Government revenues on average over the past three years, with manufacturing and trading PEs accounting for about half of total allocations. Production levels and efficiency are below potential for most MPEs. Few are cost competitive relative to imports or similar enterprises in other developing countries. Of the 28 MPEs in operation, only four have generated profits consistently, two incur large losses and the remainder are only marginally profitable. Trading PEs have the largest financial losses.  - ii - Over the past five years cumulative lobses of loss-making manufacturing and trading PEs exceeded NRs 1.5 billion. Financial losses have eroded government equity in the PEs; six of the ten MPEs in the .ample survey had negative or declining net worth. Five of seven trading PEs have a negative net worth. Actual financial performance is likely to be even worse than indicated since poor accounting standards and records understate the PEs' financial weaknesses. Deficiencies include lack of physical verification and revaluation of assets and inadequate provision for depreciation, bad debt and obsolete stock. Few PEs have internal funds to finance capital replacement costs. There is little indication that the performance of the manufacturing and trading PEs will improve in the foreseeable future. Even the few profitable PEs are beginning to show declining profitability and will eventually require support. Thus, PE debt repayment, working capital requirements, and rehabilitation and modernization costs are becoming a growing burden on Government. Constraints and Issues iv. The PEs' poor performance is due in part to real economic and physical constraints, such as poor quality and inadequacy of domestic raw materials, unreliable supply of power, obsolete technology and defective machinery. However, the PEs' policy and operating environment also provide little incentive to increase production efficienocy and achieve financially sustainable operations. Deficiencies exist in all areas critical to enterprise performance. Key problems highlighted in the report are the following: X Conflicting objectives, inconsistent policies and lack of clear performance guidelines have lessened PE accountability and weakened managers' incentives to perform. The Government has a multiplicity of often conflicting objectives for the PEs, including employment generation, meeting basic needs, providing rural services and generating financial returns through dividends, but little guidance has been given to enterprises to assist them in prioritizing or making tradeoffs among these often conflicting objectives. * The industrial and regulatory environment in Nepal shield enterprises from competitive pressures and fosters managerial inertia. Barriers such as output price controls and commodity trade agreements which support sole, state-sponsored supply of some products, limit private sector entry into some industries. At the same time, nonviable MPEs are seldom closed. In many instances, government measures such as payment of guaranteed debt, direct government subventions and tax rebates are used to support financially weak enterprises. * Weaknesses in the policy environment are compounded by an ineffective, procedure-bound system of supervision and control by government oversight agencies which limit the PEs' ability to respond to changes in their environment even if they had adequate incentives to do so. Formal and informal government control of pricing, investment, employment and other operational decisions  - iii - contribute to lengthy and inflexible decision-making processes that frequently result in suboptimal decisions that adversely affect enterprises' financial health, and efficiency. The regulatory framework of the Public Services Commission (PSC), which controls all major staffing and employment decisions, limits the PEs' ability to adjust their staffing requirements to their needs. With the emphasis on detailed control of the PEs, government oversight agencies have failed to exercise strategic control; little guidance has been pro:ided to enterprises to help develop long-term strategies nor has long-term planning been emphasized. Furthermore, despite the multiplicity of oversight agencies, there is little effective performance monitoring.