Nepal - Nonfinancial public enterprises sector report (Vol. 2 of 2) : Annex : enterprise profiles

Report No. 9076-NEP Nepal Nonfinancial Public Enterprises Sector Report (In Two Volumes) Volume Il-Annex IV. Enterprise Profiles January 16, 1991 Asia Country Department I Asia Technical Department 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 may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of March 1990) Currency Unit = Nepalese Rupee (NRS) 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 Asia Development Bank AIC Agriculture Input Corporation ATF Agriculture Tools Factory BBF Bhaktapur Brick Factory BJM Biratnagar Jute Mills BLSF Bansbari Leather and Shoe Factory BNP Basic Needs Program BOD Board of Directors CCD Corporation Coordination Division CDO Chief District Officer DCVI Department of Cottage and Village Industries DDC Diary Development Corporation DOL Department of Labor DOI Department of Industry FRG Federal Republic of Germany HBF Harisiddhi Brick Factory HCC Himal Cement Company HCIL Hetauda Cement Industry Limited HMG His Majesty's Government HTI Hetauda Textile Industry JCF Janakpur Cigarette Factory MIS Management Information System MOA Ministry of Agriculture MOF Ministry of Finance MOI Ministry of Industry MOS Ministry of Supplies MOTC Ministry of Transport and Communications NFC Nepal Food Corporation NIDC Nepal Industrial Development Corporation NLO Nepal Labor Organization NPC National Planning Commission NPO Nepal Peasants Organization NTL National Trading, Limited PEs public enterprises PSC Public Service Commission QC quality control RDL Royal Drugs Limited RJM Raghupati Jute Mills SME Small and Medium Enterprises STC Surya Tobacco Company T&T Trade and Transit Dispute 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.  Annex IV. Enterpris Profiles Company Name Page No. Agricultural Input Corporation . . . .I Agricultural Tools Factory Limited . .11 Bansbari Leather and Shoe Factory . . . . . . . . . . . . . . . 21 Bhaktapur Brick Factory, Limited . . . . . . . . . . . . . . . 31 Dairy Development Corporation ... . . . . . . . . . . . . . . 40 Hetauda Cement Industry, Limited . . . . . . . . . . . . . . . 49 Hetauda Textile Industry ... . . . . . . . . . . . . . . . . 59 Himal Cement Company, Limited . . . . . . . . . . . . . . . . . 66 Janakpur Cigarette Factory ... . . . . . . . . . . . . . . . 75 Nepal Food Corporation ... . . . . . . . . . . . . . . . . . 85 Raghupati Jute Mills, Limited ... . . . . . . . . . . . . . . 95 Royal Drugs Limited ..................... . 104  AGRICULTURAL INPUT CORPORATION (AIC) 1. BACKGROUND 1.1 AIC is an outgrowth of the former Agricultural Supply Corporation (ASC) which was started in 1966 to bring about improvements in the economic standard of Nepalese farmers by providing them with necessary agricultural supplies. In 1972, ASC was merged with the former Food Management Corporation (FMC), and the resulting entity was renamed the Agricultural Marketing Services Corporation (AMSC). AMSC was given responsibility for managing procurement and sales of al'l agricultural commodities, including agricultural inputs, throughout the entire country. In view of the functional diversity and heavy work load of AMSC, the Government once again decided in 1974 to create two separate organizations -- the Nepal Food Corporation (NFC) to distribute food supplies, and the Agricultural Input Corporation (AIC) to supply agricultural inputs. 1.2 AIC's primary objective is to procure four kinds of agricultural inputs (fertilizers, seeds, agricultural tools, and pesticides and insecticides) locally or through imports, and make them available to farmers throughout Nepal at reasonable rates. The corporation's principal activity is the distribution of fertilizer, which represents 95 percent of its sales. AIC has also started a seed development program to encourage farmers to grow good quality seeds. AIC buys the improved seeds from local farmers, and processes them in its own plants set up in Itahari, Janakpur, Hetauda, Siddharthanagar, and Nepalgunj. The seeds are then sold throughout Nepal. 2 ORGANIZATION AND MANAGEMENT 2.1 AIC is governed by a seven-member Board of Directors (BOD). The General Manager and other members of the BOD are nominated by the Government for a term of four years. The Secretary of the Ministry of Agriculture serves as the Chairman of the BOD. The other directors are appointed by the MOF, Nepal Rastra Bank, ADB, Department of Agriculture, and Nepal Peasants' Organization. 2.2 The General Manager provides leadership to AIC management in carrying out its responsibilities for the management of the affairs of the corporation. He is assisted by a Deputy General Manager. AIC's central office is organized into eight departments: Administration, Planning, Finance, Procurement, Sales, Engineering, Seeds, and Internal Audit. AIC has a wide network of branches and operating units. In total, it has 87 office units consisting of 11 zonal offices, 70 branches, five seed processing units, and one seed production unit. 2.3 The Ministry of Agriculture is the controlling ministry which approves annual plans and other activities of the corporation. The jurisdiction for planning, budgeting, financial control, monitoring and evaluation lies with the following agencies: MOA, MOF, NPC and the Auditor General's Office. AIC reports to these government agencies periodically  - 2 - (monthly, four-monthly and annually) on procurement, sales and inventory. Meetings are also held between the General Manager and officials of the MOA and CCD every four months. 2.4 Government intervention in the way AIC is run is apparent not only via formal control by PE regulations, but also informally and covertly through the actions of the bureaucrats on the BOO. The BOD ersures that the plans and policies followed by AIC are consistent with government policies and rules. Government interference is most pronounced in price setting and subsidy policies. 2.5 The BOD and AIC management have not given attention to corporate planning and strategy formulation, nor have they been able to clarify its objectives (social vs. commercial) and operating norms (AIC-Government relations). AIC does prepare annual plans; each branch office prepares an annual plan for its district, and these branch proposals are integrated at the central office. The central office makes adjustments in the final version so as to link AIC's annual plan with the Government's crop production plan. Targets set by MOA and NPC for the supply of agricultural inputs are also used to prepare the annual plan. 3 MARKETING 3.1 As indicated in para. 1.2, AIC distributes four agricultural inputs, but in terms of percentage of sales volume, fertilizer is its major item. AIC sales of other items represent less than three percent of the total market for those commodities. AIC's sales revenues increased from NRs 350 million in 1984-85 to an estimated NRs 511 million in 1989-90, an increase of 54 percent over the five year period. Sales of fertilizer, pesticides, and agricultural tools increased by 54 percent, 144 percent and 242 percent respectively during that period. Only sales of seeds has decreased, by some 21 percent. Table 1: SALES AND PROCUREMENT OF AGRICULTURE INPUT CORPORATION (AIC) (In '000 M Ton) Area Items 1984-85 1985-86 1986-87 1987-88 1988-89 Sales Fertilizer 100.1 102.1 105.0 122.0 131.4 Procurement Fertilizer 99.5 130.1 172.0 99.0 n.a. Source: AIC 3.2 AIC sets a sales quota for each of its 70 branch offices. However, almost all of its branches exceed their sales quota for fertilizer sales, as  the product is in high demand in all r gions. For other agricultural inputs, the branches sometimes lag behind their targets. 3.3 AIC distributes agricultural inputs throughout the country by appointing authorized dealers in every important market. Dealers receive four percent commissions on sales of fertilizer, six percent on agricultural tools and pesticides, and l0 to 15 percent on seeds. The number of dealers grew significantly between 1984-85 and 1989-90, increasing at a rate of 16 percent per year, from 824 to 1,730. This expansion in the distribution network has been a significant achievement of AIC. 3.4 HMG has been providing price and transport subsidies to farmers in hilly and remote areas since 1972-73. AIC's total transportation cost for these areas is, on average, NRs 20 million per year. However, AIC is not getting reimbursements for these subsidies from HMG in a timely manner. As a result, it often faces shortages of working capital. 3.5 AIC has its own godowns (warehouses) to store agricultural inputs. Many godowns have also been leased. At present, AIC has 149 godowns with a total storage capacity of 73,650 M Tons. However, in view of the total annual volume of inputs that AIC has to handle, the existing godown facilities are inadequate. 3.6 Because agricultural inputs are essential, and therefore politically sensitive items, HMG regulates prices. The prices are generally determined as follows: Fertilizer = Indian (Border) Prices + 10 percent Agricultural Tools = ATF Price + Transportation Cost + Dealers' Commission + 10 percent Seeds , Market Price + Quality Premium (15-40 percent) + Processing Cost + Dealer's Commission 3.7 Sales of seeds have been much lower than projected, and are some- times sold at half price. This is a contributing factor in 'IC's losses. 4 FINANCIAL PERFORMANCE 4.1 AIC's financial performance is difficult to assess correctly from its published accounts, due to inaccuracies which are described in the next section. But in general, its financial performance is entirely unsatisfactory. Asset ratios do not reveal any obvious decline or improvement in performance, although in 1987/88 there was a marginal improvement for this indicator. 4.2 The corporation consistently suffers large losses -- NRs 69 million in 1987-88. Its balance sheet shows a negative net worth of NRs 222 million as of July 1988. Thus, the Government's investment of NRs 232 million has been entirely eroded.  - 4- 5 FINANCIAL MANAGEMENT 5.1 Accounting Systems and Prc:edures. AIC's accounting systems are inadequate for the control of its assets. By the time the accounting information is produced, it is too out of date to be of use. Errors and inaccuracies are common. For example, at the time of the 1986/87 audit, three files were unavailable for auditing as they were in the hands of the police. 5.2 Accounts are prepared from manual ledgers based on a double entry, accruals system. Records are maintained by depots and forwarded to the head cffice in the form of a trial balance on a monthly and an annual basis. These monthly returns actually take as long as four months to be completed and sent to the head office. They are useless as a control mechanism since management cannot take action without up-to-date information. Annual returns take up to nine months to complete for submission to the head office, where they are consolidated and annual accounts are produced. At the time of our review in early 1990, the accounts for 1987/88 had just been prepared for presentation to the board. 5.3 AIC's accounting policies and practices misstate profits, assets and liabilities. For example: (a) stocks are infrequently verified, inadequately recorded and valued at selling price rather than cost; (b) insufficient provisions are made for bad debts in accounts receivable; (c) interbranch accounts are not reconciled (at the time of the 1986/87 audit, these accounts failed to reconcile by NRs 61 million); (d) cash balances are not reconciled to bank records; and (e) amounts due to HMG from sales of commodity aid (counterpart funds) are not paid over or recorded as payable in the accounts. Although AIC has received most of the subsidy due from HMG in 1989/1990, it has not paid the counterpart funds due to RMG. The effect of these deficiencies is to overstate AICs assets and understate its losses; thus, little confidence can be placed in the accaunts as presented. 5.4 Planning and Control. AIC lacks any form of financial planning or control. Annual budgets are prepared but are not related to practical proposals for achievement of sales or expenditure targets. No meaningful longer-term financial planning or business planning is undertaken. 5.5 The internal audit department is ineffective as a control mechanism. The department has an annual program to visit each outlying depot every year. During these visits they carryout stock counts and assist in the preparation of annual returns, but audit reports are produced irregularly and no formal system exists to enable management to respond to these reports. 5.6 Organization and Training. AIC's finance function is overstaffed and disorganized. At the time of our review, the post of Chief of Finance was vacant. An appointment had been made and the post was expected to be filled within the month. The finance department is divided into five sections: payments, balance sheet, purchases and sales, branch accounits, and audit queries. There is currently a proposal to revise this into two main sections, accounts and financial management, but no decision has been taken.  5.7 There are 28 staff members within the finance function, three of whom have a Bachelor of Commerce degree. In addition there is a staff of 14 auditors in a separate function. AIC has more than 80 outlying distribution depots, each of which has an officer who is responsible for accounting. There is no formal training provided for these officers. 6 PROCUREMENT 6.1 Fertilizers are often procured through global tenders. About a quarter of AIC's need for fertilizers is met through external loans and assistance by the World Bank, USAID, FAQ and GTZ. These agencies also assist AIC in training farmers and dealers, promoting its sales, and constructing godowns. Pesticides and insecticid?s are mostly imported from India (some 90 percent) and only a small quantity is imported from other countries. Seeds are procured locally from farmers. AIC management reported that HMG often compels AIC to buy more seeds from the farmers than the actual existing demand. The wastage of fertilizer is around three percent. This is mainly because of lack of proper godown facilities and the long distances necessary for fertilizer distribution. 7 PERSONNEL 7.1 The personnel system in AIC is governed by the PSC Rules (1987) which are applicable to all employees. The General Administration Department looks after the personnel management functions. In 1984-85 AIC's total employment stood at 934; it rose to 1,022 in 1989-90, an increase of about 10 percent over the five year period. In addition to permanent staff, AIC also employs casual labor. The proportion of such temporary and daily workers in the total employment is sizable. AIC's administrative cost as a percentage of total sales has gone up from 5.8 percent in 1984-85 to 6.8 in 1988-89. 7.Z There is little manpower planning in AIC. Posts are created and filled without proper analysis of the work flow and workload. Ad hoc decisions are made with regard to the number of casuals to be hired, and it would appear that such decisions are not made in response to levels of staff utilization. The situation surrounding casuals should be subject to analysis. 7.3 Rewards are fixed in terms of rigid pay scales which are uniform in all PEs. There are no incentives for individual effort and skill.. Fringe benefits to employees include medical, housing, meals, and overtime allowances. 7.4 Because AIC is an aid-assisted program, employees have opportunities for foreign training. However, such training opportunities are available primarily to senior level staff. With the assistance of foreign agencies, AIC also regularly conducts training for its dealers, training some 300 dealers per year. MAJOR PROBLEMS 7.5 The main obstacles blocking an improvement of AIC's efficiency and profitability are:  - 6 - AIC lacks MIS, corporate planning, manpower planning and financial planning functions. Accounting systems are inadequate; systems of procurement planning and inventory control are nonexistent or basic. Management lacks sufficient training to run an organization of this size. Decisionmaking is centralized; there is little delegation of authority; Pricing is not based on, or linked to, individual product costing because these costs are not separately identified; The social function of AIC, on which management places its greatest emphasis, conflicts with commercial objectives. (Privatization of sales and distribution activities in accessible areas of Nepal is one option which would address this); The organization is heavily overstaffed and many of these staff perform no active role and thereby affect the motivation of the other staff. AIC needs to reduce the size of its staff, particularly in branch offices; It is not clear that the target group -- poor farmers -- receives the full benefit of AIC's operations. Many of the advantages are absorbed by intermediaries; At present, a substantial portion of AIC's working capital needs zre being met by foreign agencies. The critical shortage of working capital facing AIC is partly due to the fact that the Government does not reimburse AIC for the full amount of required subsidies on time; AIC lacks sufficient storage facilities in different parts of the country. Its existing warehousing capacity is less than is actually needed. AIC rents godowns, but these are not always available when needed. Due to these limitations, AIC has not been able to maintain the required safety stock. There is an immediate need to expand storage facilities; - MOA's policy requires AIC to hold 25 percent of the annual national requirement of fertilizer as buffer stock. Maintaining this buffer stock has been a big drag on AIC's performance, and aggravates its working capital and warehousing problems. AIC perceives itself as an organization with an entirely social function regardless of cost. Most of its other problems stem from this perception. FRAMEWORK FOR ACTION 7.6 Few developing countries find it necessary or efficient to subsidize fertilizer costs, since it is not the most effective way to assist low income farmers. It is therefore necessary to decide what the best prospects for AIC are. AIC could:  divest all activities other than fertilizer and trade in fertilizer on a strictly commercial basis; divest all activities other than fertilizer and continue to distribute only HMG commodity aid; cease to trade; or - continue as it is. 7.7 The first three options involve varying levels of reduction in the size of the organization. In all but the third option, AIC would require significant financial restructuring of approximately NRs 500 million (as of July 1989). AIC is in need of rehabilitation in almost all aspects of its operation: management, procurement, logistics, marketing, and accounting. It requires clear commercial profit-oriented objectives, including assessment of the true cost of its social ubligations. In light of this, careful consideration should be given as to whether AIC constitutes the most efficient means to meet HMG objectives. 7.8 From this brief review, the most efficient scenario would appear to be to liquidate AIC and find more efficient ways of providing assistance to farmers and distributing commodity aid. A more detailed review would be required to evaluate the impact of liquidation and to consider alternative courses of action. The ongoing ADB study of AIC will provtde further guidance on required AIC reforms.  COMPANY NAME: AGRICULTURAL INPUTS CORPORATION PROFIT & LOSS ACCOUNT 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Audited Audited Audited Audited Estimates Budget (In millions of Nepalese Rupees) SALES Local Sales 350.20 365.90 418.80 480.40 Miscellaneous Income 16.00 18.90 28.70 23.00 TOTAL SALES 366.20 384.80 447.50 503.40 N/A N/A OPERATING EXPENSES Transport 80.40 65.20 69.60 51.10 Materials 381.10 319.60 369.50 453.20 Depreciation 2.50 2.70 2.70 2.70 Administration 24.20 27.30 30.10 44.90 Other 1.50 2.30 2.40 TOTAL OPERATING EXPENSES 489.70 417.10 474.30 551.90 N/A N/A OPERATING PROFITS (123.50) (32.30) (26.80) (48.50) N/A N/A NON-OPERATING INCOME AND EXPENSES Non-Operating Income Interest Expense (15.90) (21.80) (23.00) (20.10) Exceptional Item PROFIT BEFORE TAX (139.40) (54.10) (49.80) (68.60) N/A N/A TAX NET PROFIT (139.40) (54.10) (49.80) (68.60) N/A N/A DIVIDENDS RETAINED PROFIT (139.40) (54.10) (49.80) (68.60) N/A N/A sava. m,^.. -ff fl0 _., a SS ltaa. I*s_s..,  -9- CCOAPANY NAME: AGRICULTURAL INPUTS OORPORATION BALANCE SHEET 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Audited Audited Audited Audited Estimates Budget FIXED ASSETS (In Millions of Nepalese Rupees) Land and Fixed Assets at Cost 79.70 88.10 90.00 93.80 Depreciation (9.60) ,12.30) (15.00) (17.80) Investment 0.50 1.30 1.30 4.30 NET FIXED ASSETS 70.60 77.10 76.30 80.10 N/A N/A CURRENT ASSETS Bank Deposits 31.60 50.60 99.40 313.10 Inventory 270.50 261.90 251.20 161.50 Accounts Receivable Frorr, Government 9.20 13.40 20.40 18.00 From Piblic Ent. 151.10 192.80 153.20 70.70 Other 72.30 130.20 43.10 112.80 Branch Assets 3.20 61.40 42.80 TOTAL CURRENT ASSETS 534.70 652.10 628.70 718.90 N/A N/A CURRENT LIABILfTIES Accounts Payable From Government 238.70 308.20 366.20 436.60 From Other Public _rnt. 21.20 22.00 21.80 8.20 Other S6.40 127.20 119.70 111.60 Overdrafts and Current P.,rtion 1.60 1.60 1.60 134.80 of Long-Term Debt TOTAL CURRENT LIABILITIES 357.90 459.00 509.30 691.20 N/A N/A NETCURRENTASSETS 176.80 193.10 119.40 27.70 N/A N/A LONG TERM UABILmES Long Term Debt Government Other Public Enterprises Other 312.30 379.20 352.90 329.70