Nepal | May 20, 2019

Privatization of utilities: Obvious alternative

Rahul Shah

The suitable method of privatization for the existing utilities is partial sale of company to the public. The government can retain the majority share (51% or above) of control and still float shares/stocks in the capital market to attract investors

privatisationThe subject of power is of high importance for the socio-economic development of Nepal.

The Government of Nepal (GoN) has given continuous attention to the overall development of the power sector. During the last two decades, a reasonable amount of public sector investment has been allocated for the development of the power sector.

The energy sector of Nepal has been seriously afflicted by shortages of electricity, shifting economic growth, and social welfare.

The reasons for these problems lie in lack of proper management and inefficiency in all aspects of operations (production, transmission, distribution, billing and collection), inadequate funding for the operation and maintenance of facilities, low level of commercialization and financial discipline, low tariffs, excessive central government interventions and autonomy of the organization in decision-making, undesirable pressures from the trade unions, and insufficient expertise – partly due to low pay scale.

The obvious alternative to this problem is energy privatization, which has been a global trend. The privatization trends have placed greater reliance on market forces and less dependence on government allocations.

Additionally, disenchantment with state ownership is growing as government enterprises begin to be perceived as mismanaged and inefficient.

The private sector will be the dominant economic force with private capital funds being the main source of external capital; in emerging markets privatization is one means of obtaining badly needed foreign capital.

The common economic rationale underlying the decision to privatize is to achieve one more of the following objectives: 1) raising investment capital for the industry or company being privatized; 2) reducing the role of the government in economy; 3) promoting wider share in ownership; 4) increasing efficiency 5) introducing competition; 6) exposing firms to market discipline.

Despite the above benefits, the concept of privatization also brings several concerns.

First, since the corporation as an institution exists to generate profit for shareholders, there is concern whether the corporation is incapable of adequately managing the myriad interests to serve the needs of the public.

Second, privatization means management of resources based on principles of scarcity and profit maximization rather than long term sustainability.

Third, labor and workers’ rights may no longer be a priority – a factor that could lead to selective hiring and increased layoffs despite growth and exorbitant executive remunerations.

Fourth, corporation requires operations not only to finance themselves but also to generate a profit for corporate executives and shareholders.

The Ministry of Energy (MoE) has the responsibility of overseeing the energy sector in Nepal. Nepal Electricity Authority (NEA) is a hierarchical organization with a mechanistic and bureaucratic structure, which has also remained as a sole buyer of electricity in multi-seller market overtime.

Reforms in NEA have made little progress till date. The subject of unbundling is a sensitive one and with the presence of strong trade unions, it is unlikely that unbundling of NEA can be achieved anywhere in the near future.

Although unbundling may take time, the institutional strengthening within NEA is also being delayed and a number of steps such as accounting separation of business units, cleaning up of the balance sheets, strengthening internal processes and systems with commercial orientation and introducing appropriate governance measures have not been accelerated to ensure NEA functions as an independent commercially viable entity.

While NEA competes with private power producers for setting up new generation capacities, it has very little leeway to take decisions on commercial basis as it is state owned and continues to fulfill many state obligations.

Privatization is the answer; the suitable method for the existing utilities is partial sale of company to the public. The rationale for such a choice is that Nepal is a developing country that does not possess qualified private sector entrepreneurs who are independently or together capable of running a utility organization.

The government can retain the majority share (51% or above) of control and still float shares/stocks in the capital market which could attract local and foreign investors. This will bring in the required capital needed without jeopardizing national safety.

Shares can also be sold to cooperatives formed by organization employees that will motivate them towards attaining efficiency in performance and appease trade unions to cooperate with the corporatization process.

The participation of the private sector can be in the form of management and lease contracts such as billing, collection, delivery of bills, and maintenance of the utilities, etc.

Privatization, which will ensure national safety and citizens’ interests, is a partial sale of the company to a private enterprise and retaining the major control in the form of ownership.

This type of privatization will not only encourage a balance between the sole privatization and government ownership, but also provide the necessary services to citizens efficiently and effectively, and finally accomplishing the goal of democracy – free people, not free institutions.

Shah is a consultant for Infrastructure and Energy Industry (Asia-Pacific)


A version of this article appears in print on July 20, 2016 of The Himalayan Times.


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