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Corporate Financial Sector
Restructuring

By Sujit Mundul

Corporate and financial sector restructuring are two aspects of the same problem. The amount of debt a company can sustain – and on which lenders can expect reliable debt service – is determined by the unit’s cash flow. Indeed, a company cannot sustain interest payments in excess of its cash flows (i.e. interest coverage<1:1), let alone make any repayments on the principal. Hence, substantially higher ratios of interest coverage are most desirable.

There are a number of ways to resolve unsustainable corporate debt. The best response is for the company to raise new equity or to undertake operational restructuring, e.g. discontinuing less-profitable or loss making (“non-core”) businesses, laying off excess labour etc. If it appears that operational restructuring cannot reduce corporate debt to a sustainable level, financial restructuring becomes appropriate. For example, creditors could convert debt into equity or into lower-coupon convertible bonds. To avoid moral hazard, creditors should contemplate debt write-offs only after exhausting all other approaches and should retain some instrument (equity, option etc.) to participate in any recovery. Term extensions may also be acceptable, as long as they do not have the practical effect of transforming debt into an equity-like instrument without also giving creditors the rights of shareholders. Reducing interest below the risk-adjusted rate may also be acceptable, so long as the principal is repaid. In cases where deferred debt service is rescheduled into a large balloon payment due after several years, it is likely that the company will relapse into distress unless it uses this breathing space to address fundamental problems through operational restructuring.

As a practical matter, operational and financial restructuring are likely to be simultaneous or iterative rather than strictly sequential. Indeed, as seen in some examples from Korea , financial stabilisation and financial restructuring can “buy time” for more fundamental operational restructuring.

Now turning to the financial sector side, the distressed corporation’s creditors should provision – and, as necessary, further reduce its capital to reflect (a) the present value effects of any rate reductions, term extensions, grace periods etc. (b) appropriate provisioning of remaining corporate debt based on international standard forward-looking criteria. In cases of debt to equity conversions, the realisable value of the converted equity may be well below the face value of the debt before conversion, which would warrant additional provisions. If such measures as these reduce a financial institution’s risk-weighted capital below some ratio (e.g. 8 per cent), the government may decide to close and liquidate the unit, merge it with a stronger entity, insist on additional capital from current shareholders or recapitalise the unit and take control.

Thus corporate cash flow is linked to (a) the amount of sustainable corporate debt and (b) the cost of recapitalising financial institution for losses in resolving the portion of corporate debt that is not sustainable. In any case where financial restructuring of a distressed corporation involves a conversion of debt to equity, financial institution shareholders will need to make arrangements to manage and eventually sell the converted equity.

Corporate debtors and financial institution creditors will naturally seek to minimise their losses from corporate restructuring. The government has a role to play in balancing a variety of conflicting interest. These may include minimising the cost of bank recapitalisation; protecting workers, suppliers, and sub-contractors of failed companies and minimising ripple effects through the economy; minimising distortions to market competition through excessive debt-restructuring concessions; avoiding labour strife; and – last but not the least – dampening public criticism enough for the government to remain in office.

(Mundul is a CEO of Standard Chartered Bank Nepal Ltd.)

Secrets of Prosperity

By Manohar Man Shrestha

Recently when I entered the Pilgrim's bookshop, the store-manager was waiting for eye contact. As soon as I was through putting my bag at the gate, he approached me with a smile and greeted me with folded hands. I had gone there to buy only one book. But this greeting together with the soothing environment of the store - the colour combination, aroma and music - made me buy four more. This is what customer service excellence boils down to; this is what every business should strive for; this is what Nepal must emulate to attract large foreign investment.

Shashindra Shrestha, director of Nebico Industries is fond of retelling this anecdote. "Once at a Singapore airport counter, I realised that I had left my passport in the taxi along with the handbag that had my money. I was about to rush to the police to report it when the taxi-driver came running towards me with my handbag in his hands. After getting the bag, I asked him why he was so prompt in returning the bag, in his reply he crossed his hands on his wrists indicating handcuffs and said he would be put behind bars if he did not do so. In fact this is one of the reasons why that country developed so fast. You can trust its people."

In developed countries, trust is not an individual choice. Instead it is mandatory and institutionalised: it is not an exception, it is a rule.

Many people are unanimous in saying that there is much in common between Nepali and Indian politics. They are right but only to a certain extent. Politicians in both the countries fight like dogs for the chair. However, the similarity ends here. There is two-digit rate of economic growth in India while it is a snail-paced one in Nepal . What lies behind this? India is careful not to change its long-term economic vision, policies and agreements no matter which party comes to power. In Nepal we have no qualm about changing our positions. One latest example: the new government has dropped the Melamchi project. It might be a politically good move, but in terms of economics it is equivalent to a tsunami, sending shock waves over many years ahead, and discouraging foreign investors.

Adam Smith's book Wealth of Nations is said to be the ideological foundation of developed economies. Many Nepali scholars have been trained on the ideas of Wealth of Nations, yet the impact here has been negligible. Reasons could vary from politics to culture. But both politics and culture have changed tremendously also in developed countries from the days of Smith. Then, why doesn't the 'invisible hand' work here as effectively as it does in the West, in East Asia and now in China ? What new economic model will transform Nepal ?

There is a deep rooted problem that stands in the way when any pundit in economics tries to implement his carefully designed plans. This very problem will prevent any significant rise in the per capita income of Nepal . Many people say it is because Nepal is a land cursed by a Sati? Remember the account found in history books about how Bhimsen Thapa was forced to commit suicide in captivity. According to this account, Thapa's wife offered herself as Sati on the funeral pyre of her husband and cursed Nepal . However, has not such injustice taken place in America ? Of course it has. The ancestors of many present day Americans slaughtered Indian Americans. In Europe , around 6 million Jews were the victims of genocide during World War II. In Russia , Stalin murdered anyone who opposed him or even thought about it. The number amounted to millions. Yet are not these countries more developed than ours? What has the virtues and sins of ancestors got to do with economic prosperity today?

Some people point out that we are underdeveloped because we are landlocked. But so is Switzerland . We are small. But so is Singapore . We have no fossil-fuel reserve. Similar is Japan 's case. We have too much social diversity. So has Russia . We don't have well-wishing neighbours. Same can be said of Kuwait . There is political instability. So is the case in Sri Lanka . We have never been colonised. Neither were Korea and Thailand . There is plenty of corruption. It is worse in Indonesia . So, what is the cause of our slow economic progress?

The root cause lies in kama-artha-moksha, the three foundations of any society as told by our scriptures. A society founded on kama means all its activities revolve around pleasure. A society founded on artha means all its activities are directed towards financial gain. A society founded on moksha means all its activities are driven by desire of liberation from earthly bondage. Even though, on the surface, all these three types of societies may look alike, they operate under totally different cosmic laws. It is like the force of gravity which is different on the Earth, the Moon and the Mars. These laws in turn determine the consciousness of the masses which influences the purpose of their lives, the activities they engage in, the legacies they leave behind and the outlook of that society in its totality. This cause-effect chain, when allowed to repeat itself over thousands of years, results in some countries where the people are materially rich but spiritually poor, in others where they are spiritually rich and materially poor and yet in others where they are the connoisseurs of the finest arts. Then, like fashion, one type of society becomes more in vogue than the other and people start to question: "Why can't we be like them? They seem so happy." You got the theory, now let me illustrate my hypothesis with some examples.

Nepal and India were two societies based on moksha. The sense of piety is very high here. Wealth is considered the root of all evil and there were many kings who renounced everything to search for liberation. Our greatest thinkers, whom we know as the yogis and rishis, were too busy building roads in the spiritual realm rather than creating physical infrastructures, educating the masses and creating material wealth. Even today, as a society, we are not sure if wealth is really what we want.

Europe and later America were two societies based on artha. There the rich and the powerful are venerated like gods. They take the stature of our yogis and rishis. Wealth was the foremost priority. When England realised that there was no more wealth to be created on its soil it sought out to colonise Asia and Africa . Most of us have been duped into thinking that it was solely through Mahatma Gandhi's effort that India got its independence. Many think otherwise. The British had milked the cow long enough, and the cost of maintenance was too high. It was like venture capitalists selling off their shares after having taken as much as they could from the venture. Thousands of years in the wealth mentality leading to insurmountable entrepreneurial spirit and a canvas with ample resources, has made the New World into the powerhouse of USA we know.

For those in Europe , the US and now in East Asia as well as China , the formula of getting rich is simple:

1. Identify an unfulfilled need

2. Create a demand

3. Supply

4. Take a margin

5. Invest the accumulated profits and repeat the process from (1)

The East India Company did the same and even caused what is known as the Spice War. It was a time when the British people were willing to barter spices from Asia with gold. My friend David Carpenter used to say, "Don't be surprised. I'd have done the same. Imagine eating your food with only salt and pepper. Yes, not very tasty." Bill Gates too used this simple formula to build his empire. In Nepal too, many have followed this simple formula. Binod Chaudhary did it with Wai Wai. In India Tata did it with vehicles and heavy machinery. The list goes on.

There are some exceptions but look at the formula that a majority of Nepalis use to become rich:

1. Go to the temple and make offering of goats, chickens and ducks

2. Take fasts

3. Serve the king and receive gifts (baskish) from him.

4. Give alms to the poor

5. If your wish (bhakhal) is fulfilled repeat the same process from (1)

Now you tell me what is wrong in this. It won't take Einstein's brainpower to figure this out. Majority of our people are not oriented towards economic prosperity. This is because we have been conditioned for thousands of years on the path of moksha.

Nations that are based on kama are France , Thailand , Brazil to name a few. Look at their numerous arts, their passion for life.

In this way, different societies evolved on very different frequencies. Smith's theories on the creation of wealth worked in places that shared similar values and belief systems to his place and time. However, in Nepal we will need a different approach to economic well-being. The hints to that approach are in my earlier examples.

What we need is to start by building an environment of long-term visioning (comparison between Nepali and Indian politicians), mutual trust (Shashindra and Nebico), and customer-orientation (Pilgrim's). Only then will the 'invisible hand' of market forces be able to act effectively.

Customer-orientation: I was surprised when a shopkeeper treated me like a king when buying a dress for myself. He was young and exhibited every sign that customers mattered to him the most. He was not a Marwari, he was just a Chhetri boy. There was a time when waiters used to be shy to greet Nepali guests but felt it natural to salute foreigners. That is changing. However, customer culture is still in its infancy in Nepal . In a workshop with about 50 teachers, we had a game in which we had to vote how we viewed students: (a) children, (b) plants, (c) raw clay and (d) customers. Most went for the first three and about five opted for the last one. Then followed a heated debate. Ninety per cent of the teachers could not understand, even conceptually, how students could be viewed as customers.

Mutual Trust: Black-listed debtors do not only give tension to banks or individual lenders, they create a state of paralysis in the economy by erasing every form of mutual trust between borrowers and lenders. How much progress would have been made if entrepreneurs had come up with some novel ideas, pooled funds from banks, finance companies, and individual investors, and then paid back? The cycle of trust would have been re-enforced. That is what developed nations focus on the most. Investors can trust their government that agreements won't be breached at all costs. All this is possible because they have institutionalised trust. For example, contractors have to sign documents saying that if they don't complete a project within the given time (by complying with all quality measures), they will pay fines for every day of the delay. Try this policy with Nepali contractors or with our tailors! I was surprised to read that even during Smith's time private loans were made at the rate of about 6 per cent per annum whereas in Nepal even in this time of cash surplus it works out to a hefty 24 per cent p.a. The reason given was that the courts of justice in England during Smith's days guaranteed even risky loans. Here not even banks can sue bad debtors and hope to get their money back.

Long term vision: I wonder if our failure to have long term vision has anything to do with our capital being surrounded by mountains. Maybe this physical status has influenced our psychological status too. However, we must decide what sort of destiny we are going to pursue. The present days are the best suited for such decision as the trickiest of the political problems are almost settled. The long term vision need not be limited to positioning Nepal as the most favoured tourist destination, or as a centre for cheap labour, or as the land of herbal medicines like Yarchagumba, or as an exporter of hydro-power or simply as a production factory of cheap labour for Malaysia or the Middle East and of educated labour (graduates, nurses, doctors, engineers) for the US, Australia or the UK. We should think backwards from the future and formulate the visions that inspire and unite.

Only after we come in terms with our own limitations in kama-artha-moksha standings and focus on the above three logical groundwork, can we really think of economic prosperity. Steve Morris used to tell me, "Go back to your country and tell them not to copy the US economic model. It has robbed us of happiness, brought diseases and turned us into machines of consumption. Asian countries like Singapore and Hong Kong have emulated us, and they too are showing the same symptoms of spiritual emptiness as us. It doesn't have to be this way. There must be a better model of economic development. Don't focus only on increasing GNP (Gross National Production), also focus on GNH (Gross National Happiness)."

Maybe our lack of success in progressing economically is a call from our collective consciousness that we should take all three-- kama , artha and moksha-- together from this point forward. If you try hard but still don't succeed, as a wise man you will question your deeper self and make the necessary changes, won't you?

(Shrestha is Senior Trainer & Advisor of Standard Icon Pvt. Ltd.)

Save the golden goose

By Santosh Poudyal

Forest privatisation will be a good source of revenue to the government. A regular income can be generated from these private companies as royalty. Secondly, there will be a decrease in government expenditure for wildlife conservation. Moreover, the increase in the number of wild animals will make Nepal a destination for wildlife tourism.

Deforestation, poaching of wild animals and misusing wild resources frequently make headlines both in the Nepali and international media (see box on the next page). The Nepali government’s efforts to control such activities were failures because these efforts were traditional and mainly concentrated on punishing miscreants. Government officers (civilian and military) have the authority to investigate and mete out punishment, but these very authorities are found to be hands-in-glove with the miscreants —a classic example of a fox guarding the hencoop. The traditional approach to protect forest resources has turned out to be a mere bandage on a wound that requires major surgery.

The lack of ownership of these wild resources has turned them into a waste resource which are exploited by certain groups for short term benefits. Poachers kill rhinos, tigers, blackbuck and deer to earn a few rupees in the local market whereas these local buyers make huge money in the international market by smuggling the same products. It’s time the government did something to preserve these golden geese to reap benefits in the long run.

One of the effective measures could be privatising and leasing out these resources to wildlife companies. This should give full property rights to the private party over the wild animals and other resources in the respective forest area with clearly defined terms and conditions so as to ensure that the resources are not misutilised. The right should include selling meat, hides, horns and bones of the animals. A system can be incorporated in the privatisation deal so that the resources including the number of wild animals in the forest increases over time and does not diminish.

It's a "killing two birds with one stone" solution. After privatising, the property belongs to a particular company or group. Nepal already has a proven track record of success in such privatisation in the form of community forests. But since the plots granted to the community have normally been barren tracts, there is no strong evidence to prove or disprove if it has really helped to increase the number of wildlife in these forests, but one can reasonably assume positive correlation between the gradual increase in the forest crown cover and wildlife. More so when there is a well-defined ownership right over resources in such forests.

Some countries in the southern parts of Africa ( Zimbabwe , South Africa , Namibia and Botswana ) have been reaping substantial benefits by granting property rights on forests to multinational companies. It became an example for rest of the world when Nelson Mandela acknowledged that his poor HIV stricken country does not have enough resources to preserve this valuable resource and adopted the unique approach to privatise wildlife resources. This step has started to pay. Currently, a private Dutch nature conservation company runs a major part of South Africa 's game reserves. Today, these countries have become a centre of wildlife tourism. This process has resulted in the increase in animal population to such a level that African countries are earning revenue by allowing hunting and selling of meat, hides and horns of wild animals which have a world wide market.

Natural resurce destruction in Nepal

News that made headlines

 Red colours of rhododendron attracting tourists, but villagers are chopping the trees for firewood- http://www.bbc.co.uk/nepali (1-May- 2007)

 Ambassadors suspected to be involved in rhino-horn poaching in Nepal . http://www.bbc.co.uk/nepali (Nov 2006)

 At present only 29 per cent of the total land area in Nepal is forested. The annual deforestation rate is 2.3 per cent in the hills and 1.3 per cent in the Terai. http://www.sacep.org/html/mem_nepal.htm

 Since January 2005, a total of 35 rhinos have been found dead in and around Chitwan national park. Only 10 died from natural causes. Chitwan now has less than 400 rhinos http://www.bbc.co.uk/nepali (Nov 2006)

 Rare rhinos go missing in Nepal (2007 report) http://news.nationalgeographic.com

 Out of 861 bird species in Nepal , 133 (15 per cent) are threatened, with 72 thought to be critically endangered nationally, and at high risk of disappearing from Nepal http://www.birdlife.org


Trophy Fees in Tanzania
Species	Number	US$
Cape Buffalo	2	1st included 2nd 1800
Burchell’s Zebra	1	900
Nyasaland Wildebeest	1	500 each
Impala	1	390
Warthog	1	500
Lichtenstein's Hartebeest	1	550

Source: www.kuduland.com/hunting-in-tanzania.htm

Such companies clearly have an incentive to ensure that the number of wild animals in the forest they own increase or at least do not decrease. These companies with expertise in wildlife management are a very effective solution to nature conservation.

The example of Tanzania is worth quoting here. As shown in the box (previous page), Kuduland Safaris Africa Ltd. provides hunting opportunity against a trophy fee that differs depending upon the type of the animal. This provides an incentive to the company to ensure that the animal population remains high as the demand is high. In the case of decreased animal population, the fee can be increased to reflect the demand and supply situation. As a result, tourism has increased in Tanzania giving direct benefit to the people living in the vicinity of the sanctuaries. The local people say that wildlife is a natural resource and therefore protect them. If the same approach is adopted here then the day is near when Jhapa local, who are now terrorised by wild elephants and eager to kill them, will form anti-poaching patrols.

There is a lot of talk about the privatisation of telecommunication, hydropower, airlines, hospitals and other major sectors of the economy. The same logic applies for wildlife resources. The government has to take the initiative for this now. It can float global tenders and select the best domestic/ foreign private company. The only bottleneck lies in the point that government must come up with proper policy and farsightedness to execute this step to take maximum benefit and to prevent resource misuse after privatisation. Otherwise the step will be added to the list of other privatisation cases gone wrong for which the government is frequently criticised for its lack of proper policy and farsightedness.

African countries have booming wildlife resources while our wildlife is diminishing even though poaching and killing are criminal offences here. An African proverb "If it pays, it stays" clears the paradox. Wildlife resources flourish in Africa because they are taken as a form of industry. So, privatisation can be a major means to unlock their true value and convert these ignored resources into a gold-mine.

One reservation people may have about this forest privatisation would be about the locals' right to fulfill their daily necessities of firewood. But again, community forestry has proved that privatisation can rather increase the supply of firewood. In case of privatisation that grants the ownership to a particular company, it's good for the company to see that the local people can continue fulfilling their needs. No sensible private company will think of carrying on its business without taking the local community in confidence.