March 2005
INTERVIEW

‘Salt Trading is trying to be a marketing MNC’

Parameshwor Mahaseth, CEO of Salt Trading Corporation Ltd. (STCL), is leading a massive restructuring and business expansion in the company by entering new fields and going into partnership with outside parties in some existing units. Excerpts from an interview with this winner of “Manager of the Year” award from the Management Association Nepal (MAN) this year about the strategy he is pursuing and the results so far:

It seems that STCL is leaving manufacturing sector and concentrating more on trading. Would you mind elaborating on this strategy? For example, the Nepal Vegetable Ghee Industry (NVGI) and the Khadya Udyog Ltd. are leased out and new business of agricultural inputs and marketing of agricultural products is started.

Yes, we feel that this is the age of specialisation and STCL is a marketing company. So, STCL will have to stand as a marketing company at an international level. It has to be a multinational marketing company. At the same time we are not leaving the manufacturing portfolio. We have a difficult system in Nepal. The majority of entrepreneurs or manufacturers - I say this without any bias towards anyone - show only about 60% of the total production for tax purpose, but we cannot do that. We have maintained quality in all our brands, whether it is Shanti Ghee or Grihini Ghee or Himalchhap Maida. The consumers prefer our brands. But on other fronts we are not able to match the other manufacturers who resort to all sorts of manipulation. As a result we are comparatively a bit weaker. However, we want our loss making manufacturing units to stand on their own feet without resorting to manipulation. So we have resorted to a different strategy.

We have leased out NVGI and Khadya Udyog for the time being. But we are working to find out better alternatives. However, let it be clear that we want to maintain both the manufacturing and the trading portfolios. The only thing is that we feel STCL's roots are in marketing. As such STCL will have to grow as a marketing MNC working abroad while consolidating its position in Nepal by supplying fortified foods to all common people and exporting Nepali products to third countries and establishing its own network outside.

What strengths of STCL are being leveraged in this change of strategic focus?

We wanted to have a clear-cut separation line between our trading activity and our manufacturing activity. This strategy was formulated long ago because the people in these manufacturing units were found to be dependent on STCL and they were not trying to develop their marketing strength. Now we have drawn a cut off line between STCL and its manufacturing units, making it necessary for the manufacturing units to be competitive. We want to increase our efficiency in distribution by expanding our distribution network. We now have presence in all the 75 districts within the country. Earlier it was in 40 districts only. The number of our offices has increased to 93 from the earlier 42. The number of our dealers has increased to 10,000 from 6,000. Similarly, we are distributing more products now. At the same time, we also want to have our presence in Qatar, Dubai, India and China to achieve multinational success. On the manufacturing side, we want to enhance our capacity and efficiency by using modern technology. Modi Group's involvement in Gorakhkali Rubber will help improve its quality and increase capacity utilisation so that it can be exported to the third countries as well. We want to make similar sort of arrangement for other units as well.

What hurdles are being faced in STCL's new venture to export vegetables and fruits to the Gulf market?

Of course, there will be problems initially for all new businesses and new line of products. It's not easy to export green vegetables and fruits to the Middle East because the climate there does not match with that of Nepal at all. We do not have cold storage in the airport here. Moreover, if the cargo plane gets delayed by a few hours the quality of the products will decrease. In quality and packing, we are still in the infant stage. The expectation of the market is different and we are not able to meet that standard. So, we still have to improve. We are taking help from the agencies concerned in this regard and hope that this problem will be solved in the near future.

We are not in a position to assure our buyer about the delivery schedule because of current problems in the country. They place bulk order which demands items to be collected from different places and the frequent strikes here pose problems to fulfil that order. To solve this problem we have established our own showroom in Qatar. Now we are in a position to deliver the goods according to schedule.

The Middle East imports all food items from abroad and the majority of the consumers are South Asians (about 75-80%). The suppliers too are South Asian countries, especially Nepal, India, Pakistan and Bangladesh. But we have a better climate advantage. So once our products are introduced there, we will have a competitive edge.

Presently we are facing problems in maintaining quality and offering good packaging. Also the air freight is a bit high compared to that of other countries. Since the Middle East countries are completely dependent on imports for vegetable items, there is plenty scope for our vegetables. We have just started and we should not expect a lot right now. But as we have already set up our own showroom, I hope we will be in a comfortable position within the next six months or a year.

What would be your advice to the private sector entrepreneurs who may be considering a proposal to start a similar venture of exporting vegetables and fruits from Nepal?

In Nepal, normally the trend is to follow others. If anybody is successful in a particular line, there will be many in the queue to follow. So, I think that since there is a very good scope for green vegetables and fruits of Nepal in the Gulf area, once we get to a comfortable commercial volume, many others from Nepal will follow and the total export volume from Nepal will be big and the poor farmers will benefit.

But let me mention one point worth considering by all the prospective exporters. Anything associated with Nepal should have a clear-cut differentiation, either on quality or taste or something on that line. That is the only way we will have prospects for good business there. We have to concentrate on quality and packaging.

On the basis of your experience so far, what immediate reforms do you suggest in the country's rules and infrastructure to facilitate the export of agriculture goods?

I don't think there is much restriction from our government so far though the importing countries may have their own restrictions. The European and American markets are cautious about quality. They prefer organic products. So, if we maintain quality and grow a lot of organic vegetables and fruits, there is a good market. Of course, we have a little bit of infrastructure problem. We do not have cold storage at the airport. We do not have temperature-controlled vehicles. If the government takes measures to improve on these, it will pave the way for better export. We also have to teach the farmers about growing quality goods and in time so as to realise better prices. STCL has set up an Agriculture Development Centre as a one-step centre to fulfil the requirements of a farmer. This model provides training, advice and lab-testing facility from one centre. They also can get all the inputs such as seeds, pesticides, fertilisers, agricultural tools and tractors from the same centre. They can even sell their products to our centre. With this we can assure our member farmers in advance that we will buy particular amounts of their products at a particular price.

Despite the difficult situation of the country, the supply of goods that STCL deals in is not felt disrupted, which is appreciable. What strategic arrangements have you made to ensure that such smooth supply will continue in the future?

We have maintained a buffer stock of major commodities that we are dealing in. Even if there is a transportation blockade for a couple of weeks or even months we are in a position to serve our consumers. Though it is a business unit, STCL is always concerned about rendering service to people.

STCL is also entering the housing business. How will you arrange the financial and human resources?

As of today the standard functioning of STCL is based on portfolio management system. A particular portfolio can be managed in a different way. Specialists have been assigned for different portfolios. So far as the housing or real estate business is concerned, of course, we are in touch with established developers from outside Nepal. They are supposed to come in as a joint venture partner. So, this housing business can be a separate portfolio that could be managed by experts of that particular business.

In Nepal we have a good number of engineering colleges. In this construction business there are so many A class or B class construction companies too. We only need to have some strategic alliance with these parties from within and outside the country.

What is the latest situation in Gorakhkali Rubber, Butwal Spinning and Subarna Pharmaceuticals - the three major problem investments of STCL?

In Gorakhkali Rubber, though we are the largest single shareholder, we hold only around 20% of its equity. We invited Modi Group to manage it and with their support the company is now in a very comfortable position. The quality has improved and losses have been reduced. We expect to save about Rs. 30 million per year in fuel consumption alone. The company is projected to register profit in the next year. In Butwal Spinning Mill, again we have a strategic partnership with an Indian buyer. They will bring raw materials, operate it, and take 100% of the production back to India. Thus this company also is in a better situation now. We are trying to get some assistance from China through HMG because this unit was set up with Chinese technology. Once we get it, we will modernise it, enhance the capacity and thereby increase the financial feasibility. It may take another year but thereafter we feel that it will assume a comfortable position.

Regarding Subarna Pharmaceuticals, there were some confusions because the B.P. Koirala Institute of Medical Sciences (BPKIMS) is the main investor and there were frequent changes in the leadership of BPKIMS due to the changes in the political leadership of the country. The incumbent Vice Chancellor of BPKIMS, Dr. L.B. Thapa, is also one individual shareholder in the company. He has shown a special interest to see the company developed and operating. So I'm sure that the work on this unit will be expedited and it will come into fruitful operation soon.

As the latest annual report of STCL mentions, the loss making subsidiaries have been causing a big drain on the financial resources of STCL. Would not it be a wiser step to dispose off these companies?

We have problems with our subsidiary companies. That is true. To stop production is very easy. But to manage that industry in a better way so that it can make profit and at the same time serve the consumers would be a challenge. We are waiting for peace. Gorakhkali Rubber and Butwal Spinning Mill are not our subsidiary companies. We are minority shareholders in them. Our subsidiary companies are Morang Sugar, Nepal VGI and Khadya Udyog. We have already stopped production of Morang Sugar Mill because it had no financial viability as its rated capacity is too low - only 250 MT while in India the smallest sugar mill has 2,500 MT as rated capacity. Now we are coming up with the idea of putting in a plant of higher capacity - 3,000 MT - in this unit. We are looking for an outside strategic partner to manage Nepal VGI and Khadya Udyog. They are leased out now but this is only for the time being till we get the proper strategic partner.

STCL seems very weak in realising the arrears from its parties. The figure for overdue in excess of one year has increased from Rs. 5 crores to over Rs. 8.6 crores. What are you going to do about it?

The increase in arrears is natural with an increase in turnover. I'm not much worried about it because it is not so high when compared to the volume of the turnover.

The provision made for the loss of investment is just Rs. 8 crores whereas the investment amount is nearly Rs. 14 crores. An additional Rs. 25 crores is overdue from these units as advances and loans. As all these companies where this investment is made have substantially eroded their net worth, the provision is still much less than what is needed. What do you say about it?

The investment is about Rs. 13 crores plus. We already have Rs. 8 crores set aside as the equalisation fund to cover the possible losses in this investment. The major investment is in Gorakhkali. The market value of Gorakhkali shares is more than 25% of the face value as of today. If you add the market value of Gorakhkali's share to our equalisation fund, it covers all our investment.

Since STCL is a government agency we feel that we have a higher social obligation to fulfil. Just closing down the business may be very easy but we are trying to show that we are serious about our social responsibility of quality supply management while maintaining the financial stability of our individual units and the group as a whole. If you compare our record of the last two to three years, you will find that we are on the right track. We are improving our financial strength. We are able to maintain quality supply management.

Any other plans of STCL?

We have already entered into agreement with the farmers. We are trying to have joint ventures with Indian and European companies for floriculture products. We also want to have a herbal processing unit. And we want to have a honey processing unit as well.

“The country is not headed for bankruptcy”

Madhukar SJB Rana, the incumbent Minister of Finance in the Council of Ministers headed by His Majesty the King, shares his impression about the state of the economy and issues facing it. Excerpts from an interview taken late February:

In what state did you find the state coffers after taking charge of the Finance Ministry of the country ravaged by the insurgency? Is this country on the brink of bankruptcy as is feared by some quarters?

I would say that the county is definitely not headed for bankruptcy. This is a fear that is completely unfounded. The statistics released recently show that the country's macro economic indicators are as were expected and as planned from, say, about five years ago. Revenue collection has increased. Balance of payment is in surplus and we have comfortable foreign exchange reserves. The remittances are coming in as usual.

What specific measures are on the cards for reviving the confidence of the private sector in the economy?

The private sector has been concerned about the VAT increase to 13% which the previous government had implemented in order to raise revenue both for salary of government employees and for security needs. Now their concern is that VAT should not have been raised in such a radical fashion. We are looking into what relief can be provided. The royal proclamation had stated that relief should be given to all citizens in every way possible. We are looking at relief measures for the disabled and handicapped. The business community will also be fairly treated. They are demanding the review of VAT. We are doing that and we will shortly come up with an approach to address this problem.

Before assuming the position of the Finance Minister, you had different suggestions on behalf of the private sector for the government ministries. The private sector is now looking towards you for speedy implementation of those suggestions. To what extent are these expectations going to be met?

I first came to the ministry as the senior economic advisor at a time when Dr. Prakash Chandra Lohani was the Finance Minister. He put forward the concept of public-private partnership, which has been highly acclaimed and accepted. This spirit will be continued because this is the need of the hour. My approach has been to go a little beyond this in that the private-public partnership should not only be in investment but also in decision making. Unless this is there, they will not be able to assume the role of the leader which is expected of them. So, we are trying to make institutional arrangement within the existing set up to allow for this kind of partnership at the broad macro level, at the strategic level and on standing committee basis. In other words, it will be something like a revenue board but using the present mechanism so that we do not have to go through new Acts. We are working on this. I have been consulting with the private sector.

Can you highlight some suggestions made by the private sector and what are you doing to address them?

They have made many suggestions, for example, the question of partnership. We expect that the partnership must come with respect for each other. The overriding mistrust between the private and the public sector must be done away with. For this we feel that an institutional mechanism will be started. They want, obviously, to have a say in the budget formulation, in the formulation of policies and to not be in a position to just react. They have to act proactively and, once something is decided, to implement it jointly. But the private sector must also come up with broad national views of long-term perspective and not just with short-term perspective.

The businessmen often in the past have complained that their suggestions were not incorporated in the budget. So, will their voice be heard this year?

Yes, their suggestions were ignored in the past. If dialogued properly with earnestness, sincerity and beyond self-interests, the suggestions will be implemented. If it is going to contribute to more employment, more growth and also to reduce poverty, why not?

FDI inflow in the recent years was almost zero. Is there any FDI project getting clearance now to send positive signals to foreign investors?

First of all, to improve the environment for investment we have to take measures to reduce the transaction cost. Efforts that have been made to counteract the corrupt and corruption, smuggling, under-invoicing, over-invoicing will definitely help reduce the transaction cost. The other is to streamline the procedures to implement the one-window system as per its true spirit and to get on with the creation of special economic zones. These kinds of custom-free areas will improve the environment for investment. But more than that we are now going to also target business communities in foreign countries and invite them to talk to the private sector here. The government will provide the necessary support for this. We are thinking of inviting the FICCI and the CII from India to hold such dialogue during August where we will try to showcase the projects that the government is interested in offering the foreign private investors. Next year, maybe, we will go to China. As we cannot do all of these at the same time, it depends on the interest of the bilateral chambers of commerce and industry.

The impression abroad is that Nepal is now in complete chaos. What are you doing to improve that impression?

That is not the reality, as you can see. There is less chaos today than during the last administration. There is more peace and security, less anarchy, less corruption and a more conducive environment for business. The best words for a good investment climate are the voices of the actual investors who are already here. We have received feedback from our Indian friends that the situation has now improved. This is why they are interested to hold a meeting in August.

In view of the difficulties in spending the budgeted development expenditure by the local authorities in different parts of the country, are you thinking of transferring the budget to areas like Kathmandu where the possibility of spending it is still there?

It has to be discussed by the Council of Ministers. My view is that the budget implementation is suffering because of the lack of security. So, the question is how do we provide security in those areas where the budget cannot be implemented. So the first approach should be to strengthen security in those areas. We will have to have a plan to co-ordinate security with development. Security and development must go side by side in an integrated fashion. This is the general principle. Peace cannot be secured just by calling in the army and the police. There has to be some sort of strategy in carrying out development work in a secure manner, secure for all the workers and all the people. There's no such plan at the moment to transfer budget to urban areas.

As a member of a cabinet expected to remain for three long years, what longer term measures are you contemplating for the Nepali economy?

His Majesty has taken on the responsibility of putting democracy back on track and bringing about peace and multiparty democracy within three years. We are the members of the government formed for that purpose. Let's hope all these things can be done even before that period is over and the Maoists will come to negotiate under the terms laid down by His Majesty's proclamation. Apart from that we have taken the approach of telling the private sector that we must be proactive and visionary - not guided by just short-term objectives. We have to foresee not only the three years, but much beyond that. I have been trying to impress upon them that in Nepal the basic source of tax revenue should be the VAT. In addition to that we are saying that to create an atmosphere for greater saving and investment we should get rid of taxes that are not necessary. Gradually, in a phase-wise manner, we will lower other taxes, such as the export taxes as we increase the VAT collection. Another such example is doing away with taxes on savings, because we need more savings. Then we take out supplementary taxes, which means we rationalise the excise and the import duties. Similarly, there is the need for lowering income tax and customs duties as much as possible because we are moving towards becoming a free trade area. Enforcing the existing laws more effectively to realise the taxes that are possible is another issue we have to focus on.

If it is accepted that the other taxes have to be lowered or removed, VAT has to gradually be scaled up as others are scaled down. It's a question of calibration. As you raise this, you raise the opposites and then reduce the transaction cost. Reduction of the transaction cost will be the greatest source of benefit for the private sector. We are holding discussions with the private sector on this issue. But I am telling them that they should not just come with a reaction but with a long-term vision. We have an austerity programme, as was proclaimed by His Majesty. Once it is approved by the cabinet we will come up with this programme, and it will make substantial difference to the sources of revenue, the expenditure and to the working of the government.

When will you come out with your long-term plans?

These plans have to be incorporated in the next budget. Right now what can we do is nothing other than implementing the existing budget and making some adjustments here and there depending on the revenue situation. And of course the PRSP, as the tenth plan is also called, is the guiding document.

The former Finance Ministers were complaining of excessive pressure of budget demand from the security forces. How confident are you about controlling the expenditure on security and making the budgeted funds available for the development activities?

As the Finance Minister under the present circumstances, I have to get to understand what the security strategy and plans and programmes are and then examine them. Before me, as I find, no Finance Minister bothered to spend time to understand what the security plans, tactics and strategies were. They just considered it as somebody else's business. So there used to be demands and then there was bargaining as to what could be given and what could not. That practice should now be stopped.

How are you going to manage with the existing budget?

We will increase the review source depending on our national revenue base. I think that there is tremendous potential. I think that only about 135,000 people pay taxes. That is not the limit to our income tax collection base. We can also generate revenue through utilisation of natural resources such as water or forest, which have not been touched yet. The potential from forestry is immense. After forest conservation, the second challenge is its utilisation. The user groups have succeeded brilliantly in conserving forests but not in generating income from them. Similarly, the potential from community irrigation is immense.

The Nepali rupee has considerably strengthened against the dollar over the recent years eroding the competitiveness of Nepali products in the international market and there are pressures being felt for its devaluation also against the Indian rupee. What are your plans to address this challenge?

To know the correct level of foreign exchange requires an in-depth study. What is the loss in terms of exports due to this? How elastic our export is to foreign exchange rate changes? We do not know. We have just a few products for export. The impact of the appreciation of the Nepali rupee with respect to the dollar and its impact on the government revenue are what we do not know yet. So, we have to get a quantitative assessment. I have asked the Nepal Rastra Bank, who have the expertise, to do this. Then of course there are always two schools of thought. One school of thought believes that flexible exchange rate within a certain range would be better because when our currency is overvalued it hurts exports and promotes imports. The other school of thought says that it will be very difficult to manage flexible exchange rate in view of the mal-governance that existed. Therefore it is better to keep it fixed and deal with other problems that are incidental side effects.

One major urgent challenge facing the Nepali economy in general and the financial sector in particular is that of huge NPA. Some measures being taken by the banks, such as asking the foreign countries to deny visa to the defaulters, have aroused a lot of controversy. How are you planning to go about it?

I can understand the controversy if a bank manager writes to the embassies not to give visas to defaulters. We cannot influence banks because they are independent entities with their own commercial rights and privileges, duties and goals. We should not be involved with this. As far as the government is concerned, it has to think of measures to address the problem of the default because it also is the owner of the banks. We have to seek methods to protect the interest of the commercial banks against wilful defaulters. Wilful defaulters are those who ignore the bank and do not make any effort to negotiate. So, we have to create conditions where they will be required to come and negotiate and settle the problem in a pragmatic manner. The complaint of the banks is that these people are wilfully ignoring them. This has been the case for years. This situation has cost the nation Rs. 5 billion. Our PRGF credit is Rs. 5 billion. So you can imagine the enormity of the problem. The Royal Proclamation has also recognised this issue. We will therefore certainly do something to address this.

How will this problem be settled?

I cannot be categorical. We can only put pressure on them to negotiate and settle the problem. We have to see how they respond to government actions. I cannot say that they will not respond. A manager writing to the embassies and other such problems are what the bank and its board have to decide. Bringing it to the level of ministers will politicise the issue. It should be dealt with the laws of the lands. The charge has been that these people have got away wilfully because of the protection they received from the previous dispensation. The banks claim that we have not been able to let them do their jobs. We are paying millions of dollars of taxpayers' money to these managers to do their jobs. We are not doing anything to help them. It is strange to bring in millions of rupees through loans to pay foreign managers to do a job and then to not let them do that job.

What can a manager do when the laws cannot protect the banks?

That is the reason why they are asking us to put social pressure on such people. It is not important whether they go to jail or not. Our concern should be on what is happening to the industry, the people that are employed there and their stakeholders. That is the problem for me and it is not whether one particular person goes to jail.

The banks are also not free of errors. They must take action against the staff who have colluded in this. They cannot just come to the government for a solution and do nothing about what is in their own control. Everybody has to take appropriate action in line with his or her level of authority and responsibility and in line with the law. The power given to them should be executed to the fullest.

Nepal Rastra Bank seems focused on using the Credit Information Bureau (now Centre) as a blacklisting agency to force wilful defaulters in repaying the bank loan. This is obviously contrary to the globally accepted best practice of using such an agency as a body to help small borrowers to establish their credit standing. What is your opinion?

No. It is a part and parcel of a credit rating agency, which we still do not have. CIC should be independent. For management we follow the Pareto's 80-20 principle, 20% of the people create 80% of the problems. So you have to prioritise. You can't look after everybody. In tax collection, 80% of the tax is paid by only 20% of the taxpayers.

Blacklisting is a method by which one bank is informed by another about a borrower with bad records. It is an information sharing device so that people cannot default from one bank and then take loan from the other.

I don't know how efficient CIC is or the level of authority they have. I do not know how much of the information they have is correct and I believe that there are some wrong information. These kinds of problems have to be dealt with because they are serious. I fear that there is a lack of co-ordination between the banks and the Bankers' Association, which runs CIC. It is the central bank's job to see that the information available is timely updated and authentic. The central bank, as you know, is independent of the government.

The blacklist should be made public after due scrutiny and the persons concerned can always contest it in the courts of law. This is the method of allowing the public to know about this. Just because you are a businessman, it doesn't mean you are not socially accountable. Partnership with the business community assumes good governance in the corporations, good business ethics and social responsibility. If these things can be looked after by themselves then it is possible to have dialogue between government and business.

What strengths of the Nepali economy are you leveraging to bring about a quick turnaround in ongoing downswing?

Security has to be in place. Unless there is security, things will go towards undesirable directions. Economics is a funny thing. The economy will be moving and there could be prosperity even under anarchy. But you cannot ignore the smuggling that is going on just because the economy is prospering. That may be okay for the short-term, but that causes moral degeneration and eventually you have to bring order into the system. And the cost of bringing order back will be enormous.

The school of thought currently enjoying universal acceptance says that parliamentary democracy is a sin qua non for economic development, and that if democracy is not delivering the development cake as warranted, the solution is further democracy. If this is so, how is the present emergency rule going to help achieve the country's development goals?

That theory is very, very ideologically driven. It is ideological fundamentalism. This is a "one-size-fits-all" ideology. You have seen that all the great economic revolutions in Asia have taken place under an authoritarian regime, not under democracy. Take the example of Malaysia, China and Korea. The best method for development is to have economic and political freedom. It is, however, not true that there will be no economic development when political freedom is curbed such as in the time of an emergency rule.