The government can now dismiss chiefs and board members of PEs immediately after the PE Management Board starts functioning.

In recent times, globalisation, liberalisation and marketisation and ongoing structural transformations of national economies have contributed to the expansion of the private sector on the one hand and downsizing of the public sector including dismantling or divestment of public enterprises on the other. These initiatives have been undertaken to accomplish two main objectives – giving more space to the private sector to function as the main engine of growth and at the same time, by downsizing and divesting inefficient public enterprise operations, save costs and generate revenue.

However despite being divested or dismantled, PEs continue to occupy significant roles in both developed and developing countries. Additionally, PEs remain in many developing countries, especially in the Sub-Sahara Africa, the principal suppliers of social services, some relevant to the attainment of the Millennium Development Goals (MDGs). For example, due to the slow growth of the private sector PEs remain the main sources of employment in many countries. These varying conditions warrant a careful review of the role the PEs can play in socio-economic development of countries. However, what is also crucial is that new PEs must perform efficiently and effectively and where appropriate, under market conditions. The reform agenda of PEs includes, inter alia, the issues of management, structures, performance monitoring and feedback arrangements including exploring options of private/public partnerships etc. Currently, the debate on PEs does not seem to concern any more whether PEs have a role to play, but what that role should be and how it should be played.

Since the 1930s and particularly after World War II, numerous State Owned Enterprises (SOEs), also called Public Enterprises (PEs), were created in both  developed and developing countries to address market deficits & capital short-falls, promote economic development, reduce mass unemployment and/or ensure national control over the overall direction of the economy,  especially in developing countries. By providing capital and technology to strategic areas where the private sector either shied away from or lacked the capacity to invest (such as heavy industries, infrastructure etc), most governments resorted to PEs to increase capital formation, produce essential goods at lower costs, create employment and generally contribute to the economic development of the nation state. This trend continued till the early eighties. However, rising corruption, management inefficiencies, overstaffing (without due regard to their economic viability, many governments treated PEs as easy conduits for job creation and a convenient vehicle for patronage distribution), inflation and rising current account deficits of the 1980s, exposed serious “government failures” and the limits of PEs as major players in economic development.

What is Public Enterprise?

Public Sector Enterprise often referred to as state sector, government owned undertakings/enterprises or state-owned enterprises. These are formed under the legal proceedings, wholly or partly owned and controlled by the government and produce marketable goods and services, have an explicit or extractable budget, and are supposed to finance their operating costs from their own resources. Public sector enterprises are different from other two sub-sets of public sector, viz, the government and the public sector institutions. In a public sector enterprise, the majority of equity shares is owned by the government directly or indirectly through governmental institutions and the government has decision making control either directly or through its appointed bodies. Public sector enterprise normally has three forms of organisational structure, the departmental undertakings, statutory corporations and joint stock companies.

Public enterprises (PEs) or state-owned enterprises (SOEs) are identified by three characteristics. First, SOEs are classified as part of the public sector. Therefore, they must be owned by the government. Second, SOEs are an enterprise and therefore must be engaged in the production of goods and services for sale. Third, sales revenues of SOEs should bear some relation to cost. Therefore, a public hospital charging a flat fee from its patients irrespective of treatment is not an SOE. SOEs are predominantly businesses, at least potentially self-sustaining, and get their revenue through the sale of goods they either purchased or produced, without much regard to the way they are legally organised. This definition of PEs or SOEs includes those SOEs that supply their services against fees paid by the users of the services, which are intended to cover costs, whether or not they are separately incorporated. Aware of the definitional problem of PEs, in 1980 the International Centre for Public Enterprises (ICPE) attempted to reconcile and standardise the definition. After exhaustively examining the characteristics underlying the concept of PEs, ICPE proposed a statistical and a conceptual definition as follows:

Statistical definition of public enterprise -

“A public enterprise is a productive organisational entity which engages in activities of a business character and markets any of its output and which is publicly-owned to the extent of 50% or more”.

Conceptual definition of public enterprise -

“A public enterprise is an organisation which is: owned by public authorities including central, state or local authorities, to the extent of 50% or more; is under the top managerial control of the owning public authorities, such  public control including, inter alia, the right to appoint top management and to formulate critical policy decisions; is established for the achievement of a defined set of public purposes, which  may be multidimensional in character; and is consequently placed under a system of public accountability; is engaged in activities of a business character; involves the basic idea of investment and returns;  and which markets its outputs in the shape of goods and services”. In conclusion, based on the above definition, there are two dimensions to defining public enterprise—public and enterprise. In the public dimension, there should be public purpose, public ownership, public control and management accountability. The enterprise dimension includes business character, the concept of investment and return, and marketed the output when its pricing has some relation to the cost. Hence, public enterprise is a combination of both ‘public’ and ‘enterprise’.

Growth of Public Enterprises in the historical perspective:

Public enterprises in Nepal emerged comparatively recently. Most of these enterprises came into existence during the Second, Third and fourth plans of Nepal in the 1960s and the first half of the ‘70s. With the initiation of the first five-year plan in 1956, public enterprises have been promoted in Nepal. For the first time the industrial policy of 1957 formally recognised the responsibility of the government in “promoting, assisting and regulating” industrial development in the country and the First Plan intended to establish state monopolies in the fields of transportation, telecommunication, hydro-electric power generation and irrigation, and to run some big industries, such as cement, sugar, cigarettes, textiles, iron and steel. The emergence of public enterprises as stimulated by the inability of the private sector to adequately fulfill national objectives. The  corporate form of public enterprise appeared only in 1952 when the government that  came to power after the revolution of 1951 decided to go for the majority holding—from 40% share ownership to 51% in Nepal Bank Limited, the only commercial bank  operating in the country. The objective was clearly to control the financial market. Three struggling units (jute, cement and tea) were taken over by the government and two electrical companies were nationalised. Most of the enterprises were either established by The government or established by the donor countries

Public enterprises in Nepal were established mainly to serve the

Following objectives:

• infrastructural facilities and services;
• basic consumer and development goods;
• adequate supplies of essential goods;
• managerial support to needy enterprises; and
• entrepreneurial support to needy enterprises.

The problems of state-owned enterprises in Nepal can be summarised as follows:

They could be a constant drain on the government budget, they use their leverage as state-run enterprises to accumulate bad debts at state controlled commercial banks, they are wasteful of scarce resources, their boards of directors are ineffective in representing the interests of the owners who are the government and ultimately the people of Nepal, management has no commercial managerial ability or dynamism, and has a public service mindset under which they ‘administer’ rather than ‘manage’ the  companies, Companies are bound by, and run along, public service lines and restricted by public service regulation and procedure. There is a lack of technical expertise, even in basic areas such as accountancy, labor management, and production planning, there is an absence of responsible fiscal management and no sense of  responsibility to either the government as the shareholder, or to other creditors, Over-manning is practiced at every level and is particularly acute in the ‘administrative’ grades, There is no consideration for the interest of the consumer. There is no consideration for the interest of suppliers or the people with whom the  enterprise does business.

The Government of Nepal is all set to remove Chief executives and board members of all the public enterprises (PE), who were handpicked, and replace them with new ones selected through open competition. It was successful in finally executing the long overdue plan after making necessary amendments to the recently launched Public Enterprises Management Board (Formation and Operations) Order, which envisages formation of a semi-autonomous umbrella body to regulate and oversee management of all state-owned enterprises.

As per the amendment, the government can now dismiss chiefs and board members of PEs immediately after the PE Management Board starts functioning. This condition, however, will not apply to those who had entered into open competition to land the jobs. Presently, most of the chiefs of PEs and board members are appointed on the basis of their political connection and not on merit. As a result, most of the top positions of the PEs are filled with unqualified people, who lack skills to steer the firms properly. This is one of the reasons why most of the state-owned enterprises are generating losses despite receiving billions of rupees of taxpayers´ money from the government.

The amendments made will end the practice of appointing people lacking leadership skills and business acumen to the top posts and improve financial health of the loss-making units. In this regard, the MoF has already asked Public Service Commission (PSC) to appoint someone to head a committee, which will play a lead role in selecting chief executives of PEs.

This six-member committee, headed by the PSC chief or someone appointed by him or her , will be tasked with interviewing candidates for the chief´s post at PEs and forwarding names of three best candidates to the government for final approval. Without his appointment, the committee cannot initiate the task of appointing chief executives through open competition. This is same for selection of members of the boards of directors, as the chief of the Board heads the committee that initiates the process of selecting people to the posts.

Issues on Public Enterprise Management

Public enterprises (PEs) were created mainly for the purpose of expediting and facilitating economic development. In developing countries especially, PEs were the cornerstones in the overall national development strategy.

Despite some successes, PEs continue to be criticised for their lack of productivity, efficiency, and transparency, and are subject to demands for reforms from myriad sources. In the past thirty years, public enterprises have undergone several institutional shifts in attempts to better reflect and fulfill their social and economic objectives. During this period, institutional reforms have had both progressive and regressive impacts.  As PEs have experimented with different degrees of market orientation, management has emerged as a cross-cutting issue. PE management reform requires addressing the challenges of human resources and the underlying administrative structures. By overcoming these obstacles, PEs have greater potential to fulfill their economic and social objectives. The management issue
examines the various factors including corruption, cronyism, redundant labor, and low staff capacity that have contributed to  the management failures of PEs and spurred reforms.

Current State of Public Enterprises

Although reduced significantly, PEs continue to have a major presence in many national economies. In high-income countries, PE’s share of GDP and investment constitute 8%, and 13% respectively. For middle-income countries the corresponding shares are 9% and 17%, while in the so-called Least Developed Countries (LDCs) they are 14% and 28%. PE’s also constitute an important source of government revenue in many developing countries.

Public Enterprises (PEs) are usually defined as government-owned entities and active operation of agencies engaged in supplying goods and services to the public which otherwise might be supplied by privately owned profit-motivated firms. The term emphasises government ownership without a profit motive. Presently it covers: Industrial, commercial and economic activities, State ownership, and Self-contained managerial care, i.e. autonomous.

The first public enterprise to have legal validity in Nepal was the Nepal Bank Limited, established in 1938. After the inception of the bank as a public enterprise, a series of additional PEs was established. In total 64 PEs were established in Nepal. In spite of this impressive growth in the number, role and scope of public enterprises in Nepal, their performances—financial or otherwise—has always remained below a satisfactory level. Now the member of PE has reached to 39 after the privatisation or the realignment.

Profit and Loss

As per the figure released by Finance ministry of the GON, during the Fiscal Year 2009/10, 22 Public Enterprises have been found in net profit whereas 14 Public Enterprises in net loss. While analysing the profitability of 36 Public Enterprises during the Fiscal Year 2009/10, the net profit has been increased with Rs.8.3 million and attained Rs.10.56 billion as compared to Rs.10.55 billion of FY2008/09.

Investment in Share Capital and Loans

According to the statistics from the Office of the Financial Comptroller General, the Investment in share capital by the Government of Nepal for those 36 Public Enterprises has been attained to Rs.82.76 billion. Further, the total loan investment for these public Enterprises has amounted to Rs.84.92 billion. In last year, investment of the Government of Nepal in share capital and loan investment were Rs.86.13 billion and Rs.74.60 billion respectively. This figure shows that the investment of Government of Nepal in share capital has been decreased by 3.9 percent whereas loan investment has been increased by 13.8 percent.

Two types of monitoring and evaluation need to be performed in Public Enterprises:-

(A) To be performed by top level managements of the Public Enterprises –Monitoring and Evaluation of the performance of functioning staffs.
(B) To be done by Ministry – Monitoring of the work performed by the Chief Executive of the Public enterprises.

The work performance of functioning staffs has not been found effective due to the tendency of recruiting most of the employees in temporary basis or in a contract basis in the beginning and making them permanent by following simple formalities. The system of career development, increment in facilities, punishment and reformative system should be made strong on the basis of competency, expertise and work performance of the employees. Clear policy and mechanism has been found to be lacking for the monitoring and evaluation of Public Enterprises. Proper monitoring and evaluation of the business plan and programs conducted by Public Enterprises have not been carried out by the concerned Ministry efficiently. The tendency of crying for support to the Ministry of Finance for carry on the Public Enterprises has been found only after the Public Enterprises came into worsened situation due to shortage of operational capital. System of regular monitoring of the performance of the heads of the Enterprises, evaluation of the monthly progress report, basic standard for the selection of the Chief and Directors of the Enterprises, formation of performance contract while recruiting in the post of Chief Executive and Director and foundation of the evaluation of work performance of the Management.

(The writer is General Manager of Nepal Stock Exchange (NEPSE). He can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

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