Nepal Airlines privatisation still stuck
The long-overdue privatisation of state-owned Nepal Airlines has become a political hot potato, but with Sher Bahadur Deuba of the Nepali Congress (NC) now taking over from K P Oli the loss-making carrier may have a better chance at divestment.
The last days of the Oli administration was rife with speculation that the airline’s board was preparing to offload some of its shares to the Yeti Group, which many believe was close to the former prime minister.
The once reputable Royal Nepal Airlines has been mired in scandals and mismanagement ever since the restoration of democracy in 1990. Political parties in government used the carrier as an employment agency, and pocketed kickbacks on aircraft leases.
Now, despite strong opposition from employee unions and some in government, the Covid-19 pandemic and its economic fallout has left Nepal Airlines Corporation (NAC) no other option.
The flag carrier lost over Rs5 billion last year as flights were grounded and domestic passenger volume shrank by 73%, and international passengers went down by 86%. These losses could be a mortal blow to the company, which has racked up a debt of Rs47 billion, and never registered a profitable year in its 63 years of existence.
Yet, even when flying through severe turbulence, NAC has somehow stayed afloat because of multiple government bailouts totalling Rs31 billion over the years.
Now, NAC’s situation has become so desperate that the government’s benevolence is wearing thin. As prime minister in 2019, Oli rebuffed pleas for government subsidy from NAC executives saying the carrier had to learn to stand on its own feet.
“Currently NAC is a costly white elephant,” says Surya Raj Acharya, an expert in development and infrastructure policy. “The practice of the government always having to rescue public sector companies is wrong.”
The airline’s debts have skyrocketed because of its purchase of four brand new Airbus jets before the pandemic hit, as well the induction of six Chinese-made turboprops which have been grounded. The government currently shoulders all of NAC’s debts, pays off all its loans and is also the company’s guarantor and manager.
Partially privatising the carrier would ensure that the government handles only its own share, while hopefully making the company competitive and profitable. It would also lessen the revolving-door politically-influenced appointments and interference in management.
A corporate culture of meritocratic employment and reward, more professional management and improvement in reliability and service could turn the airline around. Just relying on flying Nepali overseas workers and the diaspora would guarantee a strong load factor.
Even so, plans to privatise and transition the company from full state ownership to only majority control have been repeatedly shelved over the years even as other state-owned companies were privatised.
NAC employees padlocked offices and went on strike on 6 July after the Board of Directors sent management letters and draft regulations for privatisation to the Ministry of Culture, Tourism and Civil Aviation on 27 June.
In response, on 11 July NAC senior management released a notice categorically denying any move towards privatisation.
Government hesitation to act and employee agitation stem from a history of bitter experiences. Nepal’s post-1990 liberalisation boom saw the then-ruling NC initiate a wave of privatisation, albeit with disastrous results.
Most newly-privatised companies, such as Gorakhkali Tyre, Bhrikuti Paper, Harisiddhi Bricks, and Bansbari Leather Shoes were unable to cope with the ownership change and folded.
As a result, the state has shied away from concrete action on privatisation even if it would remove immense financial burdens. Now, with the NC back in government, there is a chance Nepal Airlines de-nationalisation could be in the cards — even though the worst scandals in the carrier’s history have involved NC politicians.
To be sure, Nepal has had privatisation success stories too, with the likes of Nepal Telecom, Nepal Bank, Electricity Generation Company, Rastriya Banijya Bank and Timber Corporation Nepal all in profit, and they have improved their service after switching to a company model.
The airline’s Board of Directors move to privatise was based on a report by the Corporation Reform Committee in mid-September 2019 to then Aviation Minister Yogesh Bhattarai.
‘Preparations must be made to convert the Corporation into a limited company under prevailing laws,” the report said, while also recommending restructuring ownership so that 51% of the airline remained in government hands.
‘Once the company is set up, ownership must be structured and shares distributed in such a way that it gives ⅓ of total paid-up capital to those responsible for management while sharing the rest among industries in tourism, local banks and financial agencies, company employees, the government and the general public,’ the Advisory Committee’s report notes.
Member of the NAC Board Buddhi Sagar Lamichhane says: “Our understanding is that the corporation cannot survive under the existing structure, and managerial capacity. However, the government has the final say on any decision.”
But the state’s backtracking has dismayed pro-privatisation executives. As early as 2002, another committee had recommended that the NAC switch to a company model with only majority government ownership.
A new task force was then set up to review that report and present an action plan with the National Planning Commission’s Shankar Sharma. This task force presented its suggestions in 2002, backing the recommendation that the airline should either be privatised or dissolved.
A report by the International Civil Aviation Organisation (ICAO) recommended in October 2004 that NAC be split into two companies for domestic and international air travel.
Other committees followed in 2005 and 2010 recommending that NAC be scrapped with its employees, contracts, capital and liabilities shifted to a new Limited Liability Company (LLC) and registered with the Company Registrar’s office. Like all the committees before them, these reports just gathered dust.
But perhaps the most promising move towards privatisation came in 2017 when the government actively sought strategic partners from the US, Australia, France, Australia and Germany. Only Lufthansa Consulting from Germany responded, and the Nepali side managed to bungle even that deal, with the Council of Ministers taking too long to give the Finance and Tourism Ministries the go-ahead.
“Strategic partnerships are a must if the flagship is to be saved,” says former Finance Secretary Shankar Prasad Adhikari. “There is no reason for the government to keep bailing out a company that perennially haemorrhages tax-payers money like Nepal Airlines.”
There are lessons to be learnt from Air India which accumulated losses of a staggering INR5 trillion, as the government finally moves to private the flag carrier.
However, experts caution that with the global downturn in aviation, even privatisation may not save Nepal Airlines. Even so, cutting costs, streamlining the fleet, and launching a strategic recovery plan could still save the carrier. But it would be unrealistic to expect that without privatisation and better management.