PRIVATIZE, PRIVATIZE, PRIVATIZE

Rakesh Wadhwa

A decade ago Eastern Europe and Nepal were both looking towards a new future. Milton Friedman, Nobel laureate and economic advisor to various U.S Presidents, stated in a lecture delivered in November 1991 at California State University that the best program for Eastern Europe can be summarized in just three words - Privatize, Privatize, Privatize.

Why did he give such advice? Can it deliver the freedom and prosperity Nepal still seeks, more than 10 years later? Was he advocating private, "for profit" enterprises over government undertakings? Yes. It is precisely the profit element guiding and motivating private companies that make them and their nations prosper. Let us see how.

Suppose you start a factory to produce bread. The total cost including the rent of the premises, payments to workers, interest on capital invested comes to Rs. 10 lakhs every month. This then is the sum of the resources that you have purchased and paid for to produce bread. Now, assume that you produce and sell 1 lakh loaves every month at Rs 11 each. Your sales or your output is Rs 11 lakhs a month leaving you a profit of Rs 1 lakh a month.

This profit means that you have taken resources worth Rs 10 lakhs from society and when you sold your output i.e. bread, suddenly, low and behold, your resources magically increased by Rs. 1 lakh. You have created this wealth out of thin air. This is how your company prospers, its wealth increases and since your company's output is part of Nepal's output, you have contributed towards increasing the output and wealth of the nation.

What happens if there is a loss? Suppose you can sell the 1 lakh loaves of bread for only Rs 9 each. Now you have suffered a loss of Rs 1 lakh in a month. This means you have decreased in wealth. You have purchased resources worth Rs 10 lakhs from society and returned to it an output of Rs 9 lakhs only. Resources valued at Rs. 1 lakh have been destroyed, and hence the entire nation's wealth has gone down.

How stupid, you might say, to squander resources and hence money in such a manner, and you would be absolutely right. Fortunately there is a mechanism that will prevent these losses from ever threatening the whole country. You as the owner of the 'loss making' bread factory would, very soon, either find ways of becoming more efficient and making a profit, or you would have a strong incentive to close down the factory, if it has not already driven you to bankruptcy and forced closure in the meantime.

Private enterprise is a 'profit and loss' system. The loss element, frequently ignored, is a very important part of the 'free enterprise' system. This is what preserves our wealth and what directs resources away from wealth destroying activities of our society. Similarly the 'profit' element guides resources towards their most profitable and hence most desirable and correct use.

What happens with the government's Public Enterprises (PE's)? Birgunj Sugar, Hetauda Cement, Nepal TV, National Trading, Gorkhapatra Sansthan, Nepal Oil Corporation, Nepal Electricity and a myriad of other enterprises of the government do not operate under this system of profit or loss. The result is devastating to the wealth of the country. Inspite of monopoly privileges granted to many PE’s, they still somehow manage to lose money, thus squandering the resources of this poor country. The government’s annual report on the PE’s performance, published this month, made dismal reading. 29 of the 43 PE's have not even maintained updated accounts. RNAC, Nepal Drinking Water Corporation, and Rastriya Banijya Bank between them have lost over Rs. 4 billion during 2000-2001. Further, PE’s worldwide provide abysmal customer service; when RNAC had a monopoly on domestic routes, the common man often had to queue overnight to obtain tickets.The mistake Nepal made was to follow India's policy of the government attaining the "commanding heights of the economy". India built up a large public sector that did not generate any return and is to a very large measure responsible for keeping Indians poor. Fortunately India has now reversed its course and is following an aggressive policy of selling off the state enterprises, under one of its very rare honest and able Ministers, Mr. Arun Shourie. Crucially, he was given his own powerful Ministry of Disinvestment.

Will Nepal follow?

By doing so Nepal will do what has generally been recognized as the only sensible option in countries around the world. Nepal should not only privatize, it should do it with greater speed than India. Along with this step all monopoly powers of PE’s should be taken away and competition restored. This would jump start Nepal's march to become an economically free and prosperous country.

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