TAKING STOCK : Privatisation: Profit from it A decade ago Eastern Europe and Nepal were both looking towards a new future. Milton Friedman, Nobel laureate and economic advisor to various US presidents, stated in a lecture in November 1991 at California State University that the best programme for Eastern Europe in three words is – privatise, privatise, privatise. 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 a million rupees 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 100,000 loaves every month at Rs 11 each. Your sales or your output is Rs 1.1 million a month leaving you a profit of Rs 100,000 a month. This profit means that you have taken resources worth one million rupees from society and when you sold your output i.e. bread, your resources increased by Rs 100,000. 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 100,000 loaves of bread for only nine rupees each. Now you have suffered a loss of Rs 100,000 in a month. This means you have decreased wealth. You have purchased resources worth one million rupees from society and returned to it an output of Rs 900,000 only. Resources valued at Rs 100,000 have been destroyed, and hence the entire nation’s wealth has gone down. How stupid, you say, to squander resources in this manner. Fortunately there is a mechanism that will prevent these losses from ever threatening the 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. 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, makes for dismal reading. Most PE’s have not even maintained updated accounts. RNAC, Nepal Drinking Water Corporation, and Rastriya Banijya Bank have accumulated huge losses over the years. 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 contributed to keeping Indians poor. Fortunately, India reversed its course and for some time followed an aggressive policy of selling off the state enterprises. By doing so Nepal will do what has generally been recognised as the only sensible option in countries around the world. Nepal should not only privatise, 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. (The writer can be contacted at: everest@mos.com.np)