In October 2024, the KP Sharma Oli-led government made two important decisions that signal a renewed drive for economic reforms. First, a high-level commission was formed to recommend new reforms, and second, long-awaited efforts to privatise public enterprises (PEs) were initiated. Experts believe these moves could significantly reshape Nepal's public sector.

A meeting of the Privatisation Committee, chaired by Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, on 21 October, revived the long-dormant privatisation process. After nearly two decades of inactivity, the committee classified several state-owned public enterprises (PEs) as closed, ailing, or underperforming—marking the first steps towards privatisation. The proposal to privatise these enterprises is seen as part of a broader strategy to boost economic efficiency, reduce the financial burden on the state, and foster a more competitive environment for private sector involvement.

Among the PEs proposed for privatisation are Janakpur Cigarette Factory, Nepal Metal Company, Hetauda Kapada Udhyog, Biratnagar Jute Mill, Butwal Yarn Factory, Gorakhkali Rubber Udhyog, Udayapur Cement Factory and Hetauda Cement Factory. Many of these enterprises have been non-operational or underperforming for years, becoming a drain on government resources.

Mahesh Bhattarai, the Spokesperson for the Ministry of Finance, explained that the government’s approach begins with classifying these enterprises and conducting a thorough assessment of their assets and liabilities. A team of experts will then evaluate each enterprise, with the findings guiding the privatisation process, he added.

Nepal's privatisation efforts began in 1992 with the introduction of economic liberalisation policies. It continued until 2006. During the 1990s, the government pursued privatisation, liquidation and dissolution of certain public enterprises to enhance efficiency, boost productivity, reduce administrative and financial burdens and encourage private sector participation for more effective service delivery.

Since the privatisation of the Nepal Rosin and Turpentine Industry in 2006, no public enterprises have been privatised. Following the Maoists' entry into the political mainstream, left-wing forces have largely held power, placing privatisation low on the government’s agenda.

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As public enterprises continue to incur losses with no returns on state investments, the government has formed numerous committees to reform these institutions. The most recent, led by former finance secretary Shankar Adhikari, was formed in 2023, marking the third such committee in the past five years aimed at reviving struggling PEs. Despite past efforts, including plans announced in the fiscal year 2023/24 to reopen Hetauda Kapada Udyog, Gorakhkali Rubber Udhyog, and Butwal Yarn Factory, these initiatives have stalled due to bureaucratic inefficiencies and political challenges.

The Oli government’s decision to privatise certain public enterprises marks a significant policy shift after nearly two decades of inaction. This renewed push comes from a coalition government of the CPN-UML and Nepali Congress. While the first wave of reforms in the 1990s was led by a Nepali Congress government, the UML has traditionally been less committed to privatisation.

Of the eight public enterprises identified for privatisation, Janakpur Cigarette Factory, Nepal Metal Company, Hetauda Textile Industry, Biratnagar Jute Mill, Butwal Yarn Factory and Gorakhkali Rubber Industry have been inactive or underperforming for years. Udayapur Cement Factory and Hetauda Cement Factory, although operational, continue to report losses due to inefficiencies.

Nepal currently has 10 PEs in the industrial sector, four in the commercial sector, 11 in services, five in social services and utilities, and nine in the financial sector.

Underperforming Entities

The case for privatisation is reinforced by the poor performance of many public enterprises. Of the eight targeted for privatisation, most have been closed or underperforming for years. Janakpur Cigarette Factory, once a market leader in the 1960s and 1970s, ceased operations in 2011 due to political interference, mismanagement and overstaffing. The factory premises are now used by the Madhesh Province government.

Similarly, Hetauda Kapada Udyog, founded with Chinese assistance in 1976, was liquidated in 2013 after years of mounting losses. Once a major employer and textile producer, the factory is now not in operation. Butwal Yarn Factory, which began production in 1991, succumbed to political interference and labour unrest, shutting down in the early 2000s.

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Gorakhkali Rubber Udhyog, Nepal’s sole tyre manufacturer, stopped production in 2012 due to financial difficulties, while Biratnagar Jute Mill, the country's oldest factory, has been closed since 2015. These factories, once symbols of the country's industrial ambition, are now seen as liabilities — expensive, inefficient and unable to compete in the modern market.

Udayapur Cement Factory and Hetauda Cement Factory, although still operational, are financially struggling due to outdated equipment, high production costs and poor management.

Mixed Performance

According to the Annual Status Review of Public Enterprises, 2024, published by the Ministry of Finance, out of the 44 existing public enterprises, 15 are currently operating at a loss, while three reported no turnover. Although 26 public enterprises made a profit of Rs 48.51 billion in the fiscal year 2022/23, a large portion of these profits came from the Nepal Oil Corporation (NOC). The state-owned oil monopoly rebounded from a Rs 38.17 billion loss in 2021/22 to post a profit of Rs 11.72 billion in 2022/23, due to falling international fuel prices and the suspension of the automatic pricing system.

In contrast, public enterprises in the industrial sector collectively incurred a loss of Rs 1.48 billion during the same fiscal year. The commercial sector performed better, reporting a profit of Rs 11.81 billion, while the service sector earned Rs 2.22 billion. Entities in the public utility sector generated Rs 17.10 billion in profits, and the financial sector earned Rs 18.98 billion.

However, the overall profitability of public enterprises obscures the fact that many industrial and commercial public enterprises continue to drain state finances.

The government’s total investment in public enterprises increased by 8.62% to Rs 661 billion in 2022/23, comprising Rs 379 billion in equity and Rs 281 billion in loans. Despite this substantial investment, returns have been minimal, with the government receiving just Rs 13.75 billion in dividends from public enterprises in 2022/23, according to the Annual Status Review of Public Enterprises.

Making a Case for Privatisation

Experts and business leaders have largely welcomed the Oli government’s renewed emphasis on privatisation, stating that the involvement of the two largest political parties could help reassure the public that privatisation is in the nation’s best interest and necessary to prevent further economic decline.

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“There is a misconception among the public that privatisation means selling off state-owned industries," said Dipendra Chaulagain, Director of Operations at Samriddhi Foundation. “This false narrative must be corrected. The two largest political parties need to collaborate to raise awareness about the benefits of privatisation. Their role is to dispel confusion and show that privatisation is not about recklessly selling national assets, but about safeguarding the economy and promoting more efficient resource use.”

Bharat Raj Acharya, Chairperson of the Industry Committee at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), believes that the government’s role should be limited to providing public services, rather than managing industrial production. “The government is not meant to run factories or industries. In a free market economy, it is the private sector’s responsibility to handle production, while the government should focus on creating a conducive environment for businesses to flourish,” Acharya said.

He further argued that government-run enterprises distort competition, as they often receive subsidies, soft loans and other forms of state support which give them an unfair advantage over private sector competitors. “We cannot have a system where the government promotes a free market on the one hand, but continues to run loss-making state enterprises on the other,” Acharya added.

Chaulagain said that Nepal cannot afford to sustain continuous losses, especially with an underperforming economy. "The privatisation process needs to be completed as quickly as possible," he added.

A key example of the financial burden posed by public enterprises is Nepal Airlines Corporation (NAC), the national flag carrier, which is saddled with a growing debt of Rs 51.26 billion. While private airlines operate profitably, NAC’s debt continues to escalate. Despite this, the government plans to keep running the airline using its own resources.

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Chaulagain said the NAC should be privatised following the example of Air India. “India, with its much larger economy, chose to privatise Air India. Many countries have realised that it is more practical to privatise failing industries and allow the private sector to manage them,” he added.

However, former Secretary Bimal Wagle cautioned against rushing into privatisation or treating all enterprises the same. Stating that the institutions proposed for privatisation are in different conditions, Wagle said it is necessary to make a detailed study of their individual situations. "Privatisation should not proceed without proper analysis," he said. "The government’s current preparations are far from adequate."

(This news report was originally published in November 2024 issue  of New Business Age magazine.)