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NEPAL: PRIVATIZATION OF STATE-OWNED ENTERPRISES Recommended Assistance Plan

Final Report

u.s. Agency for International Development

Prepared for:

Prepared by:

Sponsored by:

December 1996

Coopers &Lybrand

USAID Nepal

Bruce Carrie, Coopers & Lybrand, L.L.P. James Ryan, Cargill Technical Services, Inc. Kieran Crowley, Cargill Technical Services, Inc.

Private Enterprise Development Support Project ill Contract No. PCE-0026-Q-OO-3031-00 Delivery Order No. 62 Prime Contractor: Coopers & Lybrand, L.L.P.

TABLE OF CONTENTS

LIST OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

I EXEC~S~Y ................................. 2

II INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3

ill BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4

IV THE CURRENT PRIVATIZATION PROCESS ................... , 5

V REVIEW OF ENTERPRISES ..... . . . . . . . . . . . . . . . . . . . . . . . . .. 8

VI ASSISTANCE REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9

vn OTIIER DONORS ...................................... 10

Vill RECOMMENDED PLAN .................................. 13

XI INDICATIVE BUDGETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

X CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ANNEXES

Annex I Annex IT Annex III Annex IV Annex V Annex VI Annex vn Annex vm Annex IX Annex X

Institutions and Individual Interviewed Documents Collected and Reviewed Enterprises Covered by the Privatization Program Enterprise Reviews Enterprise Financial and Performance Figures The Dairy Sector aDA Draft Project Memorandum Indicative Budget Proposed Privatization Schedule Monitoring Questionnaire

ABC ADB ADBN BMSS ALI APROCS BJM BSM DANIDA DDC HMG HMSS HPP HTI IRIS JCF KMSS LMSS LSM MOA MPA MPCS MSS NGO NDDB NTDC ODA PMSS STC USAID UNDP

LIST OF ABBREVIATIONS

Agro Enterprise Centre Asian Development Bank Agricultural Development Bank of Nepal Biratnagar Milk Supply Scheme Agricultural Lime Industry Agricultural Project Services Biratnagar Jute Mill Birganj Sugar Factory Ltd. Danish International Development Assistance Dairy Development Corporation His Majesty's Government of Nepal Hetauda Milk Supply Scheme Herbs Production & Processing Co. Ltd. Hetauda Textile Industry Institutional Reform and the Informal Sector Janakpur Cigarette Factory Kathmandu Milk Supply Scheme Lumbini Milk Supply Scheme Lumbini Sugar Mills Ministry of Agriculture Milk Producers Association Milk Producers Cooperative Society Milk Supply Scheme Non-Governmental Organization National Dairy Development Board Nepal Tea Development Corporation Overseas Development Administration Pokhara Milk Supply Scheme Salt Trading Corporation Ltd. United States Agency for International Development United Nations Development Program

UNITS

Nepalese Rupee (Rs) = 100 paisa Rate of ExchJnge (September 1996) U.S.$1 = Rs56 Quintal = 100,000 grams "MT"ton and "Ton" refer to a metric ton = 1,000 kg

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I EXECUTIVE SUMMARY

USAID was and still is the lead donor in promoting privatization in Nepal. When a communist government came to power in early 1995 and progress on privatization slowed, USAID suspended the majority of their assistance to the privatization program. The new center-right coalition government, which came to power at the end of 1995, has made commitment to privatization and has requested USAID's assistance with this effort. USAID has approximately $1.65 million available (consisting of local currency, and new and existing U.S. dollar funds) with which to provide support. A study team from Coopers & Lybrand L.L.P. and Cargill Technical Services, Inc. visited Nepal during September and October 1996 to review Nepal's privatization program, make an assessment of agribusinesses that could be included in the program, and prepare a recommended assistance plan for USAID.

Twelve enterprises have been privatized under Nepal's privatization program to date. The legal and institutional framework under which these enterprises were privatized functions reasonably satisfactorily, although some aspects could be improved. However, the system has yet to be tested on any large or politically sensitive enterprises; the 12 enterprises privatized so far represent only an estimated three percent of the government's investment in state-owned enterprises.

The study team identified fifteen agribusiness enterprises as being suitable for inclusion in the privatization program. These range from small enterprises in which the government owns only a minority interest and which could be sold easily, to the Dairy Development Corporation, which is wholly owned, large, and politically sensitive. The Privatization Cell, which manages HMG's privatization program, will need a range of assistance to implement the program. This will include the provision of foreign and local consultants as well as other assistance such as training, developing a public education program, and dealing with the redundancies created by the privatization of enterprises under the program.

The Overseas Development Administration (ODA) is the only other donor currently planning to assist directly Nepal's privatization program. The ODA's plans are very similar to those proposed in this report for USAID' s new U. S. dollar funds. The two agencies and the Nepalese government will need to reach agreement on the integration of the two assistance programs to ensure that aid resources are put to their best use.

The recommended assistance plan has three separate components corresponding to the three sources of funds available. The new U.S. dollar funds should be used to cover the cost of a resident advisor for a period of 18 months, as well as a limited amount of short term technical advice. The local currency funds should be used to meet the costs of all local consultants employed in the privatization of the agribusiness enterprises included in the program. In addition, the funds should be used to develop and implement a public awareness program, train the Privatization Cell staff and other senior officials, meet some of the redundancy and retraining costs associated with the privatization of agribusinesses, and provide general support to the

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Privatization Cell. Quarterly budgets for the use of the local currency funds should be prepared by the long term advisor and approved by the Privatization Committee.

The pipeline funds, as required by the terms of their commitment, should be used for the support of private dairy enterprises. Based on USAID's experience with local contractors, the Agro Enterprise Centre should first be asked to develop projects for the use of these funds. If the Centre does not come up with suitable proposals within a specified time, a general request for proposals should be issued.

Although His Majesty's Government of Nepal (HMG) has made important steps towards implementing a privatization program over the last five years, political and economic constraints may mean that there will be significant delays in implementing the privatization program recommended in this report. Should such delays occur, particularly with the privatization of the dairy sector, USAID should review its assistance for privatization in Nepal.

II INTRODUCTION

USAID was and still is the lead donor in promoting privatization in Nepal. Technical assistance, including the provision of a long term advisor, was furnished to the Privatization Cell, the body within the Ministry of Finance charged with implementing HMG's privatization program. With the change to a communist government in early 1995, this long term assistance effort was suspended. Currently, USAID is only providing modest amounts of assistance to the Privatization Cell through the Global Bureau's IRIS project and through the mission's Development Training Project.

With the formation of a new government at the end of 1995, the situation changed again. The new coalition government has stated its commitment to moving forward with privatization of state-owned enterprises. As part of this effort, the government requested the support of USAID. Although privatization is no longer a focus of the USAID's work in Nepal, the mission has agreed to provide assistance to the Privatization Cell for a period of 12-18 months.

The mission has approximately US$700,000 of newly appropriated funds available for use on privatization and approximately $250,000 of pipeline funds earmarked for encouraging private investment in the dairy subsector. In addition, the mission has reached agreement with the Government of Nepal to use Rs39.24 million (approximately U.S. $700,(00) of local currency from the mission's PIA80, Section 416(B) Program to support the privatization of agribusiness parastatals. (Note, the situation with regard to the amounts available and uses of the funds have changed since the scope of work for this delivery order was written.)

In September 1996, USAID contracted Coopers & Lybrand L.L.P., with Cargill Technical Services, Inc. (CTS) as a subcontractor, to prepare a plan for providing technical assistance in Nepal for the privatization of agricultural enterprises. The contract requires the proposed plan

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to cover a period of 12-18 months and utilize the funds identified above. In addition, the scope of work for the contract requires:

• a review of the privatization analyses already conducted by the Privatization Cell; • meetings with key players involved in privatization to determine priorities; • a review of the legislative and regulatory framework for privatization of agricultural

enterprises to determine if major legislative or administrative changes are required; • meetings with the management/staff of those agricultural enterprises assessed to be most

easily privatized to determine which are most appropriate to be privatized first, an assessment of alternative mechanisms, and the identification of the type and level of assistance required;

• a detailed assessment of the dairy sub sector; • a review and assessment of local consulting capacity and the methods by which the

Ministry of Finance identifies and selects local contract assistance.

A team, consisting of Bruce Carrie of Coopers & Lybrand, and Jim Ryan and Kieran Crowley of CTS, visited Nepal variously from 9 September to 17 October 1996 to undertake the work. This report is the outcome of that visit. A list of the institutions and individuals interviewed is contained in Annex I, and a list of the documents collected and reviewed is contained in Annex II.

m BACKGROUND

By the early 1990s, the Nepalese government had acquired an extensive portfolio of state-owned enterprises. HMG fully owned 63 enterprises, held a controlling interest in a further 15, and had a minority share holding in an additional 17 enterprises. The majority of these enterprises performed poorly and failed to earn profits.

The government first announced its intention to initiate a program of privatization in the Seventh Plan (1985-90). However, it was not unti11991 that a firm commitment was made by the newly elected government and plans laid out in a white paper and in the 1991192 budget. A high level Privatization Committee chaired by the Minister of Finance was established, and in this first phase of privatization, three enterprises were sold. All three enterprises were privatized by way of asset sales and without the benefit of a specific privatization law. Assistance for the program was provided by the UNDP under the management of the World Bank.

The second phase of privatization was carried out utilizing the provisions of the Privatization Bill, which was drafted during the second phase but not fully enacted by Parliament. During this phase, a further seven enterprises were privatized. Five of the enterprises were privatized through share sales, and two were liquidated. Assistance for this phase of the privatization program was provided by US AID .

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The third phase of the privatization program, which is still under way, has been conducted under the provisions of the Privatization Act, which was given royal assent on 3 January 1994. To date, two enterprises have been privatized, negotiations with potential buyers are under way with another two, valuations have been completed on a further two enterprises, and a pre-privatization study is being conducted on another enterprise. Assistance is being provided by USAID through the IRIS program. A list of all the enterprises covered by the privatization program to date is provided in Annex m.

The third phase of the privatization program came to a virtual halt during the nine month rule of the United Marxist-Leninist Party. USAID's long term technical assistance to the program was terminated during this period. With the formation of the new coalition government in November 1995, the privatization program was revived but has been hampered by the lack of a Minister of Finance, who chairs the Privatization Committee, and limited donor assistance.

IV THE CURRENT PRIVATIZATION PROCESS

The current privatization program in Nepal is conducted under the Privatization Act, 1994. This law provides for a Privatization Committee to recommend programs and priorities for privatization to HMG. The committee is required to evaluate enterprises and recommend to HMG "on the process of privatization." The committee also must evaluate proposals received from the private sector relating to the privatization of enterprises. The basis for the evaluation is specified in the Act. In addition, the committee can conduct studies or research in order to formulate privatization programs and is entrusted with removing hindrances faced by the privatization program. The committee is chaired by the Minister of Finance and has nine other members, mainly politicians and government officials. The President of the Federation of the Nepalese Chambers of Commerce and Industry is the only private sector member of the committee. The committee does have the power to invite outside persons, including foreign consultants, to its meetings.

The Act allows for a range of methods for the privatization of enterprises, as well for their liquidation. The Act also provides for, on the recommendation of the committee, the retirement and compensation of employees that can not continue to be employed as a consequence of the privatization process. The Act also requires that the present employees of a privatized enterprise be offered shares in the enterprise free of cost or at a discount. Various other provisions are included in the Act covering administrative matters such as the procedures for the meetings of the committee, the formation of sub-committees, and the issuance of orders and directives.

The Privatization Cell has adopted a number of standard procedures and documents, within the parameters of the Privatization Act, for carrying out the privatization process. These include: having a standard format for offering memoranda; and using a standard program and timetable for the offering of an enterprise, receipt of bids, and negotiation and signing of a sales contract. A standard sales contract also is used as the basis for negotiations with potential purchasers. Regulations to facilitate privatization and govern procedures under the Privatization Act currently

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are being prepared by the Privatization Cell with the assistance of the USAID-funded IRIS project.

a. Comment

The Privatization Act is a relatively short and straight forward act, providing a considerable degree of latitude for most of the commercial decisions that must be made as part of the privatization process. Some of the matters that are prescribed in the Act, however, potentially could cause problems. As noted above, the Privatization Committee consists of ten members, only one of whom is from the private sector. Such a large committee has the potential to cause delays with decision making. Further, as the committee makes recommendations mainly on commercial matters, such as the valuation of enterprises and their method of sale, it would be desirable to have greater representation from the private sector, rather than having such representation at the discretion of the committee.

The provision relating to the evaluation of bids is also of concern. Although the flrst item specifled for consideration in evaluating bids is the price, the second and third items relate to "management of the enterprise without changing its nature," and "retention of services of present workers and employees." As a major aim of privatization is to change the way in which enterprises are managed and operated, both these provisions could lead to negating some of the beneflts of privatization.

Evidence to date suggests that neither of the issues noted above have caused any problems with the privatization process. In fact, as the current government is a coalition, the extensive political representation on the Privatization Committee may be beneflcial in helping to resolve the differences generated by a highly political program such as privatization.

A more general criticism of the privatization program made by a number of observers is that the process is not well understood by the public, the employees of enterprises being privatized, and even by some key decision makers in the government. The process of offering enterprises for sale, receiving and evaluating bids, and negotiating and concluding a contract appears to be conducted on a fair and open basis. However, the reasons the government selects particular enterprises for privatization, chooses a privatization method, and determines other parameters of the program are not well understood by the public. More importantly, the employees of enterprises being privatized, who potentially may lose their jobs, appear not to understand the privatization process, nor their rights or place in the process. This has lead to significant problems with the labor force with a number of the privatizations undertaken to date. Some efforts have been made to educate the public, employees, and decisions makers about the privatization process, but clearly not enough has been done and a greater effort in those area is required.

Some improvements could be made to the standard procedures and documents used by the Privatization Cell. The standard contract appears to be vague with regard to the continued employment of workers, and no provisions are included to adjust the sales price or place controls

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on the enterprise for the period between the signing of the sales contract and the hand over of the business to the new owner. Similarly, there are no provisions to cover a failure by HMG to disclose all liabilities. With the poor quality of financial reporting practiced by many state­owned enterprises, this has caused, and is likely to continue to cause, significant problems. The cashing out of gratuity liabilities for redundant workers is another issue that warrants further study to ensure that the policy is not creating perverse incentives.

On the positive side, the fact that the Privatization Act explicitly recognizes the need for liquidating some enterprises, laying off employees, and dealing with outstanding debts has proved beneficial. All these provisions have been used in the 12 privatizations undertaken so far: two enterprises have been liquidated, the work force at a number of enterprises have been rationalized prior to sale, and the government has taken over some or all of the debts of other enterprises. Flexibility and a willingness to take what may be politically unpopular commercial decisions is necessary if a privatization program is to make real progress.

h. Conclusion

Overall, the mechanical aspects of the privatization process have worked reasonably well in Nepal. Some aspects of the process could be improved, but no major changes appear to be necessary. However, the 12 enterprises that have been privatized under the program so far have all been relatively small, representing in aggregate approximately three percent of the HMG's total investments in state-owned enterprises. None of the larger or more politically sensitive enterprises have been dealt with yet. The ability and willingness of the government to deal with these more difficult enterprises has yet to be demonstrated.

c. Current Enterprises

Throughout the five year history of privatization in Nepal, various lists of enterprises for privatization have been approved by the government. The list of enterprises currently approved by the Privatization Committee for privatization, although not yet approved by HMG, are:

1. Bhaktapur Brick Factory Ltd. 2. Herbs Production and Processing Co. Ltd. 3. Janakpur Cigarette Factory Ltd. 4. Nepal Rosin and Turpentine Ltd. 5. Rimal Cement Company Ltd. 6. Morang Sugar Mills Ltd. 7. Biratnagar Jute Mills Ltd. 8. Pokhara Milk Supply Scheme 9. Industrial District Management Ltd.

10. Nepal Transport Corporation (Trolley Bus Service only) 11. Royal Nepal Airlines Corporation 12. Gorkhapatra Corporation 13. Nepal Bank Ltd.

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14. Rastriya Banijaya Bank 15. Nepal Industrial Development Corporation 16. Nepal Housing Development Finance Co.

It should be noted that the list includes only six of the 15 enterprises that are proposed to be privatized under the USAID assistance program recommended below. The Privatization Cell has undertaken to have the additional enterprises approved by the Privatization Committee in the near future. As a matter of practical policy, the Privatization Cell does not ask the government to approve enterprises for privatization until the majority of the valuation and other preparatory work has been completed and the Privatization Cell has reasonably detailed information to provide to the government.

V REVIEW OF ENTERPRISES

Twenty one agribusiness enterprises, identified by USAID as potential privatization candidates, were reviewed by the study team. Of the enterprises reviewed, 15 were assessed to be suitable candidates for inclusion in the proposed assistance program. (The Dairy Development Corporation is counted as two enterprises for privatization purposes as the Privatization Committee has already made the decision that the corporation should be split into two for privatization.) Three enterprises are in sectors which do not operate on a competitive basis, and so are not suitable candidates for privatization at this stage. Two enterprises are more closely related to the fmancial sector; they should be privatized as part of that sector. Of the two remaining enterprises, one is in the last stages of being privatized, and the existence of the other could not be verified. This classification of enterprises is only preliminary and should be reviewed by the long term advisor as part of developing the work program, as described below. The fifteen enterprises identified as being suitable for inclusion in the proposed assistance program are:

1. Agricultural Lime Industry 2. Agricultural Project Services Centre 3. Biratnagar Jute Mill 4. Birganj Sugar Factory Ltd. 5. Cotton Development Board 6. Dairy Development Corporation (excluding Pokhara Milk Supply Scheme) 7. Herbs Production & Processing Co. Ltd. 8. Hetauda Textile Industry Ltd. 9. Janakpur Cigarette Factory

10. Lumbini Sugar Mills Ltd. 11. Morang Sugar Mill Ltd. 12. Nepal Rosin and Turpentine Ltd. 13. Nepal Tea Development Corporation 14. Pokhara Milk Supply Scheme 15. Salt Trading Corporation Ltd.

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Visits were made to the majority of the enterprises identified by USAID as potential privatization candidates. Of those enterprises visited, all in which HMG held a majority share or was in control were in poor financial or operational condition. All would benefit from early privatization. Those enterprises identified by USAID but not included in the list to be privatized as part of the this assistance program were excluded because of policy issues requiring resolution or because the enterprises have non-competitive operations. All of these enterprises should be transferred to private ownership as soon as those matters are resolved.

Commentary on each of the enterprises reviewed, including a preliminary recommendation on the appropriate modality for sale, is provided in Annex IV. Summary financial and physical performance figures for a number of the enterprises are provided in Annex V. Although these figures were obtained from official government sources, independent checks indicated that many of the figures are not accurate. Therefore, no reliance should be placed on these figures. Given the importance of the dairy industry and the Dairy Development Corporation to the agricultural sector and HMG's privatization program, this sector is covered separately in Annex VI. Financial and performance figures for the dairy sector are included in the dairy annex.

VI ASSISTANCE REQUIRED

The Privatization Cell currently has a staff of only five professionals plus one long term local advisor. The staff are seconded from the Ministry of Finance and other government bodies for periods of two to three years. With such a small staff, the cell must contract out a significant proportion of its work. Asset and business valuations, financial audits, marketing studies, redundancy studies, and legal work are typically contracted out. This system has worked well to date, and the Privatization Cell has decided that it will continue to operate with a small core staff. This means that it will have to continue to contract out much of its work.

As noted below in section IX, Local Consulting Capacity, most of the required consulting services can be obtained locally. However, for business valuations and some legal work, the use of foreign consultants will be necessary. For certain industrial sectors, such as tea, cotton, and dairy, industry specialists will be required. As well as these specialists, a long term advisor with general privatization experience in different countries would assist further refinement and implementation of the whole program. This advisor would be able to assist in reviewing existing policies and procedures. The long term advisor should have a strong commercial background to assist in developing realistic privatization options for enterprises, locating potential investors, and assisting in negotiations.

As noted previously, work is needed to develop and implement a public awareness program. This will require extensive use of local consultants, preferably with oversight by a foreign advisor. Other local costs for advertising, printing, holding seminars, etc., would be involved in implementing the program. Assistance with training of the members of the Privatization Cell

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members and other key decision makers also would be desirable. This should be in the form of short courses or study visits.

Assistance with funding these foreign advisors will be necessary and, given the constraints on HMO's budget, assistance with funding the local consultants also would be desirable. In addition, the Privatization Cell would benefit from receiving additional general office support. This would cover funding of administrative staff to help manage contracting and finances, additional computing facilities, communications, transportation, upgrading the office facilities etc.

A large part of the assistance described above would benefit the whole of HMO's privatization program, regardless of which sectors the enterprises are in. Of the fifteen agribusinesses recommended to be included under the USAID funded privatization assistance program, only three or four need foreign sector-specialist assistance. Some of the other enterprises on the current privatization list will, however, need extensive sector specialist assistance. This applies particularly to the banking sector. As noted below, privatization of the banking sector will facilitate the privatization of enterprises in all other sectors. Privatization of utilities, which are not yet scheduled for privatization but will need to be dealt with soon, is another area that will require considerable assistance as little thought has yet been given to the question of how to regulate these industries. Overall, as the privatization program is extended, the range of assistance required will broaden.

VII OTHER DONORS

A number of donors have in the past provided assistance to HMO with its privatization program. A more limited number are currently planning to provide assistance. A review of the current plans of major donors is provided below.

a. Overseas Development Administration (ODA)

Although the ODA is a major donor to HMO, to date it has not provided assistance with privatization. However, on 2 October 1996, the ODA proposed to the Ministry of Finance the funding of a long term advisor to provide general assistance to the Privatization Cell for a period of 18 months commencing in December 1996. A limited amount of short term assistance was also included in the offer. (A copy of the "Draft Project Memorandum" is attached as Annex VII.) This offer was made as part of the general assistance that the ODA is providing to the Ministry of Finance. It followed the June 1996 visit of a short term advisor who was contracted to recommend a privatization assistance plan to the DDA. Following the consultant's visit, the Privatization Cell were advised that the offer of assistance would cover both help with the privatization of the Nepal Telecommunications Corporation (NTC) as well as general support for the Privatization Cell. With the government encountering difficulties in the telecommunications sector, and a commitment by the Danes to provide assistance to NTC, the ODA decided to focus its assistance solely on long term general support for the Privatization

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Cell. The Ministry of Finance currently is considering accepting the offer but on modified terms to try and minimize any overlap with the assistance being proposed by USAID.

Although the ODA has provided considerable support in the past to agriculture and the tea sector in particular, they have no plans to provide specific assistance with privatization of agricultural industries.

b. Danida

Danida has provided considerable assistance to the dairy sector, most recently with efforts to assist with the privatization of the Dairy Development Corporation (DDC). (These efforts are detailed in the dairy annex.) As little progress has been made with the privatization of the DDC, and privatization and the dairy sector no longer fits within Danida's priorities for Nepal, Danida has curtailed its assistance in this area. The only program Danida currently has in the dairy sector is the provision of a long term advisor to the National Dairy Development Board (NDDB). This assistance is to be provided for five years, but may be terminated sooner if certain conditions relating to the independence of the NDDB are not met by HMG.

Danida has agreed to provide assistance with the privatization of the NTC. However, this assistance will be provided directly to the NTC to help the corporation restructure and prepare itself for privatization. Although coordination with the Privatization Cell will be required, there should be no conflict with the assistance being provided to the Privatization Cell by other donors.

c. The World Bank

The World Bank and the UNDP provided support to HMG for the initial round of privatization. With the subsequent provision of assistance by USAID, both the Bank and UNDP withdrew from the area. The World Bank is currently negotiating with HMG over the provision of assistance for the privatization of the fmancial sector. Agreement may prove difficult to reach as the Bank is proposing to provide the assistance mainly in the form of a loan, with only a minor technical assistance grant component. At this stage, HMG is reluctant to enter into a loan agreement for privatization. Should agreement be reached with the World Bank, it would be unlikely to have a significant impact on the assistance being provided by other donors to the Privatization Cell. The major risk is that the work load from the privatization of the financial sector could overwhelm the existing relatively small Privatization Cell.

Privatization of the financial sector in fact would be beneficial to the overall privatization program. Currently the government provides virtually no subsidies to state-owned enterprises in the agricultural sector, the Agricultural Inputs Corporation being the one major exception. However, many state-owned enterprises do borrow significant amounts of money from the major state-owned banks. Although the interest rates on these loans is nominally at market rates, the loans can not be considered commercial as no private sector bank would lend money to these state enterprises given their poor fmancial status. It is only because the banks are state-owned

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that the loans are made. The government is therefore indirectly subsidizing state-owned enterprises through its ownership in the fmancial sector. Privatizing the financial sector would stop this subsidy and highlight the poor fmancial status of many state-owned enterprises, perhaps forcing some of them into liquidation, or at least hastening their privatization.

d. UNDP

As noted above, the UNDP provided assistance, together with the World Bank, during the initial round of privatization. Along with the World Bank, the UNDP curtailed its support for privatization when USAID funding started. The UNDP's current three year plan does not provide for any support for privatization, nor would privatization easily fit into their overall program for Nepal. However, ifHMG requested assistance with privatization in the future, the UNDP would be willing to consider the request. The Privatization Cell has been advised that they should notify the UNDP now that they may have a need for assistance with privatization in approximately 18 months.

e. Germany/KfW

The German government is currently providing assistance through KtW for the privatization of the Himal Cement Company. The company is relatively small and the assistance is well advanced, so the activity should have little impact on the assistance being proposed by USAID.

f. The Asian Development Bank (ADB)

The ADB has provided considerable assistance to Nepal, including support for the agricultural sector. Although at a policy level they support the government's privatization program, at this stage they have no plans to provide fmancial assistance for privatization. The ADB would consider providing assistance for privatization in the future. This would probably be in the form of a loan with only limited technical assistance. Ad hoc assistance on a particular project, such as the privatization of the airline, is also a possibility.

g. Other Donors

A number of other donors have provided support for the agricultural sector, for example the Finns and Australians with forestry. In general, donors are cutting back their programs and, as far as could be established, none are planning to provide assistance with privatization. The Canadian government has provided assistance to Royal Nepal Airways Corporation. However, this assistance was provided directly to the Corporation and, although it should facilitate privatization, is not directly related to it.

h. The Future

No donor currently plans to provide assistance to HMG with its privatization program beyond the 18 month period that is envisioned for the USAID and ODA programs. The UNDP, ADB,

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and the World Bank could all be in a position to provide limited assistance in the future, although in the cases of the World Bank and the ADB it would be loan financing which HMG is reluctant to use. Thus, at this stage, there is no obvious candidate to take over the position that USAID held in the past.

VIII RECOMMENDED PLAN

The assistance program recommended for USAID is divided into three parts, corresponding to the three sources of funds available. A description of each of the three components is provided below. Section XI outlines an indicative budget for the use of the funds; Annex vrn provides detailed estimates for the use of the local currency funds and the new U.S. dollar funds.

a. Local Currency Funds - 416(B)

The 4l6(B) funds should be provided directly to the Privatization Cell, under the Ministry of Finance, as project funds. Control of the funds should be through a quarterly budget, prepared by the long term advisor and approved by the Privatization Committee. Assistance provided by these funds should cover both support for the privatization of individual enterprises as well as general support for the Privatization Cell and the strengthening of the overall privatization program.

i. Enterprise Sales Support

The Privatization Cell currently draws on local consultants to help prepare offering memoranda. It is recommended that this process continue and that part of the local currency funds available be used to meet the costs of these consultants.

The Privatization Act requires that an evaluation of each enterprise be conducted. These evaluations always include an asset valuation carried out by local valuers. In preparing offering memoranda, accountants/fmancial analysts are used to review and prepare fmancial statements and forecasts for each enterprise. A redundancy study is also carried out for most enterprises. This study estimates the number of employees that will need to be made redundant as part of the privatization process and calculates the cost of meeting all gratuity liabilities and any other redundancy costs. Local consultants typically are employed to undertake these three studies, which are required for each enterprise where HMO holds a majority stake.

For certain enterprises, other consultants will need to be employed. For example, where a new company must be established with the break up of a single enterprise, as in the case of the Pokhara Milk Supply Scheme and possibly the Nepal Tea Development Corporation, legal assistance will be required. For other enterprises, sector specialists will be required. For example, an agricultural specialist with expertise in cotton should be employed to assist with the evaluation of the Cotton Development Board. Such consulting expertise should be available

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locally. Where HMG holds only a minority stake in an enterprise, or the shares are already listed on the Nepal Stock Exchange, more limited consulting services will be required.

In total, it is estimated that approximately Rs9 million will be required to meet the costs of all the consultants needed for the privatization of the 15 enterprises proposed to be covered by this assistance program. It is recommended that all of these costs be met out of the local currency funds. Details of the projected needs for the use of local consultants are included in the indicative budget in Annex VITI.

li. Public Awareness Program

As noted above, public awareness is an area where considerably more work needs to be done. It is recommended that approximately Rs5. 7 million of local funds be allocated to a public awareness program. The public awareness program should target three main groups: the general public; key decision makers; and the employees of enterprises being privatized. Other areas covered by the program would include international advertising of enterprises for sale and public relations for the Privatization Cell and the Ministry of Finance.

The General Public. The program aimed at the general public should focus on providing the public with a general understanding of privatization and the workings of HMG's privatization program. Material should cover the failings of the existing state-owned enterprise system, the need for and benefits of a privatization program, the way the program operates in Nepal, the successes achieved so far in Nepal and elsewhere in the region, and the way in which HMG's program will effect the general public. The program should make use of radio, newspapers, and television, producing articles and programs for publication as well as paid advertisements. Seminars and workshops also could be presented around the country. Politicians and experts from nearby countries with successful privatization programs, such as Malaysia, should be brought in to describe the successes and problems of the programs in their own country.

Key Decision Makers. The program aimed at key decision makers would be based mainly on seminars and workshops and would seek to provide participants with an in-depth understanding of privatization and HMG's program in particular. It is estimated that there are close to 1,000 politicians, senior government officials, academics, journalists, and union leaders who should be targeted. A series of one day residential seminars or workshops are recommended, with a maximum of 40 people attending any seminar. One or two small teams would organize and present the seminars, covering all major centers in the country over the 18 month period of the assistance program. This program also should make use of politicians and experts from nearby countries.

A small number of selected opinion makers could also be taken on organized study tours of neighboring countries to observe directly the impacts of privatization.

Employees. The program aimed at the employees of enterprises being privatized would seek to inform the employees in detail of the privatization process as it applied to them and their

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enterprise. As soon as an enterprise enters the privatization process, a specialist team should visit the enterprise to explain the whole privatization process including the proposed timetable, the likely impact on the employees, and their rights, particularly with regard to redundancy, gratuity payments, and purchasing shares in the enterprise. The team should include one or two specialist consultants who would be core members of each team, at least one member of the Privatization Cell and, where possible, a senior officer of a private sector enterprise from the same industry. Separate meetings with the union leaders of the enterprise should be an integral part of the program.

A standard audio-visual package for use at all enterprises may be a useful tool to be employed by the team. Visits by the team should continue throughout the privatization process to keep employees informed of progress up until the enterprise is handed over to the new owner. A total of three to four visits per enterprise may be necessary.

Public Relations. Assistance should be provided to the Privatization Cell and the Ministry of Finance to help them manage the public relations aspect of their work. This assistance would include generating press releases, answering questions in Parliament, and organizing interviews with journalists. A specialist public relations firm could be contracted to carry out this work or, more practically, the full time local consultant recommended below should have the appropriate skills to carry out this task.

International Advertising. A limited amount of local funds could be used to pay for advertising in regional newspapers, magazines, and selected trade journals, for enterprises where there is a reasonable probability of foreign investors being interested in buying the enterprise. This is likely to occur with the tea, herbs, and turpentine companies.

Managing the Program. It is recommended that the Privatization Cell employ one full time local consultant to help develop and oversee all aspects of the public awareness program. This person would be responsible for contracting out the major components of the program, and supervising and coordinating the work of the consultants. Provided they had the appropriate skills, the consultant would also be directly responsible for the public relations component of the program. [During interviews with various media consultants and companies, one individual was identified with suitable skills. He was Bishnu Raj Adhikari, ex-executive director of the Management Association of Nepal.]

iii. Training

It is recommended that approximately Rs4.25 million of local funds be allocated to short term training for the Privatization Cell members and selected politicians or senior government officials.

Most of the existing Privatization Cell members have received some training abroad, usually a two to three week general course on privatization. Some have had subsequent, specialized training, for example on valuation. However, in the near future it is likely that two or three

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members of the cell will be replaced. When this happens, the new cell members should receive a similar basic level of privatization training. Other members of the cell should be sent on more advanced courses or for suitable study visits. Provision has been included in the indicative budget for the cost of six two to three week training courses including travel, per diem, and course fees.

In addition to the training of the Privatization Cell members, provision has been included in the indicative budget for sending three politicians or senior government officials on general privatization training courses. Should this aspect of the training program prove to be productive, money allocated to the public awareness program could be used to fund training courses for additional candidates.

iv. Legislative Review

The Privatization Act, as described above, is a new act and reasonably satisfactory. Although this is the main act controlling privatization, many other acts impinge on the overall privatization process. For example, the Companies Act is frequently used to establish a limited liability company to replace a state enterprise being privatized; the limited liability company becomes the new legal entity which is actually sold in the privatization process.

Other general acts that may also impinge on the privatization process are the Cooperatives Act, the Labour Act, acts relating to contract law, and anti-monopoly legislation. Although some general laws have been revised recently, for example a new Companies Act was passed this year, other general legislation relating to privatization is in need of revision. One important case is the Cooperatives Act, which is likely to playa large part in the privatization of the dairy sector. This Act contains provisions which need to be changed if newly established cooperatives are to function properly.

Other acts may directly affect one particular sector. For example, the National Dairy Development Act contains provisions relating to milk price fixing. It is likely that there is much sector specific legislation which will need to be changed so that newly privatized companies operate in a truly competitive market. If the full benefits of privatization are to be realized, it is essential that markets be liberalized and that the entry of new enterprises to compete in the market place be freely allowed.

Approximately Rs284,OOO has been included in the budget to allow for a review of all general legislation relating to privatization, as well as sector specific legislation relating to the industries being covered by this assistance program. A number of local NOOs and consulting firms have the necessary experience to carry out this work. A single contract could be let out covering all the work, or one contract could cover general legislation with separate contracts for sector specific legislation. Commencing this work as soon as possible should be a high priority.

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v. Gratuity Payments

A major fmandal cost to HMG in implementing its privatization program is the cost of meeting accrued liabilities for gratuity payments for workers that are made redundant through the privatization process. Gratuity payments normally accrue at the rate of one and a half months salary for each year employed. state-owned enterprises, which generally operate on a modified cash accounting basis, do not show these liabilities on their balance sheet. In general they also fail to hold any funds to meet the cost of paying out the gratuities when employees are made redundant or retire.

In privatization, these costs typically end up as a liability of HMG. With some of the larger enterprises that are planned to be dealt with under this program, these costs will be substantial and may become a significant hindrance to the privatization process. For example, at Janakpur Cigarette Factory, in excess of 500 employees may need to be made redundant. Based on an average of one year's gratuity payment per employee, the total liability would be in excess of Rs6 million. Approximately RsI1.3 million has been included in the budget to cover the major part of the gratuity payments that will be incurred in privatizing the enterprises covered by this assistance program. The exact costs that will be incurred by HMG for each enterprise are calculated as part of the redundancy study that is carried out when evaluating enterprises being privatized .

vi. Skills Retraining

In addition to meeting the accrued gratuity cost of employees made redundant through the privatization process, it would assist the privatization program if redundant workers were provided with skills retraining. Programs should be developed which would be implemented at enterprises with major redundancy problems. These programs would cover skills retraining and support to help redundant employees establish new businesses. A number of NGOs are already providing training in this area. Proposals should be sought from them and any other interested parties to provide a program covering the enterprises where the redundancy studies indicate the greatest need. Approximately Rs2.8 million has been included in the indicative budget to cover skills retraining.

vii. Office Support

Limited office support for the Privatization Cell currently is being provided through the IRIS project. However, this support is likely to cease in November 1996. Further, with the increase in work load planned for the cell, the level of office support will need to be increased. Approximately Rs5. 9 million has been included in the indicative budget to cover the cost of office support for the 18 month period of the assistance program. This money is intended to cover the cost of an upgrade of the office and its equipment as well as normal operating costs. As it is planned to let a large number of contracts for outside consultants, potentially in excess of 70, and incur significant local costs on other aspects or the program, the cost of employing an administrative assistant and a contract administrator have been included. Much of the written

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work for the Privatization Cell must be prepared in both English as well as Nepalese, so provision has been made to cover translation costs. Details are provided in the indicative budget below.

viii. Management of the Local Funds

The local funds should be transferred from the existing account at the DDC to an interest bearing account managed by the Privatization Cell. Officials of the Privatization Cell have yet to determine the mechanism through which they can establish such an account within current regulations, but are confident that it will be possible. The Privatization Cell should commence this process, with USAID approval, as soon as possible so that expenditure of these funds will not be delayed.

General control of the funds should be through a quarterly budget prepared by the long term advisor and approved by the Privatization Committee. No expenditure should be allowed outside that approved budget. The office administrator should assist in ensuring that adequate records are kept and controls are maintained on expenditure. The indicative budget provided in Annex VIII should not be treated as binding when the quarterly budgets are being prepared. Rather, it should be used as a guide to the areas where expenditure should be directed and an indicator of the level of support which is considered appropriate for each area. If any major divergences from the indicative budget are contemplated, they should be agreed with USAID first.

The Privatization Cell should prepare a manual detailing the procedures to be followed in spending the local funds. This procedures manual should be approved by the USAID (Nepal) controller. Audits of local fund expenditure should be carried out after one year and at the end of the project. A provision has been included in the budget to cover the cost of two audits.

If a long term advisor is not in place when expenditure of these funds commences, it is recommended that the Privatization Cell should develop the first quarterly budget with the approval of the USAID project officer.

It should be noted that gratuity payments are only made at the time an enterprise is privatized. Similarly, the majority of expenditure on skills retraining should be incurred only after an enterprise has been privatized. This means that over one third of the local funds can be accessed only when actual privatizations have been completed. This does provide some incentive component to the local fund program.

b. US Dollar Funds - New Funds

It is recommended that the $700,000 of new funds be used to meet the cost of providing a long term advisor to work at the Privatization Cell, together with the provision of short term advisors to assist with the sale of selected enterprises. As the cost of supporting a long term advisor for 18 months will use more than 70 percent of the funds available, only limited short term support can be provided.

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It is recommended that the scope of work for the long term advisor cover the following:

• assist the Privatization Cell in all matters relating to HMO's privatization program for agricultural based industries;

• recommend suitable methods for sale of enterprises and assist in preparing offering memoranda;

• assist in identifying and selecting potential investors; • assist in negotiations with potential investors; • review HMG's privatization program and recommend ways in which the program could

be improved; • assist the Privatization Cell, in consultation with the ODA long term advisor, in refining

their work program for the following 18 months, in particular identifying the enterprises to be included in the program, the external resources needed to assist with the privatization, and the target dates on which the enterprises will be offered for sale;

• approve the quarterly budget prepared by the Privatization Cell for the expenditure of the local currency fund;

• help identify and supervise the work of short term advisors selected to assist with the privatization of individual enterprises;

• assist in developing and overseeing the public awareness and skills retraining programs; • assist with the training of the local staff.

The above scope of work for the long term advisor was developed on the basis that the ODA will have a long term advisor working in the Privatization Cell for the same period as the USAID long term advisor. No final agreement had been reached between the Ministry of Finance and the two donor agencies as to how work would be divided between the two advisors at the time this report was prepared. The scope of work proposed for the USAID long term advisor therefore may need to be modified in light of any subsequent agreement between the parties on the distribution of work.

Foreign short term assistance has been included for six enterprises in the indicative budget. These enterprises are the Pokhara Milk Supply Scheme and the remainder of the Dairy Development Corporation, the two sugar mills, Janakpur Cigarette Factory, and the Herbs Production and Processing Company. Short term assistance definitely will be necessary for the privatization of the Nepal Tea Development Corporation, but this has not been included in the budget due to the shortage of funds. As ODA provided considerable assistance to the tea sector in the past, it has been assumed that they will be willing to provide the necessary assistance. Should this assistance not be forthcoming, reductions to or the total elimination of assistance to other enterprises will be necessary. Similarly, it would be desirable to have some short term assistance in developing the public awareness program, reviewing legislation, and developing and overseeing the skills retraining program. However, limitations on funding preclude this.

As there is potential for overlap with the assistance being provided to the Privatization Cell by different donors, it is recommended that USAID take the initiative in organizing regular

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coordination meetings between donors. These meetings should occur on a monthly basis at the working level, with less frequent meetings scheduled for more senior donor officials.

c. US Dollar Funds - Pipeline Funding

The exact amount available in this fund is not known at this stage, but is estimated to be approximately $250,000. This fund originally was committed for use on the dairy sector and must continue to be used in that sector under this program. This fund should be directed at helping privatize DDC and strengthening private sector participation in the dairy sector. It is recommended that this money be used to fund a range of projects aimed at achieving these objectives. A selection of projects which could be funded with this money are described below, but it is recommended that proposals for additional projects be sought from contractors before a final selection is made by USAID.

i. Suggested Projects

One project which would directly boost private sector participation in the dairy sector as well as facilitate the privatization of the DOC is giving new impetus to the program of converting Milk Producers Associations (MPA) into Milk Producers' Cooperatives Associations (MPCS). MP As are under the control of the ODC, whereas MPCSs are independent privately-owned cooperatives. Converting MP As into MPCSs directly increases the portion of the dairy sector that is under private sector control. In addition, greater flexibility is provided for the privatization of DOC if all collection centers are separated legally from the rest of the DDC. This is particularly urgent in the case of the Pokhara Milk Supply Scheme which is to be privatized first, but is also important for the rest of the ODC if the remainder of the DDC is to be sold in parts, as is currently proposed.

Another project to strengthen the private sector is providing assistance to existing and new MPCSs to improve their operations. Available evidence suggests that the majority of the existing MPCSs are operating at a loss. Although in part this is due to current DDC policies, many MPCSs would benefit from adopting a more commercial approach to their operations. Assistance in basic business skills is needed to help them meet this objective. Newly established MPCSs are likely to have an even greater need for assistance.

There are a number of other areas where assistance would strengthen the dairy sector, and in particular the private sector. The current surplus of milk produced during the flush season and the corresponding shortfall during the lean season causes considerable difficulty for the whole dairy sector. Apart from a change in pricing policy by the DOC, there are a number of specific measures that could be implemented to alleviate this problem. There are various long life products such as ice cream and milk based desserts that could be produced during the flush season to help smooth out the demand for fresh milk throughout the year. A study on the demand for such products and the feasibility of producing them could be prepared and distributed widely to assist the private sector in establishing and expanding this new segment of the industry.

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An issue which is likely to cause political problems for the privatization of DDC is the number of existing milk producers who do not produce sufficient milk or are too remote from transport or population centers to make their operations economically viable. If the dairy sector is ever to be privatized fully and operate on a competitive basis, these uneconomic milk producers will need to get out of producing milk. A project that would assist in the privatization process would be to identify the uneconomic milk producers and recommend programs to facilitate these farmers withdrawing from milk production. Should any of these programs be judged worthwhile, money could be allocated to implement them.

The above represent only some of the projects that could be undertaken to strengthen private sector participation in the dairy sector and facilitate the privatization of DDC.

ii. Contracting out the Projects

In the normal course of events, proposals should be sought from contractors to carry out the above projects and any other projects that they may suggest which would achieve the desired objectives.

The Agro Enterprise Centre (AEC), which was established with USAID funding, is one local consulting group that has the capability to carry out the above and related projects. USAID has used the AEC to carry out successfully projects similar to those above. As the Coopers & Lybrand/CTS team did not have the opportunity to review all local agricultural consulting capability, the team is not in a position to make any recommendation on the capability of other contractors to carry out such projects.

Based on the USAID experience, a waiver could be obtained for AEC. The AEC should be asked to make a detailed proposal for the expenditure of the pipeline funds based on the above guidelines. They should be allowed only a limited time, say a maximum of one month, to prepare their proposal. They should be encouraged to develop their own proposals which would achieve the objectives of strengthening private sector participation in the dairy sector and facilitating the privatization of DOC. Should the AEC not come up with a satisfactory proposal within the specified time frame, other contractors should be given the opportunity to make proposals covering all or some of the funds. Defining benchmarks for measuring the success of each of the projects should be an integral part of any proposal, whether made by the AEC or another contractor.

In selecting the projects that will be funded with this money, care should be taken to ensure that the benefits accrue to the whole dairy sector. No project in any way should go towards further consolidating the dominant position the DDC holds in the sector. Working through the two newly established private sector dairy associations would help to achieve this objective.

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IX LOCAL CONSULTING CAPACITY

The above recommended assistance plan provides for extensive use of local consultants. In light of this, and the requirements of the scope of work, a brief review of local consulting capabilities was carried out.

The Privatization Cell currently makes use of a range of local consultants and, in general, they provide adequate service. The major work for which the cell currently uses local consultants is to carry out asset valuations. This will continue to be the case under the proposed work plan. USAID previously provided training to approximately 50 local asset valuers. The Privatization Cell relies on approximately 15 of these valuers to carry out its asset valuations. All of these valuers have proved to provide adequate service. The Privatization Cell selects valuers on the basis of competitive tenders, with a minimum of three proposals being sought. The use of this selection procedure should continue and be employed wherever possible for the employment of all local consultants.

Currently all business valuations are carried out by foreign consultants. This will need to continue until training of local consultants is undertaken, as no local consultants have the necessary skills. If short term consulting resources permit, delivery of a business valuation training course should be included in the scope of work of one or more of the foreign business valuers brought to Nepal.

There are approximately 7,000 registered accountants in Nepal, but only 105 of these are qualified at the" A grade" level. Of these, only half are thought to be in practice, usually as sole practitioners. Only one local firm has an affiliation with a big six international accounting firm. For the limited range of services normally required by the Privatization Cell, such as preparing financial statements, local consultants provide an adequate service. It is recommended that the Privatization Cell only make use of "A grade" accountants. No evidence was available to indicate that more sophisticated financial analysis services are available.

There are approximately 5,000 lawyers in Nepal. Most are sole practitioners offering a full range of services. Specialization of service is only just beginning to occur. As with accountants, for the services normally required by the Privatization Cell, such as preparing articles of association or contracts, local services are adequate. For tasks such as reviewing legislation, outside assistance would be desirable to provide an international business perspective. The Privatization Cell is assisted by a lawyer from the Ministry of Law during contract negotiations with investors.

Specialist market consultants and consultants with the skills to carry out redundancy studies are in more limited supply. For these services only one consultant with the required skills or experience may be available. The quality of work produced by these consultants is highly variable. General marketing consultants were interviewed as part of developing the plan for a public awareness campaign. The quality and range of services offered by those interviewed was limited.

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Overall, the availability and quality of local consultants should prove no hindrance to HMG's privatization program or the proposed USAID assistance plan. In some specialist areas, such as business valuation and public awareness campaign development, outside assistance will be required.

X BENCHMARKS AND POST-PRIVATIZATION MONITORING

Identification of benchmarks for measuring the success of the privatization program is a necessary part of the assistance program. Suggested benchmarks, together with comments on their applicability, for each of the major parts of the recommended assistance program are provided below.

a. Enterprise Sales Program

The successful completion of the sale of the state's share in each of the 15 enterprises covered by the assistance program provides the most appropriate benchmarks to measure the achievements of the recommended sales program. Measuring the number of enterprises privatized is a good way of assessing the success of the expenditure of all the new dollar funds and a large portion of the local funds. A proposed privatization schedule for the completion of the sale of all 15 enterprises in provided in Annex IX. This timetable will be updated by the long term advisor within two months of arrival in country.

It needs to be emphasized that the proposed schedule was developed on the basis of the time necessary to carry out all the technical aspects of the privatization process. No allowance was made for delays caused through the political processes associated with the program or any legislative changes that may be required to ensure that the relevant sector is operating in a fully competitive manner. Any such delays need to be added directly to the time taken to successfully complete each privatization. As several of the enterprises proposed for privatization are politically sensitive, it is highly likely that delays will occur. However, should these delays become excessive, a review of the entire assistance program should be undertaken.

Monitoring and measuring the impact on the economy of the privatization of the targeted enterprises should be based on the monitoring work that is already undertaken by the Privatization Cell. The cell collects a significant amount of data from privatized enterprises through a written questionnaire that is sent to all enterprises on an annual basis. A copy of the questionnaire is included in Annex X. This information will continue to be collected by the Privatization Cell even after USAID's assistance to the cell has ceased and so will allow continued monitoring of the impact of the privatization program.

Care needs to be used in making use of the information collected from privatized enterprises. No single measure should be used to judge the success or otherwise of the privatization program. An increase in investment, employment, and sales of a privatized enterprise clearly represents a success. However, for some enterprises, liquidation may count as a success for the

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privatization program. Even for enterprises that continue to operate after privatization, a reduction in sales may represent an improvement in performance if the enterprise went from operating as a state-owned monopoly to being a privately owned business operating in a competitive market.

b. A wareness and Training Program

For the local funds that cover the public awareness program and training, no simple benchmarks are available apart from monitoring the delivery of the awareness program and the completion of training. Improvements in public awareness could be measured through surveys, but such efforts and expense are not justified.

c. Dairy Sector Program

In general, benchmarks for the pipeline funds used for dairy sector projects should be specific to each project undertaken, although an obvious benchmark for the program as a whole would be the number of new private dairy enterprises or the percentage of milk processed by the private sector. Benchmarks for the projects outlined above are suggested below. Recommended benchmarks should be included as part of the project proposals where additional proposals are sought from outside consultants.

For the project of converting MPAs to MPCSs, the most appropriate benchmark would be the number of MPAs converted to MPCSs. The project for offering business advisory assistance to MPCSs is more problematic. A reduction in the number of MPCSs operating at a loss would be one measure, but this could be significantly affected by weather conditions during the year and the entry of a large number of newly formed and inexperienced MPCSs.

Benchmarks for the long life milk product project could be the production of marketing and feasibility studies. In terms of measuring actual impacts, a reduction in the number of milk holidays (days when milk is not purchased from suppliers due to a lack of processing capacity) would be appropriate, although it could take several years for any impacts of the project to be felt. Weather conditions and other changes in the dairy sector would also need to be considered. Lastly, the assistance to uneconomic farmers project could be evaluated against the number of farmers helped out of milk production.

XI INDICATIVE BUDGETS

Indicative budgets covering the local currency fund and the new US dollar funds are provided below. Details of the budgets are provided in Annex vm. As described in Section vn, the local currency funds should be used to meet all local costs associated with the enterprise sales as well as to fund a public awareness program, training, a legislation review, general office support, skills retraining, and meeting some enterprise redundancy costs. The funds should be

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controlled on the basis of a quarterly budget developed by the long term advisor and approved by the Privatization Committee.

The new US dollar funds should be used to meet the costs associated with providing a long term expatriate advisor together with limited short term technical assistance for enterprise sales. An item "International travel/training/additional short term assistance" has been included in the other direct dollar costs. This item is intended to cover the travel and U.S. dollar costs associated with overseas training and travel should these costs not be able to be funded through the use of the local currency funds. Should the costs be met out of local currency funds then these U.S. dollars should be used to fund additional short term assistance, in particular, assistance for the sale of the Nepal Tea Development Corporation. Control of the new US dollar funds will be provided by a separate contract or delivery order. This contract should provide for flexibility in the selection of enterprises and the timing of their sale as well as for development of the scopes of work for the short term advisors by the long term advisors on an as-required basis.

Indicative Budget - Local Currency Funds and New US Dollar Funds

Item Local Currency Funds New US dollar Funds (Expressed in US dollars)

Enterprise Sale Costs 154,420 157,205

Long Term Advisor Costs 462,200

Other Direct Costs 549,500 72,150

Total 703,920 691,555

The indicative budgets were prepared using quotations obtained in Kathmandu for much of the office upgrade and equipment (copies of these quotations are held by the Privatization Cell). Costs for local consultants and other local supplies were based on the Privatization Cell's experience to date. Although several public relations consultants were interviewed, no accurate estimates of the cost of developing and managing the public education program were obtained. The figures included in the budget were based on estimates provided by the director of the Management Association of Nepal. The gratuity payment costs were used as a residual item to use up the remaining local funds. Based on average gratuity payment levels and rough estimates of redundancy levels, the funds included in this item should be adequate to meet a significant part of the redundance costs associated with privatizing the enterprise recommended to be covered by this assistance program.

U.S. dollar costs were based on USAID regulations and the local USAID mission's and the study team's experience. Costs for the long term advisor were based on an advisor receiving $400 per day with a multiplier of 2.3 and two additional family members. Although it is

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possible that savings could be made on this figure, particularly if the advisor does not have a family, it is also possible that the costs could be higher. If this is the case, additional funds could be used from the "additional short term assistance" item included under "other direct costs. "

It should be noted that the definition of "Other Direct Costs" used in the indicative budgets does not follow strictly the USAID definition of the term. Some costs, such as local travel, that would be included in this item under the USAID definition have been included under "Enterprise Sale Costs" where the costs are strictly related to the sale of an enterprise.

A specific budget for the pipeline funds has not been prepared as this budget will be based on the projects selected by USAID from the proposals made by contractors.

X CONCLUSION

HMG has taken important steps over the past five years in developing its privatization program. The legal and institutional framework that has been established appears reasonably sound, although it has not been tested on large or politically sensitive enterprises. All of the state­owned agribusinesses evaluated as part of this project would benefit from privatization, although some require the government to implement policy reforms first. Many enterprises in other sectors are also urgently in need of privatization. With coordinated assistance by donors, the Privatization Cell should have the resources necessary to implement a comprehensive privatization program. Political constraints may, however, lead to delays in the execution of the proposed plan. Should significant delays occur, particularly with the privatization of the dairy sector, USAID should review its continued assistance of privatization in Nepal.

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ANNEXES

ANNEX I

INSTITUTIONS AND INDIVIDUALS INTERVIEWED

Institutions and Individuals Interviewed

USAID

Dr. Frederick Machmer. Director David Johnston. Deputy Director Amanda Levenson. Controller Sribindu Bajracharya. Program Specialist Shubha Banskota. Program Specialist James Gingerich. Program Officer

Ministry of Finance

Ram Binod Bhattarai. Secretary Tirtha Sharma. Joint Secretary, Corporations Co-ordination Division Tanka Khanal. Director, Privatization Cell Narenda Man Shrestha. Privatization Cell Gopal Ghimire. Privatization Cell Durga Achary. Privatization Cell Animesh Upadhayay. Legal consulant to Privatization Cell

Ministry of Agriculture

Dan Bahadur Shahi. Secretary Jagannath Thapaliya. Joint Secretary

National Planning Commission

Prithvi Raj Ligal. Vice Chairman

Ministry of Industry

Bimal Prasad Koirala. Joint Secretary

Nepal Securities Board

Dambar Dhungel. Chairman

Danish Embassy

Liz Garvel. Counsellor Lief Kristensen. Administrative Counsellor Peter Lund. Advisor to the NDDC

British Embassy

Michael Alcock. First Secretary, Development and Commercial John Abington. Agricultural Research Coordinator

World Bank

Para Suriyaarachchi. Senior Economist

Asian Development Bank

Young Baek Lee. Senior Project Administration Specialist

United Nations Development Program

Caroll C. Long. Resident Representative (By telephone) B. K. L. Jossi. Program Officer

National Dairy Development Board

Dhruba Limbu. Executive Director

Dairy Development Corporation

Gabya Nath Pant. Acting Manager

Pokara Milk Supply Scheme

Siyaram. Plant Manager Ieswari Raj. Assistant Plant Manager

Milk Producers Associations/Cooperative Societies

Eighteen selected chairmen

Private Dairies

Ram Malan Upadyaya. Director, Sitaram Goku! Milks Ltd K.P. Thapa. Plant Manager, Pokhara Dairy Ltd

Nepal Tea Development Corporation

Y.P. Gartavla. General Manager Hari Narayan Shah. Chief Manager, Tokla Tea Estate Shiv Acherya. Manager, Barne Tea Estate

Lumbini Sugar Mills Ltd.

Madan Prasad Koirala. General Manager

Birganj Sugar Factory Ltd.

Bhupal Lamichhaney. Executive Chairman

Hetauda Textile Industry Ltd.

Upendra Shumshere J.B. Rana. General Manager

Agricultural Lime Industry, Chovar, Katmandu

Ghan Shyam Rajauriya, Acting General Manager

Herbs Production & Processing Co. Ltd.

Rana B. Rawal. General Manager

Janakpur Cigarette Factory Ltd.

Hari Gavtam. Chairman Dr. Gopal Prasad Shrestha. General Manager

Salt Trading Corporation Ltd.

R.P. Joshi. Chief Executive Officer

Agricultural Projects Services Centre

Dr. Guirija Shankar Rajbanshi. Executive Director Dr. Lakshmi Pradhan. Senior Economist

Nepal Food Corporation

Bhim Bahadur Kshetry. Acting General Manager

Agro Enterprise Centre

Ravi Dev Sharma. Managing Director Dr. Deva Bhakta Shakya. Deputy Managing Director

Biratnagar Jute Mill

Various management representatives

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Raghupati Jute Mill

S. Nagar. Chief Mill Manager Manoj Kumar Gupta. Finance Executive

Arihant Multifibres Limited

Suresh Kunmar Jain. Finance Executive

Golchha Organization

Mahendra Golchha. Managing Director

Lumle Agricultual Research Centre

Dr. Ram Sah. Technical Division Head

Nepal Small Tea Producers' Ltd.

Dilip Rai. Managing Director

Dairy Enterprise Support Component

George Murray. Chemonics, Chief of Party Mr T. Thapa Dr Singh

Consultants

Komal Bahadur Chitracar. KB Chitricar & Co. Arun Parajulee. Media Executive, Classic Advertising Services Surya P.S.Dhungel. Lawyers Inc. Bipin Adhikari. Lawyers Inc. Daniel Miller. Icimod, Ecologist (Ex-US AID Program Officer) Peter R. Walters. Managing Director, Cargill Technical Services Geoffrey Bastin. Regional Manager, Cargill Technical Services Betty Wilkinson. IRIS, Kathmandu Arjuna Herath. Nepal Sri Lanka Merchant Bank Ltd. Chief Executive Officer Surin Fernando. Nepal Sri Lanka Merchant Bank Ltd. Manager Corporate Finance Bishnu Adhikari. Executive Director, Management Association of Nepal Dr. Chiranjibi Nepal. Central Department of Economics, Tribhuvan University

ANNEX II

DOCUMENTS COLLECTED AND REVIEWED

Documents Collected and Reviewed

1. Privatization Act, 2050. HMG.1994

2. Nepal: Sugar Sector Study. UNDP/World BanI,- June 1992

3. Nepal Tea Development Corporation: Valuation ffiTCI/ ABD. September 1993

4. Study of Tea Sector Policy of Nepal. Codex Consultants/USAID. September 1996

5. Strategy and Implementation Plan for Privatization of Dairy Development Corporation (DDC). Intrados/USAID. December 1993

6. Dairy Development Corporation. Business Valuation. Intrados/USAID. February 1994

7. Fixed Assets Valuation of Dairy Development Corporation Yak Cheese Plants. Ramesh P. Nepal/USAID. May 1994

8. Financial and Management Feasibility Study of Milk Producers Associations' Participation in Dairy Business. Agricultural Projects Services Centre. June 1992

9. Financial and Management Feasibility Study of Milk Producers Associations' Participation in Dairy Business. Agricultural Projects Services Centre. June 1992

10. Development of an Advertizing Program to Increase In-home Consumption of Dairy Products in Nepal. Chemonics/USAID. July 1995

11. A Report on High Value Dairy Product Diversification Study. Chemonics/USAID. July 1995

12. Economic Impact and Results of the Nepal Privatization Program. USAID. September 1994

13. Privatization: Lessons Learned. Robin Sharma. March 1995

14. Nepal: Privatization Project. ODA/SEADA. September 1996

15. Information Memoranda. His Majesty's Government of Nepal. - Bansbari Leather and Shoe Factory Ltd. - Brick and Tile Factory Ltd. Harisodhi. - Bhrikuti Paper Mills Ltd. - Agricultural Tools Factory Limited.

16. Trading Report 2052/53(1995/96). Nepal Stock Exchange Ltd.

ANNExm

ENTERPRISES COVERED BY THE PRIV ATIZTAION PROGRAM

ENTERPRISES COVERED BY THE PRIVATIZATION PROGRAM

Enterprise

Phase 1

Bhrikuti Pulp and Paper Factory Banasbari Tannery and Shoe Factory Harisiddhi Bricks and Tile Factory

Phase 2

Nepal Film Development Company Nepal Lube Oil Ltd. Bitumen and Barrel Industries Ltd. Balaju Textiles Industries Ltd. Raw Hide Collection and Development Co. Tobacco Development Company Nepal Jute Development and Trading Co.

Phase 3

Nepal Foundry Industry Ragupati Jute Mills Agriculture Tools Factory Seti Cigarette Factory Nepal Coal Ltd. Bhaktapur Brick Factory Trolley bus component of the

National Transport Corporation

Current status

Sold 1992 Sold 1992 Sold 1992

Sold 1993 Sold 1994 Sold 1994 Sold 1993 Sold 1993 Liquidated 1994 Liquidated 1993

Sold 1996 Sold 1996 Under negotiation Under negotiation Asset valuation completed Valuation process completed Pre-privatization study

under way

ANNEX IV

ENTERPRISE REVIEWS

Agricultural Development Bank of Nepal

The Agricultural Development Bank of Nepal (ADBN) is involved in development and commercial banking and is used by HMG to channel and manage aid funds. Thus, the ADBN is a financial institution and would be regarded appropriately as part of the financial sector. Before privatization of ADBN can proceed, it will be necessary for HMG to make a commitment to privatization in the financial sector. The World Bank is planning to take the lead in the privatization of this sector. As the ADBN is also used to assist the agricultural sector, it will be necessary, before ADBN's privatization, to clarify the government's role in supporting agriculture. It is possible that some non-commercial activities of ADBN provide important assistance to the agriculture sector. A privatization plan for ADBN will involve a rationalization of its activities so that they may be divided into:

• viable commercial activities that can be conducted by the private sector; • non-viable commercial activities that should be terminated; and • non-commercial activities that should be continued by the government.

The ADBN appears to have a significant fmancial presence throughout the economy of Nepal, not just in the agricultural sector. Any proposal to privatize ADBN is likely to involve great political controversy. For these reasons, it is recommended that ADBN not be included in the list of enterprises to be privatized under this assistance program.

Agricultural Input Corporation

The Agricultural Input Corporation is owned wholly by HMG. It is responsible for managing HMG's large subsidy for fertilizer and as a consequence is virtually the sole distributor of fertilizer in the country. It is estimated that the subsidy for the coming year will cost the government approximately Rsl billion. As a government owned monopoly, the it controls the prices and supply of fertilizers. The Agricultural Input Corporation clearly has a significant effect on the market for fertilizer, which in turn affects all agricultural production.

It is probable that the liberalization of the fertilizer market would be beneficial to the Nepal economy. However, given the large level of subsidies involved, any liberalization of the market, or privatization of the Agricultural Input Corporation will be extremely sensitive politically. Officials of the Ministry of Finance and senior officials of other departments do not consider it a possible candidate for privatization at this time. It appears that at the moment the government is unwilling to review and rationalize its policy of subsidizing fertilizer. Until this is done, and the Agricultural Input Corporation operates on a strictly commercial basis, the corporation should not be privatized. As the corporation is unlikely to be an early candidate for privatization, the study team did not visit any facilities or interview management. It is recommended that the Agricultural Input Corporation not be included in the list of enterprises to be privatized under this assistance program, however, donors should continue to encourage HMG to rationalize its fertilizer subsidy policies.

Agricultural Lime Industry

HMG wholly owns Agricultural Lime Industry (ALI), a stated purpose of which is to provide lime for use by farmers whose land has acidic soil. As part of this role, ALI provides information to farmers regarding the use of lime to improve farm production. ALI has been providing lime to farmers for the past 32 years.

In addition to agricultural lime, ALI produces and sells commercial lime, colored lime, quick lime, and surkhi (crushed brick). Quantities of products sold in the past year are as follows:

Agricultural Lime Commercial Lime Colored Lime Quick Lime Surkhi

1,200 MT 2,500 MT

150MT 2,500 MT

700MT

ALI has two quarries. The quarry for agricultural products is near the Kathmandu headquarters, and the quarry for commercial products is located in Jigumara.

The prices charged for ALI's products are established by the board of directors. Five of the board members are from the government, and the other two positions are held by a farmer and the general manager of ALI. The board's position is that lime is an important product for use by the farmers of Nepal and that the price of agricultural lime must be kept low. For this reason, the price set by the board is not high enough to support commercial production. Effectively, this requires that agricultural lime be sold at a loss. However, no government subsidy is provided to ALI to fund this loss. Instead, other commercial activities are pursued in an attempt to support the agricultural product sales.

The financial performance of ALI is marginal, despite the commercial viability of the remainder of its production. There is a clear conflict between the commercial role of the business and its mission to provide farmers with lime at artificially low prices. If ALI is to be operated on a commercial basis, the government must rationalize its policy on agricultural lime. If it is the policy of the government to provide subsidized lime to farmers, then a mechanism for providing a subsidy should be implemented. ALI and other producers could compete to provide lime at the most economical commercial price practical, with the government establishing a process for subsidizing farmer purchases.

Total employment at ALI is 150 permanent staff and laborers, with an additional 50 temporary laborers at the quarries. It possible that there will be some retrenchment upon privatization, but the number of retrenched employees should be fairly small and should not pose a major obstacle to sale of the enterprise.

ALI's relatively small size means the most practical mode of privatization would be direct sale to a local investor. The profitability of the commercial products should make ALI an attractive investment, provided that agricultural lime could also be sold on a commercial basis.

Liberalization of the lime market should encourage others to pursue this line of business and create a more competitive market for lime products.

Agricultural Projects Services Centre

Agricultural Projects Services Centre (APROSC) is an agricultural consultancy wholly owned by HMG and HMG-owned enterprises. (Rastra Bank holds 50 percent of the shares, the rest are held by other State-owned banks and the Ministries of Agriculture and Finance). It operates as a profit seeking, taxable entity, controlled by a board of directors. However, since the early 1970s, it has earned a profit in only two years.

APROSC markets its services primarily to HMG and donor agencies, which contract APROSC' services through the government. Business assets include four vehicles, office furniture, fixtures, and equipment. The study team has found conflicting information as to whether APROSC owns the Kathmandu office building that it occupies. The team confmned that APROSC does not pay any rent for use of the space.

Management contends that APROSC operates on a commercial basis and that it receives no assistance from the government. However, the volume of consulting contracts that come directly from HMG or from donor agencies through HMG suggests that its government ownership provides significant marketing benefits.

The staff of APROSC totals about 150, including about 60 professional staff. APROSC also makes use of outside consultants. Management is trying to reduce the number of permanent employees. The employees are generally well educated, usually having had some training abroad, and should be very employable elsewhere if privatization should require retrenchment of employees. Many of the professional employees already undertake consulting assignments outside of their APROSC afflliation.

If APROSC were offered for sale, the main assets on offer would be its assembled work force and technical expertise, along with any existing consulting contracts. It is not the type of business that would be attractive to a broad range of investors, and the most likely buyer of any such consulting practice would be a larger firm or consortium already involved in the consulting business. A buyer of this description probably does not exist in Nepal. Therefore, the most likely mode for a successful privatization would be a negotiated sale of the business to management and/or the employees. If such a sale can be negotiated, it should include a provision for APROSC to lease its office facilities from HMG (or another owner of the building if the government should sell it) at market rates. The fact that the shares of APROSC are distributed among several government entities should cause no difficulties for the privatization process as all the entities are strictly subject to government control.

Bio-gas and Agro-equipment Development

This entity is not a company, but rather a development project managed by the Agricultural Development Bank of Nepal. The study team was unable to learn any details of Bio-gas and

Agro-equipment Development in the course of its investigation. Given the nature of the entity, it is recommended that it not be included in the list of enterprises to be privatized as part of this assistance program.

Biratnagar Jute Mill

Biratnagar Jute Mill (BJM) is an enterprise in which HMG has a 46 percent shareholding. The remaining shares are distributed among other owners, none of whom holds a majority. Until recently, HGM's holding was only about 12 percent. However, in 1995, the United Marxist­Leninist government acquired the holding of a major shareholder to reach its current level of ownership.

Founded about 60 years ago, BJM is one of the oldest jute processing plants in Nepal. In recent years, it has been plagued by operating losses. The plant facilities have not been maintained well and are currently in poor condition. As of September 1996, the mill had not been operating for about two months because the company had depleted all cash resources. Management claim a shortage of working capital as the cause of the shutdown, but it appears that operations have not been well managed and that the cash shortage is the result of previous unprofitable operations.

BJM is located in the city of Biratnagar, which is a center for jute growing and processing in Nepal. Nearby is the Raguphati Jute Mill, which was formerly a HMG holding. The situation at Raguphati prior to privatization was similar to that of BJM. Raguphati was sold to the Golcha Organization, with the transaction completed on September 9, 1996. The Golcha Organization has many years of experience in the jute industry and is already operating a mill it constructed on a green-field site located north of Biratnagar. Since acquiring the Raguphati mill, which had not been in operation for over two years, the Golcha Organization has been completely overhauling the machinery. They anticipate the gradual return to work of many, but perhaps not all, of those employed at Raguphati prior to its shut down. The similarity of circumstances between BJM and Raguphati make the success of the Raguphati privatization important in gaining local acceptance and support for privatization of BJM.

The dispersion of ownership of BJM complicates the issue of rehabilitation and divestiture of the enterprise. At present, no single shareholder owns a majority of the shares. For BJM to be restored to a viable business operation it will be necessary to resolve the issue of the large accumulated liabilities and for the new owners to invest in the refurbishment of the physical assets. The investment required for the repair and overhaul of the machinery and equipment will probably provide a positive return to that investment. This is evidenced by an observation of a representative of the Golcha Organization that the condition of the plant at BJM is not as bad as Raguphati had been. However, it is likely that the capital infusion needed to payoff the full value of existing liabilities, in addition to rehabilitating the plant, will not yield a positive return. Thus, some financial restructuring will be required, and some parties will have to accept an economic loss on the restructuring. Of course, such losses are not the result of privatization, but rather the result of BJM's earlier poor financial performance leading to the situation where some of BJM's financial obligations are now uncollectible.

At present, BJM's equity holdings probably have virtually no value. Shareholders that are not prepared to make additional capital contributions should be bought out at a nominal price, or their shareholdings must be significantly diluted to allow investors with new capital to realize adequate return on new investment.

The modality of privatization of BJM will be dictated in part by the means of restructuring. An investor must be found who is prepared to provide the necessary capital to make the mill operable and competitive. They must be allowed a sufficient shareholding or control to make the mill profitable.

Birganj Sugar Factory Ltd.

Birganj Sugar Factory Ltd. (BSF) is wholly owned by HMG. The mill is located in an industrial district along the main highway running north from the Terai city of Birganj. The mill has a daily crushing capacity of 15,000 quintals (i.e., 1,500,000 kg) of sugar cane. The plant processes sugar from November to March and maintenance is conducted on the mill during the down season.

The sugar mill is 32 years old. An on site distillery was added some 10-15 years later. The processing equipment is not ideally matched, so that some of the milling and refining processes have greater capacity than others. The products of BSF include refined sugar, molasses, and spirits.

Prices for sugar were decontrolled in 1992 and, since that date, BSF has been buying cane and selling finished products at market prices. Production of sugar in Nepal currently meets only about 60 percent of domestic demand, with the deficiency being made up with imports from India. Current capacity of established mills in Nepal are as follows:

Birganj Lumbini Sri Rani Indu Shankar Biratnagar

15,000 quintals 10,000 quintals 12,500 quintals 10,000 quintals 5,000 quintals

Of the above list, all but Birganj and Lumbini are privately owned. New mills are being developed, and some of the existing mills are expanding capacity. At this time, it is not certain how the additional capacity will affect the price and available supply of cane or the price of finished sugar products.

A critical element of BSF's business operations is procuring sugar cane from farmers. BSF has a cane division which is responsible for interfacing with farmers and making the necessary arrangements to assure a supply of cane for the mill. Financing of the cane crop is provided to the farmers through the Agricultural Development Bank of Nepal (ADBN). BSF settles its accounts with the farmers through the ADBN, where payment of the loan is deducted from farmers' proceeds. The total volume of cane available fluctuates from year to year.

Total employment at BSF is about 1,200. Of that number, about half are permanent (i. e., year round workers) and half work only during the crushing season. Seasonal employees receive 60 percent of their normal pay during the off season when they are not working.

BSF is operating within a liberalized sugar market. There are numerous private competitors in the market, and there should be no impediment to the privatization of the business. However, there are several issues that will be significant in the decision to privatize. First, the mill equipment is old and may not be entirely appropriate in design and scale for competitive commercial operations. The mill is located on valuable industrial real estate, so it is possible that assets are more valuable under liquidation than they are as part of the present business enterprise.

BSF's fmancial performance has been marginal over the past several years, so it does not have a demonstrated capability for regular earnings and dividend paying capabilities. The most likely privatization modality would be a direct sale to investors capable of managing such an agribusiness. However, consideration should also be given to liquidating the enterprise and selling the physical assets. In the case of such a liquidation, it is expected that the plant, machinery and equipment would have very limited value, but proceeds from sale of the real estate would be substantial.

The Cotton Development Board

The Cotton Development Board is a commercial producer of cotton. Due to travel and time constraints, the study team did not visit any facilities of the board, nor was management interviewed. It is understood that the Cotton Development Board operates farming and ginning operations. The inability of the board to deliver cotton lint is the source of the suspension of operations at Hetauda Textile Industry. The operations of CDB could be transferred to the private sector with little adverse economic effect. As with other development boards, it will probably be necessary to convert the Cotton Development Board into a company prior to its privatization. The issue of land ownership will also have to be resolved.

Dhankuta Textile Factory

No evidence could be found of the existence of a company by this name. The team checked with the Accountant General's office, which is responsible for recording all government share holdings, and the Accountant General confirmed that if such a company had existed at some time, it is no longer in government ownership.

Herbs Production & Processing Co. Ltd.

Formed as a company in 1991, Herbs Production & Processing Co. Ltd. (HPP) is owned wholly by HMG. It is operated under the auspices of the Ministry of Forest and Conservation. The

purpose of the company is to use agricultural resources in Nepal to process and market a variety of herbal and medicinal products. In some cases, HPP grows its own plants; in other cases, it purchases its raw materials from private farmers. About 70 percent of raw materials are cultivated, and the rest are harvested from natural sources.

HPP operates three farms, two processing centers, and a coordinating center in Kathmandu. In addition to the two processing centers operated by HPP, 15 privately operated processing centers provide product to HPP. Total employment of HPP is about 360. Of this number, 160 are permanent employees and 200 are temporary. HPP leases out some of its land for farmers to cultivate. About 300 families are involved in this aspect of the company's operations.

In the most recent fiscal year, sales totaled Rs 25 million. A large majority of sales revenues are generated from sales of bulk products, which are sold for repackaging and distribution. However, HPP also offers a line of packaged herbal products ready for direct retail sale.

The herbs market provides an opportunity for significant export. HPP currently sells about 60 percent of its products to foreign buyers. However, the general manager of HPP believes that about 95 percent of production is ultimately exported, since many of the domestic buyers market the products for exports. Over the last two years, HPP has been limited in its sales due to a prohibition on the export of certain herbal products. This is the result of the unintended effect of a law which was aimed at prohibiting the export of raw herbal products. In practice, the law prohibited the exporting of processed herbs as well. The general manager has been working with the government for two years in an attempt to correct the effect of the ban on exports. While intentions to correct the situation have been expressed, the ban is still in place. According to the general manager, HPP would be operating profitably if the ban were not in place.

The prospects for privatization of HPP are good. As a practical matter, it will probably be necessary to clear up the problem of the export ban to make the business attractive to a private investor. There should be good opportunities to expand the export business, particularly with packaged consumer products. HPP appears to be weak in marketing capability, and an investor with good marketing resources should be able to improve sales. Employee redundancy is not expected to pose a major obstacle to privatization, and sale of the company is not expected to be particularly sensitive politically. Sale to a foreign investor would be a serious possibility.

Hetauda Textile Industry Ltd.

Wholly owned by HMG, Hetauda Textile Industry Ltd. (HTI) operates a cotton textile factory in the city of Hetauda. The company started operations in 1978 at its current location with factory equipment supplied through Chinese aid. The mill produces low to medium grade cotton cloth (10, 20,30, and 40 count fabric). The plant has a three shift capacity of 11 million square meters annually. However, since 1989, only two shifts have been operating. In the 1995/96 year production exceeded 6.2 million meters, although only 5.8 million meters of cloth were sold during the year.

Product from HTI is marketed to domestic customers. The target group for marketing is low and middle income people. Over 60 percent of sales are in Western Nepal. Last year HTI sold about 200,000 meters of cloth to the government. The company owns five field offices which operate as sales depots and a network of about 85 independent dealers who sell cotton fabric.

As of September 1996, most of HTI operations were shut down. This occurred due to a lack of cotton lint supplies. HTI normally buys cotton lint from the Cotton Development Board, which is also a government owned enterprise. The cotton supply had run out, and HTI was awaiting deliveries of orders of raw material from India. During the shut down of spinning operations, employees continue to report for work and receive salaries and wages, although they are not doing any productive work. The shut down has not yet caused any problem with delivery of goods as the company holds about Rs 120 million of product in stock.

Employment at HTI is about 980 laborers and 235 administrative staff. The general manager of HTI believes the labor amount to be appropriate, but he thinks there is about 15 percent excess in the administrative staff.

The factory machinery, which was manufactured in China, is now obsolete, and spare parts are not available. The size of cloth that can be woven is limited by the maximum 100m size of 60 inches. In the current market, it would be desirable to have 90 inch 100m capacity.

HTI operates in a competitive market. Imports come into the country from India and China with only a five percent import duty. HTI is good candidate for privatization as it is operating in a competitive, commercial market. A private operator would have prospects for improving profitability with better marketing and by diversifying its raw material supply. The most likely mode of sale would be a direct sale to an investor, although some employee shareholding may be appropriate. Unless a new investor anticipates substantial sales and production growth (e.g. returning to three shift operation) it is likely that some retrenchment of staff will be necessary.

Janakpur Cigarette Factory Ltd.

Janakpur Cigarette Factory Ltd. (JCF) manufactures and sells cigarettes for the domestic market. All production of cigarettes occurs at the factory located in the city of Janakpur, which is in the central Terai. The company holds about one third of the domestic market for cigarettes. Total annual consumption of cigarettes in Nepal is 12 billion (12,000,000,000) sticks. Consumption of cigarettes in Nepal is increasing.

Ownership of a cigarette factory by foreigners is prohibited, and a heavy duty is levied on imported cigarettes. This leaves the large domestic market to manufacturers in Nepal. Foreigners are allowed to participate as technical partners in local joint ventures. There are currently two private cigarette manufacturers in Nepal, and two other firms are licensed to produce cigarettes but are not yet in production.

Employment of JCF is about 2,160. About two thirds of the employees are located at the factory in Janakpur, while the remaining one third are at five regional offices and 30 branches.

The level of employment is clearly excessive. The general manager stated that employment requirements are in the range of 300-400, but that the government will not allow him to reduce the staff in order to save costs.

JCF's complex in Janakpur occupies approximately 50 acres of land and includes factory and warehouse buildings, over 200 housing units, and school and medical facilities. The factory has 21 cigarette machines, of which only 12 are currently in use. The company also owns three of its regional offices. There are substantial excess assets at JCF. Notably, there is a large amount of real estate that is not necessary for ongoing business operations. This excess real estate includes the employee housing and ancillary land and buildings.

The factory has sustained ongoing operating losses. The largest problem precluding profitable operations is the large number of employees. A successful privatization of JCF will require a resolution of staff redundancy, as it is clear that no private investor would be prepared to maintain employment levels anywhere near those that currently exist. It is anticipated that employees will strongly oppose any steps toward privatization, although they may be receptive to a foreign cigarette manufacturer entering into a joint venture with the company in the belief that a foreign company will bring money, and technical and marketing expertise.

With proper rehabilitation, it is probable that JCF can operate profitably. However, this will require adjustments to the work force that will almost certainly result in substantial retrenchment. Further study of distribution is needed to determine whether the large company­owned distribution network is an efficient use of resources.

During the analysis and valuation phase of the privatization exercise, a determination should be made as to which physical assets are necessary for ongoing operations of the business. Assets that are not required for ongoing operations should be identified and consideration given to separating them from JCF operations and selling them separately.

Because JCF has no recent history of profitability or payment of dividends, it is not a likely candidate for sale through a public offering of shares. The best prospects for privatization appear to be direct sale of the factory, along with all rights to JCF brand names, to a private investor/company. Because of legal restrictions, the investor must be Nepalese, although a consortium including a foreign technical partner could be eligible to purchase the operation. As part of the privatization process, it would be desirable for the market for manufacturing and importing cigarettes to be liberalized.

Juddha Match Factory

Juddha Match Factory is in the business of manufacturing matches. HMG holds a minority stake in the company. Due to time and travel constraints, the study team did not visit the factory nor interview management. Three years ago, the private shareholders and HMG had let the Juddha Match Factory reach the point of collapse. At that time, the employees took over the operation of the company. Most recently, the government, the private shareholders, and the employees entered into an agreement whereby the employees would formally take over full ownership of

the company. The complete privatization of Juddha Match Factory only requires the full implementation of this agreement. It does not, therefore, need to be included in the list of enterprises to be privatized under this assistance program.

Lumbini Sugar Mills Ltd.

Located somewhat east of the city of Butawal, Lumbini Sugar Mills Ltd. (LSM) is owned wholly by HMO. The plant has a daily crushing capacity of 10,000 quintals (1,000 MT). The coming season will be the eighth year of operation for LSM.

The factory was established as a Chinese grant project. It includes sugar refining and distillery facilities. The physical plant operates on a very large plot of land, which appears to be in excess of needs. Some of this land could be divested without hindering operations of the sugar mill. The capacity of the mill is relatively low compared to private mills in the area. The general manager of LSM believes that the plant capacity should be expanded in order to improve efficiency and resource utilization. Typical private sector mills have capacity of 2,500 MT.

The market for refmed sugar from LSM seems to be good. However, demand for molasses and rectified spirits is not strong, so these products do not bring a good price. Major purchasers of LSM sugar include the local bottlers of Coca Cola and Pepsi Cola, although there are no long term delivery contracts in place.

Total employment at LSM is about 975. This may represent some excess of staffing required for efficient operations.

LSM is a good candidate for privatization, and divestiture of all or a majority of HMO's shares to a strategic investor should take place as soon as possible. The mill has been operating profitably, and should be attractive to an investor. However, additional sugar milling capacity is being added in Nepal, and the best opportunity for LSM to compete effectively would be afforded if a private sector owner can make critical decisions about capacity expansion as soon as possible. It is strongly recommended that no capacity be added to LSM while it remains a holding of HMO.

Morang Sugar Mill Ltd.

The study team was unable to verify with complete certainty HMG's shareholding in the Morang Sugar Mill. It appears that HMG has a minority holding and the company is managed independently by the Salt Trading Corporation. It is possible that the Salt Trading Corporation also holds shares in the mill. As this enterprise is essentially privatized it should be simple to sell the HMG's shares. Clarification of the share ownership structure will be necessary before the appropriate modality of sale can be determined.

Nepal Food Corporation

The Nepal Food Corporation, a corporation set up under the Corporation Act of 1964, is owned wholly by HMO. It is a non-profit corporation used by the government to support the price of paddy, and to distribute rice and wheat to remote areas of the country. The corporation receives a subsidy from the government for its transport operations. The purchase, milling, and resale of rice represents approximately 90 percent of the corporation's business. The corporation owns one large modem mill in the west of the country and several small mills elsewhere. The corporation also contracts out a portion of its milling. Subsidized transportation of food grains represents approximately seven percent of the corporation's business, with the purchase and sale of other food grains, such as maize and oil seed, representing the rest. The Nepal Food Corporation receives no direct subsidy from the government for its price stabilization efforts, but it does have a Rs1 billion line of credit from the HMO-owned Nepal Bank.

Although it would be possible to operate the transport subsidy part of the Nepal Food Corporation's business using the private sector, HMO is unwilling to consider such an option at this stage. Until this part of the corporation's business is run on a commercial basis, or is separated from the rest of the business, the corporation should not be privatized.

The corporation's buying, milling and selling operations should also be reviewed, although not as part of this assistance program. The corporation claims it runs its transport operations on a break even basis without any government support. As there is competition in the rice milling market, and milled rice can be imported from India with only a 2.5 percent tariff, the corporation appears to operate in a competitive market. The corporation may be able to operate this part of its business at a profit as a privatized entity, while still meeting the HMO's objectives of helping to stabilize the price paid to farmers for their paddy. However, separating out the two parts of the corporation's operations would be difficult so it is recommended that the Nepal Food Corporation not be included in the list of enterprises to be privatized under this assistance program.

Nepal Rosin and Turpentine Ltd.

Nepal Rosin and Turpentine Ltd. is located near the city of Nepalganj, in the Western part of Nepal. Due to its remote location and time limitations, the study team was unable to make a physical inspection of the company, nor was management interviewed. Nepal Rosin and Turpentine Ltd. produces paint products, largely for export to India. The company employs several hundred people. Concerns about employment may be a significant issue in the political decision to privatize. No commercial obstacles to privatization were identified. Sale of a majority stake to an investor, possibly foreign, would be the most likely modality for the enterprise's sale.

Nepal Tea Development Corporation

a. History

The Nepal Tea Development Corporation (NTDC) was established under the Companies Act in 1964. The original purpose of NTDC was to promote the development of tea agriculture in Nepal. This involved both developing commercial tea estates and promoting the development of tea agriculture in the private sector. Upon establishment, NTDC assumed ownership and management of two existing tea estates, flam and Soktim. Development of additional tea estates began with substantial financial support from international donor agencies, particularly the Overseas Development Administration (ODA) of the United Kingdom.

During the period of tea estate development, Tokla, Burnie, and Kanyam tea estates were planted and were fully developed as commercial estates. Development began on Baradasi and Chillingkot estates. However, relatively small portions of these two estates have been planted to date. In the mid-1980s, the ODA ceased its support of NTDC after repeated failed attempts to get NTDC to restructure its operations so as to become a commercially viable enterprise. Since that time NTDC has been unable to conduct any significant development of commercial tea production. It continues to operate at a loss.

b. The Tea Industry In Nepal

There is a very high demand for tea in Nepal. Domestic production currently accounts for only about 40 percent of total consumption, with the balance of demand met by imports. Consumers in Nepal prefer the cheaper CTC tea (crush, tear, curl) over the orthodox tea that is marketed in developed western countries. Orthodox tea is grown at higher elevations than CTC tea. Of the NTDC estates, only llam and Kanyam produce orthodox tea. These estates are geographically near the Darjeeling region of India, which is world famous for its orthodox tea. Growers in the flam region believe that growing conditions in this part of Nepal are similar to those in Darjeeling, and, with proper development of production and marketing, Nepal orthodox tea could establish a significant export market. However, so far both NTDC and the private sector have had limited success in establishing export markets. Thus, much of the orthodox product is sold domestically where it cannot command a premium price, due to the local preference for CTC tea.

CTC tea is grown and processed by NTDC estates as well as a number of private estates. The private estates appear to operate profitably, while NTDC continues to operate at a loss. Factors contributing to losses at NTDC include excess employment, poor management, lack of technical expertise, and lack of investment in the care of the tea gardens. Due to the large domestic demand, NTDC can sell all of its production of CTC tea. However, there is some question of NTDC's ability to get the best possible price for its products.

c. Assets

The significant assets of NTDC include land, buildings, and equipment at the seven tea estates, and the real estate and other assets at the head office in Dulabari. Below is a brief description of each of the NTDC tea estates.

l1am Tea Estate. flam is the oldest of the NTDC estates. It was originally planted over 100 years ago. The tea garden is small with only 120 acres of planted tea. The estate is fully developed with mature plants. There is a tea factory on the estate. flam is at a relatively high elevation and produces orthodox tea.

Kanyam Tea Estate. Kanyam is the other orthodox tea garden operated by NTDC. It is located in the hills near the eastern border of Nepal. A total of 470 acres are planted with tea, with 460 acres planted with mature plants. The garden was developed in the early years of NTDC. There is a tea factory on the estate. The estate manager indicated that 60 % -70 % of Kanyam was planted from seeds rather than cuttings and that this has resulted in very low yields. The factory equipment is old and in need of investment. Last year, production at Kanyam totaled 67,000 kg of finished tea.

Tokla Tea Estate. Tokla is a large estate, with 640 acres of planted tea. Almost all of the tea plants are mature. The estate is located in the Terai, very near the eastern border of Nepal. Producing CTC tea, it appears to be the most successful of the NTDC estates. The estate manager of Tokla believes that the estate operates profitably before a provision is made for NTDC debt service. NTDC accounting does not treat the estates as profit centers, but Tokla may have the best financial performance of the NTDC estates. It is likely that Tokla would be a very attractive investment to a private operator.

Burnie Tea Estate. Burnie is a large estate producing CTC tea. The estate is nearly fully developed but does not have an operating factory. There are currently plans to add factory facilities to the estate.

Soktim Tea Estate. Soktim is a large CTC producing tea estate. Along with Dam, Soktim is a tea estate that existed prior to the formation of NTDC. The estate includes a tea factory. The location of Soktim is remote, making access difficult, particularly during the monsoon.

Chillingkot Tea Estate. Chillingkot is a large, partially developed estate producing CTC tea. The estate covers about 1,000 acres, with a potential for planting on a further 800 acres. The estate has been a development project for a number of years, but clearing and planting have occurred at a very slow pace. Currently only 152 acres are planted, with only 100 acres of mature tea. NTDC plans on planting 50 acres per year, but it appears that they do not have the [manciaI resources to accomplish this plan. Clearing land for development is a time consuming and costly procedure as there are trees to clear and many rocks that must be removed.

Baradasi Tea Estate. Baradasi is a small estate in the Terai which produces CTC tea. The estate occupies a total of 384 acres, with about 320 being cultivable. CUrrently only 93 acres are planted with tea. About 200 acres of the estate have been encroached on by squatters.

Management of NTDC has indicated that an agreement has been reached to relocate the squatters when planting begins in exchange for employment with the estate. The land at Baradasi is not well suited for growing tea, and NTDC management believes that it was a mistake to select the site for development of a tea estate.

d. Marketing

In the past, NTDC packaged their tea products and sold them through wholesale channels. However, they currently sell their product only in bulk: at tea auctions. Management has expressed concern that they are unable to sell their products for the best price due to legal limitations on negotiated direct sales.

NTDC has not developed an export market for its orthodox tea. It is possible that the failure to establish foreign markets is the result of inconsistency of product quality. However, budgetary constraints preclude marketing efforts that could result in significant export sales.

e. Privatization Prospects

NTDC has substantial assets in its land, tea plants, buildings, and factories. While the company has not been able to operate profitably, the assets should be profitable for the right investors. NTDC has come under much political influence and probably has a significant excess of employees. Resolution of employment issues in privatization will be critical as each of the estates employs hundreds of people.

A strategic decision will have to be made regarding which NTDC unit or units to sell. Three general options would be:

• sell the entire company as a single unit; • sell the orthodox estates (Ilam and Kanyam) as one unit and the CTC estates as a

separate unit; • sell each estate individually.

Baradasi does not appear to be a viable tea operation and should probably not be included with any package of estates. A liquidation of Baradasi would require that some resolution to the encroachment problem be reached. Upon resolution of the encroachment, the estate should probably be offered for sale for any use that an investor chooses. The market would then determine whether the existing tea plants add any value to the property.

It is not clear whether Chillingkot is a commercially viable development prospect. A study of the financial prospects of the estate to a private investor should be made to determine whether it is best to pursue privatization of the asset as a tea estate under development or as a liquidation of real estate assets.

Consideration should be made to offering and publicizing the sale of NTDC assets to international investors. This is because the large scale of NTDC will make it necessary for potential investors to have substantial financial resources. The number of such investors in

Nepal is limited, so including international investors as prospective buyer could substantially improve the prospects for a favorable sale. Additionally, full utilization of the orthodox tea estates will require expertise in export marketing of tea. Such expertise does not appear to be present in Nepal.

The tea estates operated under private ownership would probably have no use for the current head office complex at Dulabari. This property should be offered separately as a real estate asset for any use.

Scheduling of the privatization process should take into consideration access to the estates. Access to some of the estates, most notably Soktim, is difficult. The problem of access becomes much greater during the monsoon. This could cause a problem in the early stage of the privatization process as asset valuers and other consultants will need to travel to the estates. Later, when bids are solicited, prospective bidders will have to be afforded the opportunity to inspect the estates. Careful planning and scheduling should be done to minimize the impact of the monsoon on this procedure.

Salt Trading Corporation Ltd.

Salt Trading Corporation Ltd. (STC) was started some 30 years ago as a joint effort of HMG and the private sector. The purpose of the venture was to assure the supply of edible salt in Nepal. Later, STC distributed iodized salt to help prevent goiter. Later still, STC expanded into distribution of sugar, food grains, and processed foods. STC now trades and imports a wide variety of commodities for consumption in Nepal and is involved in investment in and management of a number of industrial enterprises. The company is profitable and has an established record of dividend payment. Shares of STC are listed on the Kathmandu Securities Exchange. According to the general manager of STC, shares do not trade frequently because shareholders rarely want to divest of their shareholdings.

At present, HMG holds 21 percent of the equity of STC. The remaining 79 percent of the shares are held by private investors. Except for the government holding, no investor has more than five percent of the shares of STC. Management has indicated that STC operates on a purely commercial basis, receiving neither preferences nor interference from the government. The study team did not conduct any investigation to test the validity of this assertion but it seems at least possible that government ownership provides some advantage in trading operations.

Divestiture of HMG's holdings in STC should be a fairly simple matter. Since the shares of STC are traded on the Kathmandu Exchange, the shareholding could be sold directly. Some study of the share market and probable absorption rates should be made so that a sudden infusion of a large shareholding does not distort market pricing excessively. It is expected that the government can divest its shareholding with no adverse impact on employment, consumer supplies, or the economy as a whole.

The Timber Corporation of Nepal

The Timber Corporation of Nepal conducts logging operations. Its operations require it to use the timber resources of forests owned by HMG. The government has important decisions to make regarding timber resource policy. Until such a policy is established, the Timber Corporation of Nepal is not an appropriate candidate for privatization. The government has undertaken to make such policy decisions within the next year, but given the political complications involved, it is unlikely that the corporation will be ready to be privatized within the time frame proposed for this assistance project.

ANNEX V

ENTERPRISE FINANCIAL AND PERFORMANCE FIGURES

S.No

1.

2.

6.

7.

8.

9.

Physical and Financial Target! Progress of Agricultural Project Service

Description Unit Actual 1994/95

1) Projects Nos. 35 Employees 1) Permanent Staff Nos. -2) Permanent Labour Nos. -3) Misc. (Temporary+Wage Base) Nos. -Financial Tar2ets 1) Total Operating Income Million 31.90 2) Total Operating Expenses Million 30.31 3) Operating ProfitlLoss Million 1.58 4) Other Income Million 0.78 5) Net ProfitiLoss (After Provision of Million 2.36 Bonus and Income Tax) 6) Net Fixed Assets Million 10.50 7) Current Assets Million 6.41 8) Current Labialities Million 9.50 9) Net Capital Employed Million 7.40 Grant l)HMGIN Million -2) Enterprises Million -Outstanding Loans and Liabilities I)HMGIN Million -2) Bank and FIs Million 3.80 3) International Institutions Million -4) Others Million -Shares l)HMGIN Million 2.05 2) Corporation Million 5.95 3) Public Million -

Estimate 1995/96

32

136 37 32

20.83 13.51 7.32

-7.32

13.15 8.61

13.44 8.33

--

----

2.05 5.95

-

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

S.No

1.

2. 3.

4.

5.

6.

7.

Physical and Financial Target! Progress of Agriculture Development Bank

Description Unit Actual 1994/95

1) Deposits Million 1096.80 2) Loan made Million 4184.60 3) Loan repaid Million 2146.30 4) Loan Overdue Million 2614.60 5) Total Loans Million 8552.00 Stock Employees 1) Pennanent Staff Nos. 2887 2) Pennanent Labour Nos. 908 3) Misc. (Temporary) Nos. 683 Financial Tareet 1) Total Operating Income Million 118l.90 2) Total Operating Expenses Million 1193.20 3) Operating ProfitILoss Million -11.30 4) Other Income Million 19.80 5) Net ProfitILoss (After Provision of Million 8.50 Bonus and Income Tax) 6) Net Fixed Assets Million 299.20 7) Current Assets Million 12755.90 8) Current Labialities Million 5118.80 9) Net Capital Employed Million 7936.30 Grant l)HMG/N Million 142.10 2) International Institutions Million 64.40 Outstandin2 Loans and Liabilities I)HMG/N Million -2) Bank and FIs Million 89.00 3) International Institutions Million 3872.20 4) Others Million -Shares I)HMGIN Million 918.00 2) Corporation Million 30.00 3) Public Million 48.00

Estimate 1995/96

800.00 4300.00 2450.00 2850.00

10402.00

3016 895 695

1397.80 1409.60

-1l.80 22.00 10.20

42l.10 14796.80 6142.60 9075.30

275.00 70.00

-127.50

4473.20

-1123.00

40.00 44.00

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

S. No

1.

2.

3.

4. 5.

6.

7.

8.

Physical and Financial Target/ Progress of Agricultural Input Corporation

Description Unit Actual 1994/95

Chemical Fertilizer Purchase 1) Urea M.Ton 88233 2) D.A.P. M.Ton 50000 3) Ammonium Sulfate M.Ton 2800 Chemical Fertilizer Sales 1) Urea M.Ton 117716 2) D.A.P. M.Ton 52806 3) Ammonium Sulfate M.Ton 3462 4) Potas M.Ton 2630 5) Others M.Ton 74 Seeds Sales 1) Wheat M.Ton 3304 2)Paddy M.Ton 314 3)Maize M.Ton 85 4) Jute M.Ton 43 5) Lentil M.Ton 66 6) Vegetable Seeds M.Ton 17 7) Agriculture medicine Sales Million 13.80 8) Agricultural Tools Sales Million 4.83 Stock Million -Employees 1) Pennanent Staff Nos. 599 2) Pennanent Labour Nos. 286 3) Misc. (Temporary) Nos. 93 Financial Targets 1) Total Operating Income Million 1904.60 2) Total Operating Expenses Million 2070.60 3) Operating Profit/Loss Million -66.00 4) Other Income Million -5) Net ProfitiLoss (After Provision of Million -166.00 Bonus and Income Tax) 6) Net Fixed Assets Million 109.80 7) Current Assets Million 1131.30 8) Current Labialities Million 954.90 9) Net Capital Employed Million 286.20 Grant I)HMGIN Million 491.40 2) International Institutions Million 8.60 Outstanding Loans and Liabilities I)HMGIN Million 250.00 2) Bank and FIs Million 109.30 3) International Institutions Million 210.00 4) Others Million -

Estimate 1995/96

99500 55000

-96770 57200

120 3650

240

2923 300 100 67 25 20

5.50 1.37

-

---

2327.40 2504.00 -176.60

--176.60

112.80 963.60 822.20 244.20

998.00 -

400.00

290.00 210.00

-

9. Shares l)HMG/N Million 271.50 305.40 2) Corporation Million -3) Public Million -

Note: 1) 2)

Financial Year is based on Nepali Calendar and begins at approximately 15 July. MT and Ton refer to a Metric Ton = 1000 kg.

--

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Targetl Progress of Agro - Lime Industry Ltd.

Description Unit Actual 1994/95

Production 1) AgroLime M.Ton 900 2) Chemical Limestone M.Ton 14656 3) Lime and Surkhee M.Ton 2074 4) Surkhee M.Ton 594 Sales 1) Agro Lime M.Ton 827 2) Chemical Limestone M.Ton 146 3) Lime and Surkhee M.Ton 1991 4) Surkhee M.Ton 599 Stock Million Rs. -Employees 1) Permanent Staff Nos. 86 2) Permanent Labour Nos. 29 3) Misc.(Temporary + Wage base) Nos. 25 Finanilal Target 1) Total Operating Income Million 14.60 2) Total Operating Expenses Million 13.84 3) Operating ProfitILoss Million 0.76 4) Other Income Million -5) Net Profit/Loss (After Provision of Million 0.76 Bonus and Income Tax) 6) Net Fixed Assets Million 3.95 7) Current Assets Million 7.66 81 Current Labialities Million 2.89 9) Net Capital Employed Million 8.72 Grant I)HMGfN Million 20.00 2) International Institutions Million -Outstanding Loans and Liabilities l)HMGfN Million -2) Bank and FIs Million -Shares l)HMGfN Million 6.73 3) Public Million -

Estimate 1995/96

1200 12000 2000

500

1200 12000 2000

500

-

89 33 49

15.03 15.32 -0.29

--0.29

3.91 7.11 2.59 8.43

40.00

-

--

6.73 -

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July. MY and Ton refer to a Metric Ton = 1000 kg. 2)

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Target! Progress of Birgunj Sugar Factory Ltd.

Description Unit Actual 1994/95

Production 1) Sugar M.Ton 1252.26 2)Spirit (liter) Million 0.44 3) Liquor (liter) Million 0.14 Sales 1) Sugar M.Ton 1113.57 2) S~irit (liter) Million 0.32 3) Liquor (liter) Million 0.14 Stock Million Rs. 67.59 Employees 1) Permanent Staff Nos. 365 2) Permanent Labour Nos. 672 3) Misc.(Wage base) Nos. 145 Financial Targets 1) Total Operating Income Million 270.67 2) Total Operating Expenses Million 277.09 3) Operating ProfitlLoss Million -6.42 4) Other Income Million 3.23 5) Net ProfitILoss (After Provision of Million -3.18 Bonus and Income Tax) 6) Net Fixed Assets Million 78.38 7) Current Assets Million 108.05 8) Current Labialities Million 8l.24 9) Net Capital Emj)loyed Million 70.61 Grant I)HMGIN Million -2) International Institutions Million -Outstanding Loans and Liabilities l)HMGIN Million -2) Bank and FIs Million -3) International Institutions Million -4) Others Million -Shares l)HMGIN Million 75.21 2) Corporation Million -3) Public Million -

Estimate 1995/96

16500.00 0.80 0.09

9010.20 862.30 92.88

22l.39

367 665 250

228.57 232.71

-4.13 2.43

-l.70

7l.95 278.81 283.14 67 .. 62

--

-196.57

--

75.21 --

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July. MT and Ton refer to a Metric Ton = 1000 kg. 2)

Physical and Financial Target! Progress of er s ro DC on rocessm2 o. H b P d ti & P C Ltd .

S.No Description Unit Actual Estimate 1994/95 1995/96

1. Production 1) Herbs Processed Ton 54.22 230.00 2) Scented Oil Ton 11.44 14.00 3) Raw Herbs Ton 27.61 5.00

2. Sales 1) Processed Herbs Ton 76.50 257.00 2) Scented Herbs Ton 11.90 160.00 3) Raw Herbs Ton 4.40 5.00

3. Stock Million Rs. 9.13 6.23 4. Employees

1) Pennanent Staff Nos. 97 97 2) Pennanent Labour Nos. 44 50 3) Misc. (Temporary) Nos. 2 -

5. Financial Targets 1) Total Operating Revenue Million 12.18 30.00 2) Total Operating Expenses Million 16.95 38.13 3) Operating ProfitlLoss Million -4.77 -8.13 4) Other Income Million 21.00 0.17 5) Net Profit/Loss (After Provision of Million -4.77 -8.13 Bonus and Income Tax) 6) Net Fixed Assets Million 29.43 27.66 7) Current Assets Million 41.79 46.37 8) Current Labialities Million 20.94 8.77 9) Net Capital Employed Million 50.28 65.26

6. Grant I)HMGIN Million - -2) International Institutions Million - -

7. Outstanding Loans and Liabilities l)HMGIN Million 40.00 49.33 2) Bank and FIs Million - -3) International Institutions Million - -4) Others Million - -

8. Shares HMG/N Million 24.09 -Corporation Million 3.41 -Public Million - -

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July. MT and Ton refer to a Metric Ton = 1000 kg. 2)

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Target! Progress of Hetauda Textile Industry Ltd.

Description Unit Actual 1994/95

Production 1) Cotton Cloth (2 shifts) (meter) Million 4.68 Sales 1) Cotton Cloth (meter) Million 5.66 Stock Million Rs. -Employees 1) Pennanent Staff Nos. 191 2) Pennanent Labour Nos. 965 3) Misc. (Temporary + Wage base) Nos. 72 Financial Tan!et 1) Total Operating Income Million 176.00 2) Total Operating Expenses Million 196.60 3) Operating ProfitILoss Million -20.60 4) Other Income Million 1.80 5) Net ProfitILoss (After Provision of Million -18.80 Bonus and Income Tax) 6) Net Fixed Assets Million 59.10 7) Current Assets Million 200.00 8) Current Labialities Million 115.40 9) Net Capital Employed Million 143.70 Grant I)HMGIN Million -2) International Institutions Million -Outstandin2 Loans and Liabilities I)HMGIN Million -2) Bank and FIs Million 19.50 3) International Institutions Million -4) Others Million 43.90 Shares I)HMGIN Million 178.20 2) Corporation Million -3) Public Million -

Estimate 1996/97

6.38

5.86 -

190 941

65

213.90 217.60

-3.70 1.50

-2.20

55.10 203.10 117.50 140.70

--

-30.00

-31.50

178.20 --

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

S.No

1.

2.

3. 4.

5.

6

7.

8.

Physical and Financial Target! Progress of Janakpur Cigarette Factory

Description Unit Actual of 1994/95

Production 1) Cigarette Million 2270

2) Tobacco Consumption M.Ton 2894 3) Tobacco Consumption K.G 1.27 (Per .Million) 4) Cost of Tobacco Consumption" Rs. 43.57 5) Cost of Fuel Consumption

" Rs. 3.54

Sales 1) Cigarette Million 2160 Stock Million Rs. 124.50 Employees 1) Total Pennanent Staff Nos. 2371 Financial Tar2ets 1) Total Operating Income Million 783.40 2) Total Operating Expenses Million 824.70 3) Operating ProfitiLoss Million -41.30 4) Other Income Million 6.00 5) Net ProfitiLoss (After Provision of Million -35.30 Bonus and Income Tax) 6) Net Fixed Assets Million 58.80 7) Current Assets Million 477.40 8) Current Labialities Million 212.60 9) Net Capital Employed Million 323.60

Grants 1)HMG/N Million -2) International Institutions Million -Outstanding Loans and Liabilities 2)HMG/N Million -3) Bank and FIs Million -4) International Institutions Million -5) Others Million -Shares l)HMG/N Million 40.83 2) Corporation Million -3) Public Million -

Estimate 1995/96

1920

2197 1.14

42.63 5.50

1920 119.50

2229

664.40 743.80 -79.40

6.00 -73.40

57.30 450.40 210.00 297.70

--

----

40.83

--

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July. MT and Ton refer to a Metric Ton = 1000 kg. 2)

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Target! Progress of Lumbini Sugar Factory

Description Unit Actual 1994/95

Production 1) Sugar Ton 13638.90 2) Spirit Lit. 1076700 3) Molasses Ton 5928.00 Sales 1) Sugar Ton 10133.40 2) Spirit Lit. 329000 3) Molasses Ton 91763.10 Stock Million Rs. 117.54 Employees 1) Permanent Staff Nos. 852 2) Misc. (wage base + Temporary) Nos. 358 Financial Targets 1) Total Operating Income Million 240.93 2) Total Operating EXQenses Million 203.05 3) Operating Profit/Loss Million 37.87 4) Other Income Million 0.93 5) Net Profit/Loss (After Provision of Million 18.98 Bonus and Income Tax) 6) Net Fixed Assets Million 175.20 7) Current Assets Million 176.36 8) Current Labialities Million 28.44 9) Net Capital Employed Million 323.12 Grant l)HMG/N Million -2) International Institutions Million -Outstandin2 Loans and Liabilities l)HMG/N Million -2) Bank and Fls Million -3) International Institutions Million -Shares l)HMG/N Million 95.23 2) Corporation Million -3) Public Million -

Estimate 1995/96

12398.80 784450

5793.00

15558.60 588550 1882.50

51.66

852 358

368.41 357.86

10.55 0.45 4.38

181.84 184.27 35.87

330.24

--

---

95.23 --

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July. MT and Ton refer to a Metric Ton = 1000 kg. 2)

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Target/ Progress of Nepal Food Corporation

Description Unit Actual 1994/95

Purchase 1) Rice M.Ton 42812 2) Paddy M.Ton 5321 3) Wheat M.Ton 345 4) Pulses M.Ton 210 5) Mustard Oil M.Ton 30 6) Sugar M.Ton 1213 7) Sheep Nos. 4507 8) He-goats M.Ton 2925 9) Local Food Product M.Ton -Sales 1) Rice M.Ton 76247 2) Wheat M.Ton 1000 3) Maize M.Ton 0 4) Pulses M.Ton 170 5) Mustard Oil M.Ton 30 6) Sugar M.Ton 901 7) Sheep M.Ton 4500 8) He- goat M.Ton 2851 9) Floor M.Ton 694 Stock Million Rs. 417.91 Employees 1203 1) Permanent Staff Nos. ? 2) Misc. (Temporary+Wage base) Nos. ? Financial Target 1) Total Operating Income Million 1055.40 2) Total Operating Expenses Million 1055.30 3) Operating ProfitlLoss Million 0.10 4) Other Income Million 26.60 5) Net ProfitILoss (After Provision of Million 5.70 Bonus and Income Tax) 6) Net Fixed Assets Million 212.10 7) Current Assets Million 845.20 8) Current Labialities Million 1646.10 9) Net Capital Employed Million -569.30 Grant I)HMGIN Million 237.50 2) International Institutions Million -Outstanding Loans and Liabilities l)HMGIN Million 794.20 2) Bank and FIs Million 87.70

3) International Institutions Million -4) Others Million -Shares

Estimate 1995/96

30000 40414

1126 144 55

-5056 2635

30

70000 1000

0 220

50 350

5056 2635 5000

661.00 1281 994 287

1105.10 1105.00

0.10 21.90

3.30

212.10 1103.00 1903.90 -571.20

226.00

-797.40

370.00

--

l)HMG/N Million 246.70 246.70

2) Corporation Million - -3) Public Million - -

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Target! Progress of Nepal Rosin & Turpentine Ltd.

Description Unit Actual 1994/95

Production 1) Rosin Collection M.Ton 2882.24 2) Rosin M.Ton 1939.80 3) Turpentine M.Ton 479.80 Sales 1) Rosin M.Ton 2170.28 2) Turpentine M.Ton 455.43 Stock Million Rs. -Employees 1) Permanent Staff Nos. 237 2) Permanent Labour Nos. 148 3) Misc. (Temporary + Wage base) Nos. 178 Financial Targets 1) Total Operating Income Million -2) Total Operating Expenses Million -3) Operating Profit/Loss Million -4) Other Income Million -5) Net Profit/Loss (After Provision of Million -Bonus and Income Tax) 6) Net Fixed Assets Million -7) Current Assets Million -8) Current Labialities Million -9) Net Capital Employed Million -Grant l)HMG/N Million -2) International Institutions Million -Outstandin2 Loans and Liabilities l)HMG/N Million -2) Bank and FIs Million -3) International Institutions Million -4) Others Million -Shares l)HMGIN Million -2) Corporation Million -3) Public Million -

Estimate 1995/96

2409.60 2195.50

602.20

2195.50 806.30

-237 148 178

113.50 109.40

4.20

3.30

-56.01 79.28 59.08

80.37

-

---

25.28

27.75 30.24

-Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

MT and Ton refer to a Metric Ton = 1000 kg. 2)

S.No

1.

2.

3. 4.

5.

6.

7.

8.

Physical and Financial Targetl Progress of Nepal Tea Development Corporation

Description Unit Actual of 1994/95

Production 1) Tea Production (kg) Million 0.95 Sales 2) Tea Sales (kg) Million 0.99 Stock Million Rs. 37.60 Employees 1) Pennanent Staff Nos. 204 2) Pennanent Labour Nos. 2192 3) Misc. (Seasonal + Temporary) Nos. 524 Financial Targets 1) Total Operating Income Million 70.80 2) Total Operating Expenses Million 96.20 3) Operating ProfitlLoss Million -25.40 4) Other Income Million 0.70 5) Net ProfitILoss (After Provision of Million -24.70 Bonus and Income Tax) 6) Net Fixed Assets Million 172.50 7) Current Assets Million 59.00 8) Current Labialities Million 72.00 9) Net Capital Employed Million 159.50 Grant I)HMGIN Million 11.00 2) International Institutions Million -Outstanding Loans and Liabilities I)HMGIN Million -2) Bank and FIs Million -3) International Institutions Million -4) Others Million -Shares l)HMGIN Million 84.32 2) Corporation Million ' -3) Public Million -

Estimate 1995/96

1.08

1.22 12.60

204 2192

524

86.30 118.90 -32.60

0.70 -31.90

175.50 28.30 78.20

125.60

3.00 -

----

85.32 --

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July.

Salt Trading Corporation Ltd.

Balance Sheet Mid July 1995

Rs Millions Rs Million

Asset Mid July 1995 Mid July 1994 Fixed Asset 36.65 31.86 Investment 125.07 121.23 Short Term Loan (Morang Sugar Mills) 106.62 80.14 Movable Asset 477.44 421.11 Total 745.78 654.34 Capital and liabilities Paid up Capital 16.51 16.51 Profit and Reserve 42.91 40.42 Reserved Loan 355.90 306.92 Current Liabilities Provision 329.46 290.48

744.78 654.33

Salt Trading Corporation

Profit and Loss Account

Mid Aug. 1994 - Mid Jul. 1995 Income Mid July 1995 Mid July 1994 Sales 1557.36 1558.43 Miscellaneous Income 3.92 13.57 Purchase Sales Commission 13.71 12.32 Interest Received 0.24 0.18 Dividend Received 0.36 1.74 Profit on Sale of Share 2.92 Total 1578.51 1586.24 Expenses

Cost of Sales 1352.69 1372.51 Business Expenses 136.10 131.43 Interest 39.51 35.91 Management Expenses 41.84 38.43 Staff Bonus 0.83 0.79 Income Tax Provision 1.48 1.80 Net profit carried down 6.05 5.35 Total 1578.50 1586.22 Profit upto the last year 0.32 0.44

Profit on current year 6.05 5.35 Total 6.37 5.79

Allocation of Net Profit Rewards to directors 0.26 0.36

General Reserve 1.70 1.50 Dividend Equaliser Fund 0.20 0.30 Proposed Dividend 3.30 3.30 Profit transfered to reserve fund 0.91 0.32 Total 6.37 5.78

Physical and Financial Targetl Progress of The Timber Corporation of Nepal

S. No Description Unit Actual of Estimate 1994/95

1. Production 1) Round Timber Cu.ft. 702895 21Sawn Timber Cu.ft. -3) Fuel Wood Chatta 1520.35

2. Sales 1) Round Timber Cu.ft. 1036777 2) Sawed Timber Cu.ft. 17119 3) Fuel Wood Chatta 2237.58

3. Stock Million Rs. -4. Employees (incl. Wage.basis)

1) Pennanent Staff Nos. 917 2) Pennanent Labour Nos. 28

5. Financial Target 1) Total Operating Income Million 260.50 2) Total Operatil}g EJg)enses Million 232.60 3) Operating ProfitILoss Million 27.80 4) Other Income Million 8.60 5) Net ProfitILoss (After Provision of Million 36.40 Bonus and Income Tax) 6) Net Fixed Assets Million 9.50 7) Current Assets Million 228.30 8) Current Labialities Million 173.10 9) Net Capital Employed Million 64.90

6. Grant l)HMG/N Million -2) International Institutions Million -

7. Outstandin2 Loans and Liabilities I)HMG/N Million 23.70 2) Bank and FIs Million -3) International Institutions Million -4) Others Million -

8. Shares l)HMG/N Million 6.30 2) Corporation Million 0.60 3) Public Million -

Note: 1) Financial Year is based on Nepali Calendar and begins at approximately 15 July 2) Chatta is a local measure for Firewood and is approximately 500 Cll.ft.

1995/96

700000 50000

1000.00

1500000 30000

1570.00

-

918 28

269.80 217.10

52.70 8.00

60.70

11.90 292.50 178.30 126.20

--

25.00

---

6.30 0.60

-

ANNEX VI

THE DAIRY SECTOR AND THE DAIRY DEVELOP:MENT CORPORATION

THE DAIRY SECTOR AND THE DAIRY DEVELOPMENT CORPORATION

I BACKGROUND

Systematic dairy development in Nepal began in 1952 when HMG requested assistance from the Food and Agricultural Organization of the United Nations in trying to better utilize milk produced in the country's mountain region. Cheese factories were established to develop dairying in this region, the first one being in 1952 in Langtang. In the same year experimental milk processing was also carried out in Tusal village ofKavre district. In 1953/54, a Dairy Development Section was established under the Department of Agriculture. A dairy plant was erected in 1956/57 in Kathmandu with the assistance of the New Zealand Government. This plant had an average milk processing capacity of 500 litres per hour.

Realizing the significant prospects for dairy farming on a modem commercial scale, the First Five Year Plan (1956/57) stressed the need for developing a modem dairy industry. A Dairy Development Commission was formed in 1955 to guide such activities; in 1962 the Commission became the Dairy Development Board. Rapid growth in population in the Kathmandu Valley, increasing immigration, and establishment of new hotels, restaurants, and tea stalls led to increased demand for fresh milk and milk products. With a view to expanding dairy development activities to meet demand, the Dairy Development Board was transformed into the Dairy Development Corporation (nnC) in July 1969 under the Corporation Act of 1964.

DOCs main objectives, as stipulated in their Act, are to:

• provide a reliable market outlet and a fair price to milk producers; • supply pasteurised milk and other dairy products to urban consumers at a reasonable price; • organise, promote and extend milk collection/production to meet demand; • organise and promote Milk Producers Associations (MP As).

This dual mandate has been a problem as DOC has to undertake development and commercial activities which are not always compatible with the operations of a commercial dairy organization, but which may be justified by national economic and social development criteria. This conflict, together with the well documented inefficiencies associated with government owned enterprises, has resulted in the Corporation generating operating losses over a considerable period of its 27 year existence. The "10 Year Dairy Development Plan 1991-2000", the accepted blueprint for the dairy sector in Nepal, recommended that the DDC be restructured, that the development and commercial responsibilities be segregated, and that the latter activities be run on a strictly commercial basis.

n DDC - OPERATIONAL AND FINANCIAL OVERVIEW

Over the years nnc has developed a national milk grid covering specific areas, centred around Kathmandu, Biratnagar, Pokhara, Hetauda and Lumbini. Kathmandu is the main market for fresh milk (Dnc presently supplies 125,000 litres per day to the market) and depends heavily on milk transfers from other parts of the network. For example, during the flush season Pokhara sends 7,000 litres per day to the Kathmandu Milk Supply Scheme (KMSS); the Pokhara Milk Supply Scheme (PMSS) receives 7,000 litres per day from Hetauda Milk Supply Scheme (HMSS) during the lean season to satisfY its market of 11,000 litres per day.

In addition to the four main liquid milk processing facilities which form the center of the milk supply schemes listed above, nnc owns a skimmed milk powder plant at Biratnagar, and nine seasonally operated yak cheese factories. Staff numbers for 1995/96 were 1,221 split as follows: 644 technical, 577 non-technical.

Key operational and financial statistics are attached as Appendix ? Highlights of theses statistics are as follows:

• milk procurement for the 12 months ending 15th July 1996 was 52.39 million litres. This represented an increase of 23 percent over the previous year and is well ahead of the forecasts in the lOY ear nairy Plan 1991-2000;

• KMSS and HMSS account for some 65% of total milk procured, PMSS accounts for just 6.5%;

• total net assets of the Corporation as at Mid July 1996 (unaudited) stood at RS 652 million;

• revenues from sales of milk and milk products in 1995/96 exceeded Rsl billion; • it would appear that, after adjusting for capital grants labelled as income, nnc has

operated at close to break-even over the past five years; • the skimmed milk powder plant opened in BMSS in 1995; indications are that the costs of

the milk powder produced are excessive.

ill DAmy INTEREST GROUPS

The dairy industry in Nepal, and nnc in particular, is a complex grid of producers, dairy workers and consumers all involved in the daily production, collection, processing, marketing and consumption of milk and milk products. In addition, the interests of HMG (owners) and donor agencies (significant fund providers) must be taken into consideration. An understanding of this network is central to an appreciation of the problems encountered in the restructuring/privatization analysis to-date; delays in the nnc privatization process can often be traced to conflicting expectations among various interest groups. A brief profile of each of the key interest groups is provided below:

Producers. About 90,000 farmers presently supply milk to nnc. Average herd size is typically 1-2 buffaloes and average collection is 2-4 titres per farmer per day. In areas of the country

where road access is difficult or impossible, some 3,000 porters are engaged in transporting 30-40 litre cans of milk during the flush season to the local chilling center. Producers are organized into Milk Producer Associations (MP As) and Milk Producer Cooperative Societies (MPCSs) and deliver milk to chilling centres at their respective milk schemes. Despite the fact that DDC does not provide a good service to producers, eg., refusing to buy milk on set days due to lack of processing capacity - producers are wary of the private sector and perceive a degree of security in the Government owning DDe.

Employees of DDC. The staff ofDDC, many of whom have had specialised training both within Nepal and abroad, are one of its major assets. The staff of the DDC are concerned about the security of their jobs in the privatiztaion process.

Government. HMB is the present owner of DDC and also exercises a strong influence over the operations and management of the Corporation via the Corporation Act 1964. This Act clearly indicates that DDC is not only wholly owned by HMG but that its operation and management is also fully controlled by the government. In fact, the basic philosophy in constituting DOC, as is the case for any corporation under the Corporation Act, is neither to earn profit nor to run the operation in a commercial manner, but rather to undertake development functions and provide services to the community. Essentially, ODC is a department of liMB and does not have the independence or flexibility to operate commercially within the present restrictive legal framework.

Donor Agencies/Investors. This interest group consists of bilateral and multilateral agencies, financial institutions and investors who have a special interest in the development of the dairy sector. Key contributors to the Corporation in the past have been Danida, USAID, the World Food Program, and the ADB.

Private DairieslMilk Vendors and Contractors. There are approximately 60 private dairy enterprises in the country. However, the operating status of some is not very clear with the result that the number running satisfactorily is well below this figure. For example, there are just four dairies ( three in the Kathmandu Valley) who have processinglpasteurising facilities. The remainder of the private dairies mainly produce dairy products, especially ice cream and yoghurt. A significant proportion of these yoghurt makers purchase milk in sachets from the ODC. Two recent entrants into key markets are as follows: in Kathmandu, Sitaram Gokul Milks (K) Ltd, which presently sells around 5,000 litres per day but hopes to reach 30,000 litres by December 1996; and in Pokhara, Pokhara Dairies Ltd, which presently sells 1,500 litres per day and thus is the largest private milk producer in Pokhara.

Two dairy associations have been formed in recent months to represent the views of the private sector. They are the Nepal Private Dairy Association and the Nepal Dairy Enterprise Association. However, both are still in their infancy and, as yet, do not have the infrastructure or funding to be a strong voice for change. The private dairy sector perceives DDC as distorting the market because it uses donated assets to maintain a low cost base.

Consumers. This group represents the purchasers of the 125,000 litres of ODC milk consumed daily. The majority of this group, approximately 80%, are Kathmandu middle income dwellers.

Tea shops, especially in the Kathmandu Valley, are a significant commercial user of DDe milk; the lower income group's main access to DDe milk is via such tea shops.

IV PROGRESS REVIEW 1990-1996

1991 - Ten Year Dairy Development Plan 1991-2000

This Danida funded plan, the accepted blueprint for the Nepal dairy sector at the time, recommended that the DDe be restructured. This was to involve separating the development and commercial responsibilities and running the latter on a strictly commercial basis.

1991- HMG Privatization Program

In 1991 HMG made a commitment to a comprehensive privatization program for approximately 60 public sector enterprises. Under this program, DOe was classified as suitable for privatization "after some additional preparation or study."

1992/93 Budget Speech

In the budget speech for the fiscal year 1992/93, delivered to the third session of the parliament, the Minister of Finance indicated that the dairy industry would be liberalised.

1992 USAID Milk Scheme Studies

In April 1992, ODe together with USAID initiated three studies covering the Pokhara, Hetauda, and Biratnigar milk supply schemes, on the financial and management feasibility of MP A participation in the commercial dairy arena. These studies have proved a valuable source of information for subsequent ODe restructuring studies.

1993 DDe Restructuring Mission I

In January/February 1993, a Danida sponsored team of consultants was invited by HMG to prepare a conceptual plan for the restructuring of the DDe. This was a major component of the HMG ten year dairy development plan (1991-2000) and was consistent with the Government's plans to privatize many public enterprises as part of the overall economic rationalisation program.

This plan, drawn up after considerable dialogue with all of the various interest groups, envisioned a complete sale of DOC, with the shares being allocated among milk producers, general public, staff and a commercial private sector organization. The plan recognized the severe limitations, both financial and managerial, of the fledgling cooperative milk producer organization, the aspirations for staff to have some financial involvement, the benefit of general public participation, and the need for a strong commercial dairy orientated organization to control processing and marketing.

The conceptual plan was drawn up to privatize DDC by the sale of shares in the following proportions:

a. Processing and Marketing Facilities

Fifty one percent to a pre-qualified commercial company with proven experience in dairy processing and marketing and adequate financial resources. The 51 % was to ensure absolute management control. It could be higher but not lower.

Nine percent to staff and general public. This portion could be higher but not lower.

Forty percent to be reserved by Government for future sale to a nationally organized milk producers union. It was estimated this would take 5-10 years before it was in a position to take over shares. This proportion could be lower but not higher.

b. Chilling Centers

One hundred percent to milk producer cooperatives. These shares were to be transferred over a period of time when district level milk producer cooperatives were properly formed and had accessed adequate funds to finance the transaction. It was estimated this would take up to five years to complete, with the chilling centers remaining under Government ownership until sold -with the privatized DDC operating and maintaining them under a management contract in the interim.

c. Yak Cheese Factories

These were identified as being in a special category to be handled separately from the main DDC privatization.

A number of conditions, designed to protect both producer and consumer, were identified. The new owner ofDDC would have to agree to these as a condition of sale.

This plan was accepted by the National Dairy Development Board (NDDB) and put before a large seminar of the various interest groups in February 1993. Whilst no one group achieved all their objectives, the plan took into account all their views and was considered the most realistic option available.

1993 Strategy and Implementation Plan for Privatization of DDe

In December 1993, the Privatization Cell developed its independent privatization strategy for DOC. This consultancy was funded by USAID through its Privatization and Divestiture Project. Key recommendations were:

• nnc should immediately be privatized in its entirety with minimal restructuring; • the nine seasonally operated yak cheese and butter plants should be sold as a single entity;

• the remainder of DDC was to be separated into four entities comprising Kathmandu, Pokhara, Hetauda and Biratnagar. These entities were to include their respective processing plants, chilling centres, rolling stock and other related facilities. Because of the pivotal role of Kathmandu, it was to retain a 10 percent shareholding in the other three entities;

• proposed shareholdings in the yak cheese entity and the Kathmandu milk processing entity were as follows:

- Dairy farmers and :MPCSs/MP As - DDC employees - Management - General public

10% 10% 51% 29%

• proposed shareholdings in the Pokhara, Hetauda and Biratnagar milk processing entities were as follows:

- Kathmandu milk processing entity - Dairy farmers and :MPCSsIMP As - DDe employees - Management - General public

10% 10% 10% 51% 19%

The allocation of shares in this model was based on each interest group's contribution to the milk supply, processing, marketing and consumption, ability to raise equity, and financial/managerial viability and autonomy once privatized. Dairy farmers, :MP As, :MPCSs and DDC employees were to be allowed up to three years to fully pay for shares.

1994 Restructuring Mission n

This Danida funded mission followed directly from the IanlFeb 1993 nusslon. The NDDB decided that the mission should work in conjunction with the Privatization Cell in areas where assistance was considered most appropriate. The assistance was given to the Privatization Cell by making a number of written submissions. Various issues were discussed and debated and points of disagreement noted where necessary. Submissions to the Privatization Cell included proposals on skim milk powder plants, chilling centre ownership and control, DDC producer milk pricing, milk holidays, the role ofNDDB post privatization, and donor funding.

1994 DDe Business Valuation

In February 1994, USAID engaged the consulting firm IntradoslIntemational Management Group to conduct a valuation ofDDC. The valuation analysis considered the following approaches:

• net assets on a replacement cost approach; • discounting future expected cash flows under several possible future scenarios; and • analysis of likely liquidation values.

Three local teams of valuers were also sent to the field in order to prepare a full listing/valuation of all physical assets ofDDC at the various milk schemes.

1994 Fixed Asset Valuation on Yak Cheese Plants

This exercise, carried out under the direction of the Privatization Cell, produced a "Value in Use" and a "Liquidation Value" for the nine yak cheese plants of the DDC.

V PRESENT STATUS OF nnc PRIVATIZATION

As at September 1996, neither DDC itself nor any part of it had been privatized. The reasons for the slow progress since the high activity point of early 1994, when the high level privatization committee passed the four independent units model, is largely related to the political situation during this period. A change to a communist government in 1995 for a period of nine months stalled the whole privatization process and led to disillusionment among several dairy interest groups. In particular, the Privatization Cell lost a lot of impetus and funding for technical assistance was withdrawn. With the change of government in late 1995, the focus has once more turned to the DDC privatization issue. On the recommendation of the NDDB, the PMSS has been approved by the privatization committee to be privatized. The model chosen has the following share allocation:

- Private Sector - Producer Cooperatives - General Public - DDC - PMSS Employees

40% 30% 15% 10% 5%

Although this is not the scheme that was recommended following earlier studies, it is commercially feasible to separate it from the rest of the DDC and privatize PMSS first PMSS was chosen as it is the most autonomous unit of the national milk grid. Pokhara has a strong tourist trade and much of the milk/milk products are consumed locally. As indicated above, a valuation of PMSS was carried out in early 1994. However, the Privatization Cell has a policy that valuations more than one year old cannot be used in the privatization process, so this valuation will have to be updated.

Dealing with one smaller unit of the dairy sector first makes sense from a political perspective as it allows privatization of the dairy sector to be tested out and the benefits demonstrated to dairy sector interest groups with minimum risk.

The preparation of the Information Memorandum, the revised assetlbusiness valuation of PMSS and the legal issues involved in separating PMSS from the DDC structure are the next steps that must be taken in the DDC privatization process. The conversion of the remaining MP As under the PMSS to MPCSs should proceed as fast as possible to provide maximum flexibility for milk

producers in the region. The PMSS privatization is being viewed as a test case and the experiences gained will detennine the speed and strategy for the remaining units of DOC. Little consideration has yet been given to how the remainder of DOC should be privatized.

While the overall privatization process is governed by the Privatization Act 1994, several other pieces oflegislation need to be considered when planning the privatization of DOC in whole or in part. In particular these include: the 1964 Corporation Act under which DOC is constituted and which covers directors, funding, development role objectives, power to make by-laws and dissolution; the 1992 National Dairy Development Act under which the NDDB was established to co-ordinate the activities of the dairy sector, but which also covers milk price fixing recommendations to HMG; and the 1992 Cooperative Act which covers the establishment of MPCSs.

VI CONCLUSIONS AND RECOMMENDATIONS

Privatization of all of DOC should proceed as fast as possible. The DOC does not operate efficiently and the present uncertainty concerning the future ofDDC is having a damaging effect on many dairy sector interest groups. For example:

• staffat DOC are confused; • the private sector dairies perceive that the "unfair advantage" held by DOC in the

marketplace continues; • consumer demand for milk remains unsatisfied and new products/market areas remain

unexplored; • the investor community will also be agitated by the present "stop/go" policy concerning

DOC privatization; • producers are unsure/nervous as to what the future holds for them; and • the donor community are reluctantlhesitant to commit any future funding in such an

uncertain environment.

A clear statement is now needed from all arms of HMG connected with DOC to remove this uncertainty and to continue with the privatization of the organization under the mandate of the Privatization Cell.

Funds for privatization under USAJD's assistance program should be released only against the backdrop of such a statement. If all the preparation work for the sale of the Pokhara Milk Supply Scheme has not been completed and the newly established company offered for sale by mid-1997, USAID should review all its funding for the privatization program in Nepal.

INCOME

Milk and Milk Products Miscellaneous Income Grant and Subsidy Capital Grants

TOTAL INCOME

EXPENSES

Stock Variations Collection Processing

Sales Administration Gratuity Depreciation mterest Studies

TOTAL EXPENSES

NET PROFIT

KEY RATIOS

Collection Costs/Sales

Processing Costs/Sales

Selling Costs/Sales

DAIRY DEVELOPMENT CORPORATION PROFIT AND LOSS ACCOUNTS

1991192 1992/93 1993/94 Audited Audited Audited

RsOOOs RsOOOs RsOOOs

459,729 658,459 819,152 9,846 8,299 10,373 7,425 846 4,098 7,751 20,641 21,597

484,751 688,245 855,220

336 -8,602 1,334 308,798 450,879 570,708 101,151 138,355 152,672 18,388 26,163 34,759 16,461 22,654 23,468 7,724 5,928 3,455

11,139 24,498 26,162 4,718 4,786 4,328 2,839 0 0

471,554 664,661 816,886

13,197 23,584 38,334

67.17% 68.47% 69.67%

22.00% 21.01% 18.64%

4.00% 3.97% 4.24%

Administration Costs/Sales 3.58% 3.44% 2.86%

Net Profit/Sales 2.87% 3.58% 4.68%

Financial Year ends mid-July

1994/95 1995/96 Audited Estimate

RsOOOs RsOOOs

880,409 1,129,509 11,839 5,131

710 0 21,172 21,500

914,130 1,156,140

-349 0 621,927 812,343 173,478 173,973 39,066 47,378 23,799 34,153 15,056 11,192 25,315 34,680

5,176 0

903,468 1,113,719

10,662 42,421

70.64% 71.92%

19.70% 15.40%

4.44% 4.19%

2.70% 3.02%

1.21% 3.76%

DAIRY DEVELOPMENT CORPORATION BALANCE SHEETS

1991192 1992193 1993/94 Audited Audited Audited

RsOOOs RsOOOs RsOOOs

FIXED ASSETS 88,578 279,032 270,816

Exchange Rate Differences 66,533 65,193 71,529 Deferred Expenditure

CURRENT ASSETS

Cash and Bank 17,771 36,602 87,907 Donor Funds 90,567 124,020 124,188 DebtorslPrepayments 37,375 26,471 25,098 Reserve for Bad Debts -1,255 -1,554 -3,031 Inventory 145,607 80,890 99,914

TOTAL CURRENT ASSETS 290,065 266,429 334,076

CURRENT LIABILITIES

Short Term Loan 18,769 0 0 Accrued Gratuity 21,918 20,2l3 23,429 Creditors 45,517 60,042 123,274 Accrued Leave 3,302 4,489

TOTAL CURRENT LIABILITIES 86,204 83,557 151,192

NET CURRENT ASSETS 203,861 182,872 182,884

TOTAL NET ASSETS 358,972 527,097 525,229

Corporation Fund 115,880 296,860 295,885

Accumulated Reserves -33,510 -10,825 18,328

Long Term Loans 101,379 100,039 106,375

US Aid Fund 154,864 123,055 88,107 WFPFund 20,359 17,609 16,534 UNICEF 359 0

CAPITAL EMPLOYED 358,972 527,097 525,229

Financial Year ends Mid-July

1994/95 1995/96 Audited Estimate

RsOOOs RsOOOs

436,047 429,183

3,076 3,076

87,503 114,310 117,879 100,879 47,671 52,671 -3,008 -3,008 72,344 72,344

322,389 337,196

18,397 0 38,485 49,677 49,140 62,891

4,917 4,917

110,939 117,485

211,450 219,711

650,573 651,970

328,916 324,416

28,991 57,037

203,254 198,104

87,867 70,868 1,545 1,545

0 0

650,573 651,970

n~ Ih 1j v

nnc OPERATIONAL STATISTICS

SOURCE OF SUPPLY TO DDC SEPTEMBER 1996

MPAs MPCSs TOTAL KMSS 126 189 315 BMSS 40 87 127 HMSS 18 232 250 PMSS 28 66 94 LMSS 13 77 90

TOTAL 225 651 876

DDC MILK PROCUREMENT ('OOOs LITRES)

KMSS BMSS HMSS PMSS LMSS TOTAL 1991 7,070 3,536 5,324 1,662 1,249 18,841 1992 5,322 4,472 7,147 2,222 1,853 21,016 1993 11,416 6,205 10,177 2,571 3,174 33,543 1994 15,257 6,368 10,308 3,214 3,495 38,642 1995 15,680 7,564 11,323 3,347 4,639 42,553 1996 19,606 8,032 14,756 3,434 6,571 52,399

nne Milk Procurement 1990/91-1995/96

20,000

18,000

16,000

0 14,000

0 0

12,000 IIIKMSS s .BMSS

10,000 eHIMSS L

.PMSS 8,000 lmLMSS t

r 6,000

e s

4,000

2,000

0 1991 1992 1993 1994 1995 1996

ANNEXvn

ODA DRAFT PROJECT MEMORANDUM

DRAFT PROJECT MEMORANDUM -'

NEPAL: PRIVATISATION PROJECT

South East Asia Development Division Overseas Development Administration

September 1996

'Dc) =to) IGfU

CONTENTS

Acronyms

1. Summary and Recommendations

Project Framework

2. Project Concept

Background Policies Problems addressed by the project Components of the project Stakeholders and beneficiaries Sustaining benefits Economic aspects Financial aspects Social aspects Technical aspects Institutional aspects Environmental aspects Project activities

3. Implementation

Monitoring and reporting Project costs Risks

Annexes

1 2 3A 38

Budget Institutional issues ToRs ToRs

ADB CPN-UML EID ESAF GID HMGN IMF MoF MP NTC ODA PAND PC SEADD SOE UNIDO USAID

ACRONYMS

Asian Development Bank Communist Party of Nepal-United Marxist Leninist Economics Statistics and Institutions Division (of the ODA) Enhanced Structural Adjustment Facility Government and Institutions Department (of the ODA) His Majesty's Government of Nepal International Monetary Fund Ministry of Finance Member of Parliament Nepal Telecommunications Corporation Overseas Development Administration Procurement, Appointments and NGO Department (of the ODA) Privatisation Cell (of the MoF) South East Asia Development Division (of the ODA) State Owned Enterprise . United Nations Industrial Development Organisation United States Agency for International Development

PROJECT LOGICAL FRAMEWORK

NARRATIVE MEASURABLE MEANS OF IMPORTANT SUMMARY INDICATORS VERIFICATION ASSUMPTIONS

Goal:

Strengthen HMGN's - improved enterprise - Post project review public enterprise performance reform programme.

Purpose:

An as yet unspecified - further phase of - IMF reports - management skills number of state HMGN's privatisation - Project reports available owned enterprises programme completed being effectively - key markets remain managed/operated by open to competition the private sector.

Outputs:

1. Conclude - sharelasset sales - Project reports. - bidders willing and negotiations for completed (end competent to manage privatisation of an as 1997/98) businesses. yet unspecified number of - privatisation strategy - acceptance by small/medium scale agreed (end 1996/97) employees/managers state enterprises.

- Staff trained 2. Privatisation Cell (ongoing) strengthened.

Activities:

1 . Advice to MoF - Inception report - HMGN remains Privatisation Cell on completed (eight committed to restructuring, valuation weeks after start up) implementing its and sale of enterprises. privatisation

- resident adviser in programme. 2. Facilitate in-country place (18 months) training, liaison with - Support of line Ministries, and - short term advice (up counterpart staff media. to three months) maintained.

1. Summary and Recommendations

1.1 The goal of the project is to strengthen HMGN's public enterprise reform programme, thereby contributing to the ODA's Aim 1. The purpose of the project is to transfer ownership and control of small/medium state owned enterprises, as identified by HMGN in its 1996/97 and 1997/98 privatisation programmes, to the private sector.

1.2 The project would achieve this by providing the Ministry of Finance's (MoF) Privatisation Cell with a Resident Adviser for 18 months, and modest short term specialist inputs as agreed with the MoF. The Adviser would help facilitate the activities of the Cell, prepare bidding materials, liaise with potential investors and ensure effective completion of transactions.

1.3 The Project Officer will be SEADD's Economic Adviser.

1.4 It is recommended that SEADD provides £ 490,000 over 18 months (December 1996 to June 1998). Details of the budget are in Annex 1.

2. Project Concept

Background

2.1 HMGN requested technical assistance to help implement its privatisation programme in early 1996. In response we commissioned a privatisation expert to review assistance needs with the MoF and key stakeholders in June 1996.

2.2 The June review recommended the support of a full time Resident Adviser for the MoF's Privatisation Cell. Support to the Cell would complement assistance currently being provided by USAID, which is reducing its involvement and confining it to the agro-industries. The review concluded that, in the longer term, substantial preparatory work would be needed prior to privatisation of larger service and financial sector enterprises. .

2.3 Our proposals to provide the Privatisation Cell with a Resident Adviser have been discussed with MoF, and with other donors (notably USAID, the World Bank, ADB and IMF), who are supportive.

2.4 Nepal has an established, although intermittent, track record with privatisation. A satisfactory decision making and legal structure is in place. However the experience and expertise needed to implement transactions and develop policies for the longer term are lacking.

1 \

Policies

2.5 The project will contribute to the ODA/s Aim 1 by helping HMGN withdraw from areas where markets have a role to play and helping provide an environment supportive to development of the private sector.

2.6 HMGN launched its privatisation programme in 1991 as part of its Economic Reform Programme. During the initial phases of the programme eight manufacturing enterprises were successfully privatised through a combination of share and asset sales, and two non-viable enterprises liquidated. Five enterprises are currently undergoing privatisation, and fifteen further enterprises have been scheduled by HMGN for privatisation during 1997 and in the longer term. These include small/medium manufacturing enterprises and a small number of large and more complex enterprises in the financial and service sectors. Details are contained in Annex 2.

Problems addressed by the project

2.7 The project addresses problems common throughout the state enterprise sector in Nepal. These include conflicting objectives (notably employment generation versus profitability), managerial inertia, lack of technical expertise (notably in basic accounting and production planning) and over staffing. State enterprises are in a position to exert leverage with state banks, resulting in the accumulation of bad debts and a significant burden on the government budget. Managing state owned enterprises places a substantial administrative burden on HMGN.

2.8 Experience in Nepal indicates that transfer of ownership and control to the private sector has been generally effective in raising efficiency, and sustainability of employment, provided markets remain open to competition. In a few cases enterprises have not become viable and have closed down operations.

Components of the project

2.9 The main component of the project is the provision of a Resident Adviser, located in the MoF's Privatisation Cell, and modest short term specialist advice. By the end of the project the Cell will have privatised the small/medium enterprises included in HMGN/s programme, and be better placed to plan longer term approaches to privatisation.

Policies

2.5 The project will contribute to the ODA's Aim 1 by helping HMGN withdraw from areas where markets have a role to play and helping provide an environment supportive to development of the private sector.

2.6 HMGN launched its privatisation programme in 1991 as part of its Economic Reform Programme. During the initial phases of the programme eight manufacturing enterprises were successfully privatised through a combination of share and asset sales, and two non-viable enterprises liquidated. Five enterprises are currently undergoing privatisation, and fifteen further enterprises

. have been scheduled by HMGN for privatisation during 1997 and in the longer term. These include small/medium manufacturing enterprises and a small number of large and more complex enterprises in the financial and service sectors. Details are contained in Annex 2.

Problems addressed by the project

2.7 The project addresses problems common throughout the state enterprise sector in Nepal. These include conflicting objectives (notably employment generation versus profitability), managerial inertia, lack of technical expertise (notably in basic accounting and production planning) and over staffing. State enterprises are in a position to exert leverage with state banks, resulting in the accumulation of bad debts and a significant burden on the government budget. Managing state owned enterprises places a substantial administrative burden on HMGN.

2.8 Experience in Nepal indicates that transfer of ownership and control to the private sector has been generally effective in raising efficiency, and sustainability of employment, provided markets remain open to competition. In a few cases enterprises have not become viable and have closed down operations.

Com-ponents of the project

2.9 The main component of the project is the provision of a Resident Adviser, located in the MoF's Privatisation Cell, and modest short term specialist advice. By the end of the project the Cell will have privatised the small/medium enterprises included in HMGN's programme, and be better placed to plan longer term approaches to privatisation.

')

Stakeholders and beneficiaries

2.10 The primary stakeholders are current and potential future employees, managers and shareholders of enterprises scheduled for privatisation. The main secondary stakeholders are HMGN/MoF and the ODA.

Sustaining benefits

2.11 The project is inherently sustainable because the process of privatisation removes responsibility for the financing, management and operation of state enterprises into the hands of private sector investors and shareholders.

2.12 The project will contribute to the sustainability of the MoF's Privatisation Cell by helping develop its procedures and raising skills. Long term sustainability of the Cell is not critical because its role is limited to once-off privatisation of a limited number of state owned enterprises.

Economic aspects

2.13 As noted in paragraph 2.7 the state enterprise sector in Nepal suffers major managerial deficiencies, causes a significant drain on the budget and contributes to an accumulation of bad debt with Nepal's sate owned Banks. Financial losses exceed 1 % GOP, according to IMF estimates. The project would assist th~ privatisation of enterprises operating in sectors where the public sector has little economic role to play, and would help contribute to the development of longer term plans for larger enterprises where privatisation may need to be preceded by further development of regulatory environment and sector policies.

Financial aspects

2.14 During project implementation information will be assembled on the financial condition of enterprises, valuation of assets and tax environment as part of necessary bidding documentation.

Social aspects

2.15 Privatisation may result in short term redundancies, given present levels of over manning particularly at middle and managerial levels. By raising enterprise efficiency the project will encourage a more sustainable basis for income generating employment in the longer term, however.

Technical aspects

2.16 The project has no special technical implications. The PC has adequate office space and is equipped with basic computing facilities to which the Adviser would have access.

Institutional aspects

2.17 Institutional arrangements for HMGN's privatisation programme are workable, but lack of skills and cumbersome decision making arrangements inhibit the pace at which progress can be made. Nepal has an adequate legal background for privatisation. Further details of institutional aspects are contained in Annex 2.

Environmental aspects

2.18 The project has no environmental implications.

Project Activities

2.19 The goal of the project will be assessed by a short review of the performance of enterprises privatised during the project, provision for which is included in the budget. The purpose of the project will be assessed on the basis of successful completion of transactions for small/medium enterprises shown in Annex 2.

Output 1

2.20 The Adviser will work with the Privatisation Cell to determine the most appropriate methods of privatisation, identify potential investors and assist in negotiations with potential investors. The MoF will provide support consisting of six staff including a Joint Secretary and a local expert within its existing Privatisation Cell and access to office facilities.

Output 2

2.21 The Adviser will facilitate and strengthen the Privatisation Cell by providing on the job training for key staff, assisting co-ordination with line Ministries and other donors, with press and media matters and advising on the further development of HMGN's privatisation programme as requested by MoF.

3. Implementation

3.1 The project will be implemented by the MoF/PC under the overall supervision of the Joint Secretary (Privatisation) and assisted by the Adviser and short term specialists.

3.2 We expect that the long term and short term inputs will be provided by a consultancy fi[[!l selected by SEADD in consultation with GID/EID (ToRs at Annex 3A). The consultants will be accountable to SEADD for project outputs. Short term inputs will be agreed on the basis of a work plan to be developed with the Privatisation Cell within eight weeks of start up. ToRs for short term inputs will be submitted to SEADD, prior to implementation, for agreement that the proposed inputs remain consistent with project outputs. The work plan will define quantifiable indicators in the Log Frame in further detail. The use of contingency funds will be agreed in advance by SEADD.

3.3 If we are not able to recruit a consultancy firm we would alternatively recruit a singleton adviser (ToRs at Annex 3B). He/she would be responsible for identifying short term inputs, completing ODACO forms for approval by SEADD, suggesting individuals for short term tasks and identifying individuals in agreement with PAND. These responsibilities would be additional to those described in paragraph 3.2.

3.4 PAND have been consulted and are content with these arrangements.

Monitoring and reporting

3.5 SEADD will monitor the project with the MoF against the performance indicators in the Logical Framework. The SEADD Project Officer will visit the project at 6 monthly intervals.

3.6 The Adviser will submit brief quarterly reports to the MoF, SEADD and the British Embassy. The first report will consist of an inception report eight weeks after start up which will include a work programme containing targets for completion of various stages of the workplan. Subsequent reports will record progress against the workplan, revise the work plan as necessary, review the validity of assumptions and comment on the likelihood of project purpose being achieved.

Project costs

3.7 The cost of the project is £ 490,000 over 18 months including contingencies (see Annex 1).

Risks

3.8 There is a small risk that HMGN may not remain committed to further privatisation, and that suitable bidders may not be found for specific enterprises. Inability to recruit an Adviser to Kathmandu with the necessary skills and experience is a further risk, although not a risk to which SEADD is exposed.

l ,

ANNEX 1 BUDGET (£OOOs)

Dec 1996 April 1997 April 1998 Total - March 1997 - March 1998 - June 1998

Staff inputs 65,000 260,000 65,000 390,000 (long term & short term)

Accommodation and 4,250 17,000 4,250 25,500 subsistence

Air fares 4,750 19,000 4,750 28,500

Misc. (training, transport, 3,750 15,000 3,750 22,500 consumables, reports)

Sub total 77,750 311,000 77,750 466,500

5% contingency 3,917 15,666 3,917 23,500

Total 81,667 326,666 81,667 490,000

ANNEX 2

Institutional issues

Problems faced by the State Enterprise Sector

1 . Key problems contributing to the poor performance of state owned enterprises (SOEs) are: (a) conflicting objectives (employment generation, the need to provide services in rural areas and generation of financial returns) (b) safeguards created by statutory privileges, such as state monopolies and protection from competition (c) ineffective supervision and control by parent Ministries eg inappropriate controls over pricing, investment and employment; (d) managerial deficiencies resulting from the composition of Boards by government officials and appointment of Chief Executives and (e) lack of expertise in accounting and technical operations.

Institutional arrangements

2. In 1991 HMGN made a major commitment to privatising state enterprises as part of its wider Economic Reform Programme. Key policy objectives at that time were to encourage greater private sector ownership, control and commercial freedom by minimising government interference. The Government renewed its commitment in its Privatization Bill (1993), and subsequent White Paper which recommended the present institutional arrangements for designing and implementing its programme.

3. These arrangements comprise a high level policy making committee (chaired by the Minister of Finance and comprising some 10 individuals including the Minister of Justice, an opposition MP and a government MP), and a Privatisation Cell located within the Ministry of Finance (MoF). Technical support for the creation of the Cell was provided from UNIDO and the World Bank. USAID has provided staff training and is assisting with transactions in the agriculture sector, but this is expected to decline.

4. The Privatisation Cell comprises six staff headed by a Joint Secretary. Between them the staff of the Cell possess a general understanding of the privatisation process, and have some specialist financial and commercial experience. A Technical Committee, staffed by officials from relevant line Ministries, and a Financial Committee, staffed by executives from the Privatisation Cell of the Ministry of Finance, are jointly responsible for reviewing proposals and investors offers for specific transactions, and for making recommendations to the high level committee. Experience shows, however, that the presence of a privatisation expert adviser is needed in order to conclude specific transactions and to make the process operate effectively.

Experience since 19.91

5. Problems encountered with privatisation since 1991 can be summarised as follows.

- in some cases employees have sought to obstruct take overs, requiring a period of negotiation with new owners. Difficulties have usually been resolved by agreeing improved salaries, benefits and working conditions.

- newly privatized companies have faced practical difficulties with the transfer of physical assets requiring, in some cases, renegotiation of original purchase prices.

- difficulties have been experienced where liability for provident funds, gratuity payments, medical allowances etc. have not been shown in accounting records.

- SOEs have not maintained up to-date audited accounts.

6. The MoFs response to these constraints has been to provide the maximum possible information on bad debts, undisclosed liabilities etc. in information memoranda so that the bidders themselves can take these factors into account during negotiation.

7. The pace at which privatisation has proceeded has been influenced by changes in government. During 1994, under the former CPN-UML Government, little practical progress was made. The main thrust of policy viz: providing an environment conductive to the private sector, has not fundamentally altered since 1991, however.

Strengths/wea knesses

8. Nepal's institutional arrangements have the advantage of involving a wide range of interested parties, thereby helping ensure consensus. However the process also encourages delay and introduces non-commercial considerations into key decisions. The system as a whole has proved workable, but remains over complex and lacking in transparency. In the long term, as HMGN interest turns to larger and more complex privatisations, the system will need to be streamlined.

9. The main constraints are lack of understanding of effective processes, and some disinclination to press ahead especially in cases where line ministries perceive loss of control or influence. Reluctance is least likely to be felt where enterprises are heavy loss makers, although privatisation of better performing companies may be controversial. The main positive motivating forces are the MoF, which recognises the need to press ahead, and the Central Bank which is also enthusiastic and wishes to promote privatisation in the banking sector. The National Planning Commission is also strongly supportive. An experienced Adviser is required to help steer through decisions, facilitate transactions, and help build an understanding of longer term issues.

10. The legal and commercial environment is satisfactory, and is improving in those areas where deficiencies remain. Company law, taxation policy and foreign inward investment regulations are well developed. Legislation dealing with omissions and inconsistencies in existing corporate legislation is expected to be enacted by the end of 1996. Nepal operates no critical restrictions on profit and dividend remittances which would inhibit privatisation of small/medium enterprises.

Privatisation Candidates

11. A list of the candidates proposed by the MoF in its 1996/7 programme is set out below. Most of these companies are small, and some are believed to be making substantial financial losses. Small/medium enterprises are scheduled for privatisation in 1997. Preparation will begin for larger enterprises in the service and financial sectors.

Industry

1. Bhaktapur Brick Factory Ltd 2. Herbs Production and Processing Co. Ltd 3. Janakpur Cigarette Factory Ltd. 4. Nepal Rosin And Turpentine Ltd. 5. Himal Cement Company Ltd. 6. Morang Sugar Mills Ltd. 7. Biratnagar Jute Mills Ltd.

Services

8. Industrial District Management Ltd. 9. Nepal Transport Corporation (Trolley Bus Service Only) 10. Royal Nepal Airlines Corporation

Social Sector

11 . Gorkhapatra Corporation

Financial Sector

12. Nepal Bank Ltd. 13. Rastriya Banijya Bank 14. Nepal Industrial Development Corporation 15. Nepal Housing Development Financing Co.

Note: it is anticipated that assistance for the privatisation of financial sector enterprises will be forthcoming from the World Bank.

ANNEX 3A

TERMS OF REFERENCE FOR CONSULTANCY

Introduction

1 . To ensure effective implementation of its programme of privatising state enterprises His Majesty's Government of Nepal (HMGN) wishes to strengthen its Privatisation Cell, located in the Ministry of Finance, Kathmandu.

2. The consultants will be responsible for delivering the outputs in the Log Frame by assisting HMGN implement its programme and develop a strategic plan for the longer term. The consultancy will require inputs consisting of a Resident Adviser who will work under the overall supervision of the head of the Privatisation Cell of the Ministry of Finance (Joint Secretary) and provide monitoring information for SEADD as described in the Project Memorandum, and short term specialist inputs as described in the Project Memorandum subject to agreement with SEADD. It is anticipated that advice will focus on the privatisation of enterprises others than in the financial sector and areas addressed by USAID (see Annex 2).

Activities

3. Specific functions of the Adviser will be to:-

a} facilitate the organisation and operation of the Privatisation Cell;

b) assist members of the Privatisation Cell on relevant matters relating to the 1996/97 and future programmes;

c} review and help clarify the objectives of HMGN's proposed privatisation programme;

d) analyse specific targets in the 1996/97 privatisation programme and advise on their suitability (including the timing of actual privatisation) ;

e) identify measures to enhance the success of the proposed privatisation programme;

f) advise on suitable techniques to privatise the relevant companies;

g) assist in identifying potential investors, particularly foreign investors;

h) assist in all negotiations with HMGN authorities, potential investors and other relevant parties in order to complete privatisation sales;

i) train local staff in key aspects of the privatisation process;

j) assist in all press and media related matters;

k) coordinate, as necessary, the activities of the Privatisation Cell within the Ministry of Finance with other relevant HMGN authorities.

I) agree arrangements with the MoF and SEADD for a post project review of enterprise performance during 1998/99, including detailed ToRs.

4. The Adviser will be located within the Privatisation Cell of the Ministry of Finance and will report to the head of the Privatisation Cell. He/she will liaise in country with the British Embassy and other donors as necessary.

Skills/Experience

5. The Adviser should have considerable experience and knowledge of privatisation processes. He/she should have strong facilitation and interpersonal skills, experience of working in low income countries, preferably in the region, and be prepared to acquire a basic working knowledge of Nepali.

Timing

6. It is expected that the appointment would begin in December 1996 and run for a duration of 18 months.

ANNEX 38

TERMS OF REFERENCE FOR RESIDENT ADVISER (Singleton)

Introduction

1. To ensure effective implementation of its programme of privatising state enterprises His Majesty's Government of Nepal (HMGN) wishes to strengthen its Privatisation Cell, located in the Ministry of Finance, Kathmandu, through the appointment of a Resident Adviser.

2. The overall responsibility of the Adviser will be to deliver the outputs described in the project Log Frame by assisting HMGN implement its programme and develop a strategic plan for the longer term. It is anticipated that advice will focus on the privatisation of enterprises others than in the financial sector and areas addressed by USAID (see Annex 2).

3. The Adviser will work under the overall supervision of the head of the Privatisation Cell of the Ministry of Finance (Joint Secretary), and will provide monitoring information to SEADD as described in the Project Memorandum. The Adviser will draw on limited short term specialist inputs, as described in the project memorandum, subject to approval by SEADD, and by liaising with PAND as necessary.

Activities

4. Specific functions of the Adviser will be to:-

a) facilitate the organisation and operation of the Privatisation Cell;

b) assist members of the Privatisation Cell on relevant matters relating to the 1996/97 and future programmes;

c) review and help clarify the objectives of HMGN's proposed privatisation programme;

d) analyse specific targets in the 1996/97 privatisation programme and advise on their suitability (including the timing of actual privatisation);

e) identify measures to enhance the success of the proposed privatisation programme;

f) advise on suitable techniques to privatise the relevant companies;

g) assist in identifying potential investors, particularly foreign investors;

h) assist in all negotiations with HMGN authorities, potential investors

and other relevant parties in order to complete privatisation sales;

i} train local staff in key aspects of the privatisation process;

j) assist in all press and media related matters;

k) coordinate, as necessary, the activities of the Privatisation Cell within the Ministry of Finance with other relevant HMGN authorities.

I) prepare ODACO recruitment forms for short term inputs for approval by SEADD and liaise as necessary with PAND, to ensure timely short term inputs.

m) agree arrangements with the MoF and SEADD for a post project review of enterprise performance during 1998/99, including detailed ToRs.

4. The Adviser will be located within the Privatisation Cell of the Ministry of Finance and will report to the head of the Privatisation Cell. He/she will liaise in country with the British Embassy and other donors as necessary.

Skilis/Experien ce

5. The Adviser should have considerable experience and knowledge of privatisation processes. He/she should have strong facilitation and interpersonal skills, experience of working in low income countries, preferably in the region, and be prepared to acquire a basic working knowledge of Nepali.

6. The Adviser will be familiar, prior to commencing work in Nepal, with ODA procedures relating to Project Cycle Management, in particular: procedures for the recruitment of short term staff, project monitoring and PCRs. Suitable pre-departure briefing will be arranged to achieve this during which the Adviser will also familiarise themselves with appropriate sections of ODA's Office Instructions.

Timing

7. It is expected that the appointment would begin in December 1996 and run for a duration of 18 months.

pm\privlltis

7

ANNEX VIII

INDICATIVE BUDGET

Project Cost Summary

Enterprise Sale Costs Long Term Advisor Costs Other Direct Costs Total

Local Funds

154,420

549,500 703,920

Dollars

157,205 462,200

72,150 691,555

Project Costs Summary-Dollars

Enterprise Sale Costs Long Term Advisor Costs Other Direct Costs

Total

157,205 462,200

72,150

691,555

Enterprise Sale Costs-Dollars

Labor Local Trav. Per Diem Int'l Travel

Pokhara Dairy Business Valuation 16,613 80 1,800 5,200

Dairy Development Corp. Business Valuation 23,258 240 2,520 5,200 Sector Specialist 16,613 240 1,800 5,200

Birganj/Lumbini Sugar Mills Business Valuation 23,258 80 2,520 5,200

Janakpur Cigarette Factory Business Valuation 16,613 80 1,800 5,200

Herbs Production Business Valuation 16,613 80 1,800 5,200

Enterprise Sale Costs Summary 112,965 800 12,240 31,200

Total Enterprise Sale Costs 157,205

Long Tenn Advisor Costs-Dollars

Labor Post Differential Housing Education Allowance Air Fares Shipping of Pers. Prop.

Total Long Term Advisor Costs

Days Cost

360 364,320 360 31,680

12,600 20,000 15,600 18,000

462,200

Other Direct Costs-Dollars

Local Travel-L.T. Advisor DBA Medex Medical Exam Visas Airport Transfers International travelltrainingl

2,160 17,230

360 900 300

1,200

additional short term assistance 50,000 --~:...;;..;...;;...

Total Other Direct Costs 72,150

Other Direct Costs-Dollars

Local Travel-L.T. Advisor DBA Medex Medical Exam Visas Airport Transfers

Total Other Direct Costs

2,160 18,471

360 900 300

1,200

23,391

Enterprise Sale Costs-Rupees

Labor Travel Per Diem Pokhara Dairy

Asset Valuation 102,060 2,835 23,814 Market Study 0 0 0 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 . 1,418 3,402 Legal Services 141,750 1,418 3,402 Accounting 56,700 1,418 3,402 Other 56,700 1,418 3,402

Dairy Development Corp.

Asset Valuation 306,180 8,505 71,442 Market Study 0 0 0 Redundancy Analysis 170,100 4,253 10,206 Financial Analysis 255,150 4,253 10,206 Legal Services 425,250 4,253 10,206 Accounting 170,100 4,253 10,206 Other 170,100 4,253 10,206

Birganj Sugar Mill

Asset Valuation 226,800 2,835 54,432 Market Study 56,700 1,418 6,804 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

Lumbini Sugar Mill

Asset Valuation 170,100 2,835 37,422 Market Study 0 0 0 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

Hetauda Textile

Asset Valuation 170,100 2,835 37,422 Market Study 56,700 1,418 3,402 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

\\

Enterprise Sale Costs-Rupees

Labor Travel Per Diem Nepal Rosin & Turpentine

Asset Valuation 141,750 2,835 30,618 Market Study 56,700 1,418 3,402 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 56,700 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

Janakpur Cigarette Factory

Asset Valuation 226,800 2,835 54,432 Market Study 56,700 1,418 3,402 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

Cotton Development Board

Asset Valuation 170,100 2,835 0 Market Study 56,700 1,418 0 Redundancy Analysis 56,700 1,418 0 Financial Analysis 56,700 1,418 0 Legal Services 113,400 1,418 0 Accounting 56,700 1,418 0 Other (Cotton Ag. Spec.) 56,700 1,418 0

Herbs Production

Asset Valuation 226,800 2,835 54,432 Market Study 56,700 1,418 3,402 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 85,050 1,418 3,402 Legal Services 0 0 0 Accounting 56,700 1,418 3,402 Other 0 0 0

Nepal Tea Development Corp.

Asset Valuation 567,000 8,505 129,276 Market Study 113,400 1,418 20,412 Redundancy Analysis 113,400 2,835 6,804 Financial Analysis 170,100 2,835 6,804 Legal Services 170,100 2,835 6,804 Accounting 113,400 2,835 6,804 Other 0 0 0

Enterprise Sale Costs-Rupees

Labor Travel Per Diem Agricultural Lime

Asset Valuation 113,400 0 0 Market Study 56,700 0 0 Redundancy Analysis 56,700 0 0 Financial Analysis 56,700 0 0 Legal Services 0 0 0 Accounting 56,700 0 0 Other 0 0 0

Agricultural Projects Services

Asset Valuation 56,700 0 0 Market Study 56,700 0 0 Redundancy Analysis 0 0 0 Financial Analysis 56,700 0 0 Legal Services 56,700 0 0 Accounting 56,700 0 0 Other 56,700 0 0

Salt Trading Corporation

Asset Valuation 0 0 0 Market Study 0 0 0 Redundancy Analysis 0 0 0 Financial Analysis 56,700 0 0 Legal Services 0 0 0 Accounting 0 0 0 Other 56,700 0 0

Biratnagar Jute Mill

Asset Valuation 340,200 2,835 85,050 Market Study 0 0 0 Redundancy Analysis 56,700 1,418 3,402 Financial Analysis 56,700 1,418 3,402 Legal Services 113,400 1,418 3,402 Accounting 56,700 1,418 3,402 Other 0 0 0

Enterprise Sale Costs Summary 7,835,940 130,410 789,264

Total Enterprise Sale Costs 8,755,614

Other Direct Costs-Rupees

Office Support 4WD Vehicle Purchase Insurance Maintenance Fuel Driver

Computers Software (2 Sets of MS Office) 1 Inkjet Printer 2UPSs

Photocopier Office Furniture & Refurbishment

Administrative Assistant Contract Administrator Translation Services 416(8) Audit Cost

Communications Printing Office Supplies

Office Support Sub-Total

Program Support Training-6 Privatization Officials Training-3 Government Officials

Legislation Review Gratuity Payments Skills Retraining Public Awareness Program

Program Support Sub-Total

Total Other Direct Costs

1,417,500 113,400 51,030

153,090 204,120

226,800 28,350 39,690 17,010

170,100 113,400

204,120 204,120 204,120 907,200

1,530,900 680,400 510,300

6,775,650

2,835,000 1,417,500

283,500 11,340,000 2,835,000 5,670,000

24,381,000

31,156,650

ANNEX IX

PROPOSED PRIVATIZATION SCHEDULE

Proposed Privatization Schedule

1996 1997 199B Nov Dec Jan Feb Mar I Apr I May I Jun Jul Aug Sep. Oct Nov. Dec. Jan Feb Mar A r MIIY_

I I I I Lumbini Sugar Mills

I I I I Pokhara Milk Supply ~ Start

I I • Offering Janakpur Cigarette A Bids Rec'd

I I I • Contract Sianed Agri-Lime Industry

I Rosin & Turpentine

I I I Herbs Production

I I Hetauda Textile Ind.

I I I Cotton Dev. Board

I Birgunj Sugar Factory

I I I Binrtn8llar Jute Mill

I Salt Trading Corp.

I I I Morang Sugar Mill

Agr, Projects Services I

Dairy Dev. Carp. Remainder I I L I I

T es Development Corp. I I I ---- ------ I I I I I .... I

"'~--

ANNEX X

MONITORING QUESTIONNAIRE

Statement Of Facts

Name of enterprise:

Year of privatization:

Title 1992/93 1993/94 1994/95 1995/96 net change

1. Total Production a) Quantity b) Value 2. Total Sales a) Quantity b) Amount 3. Net Profit/Loss

(in value) 4. Divi.denci

(in value) 5. Av. Sales Price

( of the product having highest sales)

6. llevenue a) Sales Tax b) Incane Tax c) Excise d) Custans e) other Taxes 7. Debt Serv:i.cing To

BMG 8. Investnent

8.1 New Investnent a) Equity b) Loan

8.2 Total Investment a) Equity b) Loan

9. Errployment

9.1. Total Nurrbe:r a) Production i) Pel:manent

ii) Terrporcu:y -":;b) Administration

i) Permanent ii) Terrporaxy

9.2. Training' provided a) Production b) Administration

9.3. Incentives a) Salaxy Increarrents b) Perk c) Redundancy Package

10. Labour Relation

10.1. FOJ:mation of Labour Union

10.2. 1IJ:plication Of Labour Act

10.3. Issues Settled 1l. Export

12. Inport a) Raw matrial b) Machinary & Parts c) Others .

13. Fo%ei~ exchange F.,..,..,..,;n".

14. Work Environment a) Hygienic

Conditions b} Lighting c) Air Ventilation d) Fire

Extinguishers e) Canteen F) Toilet

15. Carmuni ty Welfa:re a) Cash donations: b) Carmuni ty works:

16. others a) Capacity

Expansion b) Product

Diversification c) Rehabilitation

Manual

Instructions to fill in the table: 1. Total production: l.a Fill in the total production in the related year cell. l.b Fill in the monetary value of total production in the related year cell.

2.Total Sales: 2.a Fill in the total quantity sold in the related year. 2.b Fill in the monetary value of the total quantity sold in the year.

3. Net profit/ loss: Mention net profit/loss incurred by the enterprise in the related year.

4. Dividend: Mention total amount of dividend in monetary value distributed to shareholders in the year.

5. Average Sales Price: Mention the price of the product having highest sales.

6. Revenue: 6.a Mention total amount of sales tax paid throughout the year. 6.b Mention total amount of income tax paid throughout the year. 6.c Mention total amount of excise duty paid throughout the year. 6.d Mention total amount of customes paid throughout the year. 6.e Mention the other taxes paid throughout the year.

7. Debt Servicing To HMG: Insert the amount paid by the enterprise to HMG as repayment of interest and principal of loan taken by it from HMG.

8. Investment: ~~a Mention total new investment made in the enterprise during the year in the form of equity. S.b Mention new investment through borrowing undertaken by the enterprise.

9. Employment:

9.1 Total Number: Mention the number of total employees working in the enterprise in the year. 9.1.a Mention the number of total employees in production. 9.1.b Mention the number of total employees in administration.

9.2 Mention the total number of employees trained during the year. 9.2.a employees 9.2.b employees

Mention trained Mention trained

9.3 Incentives

the total number during the year. the total number during the year.

of production

of administrative

9.3.a Mention total increaments (in monetary terms) in the salary of employees after privatization of the enterprise. 9.3.b Mention any perks (payoffs) provided to the employees after privatization. 9.3.c Mention redundancy package, if any, given to the employees after privatization of enterprise.

10. Labour relation 10.1 Answer whether any labour union is formed after privatization. 10.2 Answer whether labour act was imediately applied after privatization. 10.3 Mention the number of labour issues settled after privatization

11. Mention total value of export by the enterprise after privatization.

12. Import 12.a Insert monetary value of total import of raw materials by the enterprise throughout the year. 12.b Insert monetary value of total machinery and parts import by the year. 12.c Insert monetary value of other imports by the enterprise.

13. The total amount of foreign exchange that the enterprise saved through import substitution plus it earned through export minus total amount it spend to import raw materials, machinery and parts and other necessary items.

14. Work Environment l4.a Mention addition in cleanliness,sanitation, drinking water, medical facilities and any other arrangements to improve the hygenic condition in the factory after privatization. 14.b Mention the lighting arrangements made in the workplace after privatization. 14.c Mention any addition or improvement made in the air ventilation system of the workplace after privatization. 14.d Mention the total number of fire extinguisher. 14.e Mention addition or improvement made in the canteen of the enterprise after privatization

14.f Mention addition or improvement made in the toilets of the enterprise after privatization.

15. Community Welfare 15.a Insert cash donations made by the enterprise for social welfare after privatization. lS.b Mention any social works performed by the enterprise after privatization. 16.0thers 16.a Mention any expansion work the enterprise after privatization. 16.b Mention the names of additional products that the enterprise has commenced to produce after privatization. 16.c Mention any restoration effort carried by the enterprise to make it economically viable.m