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Nepal Needs Neither NOC nor NAC

By John Child in Kathmandu

How does a monopoly provider of an essential commodity lose over $80 million per year? And how can a once-dominant company be struggling to hold a ten percent share in its business?

The answer is that both of them ignored basic economics. The problem is simple and so is the solution: close both companies and let the free market take over.

State-owned businesses are rarely a good idea, and the Nepal Oil Corporation is an example of why. As a monopoly it precludes competition, the best way to ensure efficient, high-quality, and fairly priced services to consumers. Setting prices by committee is a terrible alternative to the free market.

NOC operates at a loss every month because of its mandate to subsidize kerosene, the cooking and heating fuel of the poor, and the diesel fuel that powers the trucks which bring vital imports, including fuel, into the country. That's a valid social policy, but when the Ministry of Commerce and Supplies and the Finance Ministry disagree on the policy, we all end up in long queues. If the government would simply budget for the losses that the policy causes, and then pay their bills to Indian Oil on time, we would at least have a stable supply.

But what a foolish and inefficient way to guarantee supply! It would be much easier to simply allow Nepali companies to purchase fuel from Indian Oil or any other supplier, transport it, and then sell it at their own pumps or resell it to dealers. The resulting competition would ensure the supply, price the fuel at fair, rest-of-world prices (but no higher), and reduce the adulteration of fuel: Customers would shun petrol dosed with lower-cost diesel or naphtha and buy instead from dealers offering pure petrol. Voila! No more queues and cleaner air.

If the government believes that kerosine and diesel prices have to be kept artificially low, there's a simple and efficient mechanism for that - reduce the tax rate on those fuels. Remember, we aren't just paying for the cost of our petroleum products. We are also paying hefty taxes on that cost. If the Finance Ministry took a $60 million loss on fuel taxes annually rather than bailing out NOC every few months, they (and the nation) would still be ahead.

But beware trying to thwart the market: petrol and diesel sold at lower cost here than in India would be smuggled back over the border, costing the government money with every liter. Better to keep the tax revenue: Use it to help transporters with better roads and lower import duties, and invest money into improving the income-generating capacity of the poor.

The case against Nepal Airlines is even simpler. While no longer a state-owned company, they remain hobbled by political interference. Given this crippling inefficiency, they have a negative growth rate and a huge scrapyard of domestic aircraft that can't fly.

Fortunately nearly 20 years of "open skies" in the airline business has allowed international airlines and private domestic carriers to serve Nepal. Those companies compete against each other and offer efficient services. The best of them, like Yeti and Jet, have thrived. Airlines not offering fair prices and good service have failed.

Speaking of failure, NAC once held over 50 percent international market share on flights into Nepal. It's now down to less than 10 percent. The last annual report on the company's web site (2005-2006) showed them flying, on average, only two-thirds full. For the 60 days prior to April 15, 2011, NAC flights on the lucrative Kathmandu-Dubai route arrived late 55 percent of the time.

Even the best management can't save NAC, and there's no reason to try. Other airlines would happily pick up the passengers Nepal Airlines now carries and add flights where necessary. Internationally, NAC wouldn't be missed. And letting private domestic airlines carry NAC's passengers at a profit would increase tax revenues.

The sense that Nepal "needs" a national airline is just emotional, and politicians who exploit it for personal gain are indulging in demagoguery.

Competition works. It used to be hard to fly into Kathmandu, but now it's easy and cheap. Domestic travel has benefited even more. All that's left is to let the moribund NAC expire. Eliminating NOC and allowing competition in the energy sector would be an equally large improvement for the country.

And as a side benefit, opportunities for corruption would be reduced. Win, win, win.

John Child is The NewsBlaze Nepal Correspondent, a journalist in Kathmandu who writes about goings-on in and around Nepal and her neighbors.