Developing Union Strategy in the Context of Restructuring and Privatization of Electric Power Sector in Nepal

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Posted on December 12 2003

1. Privatization of Electricity Sector
Though there are certain private initiatives for captive and hydropower generation, a large domain of electricity sector of Nepal is still the state control. Nepal Electricity Authority, which has the mandate for generation, transmission and distribution, is being managed by a Board, which is constituted by the government and led by the Minister for Water Resources as a chairperson of Board.

As the other sectors of Nepalese economy, Electricity sector also began to enter into the global process of liberalization and privatization since a decade back, when donors pushed the agenda by commenting negatively on NEA's efficiency, financial strength and capability to function as a producer and provider of transmission and distribution services. The donor dependent Government of Nepal responded quickly obviously in a positive way to the comments of the donors with legal and policy reforms in favour of liberalization and privatization of Electricity sector of Nepal.

The nature of Nepalese Electricity sector is different from the industrial sector. Therefore, the term privatization may carry different meaning to industrial and electricity sector as least in case of Nepal. Privatization of Electricity sector may include both the private sector development and privatization of the utilities previously owned and operated by Nepal Electricity Authority, while the privatization of the state owned enterprises may include only the privatization of government managed industries.

In order to attract and motivate local and private sectors in the Electricity sector, HMGN adopted Hydropower Development Policy 1992, Electricity Act 1002, and the Electricity Regulations 1993. The other relevant policies for the private investors, which HMGN adopted in 1992, were the Industrial Policy and the Foreign Investment and One-Window Policy. Based on those policies, HMGN promulgated the Industrial Enterprises Act and Foreign Investment and Technology Transfer Act in the same year. These allow private entities to build, own, and operate small and medium scale hydropower schemes including transmission and distribution facilities. Moreover, NEA has already leased out some of its existing small hydro schemes to private sectors.

Very recently Government of Nepal adopted an ever-new Water Resource Strategy, which among other re-emphasizes the privatization of NEA wants to see the role of NEA mainly in transmission services. Following the Strategy, Hydropower Development Policy 2058 came from the side of government by revision and updating previous policy more in favour privatization and private sector development. This policy has allowed private sector or the joint venture of private and public sectors to invest in the generation, transmission and distribution of electricity. In addition, it has given arrangements for the functional decentralization of NEA's work. It has also tried to attract local agencies/cooperatives or community organizations to the distribution services.

With a decade long exercise for the privatization of Nepal's electricity sector, following institutional forms are found in existence and operation to this date:

• Leasing out of NEA run Small Hydropower Plants
Managing Small hydropower plants with the participation of private sector through long term lease contract basis was one of the modality followed by NEA to reduce financial losses, increase profitability and reduce outage rates. As a first step in this regard, NEA had made an experimental approach in December 1993 by leasing out its five SHPs to the private operators for a period of 20 years.

• Joint Venture Between Public and Private sector
NEA is developing is Chilime Hydropower project (20 MW), as a joint venture between NEA , NEA's staff and general public as equity partners and raising long-term debt from internal financial market. For this purpose, a public limited company named Chilime Hydropower Company Limited has already been formed in 1995 by NEA and NEA staff. Financial structure of the company id built around debt equity ratio is 60:40. Out of the total 40 percent equity capital, 20.4 percent will belong to NEA, 10 percent to NEA staff, and 9.6 percent to public.

• Private sector participation in hydropower sector of Nepal.
To this date, about 105 private companies were awarded some sorts of license of develop power projects. However government cancelled the licenses of 53 companies of the ground that they did not fulfil the responsibilities they committed. The interest for getting license for hydropower project id increasing day by day. Khimti (60 MW), Bhotekoshi (36 MW), Jhhimruk (14 MW) and Adhikhola (5 MW) are the main hydropower projects already under operation by private sector.

• Policy intervention to decentralize NEA functionally
NEA is receiving pressure from the donors and the government to go ahead with functional decentralization. The functional decentralization of NEA is expected to generate efficient services to the customers, as it would be possible to specialize by a separate institution on one individual function. If this happened. However, with the new system the natural benefits of natural monopoly of NEA will be weakened and hence NEA will not be in a position to reap benefits of natural monopoly. Because of their network character, electricity markets require high fixed cost investments and hence display the features of so called “natural monopoly” that is a monopolistic supplier provides for the most efficient allocation of economic resources. Standard neoclassical theory admits that competition does not produce positives results if an industry shows natural monopoly features. A single supplier can produce at lower costs because of extraordinary economies of scale (declining average costs as production expands), economies of scope (lower cost of producing more than one output jointly), and economies of network (lower-cost of production because of vertical and horizontal integration). Competitors would not, under normal conditions, be able to compete in such market because of the extremely high fixed cost needed to enter and stay in the market.

2. Impact of Privatization on worker in other than Electricity sector
A review of the impact of privatization in other than electricity sector is necessary to anticipate the likely impact of privatization in Electricity sector. Privatization in electricity sector is still in infancy if we define, as it is usually done, privatization and private sector participation differently.

The preparation for the privatization state owned enterprises in Nepal started as early as 1980. However, the process got momentum after 1992, when the government of Nepal made legal and institutional arrangements to lead the process ahead.

The privatization SOEs has profound impact on workers. These impacts can be summarized as follows:

• In spite of the arrangements of" No redundancy clause", feeling of job insecurity is high among the workers.
• New owners are reported to harass workers, probably as a way to get rid of them.
• Unfavourable terms and conditions, like frequent transfers to the inconvenient places, or to unsuitable jobs or strict control and monitoring of their behaviour may have led them to give up their jobs.
• While the number of workers in PSEs is being reduced, the reduction does not mean that the work is being done by a reduced workforce, but that part of the work is being done by casual and contract labour.
• Privatization is leading to exploitation as regular jobs are getting converted into low paid jobs depriving the workers social security and other essential benefits like housing, medical and children's education.
• Job losses have occurred in almost all of the privatized units. Those loosing jobs are mainly middle level workers.

• There is growing tendency amongst the new managers to go for contractual, daily wage, price rate wage hiring in the privatized units. This is the way to avoid long- term risk and commitment of carrying a permanent labour force. This is also a way to avoid possible labour agitation and trade unionism.
• The available information of privatized units showed that the increase in the salary and benefits is being compensated by the increase in work hours or reduction in other facilities and leaves.
• During the early period of privatization, there was a growing evidence of industrial disputes .
3. Impacts of Privatization of Electricity sector on workers/staff
Impact of privatization in Electricity sector of Nepal on workers can be looked from different perspectives. For the simplicity, we can we can present the impact on two by two matrices as follows:

S.NO.	Form of Privatization	Impact on Workers
1.	Leased out SHP	- Apart from the key personnel like branch-in-charge and managing director, other staff's responsibilities and authorities were not stated. In such a situation, the staffs are bound to work on orders of managers. - Formal and regular evaluation was not carried in the leased out SHPs. This was natural as there were no defined responsibilities and roles, against nothing could be evaluated. - Not in all leased out SHPs, permanent staff enjoyed benefits like insurance, gratuity, provident fund and medical allowance. And a noteworthy thing is that almost all the new staff hired after the lease were either contracted or kept on daily basis.
2.	Joint venture (public/private)	- Chilime type joint venture might be a good beginning in favour of workers. However any final word can be said only after looking into how it operates and how it benefits to the workers that actually work in Chilime Hydropower
		- Workers share in hydropower plant provides opportunity to workers to know practically the managerial, policy level and enterprise level works, which may help them to determine their strategic move in those power projects or offices where they work.
3.	License to Private sector	- Current policy of purchasing the power produced by independent power producers by NEA has directly impacted the financial health of NEA, and there by the benefits and long term job security of NEA workers. In this way, even the private sector development in Electricity sector of Nepal affects NEA workers as if NEA itself was privatized. - In the attempt of privatization or private sector development, Government is providing a number of concessions and guarantees to attract the private sectors. The private sector, once entering into the power purchase agreement will not be sharing any risk (even market risk), just acquiring profít. This has threatened the sustainability of NEA. - In principle, private companies are interested in cheap labour and higher prices in order to operate as profitably as possible. Seemingly, more work for the same level of benefit is expected. - Dehumanization and lack of dignity of labour may prevail when workers have to face the problem of unemployment and under employment.
4.	Functional decentralization	- Functional decentralization of NEA will weaken the monopoly power of NEA. After this, the benefits that NEA is enjoying because of extraordinary economies of scale, economies of scope and economies of network may not come to NEA. This will certainly affect the strength of the organization. - The international and, to some extent the national climate is such that NEA will have to be confíned more to the transmission services and will be withdrawing gradually from generation and distribution services. In the course of this squeeze, redundancy of workers may appear. This will bring a difficult situation to the concerned Trade Unions. The next impact on workers might come from the divinizing of the membership of a single trade union. It is more likely that each decentralized units will have their own trade union, though there might be a federation among these unions. The difference in the strength of a union having a large number members and the union having a few number of workers is obvious.

4. Union Strategy in the Context of Restructuring and Privatization of Electric Power Sector

Union strategy should be forward looking and focus on improving the working conditions, salaries, benefits and dignity of workers on a sustainable basis in the factory office and societal environment. Production of goods and services or in simple terms the revenue/income generated in a factory and office is the result of the various roles and responsibilities played by workers, managers and owners, whether a state, corporation, company or others. Bargaining for more share by each type of stakeholders is natural. However, the appropriation of the reasonable share of any stakeholder by some stakeholder may not be in the long- term interest of the gainer. It is because other stakeholders may loose interest in the business and the entity itself may collapse. Union strategy needs to be very much balanced and prudent particularly in the countries like Nepal where both the state owned enterprises and the private enterprises have very weak financial status and commitment to run the enterprise. Unions should learn to live with privatization and strive for better shares with close watch and intervention in policy issues and their proper application.

In the context of Nepalese electricity sector, the Trade Unions should follow following strategies:

General

• Union members should be made aware that the existence of the factory is a necessary and the good financial health of the entity is the sufficient condition or the continued remunerative employment. Unions, on the other hand, should argue with the management that labour is the crucial factors of production in the production process and hence it deserves its due share in the returns from the business in terms of benefits and facilities.
• Union should strive for the representation and participation in the decision-making units so that they can understand the issues in discussion and contribute to decision making.
• Trade Union should learn to live in adverse situation so that they could work to turn the situation into favorable one.
• Unions should establish a sectoral network of workers in order to bring together the all workers working both in state owned enterprises of private organizations.
• The question how should be privatized rather than what should be privatized should be the professional interest of the Union.
• Specific concerns of Trade Unions and workers should be their job and income security and social security, which are threatened by downsizing the office, de-unionization of the office and new HR policies.
• Trade Union should give attention to explore new alternatives to fiscal burden, the issues of performance rather than ownership, objectives of privatization and nationalization of losses and privatization of profits.
• Trade Union should strive for improving performance and images of Pes, workers long-term interest lie in making their enterprises viable and competitive.
• Trade Union should examine the issues on merits not mere ideological grounds, should examine what change will occur in work organizations, how will be the rights of the employees will be protected with regard to the job, income and social security and continuation of benefits and securities, arrangements for retaining and redeployment, transfer redundant workers to a common pool and work for their absorption in other government jobs and try to improve compensation and social safety nets for those whose jobs become redundant

Specific to Electricity Sector

• Workers should keep close eyes on the agreement with the private sector, that affects the financial health of NEA in the long term. For example, now it is heard that two power purchase agreements with private sector done previously have now affected the financial health of NEA.
• In the leasehold small hydropower plants major repair and maintenance investment is not taking place, which can threaten long- term employment of the workers. Therefore the status of leasehold hydropower projects may be the interest of he workers.
• Union should have support the modality of Chilime Hydropower project, which allows workers to invest in the project.

• It is extremely important that the worker and low income consumer interest do get more involved in the process of change. The two aligned can form a formidable and powerful coalition, if informed and organized.