Report

On
"CG in State Owned Enterprise"

Submitted by:
Joshna Basnet
Term VI
Section A

Submitted to:
Resham Raj Regmi
Faculty of Corporate Governance
Ace Institute of Management
6th February, 2023
 Abbreviations

OECD: Organization for Economic Co-operation and Development

SOE: State Owned Enterprises

PE: Public Enterprises

 Table of Contents

Background........................................................................................................... 1

Introduction .......................................................................................................... 4

Definition and Origin of State-Owned Enterprises .............................................. 5

Formation and Management ................................................................................. 6

Overall Operational Status of Public Enterprises................................................. 7

Ownership Structure ............................................................................................. 9

Rationale for Developing Guidelines ................................................................. 10

Best Practice and Guidelines for Corporate Governance Operations in SOE.... 11

Challenges .......................................................................................................... 21

The Road Map for Operating Public Enterprises in Nepal ................................ 22

Conclusion .......................................................................................................... 24

References .......................................................................................................... 25
Background

After WWII, public enterprises (PEs) were founded and pushed with the goal of creating a
welfare state through a planned development process. PEs' operational goals are to secure the
supply of critical commodities and services, meet the demand for large-scale projects, create
market equilibrium, maintain price stability in areas where profit margins are low and risk is
high, and effectively implement government policies and programs. PEs are in operation
globally in the service sector, industrial sector, trade sector, financial sector, public utility
sector, and manufacturing sector, either with the entirety or the majority of shares under state
ownership, in response to these demands and reasoning.

PEs have existed in Nepal since the 1930s (B.S. 1990s) with the following core objectives: to
provide essential goods and services related to daily life of all citizens at an affordable price,
to ensure easy access to goods and services by citizens, to create employment opportunities,
to lay the foundation of physical infrastructures for development, to develop a self-reliant and
independent economy, to assist in import substitution and export promotion, and to develop a
self-sufficient and independent economy.

Biratnagar Jute Mill, Nepal's first public venture, was established in the year 1936 (1993
B.S.) to coincide with the start of the First Five Year Plan (1956-1961). During this time, the
government developed public firms in the banking, commercial, and industrial sectors, such
as National Trading Ltd., The Timber Corporation of Nepal, and National Construction
Company Ltd. During the Fourth Five-Year Plan, the formation of state businesses appears to
have accelerated significantly. By the end of the Seventh Five-Year Plan (1985-1990), the
total number of public firms held entirely by the Nepalese government, as well as the
majority of their shares, had risen to 62.

There are currently 44 PEs: 10 in the industrial sector, 5 in the trading sector, 10 in the
services sector, 5 in the social sector, 5 in the public utility sector, and 9 in the financial
sector. Only 33 PEs are now operational out of the total. Janakpur Cigarette Factory, Butwal
Spinning Mills Ltd., Nepal Engineering Consultancy Service Center Ltd., and National
Trading Company Ltd., although their legal existence, are not engaged in any business or
commercial activity. Metal Company Ltd. is still in the planning stages.

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The commercial operations of Nepal Railway Company Ltd. have yet to begin due to the
ongoing construction of a new railway track. In the fiscal year 2019-2020, two new public
enterprises were added to Nepal's list of PEs: Dhaubadi Falam Company Ltd. and Nepal
Infrastructure Company Ltd. Most PEs enjoyed monopoly at the time of incorporation, but
they failed to maintain it in following years. The creation of new PEs has recently coincided
with the government's policy priority of investing in hydropower generation and transmission
lines, public infrastructure construction, and the expansion of industrial districts.

PEs that relied on government protection and support were unable to compete in a market
that had become more competitive as a result of economic liberalization. When suitable
public companies with commercial capacities were privatized under the idea of privatization,
the rationale for the founding of PEs became a serious topic of debate. As a result, the
process of establishing public companies in key areas of government control, as well as the
act of empowering existing ones, did not proceed during this time period. Given the
importance of public firms in delivering public services, building infrastructure, and
supplying basic consumer products and services in Nepal, the norm of creating and operating
public enterprises has gradually altered through time. The establishment of PEs has been
critically important in the times of crises, disasters and calamities that might disrupt
production to supply chain.

So far, thirty state firms have been privatized in Nepal following the introduction of an open
market policy, in accordance with the government's divestment strategy. There were great
hopes following the privatization of public firms, such as an increase in investment in public
enterprises, a boom in output and employment possibilities, and general performance reform.
However, these expectations were not followed through on. Overall, the government has been
working on reforms in the areas of business competency, financial efficiency, service
delivery capacity, and entrepreneurship. One important reform is the consolidation of PEs
that have similar natures and purposes. National Industrial Development Corporation (NIDC)
Bank Ltd., for example, has merged with Rastriya Banijya Bank, and National Industrial
Development Corporation (NIDC) Bank Ltd. has merged with Rastriya Banijya Bank.

Food Management and Trading Company Ltd has merged National Trading Ltd. and Nepal
Food Corporation. Nepal Ban Nigam Ltd was founded by the merger of The Timber
Corporation of Nepal Ltd. and the Forest Products Development Board. PEs' service delivery
and financial performance improved noticeably as a result of the management reform, which

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gave them decision-making autonomy in the pricing and commercial sphere. These private
equity firms specialized in the banking and financial, trade, telecommunications, and public-
sector sectors. Food Management and Trading Company Ltd., Nepal Oil Corporation Ltd.,
and Salt Trading Corporation Ltd. all provided excellent goods and services throughout the
earthquake and pandemic. This exceptional achievement demonstrates the justification for the
significance of PEs in Nepal.

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Introduction

State-owned enterprises (SOEs) play an important role in the commercial and policy
landscapes of Asia's rising economies. Despite the worldwide trend toward privatization and
deregulation over the last two decades, SOEs have maintained a substantial presence in the
global economy and play a key role in the implementation of public policy in many advanced
and developing economies. In general, these institutions have played a significantly larger
role in developing nations' economic development than they have in rich countries.

SOEs continue to offer important infrastructure and public services in many nations,
including energy, transportation, water management, and natural resource exploration.
Governments also employ them to achieve a variety of economic, social, and political goals,
particularly in underdeveloped areas; provide services to the general public, including the
urban and rural poor; and address national security concerns.

Although SOEs continue to operate, the overall trend of state ownership is declining. The
degree and intensity of state capitalism, i.e., s an economic system in which the state plays a
dominant role in different sectors through government ownership and control, has mostly
differed across countries. In emerging nations, SOEs account for a bigger share of GDP than
in industrialized countries.

For example, SOEs account for 10% to 40% of GDP in Central Asian countries, compared to
5% in OECD countries (World Bank Group 2014). In Asia, SOEs account for approximately
30% of GDP in the People's Republic of China (PRC), 38% in Vietnam, and 25% in
Thailand. SOEs contribute for around 20% of global investment and 5% of global
employment (Kim and Ali 2017).

Understanding and tackling governance issues is critical for increasing economy-wide

productivity and growth. If an SOE can effectively convey its purpose and objectives, as well
as enhance its capacity to steer and manage resources, it will perform better. To improve
public service delivery and resource allocation, the government must professionally manage
SOEs on commercial terms and move them away from markets where the private sector can
more effectively provide services.

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Definition and Origin of State-Owned Enterprises

SOE are the companies/independent bodies which are wholly (100%) owned by the
government, the enterprises that have majority of shares owned by the government or the
enterprises that has minority of shares owned by the government but the government retains
the controlling vote in major financial and management decisions. It also includes a variety of
other organization models such as corporate and non-corporate structures.

It performs specific function and operate in accordance with a particular act. It basically
provides the basic organizations needed for the country to run such as water, electricity,
sanitation and transportation. For example, National Trading Limited, Nepal Airlines, Nepal
Bank Limited, Nepal Oil Corporation, NTC, etc.

SOEs have a diverse and expansive origin. Initially, SOEs were established to address market
failure and capital shortfalls, promote economic development, provide public services, and/or
ensure government control over the overall direction of the economy by infusing capital and
technology into strategic areas or in areas lacking private sector capacity or interest (Chang
2007).

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Formation and Management

In Nepal, public enterprises have been established under various acts. 33 PEs have been
founded under the Company Act, 7 under the Special Act, 2 under the Communication Act,
and one each under the Cooperative Act and the Corporation Act, out of 44 PEs with majority
government shareholdings. Various regulations and bylaws control the everyday and
managerial activities of public enterprises. The Public Service Commission, in accordance
with Nepal's constitution, has implemented standard of appointment and promotion in
organized institutions to preserve uniformity in the recruiting process and career growth.
Employee fringe benefits, on the other hand, have remained inconsistent between PEs.

PEs have three levels of operation and management: the General Assembly (GA), the Board
of Directors (BoD), and the management team. The GA's BoD is in charge of the overall
operation and management. The members of the Board of Directors must have a minimum of
five and a maximum of eleven members, according to the Company Act. According to the
nature of PEs formed under the Special Act and other relevant Acts, the number of BoD
appears to vary.

PEs are constituted by a variety of Acts and operate independently. Ministries regulate
government-owned commercial banks, securities exchanges, insurance companies, and other
PEs. Thirteen PEs are under the Ministry of Industry, Commerce and Supply (MoICS), eight
are under the Ministry of Finance (MoF), five are under the Ministry of Physical
Infrastructure and Transportation (MoPIT), four are under the Ministry of Energy, Water
Resources and Irrigation (MoEWRI), three must be under the Ministry of Communication
and Information Technology (MoCIT), three are under the Ministry of Culture, Tourism and
Civil Aviation (MoCTCA), and three are under the Ministry of Agriculture and Live
(MoEST).

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Overall Operational Status of Public Enterprises

PEs had a strong overall financial performance in FY 2018/19. The total operating revenue
has increased by 20.29 percent from Rs.390,926 million in FY 2017/18 to Rs.470,262 million
in FY 2018/19. In comparison to the previous fiscal year, the net profit increased by 12.36
percent to Rs.48,774 million. In comparison to the previous FY, dividend receipts have
reduced by 4.28 percent, with a dividend sum of Rs.9,470 million in FY 2018/19.

In compared to the previous FY, the entire accumulated profit and loss declined by 3.83
percent and 27.33 percent, respectively, in FY 2018/19. The total accumulated profit, on the
other hand, climbed by 28.93 percent to Rs.51,669 million. There are 26 profitable PEs, 5
with no transactions, and 13 with losses among the existing PEs. The commercial operations
of Janakpur Cigarette Factory Ltd., Vidhyut Utpadan Company Ltd., and Rastriya Prasaran
Grid Company Ltd. are yet to begin. Nepal Orind Magnesite Pvt. Ltd. and Butwal Spinning
Mill Ltd. are not in operation, while Nepal Railway Company Ltd. is just in the construction
phase of railway tracks. These PEs are not in the business of doing business, but they are
responsible for administrative costs. As a result, both the enterprises are at a loss. The net
profit of 26 PEs has increased by 17% and the net loss by 306.58% in the case of loss-
incurred 13 PEs.

In comparison to the previous fiscal year, shareholder fund/net worth increased by 21.01
percent to Rs.610,594 million in FY 2018/19. The total investment in PEs climbed by 27.36
percent during the review period, reaching Rs.464,593 million. The amount invested in shares
has climbed by 35.67 percent to Rs.271,839 million, while the amount invested in loans has
increased by 17.23 percent to Rs.192,753 million.

In FY 2018/19, unfunded liabilities climbed by 24.96 percent, while contingent liabilities

increased by 1173.37 percent. There has been a huge increase in contingent liabilities in this
FY due to the inclusion of unexplained liabilities of Nepal Bank Ltd. and unaccounted
deposit insurance obligations of Deposit and Credit Guarantee Fund in the previous FY. So
far, the Nepal Stock Exchange has listed six public firms. In comparison to the previous fiscal
year, the market capitalization has increased by 5.64 percent. It is impossible to provide an
accurate assessment of financial problems in the lack of frequent audit of some PEs, and so
financial discipline has not been maintained. It is critical that the Chief Executive Officer and

7
the Boards of Directors of all PEs be held accountable for conducting the audit within the
stipulated time.

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Ownership Structure

In the present 44 PEs in existence as of FY 2018/19, 23 PEs are entirely owned by the
government, while 21 PEs have a majority share (more than 50% ownership by GoN and
other company owned by GoN). The government owns all of the PEs in the social sector.
Dairy Development Corporation, Udayapur Cement Industry Ltd., Hetauda Cement Industry
Ltd., Janakpur Cigarette Ltd., Dhaubadi Falam Company Ltd. (in operation since 2019/20),
and Nepal Aushadhi Ltd. are all 100% owned by the Government of Nepal. In Nepal Orind
Magnesite Pvt. Ltd., GoN owns 83.33 percent, while the private sector owns 16.7 percent; in
Butwal Spinning Mill Ltd., GoN owns 89.82 percent, while the private sector and PEs own
10.18 percent; and in Nepal Metal Company Ltd., GoN owns 68.89 percent, while the private
sector and PEs own 31.11 percent.

The government owns all of the companies in the Trading Sector, including Food
Management and Trading Company Ltd. and Nepal Ban Nigam Ltd. The Government of
Nepal owns 100% of Nepal Transit and Warehousing Company Ltd., Nepal Airlines
Corporation, Civil Aviation Authority of Nepal, National Construction Company Nepal Ltd.,
Nepal Railway Company Ltd., Nepal Infrastructure Company Ltd. (in operation since FY
2019/20), and Nepal Engineering Consultancy Services Center Ltd., all of which are in the
service sector.

Nepal Water Supply Corporation and Nepal Electricity Authority are both entirely owned by
the Government of Nepal. In the Financial Sector, GoN and other GoN-owned organizations
own shares in Rastriya Beema Sansthan, Rastriya Beema Company Ltd., and Citizen
Investment Trust, while GoN owns the majority of the remaining PEs.

All PEs have a total paid-up capital of Rs.285,571 million, of which the Government of
Nepal owns 92.93 percent and the private sector and PEs possess 7.07 percent. According to
sectoral study, GoN owns 69.53 percent of the shares in the Financial Sector, with the
remaining 30.47 percent held by the private sector and PEs. GoN controls 97.32 percent of
the industry sector, 99.38 percent of the trading sector, 99.63 percent of the service sector,
100% of the social sector, and 98.28% of the public utility sector.

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Rationale for Developing Guidelines

The OECD aims to guarantee that state-owned firms operate in a healthy competitive and
regulatory framework, promoting efficient and open markets both at home and abroad. It
promotes national reforms in nations all over the world, guided by the OECD Guidelines on
Corporate Governance of State-Owned Enterprises, which have been agreed upon worldwide.

The OECD Guidelines on Corporate Governance of State-Owned Enterprises provide

governments with practical guidance on how to better handle their duties as firm owners,
allowing state-owned enterprises to become more competitive, efficient, and transparent. The
Guidelines, which were first published in 2005, were updated in 2015 to reflect changes since
their adoption as well as the experiences of the rising number of nations that have made
efforts to implement them.

• Enhance their competitiveness as a way to boost the economy as a whole, particularly

in nations where they play a dominant role
• Increase their operational efficiency and cost effectiveness in the delivery of essential
infrastructure, financial, and other services to businesses and consumers
• Reduce their fiscal risks and burdens
• Demonstrate better transparency and accountability in the use of scarce public funds
• Scale and scope the state sectors for the overall growth of the economy.
• The adoption of best practices into SOE corporate governance is aimed at assisting
public administration in contributing to improved performance for state institutions,
whether at the national or subnational level. Furthermore, if the choice is made to
study the prospect of privatization it in the future, the fact that these processes have
been implemented will increase the value of the SOE to the extent that openness and
accountability are applied. In this regard, it's vital to note that the adoption of
corporate governance for SOEs has no bearing on the government's readiness to
maintain these businesses in its hands.
• Pressure of reform deriving from the globalization and liberalization.
• To address the specific challenges and face to mitigate them.

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Best Practice and Guidelines for Corporate Governance Operations in SOE

This section is focused on the types of practices that could contribute to improving the
performance of SOE corporate governance. For each of the seven major areas of corporate
governance presented previously:

1. Need for an effective legal and regulatory framework

To avoid market distortions, the legal and regulatory framework for public enterprises
should maintain a fair playing field in marketplaces where public and private sector
companies compete.
As previously stated, the legal and regulatory environment in which public
corporations operate is frequently complicated. It can easily produce costly market
distortions and undermine the accountability of both the Board and executive team, as
well as the state as owner, if it is not consistent and coherent.
A clear division of responsibilities among the authorities, the simplification of legal
structures, and a logical and consistent regulatory framework would all help to
improve public company corporate governance.
Several of the methods described in this section are addressed to the state as the
property owner, rather than the SOE, because they require changes in legislation or
regulatory framework. The SOE will be responsible for bringing these
recommendations to the attention of the appropriate government officials in order to
increase awareness of the need of adopting these regulatory adjustments.
The basic guide lines for need for an effective legal and regulatory framework are as
follows:
• The regulatory framework for SOEs should ensure a clear separation between
the roles of the state as owner and as market regulator.
• A “corporate governance framework” for SOEs that will facilitate the
processes of reinforcing corporate governance should be pursued.
• Governments should advocate the simplification of the legal forms for SOEs
for two purposes: to facilitate the implementation of advanced governance
models that are comparable to those of the private sector so that creditors can
exercise their rights and pursue legal actions when there are insolvency
proceedings.

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 • The legal and regulatory framework should be flexible enough to allow for
adjustments in the capital structure of SOEs when these are necessary to
achieve the company’s objectives.
• SOEs must operate under market conditions to obtain financing. Their
relationships with banks, public financial institutions, and other SOEs must be
based on criteria that is strictly commercial in nature

2. The role of state ownership.

The state should behave as an informed and active owner and create the maximum
possible harmonization of private and public sector corporate governance norms in
order to carry out its ownership tasks successfully and in a timely way.
The law's structure should be clear, consistent, and medium- and long-term oriented.
It must clearly describe the reasons for the state's functioning as a business owner, as
well as the business and social objectives that the firms must pursue. It must also
actively pursue the adoption of corporate governance principles that improve the
performance and transparency of its businesses. It must also specify the methods for
putting these policies into action, as well as the role that various state or government
agencies would play in relation to SOEs.
The guide lines for the role of state ownership are as follows:
• Governments should define a scope of action, in the form of a public company
law or ownership policy, that determines the role of the state as a shareholder
or owner of SOEs, its role in strengthening the corporate governance, and the
manner in which such laws or policies will be implemented.
• The government should not interfere in the day-to-day management of SOEs
and should grant them operational autonomy to achieve their business
objectives
• The state as owner must allow the directors of the SOE to exercise their duties
and respect their independence.
• The Specialized Ownership Agency (SOA) must be clearly identified. In some
cases, identification may be easy because there is a single centralized legal
entity that oversees property or entity that coordinates the various agencies
involved in the SOEs. However, in other models, there may be, with different
variants, two or more government entities involved in the ownership of SOEs.

12
 • The SOA shall be accountable to congress/ parliament and other representative
bodies exercising public oversight.
• The state, as owner, must actively exercise its property rights in accordance
with the legal structure of each SOE as it endeavors to preserve institutional
soundness and fulfill organizational objectives.

3. Equal rights and treatment of shareholders.

Because shareholders, whether controlling, significant, or minor, are the true owners
of the company and those who provide the capital for it to carry out its operations, the
recognition of shareholders' rights and the mechanisms for exercising them is one of
the most important issues in corporate governance.
As a result, shareholders must have rights that ease their exercise of ownership and
enable them to perform what are considered crucial functions, which are often
recognized in each country's legislation and are typically tied to:
• Having an impact on the firm, primarily through their voting and participation in the
General Assembly of Shareholders.
• Obtaining – as well as asking – information
• Participate in the company's profits (or bear responsibility for losses).
The guide lines for the equal rights and treatment of shareholders are as follows:
• One share, one vote.
• Principle of parity in the treatment of shareholders.
• When the governing bodies of the SOEs propose extraordinary or strategic
operations, these must be sufficiently supported by the shareholders.
• The SOEs must have:
a) a report from the Board on operations that may affect minority
shareholders and, in general, on extraordinary or strategic operations;
b) an external advisor’s opinion on strategic operations and,
c) publicize such reports.
• SOEs with more than one shareholder should ensure effective communication
with all shareholders. One of the most efficient mechanisms is the creation of
a specific department to assist shareholders and investors.
• SOEs must implement the following measures to strengthen their
communication with shareholders:

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 a) maintain a website that contains corporate information,
b) implement warning systems on material information,
c) permanently update the registry of shareholders, and
d) introduce electronic communication mechanisms between SOEs and their
shareholders.
• The participation of minority shareholders in the General Assembly of
Shareholders should be encouraged in order to further their involvement in
fundamental corporate decisions such as the election of the Board of Directors.
• SOEs should provide alternative methods for resolving disputes
• Specialized audits requested by SOE shareholders.
• Organizational structure of a business group composed of SOEs.

4. General Assembly of Shareholders.

The General Assembly of Shareholders is the supreme and sovereign body of an SOE
with minority shareholders. The shareholders gather here to collectively exercise the
Assembly's powers, many of which are outlined in the statutes and, on occasion,
expanded in the bylaws.
In light of the three levels of government, ownership, administration, and day-to-day
management, the true key authority of the General Assembly of Shareholders could
be stated to be the shareholders' effective control of the company's progress and, as a
result, of the actions of the Board of Directors, to whom the shareholders have
delegated the company's management.
However, despite its vital importance and the extraordinary relevance of its powers,
the General Assembly of Shareholders is, in practice, a body that is frequently
weakened by its formality and lack of mobility.
The guide lines for the general assembly of shareholders are as follows:
• SOEs must recognize the exclusive and nondelegable powers of the General
Assembly of Shareholders.
• The SOEs must have Internal Procedure Regulations for the General
Assembly of Shareholders.
• The SOEs should recognize and, if necessary, regulate the right of
shareholders to request the calling of an extraordinary General Assembly of
Shareholders when a certain percentage of the ownership requires it.

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 • The Bylaws of the SOEs should recognize the right of shareholders, regardless
of the number of shares they hold, to propose the introduction of one or more
items to be discussed into the agenda of the General Assembly of Shareholders
or the inclusion of new proposed resolutions within a reasonable limit and
provided that the request is accompanied by a justification.
• For a better exercise of the shareholders’ right to information, SOEs must have
a sufficient period of time to call the Assembly that would guarantee its wide
dissemination and the collaboration of depositary entities when appropriate.
• The SOEs should ensure the right of shareholders to request written
information in advance of the Assembly as well as to request oral information
during the meeting.
• The SOEs should ensure that the agenda items to be discussed at the General
Assembly of Shareholders are precise.
• For SOEs listed on a stock market, the possibility of exercising the right to
vote through remote means must be enabled
• The SOEs must recognize the right of shareholders to propose the dismissal of
or the initiation of an action for legal liability against the directors.
• Even though the applicable legal framework allows it, the SOEs should
encourage the non-representation of shareholders by Board members within
the framework of the General Assembly of Shareholders.
• SOEs must ensure the attendance of external advisors, upper management and
members of the Board of Directors at the General Assembly of Shareholders.

5. Board of Directors
The Board of Directors is the most important governing body in any company,
including SOEs, because it is responsible for defining the strategic direction for
achieving the expected results, controlling day-to-day management, overseeing the
control architecture, and overseeing the company's governance.
Furthermore, it is the only body that may and must report on the achievement of the
precise objectives that have been previously disclosed to the SOA (head of state or
other public entity, and other shareholders if they exist).

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As a result, given that the Board of Directors coordinates with the SOA and is
responsible for strategy orientation and follow-up on upper management, this body
plays a critical role in the SOE's governance and attainment of results.
The guide lines for the BOD are as follows:
• SOEs should recognize the need for a Board of Directors as a governing body.
• SOEs should provide for managing the succession of members of the upper
management.
• The SOEs must have an Internal Regulation for the Board of Directors.
• The Board of Directors of the SOEs must have an appropriate size and provide
for the specific treatment of substitutes. The suggested number of members is
always odd.
• SOEs should provide for the existence of different categories of directors, their
symmetry with the capital structure, and for external directors to be in the
majority on the Board.
• SOEs must have a specific procedure for the proposal and selection of
directors that includes, along with other things, the establishment of general
requirements for being a Director and an Independent Director as well as a
justified proposal for each candidate.
• The SOEs must take into account the pre-established conditions for
considering directors, and most especially, for the Independent Directors.
• SOEs must establish the causes for the dismissal of directors which, in any
case, shall be preceded by a prior report from the Board of Directors.
• In addition to the provisions of the Law, SOEs must stipulate the definition
and regulation of the duties of the directors in its Bylaws and/or Regulations
of the Board of Directors.
• In addition to the provisions of the Law, SOEs must stipulate the definition
and regulation of the rights of the directors in its Bylaws and/or Internal
Regulations of the Board of Directors.
• SOEs must require a declaration of conflict of interest from the directors, and
the bylaws must provide a management procedure for conflicts of interest.
• SOEs must have a procedure for assessing, authorizing, and disclosing
transactions between related parties.

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 • SOEs must ensure proper remuneration for the members of the Board of
Directors approved by the Assembly, or in its absence, the ownership body,
and it must be consistent with the results of the SOE and the characteristics of
the industry. The SOEs should ensure that compensation for directors is
transparent and approved by the shareholder or property representative.
• The SOEs should evaluate and analyze how the Board of Directors’ sessions
work in order to allow for the greatest value generation by the Board in its
decision making.
• The SOEs must elect the Chairman of the Board from among their external
members. They should also encourage the separation of the position of
Chairman of the Board from that of the Chief Executive, define the position of
Vice Chairman of the Board, and reinforce the role and independence of the
Secretary of the Board.
• SOEs shall consider the distribution of responsibilities among directors
through the establishment of specialized committees of the Board of Directors
that are made up mostly of External Directors.
• The SOA, or in its absence the Board of Directors itself, must evaluate the
management of the Board of Directors within a reasonable period of time.

6. Control architecture
Carrying out any commercial activity entails being exposed to and managing a wide
range of corporate risks.
It is impossible to completely eliminate all risk because that would mean a complete
lack of commercial activity, and even then, we would be vulnerable to unplanned or
unforeseen dangers.
Corporate risks can arise at any level of the organization and can be strategic,
managerial, operational, or disruptive in nature:
• Internal operational risks arise within the company (for example, theft, system
failure, fire, or accident).
• Management risks are risks associated with company operations (e.g., environmental
risks, risks associated with one's products or services, supplier risks, and so on).
Strategy risks are those that arise from shortcomings in the strategic plan, poor
judgments, changes in the environment, or events that change the company's strategic

17
position. Finally, disruptive risks are defined as ambiguous risks that are difficult to
manage, whether internal or external, and have a significant economic, operational, or
reputational impact as a result of the VUCA (volatility, uncertainty, complexity, and
ambiguity) environment in which public and private companies currently operate.
These dangers, which are frequently associated with the development of new
technologies, are not limited to the technology environment and can harm businesses
in any area or activity.
Because the former is a result of the latter, the concept of risk and that of commercial
activity are inextricably linked.
Certain the standard risk-return relationship, where the larger the danger of a given
business activity, the bigger the projected return, the greater the risk assumed.
The guide lines for the control architecture:
• The Board of Directors is responsible for the existence of a sound control
environment within the SOE, adapted to its nature, size, complexity, and risks.
• The Board of Directors should ensure that there is a risk management process,
which provides reasonable assurance that the company’s objectives are
achieved in accordance with the defined risk profile in place in the SOE.
Likewise, the Board of Directors must be responsible for verifying that the
risk management structure clearly indicates the role and responsibilities of the
board, upper management, and other employees.
• The Board of Directors is responsible for ensuring the existence of a suitable
internal oversight system, adapted to the SOE and its complexity, and
consistent with the risk management process developed as well as for
supervising its effectiveness and suitability.
• The Board of Directors is responsible for the existence of a system in the SOE
that allows for the internal communication of the information generated by the
risk management process and the internal control system at the corresponding
levels of the organization.
• The Board should guarantee the existence of a process for monitoring the
Control Architecture that is independent of upper management and makes it
possible to evaluate its effectiveness and propose improvements.

18
 • The Board should ensure that there is a data strategy that is fully aligned and
coherent with the SOE’s strategic direction and its model of control
architecture.

7. Transparency and financial and non-financial information.

The act of releasing information about the SOE in which the content, presentation
format, and timing must follow particular rules is known as transparency.
Transparency, i.e., the company's reputation as its principal intangible asset, is used to
generate and transmit confidence.
Unlike its early perception as a regulatory requirement, transparency is now regarded
as a critical component of corporate culture, with both internal and external
consequences for the company:
a) Internally, openness is critical for making informed decisions at all levels of the
organization and, as a result, for the company's proper operation. It also reinforces
the accountability mechanisms from and to the various levels of the SOE's
corporate governance framework.
b) Externally, transparency is critical to both the generation of trust and its
transmission to the market and, as a result, to the company’s reputation.
The obligation of providing information, explanations, and justifications concerning
the company's activities so that both the SOA or Shareholders' Assembly (if any) and
the citizens can discern whether or not the SOE is acting in accordance with the
guidelines and mission in its articles of incorporation and, if not, denounce the
deviation is understood as the basic premise behind having appropriate accountability.
Furthermore, when social objectives, which SOEs frequently have, and the type of
auditor that both users and the company in general accept are taken into account, the
most effective strategy for increasing confidence in the SOE and its operations is
transparent and continuous disclosure of financial and non-financial information, even
while acknowledging its limitations.
The guide lines for the transparency and financial and non-financial information are
as follows:
• The SOEs should have an Information Disclosure Policy approved by the
Board of Directors that makes it possible to facilitate monitoring and follow-
up on the part of the different stakeholders.

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 • The SOEs must present their financial and non-financial information in
accordance with high-quality, internationally accepted standards.
• The SOEs must provide stakeholders with accurate and timely information,
both financial and non-financial.
• The SOEs shall issue an annual corporate governance report.
• The SOA shall prepare a Consolidated Annual Report on all the SOEs in
which it reports on their performance.

Specific guidelines have been identified that are understood to be major principles of
corporate governance and are complemented by an explanation that make it possible to
substantiate practical compliance with the guidelines. The first two should be understood as
areas managed by the state in its role as regulator and owner of the companies. The rest are
directly related to SOEs.

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Challenges

Following a study of the performance and analysis of the financial accounts of Nepal's public
companies for the fiscal year (FY 2018-19), some important operational and management
concerns have been identified. Some PEs' operating income and net profit have increased in
recent years, while some businesses' commercial and financial performance has remained
poor. Operating and managing some Nepalese PEs may become more difficult in the future
due to factors such as a lack of professionalism in the workplace, high operating costs, and a
lack of decisiveness. According to my observations, the following are the primary issues that
PEs face nowadays in the course of operation and management:

(a) PEs must extend the market by improving the quality and diversifying the goods and
services with which they do business.
(b) In order to achieve high returns, PEs' professionalism and efficiency must be
improved through management reform.
(c) Work efficiency and productivity of human resources in public businesses must be
improved because they are not competitive with the market.
(d) PEs' unfunded obligations, which appear to be abnormally large, must be minimized.
(e) In the functioning of PEs, corporate governance must be fostered.
(f) Some PEs are still reliant on the government for liabilities such as daily
administrative expenses, salaries, and wages, and this reliance must be ended.
(g) Because the majority of PEs have long not repaid this amount, repayment of principal
and interest amount of the loan borrowed by PEs from the government needs to be
regularized.
(h) The repayment of the principal and interest amount of the loan borrowed by PEs from
the government must be regularized because the majority of PEs have not repaid this
amount for a long time.
(i) The government faces a financial risk and a cost as a result of some PEs' persistent
losses. This should be kept to a minimum.
(j) PEs' records of stock and loan investments must be updated on a regular basis.
(k) The majority of privatized PEs have worsened financially, and this position must be
improved in order to create a positive view of privatization in the general public.

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The Road Map for Operating Public Enterprises in Nepal

PEs appear to be still relevant today, given their role in implementing fundamental rights and
directive principles stated in Nepal's Constitution, as well as numerous policies, periodic
plans, and annual policies and programs of government. It is critical to establish a clear and
objective investment and operational policy in the next days in order to raise the level of
performance through necessary PE improvements. The following is a road map for the proper
operation and management of PEs:

a) A study of the current state of public enterprises in operation should be conducted and
managed in accordance with the classification of PEs - PEs to be operated by the
government, PEs to be divested, PEs to be operated under a public-private partnership,
PEs to be operated by the private sector with full autonomy from the government, and
PEs to be dissolved.
b) For effective operation and management of PEs, it is critical to have a unified law and a
credible monitoring and assessment mechanism.
c) Restructuring PEs based on need, relevancy, and kind of work is critical. It is also
necessary to continue executing the policy of merging and acquiring PEs with comparable
objectives and nature, as well as the policy of unbundling major companies for job
specification.
d) Every year, the competent line ministry should sign a performance agreement with the
chief executive officer of each PE to define the minimum performance standards. At the
end of the fiscal year, the line ministry must complete the performance evaluation within
three months and decide whether his or her appointment should be continued or dismissed
based on the evaluation results.
e) In terms of the business plan and workload of PEs, it is critical to right-size workers by
performing new organization and management (O & M) surveys. PEs should make it a
policy to relate employee success to career advancement via clear job descriptions and
performance metrics.
f) The Nepal Financial Reporting System (NFRS) should be adopted in all PEs to preserve
financial discipline by improving PE financial performance, making accounting systems
scientific and transparent, and conforming with worldwide accounting standards.

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g) The government must pursue a targeted investment strategy based on a business plan that
is both economically and financially sustainable. It's also a good idea to keep a separate
fund to cover any potential liabilities or losses.
h) The government should use a suitable approach to bring strategic partners into select
large PEs in order to stimulate competition by providing the necessary capital investment
and cutting-edge technology.
i) A clear exit mechanism for financially unviable PEs, closed PEs, and ill PEs should be
included. For this, the government must adopt an important process and method for using
land, buildings, machinery, and tools, as well as protecting dissolved PEs' papers.
j) It is vital to resolve the unresolved privatized PEs conflict, which has been simmering for
years. The responsible body shall be involved in monitoring whether the provisions listed
in the privatized PEs agreement have been implemented or not on a regular basis. The
government must oversee this and bind purchasers of privatized PEs to complete
compliance with all requirements of the agreements signed.
k) The financial performance of PEs determines the future of their personnel. The role of
active trade unionism in PEs needs to transition from advocating professional rights,
social discussion, and collective bargaining to focusing on maintaining strong corporate
governance for the enhancement of overall performance.

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Conclusion

Many countries in the region's economic environment, as well as their corporate and
industrial structures, are dominated by SOEs, which are generally focused on providing
public services, infrastructure development, or their role as public policy instruments.

These companies, which are sometimes formed for industrial policy or regional development
reasons, face a dual challenge: on the one hand, to generate economic and financial
profitability for the state, and on the other hand, to serve the company's interests by
participating in public policies or providing public services. As a result, the SOE governance
model is a critical component for the optimal management of this challenge, ensuring that
these enterprises accomplish their goals of providing economic and social value in an
efficient and responsible manner.

As a result, a sound and consistent corporate governance model, tailored to the conditions and
unique nature of the SOE, will help to:

• maximize the SOE's leading position.

• preserving a long-term view
• efficiently meeting the goals of generating economic and social value

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References

• https://www.adb.org/sites/default/files/publication/618761/reforms-opportunities-
challenges-state-owned-enterprises.pdf
• https://www.mof.gov.np/site/publication-detail/2573

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