HEMORRHAGING FROM ON HIGH: COMMISSION RECOMMENDS

UNCLAS SECTION 01 OF 02 KATHMANDU 000495

SIPDIS

SENSITIVE

SA/INS
SINGAPORE FOR FAA

E.O. 12958: N/A
TAGS: EAIR ECON NP
SUBJECT: HEMORRHAGING FROM ON HIGH: COMMISSION RECOMMENDS
PARTIAL PRIVATIZATION OF ROYAL NEPAL AIRLINES CORPORATION

REF: 01 KATHMANDU 0741

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SUMMARY
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1. (SBU) A commission has recommended the partial
privatization of the state-owned national air carrier Royal
Nepal Airlines Corporation (RNAC) to inject fresh, badly
needed capital into the teetering enterprise and to limit the
political interference that has bled the once profitable
Corporation dry. There is considerable skepticism that the
Government, which has long regarded the airline as an easy
way to distribute political patronage, will agree to cede the
management of--and the milking of--a cash cow that is quickly
drying up. End summary.

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ROYAL NEPAL: IN THE RED
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2. (U) State-owned national air carrier Royal Nepal Airlines
Corporation (RNAC),established in 1957, is now running at
losses estimated at more than USD 2.5 million a year and
carries just under than USD 34 million in debt and
liabilities. Of the nine planes in its inventory (two Boeing
757's for international and seven Twin Otters for domestic
routes),only the Boeings and four of the Twin Otters are
operational. The airline stopped its service to Europe in
the summer of 2001 and now flies only 63 hours a week on its
limited international routes to India, Bangkok, Hong Kong,
Osaka, and Shanghai. A well-earned reputation for
mismanagement, poor service, and inconvenient scheduling had
been constricting RNAC's ever-shrinking share of the market
over the past several years. The double whammy of September
11 and increased Maoist violence, which has sliced into
tourism revenues across the board (arrivals in February
declined by 46 percent compared to last year),has further
deepened RNAC's financial troubles.


3. (SBU) Unfortunately for the GON, the Act that
established the RNAC holds the Government liable for any and
all losses sustained by the Corporation. Should the RNAC
fail--and one press report alleges the airline needs an
immediate infusion of USD 25 million to stay afloat--the GON
would be left holding the bag. The Finance Minister, to
avert an impending disaster, pushed the Cabinet in January to
appoint a high-level committee, headed by former Chief
Secretary and former Ambassador to the U.S. Damodar Gautam,

SIPDIS
to review the airline's financial health and make
recommendations for its future. The Committee completed its
report February 15 and forwarded it to the Ministry of
Tourism and Civil Aviation for review.

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PRIVATE INVESTMENT IS NEEDED
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4. (SBU) The report recommended a number of fairly drastic
changes in RNAC operation, ownership, and management. First,
recognizing that the GON is in no position to provide
investment capital for the airline,it recommended that the
domestic and international services be split into two
separate companies. Management and partial ownership (the
report recommends about one-third) in the international
airline should be offered to a private investor (likely a
foreign airline); one-third to other investors (tourism
businesses; financial institutions; airline employees; and
the general public) and the rest maintained by the GON. The
Corporation should trim its staff of 1,836 by about half, and
sub-contract out for a number of services (security guards,
drivers, etc.) that permanent staff now performs. RNAC
should sell off unused inventory and other assets to provide
more immediate cash flow. Bookkeeping should be improved.
(Note: RNAC has not been audited since 1998. End note.)
Aircraft should be leased directly from the manufacturer and
not from agents. Assets should be re-valued and the terms of
repayment of the company's debts renegotiated. A marketing
survey to determine the most profitable routes and schedules
should be performed. In conclusion, the report bluntly
highlights the key problem with RNAC: "too much political
interference" and decision making on the basis of "political
patronage."

5. (SBU) Nagendra Prasad Ghimire, a Joint Secretary at the
Ministry of Tourism and Civil Aviation who sat on the
Committee, told econoff that since chronic "political
interference" brought the airline to its present sorry state,
it was decided to recommend increasing and diversifying the
base of ownership. The Committee wants and is recommending
an internationally recognized airline as a strategic partner
for RNAC. One-third equity participation is a minimum for
the private investor to take over management and operation of
the company; the percentage "could be more" depending on the
investor's interest, Ghimire said. He described the report's
recommendations as "very bold," and acknowledged getting
agreement from all the relevant line Ministries and the
Cabinet will take some time.
POLITICAL MEDDLING ISN'T
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6. (SBU) Amb. Gautam believes the airline began its decline
over the past 12 years, when he says it began awarding leases
and other contracts on the basis of political influence
rather than competitiveness. Aircraft was not leased at the
right time at the right price because the decision-makers'
motivation was "different" from what it should be. For
example, an Airbus leased from Europe under unfavorable terms
from 1993-1995 cost the airline USD 2.2 million in 22 months.
He noted as well the controversial award of a leasing
contract for a Lauda aircraft in 2000 (for about USD 25
million over 18 months) that bypassed normal bidding
procedures (and, many believe, contributed to former PM
Koirala's decision to resign). Contracts for General Sales
Agents overseas were also awarded on the basis of political
pressure, he said, noting the infamous case of a ticket agent
in Vienna who disappeared with more than USD 1 million in
RNAC revenus in 1995. The culture of corruption has become
so pervasive that it infects not only the highest levels but
extends down to domestic ticket agents who accept bribes to
say a half-empty flight is full. Political leaders view the
Corporation as their own personal fiefdom, he indicated,
noting that RNAC has changed CEO's (12 in 12 years) with just
about as much frequency as the Nepal has changed Prime
Ministers.

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COMMENT
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7. (SBU) That RNAC has been teetering on the brink of
bankruptcy for some time now (Reftel) does apparently little
to deter the political leadership from continuing to milk
this floundering state-owned enterprise completely dry. The
Committee completed its report in less than the six weeks
allotted it for the task; whether the Cabinet will complete
its own review of the recommendations as quickly seems
unlikely. Unfortunately, at a time when embattled Prime
Minister Sher Bahadur Deuba needs all the friends he can get,
depoliticizing and privatizing a long-favored channel for
patronage may figure low on his immediate agenda.
MALINOWSKI