US embassy cable - 02KATHMANDU495

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 
-------------------------- 
 
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