Wednesday, August 15, 2012

KFC, Pizza Hut closure: A setback for foreign investors in Nepal

KFC and Pizza Hut in Nepal, operated by Devyani International Nepal, closed down the fast food outlets for indefinite period following militancy shown by ad-hoc committee of All Nepal Hotel and Restaurant Workers Union-Revolutionary (ANHRWU-R), the Maoist (Baidya faction) party affiliated trade union which was trying to register one at the Department of Labor.

This should not have happened especially this year, which the Maoist-led coalition government declared as Investment Year (irrespective of its relevance after the partial budget unveiled in July). The manufacturing output has already nosedived due to supply-side constraints, including labor related disputes. Its contribution to GDP is just below 6 percent. Merchandise exports remain below 5 percent of GDP.

Things are not completely clear right now:

  • The management says some workers trying to open union beat up managerial staff and gave threats to their life.
  • The workers (especially leader of the protesting folks) argue that nothing of the sort alleged by the management happened. They were just trying to register a union.

Few comments:

  • Before the truth comes out, it will be hard to say who is right.
  • Based on past experiences, the workers (especially those from unions who are dictated by political party bosses) have faulted badly. Read here and here. Also, remember this time when the unions stroke a deal with the industrialists to not go for strikes for four years. What happened to that commitment?
  • According to the Nawaraj Bhatta (president of the ad-hoc committee of ANHRWU-R), a team of 66 staff members had applied for the registration of ANHRWU-R at the Labor Office on August 7. But, some workers were surprised that their names appeared on the list without their consent. Is there any room for doubt that some rigging did happen?
  • As a result of the dispute, 180 workers have become unemployed. They were earning at least Rs 20,000 per month (this is higher or equal to what Nepali migrant workers usually get for unskilled jobs in Malaysia and the Gulf). The management is adamant that it will stick to “no work, no pay”—something that will flare the fight between the two seemingly warring sides.
  • In these kinds of tussle, the unions usually presume that the management will ultimately yield to their demands because of the high fixed cost (sunk cost) and interference by political leaders. However, in the case of international investors we have seen it quite clearly that this gamble won’t work. Evidence: remember how Colgate Palmolive and Surya Nepal Private Limited’s (SNPL) packed shut down production and left the country. You guess who is on the losing side?
  • The policy inconsistency of government and stance inconsistency of trade unions (that have been using extralegal means to press their demands) are bleeding the industrial sector. Vested interests of trade union bosses and their bosses of political parties are actually costing dearly not only the industrial sector but also the jobs of na├»ve workers, who are in a mirage that they are truly represented by their union leaders and politicians (most of whom are past their retirement age). Closing down Surya Nepal cost 650 direct and 1400 indirect employment.
  • Read this article that explains how labor militancy is leading to strike-unemployment cycle. This statement is even valid right now: “If you have lost a job, are potentially going to lose, or cannot get one in the market, then blame the outrageous, militant youth wings and the politicians who incite the unions to go on a destructive path.” Read this article that explains the disconnect between outrageous labor demands not matched by labor productivity. Unions need to match up the increase in wages by productivity. While wages increased by multiple folds in the last decade, labor productivity increased by just, on average, 1.10 percent.
  • The bottom line is that this is a very unfortunate development. The faster the government resolves it, the lower will be the damage. Too bad it happed just when FDI were starting to increase after years of close disappointing performance.