Competition key to privatization<\/p>\n
By Makmur Keliat<\/p>\n
SURABAYA (JP): Is privatization the best way to improve the
\nperformance of our much derided public sector enterprises, and,
\nif so, how should it be implemented?<\/p>\n
These questions merit special discussion since the government
\nrecently dropped several hints it would proceed to privatize
\nseveral state-owned companies and industries.<\/p>\n
Privatization, in essence, is a reduction of the state role in
\neconomy. In its purest form, it is carried out through a total
\ntransfer of ownership from public to private hands. In developing
\ncountries, however, privatization is largely undertaken through
\ndivestiture and leasing.<\/p>\n
While the first term refers to a selling of a substantial
\nshare of equity on private markets, the second involves an
\nofficial agreement allowing the private sector to run state-owned
\nenterprises (SEPs) under a management contract for a designated
\nperiod of time. In this context, disillusionment over the
\nperformance of the enterprises seems to have become a driving
\nforce behind introduction of privatization measures in many
\ndeveloping countries.<\/p>\n
The widespread perception is that most SEPs are failures.
\nRather than generating new development resources, the SEPs are
\naccused of being a drain on the national budget. Reasons for
\ntheir poor performance have been stated elsewhere and are well-
\ndocumented.<\/p>\n
Most are said to be overstaffed with incompetent personnel.
\nSome SEPs are believed to have misused the financial autonomy
\ngiven to them. The argument is that private hands will introduce
\na new corporate culture, emphasizing efficiency and the profit-
\noriented ethos. It is no great surprise, therefore, if staunch
\nproponents of privatization state a hypothesis that the less
\ndeveloped an economy, the greater the role of the state.<\/p>\n
Why, then, given the abundant evidence of problems with SEPs,
\nhave some displayed reluctance and pessimism about privatization?<\/p>\n
Undoubtedly, political interests are a stumbling block. In
\ngeneral, as shown in the experiences of other ASEAN countries,
\nthose in power have a great stake in maintaining the state role
\nin the national economy through gaining additional income through
\ntheir clout in the management of SEPs.<\/p>\n
In addition, opposition against privatization is also colored
\nby ideological predispositions. It is evident in this country,
\nand it makes it difficult to launch a comprehensive and serious
\nprivatization policy. Beyond these ideological and political
\nobstacles, however, there is another reason why attempts to
\nprivatize the SEPs may fail to achieve their objective.<\/p>\n
To begin with, we need to underline the fact that efficiency
\ndoes not exist in a vacuum. Efficiency can be achieved if
\nconditions for fair competition exist in a national economy. If
\nthis requirement is absent and neglected, then no matter if a
\nfirm is run by the private sector or wholly owned by the state,
\nit is highly likely that efficiency cannot be achieved. It is
\ncompetition, not ownership, that shapes and determines the degree
\nof efficiency culture in business community.<\/p>\n
Indeed, taking the history of developed countries into
\naccount, a desire by the business community for large ownership
\nneeds to be encouraged and should be seen as a legitimate
\nobjective, be it politically or culturally, if they instill the
\nidea of competition. Establishing a legal framework of
\ncompetition is therefore a must, and there should be no entry
\nbarrier to new competitors once privatization is launched. It
\nfollows that the enactment of a law prohibiting monopolistic
\npractices in business should precede a government privatizing
\nSEPs.<\/p>\n
The importance of such a law should not be underestimated. It
\nis only through its enactment that a mechanism for competition
\ncan be instutionalized and that firms can be directed to compete.
\nIt seems necessary for policy-makers to be fully aware that the
\nzeal of companies to not compete is always as strong as their
\nzeal to compete. Suppose there are four firms producing and
\nmarketing cooking oil in the country. A conventional view always
\nstates that all of them will naturally compete against each other
\nin order to secure and expand their respective market shares.<\/p>\n
But there is always the possibility they can secure their
\nmarket and still gain huge profits without falling into cut-
\nthroat competition. This is easily done through establishing a
\ncartel in setting a uniform price of cooking oil in the market.
\nThrough this kind of horizontal price fixing, they can also erect
\nan entry barrier against new competitors.<\/p>\n
These business practices could be categorized as a means of
\nconstituting a monopoly in business practices, even though number
\nof producers is more than one. It is also in this context that
\nthe recent calls for a merger for financially stricken firms in
\nthe wake of the monetary turmoil need to be examined carefully.
\nMajor firms could seize the opportunity to dominate the market to
\nthe point of creating a monopoly.<\/p>\n
This situation can be handled through the antimonopoly law,
\nunder which a merger is barred in discretionary means. A
\ndefinitive legal requirement may stipulate that large firms are
\nprohibited from merging with each other if their total shares in
\na market account for 50 percent.<\/p>\n
Since Indonesia has not enacted an antimonopoly law, raised
\neyebrows would not be inappropriate to greet the government's
\nplan for privatization. How could Indonesia achieve efficiency
\nthrough privatization without a legal framework of fair
\ncompetition? How could we expect the private sector in Indonesia
\nto cultivate the importance of efficiency if most of its members
\nhave grown without efficiency due to their close connections with
\nthose in power?<\/p>\n
It is likely that such privatization would only convert a
\npublic monopoly into a private one. If this is the case, then
\nwhat the government intends to achieve from privatization would
\nnot be an efficiency measure, but merely a financial resource to
\noffset the state's budgetary constraints.<\/p>\n
With this in mind and given people's increasing awareness of
\nthe importance of public accountability, it is likely that there
\nwill be the demand for transparency in the introduction of
\nprivatization. The government would be asked to explain openly
\nthe merits of such privatization.<\/p>\n
People may also wonder about the real number of the SEPs in
\nIndonesia, and the status of several companies established in the
\nform of yayasan (foundation) but with an intense involvement of
\nstate apparatus in their daily business activities. Are they
\ncategorically part of the SEPs? If they are not, then the natural
\nquestion is why?<\/p>\n
If the government does not handle this issue seriously and
\nkeeps rushing headlong into privatization without consulting the
\npeople, it will only serve to provoke a new resentment directed
\nat those in power. Ultimately, privatization may be conceived as
\nmerely a new network of economic nepotism and collusion.<\/p>\n
The writer is a lecturer in political science at Airlangga
\nUniversity, Surabaya.<\/p>\n
Window: Since Indonesia has not enacted an antimonopoly law, raised
\neyebrows would not be inappropriate to greet the government's
\nplan for privatization.<\/p>",
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