Why has Indonesia's privatization policy failed?<\/p>\n
E. Yonnedi, Ph.D Study Fellow, Development Economics,
\nUniversity of Manchester, UK, msriley2@stud.man.ac.uk<\/p>\n
The privatization of Indonesian state-owned enterprises (BUMN,
\nor SOE) was developed with the objectives of improving the
\nefficiency of the enterprise sector as well as helping to
\nstrengthen public finances and cope with the budget deficit.<\/p>\n
The government has made considerable investment, without
\nsignificant results, in formulating and implementing such policy
\nsince the 80s. The evidence holds true. This can be seen from the
\nfailure to complete privatization projects on time, frequent non-
\nrealization of intended objectives, rare unanimity among
\nstakeholders on methods, procedures and timing. The example of
\nthese failures is paramount. Semen Gresik, Kalbe Farma, BCA and
\nso forth are the cases in point.<\/p>\n
Why has there been little ownership transfer even though
\nofficial policy objectives and strategies have been articulated
\nand firms have been selected for potential privatization?<\/p>\n
In the early privatization program (during the 1980s) there is
\nno doubt that despite the apparent needs for privatization due to
\nthe fiscal difficulties and inefficiencies of the BUMN
\noperations, the Indonesian elite seems to be reluctant to
\ntransfer ownership to the private sector. Politicians cannot
\nafford to lose control of public enterprise. It is something that
\nenables their survival. The discussion on this matter is not a
\npublic secret at all; the BUMN have become cows to milk for
\npolitical and personal objectives.<\/p>\n
Nevertheless, what are the root causes of problems faced by
\nprivatization programs in Indonesia? There are some vivid
\ncompeting ideas that can explain why privatization policy has
\nfailed. Firstly, it is something to do with \"policy
\nconditionality\".<\/p>\n
The policy responses adopted by the government as part of the
\nstructural adjustment program (SAP) before the 1997 crisis and
\nstabilization and adjustment policies afterwards, cannot be
\nseparated from the role of the International Monetary Fund (IMF)
\nand World Bank.<\/p>\n
Indonesia signed the first letter of intent (LoI) in October
\n1997. From October 1997 to the present, a total of 16 LoIs had
\nbeen agreed upon by the IMF. The 16 LoIs comprise three during
\nthe Soeharto period, 8 under B.J. Habibie, four under Abdurrahman
\nWahid and one under Megawati Soekarnoputri.<\/p>\n
The whole program, including a variety of quantitative and
\nqualitative requirements, constitute \"policy conditionality\". The
\nessence of LoIs is in their reliance on the \"Washington
\nConsensus\", that is, fiscal discipline, public expenditure
\npriorities, tax reform, financial liberalization, exchange rates,
\ntrade liberalization, foreign direct investment, privatization,
\nderegulation and property rights. One size fits all policy!<\/p>\n
However, as advocated by former World Bank chief Joseph
\nStiglitz, one cannot \"buy\" good policy. There are sensible
\nreasons for this; it is widely recognized today that successful
\npolicies need to have the country's \"ownership\" to be
\nimplemented. This means that not only the support from the
\ngovernment, but also abroad consensus within the population.<\/p>\n
It has been proven everywhere that policy imposed from the
\n\"outside\" will be circumvented, may induce resentment and will
\nnot withstand the vicissitudes of the political process.<\/p>\n
Secondly, there has been little good governance in the process
\nof divesting the state's assets. Good governance has become a new
\nmantra but very little, if any, has been practiced.<\/p>\n
The process of reducing the government's share in state-owned
\nenterprises has also been criticized because of the lack of
\ntransparency, preferential treatment of politically well-
\nconnected buyers and the setting of unrealistically low prices
\nwhich gave the buyers a fast windfall profit once trading started
\nat the stock exchange or low prices given to strategic buyers.<\/p>\n
The plan to privatize PT Semen Gresik which became the first
\nprivatization exercise after the crisis, ran into trouble with
\nthe legislature and public opinion because the negotiation was
\nregarded as non-transparent.<\/p>\n
Not only was the problem with the privatizing of SOEs, but
\nalso it was because the \"local people and elite\" did not want to
\nprivatize Semen Gresik. Privatization has then involved a complex
\ninterplay between central and local elite, particularly after the
\nimplementation of regional autonomy in 1999.<\/p>\n
Thirdly, the government failed to take into account the
\ninterests of the stakeholders. There has been a significant
\nresistance of the stakeholders toward the policy. Of the
\nobstacles to privatization, none is more formidable than the
\nresistance of state-enterprises stakeholders.<\/p>\n
Employees, for instance, contend that privatization policies,
\nas articulated and implemented, do not take adequate account of
\ntheir legitimate interests. State-enterprise employees have
\nsuccessfully opposed some privatization programs although we do
\nnot quite know the process of this resistance and the politics
\nbehind it.<\/p>\n
Finally, institutions do matter. Market-oriented policy
\nreforms like privatization cannot just ignore institutional and
\ncultural factors. Economic policy reforms like privatization
\nunder the \"Washington Consensus\" tend to undermine the
\ninstitutional factors and take it for granted.<\/p>\n
The reforms are not simply asserting private over public,
\nmarkets over governments, fast action over gradual, but informed
\nand effective reforms in privatization, competition and
\nregulation.<\/p>\n
For us, the implication is that it is even more imperative now
\nthat we seek ways in which we might use the few reform successes
\nto better advantage, lower our sights to undertake more realistic
\nadvances and renew emphases on market transformation, market
\ndevelopment and institution capacity building with ownership of
\nreforms.<\/p>\n
The sequence of the reforms is far better than rushed
\nprivatization that will disadvantage Indonesian society in the
\nlong run. Creating more winners and eliminating losers should be
\nin the minds of policy makers. Pragmatic objectives such as
\nraising fresh money to cope with the budget deficit have been
\nproved not effective nor desirable.<\/p>\n
The ultimate objective of the gradualist approach is to
\nachieve a general balance and achieve a stronger mixed economy,
\nstronger private sectors, stronger public sectors and stronger
\ncivil society. If this is the idea underpinning public
\nenterprises reforms in Indonesia then what we are supposed to do
\nin relation to SOE reforms is to strengthening competition policy
\nand build strong regulatory framework.<\/p>\n
\"The rules of the game\" is crucial. Reforming SOEs should be
\nput in a wider context of development strategies which integrate
\neconomics and social indicators. In short, privatization should
\nbe predominantly partial and privatization proceeds and
\npercentage sold should increase overtime as policy credibility
\nincreases.<\/p>\n
The writer is a lecturer at the Faculty of Economics of the
\nAndalas University in Padang, West Sumatra.<\/p>",
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