Why privatization fails in Indonesia<\/p>\n
Reiner S., The Jakarta Post, Jakarta<\/p>\n
When popular leader Megawati Soekarnoputri was elected as the
\ncountry's new President late in July, followed by the appointment
\nof her confidant Laksamana Sukardi as State Minister of State
\nEnterprises, there were high hopes Indonesia might finally be
\nable to push ahead with its privatization program, which had
\nstalled over the past three years.<\/p>\n
Unfortunately, progress has been insignificant mainly due to
\nthe same old obstacle: opposition from the House of
\nRepresentatives and groups with vested interests in the firms
\nsuch as politicians, employees, company management and political
\nparties.<\/p>\n
For the past two consecutive years, the government has set an
\nidentical annual privatization proceeds target of Rp 6.5 trillion
\nto help finance the state budget deficit. A list of 16 state-
\nowned enterprises (SOEs) has been proposed for privatization.<\/p>\n
But no transactions were concluded last year, and for 2001 the
\nresult was almost identical, except that the government managed
\nin the later part of the year to sell shares in the publicly
\nlisted state-owned telecommunications firm PT Telkom and non-
\nlisted plantation firm PT Socfindo, raising around Rp 3.5
\ntrillion in cash for the state budget.<\/p>\n
Consequently, the government has had to cut down on
\ndevelopment spending and other expenses.<\/p>\n
Two state-owned pharmaceutical firms PT Indofarma and PT Kimia
\nFarma were privatized earlier this year via an initial public
\noffering, but the proceeds went into the two companies, not the
\ngovernment's coffers.<\/p>\n
For 2002, the same list of SOEs has been proposed and the
\nproceeds target is still set at Rp 6.5 trillion, but this time
\nonly Rp 3.95 trillion would be used to finance the budget deficit
\nwhile the remainder Rp 2.55 trillion would be used to redeem
\ngovernment bonds in a bid to help avoid a fiscal disaster as most
\nof it would mature in 2004.<\/p>\n
Will the government privatization program work this time?<\/p>\n
There are various reasons why the privatization program has
\nfailed during the past three years, but the first and foremost is
\nthe strong opposition from the House, politicians and other
\ngroups with vested interests. Other reasons include political
\nuncertainty and lack of preparedness.<\/p>\n
The opponents of privatization have various reasons ranging
\nfrom concern over foreign domination in strategic national assets
\nto unfavorable market conditions, which would put a downward
\npressure on the price of the assets.<\/p>\n
Analysts, however, said that certain politicians or company
\nmanagement had their own personal agenda in rejecting the
\nprivatization program: to retain their lucrative cash cows.<\/p>\n
The government admits that the lack of political support has
\nbeen the main obstacle to the country's privatization program.<\/p>\n
\"The privatization program needs strong political support to
\nbe successful,\" said finance minister Boediono.<\/p>\n
The biggest blow to the country's privatization program
\noccurred last month in Padang, West Sumatra province, when the
\nlocal administration backed by a certain group of politicians and
\nlocal leaders unilaterally took over PT Semen Padang, a key unit
\nof the state-owned PT Semen Gresik. The takeover was in protest
\nover the government's plan to sell another 51 percent stake in
\nthe latter to Mexico's Cemex SA de CV, which already owns a 25
\npercent stake. Padang is the home base of Semen Padang.<\/p>\n
Although the West Sumatra provincial administration later
\ncanceled the damaging move, it had dealt a major blow to foreign
\ninvestor's confidence including the World Bank, the country's
\nlargest multinational donor. There has been concern that the move
\ncould trigger similar action by other provinces toward other SOEs
\nor foreign companies operating in remote areas.<\/p>\n
For the past two years, the government has been trying to sell
\na majority stake in Semen Gresik to Cemex, the world's number
\nthree cement producer. But the strong protest, not only from West
\nSumatra but also from South Sulawesi, the home base of another
\nSemen Gresik unit PT Semen Tonasa, and from company employees and
\ntop management caused delays in the program.<\/p>\n
The government now fears that Cemex might completely back out
\nof the purchase plan due to the legal uncertainty triggered by
\nthe various protests. There has been no word yet from Cemex.
\nLaksamana said that if Cemex quits the plan, the government would
\nhave to seek other buyers. But this would be a very difficult job
\ngiven the bad record so far and amid the current global economic
\nslump.<\/p>\n
Some said that the widespread protest against the Semen Gresik
\nprivatization program was partly caused by the lack of
\ninformation provided by the government to the local people and
\nlawmakers about the importance of the transaction.<\/p>\n
Others also criticized the central government particularly
\nLaksamana and Minister of Home Affairs Hari Sabarno for being
\nindecisive in taking action against top officials of local
\nadministrations and companies who had campaigned against the
\nprivatization program.<\/p>\n
The government must be more aggressive in making privatization
\ncampaigns and dissemination of information on the benefits of the
\nprogram to the public and local politicians to win their support.
\nIt must also improve the transparency and accountability of the
\nprogram.<\/p>\n
\"There must be a more intensive dialogue with the
\nstakeholders,\" said economist Didik J. Rachbini of Jakarta-based
\nprivate think tank INDEF.<\/p>\n
\"The (local) government, the politicians and the people in
\ngeneral must understand that the privatization program is a
\ncrucial part of the country's economic reform aims to achieve
\nsustainable economic recovery,\" he added.<\/p>\n
In addition to raising proceeds to help finance the state
\nbudget, there has been stronger evidence that privatization also
\nimproves the performance of SOEs and the overall economy.<\/p>\n
International experience shows that privatized firms display
\nimproved efficiency, profitability, employment and growth, the
\nWorld Bank said in a recent report.<\/p>\n
There are more than 160 SOEs in Indonesia, and according to
\nthe results of a 1997 audit, more than half are in a weak
\nfinancial condition. At the end of 1999, accumulative losses of
\nthe SOEs reached a staggering Rp 47.65 trillion.<\/p>\n
The poor performance of the SOEs is due to inefficiency, poor
\nmanagement and corruption. This problem will continue to become a
\nburden to the state unless it is resolved, which is one of the
\naims of the privatization program.<\/p>\n
\"More importantly, cross-country evidence indicates that for
\nevery 1 percent of GDP (gross domestic product) privatized,
\noverall GDP and employment climb by about 1 percentage point and
\n0.25 percentage points respectively the first year, and 0.8
\npercentage points and 0.5 percentage points in the second. And
\nthese gains extended into the years beyond,\" the World Bank said.<\/p>\n
Opponents of privatization often urge that the sale be delayed
\namid the current unfavorable market condition, arguing that the
\nasset price could rise later on. But the problem is that there's
\nno guarantee that the price will increase particularly amid legal
\nuncertainty and the government poor track record in implementing
\nthe asset sale program.<\/p>\n
\"It makes financial sense to delay asset sales only if asset
\nprices are expected to increase faster than the rate of interest
\n-- about 17 percent a year currently. Asset values in Indonesia
\nhave not been rising anywhere near this rate, and in many cases
\nhave fallen,\" World Bank said.<\/p>\n
In other countries, privatization programs start by selling
\nsmaller SOEs operating in a competitive industry to develop a
\ngood track record and credibility, and then move to larger
\ntransactions. However, in the case of Indonesia it has no such
\nluxury due to the pressure on the state budget suffering from a
\nhuge deficit. The government must quickly privatize large SOEs to
\nplug the hole in the budget.<\/p>\n
In short, the case for moving ahead with the privatization
\nprogram is compelling.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/why-privatization-fails-in-indonesia-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}