Competition key to privatization

By Makmur Keliat

SURABAYA (JP): Is privatization the best way to improve the performance of our much derided public sector enterprises, and, if so, how should it be implemented?

These questions merit special discussion since the government recently dropped several hints it would proceed to privatize several state-owned companies and industries.

Privatization, in essence, is a reduction of the state role in economy. In its purest form, it is carried out through a total transfer of ownership from public to private hands. In developing countries, however, privatization is largely undertaken through divestiture and leasing.

While the first term refers to a selling of a substantial share of equity on private markets, the second involves an official agreement allowing the private sector to run state-owned enterprises (SEPs) under a management contract for a designated period of time. In this context, disillusionment over the performance of the enterprises seems to have become a driving force behind introduction of privatization measures in many developing countries.

The widespread perception is that most SEPs are failures. Rather than generating new development resources, the SEPs are accused of being a drain on the national budget. Reasons for their poor performance have been stated elsewhere and are well- documented.

Most are said to be overstaffed with incompetent personnel. Some SEPs are believed to have misused the financial autonomy given to them. The argument is that private hands will introduce a new corporate culture, emphasizing efficiency and the profit- oriented ethos. It is no great surprise, therefore, if staunch proponents of privatization state a hypothesis that the less developed an economy, the greater the role of the state.

Why, then, given the abundant evidence of problems with SEPs, have some displayed reluctance and pessimism about privatization?

Undoubtedly, political interests are a stumbling block. In general, as shown in the experiences of other ASEAN countries, those in power have a great stake in maintaining the state role in the national economy through gaining additional income through their clout in the management of SEPs.

In addition, opposition against privatization is also colored by ideological predispositions. It is evident in this country, and it makes it difficult to launch a comprehensive and serious privatization policy. Beyond these ideological and political obstacles, however, there is another reason why attempts to privatize the SEPs may fail to achieve their objective.

To begin with, we need to underline the fact that efficiency does not exist in a vacuum. Efficiency can be achieved if conditions for fair competition exist in a national economy. If this requirement is absent and neglected, then no matter if a firm is run by the private sector or wholly owned by the state, it is highly likely that efficiency cannot be achieved. It is competition, not ownership, that shapes and determines the degree of efficiency culture in business community.

Indeed, taking the history of developed countries into account, a desire by the business community for large ownership needs to be encouraged and should be seen as a legitimate objective, be it politically or culturally, if they instill the idea of competition. Establishing a legal framework of competition is therefore a must, and there should be no entry barrier to new competitors once privatization is launched. It follows that the enactment of a law prohibiting monopolistic practices in business should precede a government privatizing SEPs.

The importance of such a law should not be underestimated. It is only through its enactment that a mechanism for competition can be instutionalized and that firms can be directed to compete. It seems necessary for policy-makers to be fully aware that the zeal of companies to not compete is always as strong as their zeal to compete. Suppose there are four firms producing and marketing cooking oil in the country. A conventional view always states that all of them will naturally compete against each other in order to secure and expand their respective market shares.

But there is always the possibility they can secure their market and still gain huge profits without falling into cut- throat competition. This is easily done through establishing a cartel in setting a uniform price of cooking oil in the market. Through this kind of horizontal price fixing, they can also erect an entry barrier against new competitors.

These business practices could be categorized as a means of constituting a monopoly in business practices, even though number of producers is more than one. It is also in this context that the recent calls for a merger for financially stricken firms in the wake of the monetary turmoil need to be examined carefully. Major firms could seize the opportunity to dominate the market to the point of creating a monopoly.

This situation can be handled through the antimonopoly law, under which a merger is barred in discretionary means. A definitive legal requirement may stipulate that large firms are prohibited from merging with each other if their total shares in a market account for 50 percent.

Since Indonesia has not enacted an antimonopoly law, raised eyebrows would not be inappropriate to greet the government's plan for privatization. How could Indonesia achieve efficiency through privatization without a legal framework of fair competition? How could we expect the private sector in Indonesia to cultivate the importance of efficiency if most of its members have grown without efficiency due to their close connections with those in power?

It is likely that such privatization would only convert a public monopoly into a private one. If this is the case, then what the government intends to achieve from privatization would not be an efficiency measure, but merely a financial resource to offset the state's budgetary constraints.

With this in mind and given people's increasing awareness of the importance of public accountability, it is likely that there will be the demand for transparency in the introduction of privatization. The government would be asked to explain openly the merits of such privatization.

People may also wonder about the real number of the SEPs in Indonesia, and the status of several companies established in the form of yayasan (foundation) but with an intense involvement of state apparatus in their daily business activities. Are they categorically part of the SEPs? If they are not, then the natural question is why?

If the government does not handle this issue seriously and keeps rushing headlong into privatization without consulting the people, it will only serve to provoke a new resentment directed at those in power. Ultimately, privatization may be conceived as merely a new network of economic nepotism and collusion.

The writer is a lecturer in political science at Airlangga University, Surabaya.

Window: Since Indonesia has not enacted an antimonopoly law, raised eyebrows would not be inappropriate to greet the government's plan for privatization.