Competition key to privatization

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.