Disposing of bleeding ulcers: Privatization in Indonesia

Todd Callahan Senior Technical Advisor PT Jasa Cita

Across the street from the Bank Indonesia building, "Privatization equals poverty" used to be scrawled on a busy bus stop wall for all passersby to see. The message was clear: State ownership in Indonesia should be maintained ostensibly because it contributes to the public good. That, at least, is what the guardians of the status quo would have the public believe.

Indonesia's state-led development model has failed to produce anything except a collection of wasteful companies that impose huge economic costs on its population. One World Bank report put it plainly enough: The inefficiency of state-owned enterprises, combined with the attendant state enterprise sector deficits, are hampering economic growth and making it more difficult for ordinary people to lift themselves out of poverty.

An important question is why any forward looking government would tolerate such a millstone around its neck. Despite the huge burden on government finances caused by inefficient state owned firms, they survive because vested interests back them and because government policymakers lack either the will or muscle to dislodge them. In Indonesia this has certainly been the case since privatization plans were announced several years ago.

Although a few transactions have materialized, real progress has been painfully slow because of the failure of the Office of the State Minister of State Owned Enterprises to tackle special interests and make a compelling case that spells out the features and benefits of privatization. Frustrated, one observer compared the ability of the government to push ahead with a significant privatization to parachuting onto a sailboat in the midst of a typhoon.

Ultimately, successful privatization will not take place until the administration stands up to special interests. Until now opponents have been given a virtually free reign to shape the debate on privatization. This has led to false perceptions and must stop if the government expects to have any chance of advancing its privatization agenda. To neutralize the special interests, State Minister of State Owned Enterprises, Laksamana Sukardi, must lobby the cabinet and legislature more vigorously.

He also needs to seek and obtain more political support for privatization from President Megawati Soekarnoputri. To silence senior managers and local political elites who continue to treat state-owned enterprises as their cash cows, Minister Sukardi should expose their dismal performance and shine a spotlight on the rampant corruption within them. In short, it is time to begin dealing with special interest groups more assertively.

India provides an interesting example of how vigorous leadership can make all the difference. Although India still owns 240 firms at the national level and another 1,000 at the state government level, it has made significant strides in its privatization drive thanks to the efforts of its new Disinvestment Minister, Arun Shourie.

Over the last two years Dr. Shourie has successfully sold 22 companies for US$2.2 billion. He had forcefully presented his position at 10 parliamentary debates, dealt with 19 court challenges, and disarmed countless attempts to provoke labor. Responding to criticism that privatization amounts to selling off the national heritage, a claim not unfamiliar in Indonesia, Dr. Shourie retorted that he was merely "disposing of bleeding ulcers".

Government authorities need to present a stronger case for privatization. Too often the imperative of privatization is only explained in terms of raising cash for the national budget or satisfying International Monetary Fund (IMF) obligations. This is not the way to seek wider public support for the program.

Instead, Minister Sukardi and other top officials need to focus more on the beneficial changes that come with privatization. Studies show that privatization, when implemented properly, raises the efficiency of firms and promotes economic growth. Increased tax revenues from more productive companies then flow into government coffers.

Where privatization is executed through the public sale of shares, two infrequently discussed but nonetheless important benefits include broader public ownership and stronger, more developed capital markets. In other cases where state owned companies are being offered for sale to strategic investors, especially foreign ones, new ownership brings benefits such as fresh capital, better systems and technology, professional management, and access to new markets.

Dr. Shourie certainly got it right when he underscored the importance of communication at a recent IMF gathering. He suggested that the IMF include a clause in all of its loan agreements with borrowing countries which obliges them to communicate the rationale of reform provisions to their people.

Indonesia should take heed of this advice and begin an aggressive communication strategy on privatization to deal with special interests and alleviate popular misperceptions. This is the first and most essential step the country must take to rid itself of its own bleeding ulcers.

PT Jasa Cita is a research and business information consultancy associated with CastleAsia.