Disposing of bleeding ulcers: Privatization in Indonesia

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 point of 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.

The reality is that 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. The answer is
that, 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 the country announced its
privatization plans 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 current 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 the creation of 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.

On this score, 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.

In fact, over the last two years Dr. Shourie has successfully
sold 22 companies for US$2.2 billion. To accomplish this he
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".

Apart from this, the 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. Regrettably, this is not the way to seek wider
public support for the government's program.

Instead, Minister Sukardi and other top officials need to
focus more on the beneficial changes that come with
privatization. For example, studies show that privatization, when
implemented properly, raises the efficiency of firms and promotes
economic growth. As a result of this, increased tax revenues from
more productive companies 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, the public must be reminded that 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.