Disposing of ulcers: Privatization in Indonesia

Disposing of 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.