Good corporate governance vital for privatization: WB

JAKARTA (JP): The negative perception foreign investors have of Indonesia's corporate governance has hampered the privatization of state companies, a World Bank official said on Tuesday.

World Bank economist Bernard Drum said foreign investors questioned the ability of state firms to adopt good corporate governance as quickly as private firms.

"Those companies that get good corporate governance are going to get the most investment," Drum said during a break in a conference on good corporate governance hosted by the Indonesian Chamber of Commerce.

He said it was a common perception around the world that state enterprises were slower to adopt market changes, received more pressure from political intervention and had more difficulty improving accountability.

"The government has to release control (of state firms), they'll have to let go," Drum said.

According to him, speeding up the privatization process would itself create a better perception of Indonesia's state firms. Yet much of Indonesia's private sector has fallen into the government's hands as a result of the economic crisis, he said.

Aside from state enterprises, the government owns some Rp 600 trillion (US$68 billion) in nationalized assets under the Indonesian Bank Restructuring Agency.

"When investors see the structure of the Indonesian economy, and they see a large state control, it makes them nervous," he said. "It'll make a big difference to foreign perception if the government rapidly privatized."

Drum said Indonesia had made some progress in adopting good corporate governance, evidenced by the fact there was increasing public awareness of the need to implement these practices.

The recent establishment of the National Committee on Corporate Governance, he said, showed the nation was earnest in its efforts to adopt good corporate practices.

The establishment of the committee was part of the country's economic reforms, as stipulated in the letter of intent the government signed with the International Monetary Fund.

The committee formulated last May a code for good corporate governance, which it expects will become the backbone for the development of sectoral policies at the institutional level.

"Businesspeople need to understand that practicing good corporate governance is for their own interests and not something they do for the good of humanity," Drum said.

However, he said, foreign investors' perception of Indonesia's corporate practices remained unchanged despite this new awareness. "It's too early, perception is still bad as the survey result shows."

Drum was referring to a 1999 survey by McKinsey & Co., which ranked Indonesia as among the countries lacking good corporate practices according to Asian and U.S. investors.

He said foreign investors were waiting for clear signals that there was more than just an increased public awareness of the need for good corporate governance. "Some very highly conspicuous prosecutions for corruption would be very useful."

Prosecuting high-level corruption cases, he said, would show the government was upholding the rule of law, which was mandatory in ensuring good corporate governance. "There are threats (of prosecution), but nothing has happened yet. The government needs to send a message that it is serious."

The secretary to the state minister of investment and state enterprises development, I Nyoman Tjager, admitted state firms were slow to adopt good corporate governance.

"In making decisions, they (state firms) depend on the shareholders -- the bureaucrats -- which is why they are slower than private firms," he said during the conference.

However, Nyoman added, the government was adopting policies aimed at improving the corporate practices of state firms. He said these policies included the requirement of fit and proper tests for directors.

Nyoman said his ministry also was planning to establish performance incentive packages such as those found in the private sector for the boards of directors and commissioners of state firms.

Separately, Sofyan Wanandi of the National Business Development Council said foreign investors were looking for "safe, reliable, low-cost and profitable areas of investment, with world-class services to investors who comply with the principles and rules of good corporate governance".

However, he said, investors did not expect a sudden change, but were looking for gradual improvements that demonstrated Indonesia's seriousness and capability to change.(bkm)