IBRA delays proving too costly

James Castle, Castles Group, President, American Chamber of Commerce, Jakarta

One of the most frequently heard excuses for not selling IBRA assets or privatizing Indonesia's state-owned enterprises is that weak economic conditions for the offering prices will be "too low". The fallacy of this thinking was clearly revealed at the National Privatization Conference CastleAsia and Intermatrix hosted earlier last week. Virtually every expert speaker said that the selling price is actually a minor issue when the government analyzes the economic and financial benefits of privatizing state companies.

There are two principal flaws in the pricing arguments. First, governments are no better at timing markets than other investors. When the Indonesian Bank Restructuring Agency first began its activities in 1998/1999 everyone said that they should take their time in selling because the environment at that time was not conducive to good selling prices.

As we now know, 1999 was probably the best time in the past three years to sell assets. In fact, economic conditions have been extremely volatile and today's conditions are not as good as they were in 1999. Nevertheless, this is not an argument for waiting for further recovery.

It is a warning that asset prices could get even worse, particularly if the international security situation deteriorates into open warfare. By this logic, the sooner assets are sold the better, today probably offers the best pricing environment that we will find in the next 12 months. It is irresponsible to delay.

Even more important, pricing is not the major issue when evaluating the benefits of privatization. Most experts now concede that price is a relatively minor consideration for a government wishing to streamline its economy and create wealth for its citizens.

A World Bank expert, Vikram Nehru, said that because so many governments had undertaken privatization over the past two decades, there was a "very rich" database from which important conclusions can be drawn.

This was reinforced by an IMF expert, David Nellor, who said that benefits from efficiency gains and from a reduction in the burden of financing generally weak and inefficient state corporations were much bigger than the actual cash revenue received from such sales.

In terms of efficiency gains, output (as defined by real sales per employee) increased 67 percent in developing countries. Dividends also increased 76 percent and net income was up 63 percent in privatized companies.

Data on the impact of privatization of state-owned enterprises in developing countries not only shows that there is a substantial fiscal pay-off and real growth in the corporations privatized but they also help reduce government debt which adds to the fiscal sustainability of developing countries.

The data show that state-owned enterprises are a financing drain on government budgets, and eliminating this drain by selling these assets into the private sector frees up public finances for other purposes.

This view was echoed by Carlos Solchaga, formerly Spain's coordinating minister for the economy and the driving force behind the country's privatization initiative in the 1980s and early 1990s. In one telling example, the Spanish authorities effectively paid Volkswagen to take over heavily indebted state- owned auto maker SEAT. According to Solchaga, after being privatized, SEAT doubled its capacity after several years and was transformed into a first rate company.

Moreover, these are not even the most important benefits of privatization. The most important return is the "macro dividend". In many cases, aggressive privatization programs have added up to 1 percent to gross domestic production growth in the economies affected. And this is not a one-time benefit. The impact on GDP growth was felt for years to come, well after the first year of privatization.

Indonesia, for example, has over 155 state-owned enterprises including banks and other financial institutions. These enterprises employ over 650,000 persons directly and an additional 800,000 indirectly. They account for perhaps 12 percent of Indonesia's GDP.

Since state-owned enterprises have a reputation for paying poor salaries and being extremely inefficient, it is not difficult to imagine a problem what such a large public stake in corporate activities is to Indonesia. Over 1.4 million employees are trapped in poor-paying jobs in inefficient enterprises which are sucking scarce public capital out of state coffers.

A major obstacle to privatization is the emotional attachment to "ownership". Public ownership is seen by many old fashioned economic thinkers as keeping business out of the hands of greedy capitalists and entrepreneurs. All economic evidence the last 25 years points to the contrary.

Government makes no money by owning companies. These companies, as already shown, are a drain on the public treasury. The government should sell these enterprises to private interests as soon as possible and then reap the direct benefits of taxation both on the corporations and on the salaries of their employees. In this way, the government gets a no risk return and frees up tax revenues to be used in education, infrastructure and professionalization of security forces instead of feeding a greedy, unproductive public sector.

State-owned enterprises are clearly not a national asset. They are a national burden. The correct emotion is not one of romantic attachment to "ownership", but one of anger at the high cost and wastage of public ownership. Indonesia's state-owned enterprises may benefit a privileged few which manage them in a highly protected, uncompetitive environment, but they do not benefit the average Indonesian. In the words of one Indonesian analyst at the Conference, "Politicians and managerial personnel in SOE's are human. Each of them is a prisoner of the primal instincts and deeply petrified cultural values, including the values that often force one to commit corruption, collusion and nepotism."

State-owned enterprises do not benefit the people of Indonesia. The sooner they are sold to productive private interests, the better.