IBRA delays proving too costly

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.