JP/7/JAMES

JP/7/JAMES
Facing up to obligations

Indonesia in denial

James P. Bean
Regional Autonomy Researcher
Faculty of Law
Monash University
Australia
jamesbean@mail.minihub.org

Indonesia is in a bind, from which only expert maneuvering can
enable its escape. Privatization is both a national policy, and a
national dilemma -- a political football that threatens to become
a political grenade unless concrete action is taken.

Only the foolhardy would deny that the management of
corporatized public services and utilities (also called state-
owned enterprises) has been anything but incompetent and corrupt.

Figures on privatization of the abominably managed state-owned
enterprises must be inspected. Were it not so serious, it would
be funny. Meanwhile, the figures on aggregate public and private
sector debt came out recently -- US$210 billion.

All potential resources will not pay back a debt if they
cannot be qualitatively translated into actual assets. Just to
service the debt or meeting interest payments over one quarter of
the annual national budget must be allocated its way.

The creditors -- International Monetary Fund, the World Bank,
the Asia Development Bank -- have rescheduled, written off and
given concessions to substantial parts of Indonesia's debt. These
debts are soft loans -- huge risks taken by international lending
institutions aimed at priming flailing economies that have the
potential to extricate themselves from their temporary economic
woes. However, no loan comes without terms and conditions.

It is money with basic conditions like: a) It must be paid
back (loans are not gifts -- the payments make future and current
financial support of countries in economic peril possible); b) It
is a targeted loan and the recipient debtor undertakes to perform
restructuring, privatization and other economic stimulus programs
as stipulated under agreement; and c) Non-performance is not
rewarded with interest concessions and "contractual bending".

But Indonesia fails to get the point -- meet your obligations,
get investment flows happening, and get organized! A classic
contradiction is the government forever whining about investor
confidence, and whimpering over foreign investment figures.

Yet, when Indonesia's banks are bought up by foreigners and
run better than ever they complain furiously that foreign hordes
are taking over their precious banking sector. Five years have
elapsed since the financial crisis and still the world and
Indonesia's people bear witness to the never-ending overseas
trips of officials and legislators, KKN scandals, and plummeting
investor confidence.

The government, regions and policymakers must now start
earning their keep. One method is privatization of government
services/utilities through domestic and/or foreign direct
investment.

Until now the debate on privatization is borderline infantile.
Privatization is oversimplified when translated as selling off
government assets to the highest bidder. There are many forms of
privatization such as joint public/private partnerships, build-
operate-transfer arrangements, franchise agreements, contracting
out, management contracts, and long-term lease arrangements.

However, privatization is by no means a panacea for all of
economic ills. It too requires certain preconditions to maximize
its efficacy. Without a competitive market and conducive
regulatory structure, any attempt at swastanisasi will merely
reflect the incompatibility of the current economic atmosphere.

Thus, state-owned enterprises cannot be privatized until the
government gets serious about regulation and enabling foreign
investment. The regions must also start professionally and
equitably developing their own households.

The Director-General for State Owned Enterprises (BUMN) in a
performance report for the period between April and December 2001
identified a paltry 11 out of 161 BUMN as being commercially
sustainable. Moreover 145 of the state-owned firms are running at
a loss. Even the aggregate return on equity for state owned
enterprises is an embarrassing 2.5 percent.

This in itself is a compelling argument for privatization,
i.e. get unprofessional government officials and their cronies
out of the public provision of services/utilities. Public-private
partnerships can shelter and protect public interest while
bringing domestic and/or foreign investment potential and added
value from the private sector.

The management and operation of enterprises that provide
public services and/or utilities are more likely to be run
efficiently and along business lines when predicated on a
privatized model rather than a corporatized model such as a
state-owned enterprise. In the case of substandard BUMN/BUMD
(region-owned enterprise) privatization allocates risk away from
the government -- which is definitely good -- and in many cases
means infrastructure and maintenance can be made available in the
immediate term to be paid for in future budgets.

Many commentators have pointed to the 1945 Constitution, in
particular Article 33(2) which states "divisions which provide
essential services for the state and control public needs are
under the control of the state..."

This has been read as proscribing privatization; however this
provision is so ambivalent that it could equally be interpreted
as a plenary power of the state to promulgate legislation
regulating the provision of essential services and/or utilities.
Any assertion that Indonesia's regulatory structure encourages
competition and direct investment is erroneous.

There is an immediate need for a rethink and revision of Act
No. 1 of 1967 regarding Foreign Investment, and also the drafting
of legislation regulating privatization. Legislation on regional
autonomy should spur the regions to privatize services and
engender competition. The persistent and colorable practices of
regional governments and legislatures, which allocate their
budgets along self-enrichment lines, cannot and must not
continue.

The government also needs to clarify the relationships between
itself, the regions, and investment agencies such as the
Investment Coordinating Board (BKPM) and the Integrated Economic
Development Zone (KAPET). The role of investment agencies as
facilitators of foreign investment is being squandered in much
the same way they waste their own funding on overseas trips
desperately trying to woo the outside world with the same old
broken record.

The central and regional governments' propensity for
increasing tax-based revenue streams and any other instantly
gratifying exaction upon the dwindling investor community cannot
be explained away or shmoozed away by a personal visit. Indonesia
has to get on with the program, compete with neighbors and
provide cold mathematical incentives for investment.

Now, what was once a country emerging from a dictatorship with
so much potential is being sold down the river by greed and
incompetence. Yet Indonesia can still change its course and swim
a fierce current back to development.

The government needs to subject privatization to the impartial
scrutiny of an econometrician, and reappraise its irrational fear
of international lending institutions. Never look a gift horse in
the mouth, and it might just be that the IMF and World Bank are
trying to improve the country; accordingly they make better
allies, than perceived enemies.