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.