More debate on privatization needed

Winarno Zain, Director, Institute for Policy Studies, Jakarta

The debate on the government privatization programs for the state owned enterprises (SOEs) reflects how the issue is narrowly understood by the public. The merits or the shortcomings with regard to the privatization of SOEs are never clearly spelled out. It has created confusion from which political rhetoric opposing privatization has gained an upper hand and the chance to dominate the discourse. If not handled properly, these confusions could jeopardize the privatization program.

The government has given the impression that privatization of SOEs is linked to efforts to cover its budget deficit. Although earnings from sales of SOEs could help the government budget, linking privatization merely with the government budget is a big mistake. Privatization has a broader objective and meaning than just a means to increase government revenues. It is a means to achieve higher economic growth by making the whole economy more efficient.

In a free market and globalized economy, most probably, the buyer is an international corporation, operating in many parts of the world with superior international marketing networks. This could place most SOEs prominently among international networks, improving the chance to increase sales, exports and production.

And in the context of economic recovery, rightly or wrongly, successful privatization programs are seen as an important condition for regaining investor confidence.

Once privatized, the SOE will be freed from government intervention. The SOE will no longer have the obligation to perform "social functions", a vaguely defined requirement meant to assist with social equity.

Furthermore, in an era where political parties are competing for political power, there is a temptation from the parties holding the power to fill the SOE boards with their political appointees instead of professional managers. The privatization of SOEs would make such political patronage nearly impossible, allowing the business to be run by professional managers.

By any standards the performance of the SOEs or (BUMN) in 2001 was very dismal. The Indonesian government has 145 BUMNs. Last year, they made Rp 27 trillion in collective profit. But 80 percent of that profit came from only 11 BUMNs that mostly operate in a monopolistic environment.

But those who oppose privatization never base their arguments on economics. They use nationalist rhetoric instead to instill fear within the public of foreign ownership. The issue has become more complicated since various vested interests feel threatened by privatization programs.

The programs could be entangled in national and regional politics, creating a mess like the one we just witnessed recently with regard to the privatization of PT Semen Gresik. PT Semen Gresik, is now most likely obligated to divest of its ownership of its subsidiary PT Semen Padang because of locally enacted laws and regional politics in Padang which prevented the sale last year.

Nevertheless, it should be acknowledged, that there are several valid grounds for being critical of privatization. The current SOE employees may legitimately worry over the possibility of lay-offs as the new owner may embark on efficiency programs for the company. I also wonder how serious any given owner may remain committed for a long-term investment.

We can not rule out the possibility that the new owner, once they create better value for the company after successfully implementing efficiency programs, is tempted to sell the company to another owner for profit.

It is important, therefore, for the government to lay out a comprehensive strategy for its privatization program, in which the main objective should be to obtain the highest sales value and at the same time to gain political support.

A nation-wide campaign espousing the benefits of privatization should be conducted, involving many influential social groups including members of the legislature, local leaders, students and NGOs. The government should be more aggressive in disseminating the merits of privatization to the public.

As long as, the public only gets a one-sided view, and has little understanding of the issue, it will be difficult for the government to carry out privatization smoothly.