More education on privatization is needed

More education on privatization is 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.