Nationalist sentiment in business judgment

Nationalist sentiment in business judgment

Umar Juoro, Jakarta

The strong criticism of several politicians, domestic bankers
and observers over the decision of the Ministry of Finance and
the State Assets Management Company (PPA) to drop large domestic
state banks from the second stage of bidding for Bank Permata
seems to have been characterized by a strong nationalistic
sentiment.

Furthermore, the critics urged the minister of finance to give
preferential treatment to domestic bidders. Another example of
nationalistic sentiment can be noted in Pertamina's negative
stance on the extension of the Exxon-Cepu contract beyond 2010.

There have been long and treacherous debates in the House of
Representatives, and publicly, on the issue of asset sales and
privatization. The opponents of the programs (asset sales and
privatization) argue that selling assets that were taken from
distressed and closed banks and privatizing state-owned
enterprises to foreigners would only entrench foreign domination
of the Indonesian economy.

On the other hand, supporters of the programs argue that
Indonesia is desperately in need of fresh investment and the
government -- after bailing out so many banks between 1997 and
1999 -- has been in control of too many assets.

Thus, asset sales and privatization to foreign investors would
provide benefits, in terms of capital inflow, better management,
and technology.

These supporters further argue that domestic investors lack
the capital to bid for the assets offered by the government and
are acutely short of management skills to further develop the
distressed assets.

The supporters further claim that allowing state companies or
banks to take over Bank Permata would strengthen the government's
involvement in the banking industry.

Meanwhile, the critics of another extension of the Cepu
concession for ExxonMobil seem to have forgotten that Pertamina
itself is facing severe cash-flow problems. Moreover, the
domestic financial system does not yet have the capacity to
manage high risks in the oil and gas business.

The extension of the contract for ExxonMobil would not only
optimize oil and gas production, which is currently below
capacity, but would encourage new foreign direct investment
(FDI) in the oil and gas industry and other sectors of the
economy.

Unfortunately, slow economic process -- despite macroeconomic
stability -- seems to help support the view of the opponents of
asset sales and privatization, who often claim that those
programs have miserably failed to speed up the recovery process.

These opponents also argue that foreign direct investment has
not yet returned to Indonesia, claiming capital inflow has so far
been limited to portfolio investment and the acquisition of the
assets sold by the government.

They also point out that the new foreign owners have not made
significant improvements in the banks they acquired from the
government, as can be noted in the persistently very slow
expansion in bank lending and the focus of most banks on consumer
banking.

The real issue, however, does not have anything to do with the
nationality of the new owners of the sold assets or privatized
state companies.
What is really of concern is how to address structural problems,
notably those related to weak law enforcement, overly rigid labor
regulations and excesses from the decentralization process of the
government to local administrations. The government has
miserably failed to overcome those problems.

Thus, what has appeared to be the rise of nationalist
sentiment is actually an expression of frustration over the
failure of the government to address structural issues, the lack
of policy coordination among government institutions -- including
state-owned enterprises -- and the strong lobbying of certain
vested-interest groups to take advantage of this environment of
confusion.

The fact of the matter is that the House, the banking sector,
and other sectors of the economy in general have been welcoming
the participation of foreign investors, as can be seen, among
other things, by the House's approval of the sale of Bank Permata
and several other banks previously and several state-owned
enterprises.

However, the persistent lack of foreign direct investment flow
and weak manufacturing operations have caused overreactions to
asset sales, privatization and other matters involving foreign
investors.

Moreover, many politicians find asset sales and privatization
are much more capable of attracting mass-media attention than
other economic issues.

Unfortunately, these controversies tend to discourage new
foreign direct investment and business in general by creating
uncertainty.

The new government, therefore, should focus on how to overcome
structural problems that have been dampening investor interest in
the economy.

There are still many state banks and companies that would be
quite promising buys for private investors, including Bank
Mandiri, Bank BNI and even such a vital enterprise as Pertamina.

It is also better for the government to gain political support
for extending the Cepu contract to ExxonMobil because this move
would have a strong positive impact on bringing new foreign
direct investment to the petroleum industry.

The government, however, should design the privatization
program in such a way as to bring about the strongest positive
impact on foreign direct investment.

The writer is a Senior Fellow at the Habibie Center.