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.