New privatization strategy

New privatization strategy

The government's decision last week to focus its privatization
program on private placement to strategic investors, instead of
public share offerings, seems to be the best alternative
available in the present circumstances.

The Jakarta Stock Exchange (JSX) is deeply depressed, with the
JSX Composite price index hovering below 400, compared with its
peak of over 743 in 1997. Most foreign portfolio investors, badly
burnt during the 1997 financial crisis, have quit the market or
remained on the sidelines. As most of the 14 state companies set
for privatization this year have not yet been publicly listed --
thereby having no trading track record and being virtually
unknown to the investing public -- very few investors would
likely be interested in their initial public offerings (IPOs).

If the poor market response to pharmaceutical company PT
Indofarma's IPO in March is any indication, market sentiment
appears to be too bearish to accept new issues. But the cash-
strapped government cannot afford to wait for the market to pick
up, as the privatization program must raise at least Rp 6.5
trillion (US$570 million) for the 2001 state budget. Almost six
months into the fiscal year, only PT Indofarma has been
privatized through an IPO, with an utterly disappointing outcome.

Given the economic slump and political uncertainty, state
companies will be able to get better prices through private
placement than public share offerings because strategic
investors, unlike portfolio investors who are oriented to profit
in the short term, look more to the future prospects of the asset
after their strategic alliance.

But the biggest challenge in selling state companies through
private placement is to ensure that every deal goes through an
open competitive bidding system to arrive at a fair price, so
that the House of Representatives will accept the transaction as
fair and clean of corruption, collusion and nepotism.

A politically acceptable system of privatization is even more
vital now in view of past bitter experience, in which deals that
had already been legally concluded were subsequently disputed by
House members, local politicians or other stakeholders, such as
employees and local communities.

The following are just some examples of controversial
transactions: the planned acquisition of 20 percent of Bank Bali
by Standard Chartered Bank, which was aborted due partly to
employee revolt in 1999; Malaysian Guthrie's acquisition of 25
oil palm plantations in March; and Canadian Manulife's
acquisition of the 40 percent stake owned by Dharmala in PT
Asuransi Jiwa Manulife Indonesia last year.

Even the successful acquisition by Mexico's Cemex of 25.5
percent of state-owned PT Semen Gresik in 1998 through a
competitive bid is now being disputed by local people and
politicians, who demand that the company spin off its Tonasa mill
in South Sulawesi and its Padang plant in West Sumatra.

These imbroglios once again make it most imperative for the
government and the House to first agree on clear-cut, basic
principles for private placement by strategic investors, and on
what should be considered strategic enterprises that are
consequently off-limits to foreign investors.

Of no less importance is to enlighten from the outset all the
stakeholders -- local people, local politicians and employees --
about the merits of the privatization program.

No one doubts that the present is not the best of times to
sell state companies, given the melting rupiah, economic
recession and political uncertainty. These unfavorable factors
would inevitably have a discounting influence on the price an
asset could fetch. But the House would be well advised to
appreciate that one dollar now is much more valuable to help the
economy than ten dollars a few years from now, when the economy
will have already started to grow more strongly again.

The House, which is often overzealous in overseeing government
policies, would also best serve the nation's interests in
realizing that the objective of privatization is both much more
important and wider than simply raising revenue for the state
budget.

True, failure to raise the Rp 6.5 trillion revenue target
would surely create a large new hole in the state budget, which
has been threatened with an additional Rp 30 trillion deficit on
top of the Rp 53 trillion deficit earlier estimated, due largely
to the higher-than-assumed depreciation of the rupiah.

But privatizing state companies also aims to improve their
competitiveness, through revamping efforts by new investors, and
at protecting them from intervention by politicians.

Capital inflow through private placement, besides helping
restore confidence in the country's economy, will expose state
companies to higher standards of disclosure and accountability,
the main hallmarks of good corporate governance.