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.