Opposing divestment

Opposing divestment

The mounting opposition from the House of Representatives and
the lingering political controversy over the recent sale of the
government's majority stake in PT Indosat telecommunications
company could jeopardize the asset recovery programs of the
Indonesian Bank Restructuring Agency and privatization of state
companies (SOEs) and consequently threaten fiscal sustainability.

An increasing number of House members of Commission IX in
charge of state finance, banks and state companies have warned
they would simply refuse to hold consultations with the
government about privatization and divestment at nationalized
banks until a law on SOEs was enacted.

Yet more flabbergasting is that while even the status of the
bill on SOEs has remained uncertain, several House members have
demanded that government divestment programs be governed by a
privatization law.

If this position became the official stance of House
Commission IX it could immediately cause a revenue shortfall of
Rp 20 trillion (US$2.2 billion) or increase the current state
budget deficit by almost 58 percent to Rp 54.5 trillion.
Such a political stance also would be quite absurd because
privatization has been accelerated since 1998 on the basis of the
decrees of the People's Consultative Assembly, the highest
legislative body, the Law on National Development Program and
the annual state budget that has to be approved by the House.
No one denies the imperative need for better and stronger legal
frameworks such as special laws to govern state companies and
privatization. But abruptly stopping the whole program now at a
time when the government is almost broke, overburdened with
hundreds of billions dollars in domestic and foreign debts, is
entirely irrational.

Such an attitude also seems inhumanly arrogant and ignorant of
the plight of millions of people who have been suffering from
dire poverty since the onset of the 1997 economic crisis and the
millions of children who have been deprived of even simply basic
education and health services.

Are the House members so intellectually ignorant of the blunt
fact that without a faster pace of privatization and sales of
assets held by IBRA there will never be a virtuous cycle to fuel
a sustainable economic recovery?

Aren't the House members aware that the government, perceived
to be one of the most corrupt in the world, now controls and
manages all the largest national banks and thousands of other
companies taken over from closed and nationalized banks?

One does not need to be a genius to realize that the longer
these assets are under the government, the worse would be their
quality and the slower would be the recovery of the banking
industry as they will remain highly inefficient and vulnerable to
corruption and collusion.

The findings of independent audits of dozens of SOEs over the
past two years showed how grossly inefficient had been those
state companies, how lax had been their internal control, how
poor had been their accounting standards and practices and how
arbitrary had been government or senior officials' interference
into their day-to-day operations.

True, as some analysts have argued, as long as the government
remains largely corrupt, privatization would not solve the
problems of SOEs. However the empirical experiences in most other
countries have shown that privatization brought in additional
revenues to a cash-starved government to enable it to cut down
debt burdens, thereby releasing more resources for the public's
welfare.

More important too is that privatization is also greatly
effective in reducing rent-seeking activities of government
officials since private shareholders have more leverage to stand
up against political pressures from officials with vested
interests and in improving macroeconomic efficiency through the
creation of a more competitive market. Its microeconomic benefits
are equally manifold, including more efficient and consequently
more profitable enterprises, larger tax revenues for the state, a
significant increase in investment to create more jobs.

Fears that without strong regulatory and competition
frameworks the privatization program would bring the national
economy under foreign domination are overblown because the
government always retains its sovereign rights to regulate all
economic activities and all other areas affecting the economy.

The country could not afford the luxury of stopping the
privatization program because we are now in the midst of a deep
crisis whereby the economy continues to bleed and the number of
people falling into unemployment and absolute poverty is
increasing daily.

Instead of demanding a special law to govern privatization, a
process that could take more than one year to prepare and
deliberate, the House should require the government to formulate
a credible strategy for SOE reform and privatization and to
stipulate clear-cut directives, standard operational procedures
and a step-by-step process for divestment to ensure highly
accountable and transparent transactions.