Privatization or theft

Privatization or theft

It is easy to become increasingly pessimistic about the
ability of President Susilo Bambang Yudhoyono's economic team to
continue economic reforms -- especially when new evidence emerges
indicating how incoherent the policy stance of his economics
ministers is.

The latest worrisome news was last week's admission by
Minister for State Enterprises Sugiharto that it was virtually
impossible to resume the privatization program this year as the
time was not right and the market conditions were unfavorable.

He suggested instead that dividend payouts from state
companies, which were envisaged at Rp 9.5 trillion in the current
budget, could be increased to Rp 13.50 trillion to offset the
shortfall from privatization.

Last month, chief economics minister Aburizal Bakrie reminded
Sugiharto of the privatization drive that was supposed to bring
in Rp 3.5 trillion in revenues to the state budget. Aburizal's
instruction followed up a memo from the finance minister earlier
in April about the same subject.

But Sugiharto's response seemed misguided as he saw
privatization only from the aspect of fiscal need, not from the
broader perspective of reforming state companies to improve
macroeconomic efficiency. Right from the outset, even during
Soeharto's authoritarian rule, the privatization policy has
always been designed mainly to improve macroeconomic efficiency,
besides helping fiscal sustainability.

His suggestion that the shortfall in state revenues from
privatization be plugged by additional dividend payouts from
state companies -- though fiscally possible -- is inimical to
the future growth of state companies. Such a move would likely
retard their capacity to expand as the portion of their retained
earnings for investment would be very small.

Certainly, privatization, especially in such a fragile
democracy as Indonesia, is not an easy process and is always
politically sensitive and often triggers narrow-minded
nationalist sentiments. No wonder, because the program is
virtually a political transformation, which exacts a major change
in the government's role in the economy.

However, given the strong political mandate of the current
government and because privatization now has a strong legal
foundation -- the Law on State Companies -- and has clearly been
stipulated in the 2005 State Budget Law, Sugiharto should have
acted firmly and continued the privatization program.

It is now also the right time to resume the program, given the
bullish sentiment on the Jakarta Stock Exchange, and what the
government claims as the return of investor confidence in the
country's economy.

As a former businessman, Sugiharto must be fully aware of how
inefficient most state companies are; how they have been
plundered by corrupt senior officials and politicians, how lax
their internal controls and accounting standards are and how
arbitrary government interference has been into their day-to-day
operations. The sorry state enterprises are in has been confirmed
by several recent findings of the Supreme Audit Agency.

Moreover, the state seems to be directly involved in too many
sectors of the economy, as can be seen in the large number of
state companies (more than 165, not including their
subsidiaries). Analyst Umar Juoro observed at a seminar last week
that his assessment of 158 state companies with a combined total
of Rp 1,313 trillion in assets last year concluded that 31 of
them lost Rp 4.5 trillion while the other 127 earned only Rp 29.6
trillion. This meant that their average return on assets was only
2.49 percent.

As the experiences of many other developing countries have
shown, privatization that is well-managed with high standards of
transparency and accountability is greatly effective in improving
macroeconomic efficiency through the promotion of a more
competitive market and more efficient and consequently more
profitable enterprises, bringing in larger tax revenues for the
state. Yet more importantly, since many state companies operate
in upstream industries to produce basic materials, their higher
efficiency will also contribute to the competitiveness of
thousands of downstream industrial firms.

What Sugiharto needs to do to smoothen the privatization
process is to improve the standard operational procedures, the
step-by-step process for public share offerings or strategic
sales of state companies, to secure transparency and
accountability and to close any loopholes that may still be
exploited by extremely corrupt officials.

It is better for the interests of the people to put state
companies under private investors who can turn the assets into
highly profitable businesses that create more jobs and pay more
taxes to the state, rather than maintain them as state assets
which are sucked dry by crooked government officials.