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.