Privatization should be reactivated

Privatization should be reactivated

The panelists agreed that privatization of state-owned
enterprises (SOEs), like asset sales by the Indonesian Bank
Restructuring Agency, were capable of reinvigorating the economy.

Divestment would bring in additional revenue to the cash-
strapped government to enable it to reduce its debt burden, and
improve investor confidence in the economy as investors would
improve the efficiency of SOEs.

Privatization was greatly effective in improving macroeconomic
efficiency through the creation of a more competitive market. And
its microeconomic benefits were equally far-reaching, including
more efficient and consequently more profitable enterprises, a
significant increase in investment, a broader technological base
and managerial depth and better products at lower costs to
consumers.

However, privatization appeared a dirty word, political
ammunition that was often fired by vested interest groups to
incite people to demonstrate and provoke employees to strike, as
the Semen Gresik debacle over the last few months had shown.

One panelist asserted that without a faster pace of
privatization, the cash-starved government, already burdened with
mountains of debts, would have to depend on new borrowings to
finance its expenditure.

Worse still, he added, the economy would continue to suffer
from inefficiencies because the more than 180 SOEs that provided
public services, produce industrial materials and operate in such
vital sectors as public utilities and banking, were notorious for
corruption and collusive dealings.

"Moreover, we are now like a communist country where the
government owns, controls or manages almost 80 percent of
productive assets," he pointed out.

He referred to the thousands of assets consisting of
enterprises, banks and equity stakes in companies which were
taken over by the government after the restructuring of the
banking industry in 1997-2000.

"These assets have to be unleashed to private investors as
soon as possible, otherwise their quality will continue to
decline," he added.

The government itself acknowledged in its latest letter of
intent to the International Monetary Fund (IMF) on Dec. 13, that
privatization of state-owned enterprises (SOEs) was a key part of
its reform efforts aimed at improving economic performance and
strengthening the public sector's finances.

It also admitted that SOEs had often been inefficient
providers of goods and services, a drain on the public finances
and exploited as cash cows for the benefits of individuals and
special-interest groups.

Just look at the findings of independent audits on SOEs, which
were made at the request of the IMF as part of the reform
program.

The second round of independent audits that involved five SOEs
-- PT Pelabuhan Indonesia port company, PT Jasa Marga toll road
operator, PT Perkebunan Nusantara IV plantation company, PT
Garuda Indonesia national flag carrier and PT Telekomunikasi
Indonesia (Telkom) -- showed how grossly inefficient SOEs were.

The audits discovered Rp 8.5 trillion or $1.6 billion in
losses due to inefficiency, Rp 7.3 trillion in potential losses
from shady or questionable deals and Rp 776 billion or $147
million in lost opportunities for gains or savings.

Given their large size in the economy, the SOEs weak
performance has acted as a major drag on the overall economic
performance.

The government therefore has reiterated its commitment to
speed up privatization.

The government has indeed failed miserably in its
privatization program since 1998. It had set 12 SOEs for
divestment each year since 1998 but has so far divested only
around five, because almost every deal was embroiled in political
controversy and allegations of corruption.

Not a single cent of the Rp 6.5 trillion in revenues expected
from privatization was collected in 2000. This year, only Rp 3.5
trillion of the Rp 6.5 trillion revenue target was achieved. Even
these revenues were made only through a further divestment in
listed PT Telkom, which was privatized in 1995.

No one disagrees that privatization was fundamentally a
political transformation and a difficult task as it exacted a
major change in the government's role in the economy against the
strong opposition from vested interest groups.

Vested interest groups, including many politicians in the
House of Representatives, whipped up xenophobia in their attempts
to block privatization, arguing that the measure amounts to the
surrender of national sovereignty to foreigners.

Other opponents of the program have warned the government
against selling SOEs at cheap prices under the current adverse
conditions, arguing that asset prices will eventually rise when
the economy strengthens.

The problem though is that the economy will not likely gain a
sustainable recovery unless many major SOEs are released to
private investors who were certainly better managers than the
government.

As one panelist pointed out: "You cannot have the cake and eat
it too."

He said asset prices would increase only if the economy
regained investor confidence, but this confidence would never be
won unless the government showed a good policy performance
regarding privatization.

Obviously, selling state companies now would not fetch the
best prices, given the high risks associated with uncertainty
about law enforcement and the initial complications from
decentralization of political and fiscal autonomy to provinces
and districts.

It was completely irrational to predict what is possible from
transactions done in the best of times compared to those
conducted in the worst of times we are in now, especially in view
of the bleak outlook of the global economy after the Sept. 11
terrorist attacks on the United States, the world's biggest
economic powerhouse.

As the case for faster privatization is so compelling, seen
from fiscal sustainability and macroeconomic efficiency, many had
found it hard to understand why the government had not yet
formulated a broad legal and political framework for the program
and set clear-cut guidelines for privatization transactions.

The World Bank suggested in its latest report on Indonesia's
economy that the government reach a broad consensus with the
House on SOE restructuring and a privatization strategy on which
individual transactions would be based.

But given the bitter experiences in past privatization
efforts, the government also needed to formulate standard
operational procedures, the step-by-step process for divestment
in SOEs to secure transparency and accountability.