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.