Privatizing slowly-slowly

After the forest fires, followed by drought, a currency collapse and social and political unrest, Indonesia, with other emerging markets, has watched as each of its major foreign currency earners has dropped by about half during the past three years -- oil, tourism, palm oil and many others besides.

With the latest consensus of economic forecasters predicting a global downturn, even recession, in the second half of 1998 and first half of 1999, the majority of the economic drivers pushing the domestic and global economy along are now stalling or going in reverse.

Against this backdrop, Indonesia is in the midst of a major banking crisis, with 50 percent nonperforming loans (and rising), a credit squeeze with cripplingly high interest rates and a stock market collapse with 90 percent of companies bankrupt (yet still listed!). At most, it has an 18 month window, provided via an increased flow of IMF-led foreign loans, to get it through the current collapse and beyond its turning point.

It might be enough. Just.

But the government is playing a high risk game, with a host of political and social issues also crowding this agenda, when it could be taking a more proactive approach by selling off a host of state-owned businesses which (a) should be in the private sector anyway and (b) could be privatized quickly.

No government likes selling assets, but when necessary, as now, it should be done speedily to reduce the debt burden and help drive the economy quickly back up the growth curve.

It appears that the government is embarking upon its IMF commitment to raise US$1.5 billion from privatization sales somewhat reluctantly. And yet privatization, if done properly, is a "window of opportunity" to create a triple-win situation over the medium to long term.

The businesses benefit from new investment, increased growth rate and profitability, the labor force and management benefit from increased employment opportunities and higher salaries, and the government benefits from the sale proceeds and increased tax income.

The key criterion is to find the best partners to develop the businesses, not the best sale price.

When an individual's expenditure exceeds his income, he needs to earn more from his assets to reverse the expenditure-income gap. If the asset is worth more to a partner than he can earn from it himself, the rational decision is to sell and capture a part of the added value, either in the sale price or from a share of the enlarged future income stream.

When governments encounter this dilemma, particularly when confronted with selling to a foreigner, they invoke a range of arguments why they should not sell out, mainly based on economic nationalism, which puts off many top foreign firms by raising the risks of doing business. This opens the door for national investors to try to secure the asset at below market price.

Such arguments are mischievous. They promote nepotism, the practice of favoring those closest to you over the best available, often with the expectation of gaining some favor in return.

The key criterion is to find and select the best partner to develop the business to produce the greatest benefit stream in terms of maximizing profit, market share or employment. Here, selection is based upon each potential partners plan for developing the business, its track record of performance and the match of key competencies needed in each case. Only where the choice is very close, should nationality ever come into play.

To do otherwise is to adopt a strategy of slower growth than can be achieved. And it hands to your competitors, unencumbered by such uncompetitive practices, a strategic advantage to be exploited to the full.

Is it any wonder that Indonesia to date has no global market leaders?

Yet, if the above strategy to promoting business is adopted, it has the potential to produce many in the future!

SEAMUS MCELROY

Jakarta