Privatizing slowly-slowly

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