RI state companies to face bumpy road of reform

Indonesia, Inc., Privatising State-Owned Enterprises; Tanri Abeng; Times Academic Press, Singapore, 2001; 224 pages

JAKARTA (JP): Tanri Abeng has this message of caution for officials responsible for raising Rp 6.5 trillion (US$542 million) from the sale of 12 state-owned companies this year: "Don't go for fast-track privatization".

"When I tried to push through a series of quick privatizations I encountered enormous opposition from state company managers, vested interest groups and nationalistic elements," Tanri says in his book Indonesia Inc.

The 224-page book, written in English and published recently by Times Academic Press, Singapore, documents Tanri's experiences in trying to reform the 164 state companies in operations when he was the minister of state enterprises under former president Soeharto from March to May 1998, and then under former president B.J. Habibie between May 1998 and October 1999.

He describes how, in an environment characterized by very little public trust in the government, it was even more difficult to persuade people that ministers or other officials were trying to do the right thing.

"The effect of all this was to severely undermine our attempts to promote privatization," he says.

Tanri, who in the early 1990s was dubbed the million-dollar manager due to his great success in managing several foreign businesses, tells us how he found himself entangled in the government bureaucracy and power politics, having to navigate through different sets of conflicting interests.

He served in the last two months of Soeharto's more than three decades of authoritarian rule, observing how Soeharto treated the government as a vast Javanese kingdom and used state companies as cash cows for his family members and close associates.

Strikingly different, Soeharto's successor Habibie ran his cabinet like a chief executive officer chairing the board meeting of a large conglomerate, involving his ministers and key advisers in vigorous, open debates on policy matters.

It was against this backdrop of volatile bureaucratic and political climates that Tanri struggled to execute his task of restructuring the largely inefficient and corruption-infested state companies at a time when the country was mired in its worst-ever economic crisis.

As well as intervention from the Soehartos and their cronies, Tanri faced the delicate challenge of warding off meddling by other cabinet ministers who had also used state companies to their personal benefit.

The problems arose from the fact that, before the creation of a special ministry of state companies in March 1998, these enterprises were under the supervision of the various ministries, depending on the nature of their business.

Even before starting his job, Tanri was faced with the formidable task of setting up a ministry, organizing its structure and recruiting staff within a severely limited budget allocation.

He initially planned to set up a holding company, instead of a ministry, following the successes of Malaysia's Khazanah Holdings and Singapore's Temasek Holdings which manage state companies and government investments. He was forced to scrap the plan though, because it required a new law as a legal basis, something that could take years to enact.

The book is not simply an account of his experiences, but more an analytical review of how the politics of reform in state companies in a developing country like Indonesia should be conducted.

The findings of his diagnosis of the main problems besetting state companies are not much different from the conclusions of past studies on Indonesian public-sector companies made by academics: excessive government intervention, overly bureaucratic decision making, poor-quality managers and lack of accountability.

But the book delves deeper into describing the master plan he formulated immediately after the ministry was in place. This masterplan outlines the policies, methods and procedures his ministry would use for the reform and privatization process, serving as a main guide for all policy measures related to state companies.

He also describes a step-by-step approach to state company reform and privatization, explaining in detail the procedures and steps that should be taken in launching an initial public offering, private placement or finding a strategic alliance.

Tanri designs blue prints for the restructuring of state companies according to their industry and outlines efforts to increase their market value through what he calls value-creation programs.

Ultimately, Tanri's every move within the privatization process put him in the spotlight, leading to accusations by analysts and politicians that he lined his own pockets, as well as raising funds for the Golkar Party, which then supported Habibie.

Judging from the procedures and the step-by-step approach he set for every stage of the privatization process it would actually be rather impossible for him or his officials to skim off money for themselves.

One of the procedures, for example, required all money paid by investors for shares in state companies to go directly to the ministry of finance. As in a company, the functions of cashier and bookkeeper are separated.

Yet due to the pervasive distrust of the Habibie administration, which was seen by the public simply as an extension of the Soeharto regime, allegations of corruption soon became the main issue he encountered in his short career.

Public suspicions were not the only challenge facing his ministry though. With foreign and domestic investors having withdrawn their money during the peak of the crisis in 1998, it was then extremely difficult to find buyers for state companies.

Then state company managers and parties with a vested interest in the companies mounted strong opposition to the privatization, fearing that they would lose their lucrative positions with the entry of new investors, or shareholders.

Under pressure to raise money for the state budget, Tanri selected Semen Gresik as the first company to be privatized. As soon as he announced the plan publicly, including the steps and procedures for the bidding, two securities firms closely aligned with the Soehartos approached him.

Makindo allied with Swiss Holderbank cement company, and Bhakti Investama (partly owned by Soeharto's daughter Titik Prabowo) aligned with German Heidelberger cement company, wanted to bid for Semen Gresik.

"Worried that this might lead to a special deal for Holderbank entirely in violation of the system-based program I promote, I then approached Soeharto and outlined my intention to follow my- step-by-step privatization system ... and to my pleasant surprise, he told me 'to do what is in the best interest of the country'."

After several rounds of bidding, Mexico's Cemex was finally selected as the winner with the highest bid, paying a 112 percent premium on Semen Gresik's share-market value.

Despite the obstacles and unfavorable economic conditions, Tanri eventually succeeded in selling the shares of five state companies, bringing $1.03 billion into the state coffers between March 1998 and September 1999.

Tanri also claims in his book that his restructuring efforts succeeded in increasing the number of sound state companies, based on the government-set parameters, from 81 in 1997 to 89 in 1998.

Unfortunately, however, Tanri seemed to slip deeper into power politics by mid-1999, joining the Golkar Party campaign to secure Habibie's election.

He was implicated in what is now known as the Bank Bali scandal -- the alleged embezzlement of state funds through a transaction with Bank Bali -- and was investigated by the Attorney General's Office.

Even though most primary defendants in the scandal have been acquitted by the court, and investigations have not yet resulted in any case against Tanri, his image as a first-class corporate manager was tainted.

Notwithstanding this perception, however, the concept, method, step-by-step approach and procedures he developed for the reform and privatization of state companies are an instructive insight on how the daunting task should be executed in a fully transparent and highly accountable manner.

-- Vincent Lingga