Stronger case for faster privatization

Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

No one disagrees with the notion that privatization is fundamentally a political transformation and an uphill task, especially for such a fragile democracy as Indonesia. It will exact a major change in the government's role in the economy and in society as a whole.

But the experience of developing countries, which took the political courage to bite the bullet, prove that privatization of state companies is greatly effective in improving macroeconomic efficiency through the creation of a more competitive market.

Its microeconomic benefits are equally far-reaching, including more efficient and consequently more profitable enterprises, a significant increase in investment, broader technological base and managerial depth and better products at lower costs to the consumers.

Extrapolate these potential benefits against the current Indonesian condition, where most of the 185 state companies with total assets of Rp 850 trillion (US$89.5 billion) are inefficient and barely profitable with a government that is severely strapped for liquidity and one can easily see why privatization has been made a core element of the country's economic reform program.

Proceeds from privatization will immediately help plug the big hole in the budget and consequently speed up fiscal consolidation. Profitable companies generate more tax revenues and dividends. More importantly, since many state companies operate in upstream industries, their higher efficiency will also contribute to the competitiveness of thousands of downstream industries.

However, only around five state companies have been privatized over the past four years, due partly to political uncertainty, but mainly because of strong opposition from the House of Representatives and vested-interest groups, notably employees, managers and senior officials, as well as other political groups of a nationalist or populist bent.

Admittedly, privatization, like other reform measures, initially cause destabilizing impacts as redundant employees and complacent managers in inefficient companies are afraid of losing jobs and many senior officials with political power over these enterprises are worried about losing their cash cows.

But empirical evidence from research shows that no country, most notably crisis-ridden ones such as Indonesia, which has been mired in a deep multi-dimensional crisis since late 1997, can make significant gains without first undergoing short-term pains.

Inordinately nationalist groups, who see the handing over of control of inefficient companies to foreign investors as the surrender of national sovereignty to foreigners, seem afraid of the political manipulation and economic sabotage associated with several multinationals in the past.

But these groups may not realize how desperate the country's economic condition has been, where tens of millions of people are unemployed and millions of children cannot afford even primary education and basic health services -- not to mention hundreds of thousands of locally-dislocated families living in makeshift settlements under inhumane conditions.

True, while the possibility of foreign domination of the economy and the risks of foreign companies abusing their market power should be guarded against, one should remember that thousands of foreign companies have established their businesses in the country since 1967, but no legal evidence of major cases of economic sabotage or abuse of market power has so far been found.

On the contrary, almost all the major business groups associated with corruption and collusion with the government in the past and alleged to be partly responsible for the economic crisis, are not foreign-controlled but national enterprises.

The 2001 state budget is now less than three months from its end, yet not a single cent of the Rp 6.5 trillion (US$665 million) has so far been collected.

How will the cash-strapped government cover this shortfall, when the budget is also being threatened with another large hole, as only half of the Rp 27 trillion revenue target from asset sales by the Indonesian Bank Restructuring Agency have so far been realized?

Should it take an even more devastating fiscal crisis before the government and the House finally adopt the political courage to push through the privatization of state companies that are better left to private investors to develop?

Certainly, every transaction should be carried out with high standards of transparency and accountability as deals within the privatization program are highly vulnerable to corruption.

However, since privatization has been central to the government reform program since 1998, it is hard to believe that the government has not yet formulated a broad legal and political framework for the program and set clear-cut guidelines on which companies are best privatized through the stock market and which through strategic sales (private placement).

What is perhaps still needed is the fine tuning of the standard operational procedures, the step-by-step process for public share offerings and strategic sales to secure transparency and accountability and to close any loophole that may still be exploited by highly venal officials.

Obviously, selling state companies now will not fetch the highest prices, given the high risks associated with uncertainty over law enforcement and the initial stages of decentralization of political and fiscal autonomy to Indonesia's provinces and districts.

It is completely irrational to expect what is possible only in the best of times from transactions done in the worst of times, especially in view of the bleak outlook of the global economy due to the impact of the Sept.11 terrorist attacks on the United States, the world's economic powerhouse.

Moreover, given the 20 to 30 percent excess capacity hanging over the manufacturing industry, as a consequence of the economic slump, direct investment would not likely flow through greenfield projects but through asset acquisition, as the 2001 World Investment Report of the United Nations Conference on Trade and Development shows.

But further delays or foot-dragging in the privatization program would not only weaken the nascent economic recovery but could also discourage foreign creditors, notably sovereign (government) creditors.

After all, why should they use their taxpayers' money to help a government that still wastes its own taxpayers' money supporting inefficient businesses?

Or the question could be rephrased: Does a government, which continues to waste its money supporting inefficient and corruption-infested companies, still deserve more development aid in the form of soft loans with an annual interest rate of less than 2 percent and maturity of over 30 years?