Stronger case for faster privatization

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?