Who wins from privatization?

Who wins from privatization?

By Abdurrahman Binsyeh

BOGOR, West Java (JP): One of the short-cuts to raise revenue
during economic turmoil is through privatization of state-owned
enterprises.

All this has been highlighted with recommendations, if not
pressures, from the International Monetary Fund (IMF), the World
Bank and pro-market economists.

Representing a cross section of various interests (state,
market, economic technocracy, economic nationalism, international
institutions, and the public), the privatization of state-owned
enterprises (SOEs) has inevitably caused some groups to win and
some to lose.

Who are the winners? For those promoting and favoring market-
oriented economic development, the current crisis, despite its
devastating effects, has been a "blessing in disguise".

It was the economic crisis that gave the technocrats,
international organizations and the economic reformists, the
opportunity to push the privatization of SOEs much more strongly.

The ongoing ambitious privatization of SOEs can be seen as an
intellectual and ideological victory over those favoring state-
led development.

The technocrats in support of economic reformists outside the
state circle have promoted the need for privatizing the large
number of SOEs with poor performances, and have tried hard to
convince the government about the benefits of privatization.

The World Bank and the IMF have certainly supported the
privatization of SOEs as an integral part of their loan
conditions. These twin Bretton Woods institutions always give
neoclassical advice to the government that it is not good at
running commercial businesses.

Also benefiting from privatization are those in the domestic
private sector as well as foreign investors or buyers. Coupled
with enhanced competition with the enactment of the anti-monopoly
law; the phased elimination of SOEs' privileges such as
preferential access to bank credit, captive markets, soft-budgets
or subsidies; mergers and closures of non-viable enterprises --
privatization could reduce the crowding out effects for some
domestic private sector businesses and become an incentive for
businesses to expand, at least, as voiced by those favoring
market mechanisms.

In addition, foreign investors, especially those buying the
assets of privatized SOEs, would get access to expanded markets
or new markets.

Even with the government's "vindicated" commitment to
establishing transparent procedures for divestment and
privatization that allow for open bidding or other market
mechanisms, including full participation by foreign investors,
the foreign buyers can buy a majority stake in privatized SOEs.

Thus, they may have control over management, or at least
exercise control with the agreed conditions that they are allowed
to make major management decisions such as sacking employees and
incompetent directors and managers, deciding supply and purchase
contracts and selecting appropriate private contractors.

Other (potential) winners are the team of economic ministers
entrusted with privatizing SOEs and those close to them, in that
privatization can provide new patronage opportunities. The
economic team may favor buyers politically and/or personally
connected to them and those having enough "guts" to provide them
with an incentive.

And who are the losers? Economic nationalists promoting state-
led development and an interventionist economic path. For
different reasons -- material gains and political power -- losers
are also politicians and senior bureaucrats at the Ministry of
Finance and related ministries in charge of SOEs.

It was the norm for most of Soeharto's era that SOEs were
appropriated by political and bureaucratic interests. Politicians
and senior bureaucrats used SOEs as "cash cows" for their own
welfare, giving their children good jobs, and making good
contracts with political-business allies and cronies.
Consequently, they were not happy about relinquishing managerial
control of SOEs to the private sector.

The functionaries of the restructured and privatized SOEs
themselves -- employees, managers, directors, including many
military officers holding upper-echelon positions -- are the
other losers.

It has become an open secret that SOEs during the New Order
period received a large share of Soeharto's active and retired
lieutenants, thereby forming a strong political machine and solid
political support for his presidency for over 30 years.

Many of the officers may still be enjoying their positions in
SOEs but no one can guarantee that they will not be replaced by
the new majority shareholders.

No less surprising, privatization has also meant losses for
Soeharto's family members and cronies. Only a few months after
Soeharto's downfall, for the sake of the marketability of the
SOEs being privatized, a large number of supply and purchase
contracts between state companies and private contractors in
various sectors were discontinued, or not renewed. Many of the
discontinued and reviewed project contracts were under the
ownership of Soeharto's children and cronies.

So to achieve success for SOE privatization, a respected
government should be able to gain the political support of other
key stakeholders and be able to accommodate or wisely withstand
resistance from the (potential) losers of privatization.

Since SOEs constitute a cross-section of national socio-
political and economic interests, privatization should
intensively involve members of the House of Representatives.

Because privatization has implications for management,
staffing, corporate policy-making, and ownership, it is important
for the government to include, among others, the existing
stakeholders such as management and staff, customers and
suppliers, local communities and activists, and market
competitors in the process.

The process must be communicated and discussed with those who
have a direct interest in the privatized SOEs. The government
should fairly compensate those who lose in a material sense from
the SOE reform, and in the case of eliminated or abolished social
obligations of the privatized SOEs, there must be appropriate
replacements with new policy instruments.

As the implications of privatization, especially through
private placement (strategic partnership), would be much greater
than other forms of SOE reform, more intensive public
communication through the media is urgent.

There must also be good public education about the gains from
privatization because many in Indonesia, including residents in
the vicinity of state firms, do not understand the government's
reasons or justifications for privatizing SOEs. They tend to
believe that SOEs are good for the people's welfare.

The writer, who studied development studies at Canberra's
Australian National University, is co-founder of the Yayasan
Alamanda (Call of the Earth Foundation) which studies the
environment and social economic development. It is based in
Bogor, West Java.