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.