Why has Indonesian privatization policy failed?

E. Yonnedi Ph.D Study Fellow Development Economics University of Manchester, UK msriley2@stud.man.ac.uk

The privatization of Indonesian state-owned enterprises (BUMN, or SOE) was developed with the objectives of improving the efficiency of the enterprise sector as well as helping to strengthen public finances and cope with the budget deficit.

The government has made considerable investment, without significant results, in formulating and implementing such policy since the 80s. The evidence holds true. This can be seen from the failure to complete privatization projects on time, frequent non- realization of intended objectives, rare unanimity among stakeholders on methods, procedures and timing. The example of these failures is paramount. Semen Gresik, Kalbe Farma, BCA and so forth are the cases in point.

Why has there been little ownership transfer even though official policy objectives and strategies have been articulated and firms have been selected for potential privatization?

In the early privatization program (during the 1980s) there is no doubt that despite the apparent needs for privatization due to the fiscal difficulties and inefficiencies of the BUMN operations, the Indonesian elite seems to be reluctant to transfer ownership to the private sector. Politicians cannot afford to lose control of public enterprise. It is something that enables their survival. The discussion on this matter is not a public secret at all; the BUMN have become cows to milk for political and personal objectives.

Nevertheless, what are the root causes of problems faced by privatization programs in Indonesia? There are some vivid competing ideas that can explain why privatization policy has failed. Firstly, it is something to do with "policy conditionality".

The policy responses adopted by the government as part of the structural adjustment program (SAP) before the 1997 crisis and stabilization and adjustment policies afterwards, cannot be separated from the role of the International Monetary Fund (IMF) and World Bank.

Indonesia signed the first letter of intent (LoI) in October 1997. From October 1997 to the present, a total of 16 LoIs had been agreed upon by the IMF. The 16 LoIs comprise three during the Soeharto period, 8 under B.J. Habibie, four under Abdurrahman Wahid and one under Megawati Soekarnoputri.

The whole program, including a variety of quantitative and qualitative requirements, constitute "policy conditionality". The essence of LoIs is in their reliance on the "Washington Consensus", that is, fiscal discipline, public expenditure priorities, tax reform, financial liberalization, exchange rates, trade liberalization, foreign direct investment, privatization, deregulation and property rights. One size fits all policy!

However, as advocated by former World Bank chief Joseph Stiglitz, one cannot "buy" good policy. There are sensible reasons for this; it is widely recognized today that successful policies need to have the country's "ownership" to be implemented. This means that not only the support from the government, but also abroad consensus within the population.

It has been proven everywhere that policy imposed from the "outside" will be circumvented, may induce resentment and will not withstand the vicissitudes of the political process.

Secondly, there has been little good governance in the process of divesting the state's assets. Good governance has become a new mantra but very little, if any, has been practiced.

The process of reducing the government's share in state-owned enterprises has also been criticized because of the lack of transparency, preferential treatment of politically well- connected buyers and the setting of unrealistically low prices which gave the buyers a fast windfall profit once trading started at the stock exchange or low prices given to strategic buyers.

The plan to privatize PT Semen Gresik which became the first privatization exercise after the crisis, ran into trouble with the legislature and public opinion because the negotiation was regarded as non-transparent.

Not only was the problem with the privatizing of SOEs, but also it was because the "local people and elite" did not want to privatize Semen Gresik. Privatization has then involved a complex interplay between central and local elite, particularly after the implementation of regional autonomy in 1999.

Thirdly, the government failed to take into account the interests of the stakeholders. There has been a significant resistance of the stakeholders toward the policy. Of the obstacles to privatization, none is more formidable than the resistance of state-enterprises stakeholders.

Employees, for instance, contend that privatization policies, as articulated and implemented, do not take adequate account of their legitimate interests. State-enterprise employees have successfully opposed some privatization programs although we do not quite know the process of this resistance and the politics behind it.

Finally, institutions do matter. Market-oriented policy reforms like privatization cannot just ignore institutional and cultural factors. Economic policy reforms like privatization under the "Washington Consensus" tend to undermine the institutional factors and take it for granted.

The reforms are not simply asserting private over public, markets over governments, fast action over gradual, but informed and effective reforms in privatization, competition and regulation.

For us, the implication is that it is even more imperative now that we seek ways in which we might use the few reform successes to better advantage, lower our sights to undertake more realistic advances and renew emphases on market transformation, market development and institution capacity building with ownership of reforms.

The sequence of the reforms is far better than rushed privatization that will disadvantage Indonesian society in the long run. Creating more winners and eliminating losers should be in the minds of policy makers. Pragmatic objectives such as raising fresh money to cope with the budget deficit have been proved not effective nor desirable.

The ultimate objective of the gradualist approach is to achieve a general balance and achieve a stronger mixed economy, stronger private sectors, stronger public sectors and stronger civil society. If this is the idea underpinning public enterprises reforms in Indonesia then what we are supposed to do in relation to SOE reforms is to strengthening competition policy and build strong regulatory framework.

"The rules of the game" is crucial. Reforming SOEs should be put in a wider context of development strategies which integrate economics and social indicators. In short, privatization should be predominantly partial and privatization proceeds and percentage sold should increase overtime as policy credibility increases.

The writer is a lecturer at the Faculty of Economics of the Andalas University in Padang, West Sumatra.