Why has Indonesian privatization policy failed?

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.