Privatization in Indonesia Remains Uncertain

Plans to privatize Indonesia’s state-owned enterprises (SOEs) have existed for years but they appear not easy to implement. Each time State Enterprises Minister Mustafa Abubakar appears in parliament for working meetings, the issue comes up and is in a fierce debate. Facing members of the House of Representatives last week, again, he confirmed that some state owned enterprises were deemed ready to release their shares to the public.

The companies include steel-maker PT Krakatau Steel, national flag-carrier PT Garuda Indonesia, PT Bank Mandiri and PT Bank Negara Indonesia (BNI). The privatization of those companies, he said, will generate IDR30 trillion-35 trillion in cash should they all be put on the privatization list and release their shares this year.

"The figure does not yet include several smaller companies, like Sarana Karya, Primissima, and Paper Padalarang," he said at a working meeting with the House’s Commission VI. The House approved all privatization plans except for Bank Mandiri and BNI.

"For Bank Mandiri and BNI, we expect to obtain the House’s approval in October. Thus, the privatization process can run as expected," added Mustafa. Rapidly balanced with the usual nationalistic whistles, the government has been warned against recklessly privatizing state-state-owned enterprises.

"We at the House hope the privatization will prioritize investment from within," House Commission III member Bambang Soesatyo said last Monday.

Responding to the question of how the House views the drive for SOEs privatization , the Golkar politician said the program needed to be scrutinized closely considering that it is part of IMF’s Structure Adjustment Program for Indonesia, prescribed back in 1997.

"This program has been rejected by many strata of the people," Soesatyo said and he warned the government against privatizing companies which are of strategic importance such as those in the plantation and banking sectors.

The resilience of the national economy must not be weakened by the privatization of state-owned enterprises (SOEs), much less make the country dependent on foreign financing sources, Soesatyo emphasized.

Ross H. McLeod, an economic researcher with the Australian National University (ANU), in his study of Indonesia’s privatization drive, noted that privatization idea came to prominence as a result of the economic crisis that commenced in Indonesia shortly after the unexpected float of the Thai baht in July 1997.

It was included as one of the policies to which the government committed itself as a condition for the provision of financial assistance by the IMF in November 1997 (GOI 1997). The rationale for this was rather vague.

Reading between the lines, the reasoning seems to have been that since private capital was fleeing the country it was necessary to persuade the markets that henceforth the government would pay greater attention to microeconomic reform as a precondition for the return of rapid growth, he said.

Among other things, this would require SOEs-previously used as instruments for the distribution of patronage by way of artificially high buying prices, artificially low selling prices, privileged access to jobs and cheap loans or even grants-to be divested.

Presidential order

Against such an enigmatic atmosphere with regard to the privatization plans came the order from President Susilo Bambang Yudhoyono that ministers must do a thorough evaluation of all SOEs by 2013. He made clear his stance of the matter when speaking at the opening of the Indonesia Business-BUMN Expo and Conference (IBBEX) 2010, in Jakarta, Thursday.

"From ministers, especially the coordinating economic minister and the state enterprises minister, I want an incisive evaluation within three years. If SOEs are still inefficient, not productive, and not profitable and with no prospects, something will have to be done," President Yudhoyono said.

Towards getting that done, he added, the ministers could merge, reform, restructure or even liquidate the companies. Indonesia currently has 141 state-owned enterprises operating in various sectors. State firms booked Rp 45.3 trillion in net profit during the first half of this year, an 18.26 percent increase from Rp 38.3 trillion in the same period last year.

Economist Faisal Basri of University of Indonesia recently said that SOEs were mostly inefficient and this bleak condition has been due to corruption.

"SOEs will remain a cashcow to ruling politicians and their cronies because our election costs are unusually high. No one can offer subtle loyalty in the form of campaign funding other than SOE executives, who are also vying to remain in power," he said.

Cases of corruption in SOEs are becoming more sophisticated, Faisal said, with numerous proxies making the graft less apparent to the public.