Gary LaMoshi, Denpasar – A group of 35 Indonesian economists launched a campaign against privatization of state-owned companies on Tuesday in Jakarta. The group calls itself Indonesia Bangkit (Indonesia Awakens), but the group seems to have slept through the sad history of state businesses and banks during the past six years.
"The public and legislators should plead for a temporary moratorium on asset sale programs to avoid further losses, both economic and non-economic," Indonesia Bangkit spokesman Rizal Ramli urged, according to local media reports. The group joins a chorus opposing privatization that ranges from populist politicians to tycoons hoping to get their old companies back on the cheap.
To be sure, there's a lot not to like about Indonesia's privatization program, starting with Minister of State-Owned Enterprises Laksama Sukardi. At a special seminar of Indonesia's 2004 Investment and Economic Outlook in conjunction with the Ninth Asia Securities Forum in Bali last month, he came across as a stereotypical aloof, blustering, overfed government minister.
In contrast to Finance Minister Boediono, Sukardi had no prepared text for the meeting, offering a rambling 30-minute defense of the slow pace of state-asset sales. While Boedinono followed up his speech with a press conference and interviews with selected correspondents, Sukardi barely paused in the lobby of the meeting room to take a couple of questions from reporters before scurrying off.
Closing the gap
In Bali, Sukardi defended the privatization program as a way to improve the performance of Indonesian companies and to boost tax revenue. However, the Indonesian public at large has mainly been told privatization is necessary to close the budget gap. The program, which habitually misses it targets because of political interference, is projected to raise Rp5 trillion (US$595 million) this year, nearly a fifth of the overall budget gap. Closing the gap in innovation, investment and technology is far more important for Indonesia, and it's unlikely to happen with companies in key sectors such as telecommunications and tourism plodding along under state ownership.
Ramli and Indonesia Bangkit didn't criticize Sukardi, but they echoed many of the standard criticisms of his privatization program. The economists contended that the prices being paid for companies are too low, and they complained about the risks of selling the nation's assets to foreigners. These criticisms are simply ridiculous, as is Indonesia Bangkit's argument that private companies won't be better run than state ones.
On price, the Indonesian stock market is near an all-time high, and the rupiah is at its high for this millennium, meaning assets sales will bring in more dollars, euros or yen. The timing could hardly be better from an economic point of view.
Scandals galore
Ramli, a former economics minister with a clean reputation, argued in particular against the sale of Bank Negara Indonesia (BNI) at this time because it is tainted with a Rp1.7 trillion scandal. However, the scandal is an argument for selling state banks more quickly. It's been state-owned banks such as BNI and Bank Mandiri that have fallen victim to recent frauds – amid rumors of money-laundering for political parties – while privatized lenders appear to have sufficient controls and incentives to avoid similar swindles. The longer banks stay in state hands, the more likely they will become more deeply mired in scandals.
Indonesia Bangkit also complained that foreign control of banks would hamper the government's ability to set monetary policy. Foreign or domestic owners alike have to abide by whatever regulations the government sets. Foreign owners are less likely to influence regulators and policymakers than domestic ones since they don't have as much political clout.
The notion that foreign investors might undermine banking regulations is especially laughable in view of how Indonesian bank owners behaved during the 1997-98 economic meltdown. Bankers received government liquidity support loans totaling Rp144.5 trillion – US$17 billion at current rates – to avert a system collapse. These local owners funneled the funds into their own businesses or used then to speculate against the rapidly declining rupiah. The banks' eventual bankruptcy is what put them in state hands, while most bank owners have gotten away with repaying pennies on the dollar for their loans, if that. It's hard to imagine that foreign bank owners could behave any less responsibly than these patriots.
As an alternative to selling the national china (even if most of it is, in financial terms, melamine), Indonesia Bangkit proposed offering minority stakes in state companies and keeping the controlling interest in state hands. As economists, they ought to know better. Investors will pay more for control than they will for a minority stake. So, on one hand, Indonesia Bangkit complains that the government isn't getting paid enough for its assets; then it proposes an alternative that guarantees lower prices.
Minority report
As political observers, Indonesia Bangkit really ought to know better. The experiences of Mexico's Cemex with its minority stake in Semen Gresik, Indonesia's largest cement company, are enough to scare off any potential investor (see Indonesia gives up privatizing another asset, September 16, 2003). Cemex bought 25.5 percent of the company in October 1998, the uncertain times following the fall of Suharto when few dared invest in the country, and wound up wearing a cement sarong.
The government also sold Cemex an option to acquire a majority stake in Semen Gresik, then reneged on the deal in the face of pressure from the local officials in West Sumatra, loath to see their cash cow Semen Padang wind up in commercial (let alone foreign) hands. State-Owned Industries Minister Sukardi contributed to this mess with a letter endorsing the bid to keep Semen Padang in local hands. The letter had no legal standing but it quite effectively reminded foreign investors where they stood in the local political pecking order. There are few votes to be won supporting foreign businesses against local interests.
Being a minority investor with the state as your controlling partner in Indonesia is the worst of all possible worlds. It's a prescription for ending privatization. The good economists of Indonesia Bangkit are probably more well-meaning than most opponents of privatization, but they are every bit as wrong as the others.