Privatization stalls in Indonesia

Asia Times Online
25 January 2006


Southeast Asia

Privatization stalls in Indonesia
By Bill Guerin

JAKARTA - Recent comments by Indonesian Minister for State-Owned
Enterprises Sugiharto that Jakarta planned to "buy back" a stake in
publicly listed Indosat, the country's second-largest
telecommunications operator, raised eyebrows in Singapore. Singapore
Technologies Telemedia (STT), part of the government-owned investment
company Temasek Holdings Pte Ltd, paid just over US$500 million in
2002 for a 42% stake in Indosat.

In fact, if taken in the context of the fate of Indonesia's
privatization program, the message was there and clear enough. Forget
about privatization. State-owned enterprises (SOEs) will, at least
for the time being, remain as state cash cows, ever ready to help
finance the budget. But only the privileged few that turn a profit.
That is, instead of selling off more of these crown jewels, there
will be attempts at "reverse divestment" by buying into onetime state
businesses that have been brought into profit by foreign investors.

Successive Indonesian administrations since 1998 have taken a common
view that privatization was necessary, not only as part of revenue-
generating efforts to bridge the state budget deficit but also to
attract new portfolio investment, along with additional capital
investment, management skills and corporate-governance practices to
improve the poor performance of state companies. Only a few
Indonesian SOEs are noted for sound business practices and making
significant contributions to state coffers and to the economy in
general. Recruitment is rarely based on ability but often on
political lobbying. At the line-manager level, poor pay rates and
lack of performance-related incentives are the norm. Private
investors can turn these assets into profitable enterprises that
create more jobs and pay more taxes to the state.

Sugiharto, who survived a cabinet reshuffle last month, has indeed
already announced plans to privatize up to 20 of Indonesia's 158 SOEs
this year to raise funds for the 2006 state budget. The budget
deficit is estimated at Rp22.3 trillion (US$2.38 billion), about 0.7%
of gross domestic product (GDP). "We will start the privatization
program in the second half of this year. We will sell a stake in 15
state owned companies," he told reporters.

If there is no reversal of policy, partial holdings in tin producer
PT Timah, PT Bank Negara Indonesia - the country's third-largest bank
by assets - and nickel and gold producer Aneka Tambang as well as
miner PT Tambang Batubara are expected to be offered to private
investors. This would take place in the second quarter because
companies would by then have released their audited financial results
for 2005, Sugiharto said.

Yet the budget allows for only Rp1 trillion from privatization, which
suggests it is hardly likely a worthwhile stake in any major state-
owned enterprise will come under the hammer this year. It also
sustains the impression that for policymakers in the current
administration, or at least two of those who call the shots,
privatization is a means to an end - to cover the budget deficit.

This became clear last June, when Vice President Yusuf Kalla stated
that selling government stakes in state enterprises was the "lowest
priority" for the government. He could hardly have made it any
clearer. Just for good measure, he added that the government would
not "submit to privatization demands" from donor institutions in
return for their loans.

Successful privatization programs help immeasurably in regaining
investor confidence, but last year's halfhearted attempt was
eventually abandoned in October after higher-than-expected dividends
from state companies raised adequate funds to cover the budget
deficit. In 2005, SOEs contributed a total of Rp12.7 trillion in
dividends to the state budget, 43% more than targeted. Three of them
- state telecommunications giant PT Telkom, national gas distributor
PT Perusahaan Gas Negara (PGN), and state oil-and-gas giant PT
Pertamina, contributed the biggest dividends.

Among the other 158 SOEs are state electricity company PLN, aircraft
maker PT Dirgantara Indonesia (DI), shipbuilder PT PAL, state
munitions factory PT Pindad, two state airlines, a steelmaker,
shipping companies, airport operators, port operators, mining
companies, construction and civil-engineering enterprises, fertilizer
manufacturers, rubber plantations, palm-oil plantations, pulp-and-
paper manufacturers and forestry companies. In this category also are
the government's total holdings in Indonesia's 131 banks.

Together these SOEs control a total of Rp1.158 trillion in assets,
yet a recent study by an SOE watchdog showed that only 15 have booked
annual profits over the past few years. By October Sugiharto had
backed off on a plan to offer 7.1% of the government stake in PGN to
the market, which had been expected to bring in some Rp1.1 trillion.
By the end of the month it was all over, and the 2005 privatization
program was dead in the water.

In June Sugiharto had appeared temporarily to reverse his earlier "go
for the dividends" stance, and said the government would meet its
Rp3.5 trillion privatization target by selling stakes in state-owned
banks and mining companies before the end of 2005. He made it clear,
however, that the real strategy continued to be to maximize dividend
payments from SOEs, rather than pushing for their privatization.
Kalla publicly supported Sugiharto's positioning.

Of course, the problem with the assumption that any shortfall in
revenues from privatization can be boosted by additional dividend
payouts from state companies is that it leaves those few good
performers as depleted cash cows with precious little capacity to
expand their retained earnings for investment.

There are other problems. Pertamina and PLN reportedly still owe the
government almost Rp2.6 trillion in non-tax state revenue, but the
government still owes Rp23 trillion in subsidies to PLN. The power
utility had requested an allocation of Rp28 trillion in the budget,
following the massive fuel-price increases in October, but the House
of Representatives (DPR) only approved Rp15 trillion. Raising
electricity tariffs is hardly an option given that the poor are still
reeling from the blow inflicted by inflation after the increases in
fuel prices.

A case in point

The 2002 sale of the stake in Indosat has proved to be a classic
example of how the private sector can rejuvenate divested SOEs by
injecting fresh funds, introducing new management ideas and bringing
in new technology. Indosat, with the help of STT, has forged ahead
toward becoming a major regional telecom player. It has refinanced
its debt and recorded revenues of Rp8.9 trillion in the first nine
months of last year, with a net profit of Rp5.7 trillion for the same
period. STT holds 41.77% and the board of directors and commissioners
of Indosat hold 0.03%.

Does Jakarta intend to buy back STT's shares? This is doubtful
because, as sector analysts point out, at current prices the 41.77%
stake could cost as much as $1.2 billion even if by some miracle it
were to be offered to the government. It was left to Information and
Communication Minister Sofyan Djalil to point out the obvious to
local reporters: "How can we buy back the Indosat shares if STT
doesn't want to sell them back to us?"

Yet the government still owns 14.58% of Indosat, so were it to buy as
little as 30.23% from the 43.62% held by the public and available on
the Jakarta bourse, it would hold a majority shareholding in a major
player in one of the country's major growth sectors, telecommunications.

State silver with little glister

Several state-owned industries remain, in theory, protected from ever
being privatized. This is clearly not a safe assumption for state-
owned Garuda Indonesia, which is in default on a $55 million
principal debt payment due at the end of 2005 because, it claims,
creditors have made no response to its debt-restructuring proposal.
The debts are mostly as a result of corruption within the airline
during past administrations, with many government officials and
political parties taking cash from the national flag carrier.

Garuda has asked for a $105 million bridging loan from the
government, partly to repay these debts, but the writing may just be
on the wall. Sugiharto was quoted as saying the government was
considering selling up to 49% of Garuda to strategic investors or via
an initial public share offer (IPO).

"An airline today is not everything for a country. If it makes a
profit, it will be good for the country, but if it always suffers
losses, investors should be welcome to come in," Kalla said. This is
a refreshingly candid stance, but it would be more encouraging if
there were any indication that Kalla and Sugiharto were actually sold
on the idea that this principle should be applied across the board.
Far from it.

Getting rid of underperformers through privatization has for long
been controversial in Indonesia, with nationalists seeing it as akin
to selling off the country's best silver to foreigners. A blueprint
for the development of SOEs includes a plan to try another angle by
reducing the number to between 100 and 120 by merging a number of
them and setting up holding companies to supervise some of the
smaller companies. Sugiharto concedes there is widespread opposition
to restructuring and revitalizing state enterprises. "This is because
their managers are trying to maintain their interests and positions,"
he said. This understates the reality.

Opposition to privatization in fact stems from a much wider variety
of groups, including former majority owners, local affiliated
business groups, labor unions, and local and national political
elites. The substantial fiscal payoffs for the government and
demonstrable growth in those enterprises that are privatized cut
little ice with those whose vested interests are threatened.

Political battlefront?

Drajad Wibowo, a senior legislator who sits on the DPR Commission XI
for Budgetary Affairs has warned that the reported plan to sell
Garuda shares would need to be discussed with Commission XI and
Commission VI for State-Owned Enterprises. "The country's strategic
sectors such as telecommunications, banking and mining are already
controlled by foreign companies, so Garuda must not be sold to
foreigners," Wibowo said.

The sale of state-owned enterprises is often blocked by political
party interests, but with the strongest political mandate of any
post-1998 administration, the government of President Susilo Bambang
Yudhoyono is, in theory, better placed to take up the gauntlet of
privatization, so beloved by the lending agencies.

"Most state enterprises remain unhealthy since they have been
subordinated to technical departments controlled by politicians. The
companies will continue functioning as money machines for the
bureaucracy and ruling parties," warned Naldi Nazar Haroen, who heads
up BUMN Watch.

Kalla's family-controlled Hadji Kalla group is one of the top
conglomerates in Indonesia. Kalla, onetime minister for trade and
industry in the Abdurrahman Wahid administration, also heads Golkar,
the most powerful political party in the country. Historically, the
SOEs have been used to fund parties such as Golkar, which holds 129
seats in the 550-member DPR (Yudhoyono's Democratic Party holds only
57). Though not known for sinking to blatant nationalist rhetoric,
Kalla displays a staunch nationalist approach where the country's
assets are concerned.

Paskah Suzetta, who took over as state minister for planning and
development and chairman of the National Planning Board (Bappenas) in
last month's cabinet reshuffle, is a very experienced Golkar
legislator and former deputy treasurer of the party. Sugiharto,
however, is a stalwart of the Islamic-based United Development Party.
Most Muslim groups are known to oppose foreign control of state
companies.

Oddly enough, the apolitical Coordinating Economic Minister Boediono,
known to be a proponent of boosting growth by speeding up the
privatization program, has so far made no public pronouncements on
privatization. However, in speeches at home and abroad he has argued
strongly for keeping Indonesian politics out of the economy. Why is
he silent on this most fundamental issue? Most likely, Boediono has
enough on his plate trying to live up to his well-earned reputation
as "Mr Macroeconomic Stability", earned while minister of finance in
the administration of Megawati Sukarnoputri, but it could also mean
that he has been asked to remain outside the loop with respect to
state assets and focus just on macroeconomic issues.

Although it is unlikely there will ever again be the lemming-like
rush to dispose of state assets seen for a couple of years at the
turn of the century, Indonesia still badly needs to reduce the high
cost and wastage of public ownership as well as the corruption that
deters foreign investment and deprives Indonesia of badly needed
funds for development and infrastructure.

Selling state assets into the private sector helps reduce government
debt, which adds to fiscal sustainability. The president's major
campaign promises included a reduction in foreign debt. Indonesia
currently owes some $130 billion, or 48% of last year's GDP. Of this
total, more than $75 billion is foreign debt. The cost of servicing
the debt eats up growth-generating capital. Budgeted investment
capital, for example, badly needed to stimulate the economy, is only
9.7% of the total budget, or Rp62.95 trillion.

It could be argued, then, that by offering to sell more, or all, of
its remaining share in Indosat rather than encourage media
speculation, the government would send the right "signal" at the
right time and better serve the interests of the country. The
continual drain on state coffers by SOEs and any further
misappropriation of public funds will only make economic recovery
slower and thus adversely affect the lives of tens of millions of
Indonesians. Showing the cost of a stalled economy, per capita income
for 2005 rose by just a single dollar, to $766 from $765 the year
before.

Bill Guerin, a Jakarta correspondent for Asia Times Online since
2000, has worked in Indonesia for 20 years as a journalist. He has
been published by the BBC on East Timor and specializes in business/
economic and political analysis in Indonesia.