1 PRIVATIZATION Dr. Suad Husnan Faculty of Economics Gadjah Mada University October 24, 2002

2 PRIVATIZATION Pros and Cons Privatization program in Indonesia Benefits Criteria Methods

3 PROPONENTS OF PRIVATIZATION PROGRAM It is based on assumptions (and facts) that : (1)(Government) bureaucracy tends to be inefficient, not innovative, high cost, provide poor level at service and not consumers oriented, while (2) private sector tends to be more efficient, innovative and more consumers oriented.

4 PROPONENT OF ……. (CONT’D) If an institution with such characteristics is supposed to manage a business entity, then it will lower the performance of the entity. Although the State Owned Enterprises (SOEs) classified as healthy/very healthy increase from 63% in 1997 to 78% in 2000, the financial profitability is still very low. The earning power and return on equity (not included the financial sector) is around 5% and 6% respectively during the period of

5 EMPIRICAL EVIDENCE SUPPORTING PRIVATIZATION Review of performance of 79 SOEs in 21 developing countries, before and after privatization, concludes that there were significant increase in profitability, operating efficiency, capital investment spending, output, and employment and lowering debt ratio. Studies on some specific countries also show similar results. Not only significant increase in sales and earning are achieved but also substantial decrease in production cost per unit (Mexico and Bangladesh). An interesting comparison of tax payment between a privatized SOE operates in agriculture and average SOE operates in the same sector shows that the privatized SOE pays 2.2X higher than the average SOE.

6 OPPONENTS OF PRIVATIZATION PROGRAMME It will concentrate ownership to few people, hence it will widen gap between the have and the have-nots (the winner-takes-all society) SOE could perform the function of agent of development. It is the management of SOEs that should be transformed not to sell (privatize) them.

7 WHAT IS THE ROLE OF GOVERNMENT ? Is it to govern or (also) to do business ?

8 PRIVATIZATION PROGRAM IN INDONESIA The privatization program is both a national policy and a national dilemma. Resistances usually come from different perception among stakeholders (selling off government assets to foreigners, rationalization programs) and other factors such as regulation, politics, market condition, security, etc.

9 BENEFITS OF PRIVATIZATION 1. To increase efficiency, performance, and value of the SOEs. 2. To encourage or to create good governance (to avoid intervention from “stakeholders”, to improve transparencies, etc) 3. To contribute to state budget.

10 CRITERIA FOR PRIVATIZATION 1. That the SOE operates on very competitive sector or industry, or 2. It Operates in a sector with rapid change in technology, or 3. The government owns minority share.

11 METHODS OF PRIVATIZATION Initial Public Offering (IPO). Strategic Sales. Employee Management Buy Out. Regional Government Buy Out. Liquidation.

12 SHOULD THE GOVERNMENT OWNS AND OPERATES BUSINESS OR LET THE PRIVATE DOES IT ? (1) When the government owns and operates the business by herself, she takes the risk (provides additional capital when the business suffer from losses and pays debt). (2) When the government let private sector do the business, it is the private sector that take the risk. Any option selected, the sovereign of the government remains to : (1) Receive taxes. (2) Formulate sectoral policies. (3) Regulate the right and responsibilities of the investor.

13 THE GENERAL ATTITUDE TOWARD THE PRIVATIZATION In short the attitude seems could be formulated as follows : “We agree or support the privatization but …………….” The sentence(s) after the word “but” could be related to 1945 Constitution, in particular Article 33 (2) which states “divisions of productive activities which provide essential services for the state and control public needs are under the control of the state …………”