Is it Very Important to be Privatized?
By: Rayenda K Brahmana
Around 30 state-owned enterprises (SOE or BUMN and BUMD) are ready to go public. Going public is the process of selling shares to new investor for the first time in Stock Exchange. In finance, going public means two things, fresh money and increasing value. We are not going further by discussing about IPOs related issues such as underpricing, cyclical behavior in volume and initial returns, or poor long run performance that addressed by Ritter (1991), Levi (1993), Lougharn and Ritter (1995), and Brav and Gompers (1997). We will just discuss about the study case of privatization in Indonesia
Commonly, there are three main methods of privatization which are: (a) Asset Sale Privatization (ASP), (b) Voucher Privatization (VP), and (c) Share Issue Privatization (SIP). ASP is a privatization method by doing strategic sales. Usually, ASP conducts auction or Treuhand Model. VP is a method by discounted the price largely. SIP is the common method where shares are sold on the stock market.
Further, there is no evidence about the first privatized company. Ancient Greece and Roman Empire did privatization during their era. Some also believe that during mercantilism era, privatization was also conducted. The first modern privatization is British Steel in 1950s by Churchil. Then, in 1961, West Germany, for their politic-economic motives, privatized Volkswagen. The first boom of privatization was conducted by Thatcher in 1970s. Thatcher privatized British Aerospace, British Telecom, Roll Royce, British Leylands, etc. Indonesia started privatization in 1992 . The first privatized SOE is Semen Gresik. Starting from early 1980s until today; privatization has become a new face of economic policy.
30s Indonesia SOEs which will be privatized are including the big-sized companies are: Pembangunan Perumahan (30% of ownership), Waskita Karya (35%), Bank Tabungan Negara (30%), Krakatau Steel (49%), PTPN III (30%), PTPN IV (30%), PTPN VII (30%), Asuransi Jasa Indonesia (30%), PT Rekayasa Industri, Rukindo, Bahtera Adiguna, Industri Sandang, Sarana Karya, Cambrics Primissima, Industri Gelas, etc. Some of the SOEs will be divested which are Semen Kupang and Semen Baturaja. Meanwhile, the privatization of giant SOEs such as PLN, Pertamina, Merpati, and Garuda are still just issues without obvious information.
In Indonesia, privatization is a very sensitive issue. It is more about nationalism talks than economic discussion. Especially, after former president Megawati sold Indosat to Temasek. Many scholars were suspicious in that time. Indosat, which good in firm size, normal in dispersion of ROA, and very healthy, was sold for bizarre purpose.
Many scholars already proved the importance of privatization. Buckland and Fraser (2000) showed the evidence of abnormal return of UK water industry after being privatized. Gupta (2001) stated that even government sales minority share of SOEs, it can improve performance. Janes et al (2003) addressed how Estonian SOEs has performance improvement after privatization. The performance improvement of privatized SOEs is also occurred in East Africa (Ranja, 2004), and Nigeria (Tanko, 2004). The latest paper about privatization which addressed by Wolf and Pollit (2008) also showed the performance improvement of Oil Companies. Thus, Florio and Grasseni (2004) argue that privatization only has small impact in long term productivity trends.
Is it very important to be privatized? I found interesting article that written by Michael Kirby. He concludes that after Australia went privatized the wheat sector, Australia has lost their control in wheat export. Chowdury (2006) expressed the relationship between corruption and privatization. Indeed, many scholars are suspicious that the privatization in Russia and Latin America are indicating of corruption in the process of privatization. Please, do not forget Indosat case. Indosat, the second largest telco in Indonesia, also at that time still has competitive advantage, must be sold to STT very cheaply. Qtel already bought Indosat from STT 3 time higher than the price Indonesia sold.
Indeed, the dividend that received by Government (who controlled 14.29%) are also increasing (2002-Rp48Billion; 2003-Rp867Billion; 2004-Rp233Billion; 2005-Rp232Billion; 2006-Rp201Billion; 2007-Rp292Billion). Thus, fyi, every healthy companies which is injected by working capital should perform the same result, an increasing value. At least that’s what I learnt in Private Equity class and Security Analysis Class. Wanna me to prove it?
Is it very important to be privatized? I will answer it NO. China already proved that privatization is not the only answer. China had 127 thousands of SOEs. Then, they restructured SOEs to be more efficient. The junk SOEs was sold. Nordic Countries also already proved by having large public sectors, the SOEs are still efficient and effective. The Nordic Countries SOEs also can generate sustainability income. Do not forget to mention that Nordic countries are famous for their low corruption. Then, why does Indonesia still want to privatize SOEs with good shape in financial performance? Why does Indonesia still want to privatize SOEs which has competitive advantage?
Garuda Indonesia for example; Is it important to privatize the only premium class airplane in Indonesia? Garuda Indonesia just needs a better management. The privatization plan for PTPN (National Plantation) is weird for me. The ROA PTPN IV is 13.25%. It is almost similar to Lonsum which has 14% ROA. Of course, if we compare with Astra Agro Lestari which has around 27% ROA, PTPN IV’s ROA seem very low. This is indicating that the management can not utilize the asset to create more profit. Then, why does PTPN IV need more financing if they still can not manage their asset? Why PTPN IV wants to go public? For marketing reason? For transparency? Stock Exchange is the media for financing, not for putting ads.
Actually, there are several things that Government can do before put all SOEs on Sale. Firstly, check the SOEs is a junk corporation or not? There are 8 parameters for it, which are: (1) the competitive advantage, (2) dispersion of ROA, (3) firm-size, (4) Productivity Output, (5) Current Ratio, (6) Debt Ratio, (7) Risk Factors, and (8) Financial Sustainability. Selling healthy SOEs just because of to cover Government expenditure is a stupid answer.
Government also can give incentives to SOEs or make a good regulatory for SOEs. I like how Sugiharto managed SOE by CSR, restructuring, and improving GCG (although some scholars told me that he also put privatization foundation).
Government also can push SOEs to be more transparent, not only the financial performance, but also the social performance (starting from recruitment process until CSR implementation). If the SOEs are difficult in financing, selling shares in stock exchange is not the only solution. Government should help SOEs in financing by establishing a better system and infrastructures.
Privatization is the other method to improve performance. But it does not mean as the only solution. Restructuring, better regulation, better financing, and improving internal control can be the method to improve performance. Please, do not sell SOEs for absurd reason. Please do not sell SOEs for short term personal interest.
P.S : This note does not mean the author is anti-privatization. But, the author is rejecting if Government keep trying to sell healthy SOEs