Privatization and Role of Indonesian Christians
Leonard Winardi

When I think about privatization, I always think about the thousands men and women who were laid off from Pt. Industri Pesawat Terbang Nusantara (IPTN) in 19971. For small number of ex-IPTN workers, the job termination has unleashed their true potentials. One of the much heralded companies founded by ex-IPTN is PT Globalindo Technology Services Indonesia that sells Unmanned Aerial Vehicle (UAV) to Malaysian and Arabic countries (Kompas, Feb. 5, 2005).

However, for the majority of the laid off workers, the life after IPTN has been really hard. They were laid off in the worst possible time. Not only they were laid off during the worst economic recession in 30 years, but also they were caught in the wave of privatization of state owned enterprises (SOE) that were required to reduce more than 10% of their total workforce. In total, more than 15000 highly skill workers were being laid off from the SOEs during the period of 1996 to 20011. Caught in the perfect storm, even the most flexible worker would not survive. Most of these highly educated workers left Indonesia and would probably never come back.

As an Indonesian, I cannot be more saddened with the outcome of government privatization efforts. It is devastating that we not only lost most of technical competencies, but also lost all the proceeds from the selling of the SOEs. We are supposed to be the first ASEAN country that is capable of producing twin jet passenger plane. $70 millions investment later, the government scraped the project, fired every engineer, and trashed the design2. Although, Indonesian government has raised more than $5 billions in cash from the sell of SOEs3, but has not been able to raise the productivity of the privatized SOEs4 nor reduce Indonesia poverty level.

This paper attempts to describe the privatization efforts in Indonesia. The reasons why Indonesian government organized state owned enterprises (SOE) and then forced to privatize its SOE will be described. Discussion about the negative and positive impacts of privatization will follow. The paper will close about the role and calling of Indonesian Christians in the midst of this tragedy.

Motivations to form SOE and Indonesian Government Privatization Efforts

For third world countries like Indonesia, the state owned enterprises were formed to pursuit social justice. Pertamina, Indonesian Petroleum SOE, was formed to fund the country development initiatives. For example, some of Pertamina revenues were used as the seed money to develop Indonesian aerospace and defense industries5. However, Pertamina executives have been convicted in several corruption scandals and Pertamina remains the poster child of the inefficiency of Indonesian SOEs. Removing these inefficiencies of these firms are the primary reasons to privatize the SOEs.

Privatization in Indonesia has generated more than $5 billion in cash and removed subsidies. However, currently none of Indonesian SOEs can compete globally. However, one can learn, unfortunately, about how and what not to be privatized by watching Indonesian government privatization schemes. The privatization of high profile Indonesian SOEs has never been politically supported and rushed, such as the sell of Pt. Indosat4. The privatization was completed when the SOEs were in very bad shape, debt ridden, and under heavy external pressure (IMF).

Indonesian government has privatized companies that should not have been privatized in the first place. All researches5 have pointed out that privatizing SOE those yield unambiguous welfare improvements have proved to be difficult at best. Privatizing Pt. Pam Jaya was a terrible mistake. It is extremely difficult to operate water and sewerage business at a price that is both profitable for service providers and affordable for consumer. The difficulty rises exponentially in poor countries, such as Indonesia, that require large capital investments to upgrade their infrastructure. The consequence of Indonesian government failed attempts to privatize its SOEs is devastating. These consequences are outlined in the following section.

Negative Consequences of Privatization

By privatizing the SOEs, the government determines that making competitive national enterprise and reducing government budget deficit are more important objectives than the social objective initially intended leading to the creation of a particular SOE. Unfortunately, in making this decision the government is almost always under external pressure. Very seldom privatization has been planned by the government as part of their economic agenda. Consequently, the social consequences of privatization have always been overlooked and overshadowed by the potential economic impact.

In search of profit maximization, privatization always causes job terminations and neglect of the previously intended social responsibilities of the SOEs. The impact of massive layoffs can be wide spread especially in Indonesia where the economic strength and the labor flexibility are low. Under the current economic situation, finding jobs are hard and jobs specifically related to the SOE will be even harder. Highly educated professionals will leave the country; while the uneducated will be uprooted or plunged worse into poverty.

The neglected social responsibilities of the privatized SOEs had to be filled otherwise the consequences will be dire. But, nobody has the motivation to pick up the tab. The government will not fulfill these social responsibilities because it contradicts the motivation of the sell which is to reduce deficit. On the other hand, the privatized SOEs had to purse profit maximization. Privatized SOE companies will maximize profit through increasing efficiency by cutting employees and reducing spending. Despite these negative outcomes of the privatization in Indonesia, a well planned privatization can produced positive results. Steps leading to successful privatization and its positive impacts are discussed in the following section.

Successful Privatization

Large empirical research evidence has shown6–9 that ownership of the companies are important parameters affecting the performance, productivity, and profitability. Boardman and Vining6 have compared the performance of 500 largest non-US industrial firms in 1983. They reported that state owned and mixed (state and private) ownership enterprises are significantly less profitable and productive than are privately owned firms. Their report suggested that full private control is essential to achieve performance improvement.

Dewenter and Malatesta7 researched specifically on profitability, labor intensity, and debt levels of SOE and privately owned company listed on Fortune 500 for 1975, 1985, and 1995. Dewenter and Malatesta found that private companies are significantly more profitable, lower indebtedness, and fewer labor-intensive production processes than their state owned counterparts. Frydman, Hessel, and Rapacyznski8 found that privatized central European firms controlled by outside investors are more entrepreneurial in terms of their ability to raise revenues.

Interesting study was conducted by Bartel and Harrison9 on Indonesian public and private manufacturing. They found that ownership (state or private) and regulatory environment were the cause of public firm inefficiency. However, the type of industry did not affect the efficiency of the firm. State owned manufacturing, in the same regulatory environment, perform worse because of all the corruption. Regulations, such as government financing and import protection, shield the firm from competition and result in inefficiency.

Much more empirical evidence can be found to support the argument that privatization improves the profitability, efficiency, and competency of the firm. It is surprising, however, that the author cannot find any strong evidence that privatization helps alleviate poverty, improve wealth, income, and service distributions, and strengthen the country capital and political markets. This means that privatization is only good to achieve the economic objective of a particular SOE. The solution offered by IMF that privatization can lead Indonesia out of social and economic crisis is proven to be false. Privatization will not solve economic issues larger than the company’s let alone the social issues.

These positive impacts of privatization have never been realized in Indonesia. Recent privatization effort in Indonesia has not been successful. Report from Indonesian Central Bank (BI) on privatized SOEs has shown that the corporate governance in these SOEs has not improved significantly. The best privatized SOE can only achieved 72% efficiency as measured by corporate good governance index published by BI3.

Make no mistake; the unsuccessful privatization efforts in Indonesia are intentional. All privatization in Indonesia involved selling the SOEs to corporations without transparency and careful planning. The privatization is always deemed illegitimate and never addresses its social consequences. Privatization in Indonesia has never been about the national interest or even the particular SOE to be more efficient. Privatization in Indonesia is always aimed to bring fund to some of the Indonesian political elites. This is not an accusation but a proven fact. Even the corrupt court of Indonesia cannot hide these corruption scandals. It should be fresh in our mind that there are three Bulogate, numerous scandals on the Indonesian national bank liquidity assistance (BLBI), and on Pertamina.

As Christians, we cannot close our eyes in this mater. New scandal is brewing in the hall of Indonesian House of Legislature (Gedung DPR/MPR). It involves the sell of state owned steel mill, Pt. Krakatau Steel. The legislature prefers to sell Pt. Krakatau Steel to a corporation while the employees of Pt. Krakatau Steel prefer to offer its share to Indonesian public. It is part of our obligation to voice our concern to maximize transparency and profit for the Indonesian people and not just the elite. The following section will discuss in detail our role as Indonesian Christians regarding privatization.

Our Calling as Christians

The cost of being Christ disciple is enormous especially for Indonesian Christians. For doing the right thing costs dearly. The author really ponders why God choose us the wounded, broken, and surely incapable to do this task. But, the Holy Spirit keeps reminding us through the Bible that it is greater the power that is in us than in our enemy. The story of Elisha in 2 Kings 6:13-17 illustrates this well. Elisha’s city was under siege by enormous numbers of Syrian army. His servant was so frightened that he had forgotten that Elisha and he served the Almighty God. We should never be shortsighted as the servant but forever be confident in God’s promise to deliver us from the evil one.

Indonesia still has more than 139 SOEs. In every privatization, there is a big potential for corruption and therefore losses to the Indonesian people. Christians in Indonesia have big opportunities to participate. There are two essential tasks that we have to do: 1) demand transparency of the sell, 2) keep capitalism greed in check by including the employees’ welfare and job security in privatization clause, and 3) fill the neglected social responsibility of the SOE. Demanding transparency in Indonesia often means that we have to fight against the political elites and potentially sacrifice our freedom and life. But, let us keep remembering the story of Elisha and fixing our eyes Jesus, we continue fight on.

Economic systems, let it be socialism or capitalism, serve higher purpose than a mere greed. Capitalism has proven to be superior to socialism because not only it maximizes profit for the capitalist but also it improves the welfare of the society. On the same token, privatization efforts in Indonesia have to improve the social welfare. It must start with employee talent utilization and maximization and then profit maximization. If the process is reversed, the privatization efforts will fail because managing a business is much more difficult than selling assets. Without demanding certain assurance for the employee job security, the capitalists will seek to sell as much asset they could to recover their capital back faster.

The sell of SOEs will surely cause unintended negative social consequences. Let it be job losses or clean water, we have to fulfill these needs. Unfortunately, these activities require enormous amount of money and therefore have to access the capital market. The capital market is about profit and growth potential. Only people with high entrepreneurial skill can develop capital market especially among the poor. Unfortunately, these entrepreneurs will not want to sacrifice and go million miles to serve the poor. Christian entrepreneurs, because of their higher calling, are in the best position to serve in this area.

References

1. Asian Development Bank, “Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic Indonesia for the State-Owned Enterprise Governance and Privatization Program,” www.adb.org/documents/rrps/ino/rrp_32517.pdf 2. www.angkasa-online.com/10/02/english/english5.htm 3. Megginson, W.L., “The Financial Economics of Privatization,” p. 92, Oxford University Press, 2005 4. Ministry of SOE, “Privatization Update April 2006,”. 5. Pt. IPTN, “Evolution and History of The Indonesian Aviation Industry,” Our History, www.indonesian-aerospace.com/history/history.htm 6. Boardman, A., Vining, A.R., “Ownership and Performance in competitive Environments: A comparison of the performance of Private, Mixed, and State Owned Enterprises.” Journal of Law and Economics, p. 1-33, no. 32, 1989 7. Dewenter, K., Malatesta, P.H., “State Owned and Privately-Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labour Intensity,” American Economic Review, p. 378-382, no. 87, 1997 8. Frydman, R., Hasel, M., Rapaczynsi, A., “Why Ownership Matters? Entrepreneurship and the Restructuring of Enterprises in Central Europe,” C.V. Starr Center for Applied Economics working paper, New York University, New York 9. Bartel, A., Harrison, A.E., “Ownership versus Environment; Disentangling the Sources of Public Sector Inefficiency.” Working paper, Columbia Business School, Columbia University, New York

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