Partial privatisation has become the Indonesian government conservative economic policy since 1971. The selection to undertake the privatisation is often reasoned by the implementation of market orientation policy. This section analyses the environment background for the emergence of privatisation in Indonesia and its consequence on the current SOEs structure and the government- stated objectives for SOEs. Although the main focus of analysis is the privatisation after 1991, some parts of analysis also include the privatisation of PT Intirub in 1971. The reason is to provide a link or coherency of analysis.
7.2.1 Privatisation of PT Intirub: 1971
The implementation of market orientation policy encouraged the emergence of privatisation in Indonesia during the beginning of industrialisation period in 1970s. The involvement of private participants in Indonesia economic activities was reasoned by the opening a number of industries which were only SOEs. Although there was no implication on the privatisation policy and the government-stated objectives for SOEs, transfer ownership of PT Intirub was acknowledge as the first domestic partial privatisation in Indonesia. Transfer of ownership of PT Intirub occurred through the direct sale to private owners, PT Bimantara Citra14. The transfer of ownership was continued when PT Astra, a vehicle company, joint its ownership for PT Intirub through the purchase of 32.5 per cent of 70 per cent of PT Bimantara Citra’s ownership of PT Intirub (Pangestu, 1990). While the ownership transfer of PT Intirub helped the company avoid financial difficulty (Pangestu, 1990), the process of the transfer raised a number of critiques due to transparency issues (Schwarz, 1990)15.
7.2.2 Deregulation Economy: 1980-1988
Deregulation economic policy in Indonesia in 1980s was part of the Indonesian economic history for resolving the financial and fiscal problems. As mentioned in Chapter 6, fiscal problems emerged as
14
PT Bimantara Citra is owned by President Suharto’s son, Bambang Trihatmodjo.
15 The transfer of ownership of PT Intirub was alleged to have been affected by corruption and transparency issues, as the state suffered a loss of Rp 6 billion (SCHWARZ, A. 1990. Retread for Tyre Maker. Far Easter Economic Review). Since 2006, the company has not operated due to financial difficulties. The government had planned to sell the whole of PT Intirub in 2003; however, the privatisation of PT Intirub was not finalised until 2011.
the government took control of national economic activities following the increasing oil prices in 1972-1983. This control of economic activities generated the government to take control of economic activities through the roles of SOEs. This was followed by government intervention and protection policies relating to economic activities (PP Persero 1973; McCawley, 2011; Pangestu and Habir 1989). A massive infrastructure investment through SOEs mostly funded petrodollar. The government also established new SOEs as PERTAMINA’s subsidiaries which had some financial implications to the company (Robinson and Rosser, 1998). At the same time, the government deregulated the banking system by imposing a ceiling on bank assets, leading to a large number of private banks (Fane, 1999; McLeod, 2002b; Pangestu, 1990). These new private banks mostly were established by relying on the state bank expenses which later worsened the Indonesian economic situation (Fane, 1999; McLeod, 2002b). The government ability to provide funding from oil strengthened the centralisation of control policy under the government hands. This also generated the increasing of government involvement in national economic activities, particularly when the government started to reduce the private participants by limited for SOEs only (Robinson and Rosser, 1998). The centralisation of economic policy began to deal with a problem particularly when the oil price went down; and these massive investments became a burden on the state budget. The need to improve national economic activities again became a reason for the government to undertake privatisations in 1991. Privatisation became part of the government’s deregulation policy in 1988, and was aimed at resolving the economic situation and improving the SOEs’ performance (Pangestu & Habir, 1989). The private outstanding credits with state banks, and the SOEs over- investment in infrastructure, were two crucial fiscal problems during this period. The government encountered pressure to resolve the country’s financial problems as it re-implemented market orientations policy. Meanwhile, the poor performance of Perusahaan Negara became a state burden, particularly when the government found it difficult to support the Perusahaan Negara’s
business activities. Prior to privatisation, the government evaluated the SOEs. This evaluation showed that only 60 out of 180 Perusahaan Negara performed well, which later became a driving factor for privatisation (Pangestu, 1990; Pangestu & Habir, 1989). Privatisation was also followed by the requirement to improve SOE performance and budget efficiency; motivation for the Indonesian government to conduct ownership divestiture as stated through PP Pembinaan Perusahaan Negara
no. 3/1983 (PP Empowerment of Perusahaan Negara no 3/1983)and Keputusan Menteri Keuangan (KMK/Ministry of Finance’s decision) Republik Indonesia no. 740/KMK.00/1989: Peningkatan Efisiensi dan Produktivitas Badan Usaha Milik Negara (KMK no. 740/KMK.00/1989: State-Owned Enterprises Productivity and Efficiency Improvement).
7.2.3 The First Initial Public Offering: 1991
Prior the first Initial Public Offering (IPO) of the Indonesian SOEs, the Indonesian government undertook the privatisation of custom operation. The government privatised custom operations to a Swiss private surveillance company, Société Générale de Surveillance (SGS). This was aimed at reducing the heavy cost of surveillance activities through private/foreign investor involvement (Pangestu, 1990). The privatisation of custom operation had no policy or objectives implication on the government-stated objectives for SOEs. In 1991, the government established PT Surveyor Indonesia as a joint venture between the Indonesian government, PT Sucofindo (surveillance SOE) and SGS (Surveyor, 2005; 2006) to operate surveillance activities in Indonesia.
PT Semen Gresik (cement SOE) was the first listed SOE in the stock exchange market, followed by PT Indosat (a nationalised USA satellite and international telecommunications SOE). The IPO of PT Semen Gresik occurred in 1991 when 35 per cent of stocks were offered to the market. From these 35 per cent of its share offered to the market, of which 27 per cent were new shares issued for internal capitalisation purposes. The privatisation of PT Semen Gresik was motivated by a number of socio-economic reasons. Privatisation of PT Semen Gresik was pursued to open opportunity for SOEs and private entities to be involved in capital market activities. The privatisation of PT Semen Gresik was focused on the development of domestic capital markets and the requirement for the company to obtain fresh funds for its expansion. The privatisation of PT Semen Gresik was planned to be followed by two other SOEs, PT Telekomunikasi Indonesian (PT Telkom/telecommunication SOE) and PT Semen Tonasa (cement SOE). However, only PT Semen Gresik was successfully privatised, due to procedural and political risks from state welfare orientations and the public. The privatisation of PT Semen Gresik met the government’s objective to develop the domestic capital market, while the privatisation itself failed to meet the market price expectation (Tony, 1992).
Privatisation of PT Semen Gresik was followed by the privatisation of PT Indosat. Similar to PT Semen Gresik, the privatisation of PT Indosat aimed to open opportunity for SOE and private entity involvement in capital market activities, particularly international capital market activities. In practice, other reasons also motivated this privatisation. The privatisation of PT Indosat was a result of the company’s financial difficulties when the government issued Undang-Undang no. 3/1989 tentang Telekomunikasi (Telecommunication Act no. 3/1989/UU Telekomunikasi 1989). The law allowed private industry to provide telecommunication services (UU Telekomunikasi 1989). This law encouraged the establishment of PT Satelindo in 1993; a consortium of PT Telkom, PT Bimantara Citra and PT Indosat (Borsuk, 1993). The formation of this consortium resulted in PT Indosat facing financial difficulties. The government’s fiscal problems were also a motivation for the privatisation of PT Indosat. The government encountered external pressure to repay the private sector external debt
bond (Daily, 1995; James, 1996). Following the issuance of the UU Telekomunikasi no. 3/1989, the telecommunication SOEs at the time, PT Indosat and PT Telkom, had to compete with private entities in the telecommunication industry.16 Following PT Indosat’s privatisation, the government privatised 35 per cent of PT Telkom and PT Timah in 1994 and 1995 respectively. These privatisations aimed to earn fresh investment funds for further improvement of the companies’ services (Pangestu, 1990).
7.2.4 Fast Track Privatisation: 1998-2004
Fast track privatisation was the last period of privatisation evolution for Indonesian SOEs. The privatisation during this period showed fundamental changes in SOEs’ structure and objectives. This privatisation was driven by instability in the Indonesian national economic situation as a result of the Asian financial crisis in 1997. Privatisation became the reformation regime’s main economic agenda following the IMF engagement. The agreement emphasised the requirement for the Indonesian government to conduct several economic actions in consideration of the assistance required for economic recovery. The common objectives of the IMF and the World Bank, in regard to their assistance, emphasised economic stabilisation and structural adjustment for economic reforms in developing countries (Sinha, 1995). To facilitate this requirement, the government established the Ministry of State-Owned Enterprises (MSOEs) and implemented fast-track privatisation. The government also facilitated the process through the issuance of laws and restructuring SOEs. The new laws, the UU BUMN no 19/2003 (SOEs Law no 19/2003/UU BUMN 2003) and the PP Privatisation no 33/2005 (Privatisation Rule no 33/2005/PP Privatisation 2005), emphasised the importance for SOEs to fully apply corporatisation principles, which were implemented in all SOEs. This meant all SOEs were encouraged to attain profit and efficiency objectives in line with the provision of public utilities as part of their objectives. At the same time, the government restructured SOEs, by eliminating the Perjan structure, which was a barrier to fast-track privatisation. In addition to the privatisation programme, the IMF’s LoI emphasised the requirement for government to improve control and governance structure of the central and state banks. The government was forced to conduct re-capitalisation for state banks, which were later followed by their privatisation (IMF 1997a; 1997b).
7.2.5 Key Points from Partial Privatisation
It is important to underline some key points from this period of privatisation because some significant changes occurred and had the consequences on the government-stated objectives for
16 PT Indosat was not categorised as an SOE when the government sold more 65 per cent of its ownership in 2002. Since 2002, the government’s ownership was only 15 per cent.
SOEs. This period of privatisation mainly focuses on the partial privatisation where the government still hold 51 percent or more of the ownership. There are two key points from this period of privatisation. First is the beginning of public or private to be part of the SOEs ownership structure. Second is the change of government-stated objectives for SOEs, and then followed by the change of SOEs structure.