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A critical enquiry into privatisation of state-owned enterprises: the case of PT Semen Gresik (Persero) TBK. Indonesia Gugus Irianto University of Wollongong
Irianto, Gugus, A critical enquiry into privatisation of state-owned enterprises: the case of PT Semen Gresik (Persero) TBK. Indonesia, PhD thesis, School of Accounting and Finance, University of Wollongong, 2004. http://ro.uow.edu.au/theses/522 This paper is posted at Research Online. http://ro.uow.edu.au/theses/522
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A CRITICAL ENQUIRY INTO PRIVATISATION OF STATE-OWNED ENTERPRISES: THE CASE OF PT SEMEN GRESIK (PERSERO) TBK. INDONESIA
A thesis submitted in fulfillment of the requirements for the award of the degree
DOCTOR OF PHILOSOPHY from
UNIVERSITY OF WOLLONGONG
by
Gugus Irianto S.E. Akt. (B.Sc. in Accountancy), Brawijaya University, Malang, Indonesia. MSA (Master of Science in Accountancy), California State University, Fresno, USA.
School of Accounting and Finance 2004
Declaration I, Gugus Irianto, declare that this thesis, submitted in fulfillment of the requirements for the award of Doctor of Philosophy, in the School of Accounting and Finance, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged. The document has not been submitted for qualifications at any other academic institution.
Gugus Irianto 25 November 2004
i
Acknowledgments All the praise be to Allah, the Cherisher and Sustainer of the world, Who has given me opportunity, strength and ability to complete this thesis. As an expression of my gratefulness, I dedicate this thesis for those who struggle for (social) justice, equity, fairness, transparency, and accountability. This thesis is completed under the supervision of Professor Michael J.R. Gaffikin. He has put an enormous time and energy in providing intellectual insight into this thesis. Prof. Gaffikin has also taught me what I have learned as a unique approach throughout the supervision process which enhances my ability, network, determination, and self-confidence. He inspires and opens windows of opportunity and supports me not only to be a researcher but also being a researcher. He has shared the spirit of compassionate and courage throughout my journey. I am deeply indebted to and would like to express sincere thanks and appreciation for him. I am also much grateful to Prof. Gill Palmer, former Dean, Faculty of Commerce, University of Wollongong, Prof. Eka Afnan T. and Prof. Munir, Rector and Vice Rector II, Brawijaya University, and Ms. Robyn Wilkes, the Head of Halls, the University of Wollongong who initially set up a joint scholarship for this study. I would also like to express my gratitude to Prof. A. Malik Fajar, (former) Rector, Muhammadiyah University of Malang, Drs. Umar Burhan, MSc. and Dra. Titik Multifiah, MS (former Dean and Vice Dean II), Prof. Dr. M. Harry Susanto and Drs. Bambang Hariadi, MSc., Dean and Vice Dean II, of the Faculty of Economics, Brawijaya University, as well as Associate Prof. Robert Williams, the Head of School of Accounting and Finance, University of Wollongong, for their sincere support. I would also like to thank to Satriyo and Cholil Hasan, Presiden Director and Director of Finance of PT Semen Gresik (Persero) Tbk., Suryono, the Deputy for Economic and Development of the local government of Gresik, and Haeny Relawati, the Mayor of the local Government of Tuban, who have given me opportunity and access to collect necessary data for this study. The librarians of the University of Wollongong deserve my appreciation for their dedication in supporting this study. My sincere appreciation also goes to Associate Prof. Hema Wijewardena who shared his experience on particular aspects of my journey. I would also express my sincere thanks to my colleagues particularly Unti L., Iwan T., Eko Ganis S., Mustofa, Roekhudin, Yusuf W., Ainur Rofiq, Husni Thamrin, MT Sabirin, Didied PA , Ali D., Nurcholis, and Noval of the Faculty of Economic Brawijaya University, Muhadjir Effendi (Rector, Muhammadiyah University of Malang), Nazaruddin M. (Associate Director, Postgraduate Studies, Muhammadiyah University of Malang), Suaeb A, Suwandi, Tjipto S., Evie A. (Semen Gresik) and my colleagues at the University of Wollongong such as Lukman, Budi/Linda, Hilman, Gede, Agung, Rudi, Beni, Agus S. (Iwan), Imam W., Ahsyim, Nadhir, Tedy S, Alain, Nasseri, Abubakar, Abd. Salam, Hasri, Kang, Balla, and many others that I am unable to put in this limited space. Finally, I am deeply indebted to my wife, Nelly Elvida and my children, M. Fajar Ismail and M. Rizqi Akbar, as well as my parents and my younger brothers and sisters, for their love, prayers, support, sincere understanding and sacrifice. While so many supported the completion of this thesis, any errors or omissions are solely my own responsibility.
ii
ABSTRACT Privatisation has been interpreted in a variety of ways. It encompasses a variety of aspects such as ideology, politics, the economy, financial, as well as social implications and the global context. Above all, privatisation is conclusively understood as a medium of ‘reality’ construction. It is a policy that does create a newly constructed distribution of wealth and power and reveals conflicts of interests among various parties. The fundamental determinant of privatisation is ideological, which is the government’s inclination to praise laissez faire (liberalism/neo-liberalism) rather than interventionist systems. The other central issue of privatisation is about efficiency or performance of state ownership vis-à-vis private ownership. Beyond these aspects, privatisation is commonly exercised by countries that are in the middle of a deep economic crisis, facing soaring foreign debt, dealing with a widening budget deficit and dependent on international agencies, particularly the IMF and the World Bank (Ramamurty, 1992). Considering the nature of privatisation, a study on privatisation of stateowned enterprises is argued to be best placed in such a context. Such a study is parallel to the call to study accounting within its environment. Whilst a variety of theoretical frameworks of critical accounting studies are available, this study utilises one of them which is the political economy of accounting (PEA), a theoretical framework pioneered by Tinker (1980), advanced in the works of Cooper and Sherer (1984) and others and ‘applied’ in the case of privatisation, such as, in the works of Shaoul (1997a, 1997b), Arnold and Cooper (1999), and Uddin and Hopper (2001, 2003). Grounded in such a framework, this study is an enquiry into the privatisation of PT Semen Gresik (Persero) Tbk., a state-owned enterprise in Indonesia which operates in the cement industry. The privatisation of this company was carried out as part of broader policy reforms and executed at three consecutive times in 1991, 1995, and 1998. These gradual divestments have been completed within different contexts. The latest partial divestment sparked heavy opposition to the hegemonic nature of MNCs from various stakeholders. A variety of issues ranging from justice and fairness, job security, financial aspects, to the economic sovereignty have been raised. Accounting and accountants are at the nerve centre of such discourse. Whilst various deficiencies are apparent in the ‘construction’ of such policy, above all, the case raises the fundamental issue of the distribution of wealth and power, which, unlike that in Malaysia, the Indonesian government has failed to address.
iii
TABLE OF CONTENTS DECLARATION.…..………………………………………………………….. ACKNOWLEDGEMENTS………………………………………..………….. ABSTRACT.…………………………………………………………………… TABLE OF CONTENTS…..…………………………………..……………… LIST OF FIGURES….………………………………………………………... LIST OF TABLES….………………………………………………………..... LIST OF APPENDICES………………………………………………………. GLOSSARY……………………………………………………...…………….
i ii iii iv viii ix xi xii
CHAPTER 1 INTRODUCTION 1.1. Privatisation: a prologue.………..………………………………………… 1.2. Privatisation in Indonesia and the case of PT Semen Gresik (Persero) Tbk… 1.3. Methodology of the research and the PEA theoretical framework.………… 1.4. The craft of the study………………………………………………………...
1 6 11 23
CHAPTER 2 THE GENERAL CONCEPTS OF PRIVATISATION 2.1. 2.2. 2.3. 2.4. 2.5.
Introduction…………………………………………………………………. The nature of privatisation.………………………..………………………... The roots of privatisation…………………………………………………… Objectives of privatisation.…………….…………………………………… Methods of privatisation of SOEs……..…………..……………………….. 2.5.1. Public offering of shares (stocks flotation).……………………… 2.5.2. Direct placement (strategic sale).………………………………… 2.5.3. Management/Employment Buy-out (M/EBO)………………….. 2.5.4. Contracting out or outsourcing.………………………………….. 2.5.5. Selling of assets.…………………………………………………. 2.5.6. Leasing, Management contract, and Concession.……………….. 2.5.7. Build, Operate, and Transfer (BOT).…………………………….. 2.5.8. Voucher schemes.………………………………………………... 2.6. Processes of Privatisation of SOEs…………..……………………………... 2.6.1. The planning stage (pre-privatisation).………………………….. 2.6.2. The implementation stage.………………………………………. 2.6.3. The post-privatisation stage……………..………………………. 2.7. Catalysts of privatisation.…………………………………………………. 2.7.1. SOEs’ poor performance?.………………..…………………….. 2.7.2. The financial difficulties faced by the state……………………… 2.7.3. The international pressure.…………………..……………………
25 27 31 35 37 37 38 38 39 39 40 42 42 43 43 44 45 46 46 49 50 iv
2.7.4. The political factor…………….…………………………………. 2.8. Summary…………………………………………………………………….
51 53
CHAPTER 3 PRIVATISATION: COUNTRIES’ EXPERIENCES 3.1. Introduction.………………………………………………………………… 56 3.2. Privatisation in developed countries: the UK experience.…...…………….. 58 3.2.1. A brief prologue………………………………………….………. 58 3.2.2. Backgrounds and motives……………………………………….. 60 3.2.3. Results and costs………………………….…………....………… 63 3.2.4. The winners and losers……………………………….………….. 66 3.2.5. The role of the National Audit Office…………………………… 71 3.2.6. The regulations…………………………….…………………….. 73 3.2.7. Cases studies……………………………….………….………… 75 3.3. Privatisation in developing countries: Malaysian experience..…………… 78 3.3.1. A brief prologue…………………..……………………………… 78 3.3.2. Background……………………………………….…………….. 80 3.3.3. Objectives and methods…………………………………………. 87 3.3.4. The outcomes: who benefits, who loses……………………….. 89 3.3.5. Critique and dilemmas…………………………………………… 95 3.4. Summary…………………………………………………………………… 99 3.5. A brief epilogue…………………………………………………………….. 101
CHAPTER 4 SOEs AND PRIVATISATION OF SOEs IN INDONESIA 4.1. Introduction ………………………………………………………………... 4.2. The development of SOEs in Indonesia…………………………...……… 4.2.1. The early years of independence…………………………………. 4.2.2. The era of Perusahaan Negara (PN)……………………….…… 4.2.3. The era of Perjan, Perum and Persero………………………….. 4.2.3.1. The period of the oil boom……………………………... 4.2.3.2. The post oil boom period ……………………………… 4.3. The roles, profiles, performance and challenges of SOEs in Indonesia…… 4.3.1. Constitutional legitimacy and debate…………………..………… 4.3.2. Profile and Performance……………………………..…………... 4.3.3. Challenges………………………………………….…………….. 4.4. Privatisation of SOEs in Indonesia…………………………....………….. 4.4.1. Early evidence………..…………………………………………... 4.4.2. A new wave of privatisation……………………………………... 4.4.2.1. Background…………………… …………….…………. 4.4.2.1.1. The crisis and international pressures……….. 4.4.2.1.2. Budget deficit and SOEs’ performance……… 4.4.2.2. Objectives and methods…………….…………………... 4.4.2.3. Result of privatisation…………………………………... 4.5. Current development………………………………………………………...
102 106 107 111 113 116 119 121 121 128 136 138 138 141 141 142 145 147 151 152 v
4.6. Summary…………………………………………………………..………..
155
CHAPTER 5 THE CEMENT INDUSTRY IN INDONESIA AND PT SEMEN GRESIK (Persero) Tbk. 5.1. Introduction….…..………………………...………………………………. 5.2. The Cement Industry in Indonesia (CII). ……..…………………………… 5.2.1. A brief history…………….. ……..………………..………………. 5.2.2. Production Capacity, Production and Utilisation …..……………... 5.2.3. Sales and their prospects………………………………………........ 5.2.4. Financial Highlights: a comparative outlook……………………… 5.2.4.1. Debt trap, Ownership, and the MNCs……………………. 5.2.4.2. Profitability………………………………………………. 5.2.5. Government regulation and the Indonesian Cement Association…. 5.3. PT Semen Gresik (Persero), Tbk…………………………………………... 5.3.1. The genesis of public enterprise…………………………………. 5.3.2. Production capacity and expansion……..……………………….. 5.3.3. Utilisation……………………………………………….……….. . 5.3.4. Production process………………………………………………. 5.3.5. Types and characteristics of products..…………………….……. 5.3.6. Sales and Market share…………………………………………... 5.3.7. Management of SG and its accountability……….………………. 5.3.8. Subsidiaries, affiliations and supporting institutions……………. 5.4. Summary……………………………….. ………………....……………….
159 162 162 165 166 170 171 182 186 190 190 195 198 198 199 200 203 208 208
CHAPTER 6 PRIVATISATION OF PT SEMEN GRESIK (PERSERO) Tbk.: EVIDENCE AND CONTROVERSIES 6.1. Introduction.……………………………..……………..…..………………. 6.2. The divestment of SG in 1991 and 1995………………...…..…………….. 6.3. The divestment of SG in 1998…………….………………..…………….… 6.3.1. The government objective……………..……...…….……..………. 6.3.2. The environment…………….………………...…….……..………. 6.3.3. Tendering process……………………………………......……….. 6.3.4. The outcome……………………………………………………….. 6.3.5. Conditional Sale and Purchase Agreement (CSPA)….…………..... 6.3.6. Financial performances: before and after the divestment in 1998…. 6.4. The controversies..…….……………………………………………………. 6.4.1. Put option and the state’s potential loss………………….………... 6.4.2. Privileges for Cemex…..………………………………………….. 6.4.3. ‘Strategic’ vis-à-vis ‘tragic’ alliance………………….………….. 6.4.4. National interest and sovereignty..………………………………… 6.5. Other issues...............................................……..…………………………… 6.5.1. Terms of reference and scope of
212 214 220 223 224 230 234 240 241 243 244 246 249 250 257 257 vi
privatisation…………..…………. 6.5.2. Shareholders vis-à-vis corporate action……………….…………… 6.5.3. Cemex and SG’s export performance……….…………………….. 6.5.4. Cartels and competition law…………….…………………………. 6.5.5. Current developments……..………………………………………..
262 265 269 271
CHAPTER 7 CONCLUSIONS, REFLECTIONS AND FUTURE RESEARCH 7.1. Introduction…………………………..……………..……………………… 7.2. SG: the general overview…………………………………………………… 7.3. The divestment of SG in 1991 and 1995…………………………………… 7.4. The divestment of SG in 1998…..………………………………….………. 7.5. The distribution of power and wealth, and the hegemonic nature of MNC… 7.6. Reflections: policy, accounting, and accountability……………………..… 7.7. Direction of future research……………………………..…………….……..
273 279 282 284 291
Bibliography…………………………………………………………………..
335
298 311
vii
LIST OF FIGURES 4.1
Indonesia: Government Investments in SOEs, 1969-1992
118
4.2
Indonesia: The Soundness of SOEs, 1994-2000
131
4.3
Indonesia: ROA and ROE of SOEs, 1992-2001
132
4.4
Indonesia: DTA and DER of SOEs, 1992-2001
134
4.5
Indonesia: Income after Tax and Dividend of SOEs, 1992-2001
135
5.1
CII: ‘Shared’ Production Capacity, 2000
165
5.2
CII: Capacity, Production and Sales
167
5.3
SG, ITP, and SC: Trend of Total Liabilities, 1993-2000
172
5.4
SG, ITP, and SC: Trend of Debt to Total Assets (DTA), 1993-2000
173
5.5
SG, ITP, and SC: Trend of Debt to Equity (DER), 1993-2000
174
5.6
SG, ITP, and SC: Trend of Return on Investment (ROI), 1993-2000
183
5.7
SG, ITP, and SC: Trend of Return on Equity (ROE), 1993-2000
183
5.8
SG, ITP, and SC: Trend of Earnings per Share (EPS), 1993-2000
184
5.9
SG, ITP, and SC: Trend of Price Earnings Ratio (PER), 1993-2000
185
5.10
SG: Installed capacity and production
197
5.11
SG: Installed capacity, domestic sales and exports
202
5.12
SG: Market Share
203
7.1
SG: Domestic sales and exports
285
7.2
SG: The Distribution of Wealth
292
7.3
SG: The Distribution of Power
293
7.4
Distribution of Wealth in the Cement Industry in Indonesia
297
7.5
Distribution of Wealth in the Cement Industry in Indonesia if SG’s majority stake is owned by Cemex
298
viii
LIST OF TABLES 3.1
The scale of privatisations in selected OECD countries, 1980-1991
58
3.2
The scale of privatisations in selected OECD countries, 1990-2000
59
3.3
UK: Stock flotations, gross equity proceeds of sale, and privatisation expenses
64
3.4
UK: Directors' salaries before and after privatisation
67
3.5
UK: Speculative benefits from privatisation
68
3.6
UK: Size of selected privatised company’s share registers
69
3.7
UK Privatisation: Discount on share price and share’s over/under subscribed
70
Malaysia: Ownership of shares in Limited Companies, 1970 and [targets in] 1990 (%)
83
Malaysia: Ownership of Share Capital (at par value) of Limited Companies (%) (Bumiputera, Non-Bumiputera, and Foreigners)
83
3.10
Malaysia: Number of Public Enterprises, 1960-1992
84
3.11
Malaysia: Methods of Privatisation
88
3.12
Placement guidelines on Privatisation of Telekom Malaysia
91
3.13
Telekom Malaysia: Top 20 Shareholders, March 1991
92
3.14
Privatisation in Malaysia: Estimate of revenue generated and forgone by the government
93
3.15
Malaysia: Over-subscription of New Listings, 1989-1996
94
4.1
Indonesia: List of nationalised companies
110
4.2
Indonesia: SOEs' Destruction of Value by Sector
147
4.3
Indonesia: Privatised SOEs, 1991-2002
152
5.1
Cement Industry in Indonesia (CII)
161
5.2
Cement consumption per capita in ASEAN and a few other countries
169
5.3
SG: Change in Ownership Structure (%), 1995-2001
180
5.4
ITP: Change in Ownership Structure (%), 1995-2001
180
5.5
SCB: Change in Ownership Structure (%), 1995-2001
180
3.8 3.9
ix
5.6
Indonesia: Local Standard Price of Cement (Harga Pedoman Setempat Semen)
188
6.1
SG: Change in Ownership structure (%), 1991-1999
222
6.2
Divestment of SG in 1998: proceeds and expenses (US$)
234
6.3
Value per tonne of capacity of the divestment of SG in 1998: a comparative outlook
237
SG: Summary of the Comparative Financial Performances (before and after the divestment in 1998)
242
Estimated value per tonne of capacity: a comparative outlook (the case of put option)
245
6.6
SG: the Board of Commissioners and the Board of Directors
246
6.7
MNCs’ ownership in the Indonesia’s Cement Industry
254
7.1
SG [Group]: The Mean of Exports
286
6.4 6.5
x
LIST OF APPENDICES
1.1
Country breakdown of global amount raised from privatisation, 1990-2000p (US$m)
313
2.1
Examples of privatisation's objectives in several countries
314
3.1
Malaysia: Major privatised projects, 1983 - 1995
315
4.1
List of the State-Owned Enterprises in Indonesia
318
4.2
Indonesia: Summary of SOEs’ Performance, 1992-2001
322
4.3
Summary of the Development of SOEs, SOEs’ reforms and Privatisation in Indonesia
323
5.1
Financial Highlights of PT. Semen Gresik (Persero), Tbk.
328
5.2
Financial Highlights of PT. Indocement Tunggal Perkasa, Tbk.
329
5.3
Financial Highlights of PT. Semen Cibinong, Tbk.
330
5.4
SG: Dry processing of cement production
331
5.5
SG: Types and characteristics of products
332
5.6
SG: Organisational structure
333
5.7
SG: Subsidiaries, affiliations, and supporting institutions
334
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GLOSSARY ADB Berhad (Bhd.) BOT BPK BPKP
Asian Development Bank Limited Build, Operate, and Transfer Badan Pemeriksa Keuangan (Supreme Audit Board) Badan Pengawasan Keuangan dan Pembangunan (State Internal Audit Agency) BUMN Badan Usaha Milik Negara (State-owned Enterprises) CAA Civil Aviation Authority (UK) CEE Central and Eastern Europe CII Cement Industry in Indonesia Dewan Perwakilan Rakyat (House of Representative) DPR FSU Former Soviet Union Garis-garis Besar Haluan Negara (Broad Outlines of the GBHN Nation's Direction) Government of Indonesia GoI IBRD (the World Bank) International Bank for Reconstruction and Development IMF International Monetary Funds Indonesia Ind. or INA Instruksi Presiden (Presidential Instruction/Decree) Inpres IPO Initial Public Offering ISCID International Centre for Settlement of Investment Disputes Keputusan Menteri (Minister Decision) Kepmen Keputusan Presiden (President Decision) Kepres Finance Keuangan Korupsi, Kolusi dan Nepotisme (corruption, collusion and KKN cronyism/nepotism) KLSE Kuala Lumpur Stock Exchange LDC Less Developed Countries LoI Letter of Intent LRD Labour Research Department (UK) LSPEU Lembaga Studi dan Pengembangan Etika Usaha (Institute for the Study and Advancement of Business Ethics) MARA Majlis Amanah Rakyat (Council of Trust for the Indigenous People) MAS Malaysia Airlines MCA Malaysian Chinese Association M/EBO Management/Employee Buy-out xii
MEFP MIC MISC MMC MNC MP MPR MTR NAO Negara NEP OECD OFGAS OFTEL OFWAT Partai Golkar PDIP PEA Pemerintah Peraturan Pernas PKB PLC PNB PP Privatisasi Propenas PT ITP (ITP) PT SCB (SCB) PT SG (SG) PT SP (SP) PT ST (ST) Reformasi RI RM Rp. or IDR
Macro Economic and Financial Policies Malaysian Indian Congress Malaysian International Shipping Corporation Berhad Monopolies and Mergers Commissions Multinational Corporation Malaysia Plan Majelis Permusyawaratan Rakyat (People’s Consultative Assembly) Mid-Term Review National Audit Office (UK) State National Economic Policy Organisation for Economic and Cooperation Development The Office of Gas (UK) The Office of Telecommunication (UK) The Office of Water Services (UK) Golkar Party Partai Demokrasi Indonesia Perjuangan (Indonesia Democratic Party of Struggle) Political Economy of Accounting Government Regulation Perbadanan Nasional (National Corporation) Partai Kebangkitan Bangsa (National Awakening Party) Public Listed Company Permodalan Nasional Berhad (National Equity Corporation) Peraturan Pemerintah (Government Regulation/Act) Privatisation Program Pembangunan Nasional (National Development Programme) PT Indocement Tunggal Perkasa, Tbk. PT Semen Cibinong, Tbk. PT Semen Gresik (Persero), Tbk. PT Semen Padang (Persero) PT Semen Tonasa (Persero) Reform(s) Republic of Indonesia Ringgit Malaysia (The Malaysian currency) Rupiah or Indonesian Rupiah (the Indonesian currency). xiii
RUPS (ASGM) Sdn. Bhd. SEDCs Semen SK SOE SOEs TAP TAP MPR Tbk. UK UMNO UU UUD
Rapat Umum Pemegang Saham (Annual Shareholders General Meeting) Sendirian Berhad (Private Limited) State Economic Development Corporations Cement Surat Keputusan (Decision Letter) State-owned Enterprise State-owned Enterprises Ketetapan (Decree) Ketetapan MPR (MPR Decree) Terbuka (a notion for public listed company in Indonesia) United Kingdom United Malays National Organisation Undang-undang (Law/Act) Undang Undang Dasar (Constitution)
xiv
CHAPTER 1 INTRODUCTION [Political Economy of Accounting] seeks to understand and evaluate the functions of accounting within the context of the economic, social and political environment in which it operates. (Cooper and Sherer, 1984, p. 207) … an accounting model working with publicly available corporate data can be used to make an objective social analysis and critique of economic life. (Shaoul, 1997b, p. 403) 1.1. Privatisation: a prologue Privatisation is subject to a variety of interpretations (Savas, 1987; Starr, 1988; Ng and Wagner, 1989; Morgan, 1995; Feigenbaum et al., 1999; Gupta, 2000). Ramanadham (1988), for example, offers two different perspectives: a macro and a micro perspective. In a macro perspective, privatisation is perceived as a policy to transform the role of government in the economy, from interventionist to laissez faire orientation. The discourse at this perspective essentially touches the fundamental aspects of how to govern a nation’s economic life. In Indonesia, for example, selecting such a fundamental economic system cannot be separated from the country’s constitution of 1945. From a micro standpoint, privatisation is viewed as the transfer of ownership and control of state-owned enterprises (SOEs) to the private sector, and commonly is entitled as privatisation of SOEs. In many cases, a policy to privatise SOEs is usually part of broader reforms. For example, recent policy of privatisation of SOEs in Indonesia is an element of SOEs reforms (Masterplan Reformasi BUMN, 1998). Such a reform is part of the Macro Economic and Financial Policies (MEFP) of the Government of Indonesia, known as Letter of Intent, submitted to the IMF as a 1
prerequisite for a financial loan from the agency (see for instance Indonesia Letter of Intent, attachment III.3.b, 31 October, 1997).1 The background to privatisation is varied, although political and economic motives are commonly apparent. In the UK, for example, the downturn of the economy (portrayed by increasing levels of unemployment and inflation, the decline of manufacturing output, soaring interest rates, escalating public expenditure, and a widening budget deficit) was one catalyst of privatisation (Jackson and Price, 1994, pp. 1-2; Clarke, 1993, p. 206; Abromeit, 1988, p. 83). The other important factor that induced the conservative government to adopt such a policy is a political one (Abromeit, 1988; Marsh, 1991; Bishop and Kay, 1989; Biais and Perotti, 2002), particularly to eliminate the unions’ power (Marsh, 1991, pp. 472-74; Bishop and Kay, 1989, p. 647; Jackson and Price, 1994, p. 14; Abromeit, 1988, p. 73). In Malaysia, economic pragmatism is viewed as the dominant motive that triggered privatisation (Leeds, 1989, p. 753). It was also utilised to maintain and even revitalise the National Economic Policy (Milne, 1991a, p. 331), a policy that was pursued to achieve a more equitable distribution of wealth among different ethnic groups in the country (Means, 1991, pp. 23-27). Whilst, the political economy reasons were evident, the insistent role of the international lending agencies (the IMF and the World Bank) in promoting privatisation (e.g., Babai, 1988; Jomo, 1993; Ramamurty, 1992; Stiglitz, 2003; Ghosh, 2000; Uddin and Hopper, 2003) has made it widely ‘accepted’ in developing countries.
1
http://www.imf.org/external/np/loi/103197.HTM (last accessed on 11 November, 2003). Macro Economic and Financial Policies (MEFP) is part of Letter of Intent (LOI) of the Government of Indonesia submitted to the IMF to obtain ‘financial support’ (loan) from the agency. There are about 20 (twenty) LOIs in the period 31 October, 1997 - 16 September, 2003.
2
Inspired by privatisation in the UK and imposed ‘conditionalities’2 from the IMF and the World Bank, governments praised and adopted privatisation as a policy to cope with their economic downturn. The extent of such ‘acceptance’ perhaps is best expressed by Kikeri et al. (1994). They claim that “[i]t is difficult to find a country without a program of privatisation under way or at least on the policy agenda” (p.1). In terms of financial viability for governments, recent information shows that global privatisation proceeds in the 1990s accounted for more than US$936 billion (OECD, 2001, p. 44; Appendix 1.1). Thus, it is not surprising that privatisation has recently been selected as ‘a preferred policy’ in developing countries (e.g., Indonesia, Korea, and Thailand) that faced the recent 1997/1998 economic and financial crisis. The discourse about privatisation is largely viewed from an economic, political, or political economy perspective (Ramanadham, 1988, 1995; Abromeit, 1988; Jackson and Price, 1994; Pirie, 1988; Clark and Pitelis, 1993; Officer 1999; Quiggin, 1999, 2000/2001, 2003; Mandell, 2002; Perotti, 1995; Errunza and Mazumdar, 2001, Biais and Perotti, 2002; Kikeri et al., 1994; Pangestu and Habir, 1989; Gupta, 2000; Abeng, 2001, 2003; Ruru, 2003; Supratikno, 2003; to name but a few). There are also some expositions that look at the policy from an accounting perspective (e.g., Shaoul, 1997a, 1997b; Arnold and Cooper, 1999; Ogden, 1995, 1997; Ogden and Anderson, 1999; Uddin and Hopper, 2001, 2003; Cabanda and Ariff, 2002), an auditing standpoint (e.g., Beauchamp, 1990; Pomeranz, 1996; Karan, 2003), and an accountability point of view (e.g., Funnell, 2003; Wiltshire, 1986; 2
‘Conditionalities’ is the term used for imposed prerequisites that have to be carried out by countries seeking a loan from the IMF or the World Bank (see for instance Ramli, 2003a, pp. 10-11).
3
Mulgan, 1997a, 1997b). Such discussions cover both policies and cases in developed and developing countries as well as in the former centrally planned economies, and incorporated in a wide range of debate both in the macro and micro contexts. The central issue of privatisation is about efficiency or performance of stateowned enterprises (e.g., Nellis and Kikeri, 1989; Millward and Parker, 1983; Aharoni, 1986; Millward, 1988; Megginson and Netter, 2001). Private ownership is argued to be more efficient than state ownership (e.g., Hanke, 1986; Shleifer, 1998; Officer, 1999). Such a view is derived from a capitalistic principle3 known as private property. Based on this principle, private ownership is believed to be more efficient because private owners are free to make decisions based on their best interest (Alchian and Allen, 1997, p. 114) without any bureaucratic or political interference which commonly occurs in state ownership (Jensen and Meckling, 1980, p. 5). The freedom of choice is essential since it is an indicator of “clear connection between decision and reward” that will lead to efficiency of resource utilisation (Bozeman, 1987, p.52). Whilst some other theories support private ownership (e.g., agency theory, public choice theory), empirical evidence about efficiency or performance of SOEs is essentially mixed (Nellis and Kikeri, 1989, pp. 660-62). There are studies that reveal private companies outperform the state-owned enterprises (e.g., Boardman and Vining, 1989, Kikeri et al., 1994; Galal et al., 1994; Abeng, 1998; Megginson and Netter, 2001; Cabanda and Ariff, 2002), others disclose that “there is no systematic
3
The basic capitalistic principles include “private property, freedom of enterprise and choice, selfinterest as the dominant motive, competition, reliance upon the price or market system, and a limited role of government” (Jackson et al., 1994, p. 42).
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evidence that public enterprises are less cost effective than private firms” (e.g., Millward and Parker, 1983; cf., Aharoni, 1986; Millward, 1988), and even many SOEs have a world class credential (Heracleous, 1999; Jackson and Price, 1994). This mixed evidence leads to the belief that efficiency or performance may have been influenced by a variety of factors other than ownership, such as competition, enterprises’ goals, political interference or organisational cultures. (Aharoni, 1986; Garner, 1988; Vernon-Wortzel and Wortzel, 1989; Jomo, 1993) In Indonesia, concerns about SOEs’ performance have also been apparent (e.g., Presidential Instruction No. 5/1988; Ministry of Finance decision No. 740/KMK/1989 and No. 826/KMK.013/1992; Yasin, 2002a; Abeng, 1998, 2001; Masterplan Reformasi BUMN, 1998; Masterplan BUMN 2002-2006; Irianto, 2003, 2004). These can be seen from periodic reforms that have been carried out to improve the performances of SOEs. For example, at the end of 1980s, privatisation and related policies had been exercised in response to findings that more than 50 per cent of the 189 SOEs were underperforming (Abeng, 2001, p. 28). The recent privatisation policy was also justified on this sort of reasoning (Abeng, 2001, pp. 30-31), although evidence of SOEs’ performance is mixed. In fact, SOEs that have been privatised, such as Semen Gresik, Indosat, and Telkom are profitable enterprises. The recent policy has certainly had wider and more complex catalysts such as international pressure and the budget burden (Abeng, 2001, pp. 41, 98). The above evidence and discussions reveal that privatisation is not purely driven by the need to improve the SOEs performance; rather it is a policy that encompasses a variety of aspects such as the choice of economic systems/ideology, the international 5
connections, the political aspects, social implications, and performance and financial issues. Thus, a study on privatisation of state-owned enterprises may be best placed in such a context. Such a study is parallel to the call to study accounting within its environment (e.g., Hopwood, 1978; Burchell et al., 1980; Tinker, 1980). This inspires this study. In this chapter, the background and the methodology of the research are presented. Subsequent to this section, a brief introduction to privatisation in Indonesia and the case of PT Semen Gresik (Persero) Tbk. will be espoused (section 1.2). It will be followed by a discussion on the methodology of the research and the political economy of accounting (PEA) theoretical framework (section 1.3). The craft of the study will be presented in the last section (section 1.4). 1.2.
Privatisation in Indonesia and the case of PT Semen Gresik (Persero) Tbk. Privatisation of SOEs in Indonesia has been exercised since the end of 1970s.
The early adoption of such a policy was marked by selling the government’s minority interest in SOEs and by practicing management contracts (Profil and Anatomi BUMN, Vol. I, Pusat Data Business Indonesia, 1987, p. 140 cited in Pangestu and Habir, 1989, p. 238). Such a policy then was followed by reform of SOEs in the 1980s that intended to improve SOEs’ performance. In this reform, financial performance measurements (e.g., profitability, liquidity and solvency) as well as other market-based business practices (e.g., corporate plan, annual report, and remuneration system linked to performance) were introduced and obliged to be implemented in the SOEs. In turn, SOEs would be evaluated merely based on 6
financial performance and would be graded into four groups: ‘very sound’, ‘sound’, ‘less sound’ or ‘unsound’ (RBI Research, 1998, p. 19; Abeng, 2001, p. 28). Subsequently, an evaluation was carried out to access SOEs’ performance, and it was revealed that almost 50 per cent of 189 SOEs were classified as unsound. The evidence provided justification for the Minister of Finance to take special actions in respect of the unsound SOEs. The planned action included: privatisation, consolidation/mergers, conversion of legal status, management contract, and integration through joint ventures (e.g., Hainsworth, 1990, p.124; Bisnis Indonesia, 1 January, 1988, cited in Pangestu and Habir, 1989, p. 238). According to the plan … 52 state-owned enterprises were to be privatised, 17 to be merged with other enterprises, 15 to have their legal status changed and 16 to be incorporated into joint ventures. (Abeng, 2001, p. 28) Following the plan, several SOEs were partially privatised between 1991 and 1997, including PT Semen Gresik (Persero) (cement industry), PT Telkom (Persero), PT Indosat (Persero) (telecommunication), PT Tambang Timah (Persero), PT Aneka Tambang (Persero) (mining), and PT Bank Negara Indonesia (Persero) (Ruru, 2003, p. 16; Abeng, 2001, p. 29). PT Semen Gresik (Persero) Tbk. (thereafter, Semen Gresik or SG) was the first SOE to be privatised through the capital market in 1991. SG was also the first cement company that was established by the government in the earlier years of independence, and is currently the biggest company among seven main players in Indonesia (Irianto, 2004, pp. 1-2, cited data from SG, 1995, p. 55; 2001, p. 59; ASI, 7
1999, p. 3). This company is one of three giant cement enterprises that have gone public; the other two are PT Indocement Tunggal Perkasa Tbk. (subsequently Indocement or ITP) and PT Semen Cibinong, Tbk. (hereafter Semen Cibinong or SCB). These three companies control more than 90 per cent of installed production capacity of the cement industry in Indonesia (Ibid., pp. 1-5). Subsequent to the SG’s divestment in 1991, a rights issue and additional divestment were completed in 1995, and further divestment was carried out in 1998. The 1998 divestment was exercised concurrently with the new wave of privatisation in Indonesia, which was launched as a policy response to the 1997/1998 economic and financial crisis. This divestment sparked heavy controversies since its preparation up to the present time in the local, regional, and national arenas; even recently the case has been brought to the International Centre for Settlement of Investment Disputes (ISCID) (Kompas, 12 December, 2003; Tempo Interaktif, 5 January, 2004), whilst the society of West Sumatra had a plan to bring the case to the International Crime Court in Den Haag as well as to the International Tribunal for Human Rights in Geneva (Republika, 8 December, 2003). The controversies, which essentially also reveal the discourse of the national policy of privatisation, cover a variety of issues such as allegations of insider trading (Republika, 23-24 June, 1998; cf., Faizal, 2002, in the case of PT Indosat), conflicts of interest amongst interested parties (Lubis et al., 2001, p. 31; cf., Abeng, 2001, p. 37), corruption, collusion and cronyism/nepotism (e.g.,, Suara Karya, 8 May, 2002; Tempo Interaktif, 13 May, 2000; cf., Abeng, 2001, pp. 32-38), financial loss (Kompas, 24 March, 2002), ruining the society at large (Tempo Interaktif, 13 May, 8
2000), a lack of prudence transaction, transparency and accountability (Tempo, 24 November, 2002), and political aspects (Media Indonesia Online, 7 June, 1999; Jawa Pos, 24 March, 2004). Indeed there are available sources about Semen Gresik; however, a comprehensive and integrative study on such a case has not been carried out. This is the first argument in selecting Semen Gresik as a site for research. It is paralleled to Kuhn’s suggestion that a study may start from … where [previous research] leaves off and thus concentrate on the subtlest and most esoteric aspects of the natural phenomena … (1970, p.20) Second, Semen Gresik is chosen because this company was the first SOE in Indonesia that was partially divested in 1991 through the capital market following reforms at the end of the 1980s. The first privatisation project is very important for a government, since it would likely give an indication as to the direction of future policy. It would possibly also reveal problems that might be encountered and the responses to the problems. Hence, various aspects can be learnt from the first privatisation project either for further studies or advancing policies. In Malaysia, the Prime Minister directly chose the first privatisation project. The project was carefully selected based on a set of economic and political criteria that were considered important in gaining public support for a continuing program of privatisation (Leeds, 1989, p. 746).
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Third, the facts that the company has been gradually divested in three consecutive times (1991, 1995, and 1998) within different backgrounds and objectives strengthen the previous reason. Fourth, the privatisation of SG has sparked heavy controversies in the company as well as in the local, regional, national, as well as international arenas. Fifth, the researcher has continuously followed the public discourse of privatisation in Indonesia and in particular of SG since 1998 and documented such a discourse through clippings of relevant information from the national newspapers. In addition, the researcher has also participated in various national, regional, and local seminars on such a topic. This would acquaint the researcher with problems arising from such a policy. It is important to have prior knowledge for case study research since the researcher’s experience and prior knowledge is believed to have an influence on the researcher’s state of thinking (Smith et al., 1988, pp. 96-97). Finally, there are two practical reasons. First, the main site of this company is in East Java province in which the researcher resides; hence, it is attainable and manageable. Second, in March 2002, the researcher had formal permission to undertake the research directly from the President Director of SG although the company still faced difficulties in dealing with the latest divestment and its implications4. In addition, the researcher also had informal networks in the company that were available to assist in the data gathering process5.
4
Having formal access to the site of research is seen as the first important step towards the process of construction and reconstruction of the research setting which would have taken place throughout the research process. (Rasyid, 2001) 5 My networks include a network of alumni of the Faculty of Economics, Brawijaya University and another network of my former students from the Department of Accounting, Muhammadiyah University of Malang.
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This study is aimed at, first, comprehending the privatisation of Semen Gresik. Secondly, the study is a critical enquiry into the benefits claimed by the government of Indonesia in further divesting the company in 1998 as well as assessing its implications. Finally, it is a critical investigation into the role of multinational companies in SG, as well as in the national cement industry. The study is not intended to make generalisations or predictions, although it is framed in a broad context, primarily by comparison to the UK and Malaysia experiences which may lead to some commonalities as well as differences. A critical view will be used grounded on a political economy of accounting (PEA) pioneered by Tinker (1980), advanced in the works of Cooper and Sherer (1984) and others, and this will be discussed in the following section. 1.3. Methodology of the research and the PEA theoretical framework Research is a word originally from the French recercher (re- + cerchier) which literally means “to search closely.” 6 It is noted as “[d]iligent inquiry or examination in seeking facts or principles” or “…continued search after truth.”7 Thus, etymologically, two important aspects of research are addressed: the means (e.g., ‘diligent inquiry’ or investigation), and the ends (e.g., seeking facts, principles, or truth). In term of its objectives, research is also seen as intended “to discover new knowledge” (Chevalier, 1980, p. 1) or “toward increasing the sum of knowledge” (Pattillo, 1980, p. 9). Hence, research is carried out with certain purpose(s) or
6
http://dictionary.reference.com/search?q=research refers to The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2000 by Houghton Mifflin Company. (Latest accessed on 15 April, 2004) 7 http://dictionary.reference.com/search?q=research refers to Webster's Revised Unabridged Dictionary, © 1996, 1998 MICRA, Inc. (Latest accessed on 15 April, 2004)
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objective(s), and those might diverge from seeking facts, enhancing and acquiring of knowledge, to the quest of truth.8 To achieve such objectives, a methodology needs to be determined to assess a variety of research methods as well as to set a boundary to a quest (Gaffikin, 2004, p. 3). Whilst many research strategies, methods or approaches are available to be utilised (e.g., Buckley et al., 1976; Morgan, 1983; Yin, 1984, 1994), choosing the appropriate and relevant research method depends on the methodological stance. This is ultimately dependent on the selected research paradigm, both ontological belief and epistemological assumptions (Morgan 1983, p. 21; Chua, 1986, p. 604; Dillard, 1991, pp. 10-12; Gaffikin, 2004, p. 4). In fact, there are two major contrasting research paradigms: scientific paradigm (positivist, mainstream, or conventional scientific approach) and naturalistic (alternative) paradigm (Denzin, 1978; Guba and Lincoln, 1981; Tomkins and Groves, 1983). The fundamental differences between those two paradigms are in their presupposition about reality. Whilst reality may have various natures (Tomkin and Groves, 1983, pp. 367-73; Lincoln and Guba, 1985, pp. 81-87), the mainstream paradigm believes in objective reality. It sees the world as something that exists out there (Lincoln and Guba, 1985, p. 37; Chua, 1986, p. 606; Gaffikin, 2004, p. 3) and presumes that reality can be observed in part without understanding it holistically (Lincoln and Guba, 1985, p. 37). Such a “conventional view” of the world is known as “a realist ontology” (Gaffikin, 2004, p.3). Under this realist ontology, the world is
8
It is considered beyond the scope of this section or this thesis to discuss the concept of truth. A brief explanation about it can be found in Lincoln and Guba (1985, pp. 14-15). A more detail discourse about truth can be found such as in Winkel (1989), Solomon (1997, pp. 194-354) and Vardy (1999).
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assumed to be independent from the researcher (Lincoln and Guba, 1985, p. 37; Chua, 1986, p. 606), which in turn creates the dualism of object-subject that does not accept the notion that “people are active constructor[s] of their social reality” (Chua, p. 606). Working under such a paradigm, a researcher is assumed to have no influence on and even must distance himself or herself from the object of the study (Lincoln and Guba, 1985, p. 37). This is to guarantee the notion of ‘objectivity’ which is fundamental in this paradigm. The latter argument leads the mainstream study to be entitled an “objective inquiry” (Kincheloe, 1991 cited in Maykut and Morehouse, 1994, p. 3). In contrast, the alternative paradigm believes that reality is socially constructed (e.g., Lincoln and Guba, 1985; Chua, 1986; Morgan, 1988; Gaffikin, 2004). Under this paradigm, “the world exists only insofar as we create it. … we ‘make’ the world and can only understand it in terms of how we describe it” 9 (Gaffikin, 2004, p. 3; cf., Morgan, 1988, p. 477). It is, as Gaffikin points out, “a nonrealist ontology” (2004, p. 3). Unlike in the mainstream paradigm, the object (known) in this paradigm is inescapable from the researcher (knower) (Lincoln and Guba, 1985, p. 37). Critical study is a form of inquiry under the alternative paradigm10. The foundation of the study, critical theory, emerged in the 1920s, and it was associated with the philosophical belief of the prominent members of the Frankfurt Institute of Social Research (Held, 1980; Gaffikin, 1989). Max Horkheimer, Theodore Adorno, Herbert Marcuse, Friedrich Pollock, and Leo Lowenthal, particularly Horkheimer,
9
To borrow the words of Hines: “We make the picture,” and as such “[t]here is no full picture”, as it depends on the actor who create the picture (1988, pp. 251-55). 10 Other forms of inquiry under the alternative paradigm are phenomenology (interpretive), and ethnomethodology (e.g., Gaffikin, 1989, pp. 177-78; Chua, 1986).
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Adorno, and Marcuse, are among the key figures of the Institute that inspired the early development of this “tradition of thinking”, while Jürgen Habermas, Albrecht Wellmer, Claus Offe and Klaus Eder –primarily Habermas—have been recognised as the inspirators of further development in the tradition since the late 1950s onward (Held, 1980, pp. 14-16, 249-51). In accounting, research based on the alternative paradigm emerged at the end of 1970s and 1980s (Cooper and Hooper, 1990, p. 8). Various critical accounting studies have been carried out since then, for example those of Hopwood (1978), Burchell et al. (1980), Tinker (1980, 1984), Neimark and Tinker (1986), Cooper and Hopper (1987), Cooper (1980), Cooper and Sherer (1984), Loft (1986); Laughlin and Lowe (1990), Lodh and Gaffikin (1997), to name but a few. Critical accounting studies were initially associated with the Frankfurt School, primarily with Habermas’ thought (e.g., Laughlin, 1987, 1988; Broadbent et al. 1991; Chua and Degeling, 1993; Lodh and Gaffikin, 1997). However, a variety of theoretical approaches have also been used as a ground in critical accounting studies such as symbolic interactionism and ethnomethodology, political economy (including Marxian), Foucauldian, Giddens’ structuration theory, Gramsci’s concept of hegemony, Derrida’s deconstructionism, social constructionist, critical structuralist, and technoscientists (Lodh and Gaffikin, 1997, p. 437; cf., Cooper and Hopper, 1990, pp. 3-4; Arrington, 2004, p. 253; cf., Baxter and Chua, 2003 [in management
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accounting]) 11. Whilst such a variety of schools of thought exist, Lodh and Gaffikin believe that there is a fundamental aspect of the studies. The studies concern the need to develop a more self-reflexive and contextualised accounting literature which recognises the interconnections between society, history, organisations and accounting theory and practice. (1997, p. 433) Thus, even though a variety of theoretical frameworks exist, the essential characteristics of the studies remain preserved, such as being self-reflexive and context-bound. In addition to those two characteristics, further attributes are also recognised such as “producing enlightenment” and being “inherently emancipatory” (Geuss, 1981, pp. 1-2); whilst Catchpowle et al. added that It is one of the distinctive and central concerns of ‘critical theory’ in any sphere of social analysis to uncover the way in which human practices, culture and relations contain within themselves elements of alienation, domination and exploitation. (2004, p. 1038) One of the critical theoretical approaches is entitled political economy of accounting (PEA). The PEA was pioneered by Tinker (1980) and advanced in the works of Cooper and Sherer (1984), Tinker (1984), Neimark and Tinker (1986), Willmot (1986), Armstrong (1987), Hopper et al. (1987), Catchpowle et al. (2004), and ‘applied’ in the case of privatisation, such as, by the works of Shaoul (1997a, 1997b), Arnold and Cooper (1999), and Uddin and Hopper (2001, 2003). Critical accounting studies that are grounded in the PEA’s theoretical framework are intended
11
Another theoretical foundation of critical theory which is based on an Islamic perspective is proposed such as in the work of Triyuwono (1995) and Adnan (1996). In another development, Lowe (2004) espoused Latour’s de-constructionist theoretical ground.
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… to understand and evaluate the functions of accounting within the context of the economic, social and political environment in which it operates. (Cooper and Sherer, 1984, p. 207) The studies under the PEA framework, thus, essentially strengthen and broaden the calls for understanding accounting in its context (Hopwood, 1978; Burchell et al., 1980; Tomkins and Groves, 1983; Neimark and Tinker, 1986; Loft, 1986). In his pioneering work to introduce the concept of the PEA, Tinker (1980, 1984, and 1988) inquires into the fundamental aspects of neo-classical economic thinking12 in which accounting practices are developed and advanced, whilst he suggests that the classical political economic approach be adopted. By utilising the income statement as the basis of his analysis, he reveals that fundamental economic thinking has shaped the income statement in different ways. The neo-classical economic views profit as the bottom line of income statements and it is associated with an efficiency measurement of the transformation from input to output, on the contrary, the political economy attributes the division of income (and therefore the rate of profit accruing to capital) to the distribution of power in society and the socio-political and institutional structure that mirrors that distribution of power. (Tinker, 1980, p. 147)13
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Marangos (2002) offers a comparable critique on neo-classical economic thinking based on Post Keynesians’ arguments. Referring to the work of Arestis et al. (1999, p. 528), he reveals the strength of the Post Keynesians, for example, they are “…concerned with history, uncertainty, distributional issues and political and economic institutions …” (p. 574). This is comparable to the calls for understanding a social phenomenon (e.g., accounting) in its context. 13 It is in line with the work of Sraffa (1960) on the nature of prices. Sraffa points out that “prices reflect a socially and historically determined distribution of income that depends on the relative strength and configuration of social classes.” (Neimark and Tinker, 1986, p. 376)
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Classical political economy offered a transformative view from profit as the bottom line of the income statement towards a just and fair distribution as the cornerstone. Such a view is grounded in the belief that profit is an indicator of “the firm’s market viability” as well as the firm’s “social efficiency in utili[s]ing society’s resources”, rather than just merely a technical measure of efficiency in the conversion of input to output which is advocated in the neo-classical economic thinking (Tinker, 1980, p. 147; Tinker et al., 1982; Neimark and Tinker, 1986, pp. 374-76). The above view essentially is derived from the underlying thought on the functions of capital, in which it is argued not only as “(physical) instruments of production” but also as a medium of social relations in organisation (Bhadui, 1969 cited in Tinker, 1980, p. 153). Hence, the political economy framework espouses “the division of power between interest groups in a society and the institutional processes through which interests may be advanced” (Tinker, 1980, p. 148). Advancing such ideas, Cooper and Sherer (1984) delineate the social value of the corporate accounting report. They point out that the corporate accounting report is developed to generate information that is primarily focused on the shareholders’ interest while undermining the other stakeholders’ needs (cf., Chwastiak and Young, 2003). By utilising the PEA framework, the corporate accounting report can be possibly improved since the framework paves the way to observe accounting in the “the broader structural and institutional environment” in which it functions (Cooper and Sherer, 1984, pp. 207, 217). Such optimism is grounded in the beliefs that the PEA has unique features that made those possible. First, the PEA recognises the existence of power and conflict in society (p. 218). As such, the issue of ‘distribution’ (or ‘the means’) of 17
income, wealth, and power, is at the centre of importance rather than that of ‘the ends’ (Tinker, 1980; Cooper and Sherer, 1984). Second, comparable to other critical accounting studies, the PEA advocates investigation of accounting in its context. This study incorporates an understanding of the political economy as well as the social setting in which accounting functions (Cooper and Sherer, 1984, p. 218; Smith et al., 1988; Tinker, 1980). Finally, the PEA illuminates the dynamic function of accounting in society. Rather than viewing accounting as an object which was influenced by the change of its environment, it is convinced of the interplay between accounting and its environment (Cooper and Sherer, 1984, p. 219). In an excellent example of the PEA’s application, Tinker (1980) presents a case study, the Delco case study. A case study method is appropriate to be applied to the situation where the research is intended to answer “the how and why questions” and “no need of control behaviour” (Yin, 1984, p. 17; 1994, pp. 4-9). It is suitable for research that focuses on “a contemporary phenomenon within its real-life context” in which “[t]he boundaries between phenomenon and context are not clearly evident” and “multiple source of evidence are used” (Yin, 1992, pp. 123-24). In addition, a case study helps the researcher to have such a sense of self reflection since it is “both the process of learning about the case and the product of our learning” (Stake, 1994, p. 237). Although a case study method is considered “not a suitable basis for generali[s]ation” (Stake, 1978, p. 5; cf., Cooper, 1980, p. 162), the method is recognised as being able to open “a wealth detail” of analysis (Cooper, 1980, p. 162) and “may be epistemologically in harmony with the reader’s experience” (Stake, 1978, p. 5). 18
Delco is a UK based and Scottish owned MNC which operated in the iron ore industry in Sierra Leone throughout the colonial and post colonial period over a period of 46 year between 1930 and 1976. Tinker (1980) presents two different fundamental analyses based on the corporate accounting report, primarily the company’s income statement (see also Hoogvelt and Tinker, 1978). As previously revealed, one of the cornerstones of the PEA is the nature of distributional issues (of revenues, profit, wealth, and power), thus both analyses investigated the extent of the distributional nature of the company’s wealth and power. The objectives of the analysis are that it … not only attempts to show how the financial benefits from a mining venture were distributed, it also tries to explain how this distribution occurred as a result of institutional and social forces. (Tinker, 1980, p. 154) The first analysis is a distributional analysis of aggregate inflationary-adjusted revenues throughout the 46 year period of the company’s journey, named as the conventional financial appraisal (Tinker, 1980, pp. 154-55; Hoogvelt and Tinker, 1978, pp. 69-75), whilst the second is a distributional analysis based on three different periods: early, late, and post-colonial periods (Tinker, 1980, pp. 155-58; Hoogvelt and Tinker, 1978, pp. 75-79). One of the important results of such analyses is how the ‘capitalist agencies’ enjoyed a major proportion of the revenues (wealth) while the other stakeholders (e.g., Sierra Leone government, black labour, and tribal authorities) accepted a limited one. Tinker points out that the findings disclose how … the basic relations of production characteristic of capitalist enterprises, i.e. the relationships between the factors of production: capital versus land and labour, remained unaltered. (1980, p. 157). 19
In the case of privatisation, there are ‘different’ approaches to Tinker’s although the fundamental tenets are preserved. Shaoul (1997a, 1997b) examines water privatisation in the UK and confirmed the usefulness of both the accounting models (e.g., value added reporting and cash flow statement), and publicly available accounting data to evaluate economic policy. In this study, the government’s claims of the benefits of privatisation are questioned, and the distribution of wealth and power are revealed. Arnold and Cooper (1999) investigated privatisation of ports in order to understand the role of accounting in such a policy. Their study espouses how government policy (privatisation) can reveal the existence of contestable interests in the society especially related to the distribution of wealth and the pursuit of social justice (p. 149). Uddin and Hopper (2001, 2003) expose the hegemonic nature of the capitalist as well as the international lending agencies (the IMF and the World Bank) in the case of privatisation in Bangladesh. Although different ‘accounting numbers’ were utilised, the fundamental natures of the PEA framework -the distributional of wealth and power- are essentially centred in those studies. This study is inspired by and will be grounded in the political economy of accounting advocated primarily by Tinker and Cooper and Sherer, and other related studies especially but not limited to those of Shaoul (1997a, 1997b), Arnold and Cooper (1999), and Uddin and Hopper (2001, 2003), although contextualisation is employed whilst preserving the fundamental features of the PEA in particular and critical studies in accounting in general.
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Departing from the objective of the study and outlined theoretical framework, data have been gathered from various sources through interviews, observation, and analysis of relevant materials (cf., Uddin and Hopper, 2001). As such, a variety of stakeholders’ perspectives have been raised. In this ‘constructed’ research setting (Rasyid, 2001), such stakeholders include enterprise management at various level (operational, middle, and upper level management) as well as the other key stakeholders including the central and local government officials, representatives of the employees union, and prominent figures (cf., Ernst and Young, 1994, pp. 10-16; Ruru, 2003, pp. 6-8). In addition, the dynamic nature of privatisation has encouraged the researcher to follow the continuing public debate through the media reports throughout this study as well as to attend similar discourses in various national seminars. The media reports, as well as discourses in various seminars, have enriched the study with “contextual data” (Williamson, 2001, p. 10). To enhance researcher’s understanding of the cement industry, the researcher has also participated in the national marketing research of the cement industry14, attended an annual shareholder general meeting of the company on 28 June, 200215, whilst also conducting research on the performance of the industry (Irianto, 2003).
14
The research was a project funded by one main player in the cement industry in Indonesia which was carried out by one consulting company in cooperation with the Centre of Accounting and Business Development, Faculty of Economics, Brawijaya University. The researcher was a member of the team from the centre. 15 With the assistance of my network, I was able to participate in the ASGM which took place in the Shangri-La Hotel, Jakarta. My primary aims were to understand the process of ASGM and the ‘real’ role of the ASGM in the company’s decision making process as well as to meet key important persons (e.g., representative from the minority shareholders). At the end, I had to say that not all my objectives could be achieved.
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Referring to Richardson (1994, 2000), the above process is entitled “crystallisation”. Unlike triangulation which assumes that there is “a rigid, fixed, two dimensional object” which can be triangulated, crystallisation presumes that “there are far more than ‘three sides’ from which to approach the world” (Richardson, 1994, pp. 522-23; Richardson, 2000, p. 934). Such assumption is derived from the unique characteristics of the crystal. The crystal
… combines symmetry and substance with an infinite variety of shapes, substances, with an infinite variety of shapes, substances, transmutations, multidimentionalities, and angles of approach. Crystals grow, change, alter, but are not amorphous. Crystals are prisms that reflect externalities and refract within themselves, creating different colors, patterns, and arrays, casting off in different directions. What we see depends upon our angle of repose. (Richardson, 2000, p. 934). Privatisation, as has been briefly exposed, encompasses ‘an infinite’ variety of aspects (e.g., the choice of economic systems/ideology, the international connections, the political aspects, social implications, and performance and financial issues). Thus, utilising ‘the crystal’ rather than ‘a triangle’ as the central imaginary in the process of this study has a solid legitimation. Justification of crystallisation is not only limited to the process but also to the result of the study. Crystallisation “deconstructs the traditional idea of ‘validity’” which believes in a single truth. It allows the researcher to understand the social phenomenon under the study “with a deepened, complex, [and] thoroughly partial,” and at the same time, crystallisation “paradoxically” has given rise to “doubt” of “what [researcher] knows” (Richardson, 1994, p. 522; Richardson, 2000, p. 934).
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This study is not intended to either verify or falsify a theory. It also not aimed at making predictions. The study intends to extend an understanding of a social phenomenon (privatisation) from the PEA perspective. Working based on this perspective leads researchers to make reflections which in turn possibly pave the way to generate new concepts. An impressive feature of this type of study is recognised when the foundation of this study (an alternative paradigm) is associated with qualitative approaches (Cook and Reichardt, 1979; Covaleski and Dirsmith, 1990). Research based on the paradigm has guided the researcher to act as a bricoleur (Denzin and Lincoln, 1994; 2003), “a maker of quilts, or, as in filmmaking, a person who assembles images into montages” (Ibid., 2003, p.5). 1.4.
The craft of the study This study is arranged into three main parts which consists of seven consecutive
chapters. The first part consists of two chapters (chapters 2 and 3) and is dedicated to explore the fundamental nature and experiences of privatisation. In chapter 2, the general concepts (e.g., meaning, origin, methods, objectives, process and catalysts) of privatisation are espoused. Chapter 3 is devoted to elaborate privatisation experiences in developed and developing countries, primarily in the UK and Malaysia. In these chapters, images of privatisation and its political and economy environment, as well as its social implications are revealed. By so doing, the national dimensions and international connections are exposed. It aims to develop theoretical understanding of the nature of privatisation which will give insight into and benchmark this study.
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In the second part of the study, the researcher examines a more specific environment of privatisation in the context of this study. This part also consists of two chapters, chapter 4 and chapter 5. Chapter 4 explores the journey, roles, performances and challenges of SOEs as well as the genesis of privatisation in Indonesia. By so doing, the economic and political environment of the development and privatisation of SOEs in this country are revealed. In chapter 5, a specific cement industry environment in Indonesia and a depiction of Semen Gresik are presented. The exposition on the cement industry environment which encompasses a variety of aspects such as history, production and utilisation, sales, regulation, and financial highlights is aimed at understanding the position of Semen Gresik in the industry. Special attention and assessment is given to three giant enterprises (Semen Gresik, Indocement, and Semen Cibinong) that control more than 90 per cent of installed production capacity of cement industry in the country. The last part of this study espouses and discusses privatisation of SG. Genesis, controversies, outcomes and issues of distribution of power and wealth derived from empirical investigation are revealed and discussed in chapter 6. Finally, a conclusion, reflections on and the direction of future research are presented in chapter 7.
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CHAPTER 2 THE GENERAL CONCEPTS OF PRIVATISATION Privatisation is a fuzzy concept that evokes sharp political reactions. It covers a great range of ideas and policies, varying from the eminently reasonable to the wildly impractical. Yet, however varied and at times unclear in its meaning, privatisation has unambiguous political origins and objectives. (Starr, 1988, p.6) 2.1 Introduction The discourse about privatisation emerged in the 1980s (see, for example: Pirie, 1988; Ramanadham, 1988, 1995; Vuylsteke, 1988; Pangestu and Habir, 1989; Duncan and Bollard, 1992; Martin, 1993; Blommestein et al., 1993; Lieberman et al., 1995; Morgan, 1995; Martin and Parker, 1997; Officer, 1999; Quiggin, 1999, 2000/2001, 2003; Ramamurti, 1992, 1998; Kikeri et al., 1994; Perotti, 1995; Shaoul, 1997a, 1997b; Arnold and Cooper, 1999; Mandell, 2002; Biais and Perotti, 2002; Gupta, 2000; Abeng, 2001, 2003; Megginson and Netter, 2001; Prasetiantono, 2003; and Supratikno, 2003). The issues discussed were diverse, ranging from general concepts to impacts of privatisation; from privatisation in developed countries (e.g., the UK, New Zealand, the United States, and Australia), in the developing countries (e.g., Chile, Malaysia, Indonesia, and Sri Lanka), to that of in the centrally planned economies (e.g., Poland, the Czech and Slovak Republic, Russia, and Lithuania), and from the privatisation of airlines to that of jails.
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The significance of privatisation for governments can be seen from the fact that it has been implemented in more than 80 countries1 around the world, and was estimated to raise more than US$650 billion2 for the related governments by the year 2000 (Gupta, 2000, p. 3). While financial viability was apparently seen as one important driver, privatisation has also aggressively been promoted by international lending agencies (e.g., the World Bank, the IMF, and ADB) as a remedy for economic problems in developing countries through a bundle of liberalisation and structural adjustment programs that have been linked to the loans provided by the agencies (Jomo, 1993; Ramamurty, 1992; Stiglitz, 2000; Ghosh, 2000). Hence, it is not surprising that privatisation has been selected as ‘a preferred policy’ in Indonesia concurrently with the agreement for a financial loan from the IMF. However, besides the growing acceptance of the program, criticism and opposition have commonly been emerging in the countries that have implemented the policy. This chapter seeks to review the general concepts of privatisation. This review is necessary to serve as a basis for the understanding of privatisation that is relevant to this study. The chapter will be organised into eight sections. The first section is an introduction (Section 2.1), followed by nature (Section 2.2), origins/roots (Section 2.3), objectives (Section 2.4), methods (Section 2.5), processes 1
Candoy-Sekse (1988) presented a summary of privatisation programs in 83 countries, while Pirie (1988, p. 1) stated that more than 100 countries implemented such policy. Kikeri et al. even believed that there was broader acceptance of privatisation. They confessed that “[i]t is difficult to find a country without a program of privati[s]ation under way or at least on the policy agenda.” (1994, p. 1). 2 This is a modest estimation. Recent information shows that global privatisation proceeds in the 1990s accounted for more than US$936 billion (OECD, 2001, p. 44).
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(Section 2.6) and catalysts of privatisation (Section 2.7). The last section is a summary of this chapter (Section 2.8). 2.2 The nature of privatisation Privatisation is considered “a comparatively new word” (Pirie, 1988, p.1) and “a fuzzy concept” (Starr, 1988, p. 6). Not surprisingly, it is “difficult to define” (Gupta, 2000, p. 18) and is “subject to many interpretations” (Morgan, 1995, p. ix). The word privatize can be found in the Merriam-Webster’s Dictionary dated 1948. It means “to make private; especially: to change (as a business or industry) from public to private control or ownership.” 3 The other word, privatisation or privatization, can also be found in different sources. It is defined as “transfer to private ownership: the practice of transferring to private ownership an economic enterprise or public utility that has been under state ownership.”4 From this perspective, transferring ownership and/or control from state to private ownership is an essential aspect of privatisation. Beyond this etymological point of view, there are many interpretations of privatisation.5 It can also be seen either from a macro or a micro perspective. In a macro perspective, privatisation has been seen as a policy to change the role of government in the economy (Savas, 1987; Pirie, 1988; Ramanadham, 1988; Morgan, 1995; Gupta, 2000). The change of the government’s role in the economy may mean “the transfer of various activities from the public to the private sector” (Gupta, 2000, 3 4
http://www.m-w.com/cgi-bin/dictionary?va=privatization (accessed on 20 September, 2003) http://encarta.msn.com/dictionary_1861736836/privatization.html (accessed on 20 September, 2003)
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p. xii), or to reduce the role of government while promoting the role of private sector in the economy (Savas, 1987, p. 3). In Central and Eastern Europe, and in the former Soviet Union, the change means a transformation from the state-driven economy to the market-driven economy (Major, 1993). Fundamentally, in this broader school of thought, privatisation praises the supremacy of the free market6 and the limited role of government in the economy. Ramanadham (1988) classifies this type of privatisation as privatisation of the economy. Ramanadham emphasises three indicators of this type of privatisation that include: 1. no expansion of public enterprise as private enterprise expands; 2. an expansion of public enterprise at a lower rate than that at which private enterprise expands; and/or 3. some reductions in public enterprise such that, irrespective of the rate of new private investments, the private share in the economy tends to be higher than before. (1988, p. 4) Expanding or promoting the private sector while limiting the public sector role in the economy is the cornerstone of such policy. In the UK, for example, such policy was exercised in response to the large expansion of the public sector from the 1950s up to the early 1970s and economic decline in the 1970s, while in Malaysia it was a policy, among others, toward a revitalisation of its National Economic Policy (see further discussion in chapter 3).
5
Ng and Wagner state that the broad meaning of privatisation covers “transfer of ownership”, “transfer of production”, “financial privatisation” and “deregulation” (1989, p. 210) (cf., Starr, 1988; Aylen, 1987, pp. 136-37). 6 For Bishop and Kay, privatisation “reflects a renewed belief in market forces” (1989, p. 643).
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In a micro perspective, privatisation is seen as the privatisation of an enterprise (Ramanadham, 1988). The fundamental nature of this type of privatisation is transferring control of state-owned enterprises to the private sector either by the shifting of ownership or the reassigning of management and/or operational control (p. 6). Transferring ownership will reduce or eliminate the government stake in state-owned enterprises, while management or operational outsourcings will not necessarily involve transfer of ownership. In further clarifying the concept of privatisation, Pirie (1988) points out that it should be differentiated with that of denationalisation. In the UK, the term denationalisation gained much attention before the emergence of privatisation. To distinguish these two concepts, Pirie’s explanation is as follows: [Denationalisation] was taken to mean the reversal of nationalisation; …, it meant handing back state industries to their previous owners. Privatisation, by contrast, … [is] the process by which production of goods and services was transferred from the public to [the] private sector. Instead of merely handing back what had been nationali[s]ed, it sought new owners within the private sector. This did not involve a reversal to previous owners, but a complex web of arrangements to create new owners, and in some cases new forms of ownership. (p.6) The issue of reversing ownership to the previous owner is central in denationalisation, whilst privatisation seeks new measures in terms of ownership and control. In line with this argument, Ramanadham (1988, p. 3) emphasises that privatisation is also “some degree of re-marketisation” – putting state-owned enterprises business in the market environment in which competition is praised, 29
protection is eliminated, and monopoly, in turn, will be wiped out. All of these are intended to improve the performance of SOEs. The other concept of privatisation is named as mass privatisation or large-scale privatisation (Lieberman et al., 1995); it is … a process in which a substantial portion of an economy’s public assets is quickly transferred to a large, diverse group of private buyers. It involves bundling or grouping firms to be privatised, as opposed to the “classical” or case-by-case approach taken in the OECD countries …. [It] involves the distribution of shares to the public, either for free or for a minimal charge, through a voucher allocation scheme. (1995, p. 3) Mass privatisation can also be viewed as a “big bang”7 approach to privatisation. This approach, among others, is characterised by fast track privatisation even at the expense of its result. In the case of privatisation in Poland, for example, proponents of such a policy advocate that it is important “to do it fast than to do it well” (Winiecki, 1992, p. 84). The big bang approach is also politically motivated since it intends to prevent the opponents of privatisation being able to consolidate their power in challenging the policy (Heath, 1993, pp. 23-24). For the proponents of such policy, this approach is seen as more efficient than case-by-case privatisation, and more attractive to potential investors. Privatisation in Central and Eastern Europe (CEE) and the Former Soviet Union (FSU) is characterised by this type of policy.
7
The term ‘big bang’ approach can be found, for instance, in Bozyk (1993). The bottom line of the big bang approach is about “trying to do everything at once” (Heath, 1993, p. 23).
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Above all, privatisation commonly is “an element of broader economic policy comprising deregulation and liberalisation [of the economy] with the emphasis … on improving the efficiency of retained SOEs [as well] as on efforts to divest.” (Vuylsteke, 1988, p. 1). In Indonesia, for example, privatisation of state-owned enterprises is part of state-owned enterprises reform in the country – a policy that includes both restructuring and privatising of SOEs (Masterplan Reformasi BUMN, 1998), whilst in Japan it is part of administrative reform (Yamamoto, 1993).
2.3 The roots of privatisation Even though privatisation has been discussed widely and pursued as political and economic policy, there have been diverse views on when and where the idea originated. Pirie (1988, p. 4) noted that the same kind of privatisation was initiated during the reign of King Henry VIII when the King “dissolved monasteries”. Others urged that privatisation originated in the United States (Foster, 1992; Gupta, 20008), while Heracleous (1999, p. 1) stated that Chile and New Zealand were among countries that pioneered privatisation. However, some researchers share a similar view that privatisation emerged as late as 1979 when it was implemented in the UK by the conservative government under Prime Minister Margaret Thatcher (Pirie, 1988; Ernst and Young, 1994; 8
Gupta (2000, p.100) noted that privatisation in the US was initiated in 1932 when many community services were privatised.
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Morgan, 1995; Gupta, 2000). This shared view could be based on the record and the extent of privatisation in the UK. The amount of assets sales in the beginning of the privatisation (1979/80) was less than £377 (US$ 565.5) million and rose significantly to more than £5 (US$7.9) billion by the year 1986/1987 (£1=US$1.5) (Pirie, 1988, p. 1)9. The state industries being privatised were diverse, including British Petroleum, British Aerospace, British Telecom, Amersham International, Water Authorities, Cable and Wireless, British Gas, British Airways, Jaguar and Rolls Royce. Not surprisingly, then, such a policy became the legacy of Great Britain’s conservative government under Margaret Thatcher (Foster, 1992; Morgan, 1995; Gupta, 2000), and inspired the adoption of such a policy in many other countries (Bishop and Kay, 1989; Feigenbaum et al., 1999). Noting the extent of this policy, Gupta said that “[t]he question before the British Government was not what to sell but what to keep.” (2000, p. 51) Privatisation is associated with capitalistic ideology since it is reliant on capitalistic principles10, primarily private property. Under this principle, private ownership is praised rather than state-ownership, because it is argued to be more efficient (e.g., Hanke, 1986; Shleifer, 1998; Officer, 1999). Such a claim is based on the argument that private owners are free to make decisions based on their best
9
There are different ‘numbers’ from different sources (cf., Kay and Thompson, 1986, p. 18). Stevens (1992, p. 4) noted that, between 1979 and 1991, the privatisation proceeds from four industries in UK reached £45 billion (US$66.75 billion). This matter will be presented more thoroughly in section 3.2. 10 Jackson et al. (1994) summarises that the basic capitalistic principles include “private property, freedom of enterprise and choice, self-interest as the dominant motive, competition, reliance upon the price or market system, and a limited role of government” (p. 42).
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interest (Alchian and Allen, 1997, p. 114) without any bureaucratic or political interference, which commonly occurred in the state ownership (Jensen and Meckling, 1980, p. 5). For Bozeman (1987, p. 52), the freedom is an indicator of a “clear connection between decision and reward” that will lead to efficiency of resource utilisation. Further argument that supports private ownership is derived from Jensen and Meckling’s agency theory. It is urged that private ownership firms outperformed their state-enterprise counterparts because of an unambiguous principal-agent relationship, which leads to visible performance and reward/punishment (e.g., Prasetiantono, 2003; Supratikno, 2003). On top of those, a fundamental reason to reject state-ownership is revealed by Kunio (1988). He points out that “if private property is a condition of capitalism, no government enterprises qualify as capitalist institutions, and ‘state capitalism’ becomes a self contradictory term” (p. 2). For Kunio, the discourse about efficiency of state-owned enterprises within capitalistic systems, perhaps, essentially is meaningless. The other important principle that supports privatisation is a limited role of government in the economy. This principle is rooted in Adam Smith’s liberalism and Friedman’s neo-liberalism. In this school of thought, a government shall not act as regulator and business player, since this will induce a conflict of interest. The government’s function must be limited merely as “an umpire, not participant” (Friedman and Friedman, 1980, p. 4). Such a belief is supported by public choice theory, which suggests “slimming the state and remodeling government and
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reforming it according to market concepts of competition and efficiency” (Barton, 1999, p. 1). Those views are contradictory to the Keynesian welfare state, which advocates a central role of government in the economy (e.g., Regil, 2001). Therefore, the choice of privatisation as a policy is linked to the choice of economic system. Beyond the debate on the choice of economic system and its relevance to privatisation policy, Stiglitz (2003) noted another ‘root’ for privatisation. He pointed out that privatisation is one of three pillars of the Washington Consensus11 advocated by the IMF (pp. 53-54) (see also Chomsky, 1999, pp. 19-20). Initially, it was intended to be used as a prescription to deal with severe economic problems in Latin America; however, as Ramli (2003a, 2003b) acknowledged, the IMF utilised it as a generic prescription to deal with economic problems in countries around the world, including Indonesia and other countries that were facing an economic and a financial crisis in 1997/1998 (see also Ghosh, 2000). In many cases, privatisation is one among many conditionalities that were imposed on the country that sought a loan from the agencies (Ghosh, 2000, pp. 2-3; Arnold and Cooper, 1999, pp. 132-33). For example, the conditionalities imposed by the IMF on Indonesia can be observed from the agreement signed by President Soeharto on January 15, 1998 (Ramli, 2003a, pp. 1011). 11
Stiglitz points out that the Washington Consensus was designed in response to the economic crisis in Latin America during the 1980s and 1990s. It consists of three main policy advices: fiscal austerity, privatisation, and market liberalization (2003, pp. 53-54). In addition, Chomsky (1999) states that “[t]he neoliberal Washington consencus was designed by both the international financial institution and the government of the United States,” (p. 19) (cf., Aylen, 1987). On top of these, he discloses that “[t]he ‘principal architects’ of the neoliberal ‘Washington consensus’ are the masters of the private economy, mainly huge corporations that control much of the international economy …” (p. 20).
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2.4 Objectives of privatisation Similar to that of other policies, privatisation has certain objectives, and those had been outlined thoroughly (see for example: Pirie, 1988; Vuylsteke, 1988; Foster, 1992; Ernst and Young, 1994; Lieberman et al., 1995; Morgan, 1995; Gupta, 2000). In addition, extensive publications on the matter have also been produced by the IMF, the World Bank, the OECD, and the ADB through their official websites12, as well as by other means. However, every country that implements privatisation has its own objectives, and the objectives might differ accordingly. In general, improving efficiency in asset utilisation is the bottom line of privatisation policy, as has been emphasised by the IMF13 as follows:
The purpose of privatisation programs, launched by industrial and developing country governments alike, is to redeploy assets from the public sector to the private sector—where they are expected to be used more efficiently. While efficiency14 is the cornerstone of privatisation, governments may pursue the policy to achieve wider objectives such as reducing the burden on the national budget, assuring wider distribution of business ownership, generating 12
http://www.imf.org (the IMF); http://www.worldbank.org (the World Bank); http://www.adb.org (Asian Development Bank) 13 IMF (1998), “Should Privatization Proceeds be Viewed in Terms of Revenue or Financing?”, IMF Survey, March 23, pp. 91-92. 14 Efficiency is vague concept. From the economic perspective, there are many concepts of efficiency such as Pareto efficiency, allocative efficiency, productive or technical efficiency, static vs. dynamic efficiency (see for instance Thompson, 1988; Jackson and Price, 1994). In accounting, efficiency is defined as “the ratio of outputs to inputs, or the amount of output per unit of input” (Anthony and Govindarajan, 1995, p. 109).
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revenue for the state, eliminating political interference in state-owned enterprises, or achieving a combination of those objectives (Vuylsteke, 1988; Gupta, 2000). When the policy is implemented in a certain country, the objectives may differ, even though those general objectives may be in place. Appendix 2.1 presents examples of privatisation objectives in Indonesia, Lithuania, Sri Lanka, Malaysia, Senegal, and Singapore. The choice of objectives for privatisation and other related issues (e.g., the selected method and the SOEs to be privatised) in every country depends on many factors such as socio-political factors, the government’s overall economic objectives, and the performance of the SOEs to be privatised (Vuylsteke, 1988; Gupta, 2000). Therefore, it is not uncommon that almost in every case of privatisation, political interference is intense (Abromeit, 1988; Marsh, 1991; Bishop and Kay, 1989; Biais and Perotti, 2002). In some cases, although there is intense opposition and criticism, a government can successfully execute the privatisation program, while in other cases privatisation must be delayed or cancelled. Hence, comprehensive consideration must be implemented in exercising the policy as is emphasised as follows: … a certain type of transaction, such as an employee buy-out, might yield government a lower price, [but] it might still be preferable if it better addresses the government’s economic, political and social objectives. (Vuylsteke, p.5)
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Indeed, trade-off among economic, political and social achievement shall be pursued in delivering this policy.
2.5 Methods of privatisation of SOEs There are several methods, techniques or approaches (these terms will be used interchangeably) of privatisation that have been proposed and implemented. Pirie (1988) outlines twenty-one techniques of privatisation, while Lieberman et al. (1995) presents an alternative approach entitled mass privatisation. Vuylsteke (1988) summarises seven basic methods of privatisation, while Ernst and Young (1994, pp. 17-27) list twelve methods (cf., Masterplan Reformasi BUMN, 1998, pp. 25-27). Some of these will be briefly exposed in the following sections. 2.5.1 Public offering of shares (stocks flotation) The public offering of shares, as either an initial or secondary offering, is the most common technique of privatisation of SOEs. This can be exercised in either the domestic or international capital market, or in both of them. Public offering of shares may include the selling of full or partial shares either from existing shares or the issuing of new shares. The reduction of state ownership and the control of certain SOEs will be the result of this approach. It is a preferable method for achieving wider share ownership as well as for promoting the capital market while delivering transparency in its process (Masterplan Reformasi BUMN, 1998; Vuylsteke, 1988). 37
2.5.2 Direct placement Direct placement is also known as private placement, strategic sale, trade sale (Masterplan Reformasi BUMN, 1998, p. 25), or negotiated sale (Ernst and Young, pp. 17, 20). Under this technique, a government sells its stake to selected purchaser(s). Tendering and negotiation are the usual methods for selecting the purchaser(s). In addition, this method is utilised in order to meet the company’s need. For example, if the company needs a broader market, management expertise and advance technology, then a purchaser(s) can be selected based on such a need. A strategic alliance is commonly the result of this approach (Masterplan Reformasi BUMN, 1998). 2.5.3 Management/Employee Buy-out (M/EBO) Management buy-out (MBO) is associated with “the acquisition of a controlling shareholding in a company by a small group of managers” (Vuylsteke, 1988, p. 30). In some cases the acquisition is done by employees or by a joint organisation of managers and employees. The latter is known as management and employee buy-out (MEBO). In this type of transaction, there is a possibility that a consortium, which includes managers, employees and investment banking or venture capital, is formed (Masterplan Reformasi BUMN, 1998, p. 25). The other two variants of this method are Leverage Management Buy-out or Leverage Management-employee buy-out (LMBO), and Employee Stock Ownership Plan (ESOP). LMBO takes place 38
whenever management and employees acquire a minority stake while the rest will be funded by a loan. ESOP is an approach in which employees are given the opportunity to own the SOEs’ stake through a variety of ways sometimes even “…without any payment” (Vuylsteke, 1988, p. 33). This method is intended to boost company performance by inducing employee participation. 2.5.4 Contracting out or outsourcing Contracting out or outsourcing is a method in which a business operation is contracted out to other parties. Recently, this technique has become very common in private enterprise as well as in the public service. The practice of this approach can be found in various services such as the auditing of public services, waste management, refuse collection and street cleaning, catering, laundry and cleaning in public hospitals15, software development and maintenance, and security services. There is no transfer of ownership from the state to the private sector in this method, even though management or operational control of the activities under the agreement will be fully managed by the contractor. 2.5.5 Selling of assets As an entity, a state-owned enterprise often faces considerable problems that cannot be quickly resolved. Hence, under the financial, tax or Labour Research Department (LRD) (1983), Privatisation—who loses, who profits, LRD Publications, London, pp. 3-30.
15
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legal consideration, the state may sell the enterprise’s assets separately from the whole company. This method can be utilised to dispose of unproductive assets that lead to the downsizing of the enterprise (Vuylsteke, p. 21). Railway and port enterprises, for example, often have unproductive assets (such as land) that are disposable.
Another approach for the selling of assets
is liquidation. This approach can be used to sell the whole of an enterprise’s assets as it may not be possible to sell its shares. Liquidation is usually based on insolvency law (Masterplan Reformasi BUMN, 1998). 2.5.6 Leasing, management contract, and concession Leasing, management contract, and concession are comparable to contracting out in the sense that they are not involved with assets disposal or transfer of ownership. Leasing has been seen as a method of financing (e.g., Brigham and Gapenski, 1996). Moreover, leasing is defined as … a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a specific period of time in return for stipulated, and generally periodic, cash payments (rents). (Kieso and Weygandt, 1995, p. 1159) Under the lease agreement, the lessee usually leases assets or other facilities between 4 and 5 years, and the lessor receives the lease payment as compensation. There are different types of leases such as capital or financial leases, operating leases, sale-and-leaseback arrangement, and combination 40
leases (Brigham and Gapenski, 1996, p. 583). Under a capital lease, the lessee has the opportunity to buy assets at the end of the lease contract, whilst no such option under an operating lease16. The state receives certain payment for this type of arrangement throughout the lease period. The next technique is a management contract. This is a method that is utilised to improve the efficiency and other measures of the state’s enterprise by hiring a management contractor. The contractor takes responsibility in the management of the state-owned enterprises based on a specific contract. It has full control of the company. As a reward, the contractor will receive compensation that may be based on the profitability of the company or other measures specified in the contract. There is no transfer of ownership; hence, all business risks are still the responsibility of the original owner (the state). The contract may raise an additional financial burden especially for the contractor’s compensation; however, the implanting of outsiders may improve the performance of state owned-enterprises. The other method is a concession which usually is a long-term arrangement of between 25 and 30 years (Masterplan Reformasi BUMN, 1998, p. 26). Under this arrangement, the state gives a concession to the 16
Details of lease arrangement can be found in the intermediate financial management or accounting text book, such as Brigham and Gapenski (1996, pp. 583-605) and Kieso and Weygandt (1995, pp. 1121-64).
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private sector to manage assets or part of SOEs’ business within the specified period. There is no transfer of ownership involved in this method. 2.5.7 Build, Operate, and Transfer (BOT) BOT is a very popular method used to encourage the private sector to participate in the public service. For example, highways in Indonesia as well as those of in Malaysia are built through this method. Under this method, the state appoints private (or state) enterprise(s) to build infrastructure and then to operate it as a compensation. At the end of the contract, the infrastructure will be transferred to the state. 2.5.8 Voucher Schemes Voucher schemes are usually part of the mass privatisation programs that have been implemented in Central and Eastern Europe and the former Soviet Union. As has been described in section 2.2, the bottom line of the mass privatisation program is to introduce market forces into the economy and quickly privatise state-owned enterprises in a large scale manner. In many cases, mass privatisation includes distribution of vouchers either for free or at discounted prices to the citizens of the respected countries. The voucher, then, can be used to buy state-owned shares during an auction17. 17
To some degree the voucher system is recognised as a method of free distribution of assets and it is very popular approach to speed up privatisation in the Central and Eastern Europe and former Soviet Union. However, Hungary is an exception. This country did not, even rejected, this type of policy. (Winiecki, 1992, pp. 80-81).
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In brief, there are two broad approaches in the privatisation of SOEs. The first are methods that involve the transfer of ownership from the state to the private sector (e.g., public offering/flotation and strategic sale/direct placement). The other approaches focus on the transfer of management and/or operational control (e.g., contracting out/outsourcing, leasing, concessions, and a management contract). BOT can be seen as a variant of the latter. Even though transfer of ownership and the control of SOEs are the fundamental issues of privatisation of SOEs, the above exposition suggests that different measures in privatisation of SOEs may have taken place (cf., Ramanadham, 1988, pp. 6-11; Gupta, 2000, pp. 27-34). 2.6 Process of Privatisation of SOEs The process of privatisation of SOEs is tied up with the selected method of privatisation. The step-by-step privatisation process can be different for each method; however the process, in general, can be divided into three core steps: preprivatisation, implementation, and post-privatisation (Ramanadham, 1988; Vuylsteke, 1988; Ernst and Young, 1994). 2.6.1 The planning stage (pre-privatisation) Vuylsteke (1988, p. 74) acknowledged that the planning stage is critical for the success of privatisation because the comprehensive aspects of privatisation have to be determined at this stage. Many aspects shall be considered at this phase such as the extent of future ownership by the state, the cost of privatisation, employment issues and participation, and resource 43
mobilisation and financing. Furthermore, Ramanadham (1988, pp. 21-22) notes that consideration shall also be given to the following aspects before the discharge of privatisation: 1. 2. 3. 4. 5. 6.
a thorough analysis and quantification of the decline in [the] comparative advantage of a public enterprise, the effectiveness and favourable consequences of any withdrawals in government involvement in the working of a public enterprise, the accounting adjustments necessary before privatisation, the restructuring of the enterprise, financial and otherwise, before privatisation, the ‘public’ elements considered essential in the objectives of the enterprise in [the] current context, [and] the choice of enterprises for privatisation (a) sectoral, (b) temporal, and (c) modality-wise.
Above all, a government should establish the ‘right’ organisation and management (Abeng, 2001), and to publish a comprehensive privatisation plan. Those will likely contribute to the success of privatisation. 2.6.2 The implementation stage Transparency, unambiguous rules, valuation and pricing are amongst factors that must be accounted for in this stage (Vuylsteke, 1988). First, transparency will give an equal opportunity for investors and it can prevent the abuse of power from state’s officials. It is not uncommon that privatisation benefits the inner circle of policy makers and their cronies. Corruption, collusion, and nepotism are often inherent in privatisation. 44
Hence, transparency is a prerequisite in the implementation process to prevent such practices and to enhance the notion of accountability. Second, unambiguous rules are necessary to guarantee fair processes such as in prequalification of purchasers, tender, valuation and pricing. For Vuylsteke (1988) the ultimate goal of this process is to “ensure an orderly disposition, to maximize returns to the state, to preserve a fair process for the general public and to assure that the purchaser is qualified to run the acquired enterprise productively” (p.5).
2.6.3 The post-privatisation stage Ramanadham (1988) points out that a government shall have a mechanism to assure that privatisation of SOEs achieves its objectives. An independent audit, for example, is important measure that must be implemented. It is to ensure that a comprehensive view of privatisation can be obtained and controversies can be minimised. To gain optimum results, the audit must cover financial aspects as well as other relevant aspects of the privatisation. Besides an independent audit, a variety of aspects shall also be planned and integrated in the planning documents, such as …the options in the use of sales proceeds, the aggregate impacts of privatisation measures on budget balance year by year, the implications of privatisation in given cases for income and wealth distribution, and the contingent compulsions of total or partial renationalisation in a given case. (Ramanadham, 1988, p. 22) 45
Conceptually, the whole aspect of privatisation shall be put in place before the policy is implemented. However, experience has proved to the contrary. For example, in the early years of privatisation in the UK, it was not spelt out as the government’s formal policy but rather as a brief commitment to denationalise a few state-owned enterprises (Abromeit, 1988, p. 70). In Malaysia, a blueprint for privatisation was published two years after the reform was initiated (Jomo, 1993; Al-Salloum, 1999). 2.7 Catalysts of privatisation
Whilst the rise of neo-liberalism is claimed as the fundamental catalyst of privatisation (e.g., Martinez and Garzia, 2000; Baswir, 2004a), poor financial performances of SOEs, financial difficulties faced by the state, international pressure by international lending agencies, and political factors are commonly recognised as factors that have induced the policy. These factors will be described in the following sections.
2.7.1 SOEs’ poor performance? Charges of SOEs’ poor financial performances have always been used as strong justification for privatisation, even though evidence of such claims are mixed. Emphasising the work of Boardman and Vining (1989) and Galal et al. (1992), Perotti (1995) notes that empirical evidence shows that the private sector is more efficient than the public sector (see also Megginson and Netter, 2001). Similarly, Abeng (1998) 46
points out that the average rate of returns of SOEs in Indonesia was considered very low in comparison to that of similar companies in Asia (Master Plan Reformasi BUMN, 1998, p. ix). On the contrary, others disclose that “there is no systematic evidence that public enterprises are less cost effective than private firms” (e.g., Millward and Parker, 1983; cf., Aharoni, 1986; Millward, 1988), there are even world-class stateowned enterprises such as Singapore Telecom (Heracleous, 1999), Korean Posco (Pohang Steel Company), the Kenyan Tea Development Authority, the Ethiopian Telecommunications Authority, the Tanzanian Electric Supply Company and the Guma Valley Water company of Sierra Leone (Jackson & Price, 1994, p. 20). Hence, the generalisation that poor performance is the driver of privatisation of SOEs could not be used, but rather a case by case study would likely be more appropriate. In the UK, profitable companies have been privatised (LRD, 1983, pp. 40-43). This is comparable to privatisation in Indonesia. PT Semen Gresik (Persero) Tbk., PT Telkom (Persero), Tbk. and PT Indosat, Tbk. are examples of profitable SOEs that have been privatised. An important note to consider as the cause of SOEs’ poor performances primarily in the UK has been smartly espoused by Garner (1988) (cf., in Indonesia: Mardjana, 1992; Abeng, 2001; and Baswir, 2004; and in Malaysia: Jomo, 1993). Garner claims that it is “a failure of government rather than that of the institution of public enterprise18 itself” (p. 26). First, the government fails to determine 18
Garner recognises the vague concept of public enterprises, even though she still uses the term throughout her paper. In further explaining the term public enterprises, Garner points out that “it is common knowledge that there are three forms, virtually world-wide, in which public enterprise is
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unambiguous objectives and proper performance measurements (cf., Abeng, 2001, p. 32). SOEs have many objectives imposed on them (e.g., adequacy of supply, maintenance of employment, low and stable prices, support for regional development, or as ‘agent of development’) (cf., Vernon, 1979); hence, they cannot focus on merely achieving a good financial performance. But, unfortunately, SOEs performances are measured mainly based on their financial returns as applied in private enterprises. As such, SOEs’ financial performances are unlikely to be better than that of private enterprises. Second, the state fails to give sufficient autonomy to SOEs in various matters, for example in the strategic decision-making. In Indonesia, for example, Mardjana (1992) discloses that to make such a decision, management of SOEs must pass through 31 bureaucracy desks within two ministerial posts (p. 197, figure 1). As a result, the decision process is time consuming and it can lead to loss of business opportunity. However, besides such revealed problems, mismanagement of SOEs is also seen as another main source of SOEs’ poor performance (Abeng, 2001; Jomo, 1993). Such indication led to the enquiry as to whether ownership or other factors (e.g., competition, ambiguous goals, etc.) drove the performance of enterprises (e.g., Vernon-Wortzel and Wortzel, 1989; Supratikno, 2003). Empirical evidence shows that promoting competition and reforming organisations have been more important than changing ownership (Vernon-Wortzel and Wortzel, 1989; Vickers and Yarrow, 1991; Bishop and Kay, 1989; Yotopolous, 1989). constituted: as [a] government department, as a public corporation, and as a company under private
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2.7.2 The financial difficulties faced by the state The second fundamental reason that has induced privatisation of SOEs is financial difficulties (e.g., budget deficit and debt) faced by the state. This can be seen from the experience of many countries including that of the UK, Malaysia, and Indonesia. Prior to the adoption of a privatisation policy in the UK, the budget deficit was mounting and, in turn, it increased the need for a public sector borrowing requirement (PSBR). The PSBR rose to its highest level in 1975 which accounted for 10.75 per cent of GDP (Jackson and Price, 1994, p. 3). In Indonesia, Abeng (2001, pp. 48-49) points out that following the 1997/1998 financial crisis, the deficit in the country accounted for 8.5 per cent, a turning point from the budget surplus of 1 per cent of the GDP in 1996/1997. In addition, the crisis drove the collapse of the Indonesian currency (Rupiah). The rupiah fell from 2,400 per US$ in early 1997 to 14,900 per US$ in June 1998 (Abeng, 2001, pp. 38-39). As a result, the foreign debt of the government soared, as it also did in the private sector of the country19.
In dealing with such economic problems, the privatisation of SOEs is seen politically and economically as a viable choice. Emphasising the work of Fraser (1988) and Abromeit (1988), Jackson and Price (1994, p. 14) note that … [r]aising revenue from the sale of public assets was less politically damaging than raising taxes or cutting public law” (1988, p. 26). 19 The crisis also brought President Soeharto down, and gave way to international lending agencies, primarily the IMF, entering the country and exercising powerful role of directing economic policy in Indonesia.
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spending and was regarded as a more acceptable means of reducing the public sector borrowing requirement. During a crisis, raising tax is also economically improbable since both the private sector and state-owned enterprises are in trouble. Hence, while the rhetoric for promoting SOE’s performance is in place, reducing the budget deficit and repaying debt are the more prominent motives for the privatisation of SOEs especially in countries that face a crisis. By doing so, ownership will be transferred to the private sector, and the government may reduce subsidies and eliminate government capital participation for SOEs. This would seem to be reasonable, although evidence also shows that privatising SOEs can be a means of giving subsidies to the few and the rich at the expense of the general public (e.g., Shaoul, 1997a; Kernot, 1996). 2.7.3 The international pressure It has been stated in section 2.3 that the powerful actors in the promotion of the privatisation policy, especially in developing countries, are the international lending agencies (e.g., the IMF, the World Bank and the ADB). Aylen (1987) and Babai (1988) as cited by Ramamurty (1992, p. 228), and Mandell (2002, p. 1) also confirm the essential role of the IMF and the World Bank in sponsoring such policy around the world. On top of this, Babai (1988), and Arnold and Cooper (1999) detect that the US government has essentially been the key player behind the IMF and the World Bank agenda (see also Chomsky, 1999, p. 19; Schirato and Webb, 2003). Chomsky (1999) goes further and pinpoints that besides the US government, the 50
“principal architects” of such policy are “the masters of the private economy, mainly huge corporations that control much of the international economy …” (p. 20). Consequently, it is not difficult to imagine who will benefit most from the implementation of such policy. The pressures that have been put in place in developing countries have been bundled together with ‘conditionalities’ for loans that commonly come under the flag of economic reform and structural adjustment20 (Ramli, 2003, Ghosh, 2000). On this matter, Arnold and Cooper, reiterate the work of Martin (1993), acknowledge that [a]lthough neo-liberal ideology spurred privatisation in some countries, the greatest impetus to privatisation came from the World Bank and IMF (International Monetary Fund) which, in response to pressure from the United States, made privatisation an essential component of their economic reform and structural adjustment programs. (1999, p. 132). Developing countries that seek a loan from the agencies have no choice but to accept (Cook, 1986, p. 24) and implement such programs, even though those have been criticised as excessive and lacking focus as to the real inherent problems as such (Ramli, 2003b, pp. 10-11). In fact, the World Bank and the IMF not only take a prominent role in the promotion of privatisation (as an element of liberalism/neo-liberalism), but they also sponsor an interventionist ideology (Babai, 1988, p. 256; Price, 1994b). Price (1994b, p. 247) observes as follows:
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International aid and lending agencies are significant players in the privatisation game, and will have their own objectives which determine the constraints under which local government operate. Just as the World Bank (IBRD) and International Monetary Fund (IMF) played a vital role in enabling the public sector to develop, they are also crucial in the reversal of this process. The IBRD and IMF provided more than passive discipline to countries where their help was needed. In the two decades before 1980 they had been active proponents of state intervention in the development process. These are inconsistent policies advocated and imposed by the international lending agencies on developing countries; however, unfortunately, the failed outcomes of such policies were fully the responsibilities of the countries involved (Ramli, 2003a). 2.7.4 The political factor Another factor that induces privatisation is a political one (e.g., Abromeit, 1988; Marsh, 1991; Bishop and Kay, 1989; Lieberman et al., 1995; Boycko et al., 1994; Biais and Perotti, 2002). In the case of mass privatisation in Central and Eastern Europe and the former Soviet Union, privatisation has been used to draw out “bottomup political support from the population” (Lieberman et al., 1995, p. 37; cf., Boycko et al., 1994). Even though many measures have been used in the mass privatisation policy (e.g., high discount prices, special arrangements for MEBO, selling at book value, etc.), the distribution of vouchers for free or at a minimum price is the most favorable choice in order to promote a wider share of ownership, and to gain political support. In the 20
Ramli (2003a, pp. 10-11) states that conditionalities for Indonesia imposed by the IMF can be observed in the agreement signed by President Soeharto on January 15, 1998.
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UK, a political motive had also been noted behind the radical policy exercised by the conservative government to privatise its state-owned enterprise (Marsh, 1991, pp. 472-74; Abromeit, 1988, p. 73). 2.8 Summary Privatisation has been defined in a variety of ways and even though many interpretations cannot be avoided, it can be viewed from macro and micro perspectives. In a macro perspective, privatisation is defined as a policy to change the role of government in the economy, whilst in a micro view, it means transferring ownership and control of state-owned enterprise to the private sector. The latter is commonly known as the privatisation of state owned enterprises. In the context of centrally planned economies, privatisation is seen as a transformation from a state-driven economy to a market-driven economy. It includes transferring ownership and control of a substantial number of state-owned enterprises to the private sector through what is entitled mass privatisation.
Ideologically, privatisation is based on a capitalistic ideology since it has been built on capitalistic principles, particularly private property. Under this principle, private ownership is argued to outperform state-ownership for a variety of reasons, but the fundamental nature of the argument was best espoused by Kunio who points out that “if private property is a condition of capitalism, no government enterprises qualify as capitalist institutions, and ‘state capitalism’ becomes a self contradictory term” (1988, p. 2). 53
Privatisation gained new momentum following ‘the government failure’ in the 1970s. Privatisation in the UK in the late 1970s was considered as the rebirth of this policy. Many other countries around the world then followed it, either freely or under pressure from the international lending agencies (e.g., the IMF and the World Bank). The fundamental objective of privatisation of SOEs is to improve their efficiency. Other objectives of privatisation in a broader manner have also been pursued such as those designed to increase a wider share of ownership, to reduce the state’s financial burden, and to gain political advantage. To achieve such objectives, various methods can be exercised but in general there are at least two broad approaches in the privatisation of SOEs. The first are methods that involve the transfer of ownership from the state to the private sector (e.g., public offering/flotation and strategic sales/direct placement). The other approach focuses on the transfer of management and/or operational control (e.g., contracting out/outsourcing, leasing, concessions, and a management contract). A variant of the latter method can also be exercised such as through BOT. Thus, even though transfer of ownership and the control of SOEs are the core issue of privatisation of SOEs, the above exposition suggests that different measures in privatisation of SOEs may have taken place. In implementing such a policy, there are commonly three strategic stages: the planning phase, the implementation stage, and the postimplementation. Finally, besides the rhetoric that poor performance of state-owned enterprises has been considered as the main catalyst of privatisation of SOEs, there are many other aspects that drive the policy particularly the financial difficulties 54
faced by the state, the international pressure and the political motives. Departing from the above discussion, it is believed that by advancing understanding of the privatisation experience in certain countries, the comprehension of the rhetoric of privatisation will be best achieved, and this will be presented in the next chapter.
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CHAPTER 3 PRIVATISATION: COUNTRIES’ EXPERIENCES
Privatisations [are] a gift to [the] rich. (Kernot1, 1996) … privatisation was more likely to be pursued by countries with high budget deficits, high foreign debt, and high dependence on international agencies like the World Bank and the IMF. (Ramamurti, 1992, p. 225)
3.1 Introduction In the previous chapter, the general concepts of privatisation have been presented including the nature, origins, objectives, methods, and driving factors of the policy. In terms of its origin, privatisation in the UK is widely recognised as the rebirth of the policy, and it has inspired the adoption of such a policy in many other countries around the world including those in developed and developing countries, as well as in centrally planed economies. The UK, New Zealand, Japan, Australia, France, and Canada are a few examples of developed countries that have implemented privatisation. Malaysia, Indonesia, Bangladesh, Chile, Sri Lanka are among developing countries that have adopted such a policy, while Poland, Russia, the Czech and Slovak Republics, and Lithuania are examples of countries from centrally planned economies that have also carried out privatisation. This chapter intends to explore the privatisation experiences of a developed and a developing country. Exploring the experiences of these particular countries 1
[Former] leader of the Australian Democrats (The Australian Financial Review, 1996, July 25, p. 22).
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will enhance the understanding of the general nature of privatisation that has been presented in Chapter 2. The UK and Malaysia have been selected for this purpose. The UK experience is chosen because privatisation in this country has been widely recognised as ‘a source of inspiration’ of such a policy around the world (Bishop and Kay, 1989; Feigenbaumn et al., 1999). In addition, privatisation in the UK has been widely discussed and published both positively and critically, and these writings offer credible and accessible resources. The Malaysian experience is selected primarily on the basis of its proximity to Indonesia in terms of its economic and political environment (cf., Al-Salloum, 1999). Excluding this introductory section, this chapter consists of two main parts. The first part is an exposition of privatisation in developed countries which is the UK experience (Section 3.2). This part will be divided into several sections, including a brief prologue, backgrounds and motives, results and costs, winners and losers, the role of the National Audit Office, the regulations, and case studies. The second part presents privatisation experiences in developing countries which is Malaysia’s experience (Section 3.3). This section will include a brief prologue, background, objectives and methods, the outcomes, and critique and dilemmas. The last sections are a summary of this chapter (Section 3.4), and a brief epilogue (Section 3.5).
3.2 Privatisation in developed countries: the UK experience
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3.2.1
A brief prologue In developed countries especially in some of the OECD countries,
privatisation was initiated toward the end of the 1970s and has continued up until now. Privatisation proceeds and average annual GDP in these countries are presented in Table 3.1 (1980s) and Table 3.2 (1990s). Table 3.1 The scale of privatisations in selected OECD countries, 1980-1991
Please see print copy for Table 3.1
In the 1980s, six countries were listed as the top revenue recipients: Japan (US$ 71 billion), the UK (US$ 66.75 billion), France (US$ 12.36 billion), Italy (US$ 9.38 billion), West Germany (US$ 5.01 billion), and New Zealand (US$ 4.5 billion). However, if the proceeds are compared to those of the related average annual GDP, New Zealand (14.10 per cent) and the UK (11.90 per cent) outperform the others. It can also be noted that Japan experienced the shortest period of privatisation (198658
1988) with the highest proceeds. In the 1990s, a different privatisation picture can be seen in Table 3.2. Table 3.2 The scale of privatisations in selected OECD countries, 1990-2000
Please see print copy for Table 3.2
From table 3.2, it can be seen that during the period 1990-2000, privatisation in Hungary and Portugal were estimated to be outperforming the other OECD countries in terms of their privatisation proceeds in comparison to their respected GDP. Their privatisation’s proceeds accounted for between 26% and 27.5% of their respected GDP. At the same time, Italy and Australia were at the top of countries’ recipients of the privatisation proceeds in this period.
3.2.2
Backgrounds and motives
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Among the above selected OECD countries, the UK experiences have been widely analysed and published (e.g., Ramanadham, 1988; Bishop and Kay, 1989; Marsh, 1991; Pirie, 1988; Beauchamp, 1990; Abromeit, 1988; Arnold and Cooper, 1999; Ogden, 1995, 1997; Shaoul, 1997a, 1997b). The analysis of the UK experience has been done from a variety of perspectives: economic, political, public management as well as accounting. Hence, rich resources are available and accessible to be observed as a benchmark for a privatisation study of other countries. The economic crisis, indicated by rising levels of unemployment and inflation, the declining of manufacturing output, soaring interest rates, and escalating public expenditure, was the dominant aspect that drove privatisation in the UK (Jackson and Price, 1994, pp. 1-2; Clarke, 1993, p. 206)2. The adoption of a Keynesian welfare state –which advocated strong government intervention in the economy-- for more than 30 years after the Great Depression in 1930s, resulted in the UK’s public sector expansion from 25 per cent of the GDP in 1946 to 52 per cent in 1970 (Jackson and Price, 1994, p.1). In turn, it instigated high public expenditure. When the expenditure could not be financed from ordinary government revenue (tax), then debt financing became the choice. In turn, this increased the public sector borrowing requirement (PBSR). In the UK, the PBSR reached its peak in 1975 which accounted for 10.75 per cent of GDP (p. 3). The increasing PBSR was one
2
A comparable experience from an OECD country can be observed, for instance, from the New Zealand experience. The economic crisis in this country was indicated by soaring deficit, mounting debt and inflation. The crisis was seen as a result of excessive government intervention in the economy. In response to the crisis, reform was initiated in the mid 1980s, which included corporatisation and privatisation. It was claimed as large-scale reform consisting of fast track privatisation of which the primary aim was to deal with the budget deficit. (Bollard and Mayes, 1993)
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important catalyst for the adoption of the privatisation policy in that country (Abromeit, 1988, p. 83). Besides economic rationalism, political motives were another essential factor that energised the adoption of privatisation in this country (Abromeit, 1988; Marsh, 1991; Bishop and Kay, 1989; Biais and Perotti, 2002). Biais and Perotti (2002) allege that, in a bipartisan political environment, any policies (e.g., privatisation) will hardly deviate from a parties’ interest to win their constituencies. As a result, in the words of Abromeit, “reversal and re-reversal and re-re-reversal of policy” or the “adversary politics” were just not uncommon in this political environment (1988, pp. 68-69). Labour’s nationalisation program and the Conservative’s denationalisation policy prior to 1979 were just perfect illustrations of such adversary politics in this country, although such policies were “only on the level of programs and ideologies, but hardly in practical politics” (Ibid., p. 69). However, Abromeit further notes that the radical privatisation policy of the Conservative government in 1979 was beyond traditional adversary politics. Considering the extant of its scope, Abromeit claimed that privatisation in 1979 onward was no “U-turns” policy (p. 69). Others see that such policy was an example of Machiavellian privatisation –“a strategic policy to retain [in] power” (Biais and Perotti, 2002, p. 240). Moreover, the policy was also viewed as shortsighted and would unlikely drive the country to “be poorer than at its start” (Abromeit, 1988, pp. 84-85).
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The specific political motive of such policy was to eliminate the unions’ power (Marsh, 1991, pp. 472-74; Bishop and Kay, 1989, p. 647; Jackson and Price, 1994, p. 14; Abromeit, 1988, p. 73). Bishop and Kay acknowledge that [d]iscussion of privatisation in the United Kingdom began in the 1970s with policy analysis by the Conservative opposition. Reducing the power of public sector trade unions was an important objective. (1989, p. 647) The above attestation was strengthened by Marsh (1991), as he avowed that “[t]here is little doubt that one of the chief initial concerns of the Conservative government was to curb union power” (p. 472). The conservative position can be understood since trade unions, commonly associated with the Labour party, were very powerful both in the public and private sector. In the public sector, the unions were seen as too powerful since they could have an influence on economic-policy making as well as in the determination of wage increases, while their counterparts in the private sector were perceived to distract the market mechanism (p. 472). Politically, the Conservatives were expecting to be favoured by more voters, and they were. As a result of this policy, McAllister and Studlar (1989, pp. 172-73) found that Conservatives gained 10 per cent more of the vote among new shareholders compared with those who had never owned shares, while Labour lost 9 per cent of the vote, net of other things. Similarly, council tenants who had purchased their shares showed some 15 per cent greater levels of Conservative support compared to stable council tenants, net of other things. (Jackson and Price, 1994, p. 15).
3.2.3
Results and costs 62
As briefly introduced in Chapter 2, privatisation in the UK has been acknowledged as the legacy of Britain’s conservative government under Prime Minister Margaret Thatcher (Foster, 1992; Morgan, 1995). It has also been recognised as one of the biggest sell outs of public assets in the world as well as being an effort towards the redistribution of wealth for UK citizens. Pirie believed that [t]aken together, the privatisation program in Britain probably marked the largest transfer of power and property since the dissolution of the monasteries under Henry VIII. It was a transfer from the state to its citizens; from the anonymous hands of the public sector into the particular hands of [the] private individual. (1988, p.4) Quantitatively, the records of this privatisation program in the UK from the 1980s until the beginning of the 1990s, were impressive. The amount of assets sales at the commencement of privatisation in 1979 was less than US$ 500 million and by 1991 the total privatisation proceeds were more than US$66 billion (Table 3.3) 3. Privatisation consisted of selling various state industries such as British Petroleum, British Aerospace, British Telecom, British Gas, British Airways, Jaguar, Water companies and Rolls Royce (Wright and Thompson, 1994; cf., Hansard 1990, as cited by Beauchamp, 1990, p. 56; and Kay and Thompson, 1986, p. 18).
Table 3.3 UK: Stock flotations, gross equity proceeds of sale and privatisation expenses
3
The ‘numbers’ are not always matched between one and other sources (cf., Hansard 1990, as cited by Beauchamp, 1990, p. 56; and Kay and Thompson, 1986, p. 18). Recent information shows that UK privatisation continued until 1997. The UK privatisation proceeds from 1992 to 1997 accounted for more than US$28 billion. (OECD, 2001, p. 44)
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Please see print copy for Table 3.3
The broad result of privatisation in the UK can also be seen in the extent to which the public sector was transferred, the total number of shareholders created, as well as the amount of council houses sold. Marsh points out: [t]he scale of privatisation is immense. In fact, by early 1991: over 50 per cent of the public sector had been transferred to the private sector; 650,000 workers had changed sectors, of whom 90 per cent had become shareholders; 9 million people 64
were shareholders, which represented 20 per cent of the population, as compared with 7 per cent in 1979; the nationali[s]ed sector accounted for less than 5 per cent of the UK output as compared with 9 per cent in 1979; about 1,250,000 council houses had been sold, most to sitting tenants under the ‘right to buy’ provisions … (1991, p. 463) Privatisation in the UK was considered extraordinary in terms of its scope and proceeds; however, it was not disclosed as a formal policy of the conservative government in the earlier years of its implementation (Abromeit, 1988; Jackson, 1985; Clarke, 1993), and it was even considered to be “a marginal policy” (Bishop and Kay, 1989, p. 647). Initially, the policy consisted of a commitment by the conservative government to denationalise a few state-owned enterprises (such as Aerospace, Shipbuilding, the National Freight Corporation, and the British National Oil industry), to deregulate the bus industry (Abromeit, 1988, p. 70), and to sell council houses to their tenants (Bishop and Kay, 1989, p. 647; Clarke, 1993, p. 206). When it was realised that there were such significant gains to be had with such a policy, both economically and politically, privatisation was promoted as a formal policy of the Thatcher conservative government in its second and third term (Abromeit, 1988, p. 70; Clarke, 1993, p. 206). While proceeds of the assets sold were astonishing so were the associated expenses (Table 3.3). The privatisation expenses4 included expenses for marketing campaigns, financial advisors, lawyers, etc. (Beauchamp, 1990; cf., Abeng, 2003; Kernot, 1996). It is worthy to note that the costs for selling certain big companies (e.g., British Gas) exceeded the proceeds of selling small companies (e.g., Jaguar, 4
Vuylsteke (1988, pp. 138-41) presented a more comprehensive coverage on privatisation expenses.
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British Aerospace, Amersham International, or British Ports). The mean of these expenses was around 4 per cent (cf., Buckland, 1987, p. 249). In comparison to its proceeds, the highest privatisation expense was for British Ports (1983) which exceeded 9 per cent, while the lowest was for British Steel (1988) which accounted for 1.84 per cent of its proceeds5. It seems that there was a downward tendency of privatisation expenses. It was, according to Wright and Thompson (1994), as a result of strong criticism from the public that privatisation was too costly (p. 60). 3.2.4
The winners and losers The key to success in the UK’s privatisation policy was the support of, and
collaboration with, the management of SOEs (Abromeit, 1988, p. 77). It was not surprising since one group which profited from the policy was management, through a significant increase in their salary after privatisation was completed6. The highest increase of salary was obtained by Cable and Wireless’s management, being as much as 352 per cent, and the lowest increase was for Britoil’s management which received ‘only’ a 36 per cent increase (Table 3.4). Pay increases were significantly high compared to the average increase in company’s earnings (7.5 per cent) and that of ordinary workers (6-7 per cent) per annum (Clarke, 1993, pp. 222-23).
Table 3.4
5
As a comparison, Buckland (1987) outlined administrative and selling expenses of the UK privatisation from 1979 to 1987. His estimation on certain cases was higher or lower than the expenses presented in Table 3.2. For example, privatisation expenses of Associated British Ports and British Telecommunication was estimated around 11.8% and 7.2% respectively; while Cable and Wireless’ expense was estimated around 1.3% (p. 249). 6 In a certain case, not all of the members of management would have had similar benefits. In the privatisation of Medway ports, for example, the managing director benefited most compared to that of the other directors (Arnold and Cooper, 1999).
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UK: Directors' salaries before and after privatisation
Please see print copy for Table 3.4
The Labour Research Department (LRD) (1983, pp. 42-43) reported that many companies (e.g., British Petroleum, Cable and Wireless, Amersham International) which had been sold were profitable companies, and the sales prices were considerably low leading buyers to act as speculators because the speculative gain would be enormous (Table 3.5). Table 3.5 UK: Speculative benefits from privatisation
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Please see print copy for Table 3.5
Besides management, the other group of people who benefited from privatisation were some of the rich as well as people who had close connections to the conservative party. For example, the largest shareholder in Exclusive Cleansing and Exclusive Cleaning in this country is the chairman and Tory councilor, his immediate families, company secretary, non-executive directors, as well as people with connections to the party (LRD, 1983, p. 7). Unlike the government’s jargon ‘popular capitalism’ which means that privatisation was intended to promote a wider share ownership, there was indication that many of the buyer’s motives were shortterm speculations as indicated by the declining numbers of shareholders in the following years after privatisation (Table 3.6).
Table 3.6 UK: Size of selected privatised company’s share registers
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Please see print copy for Table 3.6
The UK case is comparable to that of privatisation in Australia. In Australia, for example, the government sold the shares of the Commonwealth Bank (CBA) with a discount price to “some of the Australia’s richest and most powerful people” (Kernot, 1996, p. 22; cf., Quiggin, 2000/2001, p. 43). While this benefited the few and some of the rich, the general public suffered a heavy loss, as Kernot points out: “[t]aking into account the costs of the three CBA floats, the public has lost more than $800 million on the sale” (1996, p. 22). The main source of the public loss was from the discount price given by government. Kernot argues that the discount price during the float is basically a “bonus” for the buyers (cf., Salleh, 1995). In the UK, floated shares with a considerable discount price were common (Table 3.7). An interesting feature that can be learnt from Table 3.7 is that the floated shares with discount prices were highly absorbed by the market, even oversubscribed, but shares without a discount price, such as Britoil and Enterprise 7
Another source informed that 92 shareholders owned 64.5 per cent of this company shares. The similar report presented that Cable and Wireless shareholders plunged from 157,000 (October 1981)
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Oil, did not attract many buyers and were even under-subscribed. While oversubscription is hailed by the market as an indicator of success in the floating of shares, Salleh (1995) argues that it can also be seen as “a strong indicator that [the] offer[ed] price [does] not accurately [show] prevailing market conditions” (p. 126), since oversubscription is a result of the discount price provided. Table 3.7 UK Privatisation: Discount on share price, and share’s over/under subscribed
Please see print copy for Table 3.7
While management, speculators, and some of the rich profited from the increase in their pay cheque and wealth, consumers and workers tended to face the opposite circumstances. In the case of electricity privatisation, consumers had to pay an average increase of 11-14 per cent (Clarke, 1993, p. 224). A full-fare rail
to 26,000 (September 1982), and comparable case occurred on the British Aerospace shareholders (LRD, 1983, p. 48).
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London-Manchester return ticket also soared to more than 46 per cent within a period of less than three years after privatisation (Shaw, 2000, p. 180). Workers were also facing a considerable burden, since, in the words of Chomsky (1999), private companies are concerned with “profit over people”. For example, in the case of British Shipbuilders, employment shrunk from 82,500 (March 1979) to 60,300 (March 1983), while the workers for British Airways were reduced from 56,113 (March 1979) to 38,035 (February 1983) (LRD, 1983, p. 50). In the case of refuse collections, the jobs, on average, were cut to around 28 per cent - 44 per cent within three years (Ibid., p. 5). Last, but not least, a similar report also presented that there were deteriorating job conditions or at least a change in the nature of jobs (e.g., from permanent to casual) after privatisation (see also Arnold and Cooper, 1999; Uddin and Hopper, 2001). 3.2.5
The role of the National Audit Office The National Audit Office (NAO) in the UK has played an important role
primarily in evaluating “how well and to what extent government departments have met their objectives for individual privatisations” (Wright and Thompson, 1994, p. 62). Beauchamp, the director of the NAO division that is in charge of conducting the audit of privatisation in the UK, highlights the role of the institution as follows: [t]he Office has a role to play in preparing independent assessments of the program for Parliament and in highlighting instances where better value for money could be obtained by changing practice[s] in [the] future (1990, p. 55)
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The role of the NAO basically is to exercise an independent audit for better value for money which goes beyond a conventional financial audit. This role is a constitutional one since it was mandated under the 1983 National Audit Act, and the report of this audit is presented to Parliament. The audit is intended to examine “the economy, efficiency and effectiveness” of privatisation (Beauchamp, 1990, p. 55). It focuses on the whole process of privatisation and covers “the preparations and arrangements for the sales, the financial outcome, and whether Government objectives have been achieved” (Ibid., p. 56). In the preparation phase or preprivatisation stage, the Office, for instance, investigates many aspects such as the valuation of the company to be privatised, the cost or expenses of the transaction, and methods of sales and pricing (Ibid., pp. 57-58). However, according to Beauchamp, the NAO “cannot question matters of policy” implying that the policy is the government’s sole responsibility (to Parliament), and that it focuses only on the sponsored department rather than on that of the industry being privatised since it has no constitutional right to do so (1990, p. 55). A comparable function can be observed from the Victorian Auditor-General Office in Australia. In one of its reports to Parliament in 1995, the Victorian Auditor-General, Baragwanath, states that “… my role in auditing privatisation will cover processes and not policy.” (1995, p. 4). While recognising the importance of enhancing public accountability, the Victorian Auditor-General maintains that it is important to distinguish between policy and instruments of policy which in turn leads to the distinction of who is responsible for assessing it. The Victorian AuditorGeneral believes that the Office shall focus on the assessment of policy instruments 72
(i.e. processes to implement government policy) that includes selection of method, timing, valuation process, tendering process, etc. (Baragwanath, 1995, p. 6). More specifically the Office shall assume what is entitled a performance audit of privatisation, an audit that is intended to investigate the performance of a specific privatisation program after it has been completed based on predetermined criteria (e.g., performance, efficiency, quality of service delivery, etc. (Ibid., pp. 6, 25-28). Considering that the act of privatisation was radical and covered most stateowned enterprises in the UK, Beauchamp predicted that at the end of the program “there will be few nationalised industries remaining”; however, it “does not mean that the National Audit Office’s role will cease” (Baragwanath, 1995, p. 58). The NAO will have new challenges, among others being that to exercise a comparable audit for many regulatory bodies (e.g., the Office of Water Services, the Office of Electricity Services, etc.) that were established in response to the privatisation program (Ibid., p. 58). 3.2.6
The regulations Regulatory bodies were established in almost every business in which SOEs
were privatised. The Office of Telecommunication (OFTEL), the Office of Gas (OFGAS), and the Office of Water Services (OFWAT) are examples of regulatory bodies for telecommunication, gas, and the water industries respectively. These agencies were established “to ensure that competition is conducted fairly and that the industries abide by the terms of their licenses” (Mitchell, 1990, p. 23; see also Parker, 1999). Competition is the cornerstone from which efficiency can improve as 73
well as helping to prevent monopoly or its comparable business practices (e.g., oligopoly). Thus, essentially, the agencies were established to protect customers from being abused by such unintended business practices. This is parallel to the essence of regulation which is primarily intended “to protect the public from the inefficiency and abuse of monopoly power …” (Roman, 1990, p. 239) 8. While many new regulatory agencies were established in conjunction with the privatisation of a certain company, the Civil Aviation Authority (CAA) was a regulatory body in existence before the privatisation of British Airways (BA). Interestingly, in the case of the privatisation of BA, an inconsistent policy occurred. Instead of promoting competitiveness, the government had acted on the contrary, by allowing a merger which essentially strengthened the BA’s monopoly. Following a merger between BA and British Caledonian (B.Cal), Baldwin notes that … the ‘second force’ airline disappears and competition for intercontinental routes will be impoverished. The new BAB.Cal grouping will control around 95 per cent of Britain’s share of [the] international scheduled airline capacity. (1990, p. 100) Aware that the BA experience could occur in other industries, Baldwin (1990, pp. 104-05) wisely suggested important measures that should be taken in exercising privatisation. He advocated that … since the operation of most privatised enterprises depends to a large extent on the regulatory regime in existence or to be 8
Regulation can exist in many forms such as price control, and competition measure (Vickers and Yarrow, 1990), as well as regulation on the quality of service, level of service, and profit/rate of return (Roman, 1990).
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created, efforts should be made when privatising to calculate the regulatory effects. Privatisation should thus be sold as a package with a regulatory regime not something in any sense separable. The need to revise a regulatory system to take account of the change make-up of the industry regulated should be considered in advance of regulation. (1990, p.105) It is clear that the extent of regulation should be considered in advance and not be left until after privatisation has been completed. This is to guarantee that business players and society will both be fairly and justifiably treated in the post-privatisation process. 3.2.7
Cases studies Besides the general observation of privatisation in the UK, there were studies
that focused on specific case. Among others are critical accounting studies on water privatisation (Ogden, 1995, 1997; Ogden and Anderson, 1999; Shaoul, 1997a, 1997b), and those on port privatisation (Arnold and Cooper, 1999; Collins, 1998). There are many aspects of privatisation that can be learnt from these studies. First, in terms of methodology, Shaoul (1997a, 1997b) and Arnold and Cooper (1999) exercised the political economy of accounting (PEA) approach advocated by Tinker (1980) and Cooper and Sherer (1984) (see also Tinker, 1984; Hopper et al., 1987). Second, these studies found that there were no efficiency gains on water privatisation (Shaoul, 1997a, 1997b), and “the monopoly of the industry has remained unaltered” (Ogden, 1997, p. 529). These findings confirm other research findings that point out the importance of competition rather than change of ownership in order to improve efficiency (Vickers and Yarrow, 1991; Bishop and Kay, 1989; Yotopolous, 1989; 75
Walle, 1989; Vernon-Wortzel and Wortzel, 1989). Hemming and Mansoor even note that [m]any of the problems associated with public enterprises arise not from the fact that they are publicly owned; rather, they reflect an absence of market discipline [e.g., competition]. … Privatisation of such enterprises will not succeed in making them more efficient unless it is accompanied by economic and financial liberalisation so that market forces are allowed to influence enterprise behaviour. (1988, p. 32). Shaoul (1997a, 1997b) also reveals the increase in consumer prices and the deterioration of infrastructure after privatisation. In addition, while improving the wealth of new owners, the privatisation of water services was also responsible for losses in the job market. This was contrary to the government promise and claims that there would be efficiency gains and benefit for all.
These findings, especially
in the case of employees losing their jobs or at least the changing status of their jobs (e.g., from permanent to casual) have been confirmed by Arnold and Cooper (1999) (cf., Uddin and Hopper, 2001). Arnold and Cooper (1999) have also articulated the existence of the social struggles brought on by the distribution of wealth. They have also revealed who have benefited (e.g., managing directors and financial bankers) as well as who have been the losers (employees/dock workers) in regard to the Medway privatisation, and they have shown the interplay of the neo-liberal alliance (e.g., capital, the state, and the professional) in promoting privatisation. In addition, Arnold and Cooper (1999) have affirmed the global accountancy firms’ central role as the architects of “the neoliberal transformation of international capitalism…”, and have attested the 76
hegemonic role of the IMF, the World Bank, and the US in the “global restructuring of asset ownership [that] produced massive redistribution of wealth from public to private hands and often from poor countries in the South and East to investors in North America and Europe” (p. 132). Through such research, Shaoul has a convincing argument concerning the usefulness of both the accounting model (e.g., value added reporting and cash flow statement), and publicly accounting data (e.g., annual report) to evaluate economic policy (e.g., distribution of wealth) (1997a, p. 403), while Arnold and Cooper (1999, p. 149) espouse how government policy (privatisation) can reveal the existence of a contestable interest in society especially related to the distribution of wealth and the pursuit of social justice, while wisely encouraging the rethinking of the accountant’s strategic role in the development of such policy.
3.3 Privatisation in developing countries: Malaysian experience 3.3.1
A brief prologue Privatisation in developing countries or less developed countries9 is not an
original concept developed by them; rather, it followed what had been done in
9
The terms less developed countries (LDC) and developing countries are commonly used for the same purpose and these terms will be used interchangeably throughout this thesis.
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developed countries (Price, 1994b, p. 237). The adoption of privatisation in developing countries has been driven by a variety of factors. In ASEAN countries, for example, the poor conditions of SOEs have been seen as an important factor that induces such a policy. Such circumstances are indicated by
operating deficits, causing a drain on public budgets; over-staffing, in many cases with politicians, relatives, friends, and ex-generals who have little concern or real incentives for efficient management; heavy dependence on domestic and foreign credit, leading to serious indebtedness; and sub-optimal use of resources, further lowering labour productivity. (Ng and Wagner, 1989, p. 213)
Ng and Wagner further stated that only Singapore’s public enterprises can be excluded from those state of affairs. These conditions have been brought on by extensive government intervention and lack of good governance (Ibid., p. 213). Coupled with a recent economic and financial crisis, these circumstances drove a budget deficit and an increasing Public Sector Borrowing Requirement (PSBR) that, in turn forced the government to use debt financing, especially foreign debt from the international lending agencies (the IMF, the World Bank, or Asian Development Bank). Under such difficulties, developing countries are forced to adopt privatisation. Ramamurti outlines three important aspects that commonly drive privatisation within developing countries. These aspects are, First, … privatisation does seem to be associated with financial problems in developing countries. Privatising 78
countries, especially in Africa, have higher budget deficits than nonprivatising countries, and budget deficits do seem to increase the odds that a country will privatise. Second, privatisation seems less likely if those deficits can be financed through domestic borrowing, while external borrowing seems to heighten the odds of privatisation. Third, the greater a country's dependence on the World Bank, the greater the odds it will be a privatiser. The same appears to be true in Africa with respect to IMF dependency… (1992, p. 241) Thus, financial difficulties faced by the state as indicated by a budget deficit, as well as soaring foreign debt, and dependency on the international lending agencies (especially the IMF and the World Bank) have been the main catalysts for the adoption of privatisation, along with general presupposition that performances of public enterprises have been unsatisfactory (e.g., Walle, 1989) (see also chapter 2, section 2.7).
3.3.2
Background Malaysia gained independence from British colonialisation in 1957. It has
salient characteristics in terms of its multi-ethnic population and its relationship to political representation. This country is inhabited by three major ethnic groups: the indigenous Malay (Bumiputera), Chinese Malay, and the Indian Malay10. The
10
Government statistics show that in 2002, the country had a population of 24.53 million (http://www.statistics.gov.my).
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estimated population of each group is 50 per cent, 37 per cent and 11 per cent respectively (Jesudason, 1989, p. 1), and they are each represented in the country’s main political parties: the United Malays National Organisation (UMNO), the Malayan Chinese Association (MCA), and the Malayan Indian Congress (MIC) (Means, 1991). These parties form a strong alliance known as Barisan Nasional (the National Front) and it has led the country up until now. Malaysia has had high and sustained economic growth for more than three decades since the 1960s. Abdullah and Bakar (2000, pp. 86-87), for example, note that the average economic growth of this country between 1971 and 1990 was 6.7 per cent/per annum, while at the same time its GDP rose from RM 21.5 billion to 79.9 billion. The average of economic growth was even higher during the period between 1990 and 1995. In this time, the growth was 8.4 per cent per year. Prior to the 1997/1998 economic and financial crisis, the World Bank reported that the economic growth of Malaysia, along with Thailand, Indonesia, and the Republic of Korea, was higher than that of South Asia, Latin America and the Caribbean, the SubSaharan Africa, Middle East and Mediterranean, and the OECD economies. This achievement led Thailand, Malaysia and Indonesia to be recognised as newly industrialising economies (NIEs), while the Republic of Korea was named as one of the high performing Asian economies (HPAEs)11 (The World Bank, 1993). Malaysia is an example of a developing country that in 1983 initiated privatisation (Salleh, 1995, p. 118). Many studies of Malaysia’s privatisation have
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been done, for example that by Leeds (1989), Al-Salloum (1999), Salleh (1995), Jomo (1993), Candoy-Sekse (1988), Nankani (1988), Ghosh (2000), Drake and Yusoff (2000), Gomez and Jomo (1999), Cabanda and Ariff (2002) and Smith (2003). Similar to privatisation in the UK, an economic downturn was the main factor that induced privatisation in Malaysia. The root of the problems was from excessive government intervention in the economy as a result of the National Economic Policy (NEP). Relying on the work of Ahmad (1987, p. 5), Leeds states that, … the overall involvement of the government in the economy rose from 24% of GNP in the 1966-70 period, to 29% in 1971-75, 31% in the 1976-80 period and peaked the following year at 48%. (1989, p. 742) Thus, within a period of two decades, the government had doubled its involvement in the economy. Its intervention was planned and maintained after the launching of the New Economic Policy (NEP), following the political crisis and civil disobedience of 196912. Even though early reports suggested that the crisis was driven by politics, further evidence showed that economic disparity between Malay and non-Malay was the primary cause (Means, 1991, p. 23), thus the government of Malaysia pursued a political economy approach to deal with such a crisis. It was, perhaps, a reflection of the belief that the Deputy Prime Minister of Malaysia (Tun Abdul Razak bin Hussein) stated:
11
Besides Japan, the high performing Asian economies (HPAEs) -known as the four tigers- consist of Hong Kong, the Republic of Korea, Singapore and Taiwan, China. 12 Analysis and discussion of political crisis and civil unrest in Malaysia that is known as ‘The May Thirteenth Crisis’ can be found in Means (1991, esp. part 1: The Metamorphosis).
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[d]emocracy cannot work in Malaysia in terms of political equality alone. The democratic process must be spelt out in terms of more equitable distribution of wealth and opportunity. (Straits Times, 10 November, 1969, p. 5 as quoted by Means, 1991, p. 11). The NEP is intended to promote a balance of economic participation among Malaysia’s multicultural society and foreign investors. In addition, it also aims at reducing poverty. The share of Bumiputera, non-Malay (Chinese and Indian Malay), and foreign investors in the economy was around 2.5 per cent, 34 per cent, and 63 per cent respectively in 1971, and through the NEP the figures were intended to be redressed into 30 per cent, 40 per cent, and 30 per cent respectively by 1990 (Robison, 1989, p. 380). The details of this plan in a variety of sectors are presented in Table 3.8. There were many achievements of the NEP.
Among others were the
reduction in the nation’s poverty from 37 per cent in 1973 to 15 per cent in 1987, and reduced foreign ownership from more than 60 per cent in 1970 to around 25 per cent in 1990 (Alamgir, 1994, p. 72), and increased Bumiputera’s shares from 2.4 per cent in 1970 to approximately 20 per cent in 1990 (Jomo, 1993, p. 439). Table 3.8 Malaysia: Ownership of shares in Limited Companies, 1970 and [targets in] 1990 (%)
Please see print copy for Table 3.8
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The ownership shares among Bumiputera, Non-Bumiputera and foreigners, 19701995, are presented in Table 3.9. Table 3.9 Malaysia: Ownership of Share Capital (at par value) of Limited Companies* (%) (Bumiputera, Non-Bumiputera, and Foreigners)
Please see print copy for Table 3.9
The increasing shares of the Bumiputera as well as the Chinese Malay in the national economy had reversed the domination of foreign investors in the country. At the same time, the public sector, as partly represented by the development of SOEs, was also becoming central in Malaysian economic development. Hensley and White (1993), and Shaikh (1992) note that in the 1950s there were only about twenty state-owned enterprises in Malaysia while in the 1980s the number of SOEs soared
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to around 800 companies (Al-Salloum, 1999, p. 154)13. The actual development of SOEs in Malaysia from 1960 to 1992 is presented in Table 3.10. Table 3.10 Malaysia: Number of Public Enterprises, 1960-1992
Please see print copy for Table 3.10
The expansion in the public sector also meant an increase in government budget allocation for this sector. Jomo (1990) points out that the rapid development of the public sector, … inevitably, resulted in soaring public development expenditure …. Under the First Malaysia Plan, 1966-1970, for example, the allocation was RM4.6 billion, which more than doubled to RM10.3 billion under the Second Malaysia Plan, 1971-1975. With the Third Malaysia Plan, 1976-1980, the allocation for public development expenditure tripled to RM31.1 billion; although similar rise in expenditure was projected under the Fourth Malaysia Plan, 1981-1985, the actual increase was only around Rp. 8 billion. Under the Fifth Malaysia Plan, 1986-1990, however, although RM74 billion was allocated for public development, the figure was later revised downwards to RM57.5 billion. (Gomez and Jomo, 1999, p. 31) 13
Another source states that in 1957, the time that Malaysia gained independence, there were only 23 stated-owned enterprises (Salleh, 1995; Gomez and Jomo, 1999), including the Rubber Industry Smallholders Development Authority (RISDA) and the Federal Land Development Authority (FELDA) (Gomez and Jomo, 1999). Expansion of SOE mostly occurred between 1970s and 1980s. The main area of SOE’s business included public utilities, transportation, communication, agriculture, finance, manufacturing and service (Salleh, 1995, pp. 118-19).
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Hence, in less than three decades, the public development expenditure had significantly increased, accounting for more than eleven times of its first budget allocation. Unfortunately, the expansion of the public sector, including the SOEs, was not followed by a better increased public sector performance, but rather was accompanied by inefficiency (Jomo, 1993, p. 437), losses, soaring debt and an inflating deficit (Al-Salloum, 1999, p. 155). In fact, less than one-third of 900 public companies were profitable (Supian, 1988; and Kamal and Zainal, 1989; as cited by Gomez and Jomo, 1999, p. 77). In the broader picture, Al-Salloum states that the public sector debts increased by more than 167 per cent within less than 5 years, from 21 per cent to 41 percent of the GDP, or from RM 11.3 billion in 1981 to RM 30.2 billion in 1985 (cf., Leeds, 1989, p. 744), while the deficit soared from 14.2 per cent to nearly 18 per cent of the GDP between 1986 and 1987 (Ibid., p. 744). Increasing debt, especially foreign debt, was a result of expansion in the heavy industries such as steel, cement and the automotive industries. According to Jomo (1990), Malaysia was highly dependent on foreign debt in the 1980s. In reference to the work of Jomo (1990), Gomez and Jomo state as follows: … Malaysia’s accumulated public sector foreign debt grew from RM4.9 billion in 1980 to RM28.5 billion in 1987. Including loans from domestic agencies, [the] total public sector borrowing increased from RM26.5 billion in 1980 to RM100.6 billion in 1986. (1999, p. 78). Leeds notes that, in comparison to its GDP, Malaysia’s foreign debt increased significantly from 45 per cent in 1980 to 93 per cent in 1982 (1989, p. 744). It seems 85
that Malaysia’s experience provided additional evidence for Ramamurty’s claim that large deficits and dependency on foreign debt led to the adoption of privatisation. The other force behind privatisation in Malaysia was political change, especially the change in the country’s leadership in 1981 from Hussein Onn to Dr. Mahathir (Leeds, 1989). It was the vision of Dr. Mahathir, and even his direct involvement14, that convincingly led the country to roll back government intervention towards more market orientation. The main reasons for this movement, as Dr. Mahathir (1984, p. 7) stated were … public enterprises never seem to be profitable or efficient. Even when they are monopolies they cannot seem to earn their way, much less pay tax or dividends to the owner – the Government. More often than not, a privately owned enterprise which has been making profits and paying taxes, not only ceases to do both on nationali[s]ation, but requires subsidies and copious injections of capital every now and then by the Government. (cited in Leeds, 1989, p. 744) Unlike the political motives of a bipartisan environment as in the UK, the Malaysia experience suggests a different lesson. Malaysia is governed by powerful coalition of parties, the Barisan Nasional; hence, it was unlikely that such a policy be implemented primarily as a means to gain more votes. Leeds believes that privatisation in Malaysia is motivated by “economic pragmatism”, and as a “… response to demonstrably poor state-owned enterprise performance, rapidly
14
For example, the selection of the first company to be privatised was done by the Prime Minister, Dr. Mahathir (Leeds, 1989, p. 746).
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increasing external and domestic debt levels, and public sector deficits that became unsustainable.” (1989, p. 753) 3.3.3
Objectives and methods According to Malaysia’s Guidelines on Privatisation (1985), the objectives of
privatisation in the country are: 1. to relieve the financial and administrative burden of the government in undertaking and maintaining a vast and constantly expanding network of services and investments in infrastructure, 2. to promote competition, improve efficiency, and increase the productivity of services, 3. to stimulate private entrepreneurship and investment in order to accelerate the rate of growth of the economy, 4. to assist in reducing the size and presence of the public sector, with its monopolistic tendencies and bureaucratic support in the economy, and 5. to assist the national goal of redistributing wealth in the economy. (Salleh, 1995, p. 119; cf., Al Haj and Yusof, 1985, pp. 22528) In achieving such objectives, a variety of privatisation methods have been used by the government of Malaysia such as full or partial divestment, strategic or private sale, lease of assets/contracting out, management contracts, and the BOT scheme (Candoy-Sekse, 1988; Salleh, 1995; Gomez and Jomo, 1999). Gomez and Jomo also mention that licenses are another form of privatisation such as in the case of TV channels, cellular phone and satellite, independent power producers, and airlines (1999, p. 82). The methods of privatisation adopted by the government of Malaysia and the number of SOEs being privatised are presented in Table 3.11 and also in Appendix 3.1. 87
Table 3.11 Malaysia: Method of Privatisation
Please see print copy for Table 3.11
An interesting aspect of privatisation in Malaysia is that such a policy was carried out while maintaining and even revitalising the National Economic Policy (Milne, 1991a, p. 331). To do so, specific policies are adopted and implemented, including: 1. sales of government enterprises to individual Bumiputeras or companies owned by Bumiputeras,15 2. pricing divested stock below the market price, preferential allotment of shares and sales methods, 3. allocation of shares to a National Equity Corporation (NEC), whose purpose is to provide a link between the objectives of NEP and privatisation. (Salleh, 1995, p. 129) Conclusively, the distribution of wealth has been a dominant feature of Malaysia’s privatisation. At the same time, the policy is pursued to reduce the burden of budget
15
Bumiputera commonly has at least a 30 per cent stake; however, in the cases of Paremba Bhd. and North Klang Straits Bypass, Bumiputera interest accounts for 100 per cent (Salleh, 1995, p. 129).
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deficit and the government intervention in the economy, as well as to improve the performances of SOEs. 3.3.4
The outcomes: who benefits, who losses It can be seen that the results of privatisation are commonly mixed as in the
case of Malaysia. In some cases, improving the efficiency and financial performances of SOEs have been achieved while in other circumstances government losses also took place. Among examples of increased efficiency of operation and financial profit was the privatisation of the Port Klang Container Terminal. In this case, Salleh states as follows: The privatised Klang Container Terminal managed to increase efficiency at the port. Prior to privatisation in 1985, the terminal handled 244,120 TEUs, as compared to 773,335 TEUs in 1987, an increase of 216.8 per cent. The company made a profit of RM0.7 million and RM2.1 million respectively during the first two years of its operation … (1995, p. 124) In addition, the government would benefit financially and achieve a broader privatisation objective. Leeds notes that, in terms of financial matters, the privatisation of the Port Klang Container Terminal would save the government between RM$40 million and RM$60 million a year that could be used for other development programs, while other benefits gained were as follows: … by turning over management of the terminal to a private company, the transaction demonstrated the government‘s commitment to promoting private entrepreneurship and investment. This was achieved, moreover, without violating the ethnic objective of the NEP --- [since] the majority 89
shareholder in the new container company, KTK, was controlled by Bumiputera interests. (1989, p. 750) In another case, Cabanda and Ariff (2002) report on another privatisation in Malaysia which is Syarikat Telekom Malaysia (STM) or Telekom Malaysia (TM). This research focuses on testing whether performance and efficiency improve after privatisation and competition in the Asian telecommunication industry (Telekom Malaysia, Nippon Telegraph and Telephone Company, Japan, and Philippine Long Distance Telephone Company). The main finding of their research is that “performance and efficiency improved after simultaneous adoption of privatisation and competition reforms” in the industry (p. 276). In the case of Telekom Malaysia, profitability and efficiency of the company are significantly improved after the privatisation, as well as consumer welfare (Ibid., p. 276). However, this study does not espouse whether such performances and efficiency improvement are a result of competition or change of ownership, but rather a combination of these two aspects. One important aspect regarding the privatisation of Telekom Malaysia was the government’s consistent effort to pursue the distribution of wealth under NEP direction. The total shares sold were 23.9 per cent while the government retained 76.1 per cent interest in the company (Takano, 1992; Cabanda and Ariff, 1999). Takano (1992) believed that there was a very clear and transparent policy on how the distribution of shares sold should be done. It is indicated in the placement guidelines as follows (Table 3.12): Table 3.12 Placement Guidelines on Privatisation of Telekom Malaysia
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Please see print copy for Table 3.12
As a result of the policy, the government of Malaysia has achieved not only a specific objective by introducing market discipline to the company, but was also able to achieve NEP objectives in the promoting of Bumiputera welfare through the ownership scheme of Telekom Malaysia. The latter can be seen in the top 20 shareholders in this company after privatisation (Table 3.13).
Table 3.13 Telekom Malysia: Top 20 Shareholders, March 1991
Please see print copy for Table 3.13
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Aside from performance and efficiency measures, privatisation in Malaysia was also causing loss to the government and the general public, as for example, in the underpricing of shares (Salleh, 1995; Ghosh, 2000). Revenue forgone because of the underpricing of shares is presented in Table 3.14. Evidence of the underpricing of shares has been similar to that in the UK, but the Malaysia experience is worse. In the UK, the mean of underpricing shares was around 18.73 per cent (Table 3.5), while that in Malaysia accounted for almost 40 per cent (Table 3.15). The underpricing of shares is commonly followed by oversubscription which is hailed by the market as an indicator of success (cf., the UK experience).
Table 3.14 Privatisation in Malaysia: Estimate of revenue generated and forgone by the government
Please see print copy for Table 3.14
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However, these market claims are rejected because new shares sold on the Kuala Lumpur Stock Exchange (KLSE) are mostly oversubscribed, even since the early years of the development of KLSE. Salleh interprets such phenomenon as “a strong indicator that offer prices did not accurately reflect prevailing market conditions” (1995, p. 126). Table 3.15 presents example evidence of new listing’s oversubscription in KLSE between 1989 and 1996.
Table 3.15 Malaysia: Over-subscription of New Listings, 1989-1996
Please see print copy for Table 3.15
The practice of underpricing shares sold by the government is intended to benefit cronies while depriving the state treasury, as Ghosh states that [a]s a matter of fact, underpricing of shares to be sold in the market has remained an important mechanism to benefit the cronies at the cost of huge losses to the state exchequer. (2000, p. 3) (original emphasis)
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The cronies not only benefited from the practice of underpricing shares but also from the privilege of shares distribution decided by the government official. Smith (2003), partly cited from Aliran (1994), notes that [t]he share allocation is used to reward Bumiputeras generally as well as individuals (including Chinese and Indian) and organisations with personal or political links to Malaysia’s leaders. … The MIC was allocated 10 million Telekom shares that were taken by the MIC leader and used for what appeared to be personal rather than party purposes. The International Trade and Industry Minister, Rafidah Aziz, allocated shares of Leader Universal Berhad worth an immediate profit of RM5 million ($2 million) to her new son-in-law. … She allocated the same number of shares to the deputy prime minister’s brother and to Dr. Mahathir’s son. (p. 276) Hence, Jomo (1993) concludes that … privatisation in Malaysia has primarily enriched the few with strong political connection to secure many of these profitable opportunities, while the public interest increasingly becomes vulnerable to private capitalists’ power and interest (p. 438). Finally, comparable to the UK experience, job cuts were inevitable in pursuing efficiency. It was estimated that almost 100,000 employees or about 13 per cent of employment would be reduced from several public sector organisations being privatised (Salleh, 1995, p. 140). In the case of Telekom Malaysia, the number of employees was reduced from 30,311 in 1983 to 27,484 in 1997, or at an annual rate of -0.65 per cent (Cabanda and Ariff, 2002, p. 272). 3.3.5
Critique and dilemmas
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There are a variety of critiques of privatisation in Malaysia, primarily because of the use of political connection in acquiring the benefits of such policy at the expense of ordinary people such as public sector employees, consumers and the poor (Jomo, 1993; Gomez and Jomo, 1999; Sangaralingam and Raman, n.d.16). Furthermore, privatisation was also criticised for various reasons such as lack of transparency and accountability (Sangaralingam and Raman), monopoly transfer from public to private sector (Salleh, 1995; Jomo, 1993; Sangaralingam and Raman, n.d.), and not being focused in resolving inefficiencies of SOEs (Jomo, 1993).
Sangaralingam and Raman (n.d., pp. 128-29) outline broad critiques of privatisation in Malaysia. First, they indicate a lack of transparency and accountability in the process of privatisation, because of the political interference involved in the selection of individual or companies granted to acquire ownership. Second, privatisation in Malaysia has led to the transfer of monopolies from public to private ones, since profitable companies have been privatised (cf., Salleh, 1995), and the regulatory structure was not sufficient enough to promote competition, which, in turn, would increase the burden on the general public or consumers (e.g., increase the price of product and services) (Jomo, 1993, p. 437). Third, in the case of Malaysia Airlines, sewage services, and light-rail transit systems, privatisation increased (rather than reduced) the budget burden. In these cases, Sangaralingam and Raman disclose that
16
Sangaralingam, M. and Raman, M. (n.d.), “Malaysia: The high cost of private monopolies”, Social Watch (Consumers’ Association of Penang), pp. 128-29. (http://unpan1.un.org/intradoc/groups/ public/documents/APCITY/UNPAN008670.pdf, accessed on 22 April, 2004)
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… the government has had to bail out failed privatisation projects. In 2000 it paid more than RM 192 million (US$ 51 million) to re-nationalise sewage services. At that time, Bernard Dompok, a minister in the Prime Minister’s Department, called sewage services a ‘special case’ as the government had to ‘safeguard public interest and to avoid service disruptions’. However, since then the government has also reacquired Malaysia Airlines and is in the process of taking over the Renong conglomerate and two urban light-rail transit systems for almost RM 9 billion (USD 2.4 billion). (n.d., p. 128) Fourth, Jomo (1993) argues that SOEs’ unsatisfactory performances were due to “the nature, interests and abilities of those in charge” (p. 437). Thus, privatisation by merely transferring ownership from government to private sector, without addressing the mismanagement problem, is not solving the essential problems faced by SOEs. In other words, if the policy is to be adopted, the selection of privatisation approaches (chapter 2, section 2.5) will be one important aspect for achieving success. In response to critiques on its privatisation policy, the Privatisation section of the Economic Planning Unit (EPU) of the Government of Malaysia issued ‘Guidelines on Privatisation’ in 1985, two years after reform was initiated. This was then followed by the publication of the Privatisation Master Plan (PMP) in February 1991 (Jomo, 1993; Al-Salloum, 1999). These publications were intended to improve transparency as well as to speed up the privatisation process. However, improving transparency was unlikely to be achieved since, in the year following the issuance of the guidelines, parliament issued an amendment to the legislation that led to the contrary. Jomo states that 96
[i]n December 1986, the Malaysian parliament passed amendments to the Official Secrets Acts (OSA), which extended the definition of official secrets to include, among other things, government tender documents (even after completion of the tender exercise), and any other documents or material which ministers and public officials may arbitrarily deem secret. The classification of a document or material as an official secret cannot be challenged in any court of law, while the amendments impose a mandatory minimum one-year jail sentence for any OSA offence. Such legislation, coming in the midst of ambitious privatisation efforts, further reduces the already limited scope for meaningful exercise of public accountability in such matters. (1990, p. 217) It is rather unusual that a government policy and its related legislation are issued in a contradictory manner: the policy is issued to enhance transparency and accountability, while its related legislation is purported to widen secrecy. However, the phenomenon may be understood in its political context in which the National Front controlled both the government and the parliament. The privatisation of SOEs in Malaysia is not without dilemmas. In the case of Malayan Railway, the policy maker faces the choice between the public interest and financial profit. This company faces considerable loss and increasing its fares would have helped the company to recover; however, increasing fares would harm ordinary people in need of such an affordable service. Salleh illustrates the case as follows: The Malayan Railway has accumulated losses –an estimated RM 839 million, including interest on loans. It is anticipated that the only way the Malayan Railway could become a profitable enterprise would be by increasing its fares. Alternatively, service to uneconomic areas could be stopped altogether: about 85 per cent of Malayan Railway’s revenue 97
comes from only thirty of the 130 stations in the country. (1995, p. 131) Indeed, there are choices of policies: increasing fares or providing subsidies. Increasing fares would hammer needy citizens, while subsidies would enlarge budget spending that might then trigger the need for a public sector borrowing requirement. Certainly, it is common that a profit motive is in opposition to the need of ordinary people. Thus, privatisation potentially creates a new burden by limiting the access for government to manage cross-subsidies between the ‘haves’ and the ‘have nots’ or between profitable and unprofitable state-owned companies. The latter will be apparent, since the private sector will only buy the profitable or potentially profitable companies and leave the unprofitable ones (Jomo, 1993, p. 438). Finally, the other problem of privatisation in Malaysia has been related to divestment. The divestment of SOEs is intended, among others, to widen distributional ownership. To do so, the government is commonly settling share prices below the attainable market prices. In practice, however, it has driven speculative activity to earn a quick profit, as well as having created “some modern ‘Ali Babas’ among the non-Bumiputeras who unscrupulously borrowed Bumiputeras’ names in a bid to get shares” (Salleh, 1995, p. 130; cf., Means, 1991, pp. 310-15). 3.4 Summary Political and economic considerations are the prominent factors that drive privatisation both in developed and developing countries. There are a few points 98
that can be noted from privatisation in the UK. First, the downturn of economic conditions was the main driver from an economic point of view. Second, the bipartisan political environment in the UK led to the adoption of such a policy by the conservative government in order to gain (stay in) power. Through privatisation, a variety of incentives (e.g., selling shares at a discounted price) are given to the people with the hope of gaining support for re-election. Third, management of SOEs is one factor that contributed to the success of privatisation since they are to gain from of such a policy. Others who benefited from the policy are speculators as well as a few of the rich. Fourth, in many cases, employees and customers are among the losers, facing job cuts and increasing prices. Fifth, privatisation in the UK is extensive, covering almost everything, hence Gupta avows that “[t]he question before the British Government was not what to sell but what to keep.” (2000, p. 51). Sixth, proceeds are significant for the government exchequer, but privatisation expenses are also substantial. Finally, the role of the National Audit Office is recognised even though it needs to be improved in terms of scope and focus and, it is suggested that regulation shall be implanted in the planning process. Privatisation in developing countries is commonly inspired by the experience in developed countries, especially the UK. As was the case in the UK, privatisation in Malaysia was driven by economic as well as political motives. However, the economic and political environment that surrounded the policy was different. In Malaysia, a soaring public sector debt, a budget deficit, poor performances of SOEs as well as achieving the distribution of wealth were among the drivers of the policy. In achieving the distribution of wealth, privatisation in Malaysia was linked to 99
achieving the NEP objectives. Unlike in the UK, the political environment in Malaysia was characterized by what Gomez and Jomo named “rent-seeking and patronage” which led the policy to enrich few businessmen, primarily Bumiputera and Chinese Malay who were well connected to the political parties in power. Finally, it can be learnt from privatisation in the UK and Malaysia that the outcomes of such policy brought benefits to one group of people while concurrently harming others. In the case of privatisation, the benefits are likely to go to the few and some of the rich, as reflected by Kernot that “privatisations [are] a gift to [the] rich”. 3.5 A brief epilogue Although having differences, privatisation in the UK and Malaysia has also commonalities. The political and economic environment has shaped the policy process, objectives and outcome. There was evident that the objectives that the government outlined and promised were not always achieved. The following chapter will discuss privatisation in Indonesia. Even though similarities can be found, Indonesia’s salient economic and political environment bestows a different nature to privatisation.
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CHAPTER 4 STATE-OWNED ENTERPRISES AND PRIVATISATION OF SOEs IN INDONESIA … privatisation was necessary in order to take pressure off the government’s budget, ... [to] help bring new equity capital into the country, ... [to] bring in new investment, management skills and governance … in order to improve [state-owned enterprises’] performance. And it would offer a good chance for these enterprises to shift away from their previous inward-looking focus toward external markets and thereby become major players in Asia and beyond. (Tanri Abeng1, 2001, p. 98). … philosophically, I believe in the principle of benefit rather than the principle of ownership. You know you can own a company 100% and get less benefit than if you own the company 50%. (Laksamana Sukardi2, Far Eastern Economic Review, 30 August, 2001)
4.1 Introduction The Republic of Indonesia gained independence on 17 August, 1945 after nearly three and a half centuries of Dutch colonialisation3. Indonesia is the biggest archipelago country in the world with a population of nearly 220 million in 20034. This country had been experiencing difficulties and modest economic development in the early years of independence until the beginning of the 1960s, when it faced stagnation between 19611964, and a near collapse in 1965 (Hill, 2000, pp. 1-3). However, in line with the 1
Tanri Abeng was the Minister of SOEs in Indonesia under President Soeharto (March - May 1998), and President Habibie (May 1998 - Oct. 1999). 2 Laksamana Sukardi is the Minister of SOEs in Indonesia under President Megawati (2001-2004). He held a similar position under President Abdurrahman Wahid (Gus Dur) (Oct. 1999-2001) before he was sacked and replaced by Rozy Munir. 3 Indonesia had also experienced a shorter colonialisation period from other countries such as Britain and Japan. A comprehensive account of the history of Indonesia can be found in Reid (1996) and in Encyclopædia Britannica (2004).
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change of the regime in 1966, Indonesia moved towards becoming a country with a high and sustained economic growth from 1970s to the mid 1990s. Hill outlined that in almost every economic indicator, Indonesia had convincing accounts. For example, the real GDP per capita increased from US$ 190 (1965) to US$ 690 (1991), economic growth was around 5 per cent per year, the inflation rate declined from more than 500 per cent (mid-1960s) to 5-10 per cent (early 1990s), and at the same time, gross domestic investment soared from 8 per cent to 35 per cent of the GDP (2000, pp. 4-5). The World Bank Development Report (1985) revealed that the country’s average economic growth was even higher during the period of the oil boom between 1973/1974 to 1980/1981 which was 7 per cent per annum (Sjahrir, 1987, p. 199). The World Bank also notes that those achievements are better than those of in many developed and developing countries; in turn, the achievements substantiate Indonesia as one of the newly industrialising economies (NIEs) (The World Bank, 1993)5. However, such impressive achievements were history after the 1997/1998 economic and financial crisis stormed the country. The crisis, among others, brought a widening budget deficit and mounting foreign debt. In response, the government of Indonesia invited the IMF to ‘save’ the
4
Biro Pusat Statistik (The Central Statistic Bureau) Republic of Indonesia (http://www.bps.go.id, accessed on 24 April, 2004). 5 Even though official statistics suggest such an exceptional performance, Hill avows that the real achievement might be below what has been revealed; hence, he makes some reservations by noting that the performances have been achieved while the country increasingly faces foreign debt dependency and failure to address a fair distribution of wealth. These, in turn, induced the possibility of unsustainable development (2000, pp. 27-29).
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country6. Following ‘the agreement’7 signed by the government of Indonesia and the IMF, Indonesia was under IMF surveillance which led the country to pursue a broad range of economic and financial policies under the agency direction. The policies include market liberalisation and privatisation of state-owned enterprises, the agency’s common prescription to deal with economic crisis in countries around the world (Ramli, 2003a, 2003b) (see also Chapter 2, section 2.3). From that time, privatisation of SOEs in Indonesia became one of the main government policies for overcoming the crisis. In the early years of its implementation, privatisation was developed as part of the broad reform of SOEs. The reform consisted of two main programs, restructuring and privatisation, which focused on three main thrusts of SOEs development: growth, efficiency, and profit. Such reform was intended to be part of an effort toward economic recovery and achieving prosperity. As stated in the Masterplan Reformasi BUMN that reform was intended to ensure continuous growth, efficiency, and profitability of SOEs toward economic recovery and achieving prosperity, as well as to improve the quality of service to consumers. (1998, p. 7) (my translation)
6
It seems that this is a typical shortcut solution in developing countries. In the 1997/1998 crises, Malaysia was an exception. The main architects of the Indonesian economy at the time of the recent crisis were still similar to those at the beginning of the New Order government, known as the ‘Berkeley Mafia’, and they applied a comparable recipe. In the mid 1960s’ crisis, the IMF mission arrived in Indonesia in June, 1966 (Hill, 2000, p. 293), while in the recent 1997/1998 crisis the earliest (available) agreement between the government of Indonesia and the IMF was that dated on 31 October, 1997 (http://www.imf.org/ external/np/loi/103197.HTM; last accessed on 25 April, 2004). 7 The agreement was ‘constructed’ under the term of Letter of Intent which consists of the Memorandum of Economic and Financial Policies (MEFP), and can be accessed from the IMF’s official web site.
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While the implementation of privatisation is ongoing, public discourse of such a policy continues. Many aspects have been under public enquiry, such as allegations of insider trading (Republika, 23-24 June, 1998; cf., Faizal, A., SWA, 15/XVIII/25 Juli-7August, 2002, in the case of PT Indosat), conflict of interests amongst interested parties (Lubis et al. 2001, p. 31; cf., Abeng, 2001, p. 37), corruption, collusion and cronyism/nepotism (e.g., Suara Karya, 8 May, 2002; Tempo Interaktif, 13 May, 2000; cf., Abeng, 2001, pp. 32-38), financial loss (Kompas, 24 March, 2002), ruining the society at large (Tempo Interaktif, 13 May, 2000), a lack of prudence transaction, transparency and accountability (Tempo, 24 November, 2002), and political aspects (Media Indonesia Online, 7 June, 1999). Aside from these aspects, several studies and/or publications about SOEs and the privatisation of SOEs in Indonesia can also be observed, for example by Pangestu and Habir (1989), Ng and Wagner (1989), Mardjana (1992, 1993, 1999, 2000), RBI Research (1998), Al-Salloum (1999), Hashim (2000), Abeng (2001, 2003), Prasetiantono (2003), Ruru (2003), and Supratikno (2003). It is worth noting that the recent policy towards privatisation of SOEs is only part of a long journey for SOEs in this country since their inception in the early years of independence. This chapter aims at providing an understanding of SOEs and privatisation of SOEs in Indonesia. It will be divided into three main parts. The first part will explore the development of SOEs in Indonesia (Section 4.2) and will consist of three sub sections starting from the early years of independence until the pre-period of the crisis (Sections 4.2.1 - 4.2.3). The second part will present a profile of SOEs in 105
Indonesia (Section 4.3) and will cover three sub sections including constitutional legitimacy and debate, profiles and performance, and challenges (Sections 4.3.1 4.3.3). The third part of this chapter will focus on exploring the privatisation of SOEs in Indonesia (Section 4.4) and will be divided into two experiences of privatisation: the early effort toward such a policy and a new wave of privatisation following the 1997/1998 crisis (Sections 4.4.1 - 4.4.2). Section 4.4.2 will cover background, objective and methods, and results of privatisation (Sections 4.4.2.1 – 4.4.2.3). The last two sections consist of current developments (Section 4.5) and a summary of this chapter (Section 4.6). 4.2 The development of SOEs in Indonesia8 Many SOEs in Indonesia were initially established in the earlier years of independence either by the nationalisation of a number of foreign (Dutch, British and American) companies or by the establishing of new enterprises. Hence, the history of SOEs in Indonesia can be traced from the Dutch colonial era. Nonetheless, recent publications that have covered the development of SOEs (e.g., Pangestu and Habir, 1989; Mardjana, 1992; RBI Research, 1998; Al-Salloum 1999) commonly outline the earlier independence days of Indonesia while linking such a journey to the end of Dutch colonialisation. These publications were based mainly on material prior to
8
There are a variety of assessments of the genesis of SOEs in Indonesia, but the significant contribution was by Mardjana, as proven by a wide range of citations from his work. His research points out that SOEs in Indonesia have experienced four main periods: (1) etatisme, especially during the era of Sukarno’s Guided Economy (2) de-etatisme, during the earlier period of Soeharto government until 1973 (3) neo-etatisme, during the oil boom era of 1974-1982, and (4) debureaucratisation and deregulation era, 1983-beginning of 1990s (1992, p. 205).
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the era of Indonesian reforms9 except the one from RBI Research that had already incorporated recent development of SOEs in the beginning era of reforms. According to Mardjana (1992), political change is the primary catalyst of economic policy change (cf., Leeds, 1989, in the case of Malaysia), either towards interventionist policies or liberalism. Whilst Pangestu acknowledges that [t]he rise and fall of interventionist policies appear to have a direct correlation with the resource availability of the government (1993, p. 253) Regardless of the cause, the change in a nation’s political economic policy would have a direct impact to the extent of the SOEs’ role in the country. Reiterated from previous studies, the SOEs’ development in Indonesia will be elaborated based on three important periods: the early years of independence, the era of PN and the period in which SOEs are classified as Perjan, Perum, and Persero. The most recent development will be presented in a separate section (section 4.5). 4.2.1 The early years of independence There are three important aspects related to SOEs that can be noted in the early years of independence (1945-1960). First of all, SOEs in this country had been governed under two colonial laws: the ICW (Indische Comptabiliteitswet) or Indonesian Treasury Law and the IBW (Indische Bedrijvenwet) or Indonesian Enterprise Law. The former was a regulation that was concerned with “the 9
The fall of the Soeharto government in May, 1998 is considered to be the end of the New Order era and the beginning of the Reform era. Since independence from Dutch colonial rule on 17 August,
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management and accountability of financial matters for government bodies”, while the later was a law that primarily intended to administer public enterprises (Mardjana, 1992, p. 189; cf., Pangestu and Habir, 1989, p. 225). Balai Pustaka (publisher), Pabrik Alat Peralatan (military industry) and Damri (transportation) were examples of public enterprises linked to the technical ministry that was administered under the ICW, while Jawatan Pos-Telegrap-Telepone (telecommunication), Timah Bangka (mining), Garam (salt and soda) and Pelabuhan Surabaya (port) were examples of state enterprises that were not tied up to a certain ministry and governed by the IBW (RBI Research, 1998, pp. 14-15). However, the ICW was also applicable to later groups of state-owned enterprises since the enterprises were indirectly supported by the state budget (Mardjana, 1992, p.189). Second, the government initiated the establishment of state-owned financial institutions. Two state-owned banks were established: the State Industry Bank (Bank Industri Negara [BIN]) and the Indonesia State Bank (Bank Negara Indonesia [BNI]). The former was primarily intended to support and finance the development of many industries in a variety of sectors such as cement, textiles, automobile assembly, glass and bottle manufacture, and hardboard, while the latter was projected to finance import activities as well as to function as a foreign exchange bank (Robison, 1986, p. 40). Among industries that were established by BIN were Pabrik Semen Gresik (cement) (Glassburner, 1960, cited in LSPEU, 2001, pp. 71-78), Pabrik Kertas Blabak (paper), Perusahaan Hotel dan Tourist Nasional/Natour (hotel and 1945, Indonesia has so far had three different periods of government: the “Old order” (1945-1965), the “New Order” (March 1945-1998), and the “Reform era” (May 1998-onward).
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tourism), Perusahaan Tinta Cetak ‘Tjemani’ (ink), Maskapai Asuransi Umum Krita (insurance) (RBI Research 1998, p. 15). Another important development related to the creation of state-owned financial institutions took place in 1951 when the Dutch colonial bank, De Javasche Bank (Bank of Java) was nationalised and converted into Bank Indonesia10 (Pangestu and Habir 1989, p. 225; cf., Robison, 1986, p. 40). It is now the Central Bank of the Republic of Indonesia. Third, the government launched its nationalisation policy for foreign companies, mostly the colonial (Dutch) companies. The nationalisation policy reached its peak in 1957 in the midst of increasing tension between the government of Indonesia and Dutch colonial rule over the sovereignty of West Irian (Pangestu and Habir, 1989, p. 226). Hundreds of colonial companies became nationalised, as presented in Table 4.1. The evidence in Table 4.1 presents that three major areas of business dominated the nationalised companies: agriculture and plantation (42.60 per cent), industry and mining (29.06 per cent) and trading (10.47 per cent). The fact that agriculture and plantation were dominated by the nationalised companies was understood because Dutch colonial rule had cultivated such crops (e.g., sugar, coffee, rubber and tobacco) as its main export commodities11.
10
Prawiro stated that De Javasche Bank (Bank of Java) had been renamed Bank Indonesia in 1953 (1998, p. 3). 11 The analysis of the colonial origins of this matter can be found in the work of Robison (1986), Indonesia: The Rise of Capital, Allen and Unwin Pty. Ltd., Sydney, NSW.
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Table 4.1 Indonesia: List of nationalised companies
Please see print copy for Table 4.1
The above policies were implemented within the nationalistic politicaleconomy atmosphere, and, as Robison points out, the major parties in power were committed “to broad programs of economic nationalism” towards self reliance and in general this meant an end to ‘imperialism’, a transfer of economic power to Indonesian nationals and the replacement of a colonial economy …(1986, p. 37). Although the major parties were committed to end the colonial economy, their approaches to implement such a vision were not similar, especially in relation to the role of SOEs, the co-operative and the private sector. Sutter (1959, pp. 11719, 317) clearly addresses this point as follows: [t]he Communist party, PKI, stressed state ownership; elements within the Nationalist party, PNI, envisaged cooperatives playing a dominant role; while Masyumi and the other Islamic parties were more sympathetic to private capital provided it was in Indonesian hands. However, even the Masyumi, which drew much of its support from the Muslim 110
merchant bourgeoisie, expressed opposition to ‘free-fight liberalism’ and saw co-operatives and central planning playing a crucial role in a future national Indonesian economy. (cited in Robison, 1986, pp. 37-38). Thus, in these early years of independence, the extent and role of SOEs as well as co-operatives and the private sector and ultimately the role of the state in the economy were still in discourse, although liberalism was not accepted and state intervention was apparent. Finally, at this stage, even though many SOEs had been established, their roles remained insignificant in comparison to that of Dutch private firms (especially prior to the nationalisation program) and Chinese private businesses (Abeng, 2001, p. 21; Robison, 1986, p. 64). At the same time the role of indigenous people in the economy was also very limited, as noted by Al-Salloum that the “indigenous Indonesians were confined only to petty trading and forced cash crop cultivation.” (1999, p. 169). 4.2.2 The era of Perusahaan Negara (PN) The second milestone in the development of SOEs in Indonesia was the issuance of government regulation No. 19/60, under which all different types of companies under government control were consolidated and converted into state-enterprises (Perusahaan Negara). Pangestu and Habir (1989, p. 227) have indicated that several groups of companies were converted into PN (e.g., former nationalised companies, private companies fully/partially owned by the state-owned bank and specific government institutions controlled by a variety of ministries), while others were excluded from
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this consolidation (e.g., state oil company, state banks, regional companies and military industry). There are a few important aspects to be noticed in this new development. First, SOEs had a new legal status as corporate bodies owned by the government of the Republic of Indonesia under Indonesian law. Second, they were determined to be the agents for performing the government’s public duties (popularly known as ‘the agent of development’) as well as to gain profits. Third, SOEs’ profits were determined to be distributed for national development, enterprises advancement, and employees’ welfare. Finally, technical departments related to specific SOEs acted as supervisors of the company (RBI Research, 1998, p. 15). These can be seen as a continuation in the halt of the colonial economy and its related laws as well as being able to revitalise and enhance the SOEs’ role in the country. This new development was linked to the political-economy climate change in the country with an introduction of what was referred to as Guided Democracy (Demokrasi Terpimpin) and Guided Economy (Ekonomi Terpimpin) by the late president of Indonesia, Sukarno. The former essentially is a system in which political structure is built to accommodate all functional social groups (e.g., army, peasants, trade unions, women, and youth) rather than be purely representative of political parties; and, at the centre of such were the President and the Army (Robison, 1986, pp. 69-71). This corporatist system (Fierlbeck, 1994, pp. 155-56) led to the introduction of economic policies under the Guided Economy which praised heavy state intervention in every sector of the economy while limiting the 112
foreign capital role (Robison, 1986, pp. 71-72). In broader terms, the primary goal of such a policy was to transform the economy from a colonial to a national system so as to empower the indigenous people, eradicate poverty, raise the living standards of the Indonesian people, and reduce the country’s external dependence. (Al-Salloum, 1999, p. 170). Thus, government regulation no. 16/60 could be seen as a means of implementing a broader economic policy in which SOEs were designed as the central instrument to attain the objectives (Mardjana, 1992, p. 189; Al-Salloum, 1999, p. 170).
4.2.3 The era of Perjan, Perum and Persero The third wave of SOE reforms in Indonesia was initiated through Presidential Decree/Act (Instruksi Presiden) No. 17/1967 which was followed by the issuance of Law (Undang-undang) No. 9/1969. Under this law, state-enterprises (Perusahaan Negara) were transformed into 3 (three) type of enterprises: Bureau Enterprises (Perusahaan Jawatan/Perjan), Public Enterprises (Perusahaan Umum/Perum), and Limited Liability Enterprises (Perusahaan Perseroan/Persero) (Mardjana, 1992, p. 190; Pangestu and Habir, 1989, p. 228; RBI Research, 1998, pp. 16-17; Abeng, 2001, p. 23). These groups of companies had been differentiated on the basis of their objectives and their relations to the government.
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The first group, Perjan, was designed as not-for-profit motive companies and had the responsibility of delivering public services especially in the area of public utilities. In addition, they were attached to the technical department and were led by a board of directors appointed by the government. Perusahaan Jawatan Kereta Api (train) and Perusahaan Jawatan Pegadaian (pawnshop) were two examples of Perjan; however, these two companies have recently been transformed into Persero and Perum respectively12. The second group, Perum, was created with mixed responsibilities, both providing public services as well as making profits. Perum Damri (transportation) and Perum Pos dan Giro (postal services) were examples of Perum.
The last group, Persero, was initiated as profit motive companies comparable to a private company. Persero could be partially or fully owned by the government. The Minister of Finance was the government’s designated representative for shareholders in this company. Persero was led by a board of directors and a board of commissioners appointed by shareholders during an annual general meeting. Beside these state enterprises, there was a group of enterprises, mainly in the military industries, that were classified as strategic industry (RBI Research, 1998, p. 16). These new restructuring efforts were intended to revamp government intervention in the economy particularly in relation to the SOEs. This reform took place
12
Currently, most of Perjan have been converted into either Perum or Persero, and some of Perum have been converted into Persero. The most recent development, Perjan is not included as part of SOEs anymore (see: section 4.5, current development).
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in the early years of the New Order government under President Soeharto13. Unlike the previous era which heavily relied on state intervention, the new government shifted its policy to accommodate a wide range of economic players including a more open policy to foreign investors (Prawiro, 1998, pp. 26, 46-47; Pangestu and Habir, 1989, pp. 22728; Rachbini, 1999, pp. 14-20). To encourage foreign investment in the country, the government issued the Foreign Capital Investment Act (Undang-undang Penanaman Modal Asing) No. 1/1967. Two other comparable acts --the Domestic Capital Investment Act (Undang-undang Penanaman Modal Dalam Negeri) No. 6/1968, and the Co-operative Act No. 12/1967 (Undang-undang tentang Koperasi)—were also issued to promote the development of both domestic private investment as well as co-operatives. Foreign investment was encouraged and allowed for certain industries, except for those stated in the Act No. 1/1967 (Article 6)14. All of these acts had been issued to incorporate all potential economic players: SOEs, private sectors, both foreign and domestic investors, and cooperatives in the country, as an interpretation of the notion of democratic economy mandated by the 1945 Constitution, article of 33 (Mardjana, 1992, pp. 189-90).
13
There was a national tragedy in Indonesia in September/October 1965. Following the failed coup in 30 September, 1965, the Sukarno era (Old order regime) and Sukarno’s initiative on Guided Democracy and Guided Economy were essentially finished (Robison, 1986, pp. 97-98; Prawiro, 1998, pp. 9-12). 14 The Foreign Capital Investment Act (UU PMA No. 1/1967) has been seen as an implementation of Constitutional Law (UUD 1945) Article 33. Article 6 of UU PMA No. 1/1967 states that foreign investment is not allowed in the following areas of business: ports; production, transmission, and distribution of energy (listrik) for the public; telecommunication; education; airline; water; train; atomic energy (pembangkitan tenaga atom); mass media (6.1), arms; ammunition and military industries (6.2). These areas of business are considered as essential to the State and governing the life and living of the public, and thus shall be controlled by the State as mandated by the Constitutional Law Article 33 especially verses 2 and 3.
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However, there were inconsistencies between objectives determined by the Law 19/1969 and its implementation (Mardjana, 1992, p.190). For instance, Perum that should have been supported by the state-budget was not receiving what was intended for it, whilst Persero which was supposed to pursue the sole profit objectives also had a special task as agent of development or other social responsibility roles. Most importantly, promoting effectiveness and efficiency of SOEs did not emerge from this reform (Wajah dan Prospek Bisnis BUMN Menyongsong Abad ke-21, 1999, p.1). This reform also faced considerable resistance especially from the technical ministry, especially to have handed over the SOEs’ control to the Minister of Finance, and also because of other procedural matters such as the valuation process (Pangestu and Habir, 1989, p. 228). Dealing with such problems, Presidential Instruction No. 11/1973 dated 8 December, 1973, was issued. This new regulation rolled over the controlling power of Persero back to the technical ministry. As a result, duplication of authority in relation to SOEs could not be avoided. The technical ministry supervised SOEs while the Ministry of Finance acted as the government’s shareholder for the SOEs (Mardjana, 1992, p. 190). 4.2.3.1 The period of the oil boom The period between 1973 and 1982 was marked by an oil boom. It generated significant revenue for the government and in turn stimulated the development of SOEs through government participation capital (Penyertaan Modal Pemerintah [PMP]) to the enterprises. Pertamina, the state-owned oil and gas company, became a new giant enterprise. Other SOEs were 116
developing very rapidly to monopolise almost every sector of the economy, whilst the private sector and co-operatives were left behind. The monopoly by SOEs was undermining the importance of competition. Hence, the efficiency and effectiveness of the companies were not the concern of SOEs’ management15. The reforms that were previously initiated had been practically halted with emphasis more on protectionism and interventionist policies. (Pangestu and Habir, 1989, p. 228) The PMP reached its peak in 1983, accounting for Rp. 592 billion, while the mean of PMP during 1975-1985 was more than Rp. 319 billion. Hill (2000, p. 104) presented the extent of PMP to SOEs between 1969-1992 as follows (Figure 4.1): Figure 4.1 Indonesia: Government Investments in SOEs, 1969-1992
Please see print copy for Figure 4.1
15
Evidence shows that the expansion of SOEs not only undermined the efficiency and effectiveness but also pass up prudence in financing, especially foreign borrowing. Pertamina was the best example. While it became a giant enterprise within a short period of time, the company faced a serious crisis (e.g., debt problems) in 1974/1975 which led the government to intervene in the company’s affair (Prawiro, 1998, pp. 100-18; see also Lipsky, 1978 and Barnes, 1995). It was a naïve paradox; while the oil boom reached its peak, the government enjoyed skyrocketing revenues from its oil and gas exports, but the SOE which responsible for managing the industry was nearly collapsed.
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The state’s intervention in the economy can also be observed from the extent of the Indonesian government’s equity in the domestic investment’s project which reached 60 per cent (Tempo, 14 March, 1981, cited in Abeng, 2001, p. 24). Such an extraordinary development had a direct impact on the progress of the private sector. RBI Research (1998, p. 17) notes that
[s]ince almost all economic opportunities were in the government sector, the private enterprises ran behind. They developed lobbying business management rather than professional management to get projects from the government. Such management style finally shaped a collusive business pattern, which caused uneven distribution of business opportunities among domestic economic agents. The oil boom also had a positive impact in terms of lessening the dependency of the government on foreign creditors and international lending agencies, to fund the country development, since about 70 per cent of the SOEs’ earnings were injected into the government budget (RBI Research, 1998, p. 17). 4.2.3.2 The post oil boom period The early years of the 1980s marked a sharp decline in oil prices, while the government faced increasing debt payment. Several measures had been taken such as the reduction of government participation in SOEs (Figure 4.1). According to Pangestu and Habir, this condition was also channeled to 118
“renewed calls for efficiency in state enterprise performance as well as public debates in the press on the issue of privatisation” (1989, p. 230). Reforms in this period were initiated in 1983 (Pakjun 1983) and in 1988 (Pakto 88)16. These reforms essentially were to liberalise the banking sector which was previously dominated by the SOEs. An important result of such reforms was the fast development of the private sector in the banking business. Rachbini notes as follows: Pakto 88 was a major turning point, and led to an impressive change from state domination of the banking sector to a more liberali[s]ed system of banking in which the private sector played an increasingly significant role. … In the five years between 1988 and 1993, the number of private commercial banks in Jakarta doubled, from 104 to 213. The number of branches rose from 876 to 3382. Before Pakto 88, the state banks’ share of total funds and credit was about 70 per cent, while that the private banks was only 30 per cent. By the middle of the 1990s, the share of the private banks was about 50 per cent. For the 1994-99 national development plan period, the government projected that the private sector would provide over 70 per cent of total investment. (1999, p. 25) Another development in this period took place when the government issued regulation No. 3/1983 dated 25 January, 1983, as a revision of previous Presidential Instruction No. 11 /1973. This new regulation was intended to pursue several objectives such as to synchronise the role of technical ministries and the Ministry of Finance, and their respected sub-ordinates, in
16
Pakjun stands for Paket Juni (the reform package launched in June), while Pakto stands for Paket Oktober (the reform package launched in October).
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all aspects of supervision and co-ordination of SOEs (Mardjana, 1992, p. 190). This period was also marked by an effort towards privatisation (Sjahrir, 1987, pp. 199-216). For example, in 1985, the government issued Presidential instruction (Inpres) No. 4/1985. This Inpres primarily was intended to restructure and deregulate ports and shipping procedures. One most important step exercised by the government through the Inpres was the appointment of the SGS, a Switzerland based private surveyor, to oversee the physical inspection of imports. Finally, in 1984 the Jakarta Stock Exchange was also revitalised and supported by deregulation in the capital market in 1987/1988 (Rachbini, 1989, p. 27; Noerhadi, 1994, pp. 203-13).
An initiative to boost SOEs’
performance was also initiated in 1988. Such policies, then, advanced the privatisation of a few SOEs, including the privatisation of Semen Gresik in 1991. This will be further discussed in Section 4.4 of this chapter.
4.3 The roles, profiles, performance, and challenges of SOEs in Indonesia 4.3.1 Constitutional legitimacy and debate The extent of the SOEs’ role in Indonesia is an ongoing discourse, although the fundamental nature of such a role has been incorporated in the country’s 1945 constitution (UUD 1945) as a component of the selected national economic system. 120
The framework of the system can be found in the 1945 constitution, Chapter XIV (the National Economic and Social Welfare), article 33 verses 1-5, as follows17: 1. the economy shall be organised as a cooperative effort, founded upon the basis of the family spirit; 2. branches of production essential to the State and governing the life and living of the public shall be controlled by the State; 3. land and water and natural riches contained shall be controlled by the State and used for the greatest possible prosperity of the people; 4. the national economy shall be carried out based on democratic economy along with cooperative, just efficiency, sustainability, environmental insight, and sovereignty principles whilst maintaining the balance of progress and national economy unity; 5. the implementation of these verses will be determined by governmental acts/ regulations.
Article 33 is derived from the country’s highest objective as stated in the preamble to the constitution, which is “… to attain … prosperity … [and] social justice for all Indonesian citizens.”18 The article provides general guidelines on how the Indonesian economy should be managed. According to this article the economy should function based on democratic economy principle (demokrasi ekonomi)19 whilst praising the role of the state, cooperative effort (usaha bersama) as well as the family spirit (asas 17
Verses 4-5 are new verses that have been amended and approved by MPR on 10 August, 2002. There was an unresolved dispute regarding this article and also its amendment although finally the two verses were amended. Two members of the expert staff of the MPR’s ad hoc committee ceased from the final decision of the amendment. A brief discussion on the pros and cons of this amendment can be found in Rachbini (2001) and Bisnis Indonesia 11 June, 2001 (http://www.bisnis.com/pls/ bisnis/bisnis.cetak?inw_id=150583, accessed on 11 June, 2001). 18 Cited and translated from the fourth paragraph of the Preamble to the Constitution of 1945. Social justice for all Indonesian citizens is the fifth of the five basic principles of the Republic of Indonesia known as Pancasila. The other four are the belief in the One God Almighty, humanity that is just and civilised, the unity of Indonesia, and democracy guided by the wisdom of representative deliberation. 19 This principle originally was stated in the explanation of verses 1-3 attached to the original article of UUD 1945. The explanation had been removed after the amendment, and such principle had been
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kekeluargaan). The other principles, such as just efficiency, sustainability, environmental insight, national sovereignty, and equitable development were amended from the recent constitutional changes. Interpretations of such principles have been proposed and discussed. Prawiro20 (1998) believes that the message of Article 33 (verse 1) is clear and transparent. Usaha bersama (cooperative effort) and asas kekeluargaan (family spirit) are “an alternative model to laissez-faire or ‘free-fight’ capitalism” (p. 1). In addition, he claims that these are principles that conform with the Indonesian people’s way of life which is characterised for example by mutual assistance (gotong royong), dialogue (musyawarah), and consensus (mufakat), rather than individualism and competition (pp. 85-86). Even though he urges that “[t]he constitution was not designed to regulate the specific of the nation’s commercial life”, he clearly testifies that …the intent of Article 33 was clear: the familial and community ties that link Indonesians so tightly one to another should serve as the basis for an alternative model to laissez-faire or “free-fight” capitalism. There was nothing in the ‘family-model of economics’ (ekonomi kekeluargaan), however, that discouraged entrepreneurship, trade, or other forms of commerce. The intention of the framers of the Indonesian constitution was to model the economy on the family as a way of softening the hard edge of market forces—such as the drive for profits and added to verse 4. Unfortunately, few other important aspects from the original explanation have not been addressed, such as about co-operation as the ideal form of enterprise in the country. 20 Radius Prawiro was one prominent architect of the Indonesian economy during the Soeharto presidency. He was formerly the vice-chairman of the Supreme Audit Board during the final year of Sukarno presidency, then he served in the government ministry in a variety of positions during the Soeharto presidency. The most prominent one was as Governor of Bank Indonesia, Minister of Trade, Minister of Finance and finally as co-ordinating minister for the economy, finance, industry, and development supervision. (Prawiro, 1998, p. xxiv)
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productivity—with more humanistic values such as caring and mutual help (gotong royong). The Indonesian alternative implies that the pursuit of economic advancement should be tempered by an abiding concern for the well-being of all Indonesians (pp. 1-2). The second aspect that was promulgated under article 33 (verses 2 and 3) is the state’s role in the economy. These verses, linked to verse 1, essentially support the idea of state intervention in the economy, although the extent of the intervention is still debatable and unresolved until now. Verses 2 and 3 highlighted that “branches of production essential to the State and governing the life and living of the public” (cabang-cabang produksi yang penting bagi Negara dan menguasai hajat hidup orang banyak) as well as “land, water and natural riches contained” (bumi, air dan kekayaan alam yang terkandung didalamnya) should be “controlled” (dikuasai) by the state for the benefits and prosperity of all Indonesian people. The unresolved discourse is in two aspects which centre on the interpretation of “to be controlled” (dikuasai) and branches of production essential to the State and governing the life and living of the public. As addressed by Rice (1983) and Mardjana, (1992, 1999), the debate over the interpretation of dikuasai has been continuing since the early years of independence. The word dikuasai by the state can be interpreted either “to be controlled which suggest that the economic sector need not be necessarily owned by the state, but should be directed, supervised, controlled and evaluated by the government”, or “to be owned by the state [which] may be directly run by the government through public ownership” (Mardjana, 1992, p. 188; 1999, p. 44). Rice notes that Vice President 123
Hatta suggested “less government ownership than the Sukarno Government of the early 1960s”, and that ownership was limited to certain upstream industries only (e.g., electricity and basic industries) while leaving the production of basic goods to the other sectors under the supervision of the government (1983, p. 61). On top of these ideas, Hatta (1967) suggests that Dikuasai [to be controlled] by the government does not mean that the government run enterprises through its bureaucracy. [But] the enterprises management shall be given to professionals who will be accountable to government. (Swasono and Ridjal, 1992, p. 210) (my translation) The second unresolved debate is about the interpretation of “branches of production essential to the State and governing the life and living of the public”. Warouw (n.d., p. 36) acknowledges that there was no clear interpretation of what is considered as essential to the state and the people (cited in Mardjana, 1992, p. 191), since “a button on the shirt of millions of people [can be considered as] … strategic importance to daily life of the general public” (Soesastro et al., 1988, p. 46, cited in Mardjana, 1992, p. 191). But, Hatta had previously stated that basic industries and mining were examples of such strategic industries. He added that, in some degree, these industries could be owned by the government (Hatta, 1967, in Swasono and Ridjal, 1992, p. 210). However, as previously cited, Hatta’s fundamental belief could be interpreted as how to govern the country’s resources, not merely on the issues of being owned and controlled by the government, as he advocated the supremacy of professional management rather than bureaucracy.
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The latest formal discourse of Article 33 has been undertaken by the expert staff of the Ad Hoc Committee of the People’s Consultative Assembly in 2002 and a firm conclusion has not been reached on the above matter. The conclusive result has been that the formal explanation of Article 33 was removed but part of it had been added as an amended article (part of verse 4), and more importantly the interpretation of such was left to further government regulation (verse 5). As a result, even though SOEs have been seen as a constitutionally legitimate (cf., Halim, 1986, p. 12), such legitimacy still has no single interpretation. Apart from such an unresolved discourse on the fundamental economic system, the Indonesian economy itself has been run in different directions dependent on government in power. For example, during the early years of independence, stateintervention was favoured since there was “the dominant nationalist and socialist sentiment” in power (Abeng, 2001, p. 20). On the contrary, during the early period of the Soeharto presidency, liberalisation was at the centre of the country’s economic policy (Prawiro, 1998, pp. 26, 46-47; Pangestu and Habir, 1989, pp. 227-28; Rachbini, 1999, pp. 14-20). Recent trends show that the government’s fundamental policies on SOEs tend to adopt a world wide trend which is that of praising laissez faire with minimum government intervention. The SOEs reforms from 1998 onward focus on driving the government to be a policy maker or regulator. It is intended to minimise or eliminate conflicts of interest between the regulator and the player in the economy (Abeng, 2001, p. 47; 2003, p. 4; Yasin, 2002a, p. 3). Such a policy is advancing Friedman’s position 125
that the government’s role in the economy is supposed to be as “an umpire, not [a] participant” (Friedman and Friedman, 1980, p. 4). Such a choice was not likely to coincide with Sukardi’s belief on usefulness principles (asas manfaat) rather than ownership principles (asas kepemilikan). Laksamana Sukardi, the Minister of SOEs, expressed his idea on the matter on many occasions, such as in an interview with the Far Eastern Economic Review (FEER) (August 30, 2001). In response to FEER’s question of “foreign ownership of Indonesian Assets”, he states as follows:21 well, philosophically I believe in the principle of benefit rather than the principle of ownership. You know you can own a company 100% and get less benefit than if you own the company 50%. There was no further explanation on his statement; however, Ruru22 attests that there are five advantages with the principle of benefit (asas manfaat) over the principle of ownership (asas kepemilikan) as the foundation of a privatisation policy, as follows: 1. the economic sovereignty of the state (Indonesia with UUD 1945
2. 3. 4. 5.
Article 33) is exercised through the state’s authority to determine and levy tax which is protected by law; every company, institution or individual that conducts business in Indonesia must obey the taxation law (must pay tax to the state); ownership in enterprises does not influence the state’s revenues; the [extent] of the state’s revenues from tax is depend on the efficiency and productivity of enterprises; privatisation guarantees the productivity and efficiency of enterprises. (2003, p. 20) (my translation)
21
http://www.feer.com/articles/2001/0108_30/p041money.html (accessed on 16 January, 2004) Bacelius Ruru is Secretary of the Ministry of SOE. In the Ministry’s organisational structure, it is the second strategic position below the minister (see: Minister of SOE’s Decree No. 6/2001).
22
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From these points, three basic tenets can be derived. First, there is a fundamental belief that tax is the cornerstone of economic policy. Second, government ownership in SOEs does not have an impact on government revenue. Third, privatised enterprises guarantee higher productivity and efficiency. Evidence suggests mixed support for such beliefs. Focusing on tax as a source of the state’s revenue is justifiable, since tax is the main source of government revenue. For example, in the 2003 state budget, tax revenue accounted for 76 per cent of total state revenue. However, a few aspects suggest the important roles of SOEs. First, according to the Director General of the Indonesian Taxation Office, Hadi Purnomo, the tax contribution of SOEs accounted for 20 per cent of the total national tax revenue and it will be boosted in years to come (Tempo Interaktif, 29 December, 2003). Second, SOE’s made up 97 per cent of loyal taxpayers (Ministry of SOE, Press Release, 15 September, 2003, p. 3). Third, there was an upward tendency of dividend contribution from SOEs, from Rp. 879 billion in 1992 to more than Rp. 8,000 billion in 2001 (data cited in Yasin, 2002a, p. 2). Fourth, in the state budget of 2003, the dividend contribution of SOEs was projected at Rp. 8,394 billion which accounted for about 3 per cent of the total of the state budget revenue. The 2003 dividend contribution from SOEs is nearly equal to debts from foreign sources (Program Loans) in the national budget in 2004 which was projected at Rp. 8,500 billion (data cited in Kwik, 2003, p. 15). Hence, the SOEs contribution could not be said to be insignificant. Considering such evidence, the government recently launched a modern taxation system specifically for SOEs (Tempo Interaktif, 29 December, 2003). Finally, such a claim that private 127
companies were guaranteed to have outperformed the SOEs has had mixed evidence, as has been elaborated upon in the previous chapters (Chapter 2 and 3). Apart from the above concerns, further discussion on the SOEs’ performances in this country will be presented in the following section. 4.3.2 Profile and Performance Evidence shows that SOEs have had a strategic role in the Indonesia economy at different periods of time, although their role has recently been in decline. In the 1970s, the SOEs’ contribution to the GDP was 70 per cent and recently such a contribution has declined to about 40 per cent (Yasin, 2002a, p.1). Noting the strategic role of SOEs, Abeng states as follows: [f]irst, their operations cover almost all the economic sectors, such as agriculture, forestry, telecommunication, transportation (air, land, and sea transport), mining and energy, trade and finance (banking and non-banking institutions). Some operate in upstream industries upon which the efficiency of other industries depends. Secondly, they controlled a huge amount of assets totalling around Rp. 500 trillion (equivalent to about US$200 billion) before the economic crisis. (1998, p. 1) Evidence also shows that in the 1960s there were around 800 SOEs in Indonesia; however, some of them, then, had been consolidated, and in 1999 there were about 166 SOEs operating in the following industries23: 1. 2. 3. 4. 5.
Agriculture, Plantation, Forestry, and Fishery Mining/Extractive Industries Manufacturing Industries Electricity, Gas, and Water Construction Industries
23
Wajah dan Prospek Bisnis BUMN Menyongsong Abad ke-21 (1999), Yayasan Prabunara Departement Keuangan RI, Jakarta, pp.vii-xi
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6. Merchandising and Accommodation Services/Hotels 7. Transportation, Storage Facilities/Warehousing, and Communication 8. Financial Institution (Bank and Non-Bank), Insurance/Reinsurance, Pension Fund, Pawning/Pledging, Real Estate, and Rental and Company Services. The latest list of SOEs from the Ministry of SOE presents different classifications. The list divides SOEs into 37 groups of industries that include 161 SOEs. In 2001, these enterprises were estimated to have had total assets of Rp. 772.5 billion and average ROAs and ROEs of 3.60 per cent and 19.90 per cent respectively (Materplan BUMN 2002-2006, p.8). The list of SOEs is presented in the Appendix 4.1. While the strategic role of SOEs had been recognised from the early years of independence until recently, criticism of their weak performance continues. Thus, there are mixed ‘feelings’ about SOEs. During the recent crises, SOEs have been expected to play a significant role as part of the solution, as Abeng addresses this … during the monetary and economic crisis that Indonesia is experiencing, state-owned enterprises have been the subject of the government's and the people's expectations that they should act as the driving force behind Indonesia's business activities. (1998, p. 1) However, at the same time the SOEs’ performance has been considered poor. Such a relatively comprehensive picture of the SOEs performance is presented in the Masterplan Reformasi BUMN 1998 (pp. ix, 2, and 112-13). In brief, the performance is reflected in the following statement: … within a decades or more, profit from invested capital in the SOEs was so low in comparison to that of similar private 129
companies... Average profit in 1996 and 1997 from invested capital was about 3 per cent or about a quarter or less from profit of similar private companies. As a result many SOEs could not repay their debts or gain sufficient profit for expansion purposes. In turn, this led to a condition of excessive debt … In addition, SOEs had produced relatively high cost products and services which, in turn, have burdened consumers or tax payers … SOEs are also subjected to the pressures of accepting unnecessary employees or performing unfeasible projects. (p. 2) (my translation) The benchmark that had been utilised in the above evaluation was based on the international best practice of private companies in a similar business (pp. 11213). Interestingly, a trend in the SOEs performance shows a mixed picture, and these will be discussed in the following section. First, the assessment presented here is based on the performance criteria developed by the Ministry of SOEs which is currently based on the Minister of SOEs’ Decision (Kepmen BUMN) No. Kep-100/MBU/200224. The soundness of SOEs are judged on financial, operational, and administrative aspects. Based on such measurements, SOEs are grouped into three broad categories: healthy (3 levels), fair (3 levels) and poor (3 levels) (Kepmen BUMN No. Kep-100/MBU/2002, p. 3). The soundness of SOEs for the years of 1994-2002 is presented in the following Figure 4.2.
24
Initially, such criteria were issued by the Minister of Finance in October 1988 as a part of SOEs reforms. The criteria to measure the soundness of SOEs were based on profitability, liquidity, and solvency (Abeng, 2001, p. 28). This soundness measurement had been changed overtime. Prior to the current measurement (Kepmen BUMN No. Kep-100/MBU/2002), there were two other measures based on Minister of Finance’s decision No. 198/KMK.016/1998, and Minister of SOEs’ decision No. Kep. 215/M-BUMN/1999. (Kepmen BUMN No. Kep-100/MBU/2002, p. 1).
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Figure 4.2 Indonesia: The S oundness of S OEs, 1994-2000
Please see print copy for Figure 4.2
Figure 4.2 shows that the trend for SOEs to have a healthy performance was continuing to increase, from 42.31 per cent in 1994 to 78 per cent in 2000, while SOEs with a poor performance declined from nearly 40 per cent in 1994 to less than 6 per cent in 2000. Hence, a conclusion can be reach that, based on the performance criteria stated in the Minister of SOEs’ Decision (Kepmen BUMN) No. Kep100/MBU/2002, those SOEs had basically performed considerably well. Second, the following performance evaluation is based on common financial measures which are usually used in the private sector. A summary of SOEs’ financial position and performance for the period 1992-2001 is presented in the Appendix 4.2. Figure 4.3 presents the trend of ROA and ROE of SOEs for that period.
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Figure 4.3 Indonesia: ROA and ROE of S OEs, 1992-2001 (%)
Please see print copy for Figure 4.3
The average rate of return on assets (ROA) and return on equity (ROE) for the period 1992-2001 was 2.02 per cent and 8.54 per cent respectively. The ROA and ROE was even lower when the fluctuation years of 1998-1999 were omitted, and the shorter period, 1992-1997, was evaluated. In the period 1992-1997, the average rate of ROA and ROE was only 1.78 per cent and 6.39 per cent respectively. The figures were far below the cost of money which was 12-18 per cent or 45-55 per cent during the crisis (Abeng, 1998, p. 1). The other aspect to be assessed is debt to total assets ratio (DTA) and debt to equity ratio (DER). Based on DTA and DER figures (Figure 4.4 and Appendix 4.2), the SOEs in this country can be said to be facing the burden of debt. The mean of DTA for the period 1992-1997 was 72.22 per cent, while the average of DER was 262.56 per cent. This means that most resources utilised in the companies were resources from third parties (creditors). These debt laden state-owned enterprises drove the need for ongoing government participation capital. But, whenever the 132
state’s revenue from a traditional source, e.g., tax, cannot fill the necessary fund, it will lead to debt financing which in turn induces the increase in the public sector borrowing requirement. In the case of private companies, this will lead to a probable default and increase the risk of a takeover.
Figure 4.4 Indonesia: DTA and DER of SOEs, 1992-2001 (% )
Please see print copy for Figure 4.4
The worst situation occurred during the financial and economic crisis in 1997/1998. In 1998, total liabilities (Rp. 524.234 million) were greater than total assets (Rp. 437.756 million) thus the shareholders’ equity of SOEs was negative (Rp. 86.478 million). Increasing SOEs’ debt was due to the depreciation of the rupiah during the economic and financial crisis in 1997/1998. Yasin (Ibid..) noted that the banking sector and energy company (PLN) had heavily utilised foreign debt, hence when the rupiah fell from Rp. 2,400 per US dollar to Rp. 16,000 per US dollar (Sadli, 1998, pp. 272-73; Kwik, 2003, p. 5), their respected debt in rupiah were drastically increased. In turn, the SOEs’ debt was soaring (a most unusual situation), exceeding total assets of SOEs and as a result the shareholders’ equity was negative. 133
Further, an aspect that will be assessed is the trend of income after tax and dividend (Figure 4.5 and Appendix 4.2).
Figure 4.5 Indonesia: Income after Tax and Dividend of SOEs, 1992-2001
Please see print copy for Figure 4.5
In terms of income after tax and dividends, the SOEs present a strong indication of profitable companies. For the period 1992-2001, income after tax increased from Rp. 3,793 million to Rp. 20,186 million, while the dividend contribution increased from Rp. 879 million to Rp. 8,075 million. Finally, a summary of the audit findings of the Supreme Audit Board (Badan Pemeriksa Keuangan [BPK]) shows that amongst 144 SOEs that were audited in 2001, 84.72 per cent received an unqualified opinion. However, 8.33 per cent of the SOEs did not comply and submit their report to BPK and hence they could not be audited (Triaji25, 2003, pp. 9-10).
Dr. Bambang Triaji is Vice Head of the Supreme Audit Board (Badan Pemeriksa Keuangan/BPK) of the Republic of Indonesia.
25
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4.3.3
Challenges Beside the facts that “mixed” performance had been achieved, SOEs in
Indonesia also face considerable problems. In some aspects, the problems represent SOEs’ weaknesses, while others signify challenges. Triaji (2003, pp. 11-14) identifies and summarises such problems as follows: 1. excessive use of loans; 2. disproportionate remunerations as well as post-service liabilities to the board of directors and commissioners; 3. too much intervention by shareholders (the government) and other outsiders; 4. weak implementation of Good Corporate Governance (GCG); 5. sub-optimal role of the Board of Commissioners and Board of Directors; and 6. corruption, collusion, and nepotism practice. (my translation) First, as has been proved in the crisis of 1997/1998, excessive use of loans had led to many companies in this country becoming essentially bankrupt, although through certain scenarios (such as debt to equity swap), companies were saved from bankruptcy. However, such scenarios led to a change in ownership and could be interpreted as another strategy of a hostile take over. Indocement and Semen Cibinong were two examples of such cases (Irianto, 2004).
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Second, while the enterprises were in a state of indebtedness, the practice of providing disproportionate remuneration and post-service liabilities to the Board of Commissioners and Board of Directors were not uncommon. The Kompas report on “BUMN Sakit, Direksinya Sehat” (SOEs are “poor/ill”, their Directors are “wealthy”) (24 March, 2002, p. 27), which was derived from the Business Intelligence Report (BIRO), portray such a phenomenon. An important finding of the report shows that remuneration for the directors and commissioners was not linked to the company’s performance. The report gave an example of a case as follows: … [i]n the case of PT Bahana Pembinaan Usaha Indonesia (BPUI) which is currently nearly bankrupt, the board of directors and the board of commissioners still received bonuses from 13 to 53 times that of their salaries in 1999, even though the company had suffered a loss, between Rp. 377 billion and Rp. 513 billion … (my translation) Third, too much intervention from shareholders and other outsiders is a further example of SOEs’ problems (Abeng 2001, pp. 32-38; Triaji, 2003, p. 11). The interventions cover many aspects such as imposing multiple objectives, regulations, and heavy bureaucratisations. An example of multiple objective impositions can be seen from the task of SOEs to make a profit as well as to be the agent of developments (Mardjana, 1992; LSPEU, 2001; Abeng, 2001). Such a policy can lead management to a lack of focus on achieving financial objectives. This problem soared with the existence of multiple linkages between SOEs and ministries (Mardjana, 1992). 136
Fourth, government involvement in the determination of bus and train fares, electricity rates, postal tariffs, petrol prices and road tolls which do not reflect their related cost was considered as unsound regulations. This policy results in high subsidies for several public utilities and in turn become a burden for the government (Mardjana, 1999, p. 46 in Abeng, 2001, p. 32). Fifth, Abeng notes that the management of SOEs is not flexible and relies on “management by lobby”, rather than in a professional manner, and practising ABS (Asal Bapak Senang)26 (2001, pp. 32-35). This practice, to some extent, is part of what Triaji points out as the unsound practice of good governance. Finally, Sukardi (2002) alleges that SOEs are a breeding ground for corruption, collusion and nepotism (Supratikno, 2003, p. 3). As such, Mardjana suggests that to improve the performance of SOEs, several steps must be taken, including the simplification of linkages between the government and the management of SOEs, developing new remuneration system links to the performance of the company, practicing modern management, improving the decision process mechanism by shortening the path from management to the ministry, and giving more autonomy to the management of SOEs (1992, p. 205). 4.4 Privatisation of SOEs in Indonesia
26
Asal Bapak Senang (ABS) means as long as the boss is happy (Echols and Shadily, 1989, p. 2). It is a very popular term in Indonesia to portray inappropriate management practice by covering the unwelcome information with the good but untruthful and unjustifiable information to please the boss.
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4.4.1
Early evidence The privatisation of SOEs in Indonesia has been pursued from as early as the
beginning of the New Order government. Early evidence of privatisation can be seen from a few transactions, such as the take-over of PT Golden Martapura (paper project), the adoption of a management contract for a few state-owned companies (e.g., PT Perikanan Samodra Besar, PT Bali Raya, PT Intirub, and PT Gadjah Tunggal) and the selling of a minority stake of government ownership in SOEs (Profil and Anatomi BUMN, Vol. I, Pusat Data Business Indonesia, 1987, p. 140 cited in Pangestu and Habir, 1989, p. 238)27. Another form of ‘privatisation’ of SOEs was initiated through the adoption of performance measurements which are commonly used for private companies. The objective of such was to improve the SOEs’ performance, merely based on financial aspects such as profitability, liquidity and solvency. This initiative took place at the end of the 1980s and at the beginning of the 1990s through the issuance of Presidential Instruction No. 5/1988 and was followed by the issuance of the Ministry of Finance decisions No. 740/KMK/1989 and No. 826/KMK.013/1992 (RBI Research, 1998, p. 19). Under these regulations, SOEs would be evaluated and graded into four groups: ‘very sound’, ‘sound’, ‘less sound’ or ‘unsound’. In addition, strategic management concepts were also introduced. A variety of aspects of strategic management such as corporate plan, annual report, and remuneration system linked to performance were applied to SOEs.
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Following such initiatives, a thorough evaluation was undertaken to access the SOEs’ performances. The result of this assessment shows that most SOEs being evaluated were categorised as unsound. This evidence prompted the Minister of Finance to take special action on the unsound SOEs. In a session with parliament in early 1988, the Minister of Finance outlined policies to improve performance of unsound SOEs, including privatisation, consolidation/mergers, conversion of legal status, management contracts, and integration through joint ventures (Hainsworth, 1990, p.124; Bisnis Indonesia, 1 January 1988, cited in Pangestu and Habir, 1989, p. 238). According to the plan … 52 state-owned enterprises were to be privatised, 17 to be merged with other enterprises, 15 to have their legal status changed and 16 to be incorporated into joint ventures. (Abeng, 2001, p. 28) Unfortunately, the result was far from the plan. Between 1991 and 1997, only a few SOEs became partially privatised, including Semen Gresik, Indosat, Tambang Timah, Telkom, Bank Negara Indonesia, and Aneka Tambang (Ruru, 2003, p. 16, see also Table 4.3); but, at the same time, twelve new SOEs were formed (Abeng, 2001, p. 29). In 1998, President Soeharto expressed disappointment on this matter as he stated during a conversation with Abeng as follows: I tried to get [a] privatisation program started eight years ago, but only half a dozen enterprises have actually been privatised so far. (Abeng, 2001, p. 11). 27
There was no exact date of these transactions in the cited source.
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At this stage, there was no evidence of systematic effort (e.g., by developing comprehensive planning) to execute such a policy. Thus, although political will existed from the highest authority in the country, without such effort, the result was limited. Finally, in 1989, the Strategic Industries Management Board (Badan Pengelola Industri Strategis [BPIS]) was established to incorporate 10 strategic industries28. Abeng, one of privatisation’s proponents, suspected that this step was primarily to hinder the companies under the board from being touched by the privatisation policy (2001, p. 30). 4.4.2
A new wave of privatisation
4.4.2.1 Background Previous evidence has shown that efforts to privatise SOEs or other similar measures had taken place; however, a comprehensive privatisation program of SOEs in Indonesia was clearly initiated in the mid 1997/1998 crisis. This new development was marked by the establishment of the Ministry of State-owned Enterprises Empowerment/State-owned Enterprises Agency in the Seventh Development Cabinet (Kabinet Pembangunan VII) 29. The new ministerial post was initiated not only to assume responsibility in the supervision and development of SOEs, but also
These industries include PT IPTN (aircraft manufacturing), PT PAL (shipbuilding), PT Krakatau Steel (steel manufacturing), PT PINDAD (arms manufacturing), PT Barata (heavy machinery industry), Perum Dahana (explosives), PT Inti (telecommunication equipments), PT INKA (railways), PT Boma Bisma Indra (heavy machinery industries), and PT LEN (electronics). 29 This ministry has so far had three different names since its establishment in March, 1998: State Minister for SOE Empowerment/Agency for the Development of SOE, State Minister for Investment and SOE, and State Minister of SOE. The “Minister of SOEs” is mostly used throughout this thesis to represent all of them. 28
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to assume responsibility as government shareholders in the SOEs30. Even though the Seventh Development Cabinet was only in power about 3 months (March-May, 1998), the fundamental tenets of establishing such a ministerial post are still in place in the post Soeharto’s administration. There are many factors that drive this policy (cf., Chapter 2, section 2.7, and Chapter 3, sections 3.2.1, and 3.3.1). The crisis and international pressure, and the budget deficit and the SOEs’ performances will be elaborated in the following sections. 4.4.2.1.1
The crisis and international pressure
Privatisation in Indonesia was part of a policy response to the 1997/1998 economic and financial crisis. The crisis descended upon many Asian countries31, but Indonesia experienced the worst (Hill, 2000, p. 264). As an indicator of such, among others, was the collapse of the rupiah. In less than four months, between July and October 1997, the rupiah had already depreciated by 55 per cent whereas other currencies such as the Thai baht, the Malaysian ringgit, the Philippine peso, and the Singapore dollar experienced less than that of the rupiah (Sadli, 1998, p. 272). To make it worse, within a year between May, 1997 and June, 1998, the rupiah fell from Rp. 2,400 per US dollar to Rp. 16,000 per US dollar (Sadli, 1998, pp. 272-73; Kwik, 2003,
30
It used to be the Minister of Finance. Further discussion will be presented in section 4.5. Deep analysis of the causes, impacts, responses, and lessons of the crisis which covered Asia/ASEAN countries can be found as such in Johnson (1998), Palma (1998), Sadli (1998), Pincus and Ramli (1998), Nasution (2000) and Woo (2000).
31
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p. 5). At the end of December 1998, government and private sector debts accounted for US$67.33 billion and US$83.56 billion respectively (Bank Indonesia, 2004) 32. Aside from deep analysis of causes, impacts, responses, and lessons from the crisis which can be observed elsewhere (e.g., Sadli, 1998; Pincus and Ramli, 1998, Hill, 2000, pp. 260-92; Nasution, 2000; Ramli, 2003a, 2003b), the crash of the rupiah had a direct and significant impact on the country’s debt. It inflated the foreign currency debt and led to insolvency of many large private corporations. Linnan portrayed such conditions as follows: [w]hen the exchange rate doubled from around Rp. 2,400 to Rp. 4,800 / $ during July–December 1997, Indonesian corporations were very concerned about how to repay their foreign currency debts and perform on dollarised domestic contracts. Once the exchange rate doubled yet again to Rp. 8,000-Rp. 10,000 / $ during January 1998, however, those with foreign currency obligations seemed no longer concerned, apparently believing that there was no way ever to honour their obligations from expected revenues. (1999, p. 111) Dealing with the mounting crisis, in October 1997, the government of Indonesia asked the IMF for ‘financial assistance’. Following ‘the agreement’33 signed by the government of Indonesia and the IMF, Indonesia was under IMF surveillance which led the country to pursue a broad range of economic and financial policies under IMF direction. The policies include 32
http://www.bi.go.id/bank_indonesia2/utama/data_statistik/seki/txt/T3x701.txt (accessed on 7 May, 2004). 33 The agreement was ‘constructed’ under the term of Letter of Intent which consists of the Memorandum of Economic and Financial Policies (MEFP) and can be accessed from the IMF’s official web site.
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market liberalisation and privatisation of state-owned enterprises -the agency’s common prescription around the world (Ramli, 2003a, 2003b) (see also Chapter 2, section 2.3). The deep crisis that has followed such a policy has also “strengthened the position of domestic and foreign interests that want Indonesia to shift away from interventionist economic policies towards more liberal ones, including the area of state-owned enterprises” (Abeng, 2001, p. 41), while paving a way for the international agencies (esp. the IMF) and multinational companies to ‘take over’ the Indonesian economy. The extent of the IMF role in the Indonesian economy was pictured as follow: … the IMF was able to put pressure on the government to introduce a wide range of market-based, economic policy reforms, including the elimination of several Soeharto family monopolies, reductions in tariffs and export taxes, bank closures, cuts [in] government spending, the introduction of a new bankruptcy law and commercial courts and the privatisation of several state-owned enterprises (Abeng, 2001, p. 41). (emphasis added) Observing the extent of IMF intervention in the Indonesia economy, Kwik Kian Gie, the Minister of State for National Development Planning/Chairman of BAPPENAS, even raised a question of himself as to whether such affairs were justified, and replied that “[t]hey obviously are
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unjustified” (2003, p. 3)34. A similar voice has also been raised by Rizal Ramli, former Coordinating Minister for the Economy. He sharply pointed out that the IMF program was “lack[ing] in focus and direction”, and “some of the conditions contained in the agreement reflected specific domestic and foreign political interests” (2003a, p. 11)35. Unfortunately, even though government officials recognised such evidence, some of them could not resist (Cook, 1986), since [t]he government had little choice but to concede to most of the IMF’s demands. To reject the IMF’s demands would have effectively reduced the country’s chances of overcoming the economic crisis, driven even more people into poverty and consequently invited possible revolution. (Abeng, 2001, p. 41) The above evidence parallels Ramamurty’s thesis (1992) that a highly indebted government (especially foreign debt) as well as being dependent on international agencies would lead the country to pursue a privatisation program.
4.4.2.1.2 Budget deficit and SOEs’ performance Comparable to that of the UK and Malaysia (Chapter 3), privatisation in Indonesia was primarily driven by budget burden. The World Bank’s assessment of the Indonesian economy states that in 1996/1997 the country was experiencing a budget 34
Perhaps, curious to present an example of the IMF intervention, Kwik even counted conditionalities imposed on Indonesia. He found 1,243 measures attached in the LOI until June, 2002 in a wide range of areas (2001, p. 3).
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surplus of 1 per cent of GDP, but it was turning over to a deficit of 8.5 per cent by the middle of 1998 as it was for the state budget of 1998/1999 (Abeng, 2001, pp. 48-49). As depicted in various national budgets, such a deficit needed to be filled through a variety of measures such as by depleting government deposits, selling state-owned enterprises, and acquiring new foreign and domestic debts (National Budget 2004, cited in Kwik, 2003, p. 15). Selling the government stake in SOEs was a viable choice and coincidently it was imposed by the IMF, and it was likely considered effortless to pursue. While the budget deficit was apparent as the driver of privatisation, the SOEs’ performance suggests a mixed picture. As described in section 4.3.2, recent data show that, based on the Ministry of SOEs predetermined criteria, more and more SOEs were showing increasingly healthy performances, from 42.31 per cent in 1994 to 78 per cent in 2000, while SOEs with poor performances were declining from nearly 40 per cent in 1994 to less than 6 per cent in 2000. However, SOEs were increasingly facing a debt burden. The SOEs were also not contributing significant returns on invested capital, as reflected in the ROAs and ROEs. The latter drove value destruction36 of SOEs that was estimated to account for more than Rp. 12 billion (Table 4.2). The value destruction was due to inefficiency and corruption (Abeng, 2001, pp. 30-31). This picture provides justification to privatise SOEs. 35
Critiques to the IMF can also be found elsewhere such as in Johnson, 1998 and Stiglitz, 2003. “Value destruction is defined as actual ROE minus standard ROE times Equity; the standard ROE in Indonesia is considered to be 22% for private enterprises but only 20% for state-owned enterprises because of their social/development/public service role” (Booz, Allen and Hamilton, cited in Abeng, 2001, p. 31).
36
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Table 4.2 Indonesia: SOEs' Destruction of Value by Sector
Please see print copy for Table 4.2
4.4.2.2 Objectives and methods Every country that has adopted and implemented a privatisation program has specific objectives and methods, even though commonalities are evident (Chapter 2). In Indonesia, a comprehensive outlook on a privatisation program had initially been outlined in the Master Plan of SOEs Reform (1998). The plan covers rationales, objectives, scope, methods, process, and implementation agenda of SOEs reforms. Such reforms include two main tenets: restructuring and privatisation. In 2002, a new Master Plan of SOEs 2002-200637 was published following the political change in the country. This new plan outlined the scope, current performance of SOEs, the objectives and main
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strategies in developing SOEs, and expected performance of SOEs up to the year 2006. In addition, the Ministry of SOEs’ main responsibility was also defined and inserted in the published plan. Even though the Master plan of 2002-2006 (p.1) stated that it was an improved version of the previous plan, these two plans seem not well connected but the spirit to restructure and privatise SOEs was at the centre of these two plans. As stated in the Masterplan Reformasi BUMN (1998), the objective of the reform was [t]o ensure continuous growth, efficiency, and profitability of SOEs toward economic recovery and achieving prosperity, as well as to improve the quality of service to consumers. (p. 7) (my translation) Three fundamental thrusts were intended to be pursued from the SOEs’ reform: growth, efficiency, and profit. Reform was initiated to be part of an effort toward economic recovery and achieving prosperity. In a more specific objective, the plan stated that such reform was addressed to improve the state’s financial position through the improvement of SOEs’ revenues and elimination/reduction of subsidies or other fund transfer from state to the SOEs; to widen company ownership and strengthen the capital market; to redistribute of wealth; [and] to privatise nearly all of SOEs within a decade (Masterplan Reformasi BUMN, 1998, p. 7) (my translation) Such objectives would be carried out by the Ministry of SOEs as set forth in the mission statements of the ministry. These were stated as follows:
37
The Indonesian and English versions of the Master Plan of SOEs 2002-2006 can be accessed from www.bumn.co.id. This is the modified translation of the Indonesian version.
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to carry out reform that [would] cover the SOEs’ work culture, strategies, and business management in order to achieve professionalism based on Good Corporate Governance principles; to improve corporate value through restructuring, privatising, and business cooperation amongst SOEs based on sound business principles; to increase competitiveness through innovation and the enhancement of efficiencies in order to provide competitively priced goods and services as well as high quality of services; to increase SOE contributions to the state; to increase the role of SOEs in community development and encourage cooperatives, [and] small and medium businesses through partnership programs. (Masterplan BUMN 2002-2006, 2002, p. 2)
In the early months of the work of this ministry, several actions had been taken such as appointing international advisors, and forming a Public Policy Committee (Republika, 29 September, 1998, p. 4). Co-operation was also being established between this ministry and the Management Institute (Lembaga Manajemen), Faculty of Economics, University of Indonesia (Republika, 13 June 1998, p. 4). The latter was carried out for the purpose of improving SOEs’ performances.
In developing the 1998 plan and the 2002 plan, the minister in charge had a different approach. Abeng set up a joint team of staff from the ministry and domestic as well as foreign consultants38 whilst Sukardi optimised the use of internal resources in the ministry office. For the development of the 2002-2006 master plan, Suprapto39 points out
38
Abeng (2001, pp. 67-68) noted that the development of the Master plan of SOEs’ reform in 1998 was funded by the ministry and the Asian Development Bank. 39 Parikesit Suprapto, PhD is Assistance Deputy for Restructuring and Privatisation of SOEs, the Ministry of SOEs.
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[to develop the Master Plan of SOEs 2002-2006] …an internal management team was established in the ministry office. The people were selected from every deputy … there was no involvement of the SOEs’ management although data was gathered through the technical deputy who supervised the SOEs … (Jakarta, 27 June, 2002) (my translation) This has previously been attested to by Cholil Hasan, Director of Finance of SG. He states that … the Master Plan … was developed at a ministerial level, even though they were collecting inputs from SOEs through the relevant deputies … the final decision was made by them too … (Gresik, 8 May, 2002) (my translation) The above process can basically be seen as a top-down and bottom-up approach, although the top-down approach seemed stronger. This is parallel to the notion that the privatisation policy is a matter of shareholders’ action40. Not surprisingly, then, resistance from the management and employees sometimes occurred. To achieve such stated objectives in the plan, 12 (twelve) methods are listed in the Master Plan of SOEs’ Reforms 1998 (pp. 25-27). The methods of privatisation of SOEs have been presented in Chapter 2 section 2.5. Basically, there were no significant differences in the methods applied by the government of Indonesia to that of other general methods of privatisation of SOEs. The methods presented in the Master Plan of SOEs’ Reforms 1998 (pp. 25-27) are comparable to those of outlined by Ernst and Young (1994, pp. 17-27), and essentially in line with those of published by the World 40
The matter of shareholders or corporate action will be elaborated in the following chapter.
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Bank (e.g., Vuylsteke, 1988). However, it can be noted that the two most popular methods adopted by the government of Indonesia were flotation41 and strategic sales. For example, the initial divestment of PT Semen Gresik (Persero), PT Telkom (Persero), and PT Indosat (Persero) were carried out through flotation, while the latest divestments of PT Semen Gresik (Persero) and PT Indosat (Persero) were accomplished through strategic sales (see Table 4.3).
4.4.2.3 Result of privatisation Even though criticism of the policy has continued, privatisation of SOEs in Indonesia seems to have reached no turning point, since the proponent of privatisation holds a ministerial position and is supported by members of the House of Representatives through legislation (Law of SOEs No. 19/2003). In addition, a budget deficit, soaring debt, declining performance of SOEs as well as international pressures were in place to amplify justification for such a policy (cf., Ramamurty, 1992). SOEs that have so far been privatised are presented in Table 4.3.
Table 4.3 Indonesia: Privatised SOEs, 1991-2002
41
This is parallel to the development of the stock exchange in Indonesia. Rachbini (1999, p. 27) notes that one important development in the post-1983 deregulation of the financial sector in the country was the re-opening of ‘the previously sleepy’ Jakarta Stock Exchange (JSX).
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Please see print copy for Table 4.3
4.5 Current development Amongst the latest development that relate to the SOEs and privatisation of SOEs has been the issuance of the Law of SOEs (Undang-Undang BUMN) No. 19/2003 on 19 June, 2003. Whilst various laws and regulations used to justify privatisation of SOEs existed (e.g., MPR Decree No. IV/MPR/1999 (Chapter IV: GBHN 1999-2004), MPR Decree No. X/MPR/2001, UU No. 25/2000 (Propenas 2000-2004), and UU No. 17/2003 (Keuangan Negara), for details, see Ruru, 2003, p. 12; Yasin, 2002b, p. 14), Law of SOEs addressed specifically the restructuring and privatisation of SOEs (Chapter VIII, articles 72-86) which provides an umbrella and legitimacy for the government to exercise such policies. 151
In addition, there are at least two other important aspects that have been addressed by this law. First, it restructured and reduced the type of SOEs from three types (under the Law 19/1969) to only two types. These are public enterprise (Perum) and the stateowned limited liability company (Persero), including Persero Terbuka (listed SOEs), whilst Perjan is excluded from the SOEs (Chapter I, article 1 verses 2-4 and article 9). Second, the law legitimated the role of the Minister of SOEs as the sole government representative (shareholder) of SOEs replacing the role of the Minister of Finance (e.g., Chapter I, article 1 verse 5; Chapter II, article 14, article 15 verses 1-2 and article 27 verses 1-2; Chapter III , articles 44 and 56). Following the issuance of Law of SOEs, the government of Indonesia issued Government Regulation No. 41/2003 dated 14 July, 2003 to replace Government Regulation (Peraturan Pemerintah) No. 64/2001. This regulation strengthened the role of the Minister of SOEs as the sole of government representative in Persero, Perum, and Perjan. The role as government representative in SOEs is of vital concern to the government officials and for political parties in power. For the former, it means enjoying an abundance of facilities (Supratikno, 2003, p. 4), while the latter enjoyed SOEs as their ‘milch cows’ (Abeng, 2001, pp. 23-24; Habir, 2002, pp. 55-57). Hence, securing such role has been contested among interested (political) parties in power (Habir, 2002, pp. 18-20, 55-57) 42. Whilst such struggle took place between
42
When Habibie (Golkar Party) became President following Soeharto’s resignation, Tanri Abeng was, again, appointed as the Minister of SOEs. Abeng, even though known as a successful business manager in private industry, had affiliation to the Golkar Party. He, then, was replaced by Laksamana Sukardi when Abdurrahman Wahid [Gus Dur] (PKB) took power; however Sukardi was then sacked
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the Ministry of Finance and Technical Ministries prior to the establishment of the Ministry of SOEs (see section 4.2.3; Abeng, 2001, pp. 22-30; Habir, 2002, pp. 1416), recent development shows a comparable phenomenon between the Ministry of Finance and the Ministry of SOEs, whilst the role of Technical Ministries is directed toward regulating sectors in which SOEs are operated (Law of SOEs, Chapter I, article 6). The other development shows that implementation of privatisation in this country is continuing. For example, for the fiscal year of 2004, the government intends to privatise 24 SOEs in a variety of sectors such as the banking industry (Bank Mandiri and Bank BNI), mining industry (PT Timah, PT Aneka Tambang, and PT Batubara Bukit Asam), transportation (Merpati Airlines), and forestry (PTPN III). As has been presented by the Minister of Finance to the House of Representatives (Dewan Perwakilan Rakyat [DPR]), among the objectives of such policy was to achieve Rp. 5,000 billion target of government revenue for the 2004 State Revenue and Expenditure Budget (Anggaran Pendapatan dan Belanja Negara/APBN) which was previously approved by the House of Representatives (Republika, 28 April, 2004). However, execution of such a policy depends on the new elected member of the DPR as well as the newly elected government which will effectively work around the end of October 2004. Azwir Dainy Tara, Chairman of Sub-commission V DPR of SOEs and Privatisation, states
and replaced by Rozy Munir, a close ally to Wahid from the PKB. When Megawati (PDIP) assumed the presidency, Sukardi (PDIP) was appointed again as the Minister of SOEs.
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… since there are pros and cons on privatisation, we will pass on the policy to the new elected government. (Republika, 28 April, 2004) More importantly, changes in the policy scenario may likely happen. This had been expressed by a member of Commission IX DPR A. Hakam Naja as follows: We [DPR] will not allow [the government] to sell [another] strategic SOE again as previously happened to Indosat that was sold to Singapore … [thus] privatisation approval [from DPR] will be done in more selective manner. (Jawa Pos, 29 March, 2004) Another member of Commission IX DPR, Hafiz Zawawi even rejected the new government proposal to privatise 24 SOEs. He avowed [n]o way to [the new proposal of] privatisation, especially new privatisation [proposal] of seven SOEs. (Republika, 28 April, 2004). Consequently, further execution of the privatisation policy is still much more a political game rather than just purely economic policy. 4.6 Summary SOEs in Indonesia have had strategic roles since the early years of the independence of the country. Their roles were linked to the economic and political development in Indonesia. A summary of the development of SOEs and its related strategic issues is presented in the Appendix 4.3.
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Historically, there are four milestones of SOEs development presented in this study including the early years of independence, the era of PN, the period of Perjan, Perum and Persero, and the most recent development. In the early years of independence, SOEs were established both through the nationalisation of colonial and or foreign companies as well as through the new initiative of the government of Indonesia to establish many of them. A strategic objective of the political economic policy in this period which was linked to the promotion of SOEs’ role was towards self reliance and eliminating the domination of colonial rule (Robison, 1986, p. 37), although such objective was not fully achieved (Ibid., p. 64; Abeng, 2001, p. 21; Al-Salloum, 1999, p. 169). The second milestone in the development of SOEs was marked by the issuance of government regulation no. 16/60. Under this regulation, various state companies were consolidated into Perusahaan Negara (PN) except a few state-companies such as the state-oil company and the state’s military industry. PN was established not only to consolidate effort to halt the domination of colonial law that governed state companies but also to promote the SOEs as the agent of development. Such development was tied up with the adoption of what was referred to as Guided Democracy (Demokrasi Terpimpin) and Guided Economy (Ekonomi Terpimpin). Further reforms of SOEs were indicated by the enactment of Law No. 9/1969, a few years after the political change in the country from the Old Order to New Order government. Under this new law, PN was transformed into three different types of 155
enterprises: Bureau Enterprises (Perusahaan Jawatan/Perjan), Public Enterprises (Perusahaan Umum/Perum), and Limited Liability Enterprises (Perusahaan Perseroan/Persero). They had been differentiated based on their objectives and their relations to the government. Unlike in the era of Guided Democracy (Demokrasi Terpimpin) and Guided Economy (Ekonomi Terpimpin), which heavily relied on state intervention, this reform shifted government policy to accommodate various economic players including SOEs, private sectors (both foreign and domestic investors), and cooperatives, as an interpretation of the notion of democratic economy mandated by the 1945 Constitution, article of 33 (Mardjana, 1992, pp. 189-90). Three fundamental acts, the Foreign Capital Investment Act (UU PMA) No. 1/1967, the Domestic Capital Investment Act (UU PMDN) No. 6/1968, and the Co-operative Act No. 12/1967 (UU tentang Koperasi), were previously issued to promote foreign and domestic investment as well as co-operatives. The UU PMA was seen as an indication toward a more open policy to foreign investors (Prawiro, 1998, pp. 26, 46-47; Pangestu and Habir, 1989, pp. 227-28; Rachbini, 1999, pp. 14-20), although with certain restrictions as stated in verse 6 of the act. However, such reforms had been particularly halted during the oil boom period between 1973 and 1982, and resumed with other reforms post the oil boom and at the beginning of the 1990s. The reforms at the end of the 1980s and the beginning of the 1990s which include privatisation of a few state-owned enterprises were carried out in response to the SOEs poor performance as well as the weakening ability of the government to subsidise SOEs because of the fall in the oil prices. Whilst the rhetoric of SOEs’ poor 156
performance was also a catalyst to the recent wave of privatisation following the crisis in 1997/1998, a few other factors have also been seen as contributors to the recent policy such as budget deficits, soaring debt, international pressures, and political motives. In fact, for the period of 1992-2001, the SOEs’ performance was mixed. In terms of their dividend contribution and income after tax, there were indications that SOEs were profitable companies, although their ROA and ROE were far below the cost of money in the country. On top of these, they were increasingly faced with the burden of debts as well as dealing with severe fundamental problems such as weak implementation of GCG, less autonomy, disproportionate remuneration and post-service liabilities to the boards of directors and commissioners, corruption, collusion, and nepotism practice, etc. (e.g., Triaji, 2003, pp. 11-14; Kompas, 24 March, 2002; Abeng, 2001, pp. 32-38; Sukardi, 2002). Finally, whilst privatisation in Indonesia generated some financial proceeds for the government (table 4.3), in fact profitable SOEs have been privatised. Semen Gresik was the first profitable SOEs that was gradually privatised since 1991.
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CHAPTER 5 THE CEMENT INDUSTRY IN INDONESIA AND PT SEMEN GRESIK (PERSERO) Tbk. 5.1 Introduction Cement is well known as a building material that is useful for binding a variety of materials in order to build a solid and strong construction. It is “…made by grinding calcined limestone and clay1 to a fine powder, which can [then] be mixed with water and poured to set as a solid mass or used as an ingredient in making mortar or concrete”2. The history of cement can be traced back to the civilisations of Assyria, Babylonia, Egypt, Greece and Rome; however, it was only as recently as 1824 that Joseph Aspdin patented cement in the UK. It was Aspdin’s patented product and his work in developing a cement manufacturing plant that has engendered the mass production of cement up to the present day. (http://www.cement.ca) Cement is currently made from a mixture of limestone, clay, silica sand and iron sand (SG, 1995, p. 59). Through wet or dry processing3, the mixture of raw materials within a certain composition is processed to produce cement that can be used as material for a variety of products such as concrete, ready mix, floor tiles, water-channels, electricity poles, etc. There is a variety of cement users, from small 1
The materials to produce cement are evolving. For example, the Assyrians and Babylonians used clay, the Egyptians utilised lime and gypsum, while the Romans combined lime with volcanic ash. (http://www.cement.ca, accessed on 21/01/2004).
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scale individuals (e.g., for home construction and home renovation), to large construction industries (e.g., construction of bridges, skyscrapers, tollways, dams, etc.). The cement industry worldwide is operated within the oligopoly market structure4, or, in the words of Plunkett et al., it has a “’natural’ tendency” to be an “oligopolistic industry”, because of … the geographic dispersion of cement markets, the low aggregate price elasticity of demand for cement, the industry’s high entry and exit cost, the relative importance of transport costs, and the potential to achieve marked economies of scale …(1997, p. 79) Few companies that dominate this industry can be found elsewhere. For example, there are three major players in Australia5, four main companies in the UK6, ten major firms in Canada (http://www.cement.ca/cement.nsf) and ten enterprises in Malaysia (http://www.cnca.org.my/cnca/home.htm). Such domination is carried out by multinational corporations (MNCs) such as Lafarge (France), Cemex (Mexico), the Heidelberger Group (Germany), Holcim/Holderbank (Switzerland), and Blue
2
http://dictionary.reference.com, accessed on 21/01/2004. The meaning of cement can also be found in, for example, the Oxford English Dictionary Online (http://dictionary.oed.com) and MerriamWebster Online (http://www.m-w.com ). 3 See further description on this matter in section 5.3.4. 4 Oligopoly is a form of market structure that is characterised by (1) a few firms who dominate the market in selling either standarised or differentiated products, (2) uneasy to entry into the market, and (3) dependency among the players which may lead to collusive actions (Salvatore, 2003, pp. 360-61; Jackson et al., 1994, p. 478). 5 Adelaide Brighton, Blue Circle Southern Cement, and Cement Australia. (http://www.cement.org.au, latest accessed on 26 September, 2003). 6 Castle Cement (Heidelberger Group), Lafarge Cement UK, Rugby Cement, and Buxton Lime Industries. (http://www.bca.org.uk, latest accessed on 26 September, 2003).
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Circle7 (the UK). The worldwide production capacity of this industry is estimated to be around 2,000 million tonnes per annum8. In Indonesia, eleven companies run this industry, but a few of them are subsidiaries of other companies. These companies are listed in Table 5.1. Table 5.1 Cement Industries in Indonesia (CII)
Please see print copy for Table 5.1
Three of these companies presented in Table 5.1, PT Semen Gresik (Persero) Tbk., PT Indocement Tunggal Prakarsa, Tbk., and PT Semen Cibinong, Tbk., have gone public. They control more than 90 per cent of installed production capacity. Hence, the 7
In 2001, Blue Circle was taken over by Lafarge (http://www.lafarge.com). Technology Forecasting for Indian Cement Industry (2003), http://www.tifac.org.in, latest accessed on 22 January, 2004.
8
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development of the cement industry in Indonesia may heavily depend on the role and performance of these giant companies. This specific industry environment will be discussed prior to advancing the assessment of Semen Gresik. This chapter will be divided into two parts. The first part will discuss the cement industry in Indonesia, primarily by assessing the three giant enterprises (Section 5.2). This part will consist of several sections, including a brief history, production capacity, production and utilisation, sales and their prospects, government regulation and the role of the Indonesia Cement Association (Asosiasi Semen Indonesia [ASI]), and financial highlights (Section 5.2.1 - 5.2.5). The second part will elaborate on PT Semen Gresik (Persero) Tbk. (Section 5.3), which will be divided into several sections, including the genesis of this company, from being a purely SOE to becoming a public enterprise, its production capacity, its process of production and types of products, market shares, and subsidiaries, affiliations, and supporting institutions (Section 5.3.1-5.3.4). The last part will be a summary of this chapter (Section 5.4).
5.2 The Cement Industry in Indonesia (CII) 5.2.1 A brief history The cement industry is considered to be a strategic industry since it has both forward and backward linkages to many other industries. This industry drives the development of many other industries such as the energy industry, the bond paper
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industry, and the mining industry (backward linkage), as well as pipes, pre-cast structures, bricks, blocks, and other industries (forward linkage) (SG, 1980, pp. 13839; LSPEU, 2001, pp. 35-39). In addition, the cement industry has also boosted the development of accompanying industries and services such as housing, trading, education, and health. As a result, this industry and its interrelated industries and services provide work for thousands of employees. For example, Semen Gresik and its subsidiaries and supporting institutions employ more than 6,700 employees (Yasin, 2002b, p. 22). Hence, it is not surprising that from the early days of the independence, the government of Indonesia has paid great attention to the development of this industry. The cement industry has a long history in this country which can be traced back to the era of Dutch colonialisation. The first cement company built was NV Nederlands Indische Portland Cement Maatschappij (NV NIPCM). It was founded on the 18 March, 1910 in Padang, West Sumatra (ASI, 1999, p. 4). NV NIPCM is currently known as PT Semen Padang (Persero) (hereafter, Semen Padang or SP). Whilst Semen Padang was the first cement company built in the Dutch colonialisation era, NV Pabrik Semen Gresik was the first cement enterprise to be established in the early days of Indonesian independence. It was built in Gresik, East Java Province and officially opened by the President of the Republic of Indonesia, Ir. Soekarno, on the 7 August, 1957 (SG, 1991, p. 6). Subsequent to the development of SG, PT Semen Tonasa (Persero) (hereafter, Semen Tonasa or ST) was established in 1968, in Pangkep, South Sulawesi (ASI, 1999, p. 34). All of these companies are state-owned enterprises. 163
The private sector entered this business in the 1970s, marked by the institution of PT Semen Cibinong on the 15 June, 1971. It was founded through a joint venture9 between PT Semen Gresik and Kaiser Cement and Gypsum Corp, Japan (ECFIN, 2000, p. 188). Two years later, an Indonesian conglomerate, Soedono Salim (Liem Swie Liong), formed PT Distinct Indonesia Cement Enterprise (PT DICE), one of the embryos of PT Indocement Tunggal Perkasa, Tbk.10 (LSPEU, 2001, p. 105). Further expansion of the cement industry took place in the 1990s. In 1991, Indocement took over PT Tridaya Manunggal Perkasa, and, in 1993, PT Semen Nusantara was acquired by Semen Cibinong (SG, 1995, p. 55). These consolidations were followed by Semen Gresik through an acquisition of Semen Padang and Semen Tonasa in 1995. The newest consolidation was done by Indocement and PT Indo Kodeco Cement in the year 2000 (ECFIN, 2002, p. 252)11. 5.2.2 Production Capacity, Production and Utilisation
9
Joint venture was widely utilised to develop the new cement industry in Indonesia. PT Semen Baturaja, West Sumatra (1974), PT Semen Kupang, East Nusa Tenggara (1980), PT Semen Andalas, Aceh (1982), and PT Indo Codeco Cement (1998) were founded through joint ventures (data cited from ASI, 1999, pp. 72, 92, 82-83, 104; and Wajah dan Prospek Bisnis BUMN Menyongsong Abad ke-21, p. 248). 10 Liem Swie Liong (Sudono Salim) owned a group of companies known as the Salim Group. Instead of PT DICE, this group controlled several cement companies, such as PT Perkasa Indonesia, PT Perkasa Agung Utama, PT Perkasa Indah Chemical Putih, and PT Perkasa Inti Abadi. In 1985, PT DICE and all of these companies were consolidated into PT Indocement Tunggal Perkasa (LSPEU, 2001, p. 105). 11 PT Indo Kodeco Cement was initially founded in 1995 through a joint venture between PT Indocement Investama, Indonesia (51%), Kodeco, Korea (46%) and Marubeni Corp., Japan (3%); however, the ownership structure has since changed into 71.4%, 25.6% and 3% respectively (ASI, 1999, p. 104). This consolidation was a prerequisite of the Indocement debt restructuring (see section 5.2.4.1).
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After expansion and consolidation in the 1990s, Semen Gresik became the largest cement industry in Indonesia followed by Indocement and Semen Cibinong. These three companies controlled 91.27 per cent of the 46.67 million tonnes of installed production capacity. The remaining capacity was controlled and shared by four others companies including PT Semen Andalas, Aceh, PT Semen Baturaja (Persero), West Sumatra, PT Semen Kupang (Persero), East Nusa Tenggara and PT Semen Bosowa, South Sulawesi (Table 5.1 and Figure 5.1).
Figure 5.1 CII: 'Shared' Production Capacity, 2000
Please see print copy for Figure 5.1
Expansion in the 1990s has increased the installed production capacity from 17.83 million tonnes in 1989 to 46.67 million tonnes in 1999, an increase of more than 100 per cent capacity in around a decade. It has been driven by an optimistic expectation of the sustainability of domestic demand which steadily increases by an average of 8-10 per cent a year (SG, 1995, p.56), as well as a relatively high and stable 165
utilisation rate. On average, the utilisation rate between 1992 and 2001 was 76 per cent. The highest utilisation rate was achieved in 1996 (91.18 per cent), and the lowest in the middle of the crisis of 1998 (50.47 per cent). The crisis had a severe impact on this industry. This impact can be observed by comparing the average utilisation rate between 1992-1997 and 1998-2001. The mean of the utilisation rate between 1992 and 1997 was 88.95 per cent and this drastically plunged to an average of 56.69 per cent in 1998-2001. The decline of the utilisation rate was brought about by a diminishing of domestic demand, primarily from the industrial sector (e.g., large construction industry) which was severely hit by the crisis. In turn, a substantial reduction in the companies’ revenue and cash flow was unavoidable, and the debt repayment scenario was also affected. 5.2.3 Sales and their prospects The core market for the cement industry in Indonesia at this time was the domestic market (Irianto, 2004) (Figure 5.2), especially in the area that surrounded the company’s main manufacturing plant. For example, Semen Gresik’s leading market is in East Java because its main manufacturing plant is in East Java, while Indocement’s dominant market is in Jakarta/West Java since this area is near Indocement’s main manufacturing plant. Expensive distribution costs are the main reason for selecting a target market (see Chapter 6). The real and potential market has been in Java since it has consumed around 70 per cent of domestic sales (SG, 1995, p. 56).
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During the period 1992-2001, the mean of domestic sales was 89.30 per cent with the remaining being exported. Further observation shows that during the period 1992-1997, average domestic sales was accounted for 94.61 per cent, while in 19982001 this was about 81.32 per cent. In terms of nominal sales (tonnes) there was a substantial decline since the actual production in 1998-2001 was less than 60 per cent of installed capacity. This evidence affirms that the domestic market is the dominant market for the cement industry in the country (Irianto, 2004). It is an important argument for further discussion in Chapter 6.
Figure 5.2 CII: Capacity, Production & Sales
Please see print copy for Figure 5.2
Another interesting fact to consider is the recovery process of the domestic market as well as the utilisation rate in this industry. Recovery was considerably fast, as can be seen from the above figure which shows that the lowest domestic consumption 167
was 78.5 per cent (1999) and that it was amplified to become 80.4 per cent (2001) from the actual production, or about 40.2 per cent to 52.6 per cent from installed production capacity, while the utilisation rate improved from 50.5 per cent in 1998 to 59.5 per cent in 2000. A blessing in disguise within the 1997/1998 crisis was the improvement of exports. On average, exports between 1992 and 2001 were 10.04 per cent while the highest percentage of exports was achieved in 1999 (21.4 per cent). Exports were insignificant if the domestic market was booming; for example, exports in 1996 accounted for only 1.5 per cent. Among companies that historically have had a large proportion of exports has been Semen Padang, even though its exports on average were around 22 per cent for the period 1992-2001. The highest SP records on exports took place in 1999, accounting for 48.1 per cent (SG, unpublished data, various years). With an estimated annual 10 per cent demand growth, and with no further expansion from current installed production capacity, it is projected that a shortage of cement in the domestic market will take place in 2006/2007 (Figure 5.2). However, if utilisation is about 80-90 per cent or less, the shortage could be earlier. This may cause an increase in the cement price and imports, and may consequently influence the price of construction or other cement’s based products. Prospects for the cement industry in Indonesia are promising since the domestic consumption per capita has been only 110 kg (Gapura, No. 20/Th.IV/28 May, 2003), the lowest cement consumption of most ASEAN countries. It is also below the average world cement consumption per capita which has been estimated at around 267 kg. 168
(http://www.tifac.org.in). Cement consumption per capita in most ASEAN countries and several other countries is depicted in Table 5.2. Table 5.2 Cement consumption per capita in ASEAN and a few other countries
Please see print copy for Table 5.2
Noting the prospects for this industry, an engineer and Head of SG’s Internal Control System, Ir. Marso Daryanto, convinced me that “it is not difficult to predict the prospects of this industry … [for example] you can see that in Tuban there are a lot of homes that are still made from bamboo plait” (my conversation with him on 27 May, 2002 in the Head Office of SG, Gresik; my translation).
5.2.4 Financial Highlights: a comparative outlook
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The above operational measures (e.g., domestic sales and export) are related to financial performance. While individual data on each company are publicly available (such as in the company’s annual report and in the Indonesian Capital Market Directory), a comparative analysis of the financial performances of Semen Gresik, Indocement, and Semen Cibinong has been carried out (Irianto, 2003; 2004). The analysis was based on ratio analysis12 and Altman’s discriminant analysis. A comparative data and summary of ratio analysis of Semen Gresik, Indocement and Semen Cibinong that includes liquidity, activity, profitability and coverage ratios13, is presented in Appendices 5.1 - 5.3 at the end of this chapter. An analysis in this section will be done on an exception basis which is considered relevant to the essence of this research. Part of this section has been published in a referred journal in Indonesia (Irianto, 2004). Two main aspects will be elaborated in the following section.
12
Ratio analysis had previously been used to access the efficiency of public enterprises in Indonesia such as by Machfoedz, 1998, 1999; Putra, 1997; and Widjaya, 1997. 13 Even though comparable in essence, there are different ratio classifications. For examples, Gaffikin (1993, p. 689) summarised ratios into two groups: analysis of operating performance and analysis of financial strength. Kieso and Weygant (1995, p. 1315) classifies ratios into four groups: liquidity, activity, profitability, and coverage; while Kieger et al. (1984, p. 672) outlines ratios into five groups: liquidity ratio, asset management, or turnover, ratio, debt management ratios, profitability ratios, and stock market ratios.
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5.2.4.1 Debt trap, Ownership, and the MNCs The recent wave of expansion and consolidation of the cement industry in Indonesia took place in the 1990s. For this purpose, large resources were needed either from internal sources (e.g., additional investment from existing shareholders, and retained earnings) or external funding (e.g., debt financing or capital market). Examples of this expansion and consolidation and the means to obtain this include the development of the Tuban manufacturing plant which was funded by selling stocks to the public in 1991 (SG, 1991, p. 3), the acquisition of Semen Padang dan Semen Tonasa by Semen Gresik which was preceded by a rights issue and partial divestment, and an expansion of Semen Cibinong’s manufacturing plant unit 6 in Narogong being funded through debt financing14. There is a high probability of Semen Gresik, Indocement, and Semen Cibinong being trapped in increasing debt, as indicated by the trends in their total liabilities, debt to total assets ratio, and debt to equity ratio. Three figures, derived from Appendices 5.1 - 5.3, are presented in the following discussion: trend of total liabilities (Figure 5.3), trend of debt to total assets (Figure 5.4), and trend of debt to equity (Figure 5.5).
First, an indicator of the increasing use of debt can be observed from the trend in their total liabilities (Figure 5.3).
14
In 1996, Semen Cibinong through its affiliation, Cibinong International Finance Company BV, issued Floating Rate Notes worth US$150 million in order to finance a new manufacturing plant unit 6 in Narogong, West Java (ECFIN, 1997, p. 204).
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Figure 5.3 SG, ITP and SC: Trend of Total Liabilities
Please see print copy for Figure 5.3
In 1993, total liabilities of Semen Gresik, Indocement and Semen Cibinong were Rp. 277 billion, Rp. 3,152 billion and Rp. 711 billion respectively, and by the year 2000, those figures were drastically increased to Rp. 4,558 billion, Rp. 10,530 billion, and Rp. 14,928 billion respectively (see Appendix 5.1-5.3). Those mean that, from 1993 to 2000, their total liabilities were increased by 15.45 times, 2.34 times and 20 times respectively.
During the 1997/1998 crisis, the rupiah fell from Rp. 2,400 per US dollar to Rp. 16,000 per US dollar (Sadli, 1998, pp. 272-73; Kwik, 2003, p. 5; cf., Abeng, 2001, pp. 38-39), consequently companies with foreign (US$) debt would experience dramatic mounting debts. Semen Gresik, Indocement and Semen Cibinong were no exceptions. Their respected liabilities before the crisis (1996) were Rp. 1,763 billion, Rp. 2,608 billion, and Rp. 2,066 billion, and, at the end of 1998, those figures had dramatically mounted to Rp. 4,511 billion (1.56 times), Rp. 8,975 billion (2.44 times), and Rp. 172
10,658 billion (4.16 times) respectively. Such conditions reflect that those three companies are more dependent on debt.
Second, the debt burden can also be seen from the debt to total asset ratio (DTA) (Figure 5.4). Figure 5.4 SG, ITP and SC: Trend of Debt to Total Assets (DTA)
Please see print copy for Figure 5.4
In 1993, the DTA of Semen Gresik was only 29 per cent and this figure doubled by the year 2000 (Figure 5.4; Appendix 5.1). Indocement faced a more difficult situation. In 1993, Indocement’s DTA was already 62 per cent and this DTA increased to 93 per cent in 1998 and slightly decreased to 90 per cent in the year 2000. Semen Cibinong faced the worst conditions. This company, historically, was burdened by debt. Its DTA in 1993 was already 57 per cent, and it soared to 113 per cent in 1998 and 220 per cent in the year 2000. This meant that the liabilities of Semen Cibinong were greater than its assets; hence, from 1998 to 2000, this company had negative equities (Appendix 5.3). Semen Gresik and Indocement were
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facing comparable problems, although total assets of these companies were still greater than their respected liabilities (Appendices 5.1 and 5.2).
Finally, since the leverage ratio had become increasingly higher, the DER’s pictures of these three companies have become automatically even worse (Figure 5.5). Figure 5.5 SG, ITP and SC: Trend of Debt to Equity (DER)
Please see print copy for Figure 5.5
The DER of Semen Gresik in 1993 was 40 per cent and it steadily increased to 175 per cent in 1998 and slightly decreased to 153 per cent in 2000. Indocement’s DER was already 166 per cent in 1993 and jumped to 1349 per cent in 1998 and decreased to 941 per cent in 2000. The DER figures of Semen Cibinong were the worst. Since the company had negative equities in 1998-2000, its DER figures were also negative (see also Appendix 5.3).
The above evidence shows that these three companies have faced a similar burden of debt. As shown in chapter 4 (Section 4.3.2), a comparable pattern 174
occurred in SOEs in Indonesia. Utilisation of debt is supported by Modigliani and Miller’s theory (Preposition I)15, which convinces us that [i]n a perfect market any combination of securities is as good as another. The value of the firm is unaffected by its choice of capital structure. (Brealey and Myers, 2003, p. 467)
This theory stresses that either debt financing or owners’ capital would not make any differences to a company; however, in the case of Indonesia, such a view is problematic because of two reasons (Linnan, 1994, 1999). First, Indonesian capital markets are “still at an early stage of development” which would suggest that market perfection would be unlikely (Linnan, 1994, pp. 226-41). The market imperfection is indicated, for example, by the domination of controlling shareholders. In such a condition, debt financing is unlikely to be less expensive than that of capital injection from shareholders. In addition, high interest rates in this country might also suggest that debt financing would be expensive. Hence, utilisation of excessive debt may drain company’s profit, which in turn would reduce the company value. Second, there is a presumption that interest of debt financing can be deducted from pretax income; thus, utilisation of debt would assume to give opportunity to the company to pay less tax. However, Linnan argues that “the weakness of the rule of law made full payment of taxes unusual” in Indonesia (1999, p. 109), thus tax considerations might not be the main justification to utilise debt. In brief, it would be imprudent to assume that higher utilisaton of debt would not make any differences to the company. On top of this, utilisation of debt that neglected
15
Modigliani, F. and Miller, M.H., “The Cost of Capital, Corporation Finance and The Theory of Investment”, The American Economic Review, Vol. XLVIII No. 3, June 1958, pp. 261-97.
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prudent financing principles can have a severe impact on the company, especially on the existing shareholders, as Brigham and Gapenski warn “the greater the use of debt, the greater the threat of bankruptcy” (1991, p. 26).
The threat of bankruptcy16 because of excessive debt could eventuate, although it can be solved by financial engineering (restructuring), such as through a debt to equity swap scenario. A debtor with excessive debts, even if insolvent, may negotiate with a creditor to settle this debt through such a debt conversion into equity.
Following the 1997/1998 crisis, the debt to equity swap was one adopted approach used to deal with insolvency cases within the private sector in Indonesia. The establishment of the Indonesian Bank Restructuring Agency (IBRA) and the Jakarta Initiative Task Force [JITF] (Prakarsa Jakarta) was intended, among others, to assume corporate debt restructuring programs. While IBRA was “endowed with a mission of assisting the process of economic recovery through bank restructuring and corporate loan restructuring as well as optimising repayment of state funds [in order to reduce] the burden on [the] state budget” (http://www.bppn.go.id/ai_gi.asp)17, the JITF was institutionalised to “facilitate debt restructuring negotiations between debtors and their creditors in line with best practices” (JITF, 2003 [Press Release, 18 December]).
16
Altman (1968) and Altman et al. (1977) developed models to predict company bankruptcy.
17
Last accessed on 15 September, 2004.
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Under the JITF’s scheme, “many debt restructuring deals will involve some degree of debt forgiveness and debt-equity swap” (Cameron, 1999, p. 25). Through debt to equity swap, the threat of bankruptcy can be avoided, although the majority of ownership and control of the company was transferred to new owners. Such scenarios have recently been proposed for insolvent state-owned enterprises (Tobing, 2003). 18 As forementioned the three giant cement enterprises in Indonesia were increasingly faced with the burden of debt. Of these three companies, Semen Gresik was relatively prudent in managing debt although its debt was on the upward trend. The ownership change in Semen Gresik has so far been driven by other factors rather than debt, especially by the majority shareholders (the government of Indonesia) decision. The latest divestment of this company in 1998 was driven mostly by the need of the government to fill the budget deficit and the international pressure from the IMF19. Indocement and Semen Cibinong had different cases. At the end of 2001, Indocement’s majority ownership had been transformed from the Salim Group (PT Mekar Perkasa and PT Kaolin Indah Utama) to the Heidelberger Group, a German based MNC in the cement industry. Before the crisis, Indocement was experiencing significant debt (Appendix 5.2, Figure 5.3 - 5.5). Massive expansion that was funded by debt from the syndication of foreign banks was the initial catalyst for this problem (Prospektif, 8-14 April, 2002).
18
An example and description of the debt to equity swap scenario through the JITF can be found in Tobing (2003). Samuel Tobing is the former Chief Operating Officer of the JITF. 19 Further discussion related to this matter will be presented in Chapter 6.
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During the crisis, the domestic demand for cement drastically decreased. As a result, Indocement was unable to match the payment of its debt on the due date. After tireless negotiations with its creditors, an option to implant a strategic partner (Heidelberger Group) through a debt to equity swap was selected20. At the same time, part of the government stake21 in Indocement was also sold to Heidelberger. As a result, the majority interest of Indocement was transferred to Heidelberger. Semen Cibinong had a comparable experience. The debt restructuring of Semen Cibinong was done through the mediator of the JITF (e.g., http://www.asiafeatures.com)22. Following debt restructuring, the majority of Semen Cibinong’s stake became that of Holcim/Holderbank, a Swiss based MNC in the cement industry. As indicated earlier, a new era evolved in which MNC had a dominant role in the cement industry in Indonesia. The domination of MNCs in the cement industry in many countries is apparent. Coincidently with the crisis of 1997/1998, they also conquered the cement industries in ASEAN countries, primarily in the Philippines, Malaysia, Indonesia and Thailand. For example, Cemex entered the cement industry in the Philippines by acquiring the majority stake of Rizal Cement in 1997/1998 and APO Cement in 1999 (Lubis et al., 2001, p. 9). Such a move was similarly carried out by other MNCs. Blue Circle (UK) secured Zeus Holdings and Fortune, Lafarge (France) purchased 20
This option was selected from two proposed plans to restructure Indocement debt (Prospektif, 8-14 April, 2002). In this scenario, Heidelberger took over US$150 million of the Indocement debt, which was then converted into ownership in the company ( “Heidelberger Takes Majority Stake in Indocement US$ 1.1 Billion Debt”,http://www.germancentre.co.id/new%20site/dbscripts/ mc_ germanews_showarticle.asp?ItemID=139 (accessed on 2 March, 2004) 21 In 1985, the government of Indonesia bought 35 per cent of Indocement shares (ECFIN, 2000, p. 236). 22 http://www.asiafeatures.com/business/0011,1921,01.html (accessed on 2 March, 2004).
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Continental, and Heidelberger (Germany) bought Limae and Alsons Cement (Lubis et al., 2001, p. 23). In addition, Holderbank/Holcim also extended its operation to the Philippines and Thailand; Lafarge expanded its business to India, and Korea; and Blue Circle extended its operation to Malaysia (Lubis et al., 2001, p. 23; Warta Ekonomi, No.14/XV/16, July, 2003, pp. 22-23)23. In Indonesia, four MNCs control the national cement industry. In 1998, Lafarge procured 88 per cent stake of PT Semen Andalas, Aceh, (www.lafarge.com24; Lubis et al., 2001, p. 23); Holcim/Holderbank owned 77.33 per cent shares in PT Semen Cibinong, Tbk., Heidelberger Group controlled 74.70 per cent of Indocement ownership25, and Cemex secured 25.53 per cent shares at Semen Gresik. The ownership structure of SG, ITP, and SC is presented in Tables 5.3, 5.4 and 5.5. This evidence shows that the public company in Indonesia has gradually been taken over by MNCs, and such companies may have previously been owned by the government or by a private domestic investor. Indosat (telecommunication), BCA Bank, Niaga Bank, and PT Aqua Golden Mississippi are a few other examples.26
23
As a comparison, the cement industry in Australia is also controlled by a few MNCs. The majority stake (50%) of Cement Australia belongs to Holcim, while the other two industries are controlled by Blue Circle Southern (Boral Subsidiary) and Adelaide Brighton Ltd. is owned by Rugby Portland Cement of UK which is 100% owned by the RMC Group. 24 Accessed on 29 December, 2003. 25 It used to be 61.70 per cent, but recently the government sold its remaining share at Indocement to the Heidelberger Group (Ministry of SOE, Press Release, 23 October, 2003, http://www.bumn-ri.com, accessed on 2 March, 2004). 26 Indosat, BCA Bank and Niaga Bank have been controlled by Singapore Technologies Telemedia Pte. Ltd. (Indonesia Communications Limited), FarIndo Investment, Ltd. (Farallon Capital Management LLC), and Bumiputra-Commerce Holdings Bhd. (Commerce Asset-Holding Bhd.)
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SG, ITP, and SC: Change in Ownership Structure (%) Table 5.3 PT Semen Gresik (Persero) Tbk.
Please see print copy for Table 5.3
Table 5.4 PT Indocement Tunggal Perkasa Tbk.
Please see print copy for Table 5.4
Table 5.5 PT Semen Cibinong Tbk.
Please see print copy for Table 5.5
The evidence in Tables 5.3, 5.4 and 5.5 also shows that majority ownership change was preceded by the burden of debt. This case is comparable to the debt trap
respectively. PT Aqua Golden Mississippi (Ruslina, 2002), a former domestically owned, has also been acquired by Danone (France).
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phenomenon that commonly affects developing countries. Interestingly, Ford, a giant in car manufacture in the United States, also faces such a problem. Richter (2003) noted that it was analogous to the economic crises faced by Argentina, Venezuela, or Brazil – all of them were trapped by the debt. Richter wrote that
… it is not just economic managers in emerging markets that get into trouble. Even the best-known and supposedly most prestigious corporations in the developed world can fall into the same trap27.
Massive expansion, followed by a crisis which leads to a plummeting domestic demand has also occurred in Malaysia where the cement industry’s installed production capacity was significantly increased more than 94 per cent in less than 5 years, from 12.5 million tonnes (1996) to 24.3 million tonnes (2000), but where the domestic demand drastically decreased from 17.8 million tonnes (1997) to 9.3 million tonnes (1999), down almost 50 per cent. Malaysia’s steel industry also faced a similar experience. Large expansion had increased the installed production capacity from 2 million tonnes in 1997 to 4 million tonnes in 2000, while the demand plummeted from about 2.7 million tonnes in 1997 to 1.1 million tonnes in 1999, or about a 60 per cent decrease. (Wai, 2003, pp. 40-42, 45).
It is not obvious to say that Richter’s assertion on the debt trap is comparable to the case of cement industry in Indonesia. The road to this crisis began with a massive expansion that was financed by the foreign currency debt. When the crisis took place,
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companies were unable to pay the debt and the MNCs were coming pretendly as the savior rather the conquer.
5.2.4.2 Profitability
The burden of debt and its implication to companies’ ownership has been elaborated. This section will present the profitability of Semen Gresik, Indocement and Semen Cibinong. The common measurement of companies’ profitability is the return on investment (ROI) and return on equity (ROE) (cf., Machfoedz, 1999). In addition, two other aspects will be assessed which are earnings per share (EPS) and the price earnings ratio (PER). All of the following figures are derived from Appendices 5.1, 5.2 and 5.3.
Figure 5.6 SG, ITP and SC: Trend of Return on Investment
Please see print copy for Figure 5.6
27
Richter, S. (2003), “Ford’s Debt Trap”, http://www.theglobalist.com/DBWeb/ StoryId.aspx?StoryId=3097 (accessed on 29 December, 2003).
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For the period 1993-2000, the mean of Semen Gresik’s ROI and ROE was 4.49 per cent and 8.54 per cent respectively. Semen Gresik had both a stable and positive ROI and ROE for the period, while Indocement and Semen Cibinong were fluctuating, especially in the middle of the crisis in 1997/1998 onward (Figure 5.6 and Figure 5.7). Figure 5.7 SG, ITP and SC: Trend of Return on Equity
Please see print copy for Figure 5.7
Semen Gresik can also be considered as the most efficient producer since it has a higher gross profit margin (GPM) than Indocement or Semen Cibinong. The mean of GPM of Semen Gresik is 41 per cent, while Indocement and Semen Cibinong is 39 per cent and 22 per cent respectively. Even though the average operating profit margin (OPM) of Semen Gresik is less than that of Indocement, the net profit margin (NPM) of Semen Gresik is the highest at 15 per cent. Indocement outperforms Semen Gresik on operating expenses, while Semen Cibinong has the lowest operating expenses. (Irianto, 2003)
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The other two aspects, the trend of earnings per share (EPS) and the price earnings ratio (PER), are depicted in Figure 5.8 and Figure 5.9 respectively. Figure 5.8 SG, ITP and SC: Trend of Earnings Per Share
Please see print copy for Figure 5.8
For the period 1993-2000, the mean of Semen Gresik’s EPS is Rp 386.38. Semen Gresik provides stable earnings to its shareholders. Its highest EPS was Rp. 578.00 in 2000. Indocement and Semen Cibinong had positive EPS for the period 1993-1996, but they deteriorated into negative EPS from 1997 onward, except in 1999. This picture is reflected in their PER (Figure 5.9).
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Figure 5.9 SG, ITP and SC: Trend of Price Earnings Ratio
Please see print copy for Figure 5.9
The price earnings ratio (PER) reflects the profitability of a company relative to the market price of its shares (Gaffikin, 1993; Kieger et al., 1984). Semen Gresik had the best, stable and relatively high PER compared to its competitors. On average, for the duration of 1993-2000, Semen Gresik’s PER was 19.82. As their EPS were negative, Indocement dan Semen Cibinong’s PER were also negative in the period 1997-2000, except in 1999. Between 1993 and 2000, the average share price of Semen Gresik, Indocement, and Semen Cibinong was Rp. 7,340.00, Rp. 5,883.00, and Rp. 3,167.00 respectively.
In brief, the overall financial performance of Semen Gresik, during the period 19932000, was better than that of its competitors, even though this company faced the burden of debt. 5.2.5 Government regulation and the Indonesia Cement Association (ASI)
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The other important aspects related to this industry are government regulation and the industry association. Government regulation in this industry has been changed overtime, ranging from heavy intervention to liberalisation (Plunkett et al., 1997; LSPEU, 2001). The regulation can be traced back to the mid 1970s when the domestic demand for cement was booming and domestic production could only supply less than 50 per cent of the demand. Hence, the price increase and cement imports were unavoidable. To control cement availability and distribution, the Minister of Trade intervened and issued a Decision Letter on “Supplying and Distribution of Cement” (Pengadaan dan Penyaluran Semen) (Surat Keputusan (SK) No. 05A/Kp/I/74, dated 15 January, 1974). The messages of this regulation are as follows: 1.
The government [Minister of Trade] determines the supplying and distribution of cement. 2. The government sets suppliers. 3. The Minister of Public Works prepares cement consumption plan and submits it to the Minister of Trade. 4. The Minister of Trade determines the importation of cement after consultation with the Minister of Industry. (ASI, 1994, p. 18, cited in LSPEU, 2001, pp. 107-108, my translation) Following the above regulation, the Ministry of Trade issued another decision letter, SK No. 49/Kp/II/74 dated 6 February, 1974, which elaborated in detail on several aspects of the previous decision. The suppliers, importers, price, as well as the distribution area were determined. Under these regulations, the government practically controlled every aspect of the cement industry from production and pricing to distribution (LSPEU, 2001, p. 108).
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On pricing, the government regulated the cement price by setting the upper level of the price known as the highest retail price (Harga Eceran Tertinggi [HET]). Initially, the HET was set at Rp. 1,650.00/40 kg. sack, and it was applicable to all regions of the country. However, it was then revised in 1976 after considering the distance between the manufacturing plant and the sales area. The adjusted price for the nearest market to the manufacturing plant (Sumatra, Java, Bali and South Sulawesi) was Rp. 1,375.00/40 kg. sack, while the price for other areas was set at Rp. 1,650.00 (LSPEU, 2001, p. 113; Plunkett et al., 1997, p. 87). In 1979, the HET was replaced by what was entitled the local standard price of cement (Harga Pedoman Setempat [HPS]). Unlike the HET, the HPS was only applicable in the capital of the province and its surrounding areas within the limit of 100 km. Interestingly, there was no penalty for companies that breached this price cap (SG, 2001, p. 57). The HPS has since been changed overtime, for a variety of reasons; however, there was certainly a tendency for a continuous price increase from time to time with the exception of one case (Table 5.6). Price regulation was finally wiped out in November, 1997, in conjunction with market liberalisation imposed by the IMF (SG, 2001, p. 58; LSPEU, 2001, pp. 122-23). This dramatic change became established through the issuance of the Minister of Trade decision No. 403/MPP/KEP/11/1997 which revoked the previous regulation on local standard price (Ibid., p. 123). Currently, the price of cement in the market is around Rp. 25,000.00 – Rp. 29,500.00/40kg sack (Cement Market Research, 2003 [unpublished report]). 187
Table 5.6 Local Standard Price of Cement (HPS)
Please see print copy for Table 5.6
Another heavy regulation was that concerning the distribution of cement. In 1974, following the issuance of SK No. 05A/Kp/I/74, the distribution of cement focused on dividing Indonesia into seven regions. In 1979, this regulation was modified and tightened following the issuance of SK No. 318/KP/IV/1979 on cement’s business arrangements (Tata Niaga Semen). Under this new rule, the government set the allocation of the cement market in each region to be tied to production capacity, they determined that the transportation of cement be handled by another government department. Similar to price regulation, this distribution regulation was also finally discharged in November, 1997 (LSPEU, 2001, pp. 108, 114, 123). 188
The other non-state ‘regulator’ of this industry was the cement industry association. Supported by the government, the Indonesia Cement Association (ASI) was established on 7 October, 1969 with the objective of [p]romoting cooperation among its members in developing the cement industry in Indonesia, in particular in such aspects as production, marketing, technology, quality, research and development and other relevant matters of common interest. (ASI, 1999, p. 2) Comparable to that in other countries, ASI’s members are cement industries in the country.28 While such particular objectives had been determined, the ASI also had other roles. In the 1970s, in co-operation with the government, the ASI allocated a market segment and its related quota for each member, although this was not strictly imposed and there was no penalty for a member who breached the agreement. In the 1980s, when the industry had extra capacity, the ASI, in co-operation with the Department of Industry provided a recommendation to the Minister of Trade about export quota for its members. After the government regulation was discharged in 1997, the ASI’s role was diminished. Up until now, the market mechanism has been in place, and this industry will be under the surveillance of the Commission for Competition Surveillance (Komisi Pengawas Persaingan Usaha (KPPU)) as mandated under the Antitrust and competition law (Undang-undang tentang Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat) No. 5/1999.
28
Comparable association of cement industries can be found in many countries around the world such as the Canadian Portland Cement Association, the Cement Industry Federation (Australia) and the Cement and Concrete Association of Australia, the Cement and Concrete Association of Malaysia, and the British Cement Association.
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5.3 PT Semen Gresik (Persero) Tbk. 5.3.1 The genesis of public enterprise PT Semen Gresik (Persero) Tbk. was initially institutionalised as NV Pabrik Semen Gresik by deed of Notary Raden Meester Soewandi No. 41, dated 25 March, 1953 (SG, 1995, p. 30), with its first Director Ir. Ibrahim bin Pangeran Mohammad Zahier (SG, 1980, p. 18). This company was built in Gresik, about 20 kilometres29 to the North of Surabaya, the capital city of East Java Province. The pioneering work in building this company was carried out through a geological study conducted by Ir. Van Es from the Geological Bureau of Bandung (Jawatan Geologi Bandung) in 1935-1938. On his report, Hoofdgeologish Technische Onderzoekingen, Van Es disclosed that there were substantial deposits of limestone in Gresik. Unfortunately, the discovery could not be followed by the establishment of a manufacturing plant because of the World War II. (Ibid., p. 18) The project became a reality after the independence of Indonesia. Initiatited by Vice President Mohammad Hatta, another extensive geological study was conducted by two Germany researchers, F. Laufer and A. Kraeff, of the Mining Bureau (Jawatan Pertambangan). In 1951, a report of this study entitled “Result of Investigation by Core Drilling of the Pliocene Limestone near Gresik” was published. The research findings support Van Es’ discovery, and the report recommended that a manufacturing plant could be built in Gresik. It was estimated that if this manufacturing plant was built with
29
Bagian Hubungan Masyarakat Sekretariat Daerah Kabupaten Gresik (2000), Selintas Hasil Pembangunan Kabupaten Gresik Tahun 2000, Gresik, p. 11.
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250.000 tonnes capacity a year, it could have approximately 60 years of economic life. (SG, 1987, p. 6; SG, 1980, p. 18)
As described in Semen Gresik dan Perkembangannya (1980, pp. 18-20), NV Pabrik Semen Gresik was built by the government of Indonesia through the State Bank Industry (Bank Industri Negara [BIN]) (Glassburner, 1960, as cited by LSPEU, 2001, pp. 71-78). The plant cost about US$14.5 million. It was funded by the state and a loan from Exurban, the US (30 Tahun Semen Gresik, 1987, p. 5). After a series of trial operations of its manufacturing facilities, NV Pabrik Semen Gresik was officially launched by the President of the Republic of Indonesia, Ir. Soekarno, on 7 August, 1957. (SG, 1991, p. 6)
The manufacturing plant of this company can be said to have been ‘made in the US’ because its consultants, manufacturing designers/planners, and contractors were from US’ based corporations. The US’ corporations involved in building the manufacturing plant for NV Pabrik Semen Gresik were White Engineering (consultant), MacDonald Engineering Co., G.A. Anderson, and H.K. Ferguson Company (manufacturing designers/planners), and Morrison Knudsen International/MKI (contractor). (SG, 1980, p. 19; 1987, p.5) In line with this early development of Semen Gresik, strategic initiatives were employed. Considering that one way of having success for managing the company would be the availability of qualified human resources, two important programs were 191
instigated. First, the government sent Semen Gresik’s staff to pursue higher degrees or training in foreign countries. Under this program, twenty five staff members were sent to study in the US and Canada. Twenty-two of them were sent to the US with an ICA’s (International Cooperation Administration) scholarship, and the rest were sent to Canada with scholarships from the Colombo Plan (SG, 1980, p. 20; 1987, p. 5). Second, the government hired foreign staff to work in this company but with a certain predetermined conditionality. The fundamental conditionality was that during their leadership, they must educate local staff to assume responsibility when their contract expired (Hatta, 1970 cited in Hatta, 1985, p. 83). The latter can be seen as a soft technological transfer that proved beneficial when an Indonesian assumed responsibility for managing the company. From an ownership perspective, SG had passed through four important periods including (1) a period as an NV, (2) an era as a Perusahaan Negara (PN), (3) an episode as a state-owned limited liability company (PT Persero), and (4) a phase as a stateowned limited liability company (PT Persero) and a public company. The first period was from 1953 to 1960 in which NV Pabrik Semen Gresik was indirectly owned by the government through its state-owned bank, the State Industry Bank (BIN). As a subsidiary of BIN, SG had to follow BIN’s policies and strategies. SG, for example, was to focus on production while the marketing and distribution of cement was handled by NV Usaha Industri Indonesia (NV USINDO), another BIN’s subsidiary (SG, 1980, p. 31; 1987, p. 12). The second transformation took place in 1960 when the government issued regulation No. 19/60. Under this regulation, 192
companies under government control were transformed into PN (Chapter 4, Section 4.2.2). Following this new regulation, NV Pabrik Semen Gresik became PN through the issuance of government regulation No. 132/1961 dated 17 April, 1961. This change led SG to come under the direct ownership of the Government of Indonesia (SG, 1995, pp. 30-32). Another transformation of SG took place in 1969, following the issuance of Law No. 9/1969 (see Chapter 4, Section 4.2.3) in which SG was transformed from PN to Persero. While the government introduced this new regulation, it is noted that Semen Gresik was the first PN that proposed to change its status to Persero. Led by its President Director, Ir. Sotion Ardjanggi, this company initiated such a proposal for a few important reasons, one being to attract foreign investors and to maintain the SG position as the leader in the cement industry as well as to sustain its role as the driving force for similar industries and other related industries. However, improving the attractiveness of SG to foreign investors could be seen as the fundamental reason of such a proposal, since SG needed new investment to support its plan for expansion in Cibinong (Laporan Tahunan PT Semen Gresik 24 October, 1969 – 31 March, 1971, p. 2, cited in LSPEU, 2001, p. 102). Finally, in June 1969, the government approved the proposal by issuing PP No. 19/1969 to change the status of SG from PN to Persero (LSPEU, 2001, p. 103). There was essentially no change of ownership from this transformation. The fourth era of SG was as a state-owned limited liability enterprise (PT Persero) as well as a public company. This mixed status started when SG was listed on 193
the Jakarta Stock Exchange (JSX) and Surabaya Stock Exchange (BES) in 1991. Through the initial public offering (IPO), the government of Indonesia sold 26.97 per cent of its stake to the public, while maintaining itself as the majority shareholder (SG, 1995, pp. 32-33). Two further changes in ownership structure took place in 1995 and 1998. In 1995, a rights issue as well as another partial divestment was completed. Subsequently, the government retained 65 per cent of its stake at SG, while the public held 35 per cent (SG, 2001, p. 26). In 1998, the government initially intended to sell its majority stake, but it was modified because of controversies and opposition. These issues will be discussed thoroughly in Chapter 6. 5.3.2 Production capacity and expansion The development of the SG manufacturing plant and its installed production capacity was a gradual process. SG was built with an initial installed production capacity of 250,000 million tonnes per year, and this has increased to 17.25 million tonnes of capacity per year. Expansion in order to increase installed production capacity was done in 1960-1961, 1970-1972, 1976-1978, 1991, 1995, and 1995-1997. The first expansion was planned to increase the installed production capacity from 250,000 tonnes to 375,000 tonnes a year, and this was completed in 1961. The second expansion was planned to increase capacity to 500,000 tonnes. This began at the end of 1970 and was completed in 1972 and was officially launched by the President of the Republic of Indonesia, Soeharto, on 10 July, 1972 (SG, 1991, p. 7). There were two sources of financing for this expansion: debt financing from USAID (US$5.8 million), and government capital investment (Rp. 800 million). At the same time SG also signed 194
a joint-venture’s agreement with Kaiser Cement/IFC, US, to build the Semen Cibinong project30 that cost US$42 million. The shared capital of these two companies was 35 per cent and 65 per cent respectively. (LSPEU, 2001, p. 104) The third expansion initiated in 1976 and was completed at the end of 1978. Unlike the previous manufacturing plant that had been built based on wet processing technology, the new manufacturing plant used dry processing technology. This new technology is beneficial as it improves operational efficiency especially in the utilisation of energy. It is also environmentally friendly because it uses tools to reduce air pollution (SG, 1987, pp. 31, 33). The new manufacturing plant, known as Gresik’s Unit II plant, had an installed capacity of 1 million tonnes. This expansion led SG to have 1.5 million tonnes of capacity. The fourth expansion took place in 1991. At this time SG built a new manufacturing plant in Tuban31 with an installed capacity of 2.3 million tonnes. At the same time, SG optimised its Gresik’s Unit II plant, and this added further 300,000 tonnes of capacity. After the completion of these projects, SG had 4.1 million tonnes of installed production capacity. The Tuban manufacturing plant and the optimisation of Gresik’s Unit II plant was financed through the proceeds of the company’s IPO in 1991. This expansion marked a new milestone. First, unlike the development of the previous manufacturing plant that had depended on foreign experts, the planning and construction of the Tuban manufacturing plant was fully done by SG’ engineers (LSPEU, 2001, p. 30
The Semen Cibinong project was built with strategic consideration, because the location has significant raw material deposits and is near the potential market DKI Jakarta and West Java.
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234). Second, prior to the expansion, SG implemented a strategic policy to improve energy efficiency by converting from oil to coal. According to the President Director of SG, Ir. Setiadi Dirgo, this conversion increased operational efficiency by reducing 40 per cent of energy costs and it saved company production costs up to Rp. 5 billion a year (Suara Karya, 14 July 1987, cited in SG, 1987, p. 91). The fifth expansion took place in 1995 through the acquisition of Semen Padang and Semen Tonasa. This acquisition was funded from the proceeds of SG’s right issue and partial divestment in 1995. At the time of acquisition, SP and ST had 3.27 million tonnes and 1.18 million tonnes of capacity respectively. This acquisition led SG to have 8.55 million tonnes of capacity (SG, 1995, pp. 8, 101, 123). After this consolidation, further rapid expansion has been carried out between 1995 and 1997 by expanding Tuban manufacturing plant (Tuban II and III projects), Semen Padang’s manufacturing plant (Indarung V project), and Semen Tonasa’s manufacturing plant (Tonasa IV project). As a result of this agresive expansion, Semen Gresik Group has 17.25 million tonnes of capacity and took the leading position in the cement industry, regaining it from Indocement which has 13.2 million tonnes of capacity. The development of SG’s installed capacity and production is presented in Figure 5.10.
31
Tuban is another municipality in East Java, about 80 km from Gresik.
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Figure 5.10 SG: Installed Capacity and Production
Please see print copy for Figure 5.10
5.3.3 Utilisation The mean of SG’s utilisation rate for the years 1986-2001 was 81.40 per cent, while the highest utilisation rate was achieved in 1991 (96.90 per cent) and the lowest one occurred in 1998 (57.94 per cent). The average utilisation rate of SG for the period 1992-2001 was 78.54 per cent, and this was better than that of the cement industry in this country, which was only around 76 per cent. The crisis had a severe impact on the demand for cement since the infrastructure development was partially halted. However, such an impact was only for a short period of time and recovery was soon underway. SG’s utilisation rate steadily increased during the period 1999-2001, from the lowest utilisation of 57.94 per cent in 1998 to 82.99 per cent in 2001, or an average growth of around 8.35 per cent, higher than that of the cement industry in this country, which was only about 5 per cent. 5.3.4 Production process 197
Basically there are two types of cement production processes in this company: wet processing and dry processing. In wet processing, water is used to mix the cement’s raw materials while the opposite logic is utilised in dry processing. In the latter, the cement’s raw material is dried up to reduce water content to a minimum level. Dry processing is more efficient and environmentally friendly than wet processing. Since “cement production is an energy-intensive process” (Plunkett et al., 1997, p. 77), dry processing has recently gained more acceptance while wet processing has been abandoned. SG’s first manufacturing plant and its expansion in the 1960s and early 1970s were built on the basis of wet processing technology, while the plants that were built in 1976 onward used dry processing technology. In 1995, SG’s wet processing plants were dismantled. Following the adoption and implementation of the Environmental Management System, SG gained an ISO 14001 certificate from SGS Yarsley International Certification Limited (SG [Annual Report], 2001, p. 6; SPSG, 2002a, p. 4). The dry processing of cement production in this company is presented in Appendix 5.4. 5.3.5 Types and characteristics of products SG Group produces seven types of cement including OPC (Ordinary Portland Cement/Type I Portland Cement), Type II Portland Cement, Type III Portland Cement, Type V Portland Cement, OWC (Oil Well Cement), SMC (Super Masonry Cement) and PMC (Prima Mixed Cement), and PPC (Portland Pozzolan Cement). 198
Among these types of cement, OPC/Type I Portland Cement is the main type of cement produced by the company. Each type of cement has special characteristics and purposes as depicted in Appendix 5.5. All of the aforementioned types of cement are basically produced by the same process, but with a different composition of raw materials. Quality assurance has been well maintained throughout the production process. For example, the XRF Spectrometer PW 1260 and 1660 are intensively used for the quality control of the Gresik Plant and X-Ray spectrometer type ARL 8660, 86605 (TCA) and 9800 (TCA) for the Tuban Plant (ASI, 1999, p. 23). As a result SG’ products comply with Indonesian Industrial Standards (SII) as well as the American Standard for Testing Materials (ASTM) (Appendix 5.5). Quality assurance is essentially part of the implementation of quality management in this company which was recognised and certified by SGS’ ISO 9002 on 29 May, 1996 (SPSG, 2002a, p. 2). 5.3.6 Sales and market share The average of SG’s domestic sales from 1986 to 2001 was more than 92 per cent and the rest was exported. However, the domestic sales trend decreased considerably decrease in recent years. Domestic sales were 100 per cent in 1986, decreasing to 82.96 per cent in 1998, and 73.85 per cent in 2001. The lowest domestic sales took place in 1999 which was 67.01 per cent (Semen Gresik, various unpublished reports). One of SG’s main domestic markets was East Java; however, recent trends show that SG’s share in this market has tended to decline. At the beginning of the 199
1980s, SG’s market shares in East Java was around 80 per cent, but it declined to about 60 per cent by the beginning of the1990s (LSPEU, 2001, pp. 115, 124). It is not uncommon for the cement industry to sell its product to the market nearest to its main manufacturing plant because the transportation costs for cement are expensive. A higher profit would be expected for such a strategy. SG has consistently exported its products since 1995 after its acquisition of Semen Padang and Semen Tonasa. There was a similar insignificant volume of exports in 1988 and 1989 being less than 0.5 per cent of the total sales volume. In 1995, SG’s exports were still less than 1 per cent, but this figure progressively increased and achieved a peak in 1999 of 33.99 per cent or 4,175,419 tonnes. The mean of exports between 1995 and 2001 was around 16 per cent. It was primarily contributed to by Semen Padang, one of SG’s subsidiaries. SP, traditionally, exported more than 20 per cent of its sales even before the takeover by SG. On average, SP contributed more than 65 per cent of SG’s exports. Semen Tonasa has also made a contribution to the export performance of SG. Since 1997, ST has contributed about 16 per cent of the total exports of the SG group. The recent progressive development of SG’s exports has developed because of the sluggishness of the domestic market during the crisis, and possibly also because of the supporting role of SG’s new investor. The trend of production capacity, domestic sales and exports of SG is presented in Figure 5.11. In terms of its market share in the industry, SG experienced a short period of fluctuation although overall its market share was steadily increasing. SG’s market 200
share in the industry has fluctuated in a short period of time, but overall its market share steadily increased. SG’s market share rose from 9.2 per cent in 1991 (ASI, 1994, cited in LSPEU, 2001 p. 120) to 22 per cent in 1995 (LSPEU, 2001, p. 242), and 44 per cent in 2000 (SG [Annual Report], 2001, p. 18) 32.
Figure 5.11 SG: Installed Capacity, Domestic Sales and Exports
Please see print copy for Figure 5.11
In 1997-1998, even though SG sales volume decreased by 10.73 per cent from 11.52 million tonnes in 1997 to 10.29 million tonnes in 1998, SG’s market share still gained an increase of about 5 per cent. The trend of SG’s and the industry’s cement sales volume is presented in Figure 5.12.
32
Unpublished data from SG showed higher market shares: 53 per cent in 1999 and 51.97 per cent in 2001 (field study). In the 1980s, Indocement had around 35.33 per cent of market share and SG had only 15.42 per cent (ASI, 1994, cited in LSPEU, 2001 p. 120). SG’s market share in 2002 was estimated 43.8 per cent whilst Indocement and Semen Cibinong had 32.4 per cent and 13 per cent respectively (Warta Ekonomi, 2003, No.14/XV/16 July, pp. 22-23).
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Over the last two years, SG’s export volume rose 4.2 per cent from 3,811,151 tonnes in 2000 to 3,972,068 tonnes in 2001. Sales in rupiah also grew by 17.7 per cent as a result of both a volume and price increase. Figure 5.12 SG: Market Share
Please see print copy for Figure 5.12
In 2001, SG’s net sales were Rp. 4,659,203 million, a climb of about 29.6 per cent from the sales in 2000 (SG [Annual Report], 2001, p. 19). SG sold more than 85 per cent of its products in bags of 40 and 50 kilograms using trucks, trains, and ships as its main method of transportation. It has been affirmed that SG is still leading in this market (Cement Market Research, 2003). 5.3.7 Management of SG and its accountability The management of SG and its accountability has basically evolved following the change in government regulations related to state-owned enterprises as 202
well as its article of association. The current organisational structure of Semen Gresik is presented in Appendix 5.6. In reply to my enquiry about management accountability, Cholil Hasan, the Director of Finance of Semen Gresik, explained as follows: [i]n managing a company, management has to follow the company’s articles of association, internal rules of association and other duties that have been decided by the shareholder’s annual general meeting… (Gresik, 8 May, 2002) (my translation). Hasan’s statement is basically derived from the Articles of Association of Semen Gresik33. The articles of association state that [i]n managing the company, the Board of Directors must fulfil their tasks in accordance with the Articles of Association, Annual Shareholders General Meeting’s decisions, and Program Planning and Budgeting of the company (verse 14)…[and] all Board’s actions, that are not in accordance with the Articles of Association, are not legitimate. (article 12, verse 12) (my translation) Even though it is not spelled out that the Board of Directors is accountable to the Annual Shareholders General Meeting (Rapat Umum Pemegang Saham/RUPS), the Boards are appointed and discharged by the RUPS (article 11, verse 4). A comparable case was that of the Board of Commissioners, but in the latter it was explicitly stated that the commissioners are accountable to the RUPS (article 14, verse 4). It can be said that the highest power is held within the RUPS34, and both the Board
33
The source of this discussion is the Articles of Association of Semen Gresik that was published in SG, 2001, pp. 182-200. 34 According to the Articles of Association, RUPS held the highest power in the company, but part of RUPS’ authority has been delegated to the Board of Commissioners. The RUPS which held on 28 June, 2002 in the Shangri-La Hotel, Jakarta, had the following agenda (1) presentation of the
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of Directors and the Board of Commissioners are accountable to the RUPS. The duties and authorities of the Board of Directors are outlined in article 12, verses 1-14. The main general tasks of the Board are as follows: …the main tasks of the Board of Directors are (a) to lead and to manage the company in pursuing the objectives and goals of the company. [and] (b) to control, look after, and administer the wealth of the company. (article 12, verse 1) The tasks and responsibilities of the Board of Commissioners are delineated in article 15,
verses 1-14. Generally, the tasks of commissioners are to represent the company’s shareholders in supervising the Board of Directors. The Board of Directors are responsible for presenting an annual report that consists of an audited balance sheet and income statement and other relevant reports on a yearly basis. This report is submitted to the Board of Commissioners to be evaluated. These reports are presented to the RUPS. It should be done no later than 5 months after the end of the accounting period. The balance sheet along with the income statement must also be published in a national newspaper as well as a local newspaper within 120 days of the closing accounting date (article 17, verses 1-6). The fundamental message from the Articles of Association is that the boards’ primary accountability is to shareholders (cf., Chwastiak and Young, 2003). In addition, there is also another type of accountability entitled as accountability to the
performance report by the Board of Directors for the year of 2001, (2) the ratification of the balance sheet and profit and loss statement for the year of 2001, (3) the determination of dividends to be distributed for the year 2001, (4) the selection of a public accountant, and (5) the decision on remuneration for the Board of Directors and the Board of Commissioners.
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stakeholders. Cholil Hasan discloses two primary concerns of this type of accountability including accountability to general public entitled as community development, and accountability to employees. He explains as follows: … [c]ommunity development is another type [of accountability to] stakeholders …. [for example] the company set aside a certain percentage of profit to assist small business as required by the central government… (emphasis added) … [for our employees], the company develops career track planning ... [as well as] improves employee welfare … (Gresik, 8 May, 2002) (my translation). Regrettably, community development is only peripheral to the notion of management accountability, and perhaps it may not be the concern of the management if the government does not mandate it. On the accountability issue, Tjipto Sumarsono, the President of the Semen Gresik Employee Union (Serikat Pekerja Semen Gresik (SPSG)), points out that … [SG] is a public company…[hence] accountability [both] to shareholders and stakeholders has been done in accordance with the rules that have been set up by the BAPEPAM, the Jakarta Stock Exchange (Bursa Efek Jakarta), etc. ... (Gresik, 27 May, 2002) (my translation). The accountability of the company to its stakeholders has been favourable especially through its community development program. It has been confirmed by Suryono, the Deputy II for Economic and Development of the local government of Gresik and Haeny Relawati, Mayor (Bupati) of local government of Tuban.
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In response to my question on the role of industry in general, as well as Semen Gresik in particular, Suryono stated that …[t]here is an indirect role by the companies through community development, [for example] contribution to the society activities [in sports, cultural activities, etc]. From Semen [Gresik] … there is an indirect contribution such as [payment] of [different type of] tax … (Gresik, 28 May, 2002) (my translation) While Haeny explained that … last year [2001] we collected 7 billion [rupiah] of community development both in terms of material and non material development… [such as] through the development of roads … (Tuban, 18 June, 2002) (my translation) Meanwhile Suyoto, Rector of Muhammadiyah University of Gresik, suggested that a more tangible program that benefit the people of Gresik should be developed such as in the area of education, health, and welfare. He pointed out that … [as] Gresik’s people had long been on the receiving end of this company through pollution, the degradation of environment etc., we suggest more tangible programs and contributions [such as] … [improvement] in health services … priority [should be given to] Gresik people on personnel recruitment … synergy in educational resources [between the company and the university] … research partnership … student internship … (Gresik, 28 May, 2002) (my translation). The most crucial point about management accountability is its relationship to central government. Formerly SOEs have had many links of accountability in relationship with government departments (Mardjono, 1992) which recently have been
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simplified in concurrence with the establishment of the Ministry of SOEs (see Chapter 4).
5.3.8 Subsidiaries, Affiliations and Supporting Institutions Semen Gresik has been growing into a giant company with several subsidiaries, affiliations and supporting institutions. The subsidiaries and affiliations are linked to the core business of SG, while the supporting institutions have been established to extend SG’s role in society through its community development programs. Semen Padang and Semen Tonasa are SG’s main subsidiaries that produce similar products, while PT Kawasan Industri Gresik, PT Industri Kemasan SG and PT Varia Usaha are examples of the company’s affiliations. Finally, the supporting institutions of Semen Gresik are varied, from employee cooperatives, public hospital, education institutions, and a pension fund (SG [Annual Report], 2001, pp. 91, 99-100). The subsidiaries, affiliations and supporting institutions of SG are depicted in the Appendix 5.7. 5.4 Summary Cement is a building material that was utilised in the civilisations of Assyria, Babylonia, Egypt, Greece and Rome. It was re-engineered and then patented by Joseph Aspdin in the UK in 1824. Currently, the cement industry worldwide is operated on a oligopoly market structure in which few MNCs have had dominant roles. The worldwide production capacity of this industry is estimated to be around 2,000 million tonnes per annum. 207
In Indonesia, the cement industry was initially developed in the era of Dutch colonialisation through the establishment of NV Nederlands Indische Portland Cement Maatschappij, in Padang, West Sumatra, in 1910. This was followed by the establishment of NV Pabrik Semen Gresik in 1957. The private sector entered this business in the 1970s. Presently, there are seven major business players in this industry with a total installed production capacity of 46.67 million tonnes per year. Among the players are PT Semen Gresik (Persero) Tbk., PT Indocement Tunggal Prakarsa, Tbk. and PT Semen Cibinong, Tbk. These three companies control more than 90 per cent of the installed production capacity of the industry. Beside their position as leading companies, these three giant enterprises have been increasingly faced and trapped by the burden of debt. Following the 1997/1998 crisis, Indocement was taken over by Heidelberger and Semen Cibinong was acquired by Holderbank/Holcim, while about a quarter of the Semen Gresik stake was bought by Cemex. In general, the financial performance of Semen Gresik has been better than that of Indocement and Semen Cibinong. From an ownership perspective, Semen Gresik had passed through four important periods including (1) a period as an NV, (2) an era as a Perusahaan Negara (PN), (3) an episode as a state-owned limited liability company (PT Persero), and (4) a phase as a state-owned limited liability company as well as a public company which is also known as Persero Terbuka (UU BUMN 19/2003, Chapter I, article 1, verse 3). The first period was from 1953 to 1960 in which NV Pabrik Semen Gresik was 208
indirectly owned by the government through its state-owned bank, the State Industry Bank (BIN). The second transformation took place in 1960 when the government issued regulation No. 19/60. Under this regulation, companies under government control were transformed into Perusahaan Negara (PN), and NV Pabrik Semen Gresik was transformed into PN Semen Gresik through the issuance of government regulation No. 132/1961 dated 17 April, 1961. This change led SG to come under the direct ownership of the Government of Indonesia (SG, 1995, pp. 30-32). Another transformation of SG took place in 1969, after the government issued PP No. 19/1969 which changed the status of SG from PN to Persero (LSPEU, 2001, p. 103). This status change was to follow the issuance of Law No. 9/1969 which addressed the conversion of PN into Perjan, Perum and Persero (see also chapter 4, section 4.2.3). There was essentially no change of ownership from this transformation. The fourth era of SG was as a state-owned limited liability enterprise (PT Persero) as well as a public company. This mixed status started when SG was listed on the Jakarta Stock Exchange (JSX) and Surabaya Stock Exchange (BES) in 1991. Through the initial public offering (IPO), the government of Indonesia sold 26.97 per cent of its stake to the public, while maintaining itself as the majority shareholder (SG, 1995, pp. 32-33). Two further changes in ownership structure took place in 1995 and 1998. Semen Gresik has grown to be the biggest cement enterprise in Indonesia after the acquisition of Semen Padang and Semen Tonasa in 1995 and further rapid expansion in the 1990s. Its installed production capacity has grown from 250,000 209
tonnes in its inception to 17.25 million tonnes at the present day. In terms of its market share in the industry, SG experienced a short period of fluctuation even though in overall terms its market share was steadily increasing. SG’s market share has progressively risen from 9.2 per cent in 1991 to 22 per cent in 1995, and 44 per cent in 2000. Most products have been sold in the domestic market, and the mean of SG’s domestic sales from 1986 to 2001 was more than 90 per cent and the rest was exported. Among the primary domestic market was in East Java, the region closest to the manufacturing plant of SG. However, in recent years SG’s market shares in East Java has tended to decline from about 80 per cent in the beginning of the 1980s to about 60 per cent by the beginning of the1990s. Finally, despite such a performance, SG has also been facing financial difficulties because of a tendency for higher debt since 1992.
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CHAPTER 6
PRIVATISATION OF PT SEMEN GRESIK (PERSERO) Tbk.: EVIDENCE AND CONTROVERSIES Ownership change is the shareholders’ action. Privatisation is the owners’ business. (Cholil Hasan, Director of Finance, SG, Gresik, 8 May, 2002) (my translation) … we eat corn1 again is not a problem, as long as [we] still have dignity, as long as [we] are not colonialised again …’ (N, an employee of SG, Gresik, 22 May, 2002) (my translation) 6.1 Introduction In the previous chapter, the profile of SG was presented. Whilst SG has been a general story of success, it has recently faced the burden of debt. In the private sector, such a case could drive a company into the risk of bankruptcy or a hostile take over as has been the experiences of Indocement and Semen Cibinong. In the case of stateowned enterprises, the burden of debt provides a signal to necessitate government’s capital participation in the near future as the debt mounts. However, financial difficulties faced by the state would likely reduce the possibility of government’s capital participation and increase pressure for privatising the companies. SOEs in Indonesia, as presented in chapter 4 section 4.3.2, face the burden of debt. The mean of DTA for the period 1992-1997 was 72.22 per cent, while the average DER was more than 262 per cent (Figure 4.4). Semen Gresik has a similar problem. In 1993, the DTA of Semen
1
Corn is the daily main food associated with low-income peoples in rural areas. In the early years of independence until the 1960s, corn and cassava were the main courses for Indonesian of low income in rural areas of Java Island. Such expression reflects the readiness to live in misery.
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Gresik was only 29 per cent and this reached 64 per cent by 2001 (Chapter 5, Table 5.3 and Figure 5.4). Although such a debt-laden company increases the possibility for privatisation, justification of SG’s gradual divestments in 1991, 1995, and 1998 are not based on this fundamental problem. The first and second partial divestments were completed on the basis of comparable motives, while the third divestment was carried out on the basis of different justifications. The first divestment of SG in 1991 was considerably successful, but the other two transactions, primarily the most recent effort to divest the state’s majority stake in this company sparked heavy opposition from the general public, locally and nationally, and raised a variety of controversies. This chapter, divided into six sections, attempts to discuss the privatisation of Semen Gresik. Following this introductory section (Section 6.1), the partial divestments of SG in 1991 and 1995 will be presented (Section 6.2). Subsequently, the divestment of SG in 1998 will be discussed (Section 6.3). This section will include several aspects of the divestment such as the government objective, the environment, the tendering process, Conditional Sale and Purchase Agreement (CSPA) and the put option, the outcome (proceeds, expenses, and implications), and a comparative performance before and after the 1998 divestment (Section 6.3.1 - 6.3.6). Section 6.4 will then discuss further controversies surrounding the divestment and will include the put option and the state’s potential loss, the privileges for the investor (MNC/Cemex), ‘tragic’ versus strategic alliance, and the national interest and sovereignty issues (Section 6.4.1 - 6.4.4). Subsequently, several relevant issues 213
will be presented (Section 6.5) and will include the importance of terms of reference and scope, shareholder vis-à-vis corporate action, Cemex and SG’s export performance, cartel and anti trust law, and the current developments (Section 6.5.1 6.5.5). 6.2 The divestment of SG in 1991 and 1995 The partial divestments of SG in 1991 and 1995 have almost similar motives and objectives. The first divestment was carried out to secure financial resources from the capital market. This divestment was completed in order to widen share ownership and its proceeds were utilised to fund expansion. The expansion included building a new manufacturing plant in Tuban2 and optimising Gresik’s Unit II plant (SG, 1991, p. 3). Securing financial resources from the capital market was considered unusual at that time. SG’s pioneering effort to do so was driven by the progressive vision of its President Director, Anang Fuad Rivai (LSPEU, 2001, pp. 228-32). This first divestment also coincided with the government’s intention to privatise some of its unsound SOEs (Chapter 4, Section 4.4.1), even though Semen Gresik was an exception since it was one of the profitable SOEs. In order to support its policy to privatise SOEs, the government issued a regulation (Peraturan Pemerintah [PP]) No. 55/1990 which consisted of general guidelines for SOEs that intended to go public (LSPEU, 2001, p. 236). At the same time, the management of SG arranged internal preparation and geared up lobbying for the government officials to speed up SG intentions to go public (LSPEU, 2001, pp.
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235-36). PP No. 55/1990 opened a window of opportunity for SOEs to obtain financial resources from society through the capital market, and Semen Gresik was the first SOE that initiated and took advantage of this opportunity. This partial divestment of SG marked the first privatisation of SOEs through the capital market in the country. The initial public offering (IPO) of this company was exercised subsequent to the approval from the Minister of Finance c.q. the Indonesian Capital Market Supervisory Agency (BAPEPAM). BAPEPAM issued a decision No. S-622/PM/1991 dated 17 May, 1991, to approve Semen Gresik being listed on the Jakarta Stock Exchange (JSX) and Surabaya Stock Exchange (BES) with an initial share price of Rp. 7,000.00. At this IPO, the government of Indonesia sold 26.97 per cent of its stake to the public, while maintaining its position as the majority shareholder (SG, 1991, p.3; 1995, p. 2). The second partial divestment of Semen Gresik was completed in 1995. Comparable to the previous divestment, expansion was also the main catalyst. A rights issue was pursued at this time concurrently with the selling of about 8 per cent of the government stake in SG. The rights issue scheme stated that every holder of one existing share had the right to buy three new shares; hence, the existing interest might be diluted up to 75 per cent if the shareholders did not purchase the right. After this rights issue, the public owned 35 per cent while the government preserved 65 per cent ownership of SG (SG, 1995, p. 3; 2001, p. 26). Most (74 per cent) of the
2
Tuban is another municipality about 80 km north-west of Gresik.
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proceeds of the rights issue were utilised to acquire 100 per cent of the government’s shares in Semen Padang and Semen Tonasa (SG, 1995, p. 5). The acquisition of Semen Padang and Semen Tonasa was a strategic expansion of Semen Gresik, since Semen Padang and Semen Tonasa controlled 3.27 million tonnes and 1.18 million tonnes of installed capacity respectively; as a result it led SG to have 8.575 million tonnes of capacity (SG, 1995, pp. 8, 101, 123). After this consolidation, further rapid expansion was carried out between 1995 - 1997 by expanding manufacturing plants in Tuban, Padang and Tonasa. As a result of these aggressive expansions, Semen Gresik had 17.25 million tonnes of capacity and took the leading position in the cement industry, regaining it from Indocement which had 13.2 million tonnes of capacity (see Chapter 5, Table 5.1). This also meant the strengthening of the role of the government in the cement industry since SG’s majority shareholder was the government of Indonesia. The highest installed production capacity had in turn led SG to control a higher market share, from 9.2 per cent in 1991 (ASI, 1994, cited in LSPEU, 2001 p. 120) to 22 per cent in 1995 (LSPEU, 2001, p. 242), and 44 per cent in 2000 (SG [Annual report], 2001, p. 18). Another motive of the consolidation was to maintain the state’s majority ownership at SG, while the state did not have to spend extra funding on the transaction, because at the time [of the rights issue in 1995], the government did not have resources to buy its rights, but it intended to preserve the majority stake in Semen Gresik; hence, it sold a 100 per cent of its ownership in Semen Padang and Semen Tonasa to Semen Gresik. (Kajian Dampak …, 2001, p. 3) (my translation) 216
A few aspects can be noted from this second partial divestment. First, transferring the government stake in SP and ST to SG seems just a common business transaction, but early rejection occurred from employees of Semen Padang because SP was a healthy company. It had never been in a loss situation and was the oldest cement firm in Indonesia. (Kajian Dampak …, 2001, p. 3) (my translation). In fact, SP was the oldest cement company in Indonesia (Chapter 5); however, according to its 1992-1994 consolidated reports prior to the transaction, SP’s profit continually declined from Rp. 46.5 billion in 1992, to Rp. 26.7 billion in 1993 and Rp. 13.6 billion in 1994 (SG, 1995, p. 221). Hence, the opposition’s argument seemed illegitimate. Perhaps, the more legitimate reason to reject the consolidation with SG was ‘uncertainty’ about the future of SP particularly related to the ‘how to govern SP after consolidation’. This became the concern of the local community since similar acquisition experiences in this region undermined such interests. The experience was on the acquisition of PT Tambang Batu Bara Ombilin (PT TBO) (West Sumatra) by PT Tambang Batu Bara Bukit Asam (PT TBA) (South Sumatra). After the acquisition, PT TBO was treated as a production unit of PT TBA, hence “the Minang (local) community felt the loss of their asset” (Kajian Dampak …, 2001, p. 3). A sense of the local community’s loss of ‘sovereignty’ was apparent in this case. It meant losing the power to lead and manage TBO independently, since, after the takeover, TBO was treated as a production unit of TBA. 217
This experience was used as a basis for solving the resistance in Semen Padang. The key aspect of the solution for SP that was derived from the TBO-TBA experience was the creation of an autonomous management for SP. This can be seen in the agreement that states that “after the acquisition, the business operation of SP will not be changed” (Kajian dampak …, 2001, p. 3). It meant that the management of SP and its policies would remain autonomous and unaltered. Consequently, an optimum synergy of the acquisition could not be fully achieved, especially from the perspective of SG’s management (Gapura No. 12/Th. III/1 April 2002; No. 13/Th. III/8 April 2002)3. This solution also created the seed for potential problems in the following years. Recently, there was a demand for the spin off of SP and ST from SG. The spin off demand was revealed at the same time as the recent policy to divest the state’s majority stake in SG to Cemex, a Mexico-based multinational cement producer and trader4. The demand for spin off seems to be also getting stronger after the recent efforts of SG to consolidate its business and alleviate its role as the holding company (Gapura No. 12/Th. III/1 April 2002; No. 13/Th. III/8 April 2002).
3
Whilst an optimum synergy might not be ‘fully’ achieved, there was evidence that the consolidation of these three companies produced some real benefits. In addition to the significant increase in the installed production capacity of SG (Group), the benefits were (1) to improve efficiency in reseach and development costs, (2) to strenghthen the financial position of SP, (3) to pave the way for rapid expansion of these companies, and (4) to increase market share. The latest was carried out through a specific marketing strategy in which each company was assigned to concentrate on the closest market to its manufacturing plants: Semen Padang in the west part of Indonesia, Semen Gresik in the central part of Indonesia, and Semen Tonasa in the east part of Indonesia. (LSPEU, 2001, pp. 128-29, 23844). 4 Cemex S.A. de CV is a multinational corporation based in Mexico. As a holding company, Cemex has subsidiaries around the globe. Among its subsidiaries is Cemex Asia Holding Ltd. The majority shareholder of Cemex Asia Holding is Chase Manhattan Trust Cayman Ltd. (88.48 per cent of ownership). (SG, 2001, pp. 33-34).
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The second aspect that related to the 1995 divestment was the government’s loss that was hardly considered a real loss. It was generated from selling 8 per cent of the state’s right to a syndication of managers (e.g., PT Bahana Securities, PT HG Asia Indonesia, HG Asia Inc.) (SG, 1995, pp. 3-4). The state’s ‘loss’ was about Rp. 625.00 for every right sold, or almost Rp. 30 million in total. This meant profit for the syndication managers. In addition, the syndication managers would also profit by more than Rp. 108 million from the transaction. Altogether, this transaction profited the syndication managers nearly Rp. 138 million or about 10 per cent of the total value of transaction5. From this case, it can be learnt that selling the government stake may result in the state’s loss or ultimately the general public’s loss, while the profits go to a few or certain parties involved in the process of privatisation (cf., LRD, 1983; Kernot, 1996; Quiggin, 2000/2001, pp. 42-43). The other important aspect of the divestment of SG in 1991 and 1995 concerned the impact on the employment in SG. Unlike several cases in the UK and Malaysia (Chapter 3) which showed the reduction of employees as well as deteriorating job conditions or the changing the nature of jobs after privatisation, the divestment of SG had a ‘positive’ impact on total employment in SG. Prior to divestment in 1991, the total number of employees of SG, excluding the employees of its subsidiary and supporting institutions, was 1,743 (SG [Prospectus], 1991, p. 13), and this figure increased to 2,059 in 1995 (SG [Prospectus], 1995, p. 38). 5
An estimate of the state’s ‘loss’ was (Rp. 3,275.00-Rp. 2,650.00) x 47,603,000 shares = Rp. 29,751,875,000.00; whilst an estimated of the syndication managers’ profit was {([Rp. 5,925.00-Rp. 2,650] x 47,603,000 shares) + Rp. 29,751,875,000.00} = Rp. 138,048,700,000.00. (SG, 1995, pp. 34).
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Increasing the number of employees in SG, particularly, was induced by the company’s expansion. As previously presented, most of the proceeds of the divestments in 1991 and 1995 were utilised to fund the expansion of manufacturing plants (e.g., Tuban III, Indarung V and Tonasa IV). When the expansions were executed, additional employees were needed to manage and operate the new manufacturing plants. This is parallel to Suwandi’s view that the key factors of increasing or decreasing number of employees were about the performance of the company. Good performance will lead to a company’s growth, and such growth will need funding either from creditors or from internal sources (e.g., retained earnings and/or divestments of company’s shares). Hence, selecting to divest rather than to borrow, can bee seen as a matter of strategy for getting resources. 6.3 The divestment of SG in 1998 The third and most controversial partial divestment of Semen Gresik was carried out in 1998. This divestment was intended, among others, to build a strategic alliance that could improve exports and preserve competitiveness (Master Plan Reformasi BUMN, 1998, p. 38). Initially, the government planned to sell 35-40 per cent of its stake in Semen Gresik through strategic sales (private/direct placement). If this original plan were executed, the fundamental change in SG’s ownership would take place, from the majority owned by the government to the majority controlled by the private sector. However, before the transaction went through, the government had to modify its plan because of opposition from the general public, such as from employees of Semen
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Gresik, Semen Padang and Semen Tonasa, local governments (executive and legislative), NGOs, and national political figures (e.g., Kajian Dampak …, 2001, pp. 34; Abeng, 2001, pp. 105-109). Under the modified plan, the government sold only 14 per cent of its stake to Cemex, the winner of the bid (Master Plan Reformasi BUMN, 1998, pp. 38, 65). In this transaction, the government signed a Conditional Sale and Purchase Agreement (CSPA) with Cemex. A clause of the agreement stated that the government had an option to further sell its shares to Cemex at a certain price (USD$1.38 plus 8.2 per cent premium a year) and within 36 months after the contract was signed (Kajian Dampak …, 2001, p. 15). The CSPA also consisted of a few other clauses such as a technical assistance agreement and an export assistance agreement. On the technical assistance agreement, Cemex agreed to “make the best effort” to give technical assistance on various aspects such as operational, technology, mining, the production process, the environment, worker safety, and training (Pernyataan…, 1998, p. 5). On the export assistance agreement, Cemex agreed to “make the best effort” to assist SG and its subsidiaries in improving their export performance through Cemex’s international distribution channels. According to this export assistance agreement, Cemex agreed that 1. in the first 12 months after the Export Assistance Agreement was signed, exports would be increased by a minimum of 1.5 million metric tonnes [equivalent to 1.653 million tonnes], [and] 2. exports would be boosted by a minimum of 4 million metric tonnes in 2001 [equivalent to 4.408 million tonnes] (Pernyataan..., 1998, p. 5) (my simplified translation) (cf., SG, 2001, p. 17) 221
However, the ‘liability’ of Cemex to boost SG’s export would be subject to “the international market conditions, the ability of SG to comply with international product specifications, and the availability of loading facilities in Indonesia” (Pernyataan..., 1998, p. 5, my translation). Subsequent to the transaction with the government of Indonesia, Cemex also purchased SG’s shares from the capital market and after these transactions were completed, Cemex controlled 25.53 per cent of SG’s interest (SG, 2001, p. 25). The change of SG’s ownership structure since the IPO until the end of November 1999 is depicted in the following Table 6.1. Table 6.1 SG: Change in Ownership structure (%), 1991-1999
Please see print copy for Table 6.1
Briefly speaking, since it went public in 1991 and further transactions in 1995 and 1998, SG has been transformed from a purely state-owned enterprise to a stateowned limited liability and public company, or Persero Terbuka (the term under UU BUMN [Law of SOEs] No. 19/2003), although the majority ownership still belongs to the government of Indonesia. 6.3.1 The government objective
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In September 1998, the government of Indonesia launched a formal and comprehensive privatisation program through the publication of the Masterplan of SOEs Reforms (Master Plan Reformasi BUMN). As previously described (esp. in chapters 1 and 4), privatisation is an element of SOEs’ reforms. Such reforms are part of the Macro Economic and Financial Policies (MEFP) of the Government of Indonesia, submitted to the IMF as a prerequisite for a financial loan from the agency. The general objectives of the reforms, as stated in the Masterplan of SOEs Reforms, are [t]o ensure continuous growth, efficiency, and profitability of SOEs toward economic recovery and achieving prosperity, as well as to improve the quality of service to consumers. (1998, p. 7) (my translation) In more detail, the plan stated that such reforms are addressed
to improve the state’s financial position through the improvement of SOEs’ revenues and the elimination/reduction of subsidies or other fund transfers from the state to the SOEs; to widen company ownership and strengthen the capital market; to redistribute wealth; [and] to privatise nearly all of the SOEs within a decade. (Master Plan Reformasi BUMN, 1998, p. 7) (my translation)
Under these reforms, SOEs will be forced towards achieving growth, efficiency and profit. Hence, achieving improvement of the SOEs’ (financial) performance is the cornerstone of the reforms. The improvement of the SOEs’ performance would be beneficial for the government because it would increase the contributions from SOEs in various ways (e.g., tax contribution and dividend) which in turn would relieve the 223
budget burden. The improvement of the SOEs’ performance would also increase the ‘price’ of the SOEs when these are being privatised, which in turn would increase the proceeds of privatisation. Besides such fundamental objectives, strengthening the capital market and the redistribution of wealth would also be achieved. In the case of Semen Gresik, the specific objective of the government is [to] preserve the future competitiveness of the company and its subsidiaries in domestic as well as in foreign markets (Master Plan Reformasi BUMN, 1998, p. 38) (my translation) Considering that the fundamental objective of SG’s divestment is to gain more access to foreign markets, a strategic sales or direct/private placement approach has been selected (Ibid., p. 38; Abeng, 2001, p. 109). Consequently, the intended strategic partner of SG would be selected from potential investors that have international market networks. 6.3.2 The environment Divestment of SG in 1998 was carried out in response to the 1997/1998 economic and financial crisis in Indonesia. The crisis has driven the country into turmoil. Massive civil disobedience and heavy demonstrations finally drove President Soeharto to step down after more than 30 years in power. Soeharto’s resignation is a sign of a transformation from the New Order era to a Reform era. The reform era is characterised by the spirit of transparency, accountability, democratisation, decentralisation, and the adoption of the Universal Declaration of Human Rights. These spirits influence the government policy on privatisation. 224
First, the adoption of the Universal Declaration of Human Rights through the issuance of UU No. 39/1999 (Undang-undang tentang Hak Asasi Manusia/Human Rights Law) lead to the recognition of freedom of expression and particularly freedom to form peaceful associations6. This is a catalyst to the establishment of employee unions in many companies both in the private companies and in the SOEs. Employee unions became a powerful movement that had never been imagined during the New Order era. They are critical of the government policy on privatisation. Semen Gresik Employee Unions (Serikat Pekerja Semen Gresik [SPSG]) is an example of employee union that is decisive to such a policy. SPSG was officially established in 26 February 1999, and currently has 2.342 members from 26 units of SPSG Gresik and 22 units of SPSG Tuban (Apa, Mengapa…, 2002, p. 1). The objective of SPSG is … to protect and to struggle for its members to have a freedom of uniting and improving the member’s welfare. [and] … to conduct activities that can improve member participation in the development of the company and the industry. (Ibid., p. 1) (my translation) Semen Gresik’s employees have struggled to oppose the 1998 divestment since they were not formally formed as SPSG at that time. Following the establishment of SPSG, this union strengthened and ‘formalised’ its aspirations even beyond the ‘normative’ objectives of an employee union. The main aspirations of SPSG are:
6
The original Indonesian constitution of 1945 has essentially addressed the fundamental rights of the Indonesia citizens as stated in the Chapter X article 26 verse 2, article 27 and article 28. These have been extended in the modified 1945 constitution as can be seen in the Chapter X article 27, Chapter XA, Chapter XI article 29 verse 2, etc.
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1. to preserve the state majority stake (51 per cent) in SG, [and] 2. to cancel the Conditional Sales and Purchase Agreement between the government and Cemex including the put option. (Apa, Mengapa… 2002, p. 2) (my translation) SPSG has claimed that its struggle has been supported by many non governmental organisations (NGOs), legislative and executive bodies in the local government of Gresik and Tuban and those from East Java Province, as well as prominent political figures in the country such as the speaker of the People Consultative Assembly (e.g., Apa, Mengapa…, 2002, p. 6; Rais, 2002; Gapura No. 11/Th. III/25 March, 2002; No. 19/Th. III/20 May, 2002; result of my field work’s interview). Hence, SPSG has become one of the prominent stakeholders that has led the struggle to oppose the divestment of the majority government stake in SG to Cemex. Second, the spirit of decentralisation was adopted by the enactment of UU No. 22/1999 (Undang-undang tentang Otonomi Daerah), the decentralisation/regional autonomy law. A fundamental aspect of this law is reflected in the article 10 verse 1 which states that “the local [government] has the right to manage national resources which are located in its region …” In addition the government also issued UU No. 25/1999 (Undang-undang tentang Perimbangan Keuangan antara Pemerintah Pusat dan Daerah/ Law on balance of finances between the Central government and the Regions) which gives local government a certain allocation of proceeds generated from resources (e.g., oil, timber, etc.) which are extracted/harvested from its region. These regulations have strengthened the power of local government in dealing with the central government. Disputes over the interpretation of certain verses sometimes could 226
not be avoided. For example, the dispute about the extent of the local government’s right over state-owned enterprises that have a base in its region such as Semen Gresik. However, certainly, the local government has more voice to rise over any policies of the central government. In the case of privatisation of Semen Gresik, the local governments of Gresik and Tuban have almost similar concerns. Suryono, the Deputy for Economic and Development of the local government of Gresik points out that … we follow the development of Semen Gresik since its establishment in 1957. We understand the position of the employee union of SG [on privatisation] … … [currently, as state-owned enterprise] Semen Gresik has domestic focus [for instance] in determining the price of cement, it uses standards that are attainable for ordinary people … [I am] worried … if this company is controlled by foreign owners, … the price [of cement] would be drastically increased because they would use at least the Asia standard [for pricing decision]… they may also export the majority of SG’s product which would lead to an insufficient supply [in the domestic market] … this would also cause higher prices … … even though the community development program is still in need of improvement, the company contribution is still high … [I] do not know what would happen if this company is owned by foreign owners … (Gresik, 28 May 2002) (my translation) Suryono is concerned with two aspects which are about the uncertainty of the price of the product and the continuous support from SG to the local government of Gresik whenever the company is sold to foreign investors. This concern is shared by Haeny Relawati, the Mayor (Bupati) of Tuban. Haeny outlines her views on
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privatisation in general as well as about the case of Semen Gresik. She states as follows: … cement is an essential [material] for development … if the majority stake [of SG or the cement industry] is owned by the private sector, it would have the power to determine the price of cement … this would have an impact not only on the local government and people of Tuban but also on the government and people of Indonesia as well … it would freely set up a high price … which would increase the need for development costs … (Tuban, 18 June 2002) (my translation) Haeny’s concerns with the price of cement in relation to the cost of development are justified. According to the bureau of research in the Ministry of Industry and Trade, one dollar increase in the price per sack of cement will increase the cost of infrastructure development up to US$480 million per annum (Perajaka, 2002, p. 5). SPSG and the local governments of Gresik and Tuban have similar views although differently expressed. They believe that the majority of shareholders of SG would be better off under the government. This position has another supporter from the West Sumatra region in which Semen Padang is located, as Abeng points out that [a]mong the most influential detractors of the Semen Gresik privatisation were the west Sumatra governor, Muchlish Ibrahim, who threatened to take back some 126 hectares of traditional land [tanah ulayat] which had been granted to [Semen] Padang to supply raw materials for cement, and a retired general, Azwar Anas, formerly governor of West Sumatra and CEO of [Semen] Padang. (2001, p. 107) The opposition from the West Sumatra region reveals the history of Semen Padang as a primary reason to reject the privatisation. They argue that Semen Padang is 228
supported by the local community which has contributed their traditional land [tanah ulayat] for raw materials of cement, and selling such land is not acceptable (Sakai, 2002a). Similar opposition took place in South Sulawesi in which Semen Tonasa is located. Employee unions, local governments (both executive and legislative) as well as some of the local communities have almost similar voices to reject further divestment of Semen Gresik (Kajian dampak …, 2001, pp. 3-5). The opposition demands not only to reject the majority divestment of SG but also to spin off SP and ST from SG. In addition, they also request that SP and ST shall be returned to their status as purely stateowned companies. In the case of ST, the central government is expected to give a 20% stake of ST or a 20% of the annual profit of ST to the local government of South Sulawesi (Ibid., p. 4). To express their views, the opposition have not only taken institutional measures (e.g., petition to central government and to Cemex) (Ibid., pp. 4-5; Apa, Mengapa …, 2002, pp. 6-7), but also mobilised public and media support through strikes, dialogs, talk shows and demonstrations in Gresik, Tuban, Surabaya, Jakarta, Padang, and South Sulawesi (Apa, Mengapa …, 2002, pp. 4-7; Tesoro, 1999, as cited Abeng 2001, p. 107). As a result, the SG’s divestment plan has been modified. So far, the government keeps a majority interest in SG. Certainly, without such an extraordinary opposition, the majority stake in Semen Gresik would have been transferred to Cemex. 6.3.3 Tendering process Abeng (2001) believes that there were open and transparent bidding processes in the selection of investors for Semen Gresik; however, indications of insider trading 229
(Republika, 23-24 June, 1998), lack of transparency and conflict of interest (Lubis et al., 2001, p. 30) were apparent since the early process of tendering. The head of BAPEPAM at that time, I Putu Gde Ary Suta, even points out that “[t]here are indications [of insider trading] and this insider trading is the biggest case so far” (Republika, 23 June, 1998)7. The nuance of ‘insider trading’ may be seen from the due diligence process which was carried out by three bidders, Heidelberger, Holderbank, and Cemex. Suaeb Atmawitjitra, SG’s investor relation, points out as follows: … there was a tender process [in selecting the investor]… [and] a due diligence had been done by each of them… the [due diligence by] two companies [Heidelberger and Holderbank] took quite long time … about two weeks each … whereas Cemex [did the same thing] in three days only … [and finally] Cemex won the selection. I did not know whether there was insider information [provided to Cemex]… (Gresik, 8 May, 2002) (my translation) As a middle manager, Suaeb has about 20 years of experience in SG; thus, he might know more than what he said to me, but perhaps he prefers to distance himself from something that he might consider sensitive. However, Suaeb’s comments on the shortest due diligence time by Cemex might be a sign that there were suspicious things taking place (e.g., insider information) even though it would be not easy to substantiate. Two other ‘irregularities’ that relate to the process of divestment also took place. First, throughout this process, Cemex changed its special purpose vehicle (SPV) a few times, as Lubis et al. reveal 7
A comparative case on an allegation of insider trading also arose in the case of private placement of Indosat in 2002. Interestingly, similar to the case of Semen Gresik, the financial advisors were alleged to involve in the case. The financial advisor (Meryl Lynch) performed dual functions --as advisor for the divested company as well as a securities company. (Faisal, 2002).
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[a]t the beginning of the tendering process the name of Palacefield Investment NV was used [by Cemex], then it was replaced by Cemex Asian Investment NV (CAI). … This was repeated by substituting CAI with Cemex Manila Investments, and [then] it was changed again to Cemex Asia Holding within four days only! It looks like a chameleon. (2001, p. 31) (my translation) It is not uncommon to use a special purpose vehicle in the case of acquisition in Indonesia (cf., Tempo, 24 November, 2002, pp. 27, 110-12, in the case of BCA), but for Lubis et al. the many changes of SPV in a short period of time were suspicious, although they did not further explain their suspicion. Second, conflict of interest in the transaction process was apparent. At that time, Goldman Sachs was one of the financial advisors to the government of Indonesia in the valuation process of SG, but at the same time Goldman Sachs was also the financial advisor of Cemex (Republika, 23-24 June, 1998; Lubis et al., 2001, p. 30). Last but not least, this divestment transaction was seen to have a lack of transparency. For example, there was a clause (article 14.2) within the CSPA that stated that the document could not be published even by the government, and this meant that the agreement broke the transparency principle of privatisation mandated under Keppres No. 103/1998 (Lubis et al., 2001, pp. 30-31). Leaving the above issues, the tendering processes include two steps, and Cemex won the selection for both processes. Cemex defeated its main competitor, Holderbank/Holcim (a Swiss cement based MNC). In the first round selection, there
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were three companies that were interested in buying SG’ shares: Cemex, Heidelberger, and Holderbank/Holcim. Three of them completed the due diligence process, but only two companies proposed a bid price on 19 June, 1998. Cemex proposed US$1.38/share whilst Holderbank/Holcim offered US$0.963/share. On 25 June, 1998, it was suggested that these two companies increase their offer price. Cemex offered the same price, whilst Holderbank revised its bid price into US$1.20. Cemex was then selected as a preferred bidder since it had the higher offer price. In the second round of the selection process, four companies participated: Heidelberger, Holderbank, Lafarge, and Cemex. Lafarge did not participate in the first round selection or in the due diligence process. Although four companies participated, there was no further bidding price from the first three companies; hence, Cemex was announced as the final winner of the selection process. (Abeng, 2003, pp. 34-36). Abeng, as the Minister of SOEs, notes that there was a delicate political process during this tendering process, since the interest groups from the inner circle of Soeharto’s family were involved. Holderbank was backed by Bhakti Investama, a securities’ advisor that was partly owned by Titiek Prabowo, one of Soeharto’s daughters; whilst Heidelberger (a German cement based MNC) formed an alliance with Makindo, a securities advisor that was also close to Soeharto’s family. Those two companies had approached the Ministry of SOEs but finally failed due to losing in the bidding price (Abeng, 2001, p. 105). In this case, Abeng was consistent with the initial purpose of this transaction which was intended to select the best candidate with the highest offer price. It was in line with President Soeharto’s request that the divestment must be pursued for “the best interest of the country”, disregarding any possible 232
involvement from Soeharto’s family (Abeng, 2001, p. 106), as well as from the former minister’s immediate family in Bahana Securities (Lubis et al., 2001, pp. 40-45). The final process of this tender was an official announcement from the government of Indonesia through the issuance of government regulation No. 76/1998 (Abeng, 2001, p. 108). Interestingly, the position of Abeng, as the Minister of SOEs, was also a bit ambiguous in this divestment. At one point he urged the selling of SG’s share in the highest offer price and affirmed the need for SOEs’ performance improvement, but at the same time Abeng confessed that [a]t the time negotiations with potential buyers began in early 1998, Semen Gresik was expected to record a handsome profit of Rp. 185 billion for 1998. At the same time, the government was offering a good deal for its sale: the successful bidder would be given a 35% to 40% stake in the company and then be allowed to acquire a majority stake through purchases on the stock market. If any state-owned enterprise could be sold in a depressed market, this was it. Despite Indonesia’s broader economic problems, Semen Gresik was still a good buy. (2001, p. 105) Such articulation seems inconsistent with his belief, or perhaps it can be seen as a marketing effort to promote the divestment rather to represent the interests of the potential investors. In brief, it can be noted that even though Cemex won the selection based on the highest offer price, it remains questionable whether there was a transparent, fair and a just transaction. For example, the allegation of insider trading (information) was
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unresolved, blurred, and disappeared, and the conditional sale and purchase agreement consist of some questionable clauses. 6.3.4 The outcome A brief summary of the financial proceeds and expenses of SG divestment in 1998 is presented in Table 6.2. Table 6.2 Divestment of SG in 1998: proceeds and expenses (US$)
Please see print copy for Table 6.2
Net proceeds of SG’s divestment are equal to Rp. 1,317 billion (Ruru, 2003, p. 16)8. These proceeds are considerably insignificant in comparison to the budget deficit in the fiscal year of 1998/1999 which was estimated Rp. 15,000 billion (Republika, 25 September, 1998, p. 4). However, under pressure with the economic and financial crisis, the government of Indonesia had no better choice than to pursue such a policy which was concerned with short-term necessity. Abeng discloses the difficulties that faced the government as follows:
8
Abeng (2001, p. 120; 2003, p. 40) presented different total net proceeds of this divestment. Interestingly, Ruru and Abeng were bureaucrats or former bureaucrats from the Ministry of SOEs and they cited similar official reports. The difference was Rp. 20.9 billion. Ruru presented ‘numbers’ less than those of Abeng. Similar evidence can be found in the case of divestment of Pelindo II. Unfortunately the cause of such cases could not easy to be substantiated. A comparable case also occurred in the UK (chapter 3).
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[b]etween March 1998 and April 1999, our main focus had been on quick fixes and early wins. With the economy collapsing and the budget in crisis, we had little choice but to focus on measures that would yield the highest short-term benefits. (2001, p. 122) In addition, the government of Indonesia has also faced the imposed policies from the IMF as prerequisites for financial loans from the agency. The strong role of the IMF can best be viewed from Abeng’s confession as follows (cf., Ramli, 2003a, 2003b): … the IMF was able to put pressure on the government to introduce a wide range of market-based, economic policy reforms, including the elimination of several Soeharto family monopolies, reductions in tariffs and export taxes, bank closures, cuts [in] government spending, the introduction of a new bankruptcy law and commercial courts and the privatisation of several state-owned enterprises (2001, p. 41). (emphasis added) Thus, even though proceeds from SG and other SOEs’ divestments may not have been significant in comparison to the government’s need, the above factors (e.g., budget deficit and the IMF’s imposed conditionalities) had given the government less opportunity to exercise other policies (cf., Cook, 1986). Another aspect that can be derived from Table 6.2 is the expense of SG’s divestment. The expenses were about 1.49 percent of the total proceeds, and these expenses are considerably lower than other privatisation expenses. For example, privatisation expenses for PT Pelindo II accounted for 3.5 percent of the total proceeds (Laporan Privatisasi…, cited in Abeng, 2003, p. 38-39). The expenses of SG’s divestment were also considerably inferior in comparison to that of the average expenses of privatisation in the UK which was around 4 per cent (Chapter 3). 235
Even though Abeng believed that “we got a good deal for the country” because the price “represented [a] 112 per cent premium on Semen Gresik’s share market value” and the PER was higher than the divestment in 1991 (2001, p. 108), this divestment was criticised by SPSG. SPSG argued that based on a comparative assessment of the estimated value per tonne of capacity, the state would financially suffer (Table 6.3). Based on this approach the state would financially lose about US$ 193 million, although Cemex paid the highest price. Lubis et al. supported the SPSG’s assessment (2001, pp. 33-34). They estimated that the government of Indonesia had already suffered nearly US$ 248 million. This estimation was based on Catterson’s (2001) lowest estimation of international standard’s replacement cost for a cement manufacturing plant (Ibid., p. 34; Landasan …, 2002, p. 5). Table 6.3 Value per tonne capacity of the divestment of SG in 1998: a comparative outlook
Please see print copy for Table 6.3
Finally, the value per tonne capacity sold to Cemex (US$47.45) was considered very low in comparison to those on the acquisition of Rizal Cement in the Philippines (US$114.28), Southdown in USA (US$244), both of them by Cemex, and the 236
investment by Blue Circle in Kent (US$178.64) (Landasan …, 2002, p. 5; Lubis et al., 2001, p. 34; Baswir, n.d., p. 5). Whilst SG’s 1998 divestment was completed, there are some implications that can be noted. First, the divestment of SG has strengthened the existence of the employee union, although it can be considered as an indirect implication since the main catalyst for the establishment of unions was the political change in the country (Section 6.3.2). This can be seen from the institutionalisation of SPSG and its main aspirations that were formalised in February, 1999, after the official completion of the 1998 divestment. SPSG’s main aspirations are to preserve the state majority stake (51 per cent) at SG, and to cancel the Conditional Sales and Purchase Agreement between the government and Cemex, including the put option (Apa, Mengapa… 2002, p. 2). This phenomenon is different to privatisation in the UK. In the UK, the union employees’ existence was viewed as too powerful before privatisation was implemented. Hence, privatisation in the UK was intended, among others, to curb union power (Marsh, 1991, pp. 472-74; Bishop and Kay, 1989, p. 647; Jackson and Price, 1994, p. 14; Abromeit, 1988, p. 73) (Chapter 3, Section 3.1). It is unclear yet whether there are unrevealed long-term objectives (e.g., to curb union power) within the privatisation of SG or privatisation in Indonesia. Certainly, SPSG’s struggle to mobilise support from the general public (e.g., the NGOs, local governments, prominent figures in the country) has had immediate results, which have been to cancel or at least delay the government’s intention to sell the majority stake in SG. But, the end of this story will not be known until the year 237
2006 since SG is still listed in the plan as one company to be sold (Master Plan BUMN 2002-2006, pp. 11, 21, 108-109). Second, the 1998 divestment also triggered and strengthened the spin off proposal from Semen Padang and Semen Tonasa as well as concern about the national interest and sovereignty. As pointed out earlier, the consolidation of SG, SP and ST in 1995 had sparked opposition in SP, although this opposition had been temporarily resolved (Section 6.3); whilst the issue of national interest and sovereignty was driven by the foreign investor’s participation in the acquisition. The latter could be seen from the argument raised by the local community (Minangkabau) in West Sumatra in opposing the divestment as well as demanding that SP be separated form SG. They argued that they have contributed traditional communally-owned land (tanah ulayat) for Semen Padang, and “[a]ccording to Minangkabau adat, communal land should not be sold for any reason” (Sakai, 2002a9; see also Raharti et al., 2000). This problem reached its peak at the end of 2001, when DPRD (the local legislative body) of West Sumatra province issued a declaration to take over Semen Padang and hand it to the West Sumatra local government (Tempo, 4 May, 2003, p. 128). The conclusion of this case is still uncertain, although many efforts have been done to solve the problems. The latest solution was proposed by the Co-ordinator Minister for Social Welfare, Jusuf Kalla, to split the companies off rather than to spin
9
Further discussion about traditional communally-owned land (tanah ulayat) can be found in Sakai (2002b), “Land Dispute Resolution in the Political Reform at the time of Decentralization in Indonesia”, Antropologi Indonesia, Vol. 26 No. 68, pp. 40-56.
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them off. By so doing, SG, SP, and ST would become three separate individual companies although under similar ownership: the government of Indonesia (51.01%) Cemex (25.53%) and the general public (23.46%) (Tempo, 4 May, 2003, pp. 12830). However, the follow up of such a policy is also uncertain, at least up to the time that this thesis has been written. Recent development shows that the disputes have been brought into the international arena. Cemex brought the case to the International Centre for Settlement of Investment Disputes (ISCID) (Kompas, 12 December, 2003; Tempo Interaktif, 5 January, 2004), whilst the society of West Sumatra intended to bring the case to the International Crime Court in Den Haag as well as to the International Tribunal for Human Right in Geneva (Republika, 8 December, 2003). Again the solution for this case is uncertain. There are on going efforts to discharge the case out of court by extending ‘more options’ for Cemex (Tempo Interaktif, 29 January, 2004). Most likely, the conclusions of these cases are dependent on the newly elected government’s policies that might be different to the policies of the current government. Finally, a similar phenomenon to the divestment in 1991 and 1995 also occurred in the divestment in 1998. Total employment in SG showed an increasing trend. Recent available data indicated that total number of employees of SG increased to 2.377 at the end 2000 ((SG [Prospectus], 2001, p. 32), from 2,059 in 1995 (SG [Prospectus], 1995, p. 38). 6.3.5 Conditional Sale and Purchase Agreement (CSPA) 239
The announcement of the final winner was not the end of the process and controversies; rather, it was just the beginning of a new round of conflicts. Problems emerged from the CSPA that had been signed by Cemex and the government. This agreement consisted of several clauses such as 1. Cemex has a further option to buy SG’ stake from the government at a certain price within a three-year period after the agreement was signed10. This is known as put option. (Abeng, 2001, pp. 108-109) 2. The government, within 5 years, cannot sell its share to other strategic partners without the consent of Cemex. (Landasan Perjuangan SPSG, 2002, p. 7) (my translation) 3. Cemex has a higher voting right (50 per cent) than its real stake at SG (25.5 per cent), hence the shareholders cannot exercise decisions based on the proportion of their stakes. (Ibid., p. 7) (my translation) For SPSG and other opponents of this divestment, the CSPA and its several clauses are believed to have not been based on a just and fair principle in its construction. The government has given too many privileges to Cemex, the first being about the put option. While the government had an option to sell, it did not have the right to buy. The put option is the right of the government to sell its remaining shares to Cemex at a certain price (USD$1.38 plus 8.2 per cent premium a year) and within a certain period (within 36 months after a contract had been signed) (Kajian dampak …, 2001, p.15; Abeng, 2001, p. 109). 6.3.6 Financial performances: before and after the divestment in 1998
10
The period of this agreement was initially from 26 October, 1998 to 26 October, 2001; but it was then extended by the Minister of SOEs to 14 December, 2001. (Landasan …, 2002, p. 7).
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The financial performances of SG in various aspects –liquidity, profitability, activity, and solvability—are generally better than that of its main competitors, Indocement and Semen Cibinong (Chapter 5, Section 5.2.5 and Appendices 5.1 - 5.3). In this section, the focus of analysis is on a comparative outlook before and after the 1998 strategic sale of SG. Since the last available and accessible data at the time of the field research was in 2001 which was three years after the transaction, thus a comparative time interval was used before the year of the transaction. Even though the duration is considerably short, this analysis may give an initial appraisal of the financial result from the SG partial divestment in 1998. Such an analysis is considered important since improving performance is the cornerstone of the privatisation of SG. Extending Machfoedz’s proxy on measurement of efficiency of the public enterprises in Indonesia (1998, 1999) with few other ratios, a summary of the comparative financial performances of SG is depicted in Table 6.4. A few aspects can be noted from the table 6.4. First, the ROIs of this company in 1995 and 2001 were 4.85 per cent and 3.62 per cent respectively. This was evidence that the company efficiency was not improving after the divestment in 1998 if it is compared with the similar time interval before the divestment, although there was a trend of ROI improvement in comparison to that in 1998. On the other hand, there was an upward Table 6.4 SG: Summary of the Comparative Financial Performances
Please see print copy for Table 6.4
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trend of the company’s ROE. Whilst SG’s profit shows continual increases, so does the debt as reflected in DER and DTA. Thus increasing trend of ROEs should be seen as a result of the tendency of increasingly SG debt and reduction of the equity. Finally, SG’s price earning ratio (PER) declined from 23.35 per cent in 1995 to 10.28 per cent in 2001. Hence, in terms of profitability, SG’s divestment in 1998 failed to achieve improvement. The second aspect derived from Table 6.4 was about the company solvency. There is a tendency for increasing debt within Semen Gresik. Both the debt to equity ratio and leverage ratio have been steadily upward. The DTA ratio increased from 31 per cent in 1995 to 64 per cent in 2001, whereas the DER increased significantly by nearly 400 per cent at the same period, from 45 per cent in 1995 to 177 per cent in 2001. Hence, SG has been ‘trapped’ with a burden of debt. This situation may give strong justification for further privatisation of SG in the foreseeable future. The last aspect was about the liquidity and activity ratios. In this matter, SG has shown a better picture than the other previous indicators. Liquidity was maintained as reflected in the current ratio, while the turnover suggested that the
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company was continually achieving improvement both in terms of inventory turnover and asset turnover. 6.4 The controversies There are controversies related to SG’s divestment in 1998 such as the put option and the state’s potential loss, privileges for the new investor (Cemex), strategic vis-a-vis ‘tragic’ alliance, and national sovereignty issues. These issues are extracted from the empirical works coupled with other relevant resources, and will be discussed in the following sections. 6.4.1 Put option and the state’s potential loss Section 6.3.4 has presented the state’s loss as a result of selling 14 per cent of SG’s shares to Cemex (Table 6.3). Although the government suffered a considerable loss from the previous transaction, further divestment of SG is still in the plan (Masterplan BUMN 2002-2006, p. 21). In addition, Cemex is also tirelessly working to achieve its main objective which is to conquer the majority stake at SG. This company needs only 25.5 per cent additional SG’s shares to have the majority ownership. The latest effort that has been carried out by Cemex is to bring the case to the International Centre for Settlement of Investment Disputes (ISCID) (Kompas, 12 December, 2003; Tempo Interaktif, 5 January, 2004). Hence, a put option could be exercised although the agreement has expired. SPSG who opposed the implementation of a put option has had justification for its resistance. According to SPSG, the government’s potential loss for executing a 243
put option based on the existing agreement is about US$114.73 per tonne of capacity (Table 6.5). The estimated loss might be higher if a variety of SG’s strengths (e.g., business networks, brand image, human resources expertise) as well as the fair value of assets and the prospects of the company is considered. Borrowing Cholil Hasan’s words, “the terms and conditions” of the planned transaction are not suitable for the government and SG. Table 6.5 Estimated value per tonne of capacity: a comparative outlook (the case of put option)
Please see print copy for Table 6.5
Cholil Hasan expresses one important aspect that relates to a put option as follows: … one clause that was stated in the [CSPA] agreement was ‘the right’, not ‘the obligation’ of the government [to sell] the remaining shares to Cemex. … since it was ‘the right’, the government may exercise [its right] or may not do so … and the government has not exercised its right [up to now]… the agreement already expired in October 2001… [hence] the case of a put option was history. (Gresik, 8 May, 2002) (my translation) Unfortunately, even though Cholil Hasan and his subordinates like Suaeb Atmawitjitra (Investor Relations Manager) and Suwandi (Head of Public Relations) 244
affirmed that the put option is the government’s ‘right’ and not an ‘obligation’, and the agreement has expired, it is not over yet for Cemex. Cemex has brought the case to the International Centre for Settlement of Investment Disputes (ISCID), and the end of this story still seems uncertain. 6.4.2 Privileges for Cemex The government of Indonesia has given Cemex a variety of privileges through an agreement that has been questioned in terms of its fairness. The CSPA consists of several clauses including a put option, technical assistance, and an export assistance agreement. Ultimately, Cemex has also a higher voting right than its ownership. Cemex bought a 14 per cent stake at SG, but it has 2 of 6 members on the Board of Directors and 2 of 5 members on the Board of Commissioners of SG, including the Vice President Commissioner and the Vice President Director (Apa, Mengapa …, 2002, p. 4; Landasan …, 2002, p. 10). Currently the composition of the Boards of Directors and the Board of Commissioners of SG is as follows: Table 6.6 SG: the Board of Commissioners and the Board of Directors
Please see print copy for Table 6.6
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Tjipto Sumarsono, the President of SPSG, believes that the composition is unfair because its structure is not based on the proportion of share ownership in SG. Tjipto states that …. [when Cemex joined the company] and its interest was [initially] only 14 per cent, Cemex got 2 directors, [and] 2 commissioners. There are 5 (five) commissioners, hence 2/5 equal to 40 per cent; [and] there are 6 (six) directors, hence 2/6 equal to 33 per cent … I think it is unfair. (Gresik, 27 May, 2002) (my translation). A few months later, after a tender offer and other transactions in the capital market, Cemex’s ownership increased to 25.5 per cent. Although Cemex’s interest has increased, it still has a higher voting right on the boards compared to its stake in SG. The unfairness is even worse if viewed from another source which reveales that the voting right of Cemex is actually 50 per cent. (Landasan …, 2002, p. 7). Cemex has also had other privileges related to technical assistance and export assistance agreements. In the technical assistance agreement, the President of SPSG views as follows: … we have had experience in cement industry for [almost 50] years … why should we need technical assistance? … even if we need technical assistance, why should we signed a specific contract?, and he [Cemex] charged fees … (Gresik, 27 May, 2002) (my translation)
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SG has had years of experience in the cement industry; hence, for Tjipto, technical assistance is not the company’s primary need. Various evidence supports Tjipto’s argument. For example, SG’s financial performance within the last decade has been generally better than that of its main competitor, Indocement and Semen Cibinong (Irianto, 2003; Chapter 5). In addition, the company’s engineers have proved that they have been able to independently plan and build a new manufacturing plant in Tuban (LSPEU, 2001, pp. 233-34), whilst continuing to also maintain and improve the efficiency of the company (Chapter 5). In relation to the special export agreement, Tjipto points out several confusing matters … [first] there was an agreement about exports … [since] Cemex is part of the SG’s management … why does this company still need a special agreement about exports? … improving export performance is [Cemex’s] responsibility as a member of the management … [second] when SG exports to Malaysia or Bangladesh or somewhere, the exports must go through Cemex … Cemex is both the cement producer and the trader … such business practice may not wrong for Cemex; but, how is [the impact to] this company? [third] [if] third parties [importers] want to buy cement from this company, they must also go through Cemex, and it also collects fees … [fourth]… if we try to penetrate a new market in which Cemex operated, Cemex will prevent us from so doing … [it said] “no business here, this is my market” … (Gresik, 27 and 28 May, 2002) (my translation) For Tjipto, the export agreement with Cemex has limited SG’s capability to expand its international market, since distribution has been practically controlled by Cemex’s trading division. 247
Tjipto is also especially unhappy in regard to the assumed roles and responsibilities of Cemex’s personnel as members of the management of SG. None of them reside in Gresik not even the Director of Production and hence their role set up to improve SG’s performance is questionable. Certainly, they have limited actual managerial contribution to SG. In this issue, Tjipto points out that … directors [from Cemex] have not been domiciled in Gresik from its initial participation in SG up until now …hence, there would be no problems without them … they rarely visit Gresik, and [their presence in Gresik within a year] can be counted on our fingers … sometime they arrive in the morning and leave in the afternoon … but they have asked for a lot of details about SG’s activities and thus they have become fully informed and this makes it difficult for SG to bargain …(Gresik, 27 and 28 May, 2002) (my translation) My observation in the field has affirmed such critiques but unfortunately I was unable to confirm all matters concerning Cemex. 6.4.3 “Strategic” vis-à-vis “tragic” alliance Contrary to the government’s intent to build a strategic alliance, the above evidence has led Tjipto to conclude that … [Cemex] is a tragic partner and not a strategic partner; if they are good, why should we reject them? (Gresik, 27 May, 2002) (my translation) Tjipto not only comments about Cemex’s privileges on being appointed to the board of directors and the board of commissioners and the imbalance created here but he also urges that signatory technical assistance and export agreement is unnecessary. He 248
believes that as owners as well as management of SG, Cemex has a responsibility to enhance SG’s performance in all aspects of the company. Tjipto and also Marso Daryanto, the head of Internal control systems, made a comparison between the role of Cemex as a member of the management and owners, and the relationship within a marriage. Tjipto expresses this comparison as follows: … if you are married, as husband or wife, then you do something for the sake of your family, would it be counted in terms of money? …(Gresik, 27 May, 2002) (my translation) ‘Business logic’ may or may not be comparable to a family relationship. Tjipto’s and Marso’s view might be understood in the Javanese culture, but certainly there will be differences among cultures. A corporation is always seeking profit as its ultimate goal11, and Cemex is not an uncommon corporation. Whilst critiques that have been raised by Tjipto and many others (e.g., Lubis et al., 2001; Perajaka, 2002) have sound grounds, there is other important evidence that affirms Cemex’s positive contribution to SG, especially in improving export performance (see Section 6.5.3). 6.4.4 National interest and sovereignty National interest and economic sovereignty are other arguments that justify the preservation of the state’s majority stake at SG. Concerning these matters, Bulpandi, former director of Varia Usaha (SG’s subsidiary) who is currently the Associate
11
This is in line with the neo-classical belief which views profit as the bottom line of income statements and it is used to measure business success. Such a belief is fundamentally challenged by the PEA framework (see Chapter 1, Section 1.3). Chwastiak and Young (2003) have also affirmed that utilising profit as a solely measure of business success is not only problematic but posses inconceivable danger.
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Rector for Financial and Administrative Affairs of Muhammadiyah University at Gresik, points out that … the cement industry is an industry that is needed for an unlimited time [or] as far as Indonesia is continually developing … if this strategic industry is owned/controlled by foreigners … can the government regulate them for domestic [national development] purpose … especially concerning cement price … since foreign companies’ orientation is profit … (Gresik, 28 and 29 May, 2002) (my translation) Bulpandi believes that the cement industry is a strategic industry that is essential for national development. Since Indonesia is still developing, cement would be the basic material that is needed for this purpose and the reality is that a higher cement price will mean higher developing costs. As indicated earlier (Section 6.3.2), Suryono, the Deputy for Economic and Development of the local government of Gresik, and Haeny Relawati, the Mayor (Bupati) of Tuban share comparable views. They are anxious about the cement price if foreign investors control this industry. The concerns of Bulpandi, Suryono and Haeny essentially touch the national interest since a dollar increase per sack on the cement price will increase the cost of infrastructure development up to US$480 million per annum (Perajaka, 2002, p. 5). Further attention given to the price of cement and the impact of the domination of MNCs is derived from the experiences of other countries and in particular The Philippines. Perajaka notes … [first] increasing ownership by foreign investors can be interpreted as an indication of their confidence about the future of the national cement industry … however, a majority ownership by foreign investors … has potential problems …[for example] 250
financial loss for the cement industry, domestic shareholders, and other stakeholders (e.g., the state and the general public). … [second] foreign investors [MNCs] might build a cartel that [in turn] will lead to the soaring of domestic cement prices … in The Philippines [MNCs] controlled about 90 per cent of the installed cement production capacity in 1999 … a few months later the price of cement in this country was increased 50 per cent to become US$80/tonne, the highest cement price in ASEAN … [third] there is a tendency for foreign investors to treat the national cement industry as milch cows [through a variety of measures, such as by] … price discrimination … as experienced by Indocement … (2002, pp. 5, 7) (my translation) Price volatility in The Philippines took place around 1997. When Cemex entered the country in 1997, the price of cement was Peso 90/sack/40 kg. or Peso 2,372/tonne. In 1998, when Blue Circle and Heidelberger entered The Philippines, the price went down to Peso 36/sack/40 kg. or /Peso 1,406/tonne. However, when these MNCs controlled 90 per cent of The Philippines’ domestic market in 1999, the price of cement continually increased to Peso 55/sack/40 kg. or Peso 2,234/tonne in 1999; it then increased to Peso 124/sack/40 kg. or Peso 6,134/tonne in 2000, and Peso 125/sack/40 kg. or Peso 7,476/tonne in the first semester of 2001. (Lubis et al., 2002, p. 23) The MNC’s business practice can also be seen in the case of Indocement. Heidelberger has treated this company as a ‘milch cow’ after it was taken over by the MNC (Prospektif, 8-14 April, 2002). According to the report, instead of receiving profits from Indocement, Heidelberger is alleged to have raised roughly US$7.2 million a year by charging US$3/tonne of Indocement’s exports. Heidelberger is also suspected of implementing transfer pricing and price subsidising for its 251
subsidiaries, hence gaining higher profits while concurrently sacrificing Indocement profits. (Prospektif, 8-14 April, 2002) Basically, the many stakeholders’ concerns about cement prices were based on the proven experience either domestically or in other countries, primarily in The Philippines. An aggressive pricing policy, building cartels, and price discrimination are just a few examples of the business practices of MNCs in the cement industry. Learning from those experiences primarily in the Philippines, Bulpandi doubts the effectiveness of government regulations especially those dealing with the MNCs when they control the cement industry. He also further points out that [t]he raw material of the cement industry is from the ‘land’ … hence, if we sell it to foreigners … it means selling tanah air…(Gresik, 28-29 May, 2002) (my translation) The above view can be considered as a ‘nationalistic’ reason. Tanah air, literally means ‘land’ and ‘water’ but the combination of the two words means the motherland. Hence, selling the cement industry is viewed as truly selling the motherland, since its materials are ‘extracted from the motherland’. Overall, it can be said that the general concern of Bulpandi, Suryono, and Haeny is about the uncertainties for the future of SG as well as its stakeholders, especially when the majority ownership is in the hand of MNCs. In Indonesia, four MNCs have already conquered the national cement industry. They include Heidelberger, Holderbank/Holcim, Lafarge and Cemex. These four MNCs dominate the four cement companies in Indonesia that have more 252
than 90 per cent of installed production capacity. The MNCs’ ownership and its related market shares in Indonesia are shown in Table 6.7. Table 6.7 MNCs’ ownership in the Indonesia’s Cement Industry
Please see print copy for Table 6.7
Observing the debacle of SG particularly the domination of MNCs, N12, a middle level employee at SG, states that … we eat corn again is not a problem, as long as [we] still have dignity, as long as [we] are not colonialised again …’ (Gresik, 22 May, 2002) (my translation)
This view may be seen as nationalistic, even blurred or radically nationalistic by most proponents of privatisation. However, concerns about the domination of MNCs and their potential implications to the country as these raised by a variety of stakeholders are based on bitter experiences. N pointed out about the early years of Dutch colonialisation in Indonesia. He revealed that the Dutch, who colonialised Indonesia for more than 350 years, started their colonialisation through their
12
I had a conversation with ‘N’ for almost an hour. He came to see me at my ‘temporary office’ in the Investor Relation Manager’s discussion room, when the manager was off. I got a temporary office during my field work in this company as well as a temporary home stay at the company guest house.
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multinational corporation, the VOC (Vereenigde Oost-Indische Compagnie) or the Dutch East India Company13. VOC was simplisticly known as “a trading company that held a monopoly in Indonesia 1602-1799” (Echols and Shadily, 1989, p. 610). Such a monopoly was known and practiced by local rulers, but the Encyclopædia Britannica (2004) noted that [t]he company's monopoly, however, was more extensive and came to form the basis of the Dutch territorial empire. For these reasons many historians have tended to see 1511 or 1600 as the beginning of a period of European domination lasting until the 20th century. The Encyclopædia Britannica (2004) further discloses that [t]he VOC itself represented a new type of power in the Indies: it formed a single organization, traded across a vast area, possessed superior military force, and, in time, employed a bureaucracy of servants to look after its concerns in the Indies. In sum, it could impose its will upon other rulers and force them to accept its trading conditions. Under the governor-generalship of Jan Pieterszoon Coen and his successors, particularly Anthony van Diemen (1636–45) and Joan Maetsuyker (1653–78), the company laid the foundations of the Dutch commercial empire and became the paramount power of the archipelago. It was clear that the power of VOC might be ‘unimaginable’; it had the state’s power (e.g., military forces) as well as the business power (e.g., monopoly) that the company could use to achieve its objective. But, such a powerful institution finally collapsed at the end of the 18th century for several reasons, and the VOC was then 13
The history of VOC and its role in Indonesia can be found such as in the Encyclopædia Britannica Online: “Growth of the Dutch empire - Dutch East India Company” (accessed on August 3, 2004).
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replaced by the Dutch government to further the colonialisation era. (see also: Reid, 1996). Thus, the stakeholders’ concern about MNCs’ domination and the implications was not without solid argument. It was historically proved that MNCs’ domination was an early step toward colonialisation. Whilst recent development, particularly in the case of the cement industry in The Philippines, MNCs’ domination would likely lead to higher cement price. In Indonesia, such a similar domination so far has led to the situation in which the national cement industry became the ‘milch cow’ of the MNCs. (Prospektif, 8-14 April, 2002) However, such evidence had not attracted the proponent of privatisation. For example, when I confronted Cholil Hasan with the fact that cement industry has been dominated by MNCs, he replied that … I see [the phenomenon of foreign dominated investors] like this … of course there is [ownership change] from state to private … it is [the essence of] privatisation; but [ownership change] is not always to foreigners … (I interrupted: why cement sold to foreign investors?) …because, they have the money … (Gresik, 8 May, 2002) (my translation) Cholil Hasan’s thought might not represent those of the proponents of privatisation, although such a pragmatic view was not uncommon among them; recal Abeng (2001) who clearly confessed that [b]etween March 1998 and April 1999, our main focus had been on quick fixes and early wins. With the economy collapsing and the budget in crisis, we had little choice but to focus on measures that would yield the highest short-term benefits. (2001, p. 122)
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Thus, a short-term orientation policy would likely be pursued in such a difficult situation which might undermine the long-term implications. 6.5 Other issues A few other issues derived from the field works that are considered relevant for future policy formulations are going to be presented in the following sections. These will include the importance of terms of the reference and the scope of privatisation, the role of shareholders and management in the decision to divest, Cemex and SG’s export performance, cartel and competition law, and current developments. 6.5.1 Terms of reference and scope of privatisation The privatisation of SG has created some controversies; however, it can be said that the privatisation has been well understood by management, employees, and other SG stakeholders. Management, employees, and other SG stakeholders have different thoughts on the divestment because their interests and expectations are varied but in general their views can be grouped into two main streams which are to support or to oppose the divestment. In response to my question as to whether to accept or to reject the general idea of privatisation, Cholil Hasan, the Director of Finance of Semen Gresik, states that it depends on the terms and conditions. He explains … [I] see privatisation as a neutral program … if I were asked about accepting or rejecting it … [I would say that it] depends on its terms of reference or its terms and conditions … especially we have to 256
clearly see the costs and benefits in every case … (Gresik, 8 May 2002) (emphasis added, my translation) Privatisation, in Cholil Hasan’s view, can be accepted or rejected depending on the terms and conditions, especially in terms of (financial) pay offs. It is unlikely to be accepted if it does not produce benefits (profits); however, he also recognised that this consideration might not be overall acceptable because the benefit for certain parties may be harmful for others. In reply to my similar question, Tjipto Sumarsono, the President of SPSG, pointed out that privatisation is unavoidable but it should be done in a selected manner. In addition, the government must also clearly determine which SOEs can or cannot be privatised. He states that [p]rivatisation cannot be avoided, but the government must determine the SOEs that can or cannot be privatised … because SOEs’ businesses are diverse … [the question is] shall we sell SOEs that are providing public services or SOEs whose inputs are from irrecoverable natural resources? (Gresik, 27 May, 2002) (my translation) Tjipto’s view has been shared by Haeny Relawati, Mayor (Bupati) of the local government of Tuban, as she points out that … [I] can understand [the government policy to] privatise [SOEs] in this [difficult] situation as far as the final objective is [to improve] efficiency, effectiveness, and professionalism. However, [the government] must determine the industry that can or cannot be privatised … [and consider] the implications [of the policy] for society at large … [both] in the short- and long-term perspective … (Tuban, 18 June, 2002) (my translation).
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Haeny further believes that cement, energy and oil should be excluded from privatisation, stating that … privatisation shall exclude cement, energy, and oil … both executive and legislative shall have a commitment to preserve these resources… (Tuban, 18 June, 2002) (my translation) Tjipto and Haeny have touched on the fundamental aspects of privatisation in this country. They have raised concerns related to the fundamental tenets of the constitution of 1945, article 33, although the interpretation of the article has not been resolved (see Chapter 4, Section 4.3.1), even under the most recent UU BUMN (Law of SOEs) No. 19/2003. Under this new law, all SOEs could be privatised except SOEs in the security and defence industries and those that are specifically prohibited by law (UU BUMN No. 19/2003, Ch. VIII, article 77). This new law does not address specific limitation or scope for privatisation in a plain manner; rather it gives opportunity to the government to produce further regulations which limit such a policy. Hence, the future of SOEs that deliver public services and those whose inputs are from irrecoverable natural resources have not been clearly stated. Consequently, the cement industry can be seen as an industry in a grey area: it exploits irrecoverable natural resources, but there is no specific law that plainly rules that this industry cannot be fully privatised. Thus, under the UU BUMN No. 19/2003, the pros and cons of the privatisation of SG or the cement industry in general have not been resolved; while such uncertainty has been avoided under the older law, the Foreign Capital Investment Act (UU PMA No. 1/1967) (see Chapter 4, Section 4.2.3). 258
Although it might be seen as an indirect concern to the above issues, ‘N’ wondered the intention of the government to sell its majority stake in SG. He states … why [is this company] going to be sold? …what were our mistakes… this company is well developed and has never made trouble for the government …’ (Gresik, 21 May, 2002) (my translation) N’s concern was shared by others and not only in the case of Semen Gresik. Some profitable companies have been sold, and the proceeds have been less than the expected long-terms benefits. Cholil Hasan gives an example of the BCA divestment. BCA was sold for about Rp. 5 trillion. This company had a yearly profit of Rp. 3 trillion and the government had a 67 per cent stake. With the assumption that the profit would have proportionally distributed, the government had the right to about Rp. 2 trillion profits a year. Hence, within less than three years the proceeds of the BCA’s divestment could have been recovered from the company’s profit. Apparently, short- and long-terms benefits for the government have been forcefully sacrificed and transferred to foreign investors because of “the commitment to the IMF” (excerpt from Cholil Hasan’s view, Director of Finance, Semen Gresik, Gresik, 8 May, 2002). From the above presentation, it can be understood that, first, it is important to look at the terms of reference in every case of privatisation as well as in a broader perspective. Even though financial pay off can be the fundamental objective of the policy, social benefits and implications shall not be undermined. The financial pay off itself is debatable, since short-term benefits may harm long-term results. Second, 259
the extent of privatisation must also be clearly stated. The scope of policy shall include, for example, the selection of the industry which can or cannot be privatised. Failure to determine such limitation may result in a wave of privatisation that is comparable to what is entitled as, in the words of Mandell (2002), “privatisation of everything”. In the UK, the scope of privatisation has also been unclear; hence, Gupta even asserts that “[t]he question before the [privatisation policy in the] British government was not what to sell but what to keep” (2000, p. 51). Terms of reference and scope are important aspects that must be addressed in the planning process of privatisation. It is the role of the state as well as management to prepare such comprehensive planning on privatisation, even though there are schools of thought that distinguish between the shareholders’ role and corporate’s (management’s) action. 6.5.2
“Shareholder” vis-à-vis “corporate” action The privatisation of SOEs has been seen as purely the shareholders’ action
with no management involvement. The management of SOEs has different tasks and responsibilities which are based on the rules in the company’s articles of association (Anggaran Dasar), internal rules of association (Anggaran Rumah Tangga) and other decisions made during the Shareholders’ Annual General Meeting (Rapat Umum Pemegang Saham). This is what Cholil Hasan believes and he points out that [o]wnership change is the shareholders’ action … [privatisation] is the owners’ business. [I]n managing a company, management has to follow the company’s articles of association, internal rules of association and other duties that have been decided on at the shareholder’s annual general meeting… (Gresik, 22 May, 2002) (my translation). 260
Cholil’s view was shared by his immediate subordinate, Suaeb Atmawitjitra, the Investor Relations Manager of SG, as well as Bulpandi, former director of Varia Usaha, a subsidiary of SG. Since privatisation is viewed as a shareholder’s action, it would not be integrated into the business plan. Suaeb points out that …privatisation is not included in the business plan, because it is the shareholders’ action and it is not the corporate [management] action … privatisation is only about [change] in ownership … thus, it is not the responsibility of the board of directors…(Gresik, 8 May, 2002) (my translation). While Bulpandi states that …[privatisation] is the decision of shareholders and is not that of the management … [even though] we [the head of units in Semen Gresik] have been asked to give our opinion through a questionnaire …(Gresik, 29 May, 2002) (my translation) The views of Cholil, Suaeb, and Bulpandi, distinguish the roles of shareholders and management, and consequently that of employees. Each of them has specific duties and responsibilities. Management and employees have nothing to do with the privatisation of the company, since it is the shareholders’ business. In an implicit critique on the employees’ opposition to privatisation, Cholil cites an analogy as follows: … [for example] I am living in Jakarta and having a milkfish pond in Gresik... [and] my employees are Gresik’s people. Suppose I intend to sell my milkfish pond to you … shall my employees say no? … (Gresik, 22 May, 2002) (my translation)
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Although N does not reject Cholil’s views, he states that … yes, it is up to the owner; however, orang pusat (the person in charge in Jakarta) does not really know how difficult it is [the employee’s job] in the field … (Gresik, 22 May, 2002) (my translation) N is concerned about the need for appreciation of the employee’s hard work in the field that is rarely understood by the decision maker. While the need of appreciation for employees is justifiable, there is another issue that he expresses as follows: …when an employee of SG retired, his/her children can be put in work [to replace him/her], hence there is continuity … (Gresik, 22 May, 2002) (my translation) These are mixed feelings concerning a need for appreciation and a personal interest in keeping the current job and passing it on to future generation. The latter had a nuance of preserving nepotism (cf., Sukardi, 2002). Apparently, the uncertainty of job security is another reason for rejecting privatisation. This is understood since privatisation is commonly associated with the promotion of efficiency through the reduction of the work force (cf., the UK experience, Chapter 3). Cholil Hasan and Suwandi have empathetically understood this apprehension. For N, either shareholders’ or management’s action in the privatisation decision is not the main concern. Dealing with complex issues of privatisation, Satriyo, the President Director of SG, suggests as follows:
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… [l]ets work based on our salient functions. The Board of Directors, House of Representatives, the Government, and employees shall work based on their respected functions (Prosspektif, 29 April-5 May, 2002) (my translation) Satriyo, Cholil, and Suaeb share similar views that it is important to understand and exercise duties and responsibilities based on the rules outlined by the organisation to which someone belongs14. In fact, privatisation of SG is not merely shareholders’ action. In the first partial divestment of SG in 1991, the management of SG was actively involved in the process to speed up the divestment process (Section 6.2). A similar experience took place in the SG’s second divestment in 1995. In the UK (chapter 3, section 3.2), co-operation between the management and the government in achieving the success of privatisation was also critical (Abromeit, 1988, p. 77). It has been proved that management has had substantial benefits such as an increased pay cheque after privatisation (Clarke, 1993, p. 223). Hence, it is not easy to distinguish between shareholders’ and corporate action in the privatisation decision. Corporate action may drive the shareholders action or vice versa. Setyanto P. Santosa15, former President Director of PT Telkom (Persero), Tbk.,16
14
This view is not unproblematic particularly if it is compared to Hines’ assertion on the boundary of an organisation. Hines states eloquently that “… do not confuse the boundary of the organisation, with the fence --- that is just to keep people out. You must not think of the organisation as ending at the fence – that is common sense.” (1988, p. 254) 15 Setyanto P. Santosa had an on hand experience on the privatisation of a SOE since he was --as the President Director of PT Telkom (Persero)-- in charge of bringing PT Telkom to be listed both on the Jakarta Stock Exchange (JSX) and The New York Stock Exchange in 1995. He was the Deputy Minister of SOEs for Manufacturing Industries and Distribution when Tanri Abeng served as the Minister of SOEs (Abeng, 2001, p. 61). 16 PT Telkom (Persero) Tbk. is now a state-owned limited liability enterprise and public enterprise (Persero Terbuka) similar to that of Semen Gresik. It operates in the telecommunication industry, and its majority stake belongs to the government of Indonesia. Detailed information about PT Telkom (Persero) Tbk. can be accessed from its website (http://www.telkom.co.id).
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has confirmed the important role of management in the privatisation process. During a public discourse about privatisation in the ISEI Kongres in Batu, 13-15 July, 2003, he pointed out that “the management is a key element in the privatisation process and its success”. Thus, it is not surprising that resistance did not strongly appear in the element of SG’s management. 6.5.3 Cemex and SG’s export performance Cemex was founded as a small local company in 1906 in Mexico and has grown to be a MNC that operates in nearly 70 countries around the world. It claims itself to be “a leading global producer and marketer of cement and ready-mix concrete” (http://www.cemex.com). Cemex’s Annual Report (2001, p. 35) presents information that its total trading volume in 2001 was 13.2 million metric tonnes (equivalent to about 14.55 million tonnes). More than 8.59 million tonnes or 59.09 % of the product sold was purchased from third parties, while the rest was exported from its own manufacturing plant. Furthermore, the average total trading volume between 1997 and 2001 was more than 13.44 million tonnes. Purchases from third parties increased significantly from 2.87 million tonnes in 1997 (25.79 %) to 8.59 million tonnes in 2001 (59.09 %) (Cemex’s Annual Report (2001, p. 35). This evidence shows that Cemex’s trading business is larger than its manufacturing operations. Hence, it is not surprising that Cemex now controls SG’s export activities after this MNC became the owner and the management of the company. Further information that can be generated from the Cemex annual report 2001 concerns fees. Even though there might be a different interpretation of ‘license fees’, 264
the annual report shows that license fees were part of Cemex income. The fees revenue accounted for 15.35 per cent of Cemex total revenues in 2001, decreased from 29.45 per cent in 2000, and to less than the mean of these fees for the period of 1999-2001 which is 19.41 per cent (Cemex’s Annual Report, 2001, p. 48). The fees that Tjipto voices his concern about are most likely related to these fees. It is comparable to the case of Indocement and the Heidelberger (Prospektif, 8-14 April, 2002). Another analysis shows that after Cemex became a ‘strategic’ partner of SG, there was an increase in export volume from SG. In 1998, SG’s exports were 17.04 per cent of total sales, a jump from less than 1 per cent in 1995. SG’s exports reached their peak in the middle of the crisis (1999) almost 33 per cent and declined to 27.70 per cent in 2000 and 26.15 per cent in 2001. On average, there was an increase in the figures of SG’s exports from 0 per cent (1992-1994), 3.06 per cent (1995-97), to 25.97 per cent (1998-2001) (Semen Gresik, an analysis from various unpublished data). In nominal tonnes, SG’s exports in 1998 were 1,753,000 tonnes and they increased to 3,972,100 tonnes in 2001 (SG [Annual report] 2001, and other unpublished reports). SG’s consistent export has been carried out since 1995 after the acquisition of Semen Padang and Semen Tonasa. Semen Padang had good exports performance even before it became a subsidiary of SG, and contributed nearly half of SG’s exports. Thus, both SP as a subsidiary and Cemex have contributed to SG’s increasing performance on exports. However, it should be noted that SG’s dominant market is a domestic one since the market absorbs around 90 per cent for the period of 1986-2001, although this sale was continually decreasing (chapter 5, section 5.3.6). This is not a coincidence, since 265
the cement industry is basically a raw material oriented industry as well as being domestically market oriented because of expensive distribution costs. Exports cannot be used as the preferred market. Suaeb pointed out as follow: … [the main target market of this industry] is domestic, especially to those markets that are closest to the manufacturing plant … [it] provides for higher profit [than that of the distance markets] because the transportation cost for domestic sales is less expensive. (8 May, 2002) (my translation). TY, the Deputy Manager of the Logistic Division of Indocement, shares Suaeb’s opinion. He states [I]f we want to make money … our sales orientation must be in Jakarta and its surrounding areas [near the Indocement manufacturing plant], because if we want to sell [our product] to East Java we will lose to our competitor … [since we cannot compete] in the amount of inventory [because of limited warehouses/distribution centres] and [our] transportation cost is higher [than that of our competitor] …17 (Jakarta, 9 April, 2003) (my translation) The Independent Commissioner of SG has suggested a firmer opinion during the ISEI Congres, in Batu, 15 July, 2003. Tjuk Sukiadi states that … there can be no cement industry that can stay alive and survive through exports because the distribution cost is very expensive …18 (my translation)
17
My conversation with Ir. TY, Deputy Logistic Division Manager, PT Indocement Tunggal Perkasa Tbk. (The Heidelberger Cement Group), on 9 April, 2003 in Jakarta, when I was giving a presentation on Cement Market Research in East Java, Central Java and DI Yogjakarta. I was a member of the team from the Centre for Accounting and Business Development, Brawijaya University. 18 Tjuk K. Sukiadi, an Independent Commissioner of SG provided this information as a response to questions on the controversial role Cemex played especially in dealing with exports from Semen Padang during a session of the Congres of ISEI, section Privatisation of SOEs on 15 July, 2003. (The congres of ISEI was conducted on 13-15 July, 2003, in Batu, East Java).
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Cement is heavy in nature and needs a lot of space both for transportation and distribution centres. Consequently, as argued by Suaeb, TY, and Tjuk, the distribution cost is expensive. Based on these facts, selecting SG’s business partner purposively to enhance export can be challenged and it seems misguided. Exports help the company during a crisis, but the main market for SG and other cement industries is the domestic market. Hence, the government’s intention to divest its majority stake in SG was not likely intended to purely improve performance but rather to ease the budget burden in the light of international pressure (see also Chapter 4). 6.5.4 Cartels and competition law The practice of creating cartels among MNCs as well as domestic cement companies is apparent. Suaeb, for example, points out that the implicit cartel existed long before MNCs entered the cement industry in Indonesia. He states that … a cartel has existed for a long time [through the ASI]… ASI allocated the market region, sales volume, the cement price etc. … [however] since 1997 these practices have been abandoned … and have been replaced by market mechanisms … (Gresik, 8 May, 2002) (my translation) The existence of cement association is common in the cement industry around the world. In the recent wave of acquisitions of cement industries in The Philippines by MNCs, as noted by Lubis et al. (2001, pp. 22-24), the strategy of “who takes over whom” (p. 23) was apparently agreed upon by the MNCs involved. Cemex took over 267
Rizal Cement and APO Cement, Blue Circle (UK) acquired Zeus Holding and Fortune, Lafarge bought Continental and Heidelberger purchased Limae and Alsons Cement. Following these acquisitions, they controlled The Philippines Cement Manufacturer Corp., the association of cement industry in the country. By so doing, the cement price in The Philippines is controlled by them. As a result, cement prices have soared (see Section 6.4.4). A comparable case has taken place in Indonesia. Even though Heidelberger, Holcim, and Cemex participated in the due diligence process (section 6.3.3), at the end of the process only Cemex and Holderbank/Holcim offered bid prices, and Cemex won the bid. Since then Heidelberger and Holcim moved towards taking over Indocement and Semen Cibinong respectively (cf., Lubis et al., 2001, p. 23; see also Chapter 5). In addition, these MNCs might be aware of upcoming regulations that would prevent the monopoly of cement markets in Indonesia. Awareness of the upcoming law is important in the planning process of being able to conquer the cement industry. On 5 March, 1999, the monopoly and anti trust Law No. 5/1999 (UU RI No. 5/1999: Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat), was issued. It is comparable to competition law with the pursuance of deterring monopoly and unfair trading practice. According to the Law 5/1999, Chapter III par. 4-16, monopoly practices (e.g., oligopoly, cartel, trust, oligopsoni, and vertical integration) are prohibited. Under this law, a company can be suspected of practising a monopoly whenever it controls more than 50 per cent of the market share of a certain product (par. 17, verse 2c). In the case of two or three companies controlling more than 75 per cent of 268
a certain industry market share, these will also be suspected of practicing a monopoly (or oligopoly, par. 25, verse 2b). Under this law, there would be less competition for Cemex in order to take over the majority stake at SG since Heidelberger, Holcim, and Lafarge have had a majority stake at Indocement, Semen Cibinong, and Semen Andalas respectively. Combining the majority ownership of these cement industries would likely exceed the upper limit of not practising a monopoly under the Law 5/1999. 6.5.5 Current developments There are at least two issues and developments that might induce an interesting discourse in relation to the privatisation of SG: further divestment of the state’s majority stake at SG, and spin- or split-off of SP and ST. The first issue might not be of relevance any more because of the expiration of the agreement. However, it would likely to occur since Cemex has brought the case to the International Centre for Settlement of Investment Disputes (ISCID) in Washington and the government still lists SG to be further privatised (Master Plan BUMN 2002-2006, p. 22). Hence, the case of further divestment of SG will not rest until the year of 2006 unless the plan is changed and the case with Cemex is permanently settled. Uncertainty still seems to characterise the further divestment of SG. Suwandi, head of public relations of SG, predicts that it will be carried out even though there is still uncertainty. He states that “… further divestment of SG is not easy to predict; however, it seems that it will proceed …”.
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The second issue is about the spin- or split-off of Semen Padang and Semen Tonasa, the two main subsidiaries of SG. The latest development related to the spinoff case can be seen from information released by the Minister of Society Welfare Co-ordinator, Jusuf Kalla (Tempo, 4 May, 2003, pp. 128-30). Instead of spin-off, these two main subsidiaries would be split-off from SG with a similar ownership structure19. However, similar to the former case, this is also uncertain. The other aspect that is questionable is that there is a process toward a private sector’s domination of the cement industry in the country if the state’s majority stake in SG is sold to Cemex.
19
Under the spin-off, PT SP and PT ST would be separated from SG and reinforced to be fully SOE with 100 per cent of the state ownership. The split-off would take a different path in which the ownership structure would not change for all these companies: the government of Indonesia (51%), Cemex (25.5%), and public (23.5%), except that each company would be managed independently.
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CHAPTER 7
CONCLUSIONS, REFLECTIONS, AND FUTURE RESEARCH The fundamental struggle, then as now, is between capital and labor. That struggle is always about control of the workplace and how the returns of the enterprise shall be divided. In both dimensions, capital is winning big again, claiming a steadily larger share of returns and asserting greater control over employees, just as it did in Marx’s time. The inequalities of wealth and power that Marx decried are marching wider almost everywhere in the world. The imbalances of power lead today to similar excesses and social abuses. (Greider, 1997, p. 39) A boundary is not that at which something stops but, as the Greeks recognised, [a] boundary is that from which something begins its presencing. (Martin Heidegger)1 7.1 Introduction This study is grounded in a “non-realist ontology” which essentially assumes that “the world is socially constructed” (Gaffikin, 2004, p. 3; cf., Chua, 1986; Hines, 1988; Morgan, 1988). In this regard, objects are inescapable from the researcher, and these are the “wholes that cannot be understood in isolation from their contexts”. In addition, such studies have focused on particular cases which have led to the production of “an idiographic body of knowledge” rather than a nomothetic one (Lincoln and Guba, 1985, pp. 37-39). Under such a fundamental belief, understanding the privatisation of a state owned enterprise, i.e. Semen Gresik, could not be detached from an understanding of the grand picture of the national policy of privatisation, the development of SOEs, the 1
Cited in Wijanarko (2003), Kompas, 28 April, p. 1.
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industry environment, and its global context. All of these have been presented in chapters 2-5. As discussed, privatisation has a variety of meanings; however, it is conclusively understood that privatisation is ‘a medium’ of reality construction. It does create a newly constructed distribution of power and wealth and reveals conflicts of interests among various parties (cf., Arnold and Cooper, 1999). The fundamental determinant in adopting privatisation is a government’s inclination to praise laissez faire (liberalism/neo-liberalism) rather than interventionist systems. In Indonesia, the adoption of either interventionist or laissez faire should be in accordance with the country’s constitution of 1945; however, in fact, political change and economic considerations have been possessed as the main catalysts (Mardjana, 1992; Pangestu, 1993; cf., Leeds, 1989, in the case of Malaysia). The choice of a fundamental economic system, if it can be exercised, is not easy for a developing country like Indonesia. Under pressure from high foreign debt, a high dependency on the IMF and the World Bank, as well as a high budget deficit, as has been previously theorised by Ramamurty (1992), coupled with the rise of neo-liberalism and global capitalism have been the likely reasons to lead this country to adopt privatisation. The central issue with privatisation is about efficiency or performance of state ownership vis-a-vis private ownership, and business competition. Private ownership is argued to be more efficient than state ownership for a variety of reasons and is supported by various theories (e.g., Alchian and Allen, 1997, p. 114; Jensen and Meckling, 1980, p. 5; Bozeman, 1987, p.52; Shleifer, 1998). However, empirical
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evidence about efficiency or the performance of SOEs is essentially mixed (Nellis and Kikeri, 1989, pp. 660-62). There are studies that reveal private companies have outperformed the state-owned enterprises (e.g., Boardman and Vining, 1989, Kikeri et al., 1994; Galal et al., 1994; Abeng, 1998; Megginson and Netter, 2001; Cabanda and Ariff, 2002) while others disclose that “there is no systematic evidence that public enterprises are less cost effective than private firms” (e.g., Millward and Parker, 1983; cf., Aharoni, 1986; Millward, 1988; Vickers and Yarrow, 1991), and there are even many SOEs with world class credentials (Heracleous, 1999; Jackson & Price, 1994, p. 20). This mixed evidence leads to the belief that efficiency or performance may have been influenced by a variety of factors beyond ownership, such as competition, enterprises’ goals, political interference or organisational cultures (Aharoni, 1986; Garner, 1988; Vernon-Wortzel and Wortzel, 1989; Jomo, 1993). In this fundamental issue, Vickers and Yarrow diligently conclude that [a]ny form of ownership is inevitably imperfect. Market failures can lead to divergence between profit and welfare objectives in private firms. Government failure leads to divergence between political/bureaucratic and welfare objectives in state-owned enterprises. Monitoring failure leads to divergence between the objectives of enterprise managers and their principals, whether the principals are private owners or political superiors. (1991, p. 130) Vickers and Yarrow assert the imperfection of both laissez faire and state intervention, as was proved in the 1930s and 1970s respectively. The interventionist systems that have recently been under attack have also a history of success particularly in Japan, South Korea and Taiwan (Heald, 1990, pp. 135-44; Lall, 1992; both cited in
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Martin, 1993, pp. 20-21), and it was even previously exercised in Britain and the US, as well as in most African countries and Latin America. (Martin, 1993, pp. 16-24) Despite various reasons for privatisation, the government’s preference in selecting the recipients of wealth distribution (e.g., between the general public and a few of the rich) has also been apparent. Some evidence proves how privatisation has endowed a few of the rich as well as those in the inner circle of policy makers or those who are in power (e.g., an element in the management of SOEs, supporters of a political party, etc.) while it has betrayed the general public and ordinary workers (e.g., LRD, 1983; Clarke, 1993, p. 224, Kernot, 1996; Arnold and Cooper, 1999; Salleh, 1995; Shaw, 2000, p. 180; Uddin and Hopper, 2001). On top of this, privatisation has been affirmed as producing a “massive redistribution of wealth from public to private hands”, and in a global context that such a distribution of wealth has “often [come] from poor countries in the South and East [and has been directed] to investors in North America and Europe.” (Arnold and Cooper, 1999, p. 132). In line with Perks’ assertion that the “accountant and accountancy are relatively powerful in society” (1993, p. 189), accountants and accounting also play an important role in every phase of privatisation, from planning, implementation, to the post implementation period. The ‘conventional’ role of accountants, particularly exercised by the Big Five (Four) accounting firms (Ernst and Young, 1994, p. 129) has been in providing a “technical infrastructure and organisational capacity” in the execution of such a policy, such as valuation, restructuring, consultations, selections of SOEs, evaluation of results, etc. (Arnold and Cooper, 1999, pp. 129, 148; cf., Ernst and 276
Young, 1994, pp. 129-33). These roles are parallel with a tendency to commercialise accounting services and to distance accountants from functioning as a public service profession (Hanlon, 1994, 1996). Such a tendency is a result of the changing nature of professional work which is “increasingly exposed to the exigencies of the marketplace” (Abercrombie, 1991, cited in Hanlon, 1996, p. 339). As such, accountants are more lenient, serving the particular client interest, rather than serving the interest of the general public (Hanlon, 1996, pp. 358-60). For example, “the client for auditing services is increasingly viewed as the company managers rather than the shareholders, the public, or the state” (Hanlon, 1994, pp. 131-34, cited in Hanlon, 1996, p. 339). This tendency brings a danger to the profession, since [t]he practice of buying and selling expertise, transforms intellectual labour into a commodity, and necessarily alters the content and character of expert knowledge. … When expertise becomes a commodity, only [that] knowledge for which there is a market will be produced. (Arnold and Cooper, 1999, p. 149) The pursuing of a ‘conventional’ role leads to the commercialisation of accounting services which in turn would alter the development of accounting knowledge. On top of this, in the case of privatisation, accountants would never enquire about “the end of privatisation” and in particular ask questions about the fundamental nature and implications of such a policy (e.g., the redistribution of power and wealth, class conflicts, and social injustice), but rather they would produce and reproduce conventional measures in facilitating the ‘success’ of privatisation (Arnold and Cooper, 1999, pp. 142-49). Whilst the accountants’ conventional role in privatisation is apparent, accounting’s role itself is also critical, primarily in providing ‘legitimation’ or 277
‘justification’2 for the policy. Accounting information was (is still) utilised by proponents or opponents of privatisation of SG to justify or to legitimate their arguments. Interestingly, different approaches and ‘accounting numbers’ have been utilised to make their arguments legitimate. Thus, it is evident that “[a]ccounting is not a neutral functionary calculus within [a] social struggle” (Arrington, 1990, p. 2; cf., Catchpowle et al., 2004, p. 1038).
This study uses the political economy of accounting (PEA) theoretical framework initiated by Tinker (1980), advanced in the works of Cooper and Sherer (1984), Neimark and Tinker (1986), Willmott (1986), Armstrong (1987), Hopper et al. (1987) and ‘applied’ in the case of privatisation primarily by the works of Shaoul (1997a, 1997b) and Arnold and Cooper (1999), and Uddin and Hopper (2001, 2003). Based on such a theoretical framework, this study has three centres of endeavour. First, it is aimed at comprehending the privatisation of PT Semen Gresik (Persero) Tbk. in its context. As such, the history, discourse and controversies, as well as implications (e.g., distribution of wealth and power) are revealed. Second, the study critically inquires into the benefits claimed by the government of Indonesia in further privatising the company in 1998 and also assesses its particular implications. Finally, in relation to the distribution of wealth and power, this study also critically investigates the role of the multinational company (MNC) in SG as well as the national cement industry. 7.2 SG: the general overview
2
Discussion on the accounting function as “a legitimating institution” can be found particularly in the work of Richardson (1987).
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Semen Gresik was initially established as NV Pabrik Semen Gresik in 1953 and officially launched on 7 August, 1957. SG’s first director was Ir. Ibrahim bin Pangeran Mohammad Zahier. SG is a state-owned company operating in the cement industry and built in the early years of independence. This company has not only survived but has also developed to become the biggest cement firm in Indonesia. The installed production capacity of SG has grown from 250,000 tonnes at its inception to a current 17.25 million tonnes. SG’s efficiency operation measure by the average utilisation rate is better than that of its competitors. The mean of SG’s utilisation rate for the period 1992-2001 was 78.54 per cent, whilst that of its competitors was around 76 per cent. The highest utilisation rate was achieved in 1991 (96.90 per cent) and the lowest one occurred during the crisis in 1998 (57.94 per cent), but it has since recovered to 82.99 per cent in 2001. SG has also been able to transform itself from being dependent on foreign experts to self reliance particularly in the developing and expanding of its manufacturing plant as well as in maintaining and improving efficiency. For example, the planning and construction of the Tuban manufacturing plant was fully carried out by SG’s engineers (LSPEU, 2001, p. 234). Another task that was also fully performed by SG’s experts was its energy conversion from oil to coal (SG, 1987, p. 91). A transformation has also been made since the expansion in 1976, which was marked by the utilisation of dry processing technology. This technology is energy efficient and environmentally friendly (SG, 1987, pp. 31, 33). Since this technological change, SG’s wet processing plants in Gresik were finally dismantled in 1995 (LSPEU, 2001, p. 236).
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In terms of its market share in the industry, SG has experienced a short period of fluctuation but overall its market share has tended to steadily increase. SG’s market share rose from 9.2 per cent in 1991 (ASI, 1994, cited in LSPEU, 2001 p. 120) to 22 per cent in 1995 (LSPEU, 2001, p. 242), and 44 per cent in 2000 (SG [Annual report], 2001, p. 18). The primary market of SG is the domestic market, particularly that of East Java. In recent years SG’s market share in East Java has tended to decline from about 80 per cent at the beginning of the 1980s to about 60 per cent by the beginning of the1990s (LSPEU, 2001, pp. 115, 124). The mean of SG’s domestic sales from 1986 to 2001 was more than 90 per cent and the rest was exported. Cost effectiveness and efficiency are the main reasons for the cement industry to sell its product to the market nearest to its main manufacturing plant because the distribution costs are expensive. SG has consistently exported its products since 1995 after the acquisition of Semen Padang and Semen Tonasa. The mean of export between 1995 and 2001 was around 16 per cent. In 1995, SG’s exports were still less than 1 per cent of sales, but this figure progressively increased and achieved a peak around 33 per cent in 1999. On average, SP has contributed to around 65 per cent of SG’s exports.
The overall financial performance of SG for the period 1993-2000, indicated by several financial ratios (Chapter 5), was better than that of its main competitors, Indocement and Semen Cibinong. For example, for the period 1993-2000, the mean of Semen Gresik’s ROI was 4.49 per cent, whilst that of Indocement and Semen Cibinong was 2.01 per cent and (14.05) per cent respectively. Meanwhile the average ROE of 280
Semen Gresik, Indocement, and Semen Cibinong for the same period was 8.54 per cent, (12.70) per cent, and (30.78) per cent respectively. The mean of the price-earnings ratio (PER) of these three companies for the same period was 19.82 per cent, 11.36 per cent, and 11.49 per cent respectively. However, SG and its competitors have faced a similar fundamental problem that of dealing with an increasing burden of debt. In 1993, the DTA of Semen Gresik was only 29 per cent and this reached 64 per cent by 2001. Indocement faced a more difficult situation. In 1993, Indocement’s DTA was already 62 per cent and this number jumped to 90 per cent in the year 2000, whilst Semen Cibinong’s DTA in 1993 was 57 per cent, and it soared to 220 per cent in the year 2000. These findings are contrary to the general conclusion of previous studies such as those of Megginson et al. (1994), Galal et al. (1992) and Megginson and Netter (2001). Overall, it could be said that SG is a relatively healthy company and has outperformed its main competitors, Indocement and Semen Cibinong. The company has been well developed, and it has the capacity to maintain and improve efficiency. Whilst its main market is domestic, the company’s export performance has tended to increase in recent years particularly after the acquisition of SP and ST. However, SG has recently been faced with an increasing burden of debt. Such a debt-laden company may increase the possibility of privatisation, but the justification of SG’s gradual divestments in 1991, 1995, and 1998 are not based on this fundamental problem. 7.3 The divestment of SG in 1991 and 1995
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The partial divestments of SG in 1991 and 1995 were completed primarily to secure financial resources from the capital market in order to expand its manufacturing plants. The divestment in 1991 was also intended to widen share ownership and its proceeds were utilised to build a new manufacturing plant in Tuban and to optimise Gresik’s Unit II plant (SG, 1991, p. 3). This partial divestment of SG marked the first privatisation of SOEs through the capital market in the country. In this IPO, the government of Indonesia sold 26.97 per cent of its stake to the public, while maintaining its position as the majority shareholder (SG, 1991, p.3; 1995, p. 2). This divestment was carried out following reforms that were intended to improve SOEs’ performance in this country. There have been no controversies arising from this divestment, although it has certainly transformed SG from a purely SOE to a mixed enterprise. It does mean that a new distribution of wealth has been constructed. It was reflected by a transfer of a proportion of ownership to the general public (as individual investors). The second partial divestment of SG in 1995 was carried out through further selling of about 8 per cent of the government stake concurrently with a rights issue. After this transaction, the government preserved 65 per cent of ownership whilst the general public held 35 per cent of the stake in the company (SG, 1995, p. 3; 2001, p. 26). A few other conclusions can be derived from this second partial divestment. First, most (74 per cent) of the proceeds were utilised to acquire 100 per cent of the government’s share in Semen Padang and Semen Tonasa (SG, 1995, p. 5). Second, it was a strategic expansion for Semen Gresik to boost its installed capacity with an increase of more than 282
200 per cent from its previous capacity. The consolidation has also paved the way for further rapid expansion and lead Semen Gresik to recently become the biggest cement industry in the country. Third, it was also intended that the consolidation would maintain the state’s majority ownership in SG which in turn would lead to the strengthening role of the government in the cement industry. Fourth, opposition to the consolidation did occur from employees of Semen Padang. This resistance was finally resolved through the creation of an ‘autonomous management’ for SP, which is reflected in an agreement that “after the acquisition, the business operation of SP will not be changed” (Kajian dampak …, 2001, p. 3). This solution was seen as problematic and created a seed for a potential problem in the following years which recently bore fruit in the demand for spin off of SP and ST from SG. Fifth, this second divestment has resulted in the state’s or general public’s ‘loss’, whilst the syndication managers have received almost 10 per cent in profit from the total value of the transaction. From this case, it can be learnt that the selling of the government stake may result in the government’s loss or ultimately the general public’s loss, while profits will go to a few or certain parties involved in the process of privatisation (cf., Mandell, 2002; LRD, 1983; Kernot, 1996; Quiggin, 2000/2001). Above all, the divestment retained SG’ status as a mixed enterprise, although the government’ stake was reduced, and a new distribution of wealth was formed which increased the general publics’ share to 35 per cent. 7.4 The divestment of SG in 1998
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The third and most controversial partial divestment of SG was carried out in 1998. This divestment was intended, among others, to build a strategic alliance that could improve exports and preserve competitiveness (Master Plan Reformasi BUMN, 1998, p. 38). Considering that the fundamental objective of SG’s divestment was to gain more access to foreign markets, a strategic sales or direct/private placement approach was selected (Ibid., p. 38; Abeng, 2001, p. 109). Consequently, the intended strategic partner of SG was selected from investors who had international market networks. By referring to the government objective which has been to improve SG’s performance on exports, an analysis before and after divestment to enquire about the government claim can be done (cf., Shaoul, 1997a, 1997b). It can be concluded that the result has been mixed. SG’s exports in 1999 were 4,175,000 tonnes, and the minimum export that should have been achieved under the Export Assistance Agreement was only 1.5 million metric tonnes [equivalent to 1.653 million tonnes]. Hence at this point, the government’s objective has been achieved. The exports were more than doubled their target. However, the exports’ target in 2001 was not achieved. SG’s exports in 2001 were 3,972,100 tonnes whilst the target stated in the export agreement was a minimum of 4 million metric tonnes [equivalent to 4.408 million tonnes]. The trend of SG’s exports performance is presented in Figure 7.1.
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Figure 7.1 SG: Dom estic Sales and Exports
Please see print copy for Figure 7.1
Certainly, there was an increase in export performance, although a considerable fluctuation took place in the last three years. Further assessment of SG’s export performance can be done through the utilisation of periodisation analysis (cf., Tinker, 1980, pp. 155-58) based on four different periods as follows: 1. the period of 1988-1991: SG stands alone as a company and is fully a SOE 2. the period of 1992-1994: SG after going public 3. the period of 1995-1997: SG after the acquisition of SP and ST (SG[Group]) 4. the period of 1998-2001: SG after Cemex became its owner and management (SG[Group] plus Cemex). Based on the above periodisation, the export performance of SG, SP, and ST is depicted in Table 7.1 as follows: Table 7.1 SG [Group]: The Mean of Exports
Please see print copy for Table 7.1
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This comparative assessment extends the understanding of SG’s export performances throughout the four periods in which SG has had different status. Table 7.1 also espouses the contribution of each company to the SG’s export performance, and it has been differentiated between the performance before (1995-1998) and after divestment in 1998 (1999-2001). Whilst there was an apparent increase in exports, a few aspects could be noted from Figure 7.1 and Table 7.1. First, the sluggishness of the domestic market during the crisis, the contribution of Semen Padang, and the role of Cemex’s trading networks have contributed to the recent progressive development of SG’s exports. SG’s exports jumped from less than 1 per cent in 1995 to 17.04 per cent in 1998, and reached a peak point in 1999 (32.99 percent) and then considerably declined in 2000 (27.70 per cent) and 2001 (26.15 percent). It is apparent that the improvement in SG’s export performance can not be separated from Cemex’s contribution. Unfortunately, as the President of SPSG notes, the export performance improvement has been at a ‘high price’ since international distribution for this company is controlled by Cemex’s trading division. The ultimate consequence of this is that SG could not expand and develop its own international market. Second, SG’s consistent exporting was essentially carried out after the acquisition of SP and ST. SP contributed significantly to SG’s exports performance. In the period 1992-1994, the 286
average of SP’s exports was 14.64 per cent of its total sales, and it continually increased to 16.26 per cent in 1995-1998 and 39.42 per cent in 1999-2001. On top of these, as can be seen from Table 7.1, SP has significantly contributed to roughly half of SG’s exports. Meanwhile, ST has also contributed roughly about 20 per cent to SG’s exports. Interestingly, after Cemex became SG’s partner, SP’s and ST’s contribution to SG’s exports declined whilst SG’s share significantly improved. Overall, SP, ST, and Cemex have made a positive contribution to SG’s exports. However, the dominant market for SG as well as other cement industries has been the domestic market and in particular those that are relatively near to manufacturing plants. This is because of the cement industry’s nature as a material oriented industry with high distributional costs. Evidence shows that the mean of domestic sales for SG between 1986 and 2001 was 92.9 per cent, although this sale has continually decreased. Thus, government policy to form a strategic partner which has international networks might be a necessity for anticipating a crisis, but it undermines the fact that the cement industry’s dominant markets are domestic and it fails to anticipate the ‘high cost’ of the policy.
The divestment of SG in 1998 was only part of a wider policy to privatise SOEs in Indonesia, and privatisation was an element of SOEs reforms in the country. The reforms were also only a component of a broad economic policy in response to the 1997/1998 economic and financial crisis. The crisis mounted foreign debt and widened the budget deficit which in turn induced the necessity for financial sources to repay foreign debt as well as to fill the deficit. This in turn has led the country to seek a financial loan from 287
the IMF which in turn has increased the dependency on this agency. Such dependency has led the country to pursue policies (e.g., privatisation of SOEs, etc.) under the ‘guidance’ of the IMF (cf., Ramamurty, 1992). At the same time the crisis has driven the country into turmoil and led to a transformation from a New Order era to a Reform era. The Reform era is characterised by the spirit of transparency, accountability, democratisation, decentralization, and the adoption of the Universal Declaration of Human Rights. The issuance of UU No. 39/1999 (Human Rights law) has led to the massive development of employees unions such as SPSG, whilst the enactment of UU No. 22/1999 (Decentralisation/Regional Autonomy law), and UU No. 25/1999 (Law on balance of finances between the Central government and the Regions), has strengthened the local government’s role of managing national resources which are located in its region. In this regard, it can be demonstrated that privatisation in Indonesia generally, and in particular SG, is of a different nature and circumstances to that within the UK. In the UK, privatisation was carried out, among other reasons, to eliminate the unions’ power (Marsh, 1991, p. 472-474; Bishop and Kay, 1989, p. 647; Jackson and Price, 1994, p. 14; Abromeit, 1988, p. 73). There were no such objectives in the case of privatisation in Indonesia and particularly in the divestment of SG. The privatisation of SG has even empowered employee union (SPSG) into one of the powerful stakeholders that are critical of this policy3. This can be seen from SPSG’s main aspirations which are to preserve the
3
A similar tendency occurred in other cases of privatisation in Indonesia such as the case of Indosat as well as re-privatisation of BCA.
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state’s majority stake (51 per cent) in SG and to demand cancellation of the CSPA. The struggle has been supported by many non-governmental organisations (NGOs), legislative and executive bodies in the local government of Gresik, Tuban, East Java Province, West Sumatra, and South Sulawesi as well as prominent political figures in the country (e.g., Apa, Mengapa…, 2002, p. 6; Rais, 2002; Gapura No. 11/Th. III/25 March, 2002; No. 19/Th. III/20 May, 2002; result of my field work’s interview). Further conclusion can also be made following the enactment of UU No. 22/1999 and UU No. 25/1999. Since the issuance of these regulations, the local government has definitely more voice to rise over any policies issued by the central government including that of privatisation. The local governments of Tuban, Gresik, East Java, West Sumatra, and South Sulawesi have become the other powerful stakeholders of SG with a variety of voices but they are particularly opposed the hegemonic nature of MNC. The divestment of SG in 1998 was a difficult political and economic decision exercised by the central government of Indonesia. The process was considered a complex decision since there was involvement with certain parties whose relatives were high level government officials. It could also be seen as a complicated decision since it was instigated during the crisis under imposed conditionalities from the IMF as well as in the context of the emergence of neo-liberalism and global capitalism. As a result, the government was unable to make the best decision. In this regard, although the government affirmed that the divestment of SG in 1998 had the highest bid price as well as a higher PER than the divestment in 1991, such a claim was rejected by opponents of the divestment. This opposition is being based on a different but more realistic approach such as an estimation 289
of value per tonne capacity, the lowest estimation of international standard replacement cost, and a comparative value per tonne capacity with similar investment in other countries. Finally, the divestment of SG in 1998 sparked heavy opposition from various stakeholders not only because of it was viewed as profiting Cemex (MNC), but also because of various concerns ranging from justice and fairness, job security, to the economic sovereignty. Another important aspect of the SG divestments is that unlike several cases in the UK and Malaysia (Chapter 3) which showed the reduction of employees as well as deteriorating job conditions or changing the nature of jobs after privatisation, the divestment of SG had a ‘positive’ impact on total employment in SG. Prior to divestment in 1991, total number of employees of SG were 1,743 (SG [Prospectus], 1991, p. 13), and this figure increased to 2,059 in 1995 (SG [Prospectus], 1995, p. 38), and 2.377 at the end 2000 (SG [Prospectus], 2001, p. 32). Such phenomenon is seen as a consequence of good performance rather a direct impact of divestments. 7.5 The distribution of power and wealth and the hegemonic nature of MNC From the case of SG’s divestment in 1998, it can be learnt that there are social (power) struggle among stakeholders (cf., Arnold and Cooper, 1999). Particular groups of stakeholders support divestment and further divestment of SG, whilst others oppose such a policy. This struggle is still continuing since no final decision on further divestment of SG has been reached. It is parallel to Marx’s critique which is perhaps best illustrated by the words of Greider as follows:
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[t]he fundamental struggle, then as now, is between capital and labor. That struggle is always about control of the workplace and how the returns of the enterprise shall be divided. In both dimensions, capital is winning big again, claiming a steadily larger share of returns and asserting greater control over employees, just as it did in Marx’s time. The inequalities of wealth and power that Marx decried are marching wider almost everywhere in the world. The imbalances of power lead today to similar excesses and social abuses. (1997, p. 39) A few points can be noted from Greider’s assertion, which is grounded in Marx’s critique on capitalism. First, the struggle for power is essentially between the capitalist and the working class. In the case of SG, wider actors exist in the struggle although the main actors can be grouped parallel to Greider’s claim: the capitalist and its associates (Cemex/MNC, the central government, and elements within the management) vis-à-vis the working class and its supporters (employees’ unions in SG, SP and ST, and the local governments in Gresik, Tuban, East Java, West Sumatra, and South Sulawesi, etc.). There are also some other proponents as well as opponents of further privatisation of SG among academics, NGOs activists, as well as in the general public. Second, the struggle is related to the distribution of wealth and power. In this regard, such a struggle is apparent and affirms Greider’s claim that to some extent the capitalist has won over its opponents. The new constructed distributional of wealth in SG is reflected in the new structure of ownership in Figure 7.2.
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Figure 7.2 SG: The Distribution of Wealth
Please see print copy for Figure 7.2
Cemex has 25.53 per cent of SG’s stake, however it has some privileges beyond its real ownership. First, Cemex has a 33.33 per cent voting right on the Board of Directors and a 40 per cent voting right on the Board of Commissioners or overall about 36.67 per cent on the boards. This privilege is not owned by other minority shareholders who control 23.46 per cent of SG’ share, almost a similar proportion to Cemex’s interest in SG. A recently selected independent commissioner is the only representative of these minority shareholders4. The new overall distribution of ‘power’ which is reflected in the structure of the boards is presented in Figure 7.3.
4
Based on my observation of SG’s annual general meeting of shareholders, I doubt whether an independent commissioner truly represents the minority shareholders’ view; however, the idea to have a representation of minority interest on the boards is an important step for the improvement of good corporate governance.
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Figure 7.3 SG: The Distribution of Power
Please see print copy for Figure 7.3
Second, the other privileges owned by Cemex are reflected in the technical assistance agreement and export assistance agreements. The privileges in these agreements that unfairly profit this MNC have been heavily criticised by the President of SPSG and others (Chapter 6). Such privileges were constructed through ‘manufacturing’ the language of agreement. For example, although Cemex is legally responsible to assist SG in a variety of technical aspects as well as to achieve certain exports targets, such responsibilities have been framed with some reservations in the agreements, such as by adding the words “to make the best effort” or “depending on the market conditions”. Hence, failure to fulfil certain responsibilities may be blamed on ‘other factors’ (e.g., market conditions, etc.) rather than the failure of this MNC. In such a case, this MNC will never ‘lose’. Such a phenomenon can be compared to the state’s put option debacle. In this regard, although the government of Indonesia has ‘the right’ and not the obligation to further divest SG to Cemex, in fact, this MNC has the extraordinary power to push the government to exercise the put option whilst the government ‘looks so weak’. For example, with its failure to negotiate within the national boundary, Cemex brought the case 293
to the international forum (ISCID), and the government of Indonesia arranged to settle the case out of court (Tempo Interaktif, 29 January, 2004). This type of agreement which gives extraordinary privileges to the MNC at the expense of SG, the state or the general public, has led to a popular joke heard in a variety of informal discussions such as ‘whether it is the stupidity of leaders in this country or the extraordinary smart people who run the MNC’. However, ‘the power’ of the MNC to do such things to achieve its objective (e.g., accumulation of wealth and power) seems limitless. It is not uncommon that the MNC “demands a ‘high price’ from the government in exchange for their investment”, as Ash et al. provide an example as follows: Mercedes expressed a willingness to acquire a 31 per cent and 20 per cent share respectively in two of the CSFR’s [Czech and Slovak Federative Republic] main manufacturers of trucks, Avia and Liaz, but only on the understanding that [the] CSFR government provided the company with tax holidays, agreed to the removal tariffs on the import of spare parts for the company, provided state subsidies for investment, and agreed to the introduction of a 40% tariffs on the imports of utility vehicles into the CSFR so as to protect Mercedes Benz’s investment. In a similar vein, in 1991, as a condition for Volkswagen taking a stake in Skoda the CSFR government was forced to concede to Volkswagen demands for the imposition of an import tariff on cars entering the CSFR market so as to protect VW’s investment. … In Poland Fiat, General Motors and Volkswagen have pressurised the government into allowing these companies to import 10,000 vehicles apiece duty free in exchange for an agreement to invest $50 million in the Polish automobile industry.” (1994, p. 227) The above evidence affirms Winters’ claim that there is “extreme asymmetries of power” in capitalism (1996, p. ix). Capitalists have the power to determine “where, how much, and when to invest” the capital that they control which in turn give them “tremendous
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political power” (Winters, 1996, p. ix) which they may exercise to defeat the state as well as other social ‘classes’ in society. With capital and power in hand, the capitalist is commonly the winner over others in the struggle for the distribution of wealth and power. In the case of SG, to some extent, Cemex could be said to have won the struggle in terms of privileges and profits from the transaction, although its struggle to control majority ownership in SG is still to be achieved. It is, perhaps, as a matter of ‘the timing’, since Cemex seems to have never stopped from its initial objective to own the majority stake in SG. On the other hand, the government of Indonesia has now to deal with its self-created problem, because of the decision made by the previous administration. The debacle of SG will continue until it finds closure. However, based on other privatisation experiences in this country, particularly the cases of Indosat and BCA, the capitalist will finally defeat the opposition (e.g., employee union and others). Whilst further divestment of SG is likely to happen because of a variety of factors (e.g., SG is still listed to be privatised in the Masterplan of SOEs 2002-2006, the case has been brought to ISCID, and the government still faces the burden of debt, the budget deficit, and is dependent on the international agency), a new political configuration post the 2004 elections will likely be the determinant of further divestment of SG as well as the whole privatisation policy in Indonesia. A further aspect that can be espoused from the divestment of SG in 1998 is the broad policy on the distribution of wealth. Whilst the state’s policy on the matter at the 295
company level was unclear, the government of Indonesia has such rhetoric in the master plan of SOEs’ reforms. However, it has no clear policy on how to materialise it. In the case of SG, for example, there is no certain policy on how the ‘final’ distribution of wealth would be achieved. In Malaysia, despite some apparent weaknesses, the policy that alleviates the distribution of wealth has been initiated through the National Economic Policy (NEP). Furthermore, the national policy of privatisation as well as a case by case privatisation (e.g., Telekom Malaysia and the Port Klang Container Terminal) have been utilised to achieve and to revitalise the NEP’s objective, particularly the distribution of wealth. An equitable distribution of wealth among Malaysia’s multicultural society was the cornerstone of the NEP. In the case of the privatisation of Telekom Malaysia, there is a placement guideline that shows how the distribution of wealth would be achieved. In the case of the port Klang Container Terminal, a comparable approach has been used (Chapter 3). There is no such policy in the case of SG or in the national policy of privatisation in Indonesia. Finally, recent developments show the hegemonic nature of MNCs in the cement industry in Indonesia. So far, three MNCs (Lafarge, Holderbank/Holcim, and Heidelberger) own majority stakes in Semen Andalas, Semen Cibinong, and Indocement, whilst the fourth MNC (Cemex) controls a minority interest but with special privileges in Semen Gresik. Semen Andalas, Semen Cibinong, Indocement, and Semen Gresik control 94.28 per cent of installed production capacity in the cement industry in this country (Table 6.7). In addition, these four cement industries control 296
nearly 94 per cent of the national market shares5 (Warta Ekonomi, No.14/XV/16, July 2003, pp. 22-23). Combining both the information from the production capacity and the ownership structure of the four MNCs, the distribution of wealth in the cement industry can be generated as follows (Figure 7.4) (cf., Lubis et al., 2001, pp. 45-47):
Figure 7.4 Distribution of Wealth in the Cem ent Industry in Indonesia
Please see print copy for Figure 7.4
Thus, with this current ownership structure, the MNCs already control around twothirds of the national production capacity. This picture would significantly change if the majority stake in SG be transferred to Cemex (Figure 7.5)6. Such a phenomenon, unfortunately perhaps is not the main concern of the government, as comparable cases
5
This phenomenon affirmed Orwell’s critique on Hayek’s ‘The Road to Serfdom.’ He asserts that “… [Hayek] does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State,” and most importantly, unlike Hayek, Orwell concedes that “free capitalism necessarily leads to monopoly” (cited in Gissurarson, 1984, p. 10). 6 In the case of privatisation of the Czech cement industry (Williams, 1993), foreign firms were also deeply involved; however, the extent of which foreign companies control over the Czech cement industry were considerably less than that in Indonesia. Williams notes that “no one foreign partner controls more than 20% of the Czechoslovakian cement market” (1993, p. 67).
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have also taken place in other industrial sectors in Indonesia such as in the banking and telecommunication industries.
Figure 7.5 Distribution of Wealth in the Cement Industry in Indonesia if SG majority stake is owned by Cemex
Please see print copy for Figure 7.5
Perhaps, the Commission for Competition Surveillance (Komisi Pengawas Persaingan Usaha (KPPU)) which has a mandate to implement the Antitrust and competition law (UU No. 5/1999) should take the lead and critically scrutinise and even challenge the hegemonic nature of these MNCs. 7.6 Reflections: policy, accounting and accountability Being acquainted with such a social phenomenon, the researcher is able to make reflections and propose recommendations, particularly in relation to future policy as well as for the improvement of accounting and accountability. First of all, by looking at the ‘story’ of SG’s divestments and the history of the company’s success, it can be suggested that the government of Indonesia should make a firm decision to settle the SG debacle. This would be important for SG, the government, the general public, and the other stakeholders as well as Cemex and other minority shareholders. For SG, a firm 298
decision within a certain time frame would allow the company to focus its energy in order to build a prosperous future and to deal with increasing company debt. Comparable benefits could be derived by other related parties. When the SG case is settled, the central government could put aside one case and focus on a variety of problems faced by the country. At the same time, Cemex could relax from the tension of the general opposition to it within this country, and move forward to do and expand its business. Up to the present day, it is not easy to say whether there is true, genuine intent to settle the case as policy agenda. For example, after the general public has strongly opposed divestment of the state’s majority stake in SG and this opposition has resulted in a modification of the government’s decision, central government still lists SG as one of the companies to be further privatised in the Master plan of SOEs 2002-2006. This means that the government still intends to sell the company even though the general public has already rejected further privatisation of SG7. By placing SG in the plan, the government exercises a strategy of ‘buying time’ which is not an uncommon way for the state to deal with delicate political decisions in this country. It is a strategy which waits and looks for change in its opponent’s capacity in the foreseeable future. When its opponent’s capacity is considered weak, a decision is then executed. In the case of SG, such an opportunity is perhaps expected to occur after some of the strong activists of SPSG retire in the next 2-3 years. In the case of Cemex, its intention to acquire the
7
There is a real (or potential) danger in formulating and implementing a policy which ignores the general public’s views; the experience of civil disobedience in Malaysia in May, 1969 is a case in point (see for example Mahathir’s The Malay Dilemma (1970, pp. 4-11).
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majority stake at SG seems unbreakable, as evidence shows that Cemex recently brought its case to the International Centre for Settlement of Investment Disputes (ISCID) in Washington. It is expected that further divestment of SG will be counter productive for all parties particularly those of central government and Cemex since opposition will continue from SPSG and its broad supporters including those in Padang, West Sumatra and South Sulawesi. A comparable firm decision is needed in the case of spin-off’s demand from SP and ST. Considering that the spin-offs would have a great affect on all related parties (e.g., SG, Cemex, the central and local governments, and the general public), there should be a careful and comprehensive analysis undertaken and negotiations should be pursued to achieve optimum solutions. It is argued that responding to, and the delivering of the stakeholders’ needs and hopes are fundamental in achieving such a firm solution. On top of this, redefining and refining the state’s fundamental role in the national economy as well as reconstructing the nature and objectives of SOEs is a necessity. Second, whilst privatisation of SOEs in Indonesia is inevitable because of various factors comparable to that theorised by Ramamurty (1999), such a policy is argued to be framed in a comprehensive manner. Compared to the UK experience, the privatisation process in Indonesia so far has failed to address the fundamental role of the Supreme Auditor General. In the UK, the National Audit Office (NAO) has played an important role primarily in evaluating “how well and to what extent government departments have met their objectives for individual privatisations” (Wright and Thompson, 1994, p. 62). In a 300
more specific tone, Beauchamp pointed out that the audit is intended to examine “the economy, efficiency and effectiveness” of privatisation, and it focuses on the whole process of privatisation and covers “the preparations and arrangements for the sales, the financial outcome, and whether Government objectives have been achieved” (1990, pp. 55-56). Such measures have not been found in the case of SG as well as in other privatisation transactions in Indonesia. Another fundamental aspect to refer to the UK experience was about regulation. It is an important measure to guarantee that business players and society will both be fairly and justifiably treated in the post-privatisation process. Thus, regulation should be considered in advance and not be left until after privatisation has been completed (Baldwin, 1990, pp. 104-105). Third, the financial position of SG as well as SOEs in general has been characterised by mounting debt (cf., Triaji, 2003, pp. 11-14) and thus further reforms that address these problems are necessary. It is argued that further reforms shall be constructed to solve the fundamental problems faced by the SOEs and directed toward the goals of SOEs as well as the general objectives of the government. The Master Plan Reforms of SOEs 1998 and the Master Plan of SOEs 2002-2006 have outlined and addressed the fundamental aspects of SOEs’ reforms which include the implementation of good corporate governance, improving transparency, enacting laws on SOEs, restructuring and privatisation, and many others, with restructuring and privatisation being seen as the cornerstone of such reforms. With these plans, the debt problem is expected to be resolved through restructuring.
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It is suggested that the debt-laden issue needs to be raised explicitly. This is in line with Linnan’s (1994, 1999) arguments that accepting Modigliani and Miller’s theory would be problematic in the case of Indonesia (Chapter 5). By raising the debt issue, it is possible that the mismanagement of the past could be lifted and most importantly it would be an example to benefits future endeavours. Concurrent with the alleviation of SOEs debts, it is recommended that the rules governing remunerations/ compensations and post service liabilities to the Board of Commissioners and Board of Directors need to be issued, since the practice of providing disproportionate remunerations and post service liabilities to the Boards are not uncommon (Triaji, 2003; Kompas, 24 March, 2002, p. 27) (Chapter 4). Fourth, privatisation in Indonesia is as much a political decision as it is an economic policy choice, and this trend is expected to continue although its scope, limitation, and speed, will depend on the new elected government of the 2004 election. Under the Megawati leadership, there will be perhaps not much change in policy since Laksamana Sukardi or his immediate counterpart is expected to lead the similar ministerial post. However a new configuration in the House of Representatives might have a different voice since there has been no single majority party in the House. It is suggested that through certain legislation, the scope and limitation of this policy shall be more plainly determined (cf., Cholil Hasan’s views in chapter 6). Such legislation might be compared to the Foreign Capital Investment Act (UU PMA No. 1/1967). Under this suggested legislation, the government would be prevented from selling
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‘everything’ (cf., Mandell, 2002), and the general public would have certain grounds to evaluate whether a policy to privatise certain SOEs is lawful or unjustifiable. However, it is expected that to produce such determined legislation would not be easy because it is a product of the political process. This was proven by the issuance of the Law of SOEs No. 19/2003. Before Law of SOEs No. 19/2003 was issued, it was hoped that the legislation would clearly determine the limits of privatisation which protect strategic industries as well as industries that utilise unrecoverable resources. Unfortunately, the enacted legislation gives government an even stronger justification to privatise nearly ‘everything’ except the military and other industries subject to ‘further’ government regulation (Law of SOEs No. 19/2003, verse 77). This is not surprising since such legislation is a product of a ‘corrupt’ political process, as noted by McBeth (2003) in a report in the Far Eastern Economic Review as follows: [o]ne former minister who served in the cabinet of President Abdurrahman Wahid estimates the government paid each of the 50 members of parliament's nine commissions between 10 million rupiah ($1,200) and 50 million rupiah to secure [the] passage of individual pieces of legislation. That is only the tip of the iceberg. Parliamentary sources say pay-offs are common in the process of filling senior bureaucratic positions, in the creation of new provinces and districts and in the disbursement of tax revenue to local governments’8.
Betrayal of the general public is not uncommon in Indonesian politics even in this reform era in which the spirit of transparency and accountability is the daily rhetoric. Recently, the practice of corruption has been widely publicised and the 8
McBeth, J. (2003), The Betrayal of Indonesia, http://www.feer.com/cgi-bin/prog/printeasy?id= 87836.7937010811, June 26.
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country has been named as one among the most corrupt countries in the world (see for example Transparency International and Global Corruption report, http://www.transparency.org/; http://www.globalcorruptionreport.org/). Fifth, learning from the development of the cement industry in Indonesia which was mostly established through joint venture, it is important to develop a scheme based on a just and fair consideration which will encompass the interests of government (central and local), the MNCs, and other stakeholders. Developing such a scheme would essentially touch the fundamental nature of redefinition and reconstruction of the roles of central and local government, the MNCs, and other parties in the economy (e.g., co-operative and small and medium size enterprises) and not just be limited to the cement industry. This will ultimately touch the issue of the distribution of wealth and power. In Malaysia, it has been carried out through the National Economic Policy. The NEP was launched not only to eradicate poverty but most importantly to restructure the imbalanced economic role of Bumiputera, Non-Malay (Chinese and Indian Malay), and foreign investors. Ultimately, the policy is also intended towards “inter-ethnic peace as well as social justice” (Means, 1991, p. 24). The NEP has had considerable success in achieving such objectives. It has reduced the rate of poverty from 37 per cent in 1973 to 15 per cent in 1987. It has also improved the shares of Bumiputera and Chinese Malay in the economy from 2.4 per cent and 28.3 per cent in 1970 to 20.6 per cent and 43.4 per cent in 1995 respectively, and at the same time there has been a reduction in the domination of foreign investors from more than 60 per cent to less than 30 per cent 304
(Gomez dan Jomo, 1999, p. 168, cited from diverse resources; see also Jomo, 1993; Alamgir, 1994). On top of this is the achievement of racial and national harmony in Malaysia (Means, 1991, pp. 23-27)9. The NEP then functioned as fundamental basis in the privatisation policy in Malaysia. The latter was implemented to revitalise and to facilitate the achievement of the NEP objectives as has been discussed in chapter 3. Indonesian society is far more complex than that of Malaysia; hence, a different approach but with comparable fundamental beliefs should be pursued. The question that remains is whether the government, the international agencies (the IMF and the World Bank), as well as the MNC have a genuine intention to do so. Whilst the promotion of democracy is underway, leaving the issues of the distribution of wealth could bring a catastrophe in the foreseeable future when national harmony might not be able to be achieved. A wise reminder from Tun Abdul Razak bin Hussein is important for the leaders in Indonesia. He stated that [d]emocracy cannot work …in terms of political equality alone. The democratic process must be spelt out in terms of more equitable distribution of wealth and opportunity. (Straits Times, 10 November 1969, h. 5, as cited by Means, 1991, h. 11). Such a message was likewise delivered by one of the founding fathers of Indonesia, Hatta, a few years earlier. Hatta, for example, was critical of capitalist systems and
9
There are different views on the issues of racial harmony in Malaysia. Stewart, for example, claims that there is “growing segregation of the races” rather than unifying of the ethnic groups, particularly amongst the young generation in Malaysia (2003, pp. vi-xii). Thus, even though one of the primary thrusts of the NEP, the distribution of wealth, is believed to have considerable role in creating national harmony in Malaysia, an effort to continuously construct and reconstruct of such fundamental tenet is in necessity.
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stressed the important of social democracy which encompasses political and economic democracy. He believed that such democracy was “in conformity with the ideals of the Indonesian struggle for independence, which aimed at realisation of the principles of humanity and social justice” (Hatta, 1956, cited in Feith and Castles, 1970, pp. 32-40); unfortunately, it is still a dream not yet realised. Sixth, considering that heavy intervention from shareholders and other outsiders is inherent in the management of SOEs (Abeng 2001, pp. 32-38; Triaji, 2003, p. 11) which results in the underperforming of SOEs, an effort has to be made to eliminate or reduce such intervention. This would overhaul a variety of aspects such as the redefinition and reconstruction linkages between SOEs and government institutions (e.g., Ministry of Finance, Ministry of SOEs, Technical Ministries, and the local governments), and the reorientation of SOEs’ objectives.
Baswir (2004b), for example, proposes clear separation between ministerial posts (bureaucracies) and SOEs. He suggests that all SOEs should be placed under the autonomous SOEs’ Management Board (Badan Pengelola BUMN). As a consequence, the appointment of the Board of Directors and the Board of Commissioners should be carried out by an independent board which distances itself from the political process that is currently in practice. Another consequence of such a proposal would be the transfer of the state’s shareholders from the Minister of Finance/Minister of SOEs to the autonomous boards. Baswir’s proposal to appoint all members of SOEs’ boards based on a true merit system is justifiable. It is expected to reduce the involvement of 306
incapable bureaucrats in SOEs as well as to eliminate ‘collusion’ practice in the appointment process10.
However, his idea to institutionalise autonomous SOEs’ Management Boards which would assume responsibility to control all SOEs has a potential problem. It is expected to raise the problem of power concentration that is comparable to the role the Ministry of SOEs at the present time. As proven by experience, concentration of power tends to produce an abuse of power. For example, Laksamana Sukardi as the Minister of SOEs who assumes responsibility for the state’s shareholders has appointed himself as President Commissioner of Pertamina (a state-owned enterprise in the oil industry). In the case of Indonesia’s multicultural society as well as multi factions, distributive power is argued to be more effective in reducing the potential abuse of power which is inherent in the concentration of power.
Seventh, as pointed out earlier, accountants assume a “conventional” role which is to provide “technical infrastructure and organisational capacity” to execute privatisation (Arnold and Cooper, 1999) that tend to undermine the general public 10
A report from Investor, 13-27 March, 2001, p. 15, discloses an example of collusion practices in the appointment of SOEs’ management position as follows: "[i]n the initial negotiations, a candidate is asked to deposit a down payment of between Rp. 500 million (about US$50,000) to Rp. 1.5 billion (about US$ 150,000). Then the individual or team recommending the candidate lobbies their contact in the ministry. If the person is selected, then an additional larger sum is to be given. If not successful, the candidate loses the down payment" (cited in Habir, 2002, p. 56). Thus Habir concludes that, although it is difficult to substantiate, "[t]he practice of selling state enterprise management positions seems to be institutionalised" (2002, p. 56). The collusion practice has recently spread as Investor, October, 2001, p. 10 reported that "[o]ne state enterprise director said that in the present situation, more groups were milking state enterprises compared to the Soeharto era in which only Golkar, the dominant government party then, the military, and bureaucracy officials had the political power to do so. Now there are many more parties, and the larger ones [have] had strong influence on the government” (cited in Habir, 2002, p. 55). Appointing a political party’s supporter in the management of SOEs is also another practice for generating funding for the party (Habir, 2002, p. 55)
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interest. A comparable phenomenon took place in the case of SG. In 1991, State Internal Audit Agency (BPKP) of East Java Province performed an audit of financial statements of SG prior to divestment of SG in 1991 (SG [Prospectus], 1991). Such role was done by an affiliation of Ernst & Young in Indonesia both in 1995 and in 1998 (SG [Prospectus], 1995; (SG [Annual Report], 1998). In addition, CSS Management and Tax Consultants which is affiliated to another international accounting firm (Deloitte) performed an appraisal of Semen Padang’s and Semen Tonasa’s shares prior to acquisition by Semen Gresik in 1995. The other professions involved in the process were lawyers and securities company (e.g., Goldman Sachs performed as financial advisor in the divestment in 1998). Such phenomenon is not only limited to the case of SG but has also taken place in the whole privatisation agenda in Indonesia. The international accounting firms, such as Ernst and Young, and Price Waterhouse Coopers, were involved in such process (Abeng, 2001, p. 129).
In the case of privatisation, accountants may also exercise their role to serve the general public, particularly in enhancing transparency and accountability. To do so, the accounting profession can produce ‘regulations’ (standards) to enhance transparency and accountability. Certain standards basically consist of rules and/or the scope of (financial) information that should or should not be published in accounting reports. Unfortunately, focus to enhance transparency and accountability is heavily placed on
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the disclosure requirements, whilst it rarely touches the main reports, e.g., the forms and substances of income statement, balance sheet, etc11.
Considering that constructing and reconstructing of accounting regulation is a social and political process (Willmott et al., 1992; Merino and Neimark, 1982; Lent, 1997; cf., Hopwood et al., 1979; Francis, 1990), it is ‘possible’ that accounting regulations require a clear and transparent report on debt management, remuneration and post-service liability in SOEs. There was a fundamental problem in SOEs relating to debt management. There was also a tendency for the abuse of power in the determination of a compensation scheme since the boards determined those by themselves, although they may have had a certain committee to do so. For example, recent information shows how management of a certain SOEs raised their own ‘compensation’ whilst the company was in a difficult position (Jawa Pos, 20-21 June, 2004; Antara, 26 October, 2003; Media Indonesia, 14 October, 2003).
Enhancing transparency in such a case would lead to being able to see whether ‘a fair and a just distribution’ had been achieved, rather than merely a focus on income or profit. This is what Tinker (1980) and Cooper and Sherer (1984) advocated in their introduction to the PEA. At the same time a similar rule could also be produced to prevent excessive payments by the company to its employees on behalf of welfare improvement
11
Elaboration on the “calls for expanded disclosures” particularly in relation to the fairness doctrine in accounting can be found for example in Belkaoui (2000, pp. 205-12). Recent discourse on related issues post various accounting scandals may be observed in Burrowes et al. (2004), Cullinan, (2004), Unerman and O'Dwyer (2004), cf., Sterling (2003), Wells (2003), Walker (2003), Leibler (2003), Ijiri, (1983).
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while sacrificing the sustainability of a company. Such standards would encourage fairness and justice and strengthen public access to information (Coy et al., 2001).
Eight, public access to information is the fundamental tenet of enhancing transparency and accountability, and it could be achieved through certain regulations or law. Public access to information is a fundamental prerequisite to fight secrecy and be more open to accountability since “the struggle for information is, first and last, a struggle for accountability” (Pope, 2003, p. 8). As suggested by Transparency International (2003) in the Global Corruption Report 2003, a regulation may adopt the underlying concept of the public’s right to information as stated in the Universal Declaration of Human Rights espoused by the United Nations in 1948 (Article 19). The same kind of law has been implemented in the US as federal Law under the Freedom of Information Act of 1967, and in New Zealand under the Official Information Act of 1982 (Coy and Pratt, 1998). The Official Information Act 1982 in New Zealand, for instance, “entitles the public to gain access to broadly-based and detailed official information held by governments and public sector organisations” (Coy and Pratt, 1998, p. 541).
7.7 Direction of future research Future critical accounting studies which focus on privatisation in Indonesia, or perhaps elsewhere, may be advanced. A comparable approach to this study could be utilised for enquiry into different industries such as telecommunication, energy, banking, pharmacy, mining, plantations, or ports. It is argued that such studies would 310
do better to focus on certain industrial sectors rather than on all SOEs in this country, since every industry has unique characteristics. A comparative study between industrial sectors could then be investigated. However, privatisation, as has been revealed in this study, encompasses ideology, constitution/law, politics, the economy, financial and social aspects as well as transparency and accountability issues. Thus, critical accounting studies are certainly best observed from a perspective that incorporates such a variety of aspects.
Whilst PEA is argued as being the best framework for such studies, it could be combined with an accountability perspective that would be particularly derived from the works of Stewart (1984), Coy et al. (2000), Normanton (1971), Chen (1975), Wiltshire (1986), Mulgan (1997a, 1997b), Coy and Pratt (1998), Funnell (2003), Broadbent and Laughlin (2003), Pallot, (2003), English, (2003), and others. An initiative has been pursued i this matter but is still in the initial phase. At this point, I mark a boundary of this quest, as I imagine that this is perhaps the boundary suggested by the Greeks, as Martin Heidegger eloquently states
“[a] boundary is not that at which something stops but, as the Greeks recognised, [a] boundary is that from which something begins its presencing.”
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Appendix 4.3 Summary of the Development of SOEs, SOEs’ reforms and Privatisation in Indonesia Year 1945 - 1960
Strategic issues The Republic of Indonesia gained independence on 17 August, 1945.
The government of Indonesia Soekarno era (the Old order era), 1945 –1966
SOEs were established through nationalisation of foreign companies and by establishing new enterprises.
Notes Nationalisation of foreign companies (e.g., agriculture and plantation, industry and mining, trading, etc.) (Table 4.1) SOEs had been governed under two colonial laws: 1. The ICW (Indische Comptabiliteitswet) (e.g., Balai Pustaka/publisher and Damri/transportation) 2. The IBW (Indische Bedrijvenwet) (e.g., Jawatan Pos-TelegrapTelepone/ telecommunication, and Garam/salt and soda) Two state-owned banks were established: 1. Bank Industri Negara/BIN (State Industry Bank) 2. Bank Negara Indonesia (Indonesia State Bank)
1960 – 1967 (The era of Perusahaan Negara)
The issuance of government regulation No. 19/1960
Soekarno’s Guided Democracy and Guided Economy era. The corporatist system (Fierlbeck, 1994)
De Javasche Bank, the Dutch colonial Bank, was nationalised and converted into Bank Indonesia (the Central Bank of Indonesia) Different types of companies under government control were consolidated and transformed into state-enterprises (Perusahaan Negara). SOEs had been governed by Indonesian law. SOEs functioned as the agents for development and profit making companies. Heavy state intervention in the economy.
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1967 – 1973 (The era of Perjan, Perum and Persero)
1973 – 1982
Presidential Decree/Act No. 17/1967 The issuance of Act No. 9/1969
Soeharto era (the New Order era), 1967-1998.
State-enterprises (Perusahaan Negara) were transformed into 3 (three) type of state-companies: 1. Perusahaan Jawatan/Perjan (Bureau Enterprises) 2. Perusahaan Umum/Perum (Public Enterprises) 3. Perusahaan Perseroan/Persero (Limited Liability Enterprises)
Presidential Instruction No. 11/1973 (8 December, 1973) The issuance of Act No. 1/1967 (the Foreign Capital Investment Act / Undang-undang Penanaman Modal Asing)
Rolled over the controlling power of Persero from Minister of Finance to the technical ministry. To encourage foreign investment in certain industries except in ports; production, transmission, and distribution of energy (listrik); telecommunication; education; airline; water; train; atomic energy (pembangkitan tenaga atom); mass media, arms; ammunition and military industries (Article 6.1 and 6.2).
The issuance of Act No. 12/1967 (the Cooperative Act / Undang-undang tentang Koperasi) and Act No. 6/1968 (the Domestic Capital Investment Act / Undang-undang Penanaman Modal Dalam Negeri)
To promote the development of co-operatives and domestic private investment.
Initial evidence of privatisation (Profil and Anatomi BUMN, Vol. I, Pusat Data Business Indonesia, 1987, p. 140, cited in Pangestu and Habir, 1989, p. 238). The period of the oil boom
Three economic actors: SOEs, private sectors, both foreign and domestic investors, and co-operatives were promoted as an interpretation of the notion of democratic economy mandated by the 1945 Constitution, article of 33. The adoption of management contract in PT Perikanan Samodra Besar, PT Bali Raya, PT Intirub, and PT Gadjah Tunggal. The selling of the government’s minority stake in SOEs. Heavy government participation capital to the SOEs (protectionism and interventionist policies).
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1982 – 1988/1989
The post oil boom period
Oil prices were declining while debt payment was increasing.
The issuance of regulation No. 3/1983
To synchronise the role of technical ministries and the Ministry of Finance in supervision and co-ordination of SOEs.
The issuance of the Presidential Instruction (Inpres) No. 4/1985 1984
Jakarta Stock Exchange was revitalised Deregulation in the capital market in 1987/1988 The issuance of Pakto 1988 The issuance of Presidential Instruction (Inpres) No. 5/1988 The issuance of the Ministry of Finance’s decisions No. 740/KMK/1989 and No. 826/KMK.013/1992
1988
1989
The Strategic Industries Management Boards (Badan Pengelola Industri Strategis/BPIS) was established.
1991-1997
Partial divestments of SOEs 1991 1995
The first partial divestment of PT Semen Gresik The second partial divestment of PT Semen Gresik
1998
The third partial divestment of PT Semen Gresik
To restructure and deregulate ports and shipping procedures. Marking an effort towards privatisation in the physical inspection of imports (Sjahrir, 1987, pp. 199-216).
Liberalisation of the banking sector The adoption of common financial performance measurements for SOEs. SOEs would be evaluated and classified into four groups: very sound, sound, less sound or unsound. Best business practices (e.g., preparing corporate planning and annual report, and implementation of remuneration system linked to performance) were imposed to SOEs. To incorporate 10 (ten) strategic industries which include PT IPTN (aircraft manufacturing), PT PAL (shipbuilding), PT Krakatau Steel (steel manufacturing), PT PINDAD (arms manufacturing), PT Barata (heavy machinery industry), Perum Dahana (explosives), PT Inti (telecommunication equipments), PT INKA (railways), PT Boma Bisma Indra (heavy machinery industries), and PT LEN (electronics). e.g., PT Semen Gresik (Persero), Indosat, PT Telkom (Persero), PT Tambang Timah, PT Aneka Tambang, and Bank BNI IPO Acquisition of PT Semen Padang and PT Semen Tonasa, and partially sold SG’s shares. Strategic sale
325
1997/1998
The economic and financial crisis was emerged.
March 1998
Development Cabinet VII was inaugurated under Soeharto leadership. Soeharto was previously inaugurated as the President of Indonesia for a seventh term. Ministry of State-owned Enterprises/State-owned Enterprises Agency was established in the Seventh Development Cabinet (Kabinet Pembangunan VII, March - May 1998). Tanri Abeng was appointed as the Minister of SOEs.
May 1998
The crisis was mounting.
1998
The Master Plan of SOEs Reforms was published.
The rupiah fell from Rp. 2,400 per US dollar to Rp. 16,000 per US dollar (Sadli, 1998, pp. 272-273; Kwik, 2003, p. 5).
The objectives of the ministerial portfolio are: 1. to assume responsibility in the supervision and development of SOEs. 2. to assume responsibility as government shareholders in the SOEs. Soeharto resigned and was replaced by Habibie. Habibie era, May 1998 - Oct. 1999.
Tanri Abeng was appointed again as the Minister of SOEs. Laksamana Sukardi was appointed as the Minister of SOEs before he was sacked and replaced by Rozy Munir
Abdurrahman Wahid (Gus Dur) presidency, Oct. 1999-2001.
Public Policy Committee was established. Co-operation between the Ministry of SOEs and the Management Institute (Lembaga Manajemen), Faculty of Economics, University of Indonesia was also established. No significant development on the reform and privatisation of SOEs.
326
2002
A New Master Plan of SOEs 2002-2006 was published.
Megawati presidency, 20012004.
Laksamana Sukardi was appointed again as the Minister of SOEs.
2003
The issuance of the Law of SOEs (Undangundang BUMN) No. 19/2003 (19 June, 2003) The issuance of Government Regulation No. 41/2003 (14 July, 2003)
October 2004 -
Missions of the Ministry of SOEs were outlined as follows: to carry out reform that [would] cover the SOEs’ work culture, strategies, and business management in order to achieve professionalism based on Good Corporate Governance principles; to improve corporate value through restructuring, privatising, and business cooperation amongst SOEs based on sound business principles; to increase competitiveness through innovation and the enhancement of efficiencies in order to provide competitively priced goods and services as well as high quality of services; to increase SOE contributions to the state; to increase the role of SOEs in community development and encourage cooperatives, [and] small and medium businesses through partnership programs (Masterplan of BUMN 2002-2006, p. 2). The Law No. 19/2003 addressed specifically the restructuring and privatisation of SOEs (chapter VIII, articles 72-86) which provides an umbrella and legitimacy for the government to exercise such policies. This regulation strengthened the role of the Minister of SOEs as the sole of government representative in Persero, Perum, and Perjan.
Susilo Bambang Yudhoyono presidency
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Please see print copy for Appendix 5.2
Please see print copy for Appendix 5.3
Please see print copy for Appendix 5.4
Please see print copy for Appendix 5.5
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Please see print copy for Appendix 5.7
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