Callum criticizes partial privatization plans for Kratakau Steel, Garuda Indonesia and Bank Tabungan Negara.
Lawmakers have approved plans for an initial public offering (IPO) of steelmaker PT Kratakau Steel, flag carrier PT Garuda Indonesia and PT Bank Tabungan Negara (BTN) in a partial privatization.
Plans are afoot to sell 30% of each company to private investors. Though I am all for the Government getting out of the business of running businesses, this not even half measure should be understood for what it is. An attempt to direct much needed capital into businesses that will continue to be under majority control of the government. The problem with this is the management is still going to be motivated by the interests of the majority shareholder and will be unable to make the necessary decisions that it must as a business entity.
When hard decisions need to be made they will be subservient to political interests. If these companies need to shrink their workforce to remain competitive will they be able to do this if this conflicts with the interests of the political class? I doubt very much that they will.
In Indonesia state owned industries tend to be used to serve political ends. The 2 best examples of this are Pertamina and PLN. Both have been used as subsidy delivery mechanisms which have detracted from their role a businesses. Would rural electrification and power plant construction be so woefully inadequate if PLN was not forced to sell electricity at below its production cost? Would Indonesia be facing a precipitous fall in oil production if Pertamina was not forced to provide Benzene at below the cost of production?
This brings us back to the 3 companies involved in this partial privatization.
Garuda which desperately needs a fresh infusion of capital to update its aging fleet is intending to tap the investment market at precisely the same time as other state owned carriers are in serious financial trouble around the world. Alitalia, the Italian majority state owned airline will probably be grounded by the end of this week. Olympic Airways looks as though it may next and Aerolineas Argentina has been forced back into state control after its failed partial privatization. Now is not a particularly good time for an airline to go looking for new capital. Investors will be reluctant to climb into bed with a partner who has shown that it treats assets as play things for politicians.
Bank Tabungan Negara (BTN)
The decision to sell 30% of a state owned bank, when banks globally are suffering from seriously low valuations and the headlines are rife with bank failures, boggles the imagination. This is perhaps the absolute worst time to do this in the last nine years. It makes you seriously wonder if any of the people involved in this decision have any clue about what they are doing.
The third company PT Krakatau is perhaps the most sensible in terms of timing; as the steel industry continues to do relatively well despite rising costs for iron ore. One however wonders that in an industry that is consolidating into a few large global players what role a small standalone player like PT Krakatau can have. Would it not be far better to see PT Krakatau sold to a large global steelmaker that would have the scale to modernize and expand the company? Creating needed products for domestic users and opening more export markets for the company. An obvious choice of partner would be Mittal Steel, whose owner has a strong historical connection to Indonesia as well as proven ability at modernizing steel mills.
Though the Government seems to be moving in the right direction in getting the state out of the business of running businesses, these ill timed partial privatizations carry with them the potential for failure that could set back future moves to privatize other enterprises. If the government fails in its partial IPO, this will be detrimental in its future attempts to privatize much more important candidates such as Pertamina and PLN.