Partial Privatization & IPO’s

Sep 23rd, 2008, in Business & Economy, IM Posts, by

CallumCallum criticizes partial privatization plans for Kratakau Steel, Garuda Indonesia and Bank Tabungan Negara.

30% Solution

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

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.

PT Krakatau

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.


6 Comments on “Partial Privatization & IPO’s”

  1. avatar Purba Negoro says:
    September 24th, 2008 at 3:39 pm

    Callum,
    it’s an excellent compromise situation and the very best the parasitic Fund Managers will ever get, that is the few solvent and non-bankrupt ones left- so you’d better learn to like majority government shareholding.

    I spoke with the investment head of FORTIS Indonesia on Saturday- and he seemed rather chuffed about it. Enthusiastic would be more accurate.

    It’s the way of the future- sovereign capitalism as per Russia and China- but I don’t hear such teeth-gnashing protestations about Temasek.
    Also- China only allows 50% foreign ownership- but no complaint about that either.

    You seem to completely reject the reality that majority privatisation is Unconstitutional as per the unalterable 1945 Constitution.
    Sukarno was a brilliant man- he knew exactly the character of the West and their Semitic funders. Why involve Jews you ask? Well Soros is only one name among many, for starters.

    So you’re welcome to lament the sky not being green- but it will never change it from being blue.
    Government interests are the Interests of the State and the Rakyat, which would place Western capitalist interests as counter to those- hence being Enemies of the Rakyat and State

    Gazprom and French National Rail are excellent examples of the total baseless and ridiculous premise of your arguments government cannot run business.

    Speaking of privatisation- didn’t the UK have to re-Nationalize rail due to private sector funny business and fatalities caused therein?

    What is the service of former British Rail like? Frequent derailings? Frequent maintainance issues? Frequent delays?

    And how are utility prices in the West- excluding the financial collapse and subsequent maelstrom caused by Enron- higher than ever and continually ascending despite constant assertions everything would vastly cheaper in this brave new world of competition?

    Why won’t the UK or France ever trust private ownership of the nuclear facilities?

    Sorry Callum- a very poor and transparent argument easily countered by piles of contrary evidence. You’ll have to learn to love skyblue, I’m sorry.

  2. avatar sputjam says:
    September 25th, 2008 at 9:41 am

    a) Correction – all the state owned companies 30% are being sold at the wrong time. Steel prices are expected to free fall soon, based on falling prices of scrap ships in India/bangladesh.

    b) never invest in companies whereby majority held by one entity, whether private or government. Invest in companies which are held by several entities, with neither holding majority.

  3. avatar sputjam says:
    September 25th, 2008 at 9:44 am

    January 2009, ASEAN open sky policy commence, hence no regional interest to buy garuda as these players can fly to and from any indonesian airports as they wish as long as the airlines are based in ASEAN.

  4. avatar Enigmatic says:
    September 25th, 2008 at 11:12 pm

    sputjam Says:

    September 25th, 2008 at 9:44 am
    January 2009, ASEAN open sky policy commence, hence no regional interest to buy garuda as these players can fly to and from any indonesian airports as they wish as long as the airlines are based in ASEAN.

    Guess that means the end of Garuda Indonesia then. Heh.

    Then again I’ve always taken budget airlines like Valuair and lionair between JKT and SGP.

  5. avatar sputjam says:
    September 26th, 2008 at 10:23 am

    Plus the fiskal policy, which discourages Indonesian to travel abroad, will definitely kill Garuda, which obtain its revenue from overseas flights.l

  6. avatar Purba Negoro says:
    September 27th, 2008 at 12:12 am

    Sputjam,

    Departure Tax is one of the few taxes the government receives. It is entirely means-tested – those that can afford the luxury of overseas travel can obviously afford to pay Pajak.

    It’s less than $50 USD- most people spend that within their first hour of arrival.

    I knew very well the Dir Gen MenPajak that created this brilliant taxation scheme. A school friend of my father’s.
    A truly wonderful man, an exceptionally brave and heroic Patriot guerilla and an educated man of infinite wisdom.

    He calculated departure tax specifically as only those with means were burdened, but most specifically that especially the Chinese could not worm their way out of paying their fair tax burden.



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