A critical enquiry into privatisation of state-owned

University of Wollongong Thesis Collections
University of Wollongong Thesis Collection
University of Wollongong
Year 
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
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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
xi
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).
4
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).
9
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.
10
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)
11
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).
12
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).
13
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
14
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.
15
… 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
12
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)
16
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.
20
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.
21
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).
22
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.
23
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.
24
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.
25
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).
26
(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)
27
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).
28
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).
30
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.
31
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).
32
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
33
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).
34
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).
35
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)
36
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
39
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).
41
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).
42
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
47
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
48
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.
49
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:
51
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.
52
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.
55
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).
56
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
57
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
59
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)
60
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).
61
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)
63
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.
65
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).
66
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
67
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
68
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)
69
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).
70
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)
71
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).
74
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.
77
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
ƒ
ƒ
ƒ
ƒ
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).
79
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
80
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).
81
[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
82
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
83
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).
84
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).
86
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).
88
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
90
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
91
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
92
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)
93
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
94
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)
95
… 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.
100
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).
102
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.
104
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).
106
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,
107
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).
108
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.
109
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
111
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.
113
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).
114
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.
115
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.
117
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).
119
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
121
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)
122
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.
124
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
126
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
128
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).
130
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.
131
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
134
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).
135
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.
137
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.
138
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.
139
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
140
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
141
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.
142
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
143
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).
144
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
145
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
146
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
ƒ 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;
ƒ to widen company ownership and strengthen the capital market;
ƒ to redistribute of wealth; [and]
ƒ 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.
147
ƒ 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;
ƒ to improve corporate value through restructuring, privatising, and
business cooperation amongst SOEs based on sound business
principles;
ƒ 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;
ƒ to increase SOE contributions to the state;
ƒ 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.
148
[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.
149
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).
150
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
152
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.
153
… 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.
154
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.
157
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).
159
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).
160
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
161
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
162
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).
164
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).
166
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
169
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.
170
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$150 million in order to finance a new manufacturing plant unit
6 in Narogong, West Java (ECFIN, 1997, p. 204).
171
Figure 5.3
SG, ITP and SC: Trend of Total Liabilities
Please see print copy for Figure 5.3
In 1993, total liabilities of Semen Gresik, Indocement and Semen Cibinong
were Rp. 277 billion, Rp. 3,152 billion and Rp. 711 billion respectively, and by the
year 2000, those figures were drastically increased to Rp. 4,558 billion, Rp. 10,530
billion, and Rp. 14,928 billion respectively (see Appendix 5.1-5.3). Those mean
that, from 1993 to 2000, their total liabilities were increased by 15.45 times, 2.34
times and 20 times respectively.
During the 1997/1998 crisis, the rupiah fell from Rp. 2,400 per US dollar to Rp.
16,000 per US dollar (Sadli, 1998, pp. 272-73; Kwik, 2003, p. 5; cf., Abeng, 2001, pp.
38-39), consequently companies with foreign (US$) 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
173
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.
175
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.
176
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.
177
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).
178
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.)
179
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).
180
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,
181
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).
182
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)
183
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).
184
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)
185
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).
186
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.
189
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.
190
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.
195
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.
196
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).
201
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
203
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.
204
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.
205
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
206
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.
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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
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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.
212
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.
214
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.
215
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)
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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).
218
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).
219
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
220
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)
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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
ƒ
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;
ƒ to widen company ownership and strengthen the capital
market;
ƒ to redistribute wealth; [and]
ƒ 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.
225
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
227
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
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(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).
230
[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
231
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
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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
233
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.
238
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).
240
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
241
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
242
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
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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)
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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.
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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
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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]
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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
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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
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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” <http://80search.eb.com.ezproxy. uow.edu.au:2048/eb/article?eu=109270&tocid =22811&query=voc&ct=eb>
(accessed on August 3, 2004).
254
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
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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).
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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,
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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’,
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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
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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
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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
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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.
273
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
275
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
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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
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‘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).
278
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).
279
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
281
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
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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
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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
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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
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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
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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
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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
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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
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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).
299
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
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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.
303
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.
305
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)
307
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
308
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).
309
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.”
311
Please see print copy for Appendices 1.1 - 4.2
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.
323
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).
324
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:
ƒ 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;
ƒ to improve corporate value through restructuring,
privatising, and business cooperation amongst SOEs
based on sound business principles;
ƒ 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;
ƒ to increase SOE contributions to the state;
ƒ 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
327
Please see print copy for Appendix 5.1
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
329
Please see print copy for Appendix 5.6
Please see print copy for Appendix 5.7
330
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