Wednesday, May 14, 2008 Vincent Lingga, The Jakarta Post, Jakarta
It is unlikely anything will come of the media hype over the past few weeks about the keen competition between four global steel giants to acquire up to a 40 percent stake in state-owned
PT Krakatau Steel, Indonesia's largest steel producer with annual capacity of 2.5 million tons.
The headlines began after global steel giants ArcelorMittal, Tata Steel and Essar, all from India, and BlueScope Steel of Australia separately notified Indonesia's ministries of industry and state enterprises of their interest in acquiring up to 40 percent of Krakatau Steel.
But even before serious negotiations began and the potential investors submitted their business plans, politicking and controversy have been heating up.
Vested interests within Krakatau Steel's boards of directors and commissioners and trade union immediately came out in opposition to the sales plan, arguing the steel company was too strategic for the country's economic interests to be sold to foreigners.
The legal aspects of the privatization of state companies are entirely under the jurisdiction of the state enterprises minister, and such a transaction can be conducted only with prior permits from the inter-ministerial Privatization Commission and parliament.
But the potential investors did nothing wrong in also consulting the ministry of industry, which is fully in charge of the regulatory and policy framework of the steel industry, before submitting their business plans to Djalil.
As with the controversy over previous privatizations of state companies, the vested interests, including politicians in the parliament, would likely gang up in flaunting national interests as the main reason for their opposition, whipping up xenophobia.
But what they really want is to maintain state companies as their cash cows.
The defense ministry also joined the fray, trying to shoot down the privatization idea by asserting that Krakatau Steel is strategic to the country's defense industry.
True, steel is a strategic commodity. But what is strategic about Krakatau Steel if it remains grossly inefficient and small.
Ten years ago, the House of Representatives blocked an attempt by Lakshmi Mittal, ArcelorMittal's chief executive officer, to buy a stake in Krakatau Steel, even after then minister of state enterprises Tanri Abeng, impatient with the inefficiency of the state company, consented to the deal.
Strategic sales should theoretically be the best way for Krakatau Steel to improve its competitiveness and expand its production capacity, because it needs not only fresh capital but, most importantly, a strategic partner that can provide the capital, technology and managerial expertise.
Economies of scale and high technology are key to the market competitiveness of a steel producer. Without a synergy with a strategic partner, Krakatau Steel will remain tiny as it has been since its establishment over 30 years ago.
An initial public offering on the Indonesian Stock Exchange -- the option initially planned for Krakatau Steel's privatization this year -- is not favorable now, given the bearish market sentiment caused by uncertainty in the global financial market and a weakening global economy.
It is not Krakatau Steel itself that has attracted the four steel giants but the huge potential Indonesia offers as a major production base for steel. The company itself, like most other state firms not traded on the stock exchange, is inefficient, burdened with excess baggage from decades of mismanagement during Soeharto's authoritarian rule and highly vulnerable to corruption by the management and "poaching" by senior officials and politicians.
The four potential investors have a long-term horizon, looking into the future of the Indonesian economy. The country now needs more than 6 million tons of steel, of which 2 million tons have to be imported, and the domestic market will certainly grow steadily as the economy expands.
But strategic sales of state companies have always been difficult and vulnerable to "political turbulence" because the government has yet to develop standard operational procedures, the step-by-step process to secure transparency and accountability and to close any loopholes that could be exploited by corrupt officials.
Given the slippery political road ahead, here is some free advice for the potential investors: tread very carefully at every step of the long, slippery process, otherwise you may be caught in an imbroglio engineered by the vested interest groups within Krakatau Steel, parliament or other ministries.
Look what happened to Mexico's Cemex cement group, which quit sate-owned PT Semen Gresik last year after almost 10 years of legal and political harassment, or Singapore's Temasek, which is now trapped in a messy litigation for its investments in state-controlled PT Indosat and PT Telkomsel.
This is just to mention a few of the foreign investors who have suffered from attacks by vested interests eager to maintain state companies as cash cows.
Minister Djalil is well advised to realize that privatization, if well managed with high standards of transparency and accountability, is greatly effective in improving macroeconomic efficiency through the promotion of a more competitive market and more efficient and consequently more profitable enterprises, bringing in larger tax revenue for the state.
It is simply much better to put state firms in the hands of private investors who can develop the assets into profitable businesses, which create more jobs and pay more taxes, rather than maintaining them as state assets that are easily plundered by senior officials and politicians.
More efficient and competitive state companies, especially those operating in upstream industries like Krakatau Steel, have multiplier impacts on downstream industries. The great concern about a minority foreign shareholder in Krakatau Steel is therefore rather strange.
