IPOs the right choice for SOEs privatizations: Analyst

The Jakarta Post , Jakarta | Mon, 06/16/2008 10:03 AM | Business

The privatization of state-owned enterprises (SOEs) should be conducted through IPOs rather than strategic sales, a market analyst said Saturday.

Dandossi Matram, a market analyst and SOE consultant, was speaking at a discussion sponsored by Otonomi Media in Jakarta. He said IPOs offered the distinct advantage of allowing the government to retain control of the companies while at the same time bringing in much-needed investment for expansion.

"With IPOs, buyers are mostly from overseas. The problem with Indonesian investors is they sell their shares very quickly when they think a company is underperforming," he said.

"This causes the share price to dip soon after the IPO. This was the case with Bank Negara Indonesia (BNI) and Kimia Farma. So underwriters actually prefer local institutions or overseas investors as the main shareholders. In this way, we do not lose our say in company decisions."

Dandossi said a good example was Perusahaan Gas Negara (PGN), the national gas company. Around nine-tenths of the 49 percent public shares in PGN are held by overseas investors, with the remaining 51 percent held by the government.

He said many partnerships formed around privatization efforts did not bring much added value because investors were reluctant to pump in continuous investments.

"Take, for instance, Telkom's joint operating schemes (KSO). The investors did not want to invest more after they clinched the deal... When the market needed more capacity, Telkom could not meet it," he said, referring to a long-standing dispute between investors and the government on expansion plans and profit sharing.

"Or Cemex, which invested in state cement producers -- what does it give while they act as shareholders?"

Despite these cases, he said some partnerships had worked out well. He said one example of this was the privatization of a palm oil plantation in North Sumatra.

Dandossi said strategic sales theoretically allowed for the transfer of production technology, opened up supply and marketing networks and brought in new management perspectives, in addition to providing an initial capital injection.

However, he said, strategic sales in practice suffered from an obvious drawback: they created loopholes for backdoor agreements and manipulations, while IPOs offered greater transparency in the privatization procedure because they were conducted openly.

PT Krakatau Steel is the latest SOE targeted for privatization. Dandossi said the steel industry did not need much foreign expertise because of the wide availability of production technology, market and raw materials.

"Krakatau Steel does not need immediate outside investment. It has a low debt-to-equity ratio which will allow it to borrow from banks and proceed with plans to upgrade its production facilities while preparing for an IPO," he said.

"Nevertheless, privatization is important. It has a 'magic pill' effect on SOEs. After going under public scrutiny and having to compete on the same playing field as private companies, SOEs automatically begin reducing inefficiencies and improving services.

"Kimia Farma, Jasa Marga, BNI and PGN are prime examples of this."

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