Privatization and capital markets have again entered the spotlight following the Indonesian government's plan to streamline its more than 140 state-owned enterprises (SOEs). The so-called "rightsizing" plan involves measures to merge, divest and form SOE holding companies in similar sectors.

The idea has begun attracting public attention and media hype, as the question of state-owned assets and how they should be run carries certain political baggage. In a young democracy such as Indonesia, political issues are exciting -- at times, so exciting that substantial issues are neglected.

On the issue of privatization, political considerations move to the center of public discussion, media debates and even policy making.

In the past, privatization of Indonesian SOEs -- and the way political groups have portrayed the issue -- has underscored how nationalistic sentiment, combined with concern for transparency, enters the debate on how decisions are made, especially on the preferred method for privatization.

A case in point: The 2002 privatization of Indosat through a strategic sale to ST Telemedia (STT), in which resistance to the takeover persisted until STT's recent sale of its shares to Qatar Telecom (QTel). This occurred for two reasons.

First, STT was a foreign party, sparking nationalistic sentiment against the takeover of a telecommunication company deemed "strategic" to the country. Second, it was alleged proceeds from the privatization were misused, leading some to conclude an initial public offering (IPO) would have been a better option for Indosat's divestment.

In the past, IPOs were considered the method of choice when privatizing SOEs, especially when dealing with "strategic" assets. This has led many to forget the key issues involved in transferring ownership through privatization, namely: the problems facing the company, and the necessary solutions to those problems. In this regard, the current debate over the privatization of Krakatau Steel is a valuable example.

On Krakatau Steel's road to privatization, the public debate -- strongly affected by political considerations -- concluded an IPO was the best option or, to be precise, the most "politically realistic", according to the minister for SOEs Sofyan Djalil -- especially if compared with a strategic partnership.

However, those who look into the matter more carefully -- in particular, to the current challenges in the global steel industry -- might not come to the same conclusion.

First, an IPO may seem the best way for companies to be more open and transparent. No doubt openness and transparency are key principles of good corporate governance, just as "the best way to kill germs is to expose them to sunlight" -- meaning the best way to prevent corporate scandals is to transform private companies into public ones following the rules and regulations of capital markets. An IPO is one way to do that.

However, IPOs also involve dispersed ownership among several hundred, if not thousand, financial investors, each with limited impact on the company's day-to-day operations and limited power to instill a culture of accountability, transparency and continuous improvement.

Moreover, a large number of small investors would have little interest in and knowledge of how to improve the company's operations. Thus, an IPO could, in fact, lead to less accountability. A strategic partner, on the other hand, would have a long-term interest and be more committed to good corporate governance practices.

Second, in the case of Krakatau Steel, the biggest problem currently faced might not be lack of transparency. Although the election in 2009 could expose the company as a cash cow for political parties, there is a more fundamental problem facing Krakatau Steel: Indonesia's lack of competitiveness in the global steel industry, due to urgent need for technology transfer, know-how and best practices that matter most for the company.

Facing a low per capita national steel consumption of 33 kg, suboptimal use of only 38 to 63 percent of installed production capacity and low volume of domestic production requiring import from China and India, the Indonesian steel industry cannot solve its capacity problems with injection of capital alone, certainly not without access to markets and raw materials.

With respect to Krakatau Steel, an IPO is a short-term cash infusion that could raise capital, but not the above-mentioned strategic access, assets and long-term investment commitment, which will more likely come from a strategic partner.

The presence of foreign parties as strategic partners -- something many fear as endangering the country's interests -- does not mean the national agenda will be put aside. On the other hand, an IPO could lead to control by financial investors, who tend to have short-term interests without long-term commitment. This will have dire consequences for two key areas: community development and human capital development.

It is not in financial investors' interest to spend community development funds above and beyond the minimum required, as that would run counter to their short-term interests. It is also unlikely they will take see human capital development in Indonesia as involving a strategic asset, as this, too, goes beyond the short-term investment horizon.

Krakatau Steel, like many other SOEs, needs to improve its human capital if it is to compete in the global marketplace.

Indonesia needs to remember the choice to privatize SOEs is a political and business decision. The privatization method for SOEs should be selected by taking into account key business issues, not only political considerations. Otherwise, we will make suboptimal decisions under political pressure, leading to suboptimal business performance.

The writer is a faculty member of the Sampoerna School of Business & Management at Bandung Institute of Technology (SSBM-ITB), as well as its coordinator for business development. He can be reached at agung.wicaksono@sampoernasbm.itb.ac.id

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