How satisfied are you with the progress you have made in the last two years privatizing state owned companies?
In terms of meeting our targets, not just the financial proceeds of privatization, but also in terms of the multiplier effect and the stimulus given to the economy, it has been tremendous. Last year was a great year for us because of privatization, not just of state owned enterprises (SOEs) but also of IBRA assets and the banks. These sales brought capital back into our economy. Foreign exchange reserves have increased dramatically and that has led to the stability of our currency. Also the banks are now the healthiest banks in the global emerging markets because not only did we have to privatize them but also we had to sanitize them before we could sell them. No other country has had to sanitize them as much as we have. So we are very satisfied with that and with the more efficient operations of the companies. This brings confidence back so the companies are able to mobilize funds from the international capital markets.
You've said that the banks have been sanitized but has this not also left a big hole in the government's accounts? The recapitalization process has been very expensive for the government.
Recapitalization bonds for the banks have been a very expensive lesson for us. But we learned this very expensive and hard lesson. In the past, the state was the supervisor of the banks and the central bank was not independent. And to make it worse the state was the owner as well as the manager of all these banks. So when we are acting in four roles at the same time - as regulator, supervisor, owner and manager - it is a recipe for disaster.
So this is a government with vision. We are acting now on a clear fundamental analysis rather than having a policy based on a symptomatic approach. We do not want this to happen again. The first question that the World Bank, the IMF and investors ask us is will a crisis like 1997 happen again in Indonesia and we have told them that we guarantee no. The situation of having the government having those four roles in one is over; the roles are split. We do not believe that the state should run a bank. Why should the state take the risks of the banking system? Let strong and sound financial institutions manage our banks and take the risk. At the same time we have plugged our economy into the global network and that is why we are doing so well.
By that token can we assume that the remaining bank stakes that were left with IBRA and are now back with the government are intended to be sold off entirely?
Yes. In the longer term we have fundamental policies that the state should not take banking risk; there is too much moral hazard. The stakes will go over time. In IBRA we have only one bank left - Bank Permata - which will be divested. The state owned bank Bank Negara Indonesia, is in the pipeline for an IPO.
As the process goes forward are you finding that you are running out of potential strategic buyers for the banks? And those international banks that might bid are being scared off by the presence of the previous owners? If that is the case are you tending to favour public sales such as IPOs and secondary sell downs over wholesale strategic sales?
We believe that we need strong and credible financial institutions to run the banks, not the former owners buying the banks back. There is no point for us to recap the banks if that happens. One important principle that we believe strongly is that the banking system of the country must be strong: you can have companies go bankrupt but you cannot have banks going bankrupt.
Is it more important to have a strong banking system than perhaps to forbid some of the former owners and managers to retain their positions within the banks?
Two of the strategic factors that we believe in strongly are professional management and capital. Professional management can be achieved through making the banks more transparent via an IPO or if we want to accelerate it, we can cultivate professional management by a strategic sale. We can now pick the right combination. At the beginning, when we had lost total confidence, the challenge was to jump start this confidence. So we brought in professional management through strategic sales of banks such as BCA. If you look at the early days of our government you can see that we wanted to jump start the economy and immediately cultivate professional management in the banks and SOEs. That led to an acceleration in cultivation of professional management. But once that confidence is there and the capital markets are bullish, then it is time for us to enjoy the upside by going through an IPO. It is a very systematic approach. You cannot do an IPO when you have a total loss of confidence and the markets are not bullish.
You seem to have a very pragmatic philosophy; you do what is right for each institution on a stand-alone basis and privatize each institution on its own merits.
I came from a private sector banking background and I think its good to get private sector people into the government. Restructuring the country's debt overhang is a massive task for the government.
A friend of mine once gave me a video of a National Geographic documentary about the construction of the Panama Canal. At first French engineers handled this but these engineers all died of malaria. Then the construction was taken over by the Americans; but they did not send engineers, they sent doctors. What they did first was to dry out the swamp where the mosquitoes were breeding. The mosquitoes can breed faster than they can kill them.
The moral of that story that inspired me is that Indonesia was high in the ranking of corrupt countries. So we had to find the breeding ground and that was the state owned enterprises. As I mentioned before it was this four in one system which was a recipe for disaster. So we needed to dry out the swamp by privatizing the state owned enterprises through IPOs and through strategic sales. We had to really strategize the right methods and timing for each of these. The basic philosophy was to increase each company's productivity and efficiency.
The upshot of this is the tax revenues enjoyed by the government (and that we can give back to the people) have increased dramatically as a result of the massive privatization and divestment efforts we have undertaken in the last two years. In the next five years, I think the finance minister will have an easy job because we have paid our debt and we have increased our tax revenues. Just like with our phone company Indosat: we might not have a majority stake any more but we receive much more tax revenue from the company. It is the principle of benefit rather than the principle of ownership.
Are there any enterprises that you believe should stay state owned and are there any stakes you would want to keep?
There is a debate underway in Indonesia about keeping strategic industries or strategic commodities. But I keep educating the people about what is strategic. It is not the commodities themselves, like water or forests or mining deposits. But rather it is professional management and capital. Professional management can make the water clean but without the capital they cannot do it. So we want a strong capital market so that companies can benefit. The direction is to move towards more professional management and more capital, not to keep the companies state owned because they are strategic commodities.
We are a rich country; there is no question about it. What we need is good governance. Of all the things we learnt from the crisis, the main reason it happened was because of the lack of good governance. It was not economic phenomena: it was bad governance. This is the most expensive lesson we learnt. If Indonesia can have professional management alongside stronger and better markets, then the economy is going to be on autopilot because we have tremendous natural resources.
What impact do you think April's general election will have on the privatization programme and the economy in general?
I don't think there will be a significant impact. If they [the opposition] give some opinions in the public domain it is because of political rhetoric and demagoguery. At the end of the day everyone will be under pressure to fund their budgets. What else can they do? The only thing we agree on is that we will increase tax revenue. And how do we do that? Of course not from borrowing money any more but by making companies more efficient. It is a typical election time when the opposition comes up with rhetoric and demagoguery. If we win, we will shift gears, so that the economy will run faster.
The one missing component from your economic success is inward investment. As Minister of State Owned enterprises, what is your position and policy towards attracting more inward investment?
I agree. In the first two years that we took over the government, companies were in a mess. Our number one priority was to strengthen our macroeconomic fundamentals, such as bringing inflation under control and bringing down the interest rates. Interest rates are now the lowest they have ever been in the history of the Indonesian economy. Our foreign exchange reserves are the highest they have ever been in our history. The stock market is up as well. The macroeconomic targets are met and the tax revenue and budget sustainability are guaranteed.
So we have closed the first chapter and we are embarking into the second chapter. The name of the game is now to increase Indonesia's international competitiveness so that is why we are inviting international investment. For instance, we are going to build infrastructure funds in areas such as toll roads.
It is a challenge especially as we are dealing with the same pool of assets as we had in the past. We have rebooted the economy after our massive debt overhang. In IBRA alone there are debts of $65 billion and in the Jakarta Iniative we restructured $20 billion. What we have achieved so far is significant and we are happy. But we have just put down the foundations of the economy. We need now to put in the upper structures.
It is a different Indonesia now. We have learnt about the importance of good governance and we know that in the past Indonesian businesses have been victimized by bad governance. Indonesia is a big country and we need to go through a democratic process that may take some time. But so far we have put the economy back on the right track and it is now a question of shifting gears.
