IS JAKARTA’S privatisation programme about to stall yet again? This could be the result of the controversy over last week’s initial public offering (IPO) by state-owned Krakatau Steel.
Since 1999, Jakarta has attempted to implement various privatisation programmes in an attempt to raise capital, improve the efficiency of state-owned enterprises and reduce the role of the government in the economy. However, political obstacles have meant that execution has been far from smooth.
In Indonesia, implementing a privatisation programme invariably draws the Ministry of State Enterprises into complex negotiations with the management and trade unions of the affected state company, nationalist politicians and various other pressure groups.
The latest Krakatau Steel controversy could “ruin the atmosphere within which these processes take place” by “undermining its political backing and support”, argues Mr Agung Wicaksono of the School of Business Management at the Bandung Institute of Technology.
Krakatau Steel issued 3.15 billion new shares to the public last week, representing 20 per cent of its equity, and raising about US$300 million (S$386 million) in capital. The decision to privatise through an IPO was made in May 2008 after nationalist groups raised objections to an alternative plan involving a strategic sale to a major foreign steelmaker.
But instead of settling the long-running controversy, the weeks leading up to the IPO have produced a fresh avalanche of criticism, mostly over the allegedly low share price. The offer price of 850 rupiah (12 cents) per share has been deemed too low by local analysts, who argue that a fairer valuation would be closer to 1,150 rupiah.
The IPO certainly generated strong interest, having been oversubscribed by eight times. One reason is that world steel demand has risen faster than expected this year. According to the World Steel Association, global demand could reach a record 1.34 billion tonnes next year.
Defenders of the share price point out that the offer was in line with price earning ratios of other regional steel companies. But this has not silenced the critics, who say that as a result of the IPO, the state effectively lost between 450 billion rupiah and 750 billion rupiah in revenue. Company shares gained nearly 50 per cent when they began trading on the Jakarta Stock Exchange on Wednesday.
The suspicion is that by setting a low share price and then allocating shares to favoured individuals or companies, well-connected groups stand to make large profits by subsequently selling their shares on the open market. Unhappiness has also been expressed about the large share allotments to foreign companies, notably Posco (South Korea) and Nippon Steel (Japan), and the possible influence these groups may have on future company policies.
The current focus on the offer price has prompted some to point to what they see as a worrying pattern. Earlier this month, Marwan Batubara of local think-tank Indonesian Resources Studies argued that State Enterprises Minister Mustafa Abubakar had sold the shares of at least three state companies too cheaply.
In December last year, the stock of Bank Tabungan Negara (BTN) was sold at 1,000 rupiah per share, whereas it is now selling at 2,000 rupiah. And in the same month, Bank Nasional Indonesia (BNI) implemented a rights issue at 2,900 rupiah per share (current price 3,500 rupiah). Similarly, state-owned construction company PT Pembangunan Perumahan (PP) shares were priced at just 560 rupiah for its IPO in January, while their current market price is around 1,000 rupiah per share.
With the Jakarta stock market booming, such price rises prove very little. But the fact that they are being cited at all is evidence of the sort of public scepticism that could face future IPOs. This is especially true of state-owned companies which, like Krakatau Steel, are regarded as being in strategic industries.
The Ministry of State Enterprises certainly seems to have become more cautious in recent weeks. In September, the authorities announced that national flag carrier Garuda’s privatisation had been postponed, reportedly to allow auditors to assess the company’s finances. Interestingly, the announcement was made barely a month after Mr Mustafa had expressed optimism that the IPO would be held on schedule in December.
Like the long-running dispute over the Bank Century bailout, the controversy over the Krakatau Steel IPO is unlikely to fade for some time. Last week, two parliamentary commissions (Commission VI on trade, industry and investment, and Commission XI on banking and finance) announced separate investigations into the allegedly low share price. The Corruption Eradication Commission has also promised to look into the matter.
Because the market value of their shares is already known, planned rights issues by partly privatised government entities, such as Bank Negara Indonesia and Bank Mandiri, appear to be unaffected by the current controversy.
But should investigations into the Krakatau Steel IPO reveal significant irregularities, fresh privatisations could face serious political obstacles in the coming months.
Copyright © 2010 Singapore Press Holdings Ltd