Introduction
Globalization is a key challenge facing economic policy makers. Governments should ensure that their people get the best public services and social protection, whilst facing global trade and capital movement. These global pressures have forced governments to restructure and introduce privatization to state owned companies since privatization is usually associated with better performance. Although privatization arguably has a significant impact on the macro economy, companies’ performance and other stakeholders, in both positive and negative ways, this essay will deal only with the effects of privatization on companies’ and employees’ performance. Often, issues related to service quality and labors raise skepticism of privatization, however a growing number of studies suggest that privatization has significantly more benefits than drawbacks. Therefore, The government of Indonesia should privatize state owned companies so that they can compete effectively in global market.
Definition of Economic globalization related to Privatization
Globalization is a concept that has multiple meanings. However, it will be more valuable to define globalization from an economic perspective, since globalization is firstly and mainly fuelled by economic interests. Economic globalization can be defined as global integration of economy regardless of national borders leading to the declining role of government in economic arena. It is indicated by “increasing interdependence of national economies in trade, finance and macroeconomic policy” (Gilpin, Robert & Guillen, Mauro F, 2001). The result is “ …government can no longer ‘manage’ their national economies” (Colin Leys, Smith, M.K, 2004). This loss of power manifests in many ways with the most visible manifestation being privatization of state owned companies around the world. For example, during 1997, 35 countries around the world have privatized their state owned telecommunication companies to cope in the global market. Privatization refers more to “restrict government role and to put forward some methods or policies in order to strengthen free market economy” (Aktan, C.C., n.d). Its forms range from contracting out to denationalization – that is “sale of a state owned company’s assets or shares to the private sector” (Ibid).
Historical Background of Economic globalization related to Privatization
It is undoubtedly true that transnational economic integration particularly in trade and capital movement has occurred since post World War II. At that era, multinational companies began to expand their factories and markets across national borders. However, true economic globalization commenced in 1980s when unprecedented and dramatic free trade and capital movement involved most countries around the world and government power in national economic management declined. It has been triggered by trade deregulation and privatization policies that initially were inseparable part of IMF and World Bank structural adjustment programs to overcome debt crises. The economic integration was also encouraged by the spread of computer and the Internet technology as business tools and introduction of privatization by Margaret Thatcher and Reagan. As a result, there was a dramatic change in international business and finance as international institutions and companies increased their power undermining government power in economic arena.
Globalization and The Wave of Privatization around the World
In the last decade, the intensity of economic globalization has risen dramatically, resulting in a significant increase in the volume of transnational capital flow. Privatization, which is one of the most important forms of capital mobilization, has been carried out massively by countries around the world with vigorous support from key globalization agents such as IMF, World Bank and rich countries. The purpose of this action is to provide a global capital market and encourage free global competition. From the countries’ point of view, it is hoped that privatization can improve State Owned Companies’ (SOEs) performance so they can compete effectively in the global market. In the last 13 years, from 1990 to 2003, 8998 state owned companies around the world have been privatized, involving US $ 410.8 billion (Nellis, John, 2005). In Indonesia, from 2002 up to 2007 privatization took 22 state owned companies out of public ownership (www.antara.co.id & www.bumn-ri.com).
The Impacts of Privatization on Companies and Employees
A critical factor involved in deciding whether or not Indonesian Government should privatize state owned companies is the nature of the benefit privatization might provide. Undoubtedly, the benefits of privatization are enormous, not only for the internal performance of companies but also for the macro economy. However, Savas and Sclar (cited in www.government.cce.cornell.edu) (2006) argue that privatization may increase operating cost of state owned companies since it is likely to entail hidden costs. Lack of information about private companies which will be contracted or partnered is claimed as one factor contributing to those hidden cost. Sometimes, state owned companies need to hire second parties and legal experts to analyze the proposal and manage legal issues during the privatization process. Stockton City in California spent $ 773,000 merely to prepare RFP/RFQ, engineering evaluation and contract negotiation when they considered privatization (Public Citizen, 2004). The need for supervision of the partners’ performance is also a cause of hidden cost, particularly in the case of contracting out method. Hebdon and Gunn state that state owned companies may have to hire technicians and managers to supervise private companies which are becoming their partners (2004).Those costs may occur in the short term, however; in the long-term privatization will result in operational cost savings that outweigh those short-term costs. Smith claims that outside contractors or partners of state owned companies usually are private companies who specialize in the services that they are providing (2003). This specialization has allowed the private companies to develop best management practices and technologies so as to perform more efficiently than state owned companies. Operational cost savings also result from “economies of scale” – which is defined by Coskun Can Aktan as situations in which “average cost of producing a product constantly decreases while output is increased”. This can occur since the larger a company, the more products it can produce. As a result, the large set-up costs become more economical, since they are spread over a greater number of products (ibid). A further reason why operating costs can be reduced with privatization is by reducing the costs of institutional structures and bureaucracy. It is evident that government usually has a more complex management structure and slower bureaucracy than private companies. A good example for this is that procurement of goods and equipment for Indonesian state owned companies has to be conducted with open public tender. This process undoubtedly involves high administrative costs, whereas private companies do not have an obligation to follow the government rules, so they can find the most efficient way to do that. There is considerable empirical evidence to suggest that operating cost savings are significant. Privatization of several government functions in Missouri in 1996 has saved annually $44,000 from housekeeping and $200,000 from delivery services (Richardson, L.E. & Valentine, D.C., 2005). More conclusive evidence comes from a study of 79 companies in 21 developing countries indicating that their efficiency increased by 25% post privatization (Boubaki & Cosset, R. J., 200).
Considering the second significant impact of privatization, Zeller alleges that privatization may result in diminished service quality since cost savings are sometimes achieved by cutting quality (2000). This might happen if companies are just concerned about short-term profit. For instance, companies may reduce their spare part inventories in order to save warehousing costs, and as a result, companies may face difficulties in repairing machines which break down so this can delay service delivery to customers. However, that scenario is somewhat questionable because in the open competitive market, companies having bad quality services will go out of business. As Moore argues, privatization can improve service quality due to open market competition that leads to improved incentives to innovative (1994). Therefore, private companies ensure that they pay great attention to satisfy customer (Hebdon, R. & Hazel, D., 2004). Furthermore, Gough claims that companies may well respond to customers’ desire by introducing satisfying services and technological innovation since customer satisfaction is positively linked to increased sales and profits (2002). Otherwise, customers will move to competitors. In addition, a higher quality of service can be gained by simplifying bureaucracy which is usually complex and slow to respond to market and customer demands in state owned companies. Having no obligation to follow particular government regulations, such as civil servant regulations, private companies have greater flexibility in using their resources to respond to their customers’ demands. For instance, they can fire workers who perform badly or hire temporary workers in the peak season without complex bureaucracy. Reliable evidence from GAO suggests that a public office in California which was privatized has achieved significantly better performance, particularly in paternity, support order and making collections, compared to public office (Winston, P. et al, 2002).
Turning to the impacts of privatization in term of employees, we can also see several significant positive impacts. JubileeSouth affirms that privatization may create job insecurity and decrease employees’ motivation and performance due to intolerable terms and conditions, such as strict rules punctuality. However, those feelings almost certainly apply to only a few workers who have questionable performance. In addition, Winston argues that private companies are usually not reluctant to offer higher salaries, better benefits and working conditions to attract more productive workers (2002). This benefit package may well improve employees’ motivation and performance. Better remuneration and promotion systems also contribute to increased employees’ performance since they trust that remuneration and promotion are based on performance instead of political reasons, subjective consideration or seniority, as commonly happens in public companies. A study from The World Bank indicates that privatization in three Latin American cities has led to increased labor productivity and in Cartagena de Indias, employees per thousand connections fell from 14% to 4,5% post privatization (Martin & Micoud, World Bank, 1997).
Relatively cheap financing due to tax exemption is often claimed to be one positive side of state owned companies. However, Smith maintains that public utilities cannot always access tax exempt funding (2003). Moreover, public companies are constrained by government regulations and budgets; as a result, they have difficulty in getting funds and capital excepting what government has allocated in their budget. In this case, private partners may have access to quicker and cheaper sources of funding such as state revolving funds (SRF) (ibid). In addition, the accessibility of funds and capital depend on the rating of the entity issuing the debt since investment risk is associated with the image, trust and performance of companies. Therefore, the higher rating and public trust had by companies, the more easily and cheaply they can raise funds. In fact, usually public companies are perceived as poorly managed companies, while private companies have a better image since they have to follow strict rules related to accounting practices and regulations that promote transparency. This has been proved by PT. Semen Gresik which was the first privatized state company in Indonesia. Post privatization, when the majority of Indonesian stocks plunged, Gresik shares rocketed by 57% (Gough, L., 2002).
Conclusion
Considering this evidence, it is clear that privatization benefits companies, customers and government of Indonesia as a shareholder. Privatization not only means improved companies’ performance, but also more choices and better services for citizens as customers. Trough privatization, The Indonesian government can still fulfill their obligation to provide the best public services to their citizens while strengthening their state owned companies’ performance. Therefore, the government of Indonesia supported by parliament, should consider privatization as a part of its restructuring program, so that Indonesian state owned companies can compete effectively in the global market that is now inevitable.
References:
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