05 Juni 2008
The long debated fate of Krakatau Steel

In a bid to reduce dependency on imports, the government expects Krakatau Steel, a state-owned enterprise (SOE) currently listed for privatization, to triple production from its current 2.5 million tons per year.

The plan to privatize the company, which is a key supplier to the countrys defense industries, has generated concern that Indonesias steel industry could become controlled by foreign players.

Krakatau Steel can be privatized in two ways through an initial public offering (IPO), or through a strategic sale.

An IPO would directly contribute to the development of Indonesias capital market, and would attract investors seeking to expose themselves to the Indonesian Stock Exchange, while possibly drawing other industry players to go public.

In an IPO scenario, pricing is an important issue, with the companys financial performance proving criticalin determining the price per share.

Over the past eight years, the company has twice reported losses. For 2007, however, the company is expected to record a net prof-Rp 363 billion, and since 2000, company assets have grown 40 percent, while the leverage ratio has increased 17 percent.

The alternative privatization method is via a strategic sale, where investors are hand picked by the government, paving the way for sales to foreign companies - a sensitive issue given the strategic importance of Krakatau Steel. Nationalistic feelings have been running high in some quarters.

Five foreign companies have so far stated interest in a strategic sale ArcelorMittul of India, BlueScope of Australia, Tata Steel of India, Essar of Japan and Posco of South Korea.

Although a strategic sale would be conducted through a tender, one challenge facing the procedure would be ensuring its transparency.

Another challenge wouldbe to gauge the best selling price. This is important to raise the maximum amount of proceeds from the sale and to ensure public perceptions toward the sale remain positive.

Similarly, it is important for such a sale to not be marred by allegations of wrongdoing or corruption that could later be subject to investigation by the Corruption Eradication Commission (KPK).

According to the KPK, corruption falls into three categories Violation of standard procedures; giving benefits to a second party and causing state losses.

The timing of the privatization is also key. Some argue Krakatau Steel should be privatized after the 2009elections.

The government, however, has said the privatization should not be linked to political issues, even though a successful privatization would give kudos to the current government.

In conclusion, there are pros and cons to both options. An IPO has the advantage of being transparent the public can clearly see the value of Krakatau Steel through its share price.

An IPO, however, does not directly provide a written commitment from investors to provide funding for strategic long-term investment plans. In contrast, a strategic sale may be expected to h; written commitment to provide investment funding.

However, a strategic sale is politically sensitive and the government would need to tred carefully to avoid any potential problems down the road.

For now at least, it remains to be seen which method the government will prefer.

Pramayanti Meitisari Analyst

The writer is an economist at Danareksa Sekuritas

Source : The Jakarta Post, Page : 13 

 

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