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Should Indonesian airline Merpati be privatised?

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In Brief

It was reported last week that the government intended to continue to maintain ownership of Merpati Nusantara Airlines, even though the airline is losing over US$2.2 million a month on average. Indonesia’s airline industry has been growing at a remarkably rapid rate of around 16% annually during the last several years, and yet Merpati has seen its fleet shrink from 90 planes to just 19, suggesting clearly an inability to compete with new private sector entrants.

This is a good example of the true rationale for privatisation: the desire to increase efficiency in the use of productive resources. State-owned airlines such as Garuda and Merpati were able to survive in the past because the private sector was not permitted to compete with them on an equal footing. Since the airline industry was deregulated several years ago, many new firms have been established, and there has been an explosion of domestic passenger traffic—to the extent that flying has become an attractive alternative to traveling by rail or bus. Indonesia’s taxpayers have every reason to question the logic of keeping companies like Merpati in government hands when it is blindingly obvious that the private sector can do a better job.

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But politicians can always come up with a justification for even the most outrageously wasteful policies. In the present case, the rationale is that Merpati is still needed in order to serve routes between Indonesia’s smaller cities. In other words, the implication is that if Merpati were to be privatised, it would no longer be interested in serving these routes.

Supposing that is true, however, the appropriate solution to this problem is quite simple. If the political decision has been made that Indonesia should have at least one airline serving routes that would not normally be profitable, then all that is required is to open a tender in which airlines are invited to bid for the right to provide this service—just as construction companies bid for the right to build roads, dams, office blocks and so on for the government. Provided such tenders are conducted transparently, the government will then be able to provide these subsidised services at minimum cost, which will be less than the cost of keeping an inefficient airlines such as Merpati in business.

Bottom line: there is no justification for Indonesia’s government to be in the domestic airline business.

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