T

he government should be very careful in implementing the decision of the House of Representatives budget committee on Monday, which increased the target of government non-tax revenues (dividend payouts) from state companies to Rp 43.73 trillion (US$3.8 billion) for next year.

This target is substantially higher than the Rp 40 trillion set for this year. The government should tread carefully in distributing the dividend target among the estimated 140 state companies because a dividend payout that is too large could be damaging to the future growth of state enterprises, as they will not be able to reinvest a sizeable portion of their earnings for capacity expansion.

We understand the difficulty that the House and the government currently face in setting targets for major items of revenue and expenditure for next year due to the rapidly changing situation in the international market and the global economy in general.

Forcing state companies to pay out more than 30 percent of their profits in dividends would stunt their future growth. Prudential business sense dictates that annual dividend payouts be capped at a maximum of 30 percent to allow companies to reinvest a good portion of their earnings for capacity expansion. An acute lack of investment in new technology and human resource development will severely impair the market competitiveness of state companies.

It is no wonder that most of the companies listed on the stock market abide by that dividend payout principle (maximum 30 percent) even though the investing public (retail investors) usually demand higher payouts. Wise investors will not hold the shares of companies that tend to pay out the bulk of their profits in dividends.

The plan to derive more than 21 percent of the Rp 43.73 trillion dividend payouts from the four state banks is most appropriate because banks constantly need to reinvest the bulk of their earnings in replenishing their core capital to meet international prudential regulations.

For example, the country'€™s biggest banks '€” state-owned Bank Mandiri, Bank Negara Indonesia (BNI) and Bank Raykat Indonesia (BRI) '€” should further increase their capital to fulfill Basel III capital requirements, as set by the Bank for International Settlement, if they want to expand operations in the region, especially in the upcoming ASEAN Economic Community.

Basel III rules on capital standards, to become effective in 2018, introduce requirements involving two liquidity ratios, designed to ensure that banks can survive liquidity pressures. The first, liquidity coverage ratio (LCR) focuses on a bank'€™s ability to survive a 30-day period of liquidity disruptions and the second, net stable funding ratio (NSFR) focuses on liquidity management over the period of one year.

Other state companies that badly need to reinvest the bulk of their net profits are those operating in basic infrastructure, such as Pelindo in port operations and management, Angkasa Pura in airport operations, as well as toll-road operator Jasa Marga, as they need to continuously improve and expand their facilities and capacity to make the country'€™s logistics system more efficient.