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here are two kinds of business entities. We have public and privately owned companies, a concept that is more widely adopted in the western world.

On the other hand, we also have the state-owned enterprise (SOE), a business entity that is tightly controlled by the government.

Businesses in which the state is a majority shareholder are suitable for countries that consider certain social goals — such as energy security, economic development or job creation — to be as important as profits.

SOEs play an important role in the economy, especially in strategic sectors like energy, utilities, mining and infrastructure. However, SOEs in Indonesia have a reputation for weak corporate governance, lagging business performance and being half as efficient as their private counterparts.

The roots of the problems are many. SOEs in Indonesia almost always juggle multiple or even conflicting financial and social objectives, such as keeping electricity tariffs below the market price.

Finding talented people to work at SOEs is not an easy task either; the brightest and best tend to go to the private sector, where pay is often higher.

Political appointments to managerial positions exacerbate the issue by limiting the autonomy of particular SOEs.

The SOE Ministry, with the support of President Joko “Jokowi” Widodo, is campaigning for an ambitious overhaul of Indonesia’s inefficient SOEs. Privatizing these companies would have a negative political impact on the government, so that remains out of the question. The SOE minister prefers to learn from the success of foreign SOEs, like Temasek.

In 1974, the Singapore government established an investment company, Temasek Holdings, to own and manage state-owned enterprises.

That same year, 36 companies directly managed by the government were put under Temasek’s control. Today, Temasek is one of the largest SOEs, and one that looks almost like a private corporation.

Temasek is registered under the Companies Act and subject to all the same requirements as private businesses.

It behaves like an active investor guided by a strategy to maximize long-term returns. It should be noted that the government refrains from interfering in Temasek’s business decisions.

The state-owned enterprises under Temasek operate fully as for-profit commercial entities, on the same bases as private-sector companies.

They do not receive any subsidies or preferential treatment from the government.

As a first step of reform, the Indonesian government is considering to turn six SOEs into holding companies in different sectors.

They would own and manage SOEs engaged in the sectors of mining, oil and gas, housing, infrastructure, financial services and food, respectively.

Merging SOEs in the same sector is a way to eliminate “malicious competition” between rival state groups and reduce resource duplication, thereby improving efficiency.

In the long run, a “super-holding” body will be formed to replace the functions of the SOE Ministry. This super-holding body would resemble Singapore’s Temasek.

We can see that the concept is to have a centrally managed investment company and then a layer of state level holding companies that will make investments in the SOEs or even in private companies.

This mechanism is attractive for the government, because it retains control over all SOEs without the need for direct day-to-day involvement in the decision-making process at individual SOEs.

The Temasek model may work fine in Singapore, where the civil service has a reputation for clean management. But Indonesia’s bureaucracy has proven to be riddled with corruption.

Adding to that, corporate governance at the SOEs is a nightmare. Thus, it is questionable whether the same model would work here.

Furthermore. Temasek’s charter obliges it to increase the value of its holdings over the long term.

This is a simple goal compared with the Indonesian government’s numerous ambitions.

Indonesia wants its holdings to also promote technological innovation and favor local industries, among other things.

Questions also arise about the legal status of SOEs in the planned new structure. The SOE Law only acknowledges SOE holding companies as SOEs. “Direct [capital] participation by the state” is the key criterion to define a company as an SOE. If the government intends to retain the SOE status of the subsidiary companies, the Law needs to be amended.

We have to remember that Indonesia differs from Singapore in terms of country size, history and political economy. As such, it may need to adjust or even to develop its own SOE governance model that suits domestic conditions.

The most important element in order to reform our SOEs is to remove political involvement in boards and decision-making.

It is ironic that the government acknowledges the need for reform, encourages studies on those reforms and prepares for their implementation, but then does exactly the opposite.

We remember that in 2015 the government appointed 16 of President Jokowi’s supporters in the presidential campaign (or their colleagues) to become SOE commissioners.
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The author is a lawyer with a prominent law firm in South Jakarta with lots of experience dealing with SOEs.