Special Reports: State enterprises: Restructuring slowly, but still on track

Sat, 07/04/2009 12:59 PM  |  Business

On the lower floor of a nondescript low-rise building, next to the Jalan Medan Merdeka Selatan head quarters of state airline, Garuda Indonesia, is the office of the Minister of State-Owned Enterprise (SOE), Sofyan Djalil, arguably one of the most influential ministers in the Cabinet under President Susilo Bambang Yudhoyono.

The Minister oversees a diverse collection of 141 SOEs (with total assets of Rp 1,964.2 trillion and total revenues of Rp 1,159.0 trillion, as of 2008), dominating key sectors of the Indonesian economy.

To highlight a few leading SOEs in their respective markets, there is the largest profit generator, Pertamina, the oil company, and the largest loss maker, PLN, the electricity utility, both in the oil and energy sector.

In banking, there are Mandiri, BRI, and BNI, the numbers one, two and four banks respectively, in terms of assets.

In airlines, there are, national carrier, Garuda Indonesia, which recently turned around to profitability and, feeder carrier, Merpati Nusantara, still struggling with losses.

In mining, there are the diversified mining company, Aneka Tambang; coal mining company, Tambang Batubara Bukit Asam and, tin mining company, Timah.

In telecommunications, steel and cement there are, respectively, Telkom, Krakatau Steel and Semen Gresik. In plantations there are the Perkebunan Nusantara 3, 4 and 5. In construction, there are Wijaya Karya and Adhi Karya. In seaports there are Pelindo 1, 2 and 3, while in airports, there are Angkasa Pura 1 and 2.

Not all are profitable. Nevertheless, total annual SOE profits generated still exceed their losses.

In 2008, total profits from 114 state-owned companies reached Rp 77.6 trillion, while losses from the remaining 27 companies were estimated at Rp 13.8 trillion. During the same year, total SOE dividend contributions to the government budget reached a sizable Rp 29.1 trillion.

Minister of State Owned Enterprise, Sofyan Djalil, recently met with The Jakarta Post's senior editor, Manggi Habir, to discuss how he sees his achievements and challenge since taking over the Ministry from Sugiarto back in 2007.

The following are the excepts of the interview.

Question: When you took over the SOE Ministry, with such a diverse collection of companies, what was your immediate priority?

Answer: There already was a masterplan, which just needed to be continued and implemented.

A comprehensive review of SOEs was done back in former President Suharto's last cabinet, when this Ministry was first established. Before that SOEs were largely extensions of related Ministries.

In fact, going back in history, SOEs were initially borne as a result of nationalization and, later when oil prices surged in the 70s and with the limitations of the bureaucracy, at that time, SOEs grew in importance, as they helped fund development.

There was a time when there were over 200 SOEs, for example, there were 34 plantation companies.

By the late 90's the number of SOEs had shrunk to about 140 and remains at this level until now.

Since the ministry's establishment, SOEs were rationalized and restructured and a few were privatized. Of the 22 SOEs privatized since 1991, 17 of them were partially privatized, where the government has retained majority ownership.

In the remaining five companies, the government has either a minority stake or no interest at all. For example, in Hotel Borobudur the government's stake is only 1.6 percent.

The next step is to make the SOEs more efficient and effective by consolidating SOEs within similar business lines. This is done by grouping similar business SOEs, under one sector-specific holding company.

For example, there will be one holding company for state banks, another holding company for plantation SOEs, and so forth.

The objective is to eventually streamline the SOEs so that the total number can be brought down to 25-30 within the next five years. Ideally, we then won't need this Ministry.

In its place, we will have a super-holding company, like Temasek in Singapore and Khazanah in Malaysia.

So since you took over the SOE Ministry, what targets do you feel you have achieved and what targets do you still need to work on?

In 2008, total SOE revenue has reached Rp 1,159 trillion from Rp 464.2 trillion in 2003, while 2008 net income reached Rp 77.6 trillion from Rp 25.7 trillion five years ago.

A large part of this is due to the rise in oil and commodity prices as well as efficiency efforts.

Total SOE dividend contribution to the government budget has also risen from Rp 9.8 trillion in 2004 to Rp 29.1 trillion in 2008.

We've also been successful in turning around Garuda and Krakatau Steel from loss-making to profitability.

On the other hand, there have been no privatizations in 2008, due to the poor global economic climate.

We've also had a difficulty in further streamlining the number of SOEs, through the creation of sector-specific holding companies.So far, the holding companies that have been set up are in cement and fertilizers.

In cement, we have Semen Gresik functioning as both an operating company as well as a holding company for its two subsidiaries Semen Padang and Semen Tonasa.

The fertilizer company, PUSRI, has the same set up, where it is both an operating and holding company for other fertilizer SOEs.

For the 14 plantation SOEs, the Ministry has completed the holding company design, but is still in the process of implementing it.

Once consolidated, the plantation SOE holding company would be more efficient, given economies of scale, and could allocate resources more easily between each plantation subsidiary.

Our calculations show that we could expand our plantation area by 200,000 hectares a year. We are still very much behind the growth of the privately-owned plantations.

What have you identified as the key problem in pursuing your sector-specific holding company program and what have you done to overcome this?

First of all, my Ministry cannot decide by itself in implementing this holding company program.

I need to get approval from the Ministry of Finance and also parliament. This is not easy as it involves regulatory issues and the authorization process takes time.

For example, last year we proposed to parliament to rationalize 36 SOEs and so far only 30 of them have been approved.

We still have an inefficient political process. Instead, what we have focused on is to make the SOEs more efficient and effective by getting the right people to manage them and implement good corporate governance.

This doesn't require external approval. We have recruited professionals from the private sector.

We have set appropriate key performance indicators (KPIs) to monitor their performance and we have improved their remuneration, to be more in line with the private sector.

We have introduced an improved system of rewards and sanctions. My experience so far shows that improvement in SOE performance relies heavily on getting the right management in place.

The ideal management should not only be technically competent and professional, but also able to understand and manage the political aspects of the job.

This is what we look for when we select the right management.

In the past, we put considerable weight on being able to address the political issues, but now we are putting more weight on the professional and technical side.

We have seen more private sector professionals that are willing to join the top managerial positions in SOEs.

For example, in Garuda, two of the directors came from Hewlett Packard and from General Motors.

I'm a firm believer that a country's development is dependant on the quality of its human resources. And we have a serious shortage of qualified and experienced managers. Now, however, the external environment is also more conducive.

With our anti-corruption campaign, with the government's checks and balances with parliament, with more transparency and freedom of the press, this allows us to introduce more professional principles.

What other hurdles do you face, with regard to setting up a super holding company, like Temasek and Khazanah, and what is your plan to address it?

One notable area is the state of the laws on SOEs and government finance. The SOE law states that SOE assets are separate from government assets and, as such, are treated as corporate assets.

But the state finance laws still regards SOE assets as government assets.

This ultimately makes it difficult for the state banks to write off bad loans, for fear of being charged with generating losses on state assets.

The Ministry of Finance is concerned with possible abuse of power at the SOE ministry and wanted to ensure tighter control, which is understandable, but this limits our ability to improve SOE efficiency.

This ultimately is a matter of trust. Whoever heads the SOE ministry has to be able to say no to political interests and maintain appropriate governance principles.

If not, it would be difficult to attract good people to run the SOEs. That is why it is important to build credibility first.

What do you think needs to be done going forward?

There are two things. One is the political will to create a super holding company that would encompass all the sector-specific holding companies.

Second, is to change the clause in the laws so as to ensure that SOE assets can be considered just as corporate assets.

This political will can only be generated if this Ministry can build credibility.

With a clean government and a more conducive external environment, I don't see this as a problem.

In my younger days, I was concerned that SOEs would be used as cash cows for political purposes, but now I believe that with the right people, with a conducive external environment and good corporate governance, SOEs can compete effectively with the private sector.

If you could go back in time, what would you have done differently?

I don't think I would do anything differently.

I still believe we can create a super holding company within the next presidential term. By then, you would no longer need an SOE Ministry.

I believe we are on the right track.

10 SOE with most profits

SOE----------------- 2008 Profit (in Rp trillion)
Pertamina-------------- 30.20
Telkom Ind------------- 10.62
Bank Rakyat Ind-------- 5.96
Bank Mandiri----------- 5.31
Semen Gresik----------- 2.52
Pupuk Sriwidjaja------- 1.81
Bukit Asam------------- 1.71
Aneka Tambang---------- 1.39
Timah------------------ 1.34
Bank Negara Ind-------- 1.22
10 SOE profits (or 80% of total) 62.06
Total SOE profits------ 77.63

10 SOE with most losses

SOE------------------------------- 2008 Loss (in Rp trillion)
PLN------------------------------- (12.30)
Merpati--------------------------- (0.56)
Kertas Kraft Aceh----------------- (0.15)
Djakarta Lloyd-------------------- (0.15)
Perkebunan N XIV------------------ (0.11)
Dirgantara Ind-------------------- (0.08)
Industri Gelas-------------------- (0.08)
Industri Sandang N---------------- (0.07)
POSINDO--------------------------- (0.06)
PAL Ind--------------------------- (0.06)
10 SOE losses (or 99% of total)--- (13.62)
Total SOE losses (13.82)

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