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Jakarta Post

The dire need for reform of Indonesian SOEs

  • Mukul Raheja

    The Jakarta Post

Jakarta   /   Wed, February 26, 2014   /  11:09 am

'€œThe government has no business being in business'€ goes the famous quote. The practicality of these words is debatable, but it is unanimously acknowledged that the excessive involvement of state-owned enterprises (SOEs) in business crowds out private businesses and investment.

The SOE sector in Indonesia is oversized and inefficient to say the least. The number of state-owned companies is 141, with another dozen companies in which the government has a minority stake. In terms of the total assets held, these SOEs account for Rp 3.5 quadrillion (US$300 billion). The total revenue estimates of these enterprises stood at an estimated Rp 1.5 quadrillion or about a fifth of the Indonesian gross domestic product (GDP) in 2012.

Their sector-wide presence is extremely pervasive with interests in energy, power, transportation, aviation, agriculture, banking and telecommunications. One measure of the massive failure of the state enterprises is that in spite of their colossal size and spread, the majority of the population in Indonesia is still employed in the informal sector. Further, there is only one Indonesia SOE ranked in the Fortune 500 list; Pertamina.

This is not to say that all state enterprises should be tarred with the same brush, even though the best of the state enterprises in Indonesia still suffer from endemic poor practices. It is, nonetheless, essential to differentiate between the loss-making SOEs and the profit-making ones. The optimal approach would be for the government to divest its stakes in the loss-making businesses and radically reform even the profit-making ones.

It is incorrect and counter-productive to assume a profit-making state enterprise on paper is an actual profit-making and efficient business. More often than not, one of the major reasons for the apparent profitability of the SOEs is the explicit and hidden subsidies which come directly out of the taxpayers'€™ pockets. This has been amply demonstrated by examples in China where recent independent studies have shown that in the absence of all the government subsidies, SOEs which appear to be doing great would actually be making losses.

State enterprises also have an unfair advantage due to various factors like priority bank lending, an absence of healthy competition from private businesses and access to natural resources at giveaway prices due to the lack of proper bidding procedures to name a few.

According to the Indonesian government'€™s own figures for 2012, the total subsidies earmarked for fuel and electricity amounted to Rp 300 trillion out of a total state budget of Rp 1.6 quadrillion. These subsidies go into offsetting the losses to the state enterprises for selling the fuel and electricity at subsidized prices. The bulk of the subsidies will go to fuel because Indonesia now depends on imports for more than 60 percent of its consumption.

Another major problem and the most critical one that SOEs in Indonesia face is the widespread corruption. This corruption is not only detrimental to the smooth operation and efficiency of the company, but also results in direct loss to the state exchequer and taxpayers. In the past few years many SOEs have been investigated by the Corruption Eradication Commission (KPK) for gross irregularities. The list includes many well known names spread across various sectors like PT Adhi Karya in the construction sector, Telkom the country'€™s telecommunications giant, PGN and PLN the state natural gas and power companies respectively and Sang Hyang Seri the wholly state-owned agro chemical company.

The constant meddling in the affairs of the state enterprises by influential legislators and members of the government is another issue that plagues these enterprises. The recent revelations and allegations by Karen Agustiawan, the president director of Pertamina, are an indication of the mammoth complications in running a
state enterprise in Indonesia. She alleged that several lawmakers threatened to undermine her position if the state energy company did not pay them undisclosed sums of money. The interference of political parties and the government in the appointment of executives to the board of SOEs is a reflection of how these enterprises are used as cash cows for political and economic gains.

The list of reforms that are required to fix the problems hindering SOEs is long and the road is difficult. The attempts made in the past by the State-Owned Enterprises Minister Dahlan Iskan at even minor reforms fell flat on their face and the frustration is only growing. The ministry is a toothless body with excessive interference by the House of Representatives.

The first major step toward change would be attracting the best talent to the SOEs and appointing them to senior positions in an open and transparent manner. State enterprises like Pertamina and Garuda Indonesia have gained under the stewardship of their able leaders. The next step in the right direction would be for these companies to be evaluated on the measures of profitability and efficiency like a world-class multinational national company and not under the shield of subsidies. Another reform would be to open some of the previously closed sectors to private businesses and ensuring a healthy competition to keep even the best of the state enterprises on their toes.

In order to efficiently tackle the crisis of corruption marring the state enterprises, the best way forward would be for these enterprises to be publicly listed on
the Indonesia Stock Exchange (IDX). This would ensure enhanced transparency of information dissemination regarding their corporate governance structure, subject them to rigorous disclosure requirements and expose them to increased public scrutiny and independent audits.

The major reform of freeing these enterprises from overt political influence, though extremely difficult, needs to be done through strong political will in order to achieve any real change.

The need is for Indonesia to have independent, transparent, efficient and corruption-free state enterprises, limited to operating in only a selected number of strategic sectors where they have a comparative advantage. Otherwise in their current state, they will be a liability and not an asset to the state and economy. They will be also be detrimental to private businesses and investment and thwart the growth of medium-sector enterprises, which Indonesia badly needs in order to generate more employment in the formal sector.

In the past there has been some lip service paid to the need for reform but no real reform itself. It will take an administration with a firm agenda for reform and strong political will to achieve any real change.


The writer, who holds a Master'€™s degree in international relations with a focus on political economy, is a researcher in public policy and business consulting.

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