The
dire need for reform of Indonesia’s SOEs
Mukul
Raheja ; 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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JAKARTA
POST, 26 Februari 2014
“The
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. ●
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