"Cleaning Up" State-Owned Companies

KOMPAS/ALIF ICHWAN

Finance Minister Sri Mulyani (left) along with State-Owned Enterprises Minister Erick Thohir (right) inspect the condition of a Harley Davidson motorcycle smuggled aboard an Airbus A330-900 neo aircraft, before holding a press conference at the Finance Ministry Office, Jakarta, on Dec. 5 (5/12/2019).

Indonesia has 114 state-owned enterprises (SOEs) engaged in vital and strategic sectors of businesses, ranging from energy and food to water. The SOEs that control the lives of many people should be managed and operated for the people\'s welfare.

Likewise, the SOEs in the field of public services, such as hospitals and public transportation, their performance indicators should be based on the quality of the services they provide to the community. Beyond that field, the SOEs should be operated as a business entity whose governance must still meet business considerations.

The performance benchmarks of the SOEs should not only be based on financial benefits. However, as a business entity, they must contribute to stimulating the economy. Even though they don’t produce a large profit, if they are able to produce energy efficiently, the SOEs can attract investment.

The operation of SOEs engaged in the financial sector such as banks, for example, should be based on governance especially designed for the banking industry, which must be prudent and strict. However, it should not conflict with its role as a development agent.

If private banks are free to channel loans to conglomerates and their business units, state-owned banks should also be able to focus on financing of the sectors that create the greatest added value to the economy. They should, for example, be able to prioritize loans for a productive sector that can create more employment, such as the manufacturing and agricultural sectors and micro, small and medium enterprises.

In 2019, SOEs\' profits are projected to reach Rp 210 trillion (US$14.9 billion).

In 2019, SOEs\' profits are projected to reach Rp 210 trillion (US$14.9 billion). About 80 percent of the profits is contributed by only 20 percent of existing SOEs. Ironically, a greater proportion of the profits is provided by SOEs engaged in the strategic sectors, public services and those acting as development agents, such as Pertamina and the banking sector.

Meanwhile, SOEs engaged in pure business activities often have poor financial conditions and even suffer losses.

Despite the losses, the SOEs continue their expansion. The number of SOEs has shrunk from more than 140 to 114, but if included with their subsidiaries, the number reached 800 companies.

In aggregate, SOEs’ contribution to gross domestic product (GDP) is only around 1.5 percent, while the net profit ratio of Singapore\'s state-owned holding company, Temasek, to GDP reached 4.64 percent. In fact, the ratio of Temasek\'s assets to Singapore\'s GDP is 10.52 percent.

The total assets of Indonesian SOEs are estimated to reach Rp 8.5 quadrillion.

KOMPAS/PRIYOMBODO

Customers queue at the Bank Mandiri sub-branch at Pondok Indah Mall 2, South Jakarta, in July (20/7/2019).

Problems

A number of problems that have entangled SOEs underlie SOE Minister Erick Tohir "cleaning up" program to improve SOE governance.

Some of the actions that will be taken include, first, the improvement of bureaucratic efficiency. The SOE Ministry has reduced the number of deputies from seven to only three. This program is part of the commitment to transforming a bureaucratic culture into professional and competitive culture. However, the SOE Minister also appointed four special staff members, comprising academics and professionals.

Second, restructuring the formation of SOEs\' subsidiaries, both "first-tier subsidiaries" and "second-tier subsidiaries". SOE expansion through the establishment of fist-tier or second-tier subsidiaries is fairly excessive. The first and second-tier subsidiaries don’t really support the core business of their parent companies.

The SOE Ministry will comprehensively restructure the SOEs by issuing SOE Ministerial Decree Number SK-315 / MBU / 12/2019 concerning the establishment of subsidiaries or joint ventures under the SOE Ministry. Some first-tier and second-tier subsidiaries that have similar business lines will be merged or even be dissolved.

KOMPAS/FRANSISKUS PATI HERIN

Customers wait for their turn to get services at Bank BNI branch in Ambon, Maluku, in October (17/10/2019).

Third, clean corporate governance. The SOE Minister dismissed the director of national flag carrier PT Garuda Indonesia (Persero) Tbk for his alleged involvement in smuggling luxury goods. This scandal can be used as an opportunity to fix the governance of SOEs without exception.

Fourth, eliminating multiple positions. One common practice is that directors of SOEs can concurrently serve as commissioners for subsidiaries. Fifth, strengthen management. Improving bad corporate governance doesn\'t just open up Pandora\'s boxes. The most important thing is to place professionals who are competent, credible and have more than enough experience. It is also important to improve the mechanism in the appointment of commissioners. This means that the appointment of commissioners should not just be based on the distribution of positions to political parties that support the government.

Sixth, optimization of core business and sanitation. A number of business lines of SOE subsidiaries have no clear direction. Seventh, building corporate ethics. The SOE Minister has issued Circular Letter (SE) Number SE-9/MBU/12/2019 concerning the implementation of ethics and or compliance in the context of the management and supervision of the company. It, among other rules, prohibits SOEs from distributing or giving souvenirs during general meetings of shareholders.

KOMPAS/HARYO DAMARDONO

Garuda Indonesia Airlines introduces the Airbus A330-900 neo aircraft on Wednesday (27/11/2019) at the GMF hangar at the Soekarno-Hatta International Airport in Cengkareng, Banten. Garuda has ordered 14 of the wide-bodied aircraft. The neo Airbus A330 is equipped with the latest generation Rolls-Royce Trent 7000 engine.

The goal is to improve efficiency and the implementation of corporate culture based on professionalism and the principles of good corporate governance.

These various breakthroughs must primarily be aimed at realizing and improving good corporate governance, professionalism and improving the performance of SOEs.

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

To make this happen, the “clean-up” effort must have a clear blueprint, be carried out consistently, transparently, accountably and not selectively. Thus, it will foster public trust and lead to the optimization of SOEs’ performance.

ENNY SRI HARTATI, Senior Researcher, Institute for Development of Economics and Finance (Indef)