Challenges for SOEs Minister

KOMPAS/ERIKA KURNIA

State-owned Enterprises Minister Minister Erick Thohir shook hands with former SOE Minister Rini Soemarno at the SOE Ministry office, Jakarta, Wednesday (23/10/2019).

Erick Thohir, the State-Owned Enterprises (SOEs) Minister, trully faces a mountain of challenges in addition to what he has inherited from the previous minister. What are these challenges? Washing the dishes!

Indonesia had 143 BUMNs (SOEs) in 2018, which had grown from 115 BUMNs in 2017 and 118 in 2016. How have they performed? Total assets continued to increase from Rp 5.76 quadrillion in 2015 to Rp 6.47 quadrillion (12.38 percent), Rp 7.21 quadrillion (11.39 percent) and to Rp 8.09 quadrillion (12.23 percent) in successive years. The BUMNs earned net incomes of Rp 150 trillion in 2015, which then grew to Rp 176 trillion (17.33 percent), Rp 186 trillion (5.68 percent) and Rp 188 trillion (1.08 percent) in successive years.

Their contributions – including taxes, dividends and non-tax payments – also grew from Rp 303 trillion in 2015 to Rp 309 trillion (1.98 percent), Rp 354 trillion (14.56 percent), and Rp 422 trillion (19.21 percent) in successive years. Their reports were mostly blue.

Various challenges

It is time to adopt a yearly employee appraisal system that uses key performance indicators (KPIs) – a quantitative gauge for measuring the annual performance of employees in an organization. Since KPIs are derived from the organization\'s vision, mission and values, all employees may have different targets but have the same goals. Does every ministry, government agency and BUMN use KPIs? Not yet, I’m afraid.

Second is segregation of duties (SoD). It is appropriate that there are two SOEs deputy ministers. Budi Gunadi Sadikin, a former president director of PT Inalum and PT Bank Mandiri, is tasked with increasing the role of BUMNs in public welfare. Kartika Wirjoatmodjo, a former president director of PT Bank Mandiri and executive director of the Deposit Insurance Corporation (LPS), is tasked with increasing the competence of BUMNs so they can compete with private companies.

In practice, the duties of deputy ministers intersect with the duties of echelon 1 ministerial staff – the ministerial secretary, the four existing deputies and two expert staffers. Therefore, the BUMN minister must clearly stipulate the authority and duties of all deputy ministers and echelon 1 officials. The deputy ministers’ duties should be coordinative, the ministerial secretary administrative, and deputies and expert staffs operational. Firm segregation of duties can create synergy to achieve targets.

These figures do not include losses incurred through the alleged corruption committed by BUMN directors. Alas!

Third is to clean house. What has been inherited from the previous minister? At the end of 2018, PT Asuransi Jiwasraya incurred Rp 15.83 trillion in losses. PT Krakatau Steel made losses of Rp 1.09 trillion, Perum Bulog Rp 961.78 billion, PT Dirgantara Indonesia Rp 961.78 billion, PT PAL Indonesia Rp 304.15 billion, PT Dok and Shipping Kodja Bahari Rp 272.87 billion. Even PT Sang Hyang Seri incurred Rp 182.54 billion in losses. PT Iglas made losses of Rp 84.61 billion, PT Pertani Rp 83.07 billion, PT Kertas Kraft Aceh Rp 75.11 billion, PT Varuna Tirta Prakas Rp 6.65 billion and PT Indofarma Rp 32.73 billion (infobanknews.com, 23/10/2019). These figures do not include losses incurred through the alleged corruption committed by BUMN directors. Alas!

What is an alternative solution? Evaluate all commissioners and directors, especially those deemed problematic, through special audits. This will ensure that the losses are due to business risks or mismanagement. Now is the time to build modern and prominent BUMNs so they can compete at the regional level, never mind globally. Therefore, what is needed are commissioners and directors who possess high integrity and a long-term vision, who are competent and professional.

To urge synergy among BUMNs, state-owned banks can be instructed to disburse loans to ailing BUMNs to improve their financial performance. Other suggestions include injecting state capital, issuing subordinated bonds and divesting some assets to foreign investors. This last suggestion will be welcomed by foreign investors, because Indonesia has a vast market base of 267 million people.

Fourth is good corporate governance (GCG). It is necessary to review the implementation of the GCG principles, which include transparency, independence, accountability, responsibility and fairness. This also means the implementation of integrated risk management (IRM), especially at BUMNs that have many subsidiaries, so that one subsidiary that is exposed to risk will not spread the risk to other subsidiaries because the risk potential was calculated beforehand.

Fifth is controlling debt. BUMNs and their subsidiaries had a combined debt of Rp 3.2 quadrillion in the first semester of 2019 (Kontan, 25/10/2019). Developer BUMNs had especially high debts, because they are financing the government’s infrastructure project. Erick’s experience as a leading businessman will be challenged to ensure that debts are under control, especially debts denominated in foreign currency, to prevent the risk of defaulting when global recession occurs.

Threat of recession and disruption

Sixth is to anticipate recession. Not just the finance minister, but the teams of all ministers that deal with the economy – like the SOEs minister, agriculture minister, trade minister and industry minister – must be able to anticipate the increasingly real threat of a recession.

The threat of recession started emerging in banking when credit growth continued to decline. Indonesian Banking Statistics shows that credit growth on an annual basis had slowed from 9.84 percent in June to 9.52 percent in July and 8.52 percent in August 2019, respectively.

These figures are above the ideal LDR of 78-92 percent.

Third-party funds respectively slowed 7.27 percent, 7.93 percent and 7.52 percent in June, July and August. The tight liquidity was more explicit in the ratios of loans to third party funds (loan-to-deposit ratio; LDR) in June-August of respectively 94.98 percent, 94.48 percent and 94.66 percent. These figures are above the ideal LDR of 78-92 percent.

As a result, only foreign banks, private commercial banks (BUSN) that offer forex transactions and state-owned banks saw increases in August in their profits before tax (PBTs) of respectively 64.38 percent, 9.11 percent and 6.78 percent. Conversely, the PBTs of mixed banks, non-forex BUSN and regional development banks (BPD) declined respectively 13.76 percent, 11.79 percent and 2.99 percent.

Moreover, the Duniatex Group, which is a debtor to 21 banks, went into limbo. The critical debt case began when PT Delta Dunia Clothing and Textiles (DDST), a subsidiary of the Duniatex Group, defaulted on its principal debt and debt interest payments for US$11 million in syndicated loans that reached maturity. PT Delta Merlin Dunia Textiles (DMDT) faced a challenge in fulfilling its $5 million obligation in September and must start paying $13 million in bond interests with $300 million in debt securities.

Debts that become non-performing loans (NPLs) heavily burden banks. In the end, banks must make impairment loss allowances (CKPN) in accordance with credit quality. There are five receivables: 1) current loan, 2) special loan, 3) substandard loan, 4) doubtful loan and 5) bad loan. Receivables 3, 4 and 5 are called NPLs for which banks must provide reserves of respectively 15 percent, 50 percent and 100 percent of the loan minus collateral. The reserves will reduce profits, even diminish capital. Therefore, the central bank must continue to conduct stress tests to determine whether banks can withstand future economic instability.

Seventh is the threat of job loss. Infobank magazine (31/10/2019) noted that 114 commercial banks terminated 38,831 employees in 2014-2018 and that this could exceed 40,000 bank employees by the end of 2019. This was not only because of the crisis, but also technology disruption such as the emergence of financial technology (fintech) companies. The positive impact is that fintech companies can spur banks to explore a variety of digital products. However, this is not enough. Banks must also change their business model so they can better compete and survive amid the fierce competition.

Eighth is the establishment of BUMN holding companies. Will BUMN holding companies continue to be formed? Care should be taken in establishing a BUMN holding company for financial enterprises and banks. Why? Because state-owned banks have millions of customers that must be protected. It would be better for the SOEs Ministry to cooperate with universities in studying their benefits and impacts for the parent company.

PERSONAL ARCHIVE

Paul Sutaryono

On the other hand, the Financial System Stability Committee – which falls under the finance minister and consists of the BI governor, the Financial Services Authority executive chairman and the LPS chairman – must further increase its vigilance. Prevention and systemic management of banks is the key to maintaining a stable financial system.

Armed with these various strategic steps, BUMNs can be expected to become increasingly modern, professional and reputable.

Paul Sutaryono, Expert Staffer at BUMN Study Center, Banking Observer and Former BNI Assistant Vice President