State-Owned Enterprise (SOE) Reforms

Post Monetary Crisis in Indonesia

Prepared by
Mochammad Hadi pratomo

2007
 Why Privatized?
 Empirical studies indicate that SOE used to finance infeasible projects/ provide
subsidies to particular elite groups (Kikeri, Nellis, and Shirley 1992
 Less competition, greater political intervention and weaker good corporate
governance and empirical studies showed that reformation thru privatization of
SOE improved performances even in poor regulatory environments

Generally there are three objectives of privatization:

1. Enhancing efficiency of asset use through the creation of
private ownership;
2. Reducing budgetary burdens
3. Privatization as a socio-political goal (especially in transition
economy countries)
 Overview of Indonesia’s SOE post
monetary crisis
 State owned enterprises (SOE) historically have long played significance role
in Indonesia's economy, accounts for around 70% of GNP by the early 1980s
and partly due to impact of monetary crisis, is for around 40% in 2001 (World
Bank 2001)
 In 1999, total assets of the 113 SOEs (book value) were $39 billion (Rp391
trillion), equivalent to 42 percent of the total assets of Indonesia’s producing
sector and SOEs employed 655,000 persons on a full-time basis. However,
including their subsidiaries and the contract and subcontract workers, the total
workforce of SOEs was close to 1.4 million, or 18 percent of the workforce in
large and medium enterprises. The contribution of SOEs to the country's GDP
was estimated at 12 percent, indicating a relatively low efficiency in the use of
labor and assets (ADB 1999). In 2000, total asset of whole SOE’s were $ 86
billion (Rp 861 trillion) but only generating $ 1.3 billion (Rp 13.34 trillion) as
net profit with Return on Asset (ROA) rate 1.55%. This table below illustrate
the range of ROA rate of Indonesia’s SOE during of 1997-2001 which only
about 1.55%-3.25%
 Overview of Indonesia’s SOE post
monetary crisis
Table 1.SOE performance from profitablity measurement view (millions rupiah)
Year Total Asset Net Profit ROA
1997 425,971,407 7,310,092 1.72%
1998 437,756,394 14,226,201 3.25%
1999 607,022,845 14,271,101 2.35%
2000 861,520,494 13,336,582 1.55%
2001 845,186,151 20,186,469 2.39%

Source: SOE Performance Development report – Dirjen Pembinaan BUMN, 2001

 Within this context, the implementation of a rigorous system of corporate governance for SOEs is critical and is viewed to lead the reforms for the overall corporate
sector[1]. Successful corporate restructuring, especially debt restructuring of SOEs will provide models to accelerate related efforts in the private sector. For example,
privatizations through stock exchange listing will promote capital market development. Furthermore, SOE reforms will also establish the best practices in managing
labor redundancies.
 Second critical reason why SOE need to be immediately privatized is based on the budget deficit occurred post monetary crisis. The economic slowdown in country
during the first half of 2001 has imposed severe contraction on the budget. It is critical to deal with the issue of the massive public debt up to $127 billion. About half
of the debt is owed to foreign creditors, including $20 billion to multilateral institutions, $43 billion to bilateral creditors, and $2.4 billion to foreign banks and
bondholders. Interest payments alone currently absorb 31 percent of budgetary revenues, reducing the availability of resources to address social development priorities
(ADB 2001). To overcome this condition, it is becomes critical that government should launching an aggressive privatization of SOEs to mobilize the required
resources for debt repayments[2]. In view of the important role of privatizations for future budgets, the Government should place a high priority on SOE reform
[1] Ministry of SOE has been evaluating and mapping condition for SOE privatization. See chart 1. in attachment for illustration of privatization.
 [2] See Table 5 in attachment for steps might be occurred during privatization.
C. Problems to be encountered
Generally there are five issues of SOEs
condition considered to be urgently
restored. There are corporate governance,
burden as PSO facilitator, poor financial
performance, excessive labor and endemic
corruption
SOE Privatization Policy Framework

Current Environment: Govt Function

· Inefficient SOE Regulator
· Limited govt. budget &
· Globalization demand Facilitator

Reform Action:
· Restructuring
· Privatization
· GCG
Constraints: Implementation
· Limited Capital
Market Capacity
Objectives:
· Lack of experiences
· Economic/Real
· Incoherent
Sector Recovery
perception and
· Reduce Budget deficit
regulation among
· Capital Market
institutions
development
· Ownership Expansion
· Competitiveness
Enhancement
· Profesionalism,
Transparency &
Accountability
 Objectives Proposed Actions Potential Risks

1. Corporate Governance

Develop and introduce corporate governance policy framework Delays in consultations between Ministry
. .
for SOEs SOE (MSOE) and SOEs

Opposition from SOE commissioners and

. Implement corporate governance policy .
directors

· Improve transparency of SOEs. . Resistance from directors and

commissioners

to publish annual reports and establish audit committees Lack of funds in MSOE to establish
· . Internet site

Capacity building for effective implementation of corporate Lack of interest of directors and
. governance mechanisms . commissioners

2. Public Service Obligations (PSOs)

· Identify PSOs in selected SOEs.

. Opposition from line ministries.
· Quantify PSO for costs and environmental impact
a. Quantify PSOs and develop regulations for
their tender. Develop rules and regulations for tendering such services .
(allowing bidding by private companies) with the Public opposition to changing delivery
· objective of minimizing subsidies. system for services.

Introduce the rules and regulations for tendering PSO, by

Government can not allocate funds for
b. Implement Policy · private companies with the objective of minimizing .
transparent subsidization of PSOs
subsidies
 Objectives Proposed Actions Potential Risks Potential Risks

3. Corporate Restructuring

Identify nonviable SOEs and SOE business lines to be

· · Delay in MSOE decision.
discontinued.
a. Liquidation of non-viable SOEs.
. Liquidate for nonviable SOEs. Opposition/protest from nonviable SOEs
·
and their employees.

b. Financial Restructuring of SOEs · implement corporate restructuring plans for identified SOEs, Delay in negotiations with banks and
with appropriate consideration for all relevant legislation . other lenders,
and policies predetermined

Disagreement between MSOE and SOEs

c. Improve quality of financial audits. · Complete independent audit ·
on selection for audit.

· Determine the privatization options SOEs. Delay due to unfavorable market

· condition or finding investment
· Issue initial public offerings (IPOs) for SOEs partner
d. Privatize SOEs
Disagreement about valuation of SOEs
· Privatize 15 SOEs. · between the Government and
strategic investors.

4. Excessive Labor

Lack of cooperative attitude of working

· MSOE to prepare a draft labor rationalization policy ·
group members

. MSOE to facilitate establishment of a consultative working . Opposition from labor union/workforce

Development of labor redundancy policy for group on labor rationalization
all SOEs
SOEs to lodge their labor restructuring plans, if any, (including Government can not allocate sufficient
cost implications) with MSOE, and Ministry of funds for redundancy payments in
· ·
Manpower(MOM) to provide endorsement. lieu of SOEs

5. Corruption, Collution and Nepotism (KKN)

Reduction of corruption in SOE procurement. . Initiate random, independent, or BPKP audits of the . Opposition to the implementation of
procurement by SOEs, and present audit reports to guidelines from SOEs.
steering committee and ADB

. Publish summary findings and identify measures to recover

losses and prosecute culprits
D. Concluding comments
 In general by implementing these agenda hopefully SOEs will:
 achieved the establishment of sound policy, legal, regulatory,
and operational frameworks for improving corporate
governance;
 improved awareness of international norms and practices in
corporate and financial governance;
 promoted transparency and disclosure by stipulating the regular
submission of financial, operational, and procurement audits that
include financial outcomes, board compensation, and
compliance with legislation (labor, environmental, and
procurement);
 In particular, subsequent tasks still remaining following these
scenarios is government should be focused on initiatives to
improve macroeconomic growth environment condition in
commercial sector by addressing key issues relating to
competitiveness.