State-Owned Enterprise (SOE) Reforms

Post Monetary Crisis in Indonesia

Prepared byMochammad 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 burdens3. 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

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.

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

C. Problems to be encounteredGenerally 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

Govt Function Regulator

& Facilitator

Current Environment: · Inefficient SOE

· Limited govt. budget · Globalization demand

Reform Action: · Restructuring

· Privatization · GCG

Implementation

Objectives: · Economic/Real

Sector Recovery · Reduce Budget deficit · Capital Market

development · Ownership Expansion · Competitiveness

Enhancement · Profesionalism,

Transparency & Accountability

Constraints: · Limited Capital

Market Capacity· Lack of experiences

· Incoherent perception and regulation among institutions

Objectives Proposed Actions Potential Risks

1. Corporate Governance

.Develop and introduce corporate governance policy framework

for SOEs .Delays in consultations between Ministry

SOE (MSOE) and SOEs

. Implement corporate governance policy .Opposition from SOE commissioners and

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

governance mechanisms .Lack of interest of directors and

commissioners

2. Public Service Obligations (PSOs)

a. Quantify PSOs and develop regulations for their tender.

· Identify PSOs in selected SOEs. . Opposition from line ministries.

· Quantify PSO for costs and environmental impact

·

Develop rules and regulations for tendering such services (allowing bidding by private companies) with the objective of minimizing subsidies.

.

Public opposition to changing delivery system for services.

b. Implement Policy ·Introduce the rules and regulations for tendering PSO, by

private companies with the objective of minimizing subsidies

.Government can not allocate funds for

transparent subsidization of PSOs

Objectives Proposed Actions Potential Risks Potential Risks

3. Corporate Restructuring

a. Liquidation of non-viable SOEs.

·Identify nonviable SOEs and SOE business lines to be

discontinued. · Delay in MSOE decision.

. Liquidate for nonviable SOEs.·

Opposition/protest from nonviable SOEs and their employees.

b. Financial Restructuring of SOEs · implement corporate restructuring plans for identified SOEs, with appropriate consideration for all relevant legislation and policies predetermined

.

Delay in negotiations with banks and other lenders,

c. Improve quality of financial audits. · Complete independent audit ·Disagreement between MSOE and SOEs

on selection for audit.

d. Privatize SOEs

· Determine the privatization options SOEs.

·Delay due to unfavorable market

condition or finding investment partner· Issue initial public offerings (IPOs) for SOEs

· Privatize 15 SOEs. ·

Disagreement about valuation of SOEs between the Government and strategic investors.

4. Excessive Labor

Development of labor redundancy policy for all SOEs

· MSOE to prepare a draft labor rationalization policy ·Lack of cooperative attitude of working

group members

. MSOE to facilitate establishment of a consultative working group on labor rationalization

. Opposition from labor union/workforce

·

SOEs to lodge their labor restructuring plans, if any, (including cost implications) with MSOE, and Ministry of Manpower(MOM) to provide endorsement. ·

Government can not allocate sufficient funds for redundancy payments in lieu of SOEs

5. Corruption, Collution and Nepotism (KKN)

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

. Opposition to the implementation of guidelines from SOEs.

. 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.