No business in business

Where next for Indonesia's stalled debate on state-owned enterprises?

Kyunghoon Kim

Economics and finance, Government and governance, Trade and industry | Asia, Southeast Asia

7 March 2017

Indonesia’s government and the parliament are in a conflict again regarding the reform of state-owned enterprises. Legal wrangling aside, building public consensus regarding the place of SOEs should form the basis of any change, writes Kyunghoon Kim.

Almost 30 years have passed since state-owned enterprise (SOE) sector reform began in Indonesia. It aimed to reduce government’s role and stake in key industries – after all, government has no business in business, as the adage goes.

Yet SOEs are still present across diverse economic sectors in Indonesia, and it is nearly impossible for Indonesians to avoid consuming goods and services produced by SOEs in their everyday lives. As of 2014, Indonesia SOEs were present in 37 out of 68 industries. This number is higher if SOEs’ non-primary businesses are included.

In the past 30 years, privatisation has been a major component of SOE reform, with the prime objective of selling shares in state enterprises changing over time. This has taken place through four phases. The first began as a way to deal with external financial imbalances and a rise in foreign debt service payments in the early 1990s. Privatisation was meant to attract foreign investment.

The second phase took place from the late 1990s to the mid-2000s. The economy shrank by 13 per cent in 1998, and the government’s fiscal position collapsed in the aftermath of the Asian financial crisis. By 2000, government debt was equivalent to 87 per cent of GDP. Under the IMF economic structural reform program, the government devised a long-term plan to sell nearly all SOEs in order to reduce its debt.

The third phase was from the mid-2000s to the mid-2010s, with around a third of all SOEs considered for privatisation. This phase aimed to strengthen the efficiency of SOEs and focused on “good corporate governance.” The government expected that partial privatisation would make SOEs market-oriented and more able to increase their contribution to the state budget through larger dividends and taxes.

The fourth and final phase is taking place now under the Joko Widodo government. The objective is to strengthen the investment capacity of SOEs that have been assigned to support economic development especially in the area of infrastructure. The current administration’s privatisations have been unique in that the government has sold equities of already listed SOEs to the private sector without changes in the government ownership share. As such, the government has injected capital in order to avoid its ownership share being diluted.

Despite the different objectives of privatisation in each of the phases, the four share similarities that explain the widespread presence of SOEs in the Indonesian economy today. First, the SOE reform plans have been consistently overambitious, not least in the number of privatisation targets, given the lack of consensus among stakeholders.

Second, most privatisations have been partial divestment, and therefore the government has retained a controlling stake in most firms. In 2015, the government directly held an ownership stake in 148 companies: 89 were fully owned, 36 were majority owned (between 50 and 99.9 per cent of shares), and 23 were minority owned (less than 50 per cent of shares) state enterprises.

Third, even though the government has adopted different combinations of reform methods for different industries, each administration has not considered making SOEs exit most industries.

A clash of opinion between the government and the parliament has been a key reason behind the slow implementation of privatisation. This friction has also slowed down the formation of state-owned holding companies, which has been another key component of SOE reform and one that the current government is strongly pursuing.

Conflict between the government and the parliament is intensifying again, this time over Government Regulation No. 72/2016, which oversees state capital investments and management. This legal basis for the establishment of state-owned holding companies is accused of making future privatisations easier for the government while weakening the parliament’s power over the SOE sector.

There is also a more fundamental issue that requires attention. The range of sectors in which SOEs operate has barely changed in the past 30 years. Will this trend continue in the next 30 years?

As a part of the next phase of SOE reform, the government needs to clarify the areas in which SOEs will or will not be necessary to protect and improve people’s welfare. Public debates on this matter, and not just discussions among politicians, will be vital. After the government makes its decision it will then need to go to great lengths to communicate with and to persuade the public.

Of course, as soon as the government tries to define vague terms such as “competitive” sectors and “important” sectors, resistance will arise from those who interpret the SOE Law (No. 19/2003) and Article 33 of the Constitution differently.

Consensus building is never easy. That is why reform requires courage and leadership.

This article is published in collaboration with New Mandala, the premier website for analysis on Southeast Asia’s politics and society. 

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One Response

  1. Stej says:

    Maybe the Chinese model of partial privatisation of SOEs would work better?

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