Indonesia’s state-owned predicament

Will state-owned holding companies be greater than the sum of their parts?

Kyunghoon Kim

Development, Economics and finance | Asia, Southeast Asia

26 June 2018

Indonesia’s Jokowi government plans to use state-owned holding companies to stimulate a sluggish economy. But for the plan to succeed, it will need more than a one-size-fits-all strategy, Kyunghoon Kim writes.

Indonesia’s state-owned enterprises (SOEs) are the central actors in the current government’s development strategy under President Joko ‘Jokowi’ Widodo. The government is using SOEs to solve the country’s slow infrastructure development, stagnant industrialisation, and swelling inequality.

In the first half of Jokowi’s term, the government put a large sum of capital towards supporting the expansion of SOEs. But pressures to increase spending on social policies and subsidies have been growing amid sluggish poverty reduction and rising inflationary pressures. As fiscal limitations are intensifying, the government may have little financial power to directly support SOEs in the coming years.

As a solution, the government has been pursuing a plan to establish state-owned holding companies – also known as SOHCs. The government sees the creation of these companies as a ‘fiscal-friendly’ way of stimulating SOEs’ activities.

The government intends to create 16 SOHCs, one for each major economic sector. The plan involves shifting government ownership in SOEs to designated SOHCs. The latter will be fully state-owned companies and will act as parent companies of SOEs in respective sectors.

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Four SOHCs have already been established by previous governments aiming to strengthen collaboration, simplify the ownership structure, and streamline management.

While the current government also mentions these aims, its major goal is to strengthen SOEs’ investment capacity. The government expects that SOHCs will enable state enterprises to increase their borrowing significantly through leveraging their aggregated equities. For example, the government estimates that the debt-to-equity ratio of SOEs in the mining sector could increase from just 0.45 to as high as 3.

In preparing to carry out this plan, the government has faced strong political opposition. When the Jokowi administration announced a government regulation (PP 72/2016) that clarified the ownership transfer mechanism, opposing lawmakers argued that the regulation would weaken the House of Representatives’ monitoring role while expanding the government’s discretion in SOE affairs.

The Supreme Court confirmed the legality of the government regulation in June 2017. By May 2018, the Jokowi government had established SOHCs in the mining sector and the oil and gas sector.

SOHCs in other sectors such as construction, finance, and food commodities are likely to be established under the current and next administration if Jokowi is re-elected.

However, this policy is unlikely to be implemented smoothly. Political opposition to establishing SOHCs has continued even after the Supreme Court’s confirmation of the government regulation’s legitimacy.

Moreover, practical concerns need to be addressed to gain public support. Currently, the benefits of creating SOHCs remain ambiguous, and there may even be costs associated with this method of ownership reorganisation.

My recent study discusses these concerns.

The most obvious concern is the capacity of SOHCs to manage their subsidiaries. Many large SOEs that are currently leading companies in their respective sectors have been partially privatised in the past.

In comparison, some fully state-owned companies that have been designated as SOHCs tend to be smaller in size and have shown weaker performance – and therefore are likely to have limited management capacity. This issue is particularly acute in the financial and construction sectors.

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The government also needs to recognise that the operational and financial benefits resulting from the policy are going to vary across sectors. In sectors with SOEs operating in significantly different geographical locations and business segments, the benefits of creating SOHCs may be much smaller than expected. Further, the credit worthiness of some leading SOEs may be hurt when they are associated with financially weaker SOEs under the same SOHC.

Concerns have also arisen regarding corporate governance. External stakeholders’ struggle to monitor the subsidiaries of SOEs is already a big problem. Establishing SOHCs may make monitoring even more difficult as it adds another layer to the ownership structure. The current SOE oversight system would be insufficient, as SOEs lose their state-owned status when they become subsidiaries of SOHCs.

Some private companies are also worried about the SOHCs. Many SOEs have strong market power, and private companies often struggle to compete against them. The private sector will find it even more difficult to gain market share when SOHCs are created, as the subsidiaries of state-owned holding companies are likely to cooperate during tender and procurement rather than compete against each other.

To achieve the stated goals, the government needs to revisit the uniformity of the mechanism for ownership reorganisation across sectors. Considering the diversity of Indonesia’s SOEs, the government needs sector-specific reorganisation methods that reflect the strengths and weaknesses of the SOEs involved, instead of a one-size-fits-all strategy.

The government also needs to ensure that the subsidiaries of SOHCs will be managed and monitored properly by granting appropriate oversight roles to existing or new institutions.

This article is based on the author’s paper ‘Matchmaking: Establishment of stateowned holding companies in Indonesia’, which was published in Asia & the Pacific Policy Studies in May 2018. All articles in the journal are free to read and download.

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