Even before the Covid-19 pandemic hit Indonesia harder than any other Southeast Asian nation, the country’s state-owned enterprises (SOEs) were in serious need of structural reform.
Indonesia’s massive SOE sector has long been beset by corruption and mismanagement. The sheer numbers of state firms has spiraled out of control, with 142 state firms creating another 800 or so subsidiaries – nobody seems to know the exact number. These bloated companies are now struggling to cope with the challenges of Covid-19 while providing essential public services in sectors such as insurance, energy, construction, and logistics.
The proliferation and expansion of Indonesia’s SOEs was championed by President Joko “Jokowi” Widodo during his first term in office. The popular president saw SOEs as a key tool for delivering his campaign promise of seven percent annual GDP growth and major infrastructure projects across the sprawling archipelago. SOEs such as Angkasa Pura (airports), Pelindo (seaports), and Hutama Karya (toll roads and highways) were the leaders in developing new transportation networks and revitalising decaying logistical infrastructure. They were also a helpful tool in building Jokowi’s populist credentials ahead of the 2019 election, such as when state-owned mining firm PT Indonesia Asahan Aluminium (INALUM) was used to nationalise American company Freeport McMoRan’s Indonesian assets.
While the infrastructure drive failed to deliver the targeted seven percent GDP growth, the economy progressed at a solid five percent clip and won praise from international institutions such as the IMF and credit ratings agencies.
But in delivering Jokowi a second term and making tangible progress on logistical connectivity, Indonesia’s SOEs took on massive amounts of debt and failed to adequately address systemic issues of corruption and inefficiency. These problems have only become more acute during the Covid-19 pandemic, which has suppressed revenues while increasing the demand for essential services some SOEs provide.
The SOE debt burden is a well-documented problem that continues to get worse. Abra Talattov of the Jakarta-based Institute for Development of Economics and Finance (Indef) emphasised on 3 June 2020 that SOE debt problems have existed since before the Covid-19 pandemic and have caused investors “to be more careful in investing in them due to their high-risk nature.” In October 2018, the OECD expressed concern that the SOE debt used to finance infrastructure projects would pose serious cash flow constraints if interest rates rise or projects are delayed. As of the third quarter in 2019, SOEs amassed a combined debt of $98 billion according to the Ministry of State Owned Enterprises. The situation has only deteriorated in 2020 with Indonesia’s largest steelmaker, Krakatau Steel announcing a $2 billion restructuring in January to avoid bankruptcy. With the Covid-19 pandemic causing most of the nation to enter a lockdown, the debt situation for SOEs has become even more dire, as exemplified by flagship airline Garuda Indonesia which saw its bond value fall by more than 50 percent from the end of January to the beginning of June 2020.
Compounding the problem, many SOEs appear to have been created merely to hand out government salaries and provide opportunities to extract economic rents rather than perform an essential public service or generate government revenues. The Ministry of State Owned Enterprises recently claimed that 80 percent of SOE income is derived from just 15 out of 142 companies, suggesting that the majority of SOEs are run sub-optimally, to say the least. The full scale of SOE mismanagement is hard to ascertain, as Transparency International Indonesia found that most SOEs failed to disclose financial reports in 2018.
Against this lack of transparency, NGO corruption watchdogs continue to sound the alarm on the state of the sector. Ade Irawan, Director of the Jakarta-based NGO Visi Integritas said in March that corruption and bribery is common among the executives of Indonesian SOEs. A study by Indonesia Corruption Watch quantified the impact of their graft at IDR 1.3 trillion (USD 88.6 million) in losses to the state treasury. Few are optimistic that the current batch of SOE leadership can navigate these bloated companies through a debt crisis during an unprecedented pandemic.
High-profile examples of corruption and mismanagement have highlighted the need for structural reform. In December 2019, the Attorney General’s Office began an investigation into PT Asuransi Jiwasraya, the state-owned insurance company. One of the oldest SOEs in Indonesia, PT Asuransi Jiwasraya traces its roots back to 1859 and the Dutch colonial era. The company is now $2 billion in debt, unable to satisfy policyholder claims, and in need of a government bailout. On 25 June, prosecutors named 13 company officials and a member of the Financial Services Authority (FSA) as suspects in a criminal case that looks set to continue for some time.
Indonesia’s flagship airline, Garuda Indonesia, was recently rocked by a corruption scandal that felled its top leadership. On 24 April, former President Director Emirsyah Satar, was charged with accepting bribes totaling Rp 49.3 billion (USD 3.1 million) from international aviation companies. Emirsyah had been praised for returning the struggling airline to profitability. But now the Corruption Eradication Commission (KPK), Indonesia’s independent corruption investigation and prosecution agency, is demanding a 12-year prison sentence and IDR 10 billion (USD 660,000) fine.
In an effort to address such endemic issues and improve SOE governance, in October 2019 President Jokowi appointed Erick Thohir – at 50, one of the youngest members of Jokowi’s second cabinet – to lead the Ministry of State Owned Enterprises. Thohir is a successful media tycoon known internationally for his former ownership of football teams D.C. United and Inter Milan. He entered the president’s inner circle by leading his reelection campaign, delivering Jokowi a second term by a wider margin of victory than he achieved in 2014.
Thohir swiftly announced an ambitious strategy to reform Indonesia’s ailing SOEs. While the Covid-19 pandemic has somewhat slowed the pace of change, the new minister’s reform plan now appears to be making tangible progress.
The first step was shaking up the current leadership at SOEs by removing underperforming directors, reducing the size of boards and appointing capable reform-minded individuals to leadership positions. The most notable changes have taken place in state-owned oil and gas firm Pertamina, where Thohir cut the number of board seats from 11 to six, according to a ministry document leaked in June.
Thohir also pledged policy reform to strengthen the quality of management and increase transparency. A new ministry directive requires all SOEs to obtain anti-bribery management system ISO certification by August this year. Thohir also called for greater cooperation with the Indonesian Corruption Eradication Commission, widely recognised as one of Indonesia's most effective government institutions.
Finally, the minister called for structural reforms to consolidate, liquidate and privatise a large number of inefficient SOEs and their subsidiaries. Despite pandemic-induced financial pressures, on 9 June the ministry announced a series of SOE mergers and liquidations resulting in a reduction in numbers from 142 to 107. Thohir plans to go further still, reducing the number to 70 and focusing on 14 business sectors down from the 27 sectors today.
While anti-corruption activists and international businesses support Thohir’s moves, he may face resistance from vested interests, including within President Widodo’s own political party. Reducing the number of SOEs means fewer jobs for political leaders to hand out among their patronage networks. Appointments to the most desirable SOE posts are widely believed to be the remit of the Indonesian Democratic Party of Struggle (PDI-P), the largest party in the House of Representatives (DPR) and the party of President Jokowi. As Thohir conducts his consolidation campaign, removing SOE offices and enacting corruption controls, he faces criticism and even threats emanating from PDI-P leaders who would hitherto submit names to the minister for appointment to SOE boards of commissioners. Thohir has commented publicly, stating he is “not afraid of threats” because his “loyalties lie with the president.”
In a post-pandemic world, Indonesia will need to reform its SOEs to improve ease of doing business, attract foreign direct investment and provide jobs for its massive young working-age population. Reforming the systemic failings of SOEs requires a minister with resolve to face not only global financial headwinds, but also an entrenched state bureaucracy. Although Thohir’s progress to date has been impressive, much work remains to be done if Indonesia wishes its SOEs to be a strength rather than a burden for the national economy. Nor is it clear if Thohir will even be given the chance to finish the job he has started. President Widodo is fond of reshuffling his cabinet, having done so three times in his first term. If pressure from the president’s own party becomes too great, Thohir may find himself replaced with someone less willing to rock the boat.
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