Corporate governance: Problems and challenges<\/p>\n
This is the first of two articles on good corporate governance
\nprepared by Sauri Hasibuan, business development manager of PT
\nAirindo Bersih Jaya.<\/p>\n
JAKARTA (JP): A lack of good governance in the public sector
\nhas created a crisis that hurts children by pushing them out of
\nschool and into hard and often dangerous labor. It is a crisis
\nthat puts millions of people out of work and into greater
\nuncertainty in facing their future with a risk of being forced
\nback into poverty.<\/p>\n
Meanwhile, the result of bad governance in the private sector
\nis just as nightmarish. Take for example a competitive company
\nwith an international reputation which is about to tap a
\npotential market in a developing country. It has passed the
\nprequalification stage in the bidding process of public
\nprocurement and contract negotiations with the government and
\narrangements with financial institutions have been successfully
\ncompleted. In all, the company has gone even further by including
\na \"very important person\" on its networking team. All of a
\nsudden, unforeseen problems surface.<\/p>\n
Government officials and local partners, ranging from junior
\nto senior ranks, are beginning to question the validity of the
\nproject. They also begin to question details and demand
\nrenegotiating technicalities. Moreover, these officials and local
\npartners begin to detect that there is corruption, collusion and
\nnepotism (KKN) being practiced because the company was primarily
\nhelped by people in power to get the project -- while the people
\nare now losing their power.<\/p>\n
After having invested millions of dollars and spent untold
\namounts of man-hours on the project, everything seems to be in
\nshambles. How could this happen? Did the company not prepare for
\nits investment scheme? In short, after all the preparation, why
\ndo problems still arise? The answer lies in the fact that good
\ncorporate governance does not seem to exist in the relevant
\ninstitution.<\/p>\n
What happened to PT Thames PAM Jaya (TPJ), a British-
\nIndonesian water company, illustrates what good governance is all
\nabout.<\/p>\n
A corporate governance conference in Jakarta on April 19, 1999
\nsummarized that \"In today's business environment, improving
\ncorporate governance is a critical issue for all countries and
\nall companies. Companies around the world are facing increased
\npressure to find and secure sources of capital in order to expand
\nand improve their operations.<\/p>\n
As a result, governments and individual firms are beginning to
\ntake steps to address this issue because they recognize that by
\nhaving good corporate governance practices, which engender
\ninvestor confidence, can have a significant affect on how vast
\nand increasingly mobile amounts of capital are raised and where
\nthat capital is directed.<\/p>\n
\"By safeguarding transparency and accountability, high
\nstandards of corporate governance can form a bedrock set of rules
\nnecessary to facilitate increased access to capital and the
\ndevelopment of more viable and competitive environment. Markets
\nwhich do not begin to achieve these standards will face one or
\ntwo fates -- to be increasingly ignored by international
\ninvestors, or to pay a higher cost of capital through having to
\ncompensate for the investors' perceived additional risk.\"<\/p>\n
From the lengthy quotation above, good corporate governance
\ncan be concluded as \"a process in which a decision is based on
\ntransparency and accountability in a corporate culture\".<\/p>\n
Is Thames Water International (TWI) of Britain being
\ntransparent in conducting its international business in
\nIndonesia? Did it adopt regular international procedures in
\nbidding for the project it secured? What lessons can be learned
\nfrom this case for any company and public sector in the future?
\nIn trying to answer these issues, it might be useful to get some
\ninsight into how the project got into being.<\/p>\n
TWI is the largest water and wastewater services company in
\nBritain, supplying domestic and commercial customers in London.
\nIt provides water services to over seven million customers and
\nwastewater services for nearly 12 million customers in Britain
\nalone. TWI has been active in the international water market for
\nwell over a decade, initially offering consultancy and training
\nservices. Current major international projects provide over 12
\nmillion people in countries from Puerto Rico to China with water
\nand wastewater services.<\/p>\n
In June 1997, TWI reached an agreement with PT Kekar Pola
\nAirindo (KPA), a Jakarta-based company owned by a son of former
\npresident Soeharto, and established a joint venture -- PT Kekar
\nThames Airindo (KATI). The format of this venture was changed
\nlater into PT Thames PAM Jaya (TPJ) soon after the May 1998
\nriots, making a long-term commitment to the people of Jakarta for
\nthe next 25 years. TPJ will manage, operate, maintain and develop
\nthe water supply system for the eastern half of the Indonesian
\ncapital, Jakarta.<\/p>\n
The concession includes the operation of drinking water
\ntreatment facilities and the distribution system. In addition,
\nTPJ will reduce non-revenue water, provide more connections,
\ndevelop the water distribution network, as well as carry out
\nbilling and collection activities on behalf of PAM Jaya, a water
\ncompany owned by the Jakarta administration.<\/p>\n
Little is known of how TWI was selected as a partner in
\nmanaging the concession, and just as obscure is the government's
\nreason for choosing KPA as its local partner for privatizing the
\nJakarta water supply company. The obvious answer for this concern
\nis, of course, the direct access of KPA to the then first family.
\nThese people in power practically undertook all important
\ndecisions, including the privatization of most strategic
\nbusinesses.<\/p>\n
It all started out when KPA was chosen to do business in an
\nexisting market with established facilities. Infrastructure
\nseemed to top its priority list. By privatizing the local water
\ncompany, two birds could be killed with one stone. Private
\ncompanies are believed to be more efficient than state ones. By
\ninviting them to invest, members of the public can be better
\nserved by exploiting technical as well as financial resources
\nfrom the private sector. Or so goes the thought.<\/p>\n
The appointment of KPA was quickly coordinated with other
\ngovernment agencies. This would prevent KPA from the imposed
\nmultitude of rules that require exhaustive filings, reports, nit-
\npicking inspections and picayune compliance with every jot and
\ntitle of the law.<\/p>\n
Furthermore, many special arrangements were also issued to all
\nrelevant departments within the government in order that KPA
\ncould avoid bureaucratic obstacles. By passing layers of
\nrequirements, KPA paved the way in meeting all the important
\nrules and regulations as imposed by the relevant government
\nagencies. That many government officials complained because they
\nwere being pushed aside was not the concern of KPA. After all, it
\nwas in \"national interest\" to privatize PAM Jaya.<\/p>\n
It is clear that transparency was nonexistent in choosing KPA
\nas a partner for the privatization. The related government
\nagencies never widely publicized the procurement process related
\nto contracting opportunities and other aspects of the
\npreselection phase.<\/p>\n
As a result, it is obviously impossible to have a competitive
\nbidding among qualified suppliers of goods and services. Rules
\nwere never made clear and transparent for public scrutiny,
\nespecially in terms of the bidding process, contract
\nterms\/conditions, and comprehensive criteria for choosing a
\nwinner. The public was little informed on the selection process
\nand the appointment was very much \"personally decided\".<\/p>\n
It seems that the \"personally made decisions\" provide a
\nlegitimate basis of nontransparency in transactions involving
\npublic funds. Transactions involving government funds are
\nstrictly government business and outside parties do not need to
\nbe informed about them. Such an attitude toward nontransparency
\nopens the way for inefficient practices, including KKN.<\/p>\n
By not having clear procedures, foreign investors will view
\nIndonesia's investment outlay and risk as very high in terms of
\nboth macroeconomic and political stability. Shortly after the
\ncollapse of the New Order regime, the public started to raise
\nlegal issues with regard to various dimensions in the types of
\ncontracts, concessions and other details of the water project.
\nThat was when the public demanded that the KATI joint venture be
\ncanceled on the grounds that the venture was full of KKN
\npractices.<\/p>\n
In Indonesia, the water sector remains a sensitive issue. Some
\nargue that private infrastructure would undermine the position of
\nthe public sector, while others fear that this would only help
\nenrich some private companies favored by the government.
\nTherefore, there is a need for accountability, greater openness,
\ntransparency and fairness in the selection of private
\ninfrastructure developers and investors -- in this case, the
\nselection of competent local water supply companies which will be
\npartnering with international firms.<\/p>\n
Accountability in a corporate sense implies that a person is
\nresponsible for the existence of a business enterprise. During
\nthe New Order administration, accountability was blurred because
\neconomic and business decisions came from the top. No single
\nperson in the lower echelon could be held responsible for KKN
\npractices. However, though KKN is assumed defunct, the problems
\nof accountability do not just cease there.<\/p>\n
In our illustration, what is the problem of accountability?
\nWhy and how does it becomes a problem? What lessons can be
\nlearned by companies and the public sector in the future?<\/p>\n
The latest polemic between TPJ's management and its union
\nworkers is an indication of a lack of accountability in the
\nprivatization process. The workers are threatening a spring
\noffensive of strikes and rallies.<\/p>\n
The government, worried that strikes will drive away foreign
\ninvestors, is threatening to take tough action. The governor, for
\nexample, has ordered his staff to investigate to see if there is
\nany mastermind behind the strikes. Even though PAM Jaya's
\ndirector was fired soon after the strikes, there is no sign that
\nthe strikes will cease. This illustrates that no one wants to be
\nresponsible for the process.<\/p>\n
It seems that the union workers demand clarity on every phase
\nof the privatization process. Therefore, they insist that TWI, as
\nan international partner with share-ownership of 5 percent, be
\nremoved from PAM Jaya's management. This is interesting because
\nthe latest hearing between Pam Jaya's director, TWI and members
\nof the House of Representatives (DPR) concluded that KPA's
\nownership is nonexistent in the agreement structure of TPJ.<\/p>\n
The removal of KPA is seen necessary because the majority of
\nunion workers suggest that KPA, as a local agent, only acts as a
\nsleeping partner which gains an advantage in the form of fee
\nextraction from international companies entering the country and
\na free shareholding.<\/p>\n
In other words, the union workers accuse KPA of being
\nopportunistic, considering its access to people in power. They
\ninsist that the matter be taken to the international court for
\narbitration.<\/p>\n
When people in power are involved in such a case,
\naccountability is likely to be far-reaching because the logic of
\npower is more dominant than the power of logic.<\/p>\n
Although the joint venture, according to Indonesia Corruption
\nWatch (ICW) chairman Teten Masduki, was not in accordance with
\nthe law -- Law No. 1\/1967 on foreign investment and Jakarta Bylaw
\nNo. 11\/1993 on regional water supply companies and Bylaw No.
\n13\/1992 -- privatization proceeded as usual.<\/p>\n
ICW's investigation suggests the involvement of former
\npresident Soeharto, former minister of public works Radinal
\nMoochtar, former Jakarta governor Surjadi Soedirdja, current
\nJakarta Governor Sutiyoso and former PAM Jaya president director
\nSyamsu Romli in the privatization process. (Suara Pembaruan, May
\n10, 1999). In essence, these are the people who should be
\nresponsible for the whole turmoil in TPJ.<\/p>\n
For example, assurance came from Surjadi, who stated that \"the
\njoint venture must give substantial benefit to the people of
\nJakarta and be rest assured there will be no increase in the
\ntariffs of water supplies in the near future, but only a minor
\nadjustment\".<\/p>\n
Similar assurance also came from the assistant secretary of
\nthe Jakarta authority, Prawoto. S. Danoemiharjo, who said the
\njoint venture was in accordance with the national agenda in
\neconomic development and the city administration, therefore, need
\nnot ask for approval from the City Council. (Republika,Jan. 17,
\n1997). Having said all that, it seems nothing is against the
\nstandard procedures when every process of the project gets the
\nneeded approval from related officials.<\/p>\n
To answer the issues of accountability, it is necessary to
\naddress several concerns. Are the PAM Jaya workers counted as
\nprimary shareholders in the process? If the answer is yes, what
\nis their level of involvement? Has a consensus been reached among
\nthe other shareholders as well?<\/p>\n
Unless and until the disputed parties trace this issue
\nindividually and take a shrewd approach to solve the disputes
\nwith an open mind, it will be hard to determine precisely the
\nlegal structure of the agreement, which would indicate who was
\nresponsible for what -- which, in turn, would be hard to make
\nsomebody accountable for the process.<\/p>\n
A reputable service company such as TWI should probably have
\nknown well that legal agreements in countries like Indonesia
\nshould not be taken at face value. To make a local partner
\naccountable for any discrepancy seems to be a bit unrealistic as
\nthere is no single player in contract agreements.<\/p>\n
In a sense, it is a big irony for TWI. The local partner is
\npolitically influential but at the same time not neutral enough
\nto survive and manage shifts in power. Considering KPA's access
\nto the people in power at the time, TWI probably did not have to
\ndevote a serious amount of time to screen the company. This, in
\nturn, benefited KPA since under normal circumstances thorough
\nfeasibility studies would be required in which it would be
\ncompared with other candidates.<\/p>\n
From the perspective of TWI, the partner's ties to the people
\nin power in their mutual dealings would seem to reduce the risk
\nof making a wrong decision.<\/p>\n
Therefore, to question KPA's credibility would have been
\nsuicidal and would have endangered the existing links. TWI also
\nmight have considered the fact that by choosing KPA, it would be
\neasier to hold KPA accountable for the privatization process if
\nthings turned sour in the future. Now TWI probably feels the
\npartnership with KPA only gives operational and legal headaches
\nwithout contributing much to the business.<\/p>\n
To raise the question of who is accountable for this
\nprivatization process is like lifting the lid on Pandora's box.
\nUsually the phrase, in its negative connotation, refers to the
\nillegal, misbehavior on the part of public officials.<\/p>\n
The debate about who is responsible for this polemic seems to
\nbe irrelevant, for there is no single pattern. To get ahead from
\nthe horror of bureaucracy, often a bidder is the first to offer
\ninducements to these officials. In other cases, there is some
\ndegree of complicity between bidder and officials. Whatever the
\ncase, the taxpayer and public at large are the losers.<\/p>",
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