Lessons from S'pore SOEs<\/p>\n
By I Ketut Mardjana<\/p>\n
JAKARTA (JP): State-owned enterprises (SOEs) in Indonesia,
\nlike those in many other countries in the world, have been
\nnotoriously known for their inefficiency. However, Singapore's
\nSOEs seem to be an exception. They are efficiently managed. As
\nSingapore's case indicates, it is possible for SOEs to be as
\nefficient as private companies, which depend on the way SOEs are
\nmanaged.<\/p>\n
In the context of Indonesia and Singapore, management
\napproaches to SOEs evolved differently. The prevalent differences
\nin the management systems are significantly influenced by
\ndifferent philosophical backgrounds of the SOE's existence and
\nalso, to some extent, by the size of each country.<\/p>\n
The initial emergence of the SOE in Indonesia was established
\nmainly for political purposes, while the establishment of the SOE
\nin Singapore was motivated more by economic reasons. These
\nphilosophical differences may cause both countries to adopt
\ndifferent attitudes, either at the government or the management
\nlevel.<\/p>\n
It is important to stress that the domestic market sizes of
\nIndonesia and Singapore differ significantly. Since it has a
\nsmall domestic market, Singapore has strived for
\ninternationalization of its economy. In this sense, economic
\nfacilities and efficiency are a must; otherwise, it cannot
\nattract foreign investors to invest domestically, and the
\nproducts cannot compete internationally.<\/p>\n
Indonesia, on the other hand, is more concerned with balanced
\ndevelopment among the regions, and equity among the people. State
\nenterprises are the best policy tools of the government in
\napplying the policy. Subsidies and other types of protection are
\noften unavoidable. But, since liberalization of the world economy
\nhas been the current issue, both countries have tended to move in
\nthe same direction toward economic efficiency in order to improve
\ncompetitiveness of their products.<\/p>\n
The economic and unemployment problems facing Singapore in the
\nmid-1960s led to an economic transformation. The two previous
\nmainstays of the economy, entrepot trade and British military
\nexpenditure, were not going to continue as reliable bases.
\nEntrepot trade came under threat because neighboring countries
\nattempted to engage in direct commerce with developed countries.<\/p>\n
The British military, which provided quite significant
\ncontributions to the GDP and employment, were withdrawn in 1968.
\nThis meant that military expenditure was terminated forever.
\nAnticipating bigger problems, and in a bid to rebuild the
\neconomy, the government started to adopt a highly interventionist
\nrole in the business sector.<\/p>\n
The private sector during that time was still weak, both
\nfinancially and technically, or did not want to participate in
\nheavy industries or high technologies, which are usually capital
\nintensive and highly risky.<\/p>\n
Eventually, SOEs have become strategic economic tools of the
\ngovernment in transforming Singapore's economy into an
\nindustrial-based economy, while directives aimed at making
\nSingapore a commercial and service center have also been adopted.<\/p>\n
Since Singapore is a relatively tiny island with a small
\ndomestic market, the best policy agenda has been an outward-
\nlooking strategy. This must be supplemented by a proper domestic
\npolicy that is aimed at supporting the pursuit of business
\nexcellence. Indeed, this outward-looking policy has had positive
\nimpacts on SOE management.<\/p>\n
The government has applied the theory of private property
\nright economy consistently for the SOEs. They are required to
\nearn profits and expand when feasible. Conversely, they are
\nallowed to go bankrupt if they lose money. With this rationale,
\nthe Singapore government has hardly been involved in the day-to-
\nday operations of the SOE, but rather allows management the
\nindependence to make decisions. Flexibility is an important
\ncomponent in the management style of Singapore's SOEs. This is in
\norder to allow the SOE to quickly adapt to the world's changing
\nenvironment.<\/p>\n
The SOE in Singapore has been structured in two ways. One is
\ngovernment-linked companies (GLCs). GLCs are companies in which
\nthe government has a shareholding. They are charged with being
\nalmost exclusively profit oriented. They are put under holding
\ncompanies. These are essentially only \"paper\" companies.<\/p>\n
The government does not have direct operational influence in
\nthe daily operations of subsidiary companies. Another type of SOE
\nis the statutory board. It was established with the aim of
\ntransforming government functions into a more flexible structure.
\nThe statutory board deals with two functions: social services and
\ncommercial services.<\/p>\n
However, the government has endeavored to omit the common
\nblurred lines between the two. Most statutory boards have
\nsubsidiary companies, which are structured along the lines of
\nGLCs. This is to allow them to operate in a commercialized
\nmanner. To summarize, the world competitive environment pressured
\nthe government to provide the business sector with a conducive
\nenvironment, and pressures SOE's products to achieve optimal
\nefficiency.<\/p>\n
In a small way, the structures of state enterprise in
\nIndonesia are similar to those in Singapore. There are also two
\ntypes of state enterprise, the Perum (Perusahaan Umum) and the
\nPersero (Perusahaan Perseroan). Perums are wholly government
\nowned and comply with the House of Representatives' act. They
\nhave dual functions: social -- which provide public services to
\nsociety and economic infrastructure -- and commercial. Perseros
\nare companies established under the Company Act, in which the
\ngovernment has equity holding. So, from this structure, they are
\nlikely to be no different than statutory boards and government-
\nlinked companies in Singapore. But, if we look more carefully,
\nthere are a lot of differences. The differences are mainly
\ncharacterized by the structure of control.<\/p>\n
The implementation of a rigid structure of control has
\nresulted in inefficient Indonesian state enterprises. The
\ngovernment bureaucracy has been involved in both strategic as
\nwell as operational activities of the SOE, either Perum or
\nPersero. This has led to the removal of management discretion.<\/p>\n
The government often includes itself in the budgeting process,
\npricing or in determination of products or services that state
\nenterprises should produce. The SOEs are subject to audits from
\nthe Supreme Audit Agency and the Development and Finance Control
\nBoard.<\/p>\n
In Singapore, the auditor general is only responsible for
\nstatutory boards, while GLCs are audited by public accountants.
\nThese approaches have different implications for management
\nstyles, since the auditor general aims at more procedural
\nobedience and public accountants would take a more business-like
\napproach.<\/p>\n
Another type of control dictates that all state enterprise
\ninvestments are subject to the application of procedure when
\napplying for government procurement. This is rigid and takes
\ntime. However, one preeminent crucial control mechanism ensures
\nthat two ministerial departments -- the Ministry of Finance and a
\ntechnical ministry (such as the Ministry of Agriculture, the
\nMinistry of Industry, or others) -- have direct access to the
\nSOE.<\/p>\n
This causes a long policy process, because such a policy may
\nhave to pass through hierarchical structures in two ministerial
\ndepartments. This type of control has been widely claimed as a
\nfactor causing inefficiency in SOE management.<\/p>\n
The strong control of the government may be linked to the
\nhistory and the philosophy of the state. The emergence of SOEs in
\nIndonesia was inspired by a political motivation: to shift the
\neconomy from colonial to national.<\/p>\n
Strong nationalist sentiment in response to the Dutch refusal
\nto transfer the sovereignty of West Irian to the Republic of
\nIndonesia led to a nationalization policy. All enterprises in
\nwhich Dutch capital was invested were nationalized between 1958
\nand 1959 and became Indonesian state enterprises.<\/p>\n
In addition, in contrast to Singapore, Indonesia is a
\nwidespread archipelago, with a huge population. Political
\npressures for balancing overall development among regions and for
\nachieving a more ethnically balanced of wealth distribution,
\nwhich was exacerbated by the need for social services regulated
\nby the Constitution, have shaped SOE policy direction towards
\nbecoming more inward-looking.<\/p>\n
They have become the government's policy instruments in
\nexercising their social service obligations and other policy
\ngoals. Consequently, those monumental responsible have located
\nmany of the SOE's operations in very strategic areas, and even
\nprovided some of them with monopolistic positions, where
\nefficiency did not become the first priority. As compensation,
\nbudget drains from the government to SOEs, as well as other types
\nof privileges, have become common.<\/p>\n
This policy, however, has now come under a continual review
\nprocess. Government control and protection have been considered
\nresponsible for creating the \"high-cost\" economy which is
\ninimical to the competitive domestic market and constrains the
\ndomestic export producers from being able to compete
\ninternationally.<\/p>\n
The Indonesian government is trying to escape from this
\nsituation, especially after it began to face budget difficulties,
\nbeginning from the period of the 1982-1984 world recession and
\nfollowed by plunging domestic oil revenues in 1986.<\/p>\n
By then, the government had conducted economic deregulation.
\nMoreover, the GATT agreement, which Indonesia has ratified, the
\nAPEC declaration, which approved free trade in the regions and
\nwill take effect in 2010 and 2020 for developed and
\nunderdeveloped countries respectively, or Afta, which is
\nestimated to take full effect in the year 2003, also provide
\nadditional pressure to implement economic change.<\/p>\n
Facing the liberalization process, Indonesia urgently needs to
\ndress itself up. Deregulation and debureaucratization of the
\neconomy is still an essential part of the government policy
\nagenda. This trend would significantly affect future state
\nenterprises in Indonesia.<\/p>\n
The global free trade era leaves Indonesia no other choice
\nbut to push for efficiency. As the global economy has become
\nborderless, an inward- or outward-looking policy being pushed
\nindependently is no longer relevant. Indonesia's main challenge
\ntoday is to produce products efficiently and competitively, both
\nfor domestic and international markets.<\/p>\n
In contrast, the establishment of Singapore's economic policy
\nhas been motivated by the \"going international\" concept from the
\nbeginning. Singapore's companies, both private and state, have
\nalready been pursuing joint ventures with multinational
\ncompanies long before other nations in this region and other
\nparts of the world. Therefore, when the liberalization of the
\nworld economy is finally realized, as it happens now, the state-
\nowned enterprises in Singapore are well-prepared.<\/p>\n
Nevertheless, Singapore continues in its efforts to improve
\nits efficiency by restructuring its SOEs. Apart from the
\ndivestment policy of the GLCs, which has been implemented
\nsuccessfully, some statutory boards are in the process of being
\nrestructured into adopting the features of private companies.<\/p>\n
This is to provide opportunity for the enterprises to be
\nlisted in the capital markets. For example, the old
\nTelecommunications Authority of Singapore (TAS) has been split up
\ninto three entities: TAS, Singapore Telecom Pte. Ltd., and
\nSingapore Post Pte. Ltd. Singapore Telecom has listed in the
\nStock Exchange of Singapore. The PUB-Public Utility Board will be
\ncorporatized in September 1995, followed by privatization in
\n1996.<\/p>\n
Hence, Singapore's state enterprises have moved one step ahead
\nof Indonesia's SOEs. In such a situation, consultations could be
\ninitiated for some joint work between Indonesia and Singapore on
\nstate enterprise policy reforms.<\/p>\n
Singapore's success in managing its SOE may be a relevant
\nlesson for Indonesia, as it embarks on reforms of its own SOE
\nsystem. On the other hand, Indonesian state enterprises may be a
\ngood place for Singapore's SOEs to extend their investment
\nabroad, as well as to transfer their expertise.<\/p>\n
The writer is an alumnus of the Faculty of Business and
\nEconomics, Monash University, Melbourne, Australia.<\/p>",
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