The good, bad and ugly sides of SOEs<\/p>\n
The following is the second of two articles on state-owned
\nenterprises by Sauri Hasibuan, assistant manager at Ernst & Young
\nConsulting Corporate Finance Division, Jakarta<\/p>\n
JAKARTA (JP): Bankrupting those state-owned enterprises (SOEs)
\nsuspected of improper accounting practices is hardly a solution,
\nfor that would mean most of them. So the government is trying to
\nseparate them into three groups: The hopeless, the bad and the
\nprospective.<\/p>\n
A realistic estimate, one senior consultant suggests, is that
\nhalf will fall into the first group, 40 percent into the second,
\nand only 10 percent into the third. The fate of the duds should
\nbe managed to ensure a gradual exit from the market.<\/p>\n
As a first step, their bad debts are being transferred to the
\nIndonesian Bank Restructuring Agency (IBRA) through its asset-
\nmanagement units, although it is not clear what these units will
\nthen do with them.<\/p>\n
Those in the second group are being prepared for sale to
\nforeign or domestic private investors. Those in the third group
\nare possibly being listed on the stock market. Out of 167 SOEs,
\n71 are on the list of IBRA's restructuring program.<\/p>\n
The process is painfully slow. SOE debts that must be
\nrestructured total Rp 18 trillion. A centerpiece of the
\npreparations for sale is forced consolidation.<\/p>\n
Indonesia has one behemoth, the PLN electricity firm. Its
\ndebts would eventually be returned to Bank BRI, as PLN's original
\nlenders, which in turn would have to report to Bank Mandiri which
\nhas since taken over Bank BRI's lending facilities under which
\nthe PLN terms would have been agreed.<\/p>\n
The arrangements are complex since PLN also has disputes with
\na multitude of foreign creditors. There is also talk on merging
\ntelecommunications firms Indosat and Telkom, plans on fusing all
\ncompanies under the Strategic Industries Supervisory Agency into
\none, several regional banks into one, and so on.<\/p>\n
In some cases, these mergers will help, especially when they
\nare, in effect, takeovers of weaker management by the stronger.
\nSometimes they have also helped cut oversupply.
\nMeanwhile, the energetic president director of PT Telkom, Cacuk
\nSudarijanto, was forced to resign despite the fact that the
\ncompany's performance had improved under his stewardship.<\/p>\n
But Telkom was fortunate that it had already entered
\ninternational capital markets as its shares had been publicly
\nlisted since 1995. PLN is a different case though: is the company
\nable to cut its workforce?<\/p>\n
It has to look further into its revenue and expenditure. If
\nthe two components are on a par then you have an answer. Reducing
\nexpenditure seems a bit difficult since there has been a raise in
\nemployees' salaries. One solution is increasing the tariff
\nthrough the consumer segmentation and differentiation.<\/p>\n
But in many other cases, the mergers and privatization will
\nonly create mediocrity on a larger scale. Moreover, the
\ngovernment has not yet resolved a basic dilemma: if it sells the
\nenterprise before it is restructured, it will only be able to do
\nso at a pittance. The government needs cash to pay off
\nliabilities at other enterprises too.<\/p>\n
Yet the alternative, which is to restructure the enterprises
\nin the hope of selling them for more, will be tricky. \"Government
\ncannot restructure itself,\" is the blunt assessment of one local
\ninvestment banker.<\/p>\n
One school believes that government should give more autonomy
\nto its enterprises and managers in the hope that this will lead
\nto more transparency and cleaner accounting.<\/p>\n
A prominent economist states that privatization, which is a
\ntransfer of property rights, is not only meaningless but also
\npositively counter-productive in a country that has not yet
\nadequately defined these rights.<\/p>\n
Without regulatory regimes and strict accounting standards,
\nprivatization could simply offer incentives for corruption.
\nAnother option is to disable an essential prerequisite for
\nmismanagement, which is the SOEs' access to \"soft\" budgets.<\/p>\n
Managers could not run their businesses against the law of
\neconomics, and officials could not pilfer from them indefinitely,
\nif their source of cheap bank credits were removed. If the banks
\nwere capable of selecting borrowers and charging interest rates
\naccording to the perceived risk, the SOEs would soon learn to
\ninvest rationally and to run their operations for cash and not
\npaper profits. And by putting teeth into the bankruptcy law so
\nthat insolvent firms were actually forced into liquidation,
\nmismanagement would at last have a downside.<\/p>\n
The most concrete impact that will be felt by Indonesia's SOEs
\nwith the arrival of the ASEAN Free Trade Area is the introduction
\nof foreign competition and more stringent credit assessment by
\nIndonesia's banking system.<\/p>\n
Even so, change will be both dangerous and hard. A string of
\nsudden bankruptcies would strain Indonesia's public finances.
\nUnless and until Indonesia implements good corporate governance
\nwithin all companies it will be of no relevance to plan the
\nprivatization of companies.<\/p>\n
Telkom shares as well as those of Indosat have now become blue
\nchip shares. Though if Telkom, which holds a telecommunications
\nmonopoly, had not been privatized, it is extremely likely that it
\nwould have suffered a similar fate to Garuda, which had assets
\ndismantled and illegally sold because it lacked transparent
\naccountability and good corporate governance.<\/p>\n
On a larger scale, further delays in implementing good
\ncorporate governance may prove a catastrophic mistake. Worker
\nunrest has been growing: the government is becoming fragile,
\nespecially if the economy turns down.<\/p>\n
It would be better to be bolder now and fix the SOEs while the
\ncountry needs their contribution the most.<\/p>",
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