Corporate governance: Problems and challenges
This is the first of two articles on good corporate governance prepared by Sauri Hasibuan, business development manager of PT Airindo Bersih Jaya.
JAKARTA (JP): A lack of good governance in the public sector has created a crisis that hurts children by pushing them out of school and into hard and often dangerous labor. It is a crisis that puts millions of people out of work and into greater uncertainty in facing their future with a risk of being forced back into poverty.
Meanwhile, the result of bad governance in the private sector is just as nightmarish. Take for example a competitive company with an international reputation which is about to tap a potential market in a developing country. It has passed the prequalification stage in the bidding process of public procurement and contract negotiations with the government and arrangements with financial institutions have been successfully completed. In all, the company has gone even further by including a "very important person" on its networking team. All of a sudden, unforeseen problems surface.
Government officials and local partners, ranging from junior to senior ranks, are beginning to question the validity of the project. They also begin to question details and demand renegotiating technicalities. Moreover, these officials and local partners begin to detect that there is corruption, collusion and nepotism (KKN) being practiced because the company was primarily helped by people in power to get the project -- while the people are now losing their power.
After having invested millions of dollars and spent untold amounts of man-hours on the project, everything seems to be in shambles. How could this happen? Did the company not prepare for its investment scheme? In short, after all the preparation, why do problems still arise? The answer lies in the fact that good corporate governance does not seem to exist in the relevant institution.
What happened to PT Thames PAM Jaya (TPJ), a British- Indonesian water company, illustrates what good governance is all about.
A corporate governance conference in Jakarta on April 19, 1999 summarized that "In today's business environment, improving corporate governance is a critical issue for all countries and all companies. Companies around the world are facing increased pressure to find and secure sources of capital in order to expand and improve their operations.
As a result, governments and individual firms are beginning to take steps to address this issue because they recognize that by having good corporate governance practices, which engender investor confidence, can have a significant affect on how vast and increasingly mobile amounts of capital are raised and where that capital is directed.
"By safeguarding transparency and accountability, high standards of corporate governance can form a bedrock set of rules necessary to facilitate increased access to capital and the development of more viable and competitive environment. Markets which do not begin to achieve these standards will face one or two fates -- to be increasingly ignored by international investors, or to pay a higher cost of capital through having to compensate for the investors' perceived additional risk."
From the lengthy quotation above, good corporate governance can be concluded as "a process in which a decision is based on transparency and accountability in a corporate culture".
Is Thames Water International (TWI) of Britain being transparent in conducting its international business in Indonesia? Did it adopt regular international procedures in bidding for the project it secured? What lessons can be learned from this case for any company and public sector in the future? In trying to answer these issues, it might be useful to get some insight into how the project got into being.
TWI is the largest water and wastewater services company in Britain, supplying domestic and commercial customers in London. It provides water services to over seven million customers and wastewater services for nearly 12 million customers in Britain alone. TWI has been active in the international water market for well over a decade, initially offering consultancy and training services. Current major international projects provide over 12 million people in countries from Puerto Rico to China with water and wastewater services.
In June 1997, TWI reached an agreement with PT Kekar Pola Airindo (KPA), a Jakarta-based company owned by a son of former president Soeharto, and established a joint venture -- PT Kekar Thames Airindo (KATI). The format of this venture was changed later into PT Thames PAM Jaya (TPJ) soon after the May 1998 riots, making a long-term commitment to the people of Jakarta for the next 25 years. TPJ will manage, operate, maintain and develop the water supply system for the eastern half of the Indonesian capital, Jakarta.
The concession includes the operation of drinking water treatment facilities and the distribution system. In addition, TPJ will reduce non-revenue water, provide more connections, develop the water distribution network, as well as carry out billing and collection activities on behalf of PAM Jaya, a water company owned by the Jakarta administration.
Little is known of how TWI was selected as a partner in managing the concession, and just as obscure is the government's reason for choosing KPA as its local partner for privatizing the Jakarta water supply company. The obvious answer for this concern is, of course, the direct access of KPA to the then first family. These people in power practically undertook all important decisions, including the privatization of most strategic businesses.
It all started out when KPA was chosen to do business in an existing market with established facilities. Infrastructure seemed to top its priority list. By privatizing the local water company, two birds could be killed with one stone. Private companies are believed to be more efficient than state ones. By inviting them to invest, members of the public can be better served by exploiting technical as well as financial resources from the private sector. Or so goes the thought.
The appointment of KPA was quickly coordinated with other government agencies. This would prevent KPA from the imposed multitude of rules that require exhaustive filings, reports, nit- picking inspections and picayune compliance with every jot and title of the law.
Furthermore, many special arrangements were also issued to all relevant departments within the government in order that KPA could avoid bureaucratic obstacles. By passing layers of requirements, KPA paved the way in meeting all the important rules and regulations as imposed by the relevant government agencies. That many government officials complained because they were being pushed aside was not the concern of KPA. After all, it was in "national interest" to privatize PAM Jaya.
It is clear that transparency was nonexistent in choosing KPA as a partner for the privatization. The related government agencies never widely publicized the procurement process related to contracting opportunities and other aspects of the preselection phase.
As a result, it is obviously impossible to have a competitive bidding among qualified suppliers of goods and services. Rules were never made clear and transparent for public scrutiny, especially in terms of the bidding process, contract terms/conditions, and comprehensive criteria for choosing a winner. The public was little informed on the selection process and the appointment was very much "personally decided".
It seems that the "personally made decisions" provide a legitimate basis of nontransparency in transactions involving public funds. Transactions involving government funds are strictly government business and outside parties do not need to be informed about them. Such an attitude toward nontransparency opens the way for inefficient practices, including KKN.
By not having clear procedures, foreign investors will view Indonesia's investment outlay and risk as very high in terms of both macroeconomic and political stability. Shortly after the collapse of the New Order regime, the public started to raise legal issues with regard to various dimensions in the types of contracts, concessions and other details of the water project. That was when the public demanded that the KATI joint venture be canceled on the grounds that the venture was full of KKN practices.
In Indonesia, the water sector remains a sensitive issue. Some argue that private infrastructure would undermine the position of the public sector, while others fear that this would only help enrich some private companies favored by the government. Therefore, there is a need for accountability, greater openness, transparency and fairness in the selection of private infrastructure developers and investors -- in this case, the selection of competent local water supply companies which will be partnering with international firms.
Accountability in a corporate sense implies that a person is responsible for the existence of a business enterprise. During the New Order administration, accountability was blurred because economic and business decisions came from the top. No single person in the lower echelon could be held responsible for KKN practices. However, though KKN is assumed defunct, the problems of accountability do not just cease there.
In our illustration, what is the problem of accountability? Why and how does it becomes a problem? What lessons can be learned by companies and the public sector in the future?
The latest polemic between TPJ's management and its union workers is an indication of a lack of accountability in the privatization process. The workers are threatening a spring offensive of strikes and rallies.
The government, worried that strikes will drive away foreign investors, is threatening to take tough action. The governor, for example, has ordered his staff to investigate to see if there is any mastermind behind the strikes. Even though PAM Jaya's director was fired soon after the strikes, there is no sign that the strikes will cease. This illustrates that no one wants to be responsible for the process.
It seems that the union workers demand clarity on every phase of the privatization process. Therefore, they insist that TWI, as an international partner with share-ownership of 5 percent, be removed from PAM Jaya's management. This is interesting because the latest hearing between Pam Jaya's director, TWI and members of the House of Representatives (DPR) concluded that KPA's ownership is nonexistent in the agreement structure of TPJ.
The removal of KPA is seen necessary because the majority of union workers suggest that KPA, as a local agent, only acts as a sleeping partner which gains an advantage in the form of fee extraction from international companies entering the country and a free shareholding.
In other words, the union workers accuse KPA of being opportunistic, considering its access to people in power. They insist that the matter be taken to the international court for arbitration.
When people in power are involved in such a case, accountability is likely to be far-reaching because the logic of power is more dominant than the power of logic.
Although the joint venture, according to Indonesia Corruption Watch (ICW) chairman Teten Masduki, was not in accordance with the law -- Law No. 1/1967 on foreign investment and Jakarta Bylaw No. 11/1993 on regional water supply companies and Bylaw No. 13/1992 -- privatization proceeded as usual.
ICW's investigation suggests the involvement of former president Soeharto, former minister of public works Radinal Moochtar, former Jakarta governor Surjadi Soedirdja, current Jakarta Governor Sutiyoso and former PAM Jaya president director Syamsu Romli in the privatization process. (Suara Pembaruan, May 10, 1999). In essence, these are the people who should be responsible for the whole turmoil in TPJ.
For example, assurance came from Surjadi, who stated that "the joint venture must give substantial benefit to the people of Jakarta and be rest assured there will be no increase in the tariffs of water supplies in the near future, but only a minor adjustment".
Similar assurance also came from the assistant secretary of the Jakarta authority, Prawoto. S. Danoemiharjo, who said the joint venture was in accordance with the national agenda in economic development and the city administration, therefore, need not ask for approval from the City Council. (Republika,Jan. 17, 1997). Having said all that, it seems nothing is against the standard procedures when every process of the project gets the needed approval from related officials.
To answer the issues of accountability, it is necessary to address several concerns. Are the PAM Jaya workers counted as primary shareholders in the process? If the answer is yes, what is their level of involvement? Has a consensus been reached among the other shareholders as well?
Unless and until the disputed parties trace this issue individually and take a shrewd approach to solve the disputes with an open mind, it will be hard to determine precisely the legal structure of the agreement, which would indicate who was responsible for what -- which, in turn, would be hard to make somebody accountable for the process.
A reputable service company such as TWI should probably have known well that legal agreements in countries like Indonesia should not be taken at face value. To make a local partner accountable for any discrepancy seems to be a bit unrealistic as there is no single player in contract agreements.
In a sense, it is a big irony for TWI. The local partner is politically influential but at the same time not neutral enough to survive and manage shifts in power. Considering KPA's access to the people in power at the time, TWI probably did not have to devote a serious amount of time to screen the company. This, in turn, benefited KPA since under normal circumstances thorough feasibility studies would be required in which it would be compared with other candidates.
From the perspective of TWI, the partner's ties to the people in power in their mutual dealings would seem to reduce the risk of making a wrong decision.
Therefore, to question KPA's credibility would have been suicidal and would have endangered the existing links. TWI also might have considered the fact that by choosing KPA, it would be easier to hold KPA accountable for the privatization process if things turned sour in the future. Now TWI probably feels the partnership with KPA only gives operational and legal headaches without contributing much to the business.
To raise the question of who is accountable for this privatization process is like lifting the lid on Pandora's box. Usually the phrase, in its negative connotation, refers to the illegal, misbehavior on the part of public officials.
The debate about who is responsible for this polemic seems to be irrelevant, for there is no single pattern. To get ahead from the horror of bureaucracy, often a bidder is the first to offer inducements to these officials. In other cases, there is some degree of complicity between bidder and officials. Whatever the case, the taxpayer and public at large are the losers.