Corporate governance: Problems and challenges
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.