Indonesia Inc.

Indonesia Inc.

The quick decision by the government to appoint a new
supervisory chief for the 155 state companies should be welcomed
as a move which will, at the least, immediately put an end to the
atmosphere of uncertainty which has prevailed ever since the
disbandment of the ministry of state enterprises during the
recent Cabinet reshuffle. But we remain skeptical as to whether
the move will be sufficient to kick start a process of real
reform in state companies.

In fact, after President Abdurrahman Wahid abruptly fired the
well-respected Minister of State Enterprises Laksamana Sukardi in
April in an extremely ill-advised decision, we have been
pessimistic as to whether the government will ever be really
serious about reforming state companies.

The new chief economics minister, Rizal Ramli, announced early
last week, or only two days after his installation, that he is
now taking direct charge of state enterprise supervision, making
him the fourth person to hold this position within a period of
only 30 months.

Rizal himself seemed to be fully aware of the public's
tendency to be suspicious of anyone charged with the
responsibility of overseeing state companies, which for more than
three decades were used by former president Soeharto, his family
members and cronies as their cash cows. Rizal said that the
government would soon set up a new governing body, coming under
his office, to supervise state enterprises.

But no details were immediately available as to the
responsibilities and job description of the new body. Rizal only
said that it would consist of the Cabinet ministers who regulate
the sectors in which the majority of state firms operate.

Those who have followed the progress of state sector reform
programs in the past are obviously dubious about the government's
seriousness in improving the competitiveness of state
enterprises. There are too many conflicts of interest and too
many politically well-connected rent seekers competing with each
other to milk the huge assets of the state sector.

Since the efficiency of state companies is so crucial to the
health of the economy given the fact that they operate in the
areas of public utilities, services, basic infrastructure and
upstream industries, international creditors, notably the World
Bank, have from the outset made state enterprise reform one of
the top priorities of their aid programs. But little more than
lip service has been paid to this ideal due to an absolute lack
of political will on the part of the government and too many
short-term interests on the part of our political leaders.

The International Monetary Fund-led bailout program for
Indonesia includes independent audits of state companies as a
first step towards comprehensive reform. Two of the first audits
to be conducted, namely those on Pertamina and the State
Electricity Company (PLN), only confirmed the general suspicion
of how those companies had been recklessly milked by those in
power.

Tanri Abeng, the first minister appointed by then president
Soeharto in March, 1998 to oversee state companies, planned to
establish a holding company to manage the 155 state companies.
This was to be modeled on the successful Temasek Holdings Co. in
Singapore and Khazanah Holdings in Malaysia. But the plan fell
apart due to strong opposition from both the IMF and the World
Bank as the model that Tanri had designed, instead of minimizing
excessive government intervention in daily management, would have
served only to further diversify Soeharto Inc.

Laksamana Sukardi, who took over from Tanri Abeng in late
October, 1999, acted immediately to tackle the root problem. He
focused on building up a system that protected management from
political intervention, recruited directors based upon a fully
transparent fit-and-proper procedure, required them to produce
business plans and made them fully accountable for their
performance. He also emphasized the preparation of as many state
companies as possible for public flotation, not so much as to
raise revenues for the government, but rather to expose them to
the stringent disclosure and accountability requirements of
publicly listed companies.

However, Laksamana ruffled too many feathers, prompting
President Abdurrahman to fire him in a controversial decision
that spooked the market, damaged investor confidence and
emboldened the House of Representatives to exercise its
interpellation right to summon Abdurrahman so as to explain his
decision. The reform program came to a virtual halt under
Laksamana's successor, Rozy Munir, who got his job only on
account of his close personal relationship with the President.

We fear that Rizal in turn will also prove incapable of making
any significant difference as long as the government, notably the
President, is not really committed to providing state company
managements with full operational (managerial) and financial
autonomy within a framework of accountability. State enterprises
will remain inefficient and highly vulnerable to corruption and
rent-seeking practices by those in power, thus adding to the
inefficiency of the economy as a whole.