Lessons from S'pore SOEs

By I Ketut Mardjana

JAKARTA (JP): State-owned enterprises (SOEs) in Indonesia, like those in many other countries in the world, have been notoriously known for their inefficiency. However, Singapore's SOEs seem to be an exception. They are efficiently managed. As Singapore's case indicates, it is possible for SOEs to be as efficient as private companies, which depend on the way SOEs are managed.

In the context of Indonesia and Singapore, management approaches to SOEs evolved differently. The prevalent differences in the management systems are significantly influenced by different philosophical backgrounds of the SOE's existence and also, to some extent, by the size of each country.

The initial emergence of the SOE in Indonesia was established mainly for political purposes, while the establishment of the SOE in Singapore was motivated more by economic reasons. These philosophical differences may cause both countries to adopt different attitudes, either at the government or the management level.

It is important to stress that the domestic market sizes of Indonesia and Singapore differ significantly. Since it has a small domestic market, Singapore has strived for internationalization of its economy. In this sense, economic facilities and efficiency are a must; otherwise, it cannot attract foreign investors to invest domestically, and the products cannot compete internationally.

Indonesia, on the other hand, is more concerned with balanced development among the regions, and equity among the people. State enterprises are the best policy tools of the government in applying the policy. Subsidies and other types of protection are often unavoidable. But, since liberalization of the world economy has been the current issue, both countries have tended to move in the same direction toward economic efficiency in order to improve competitiveness of their products.

The economic and unemployment problems facing Singapore in the mid-1960s led to an economic transformation. The two previous mainstays of the economy, entrepot trade and British military expenditure, were not going to continue as reliable bases. Entrepot trade came under threat because neighboring countries attempted to engage in direct commerce with developed countries.

The British military, which provided quite significant contributions to the GDP and employment, were withdrawn in 1968. This meant that military expenditure was terminated forever. Anticipating bigger problems, and in a bid to rebuild the economy, the government started to adopt a highly interventionist role in the business sector.

The private sector during that time was still weak, both financially and technically, or did not want to participate in heavy industries or high technologies, which are usually capital intensive and highly risky.

Eventually, SOEs have become strategic economic tools of the government in transforming Singapore's economy into an industrial-based economy, while directives aimed at making Singapore a commercial and service center have also been adopted.

Since Singapore is a relatively tiny island with a small domestic market, the best policy agenda has been an outward- looking strategy. This must be supplemented by a proper domestic policy that is aimed at supporting the pursuit of business excellence. Indeed, this outward-looking policy has had positive impacts on SOE management.

The government has applied the theory of private property right economy consistently for the SOEs. They are required to earn profits and expand when feasible. Conversely, they are allowed to go bankrupt if they lose money. With this rationale, the Singapore government has hardly been involved in the day-to- day operations of the SOE, but rather allows management the independence to make decisions. Flexibility is an important component in the management style of Singapore's SOEs. This is in order to allow the SOE to quickly adapt to the world's changing environment.

The SOE in Singapore has been structured in two ways. One is government-linked companies (GLCs). GLCs are companies in which the government has a shareholding. They are charged with being almost exclusively profit oriented. They are put under holding companies. These are essentially only "paper" companies.

The government does not have direct operational influence in the daily operations of subsidiary companies. Another type of SOE is the statutory board. It was established with the aim of transforming government functions into a more flexible structure. The statutory board deals with two functions: social services and commercial services.

However, the government has endeavored to omit the common blurred lines between the two. Most statutory boards have subsidiary companies, which are structured along the lines of GLCs. This is to allow them to operate in a commercialized manner. To summarize, the world competitive environment pressured the government to provide the business sector with a conducive environment, and pressures SOE's products to achieve optimal efficiency.

In a small way, the structures of state enterprise in Indonesia are similar to those in Singapore. There are also two types of state enterprise, the Perum (Perusahaan Umum) and the Persero (Perusahaan Perseroan). Perums are wholly government owned and comply with the House of Representatives' act. They have dual functions: social -- which provide public services to society and economic infrastructure -- and commercial. Perseros are companies established under the Company Act, in which the government has equity holding. So, from this structure, they are likely to be no different than statutory boards and government- linked companies in Singapore. But, if we look more carefully, there are a lot of differences. The differences are mainly characterized by the structure of control.

The implementation of a rigid structure of control has resulted in inefficient Indonesian state enterprises. The government bureaucracy has been involved in both strategic as well as operational activities of the SOE, either Perum or Persero. This has led to the removal of management discretion.

The government often includes itself in the budgeting process, pricing or in determination of products or services that state enterprises should produce. The SOEs are subject to audits from the Supreme Audit Agency and the Development and Finance Control Board.

In Singapore, the auditor general is only responsible for statutory boards, while GLCs are audited by public accountants. These approaches have different implications for management styles, since the auditor general aims at more procedural obedience and public accountants would take a more business-like approach.

Another type of control dictates that all state enterprise investments are subject to the application of procedure when applying for government procurement. This is rigid and takes time. However, one preeminent crucial control mechanism ensures that two ministerial departments -- the Ministry of Finance and a technical ministry (such as the Ministry of Agriculture, the Ministry of Industry, or others) -- have direct access to the SOE.

This causes a long policy process, because such a policy may have to pass through hierarchical structures in two ministerial departments. This type of control has been widely claimed as a factor causing inefficiency in SOE management.

The strong control of the government may be linked to the history and the philosophy of the state. The emergence of SOEs in Indonesia was inspired by a political motivation: to shift the economy from colonial to national.

Strong nationalist sentiment in response to the Dutch refusal to transfer the sovereignty of West Irian to the Republic of Indonesia led to a nationalization policy. All enterprises in which Dutch capital was invested were nationalized between 1958 and 1959 and became Indonesian state enterprises.

In addition, in contrast to Singapore, Indonesia is a widespread archipelago, with a huge population. Political pressures for balancing overall development among regions and for achieving a more ethnically balanced of wealth distribution, which was exacerbated by the need for social services regulated by the Constitution, have shaped SOE policy direction towards becoming more inward-looking.

They have become the government's policy instruments in exercising their social service obligations and other policy goals. Consequently, those monumental responsible have located many of the SOE's operations in very strategic areas, and even provided some of them with monopolistic positions, where efficiency did not become the first priority. As compensation, budget drains from the government to SOEs, as well as other types of privileges, have become common.

This policy, however, has now come under a continual review process. Government control and protection have been considered responsible for creating the "high-cost" economy which is inimical to the competitive domestic market and constrains the domestic export producers from being able to compete internationally.

The Indonesian government is trying to escape from this situation, especially after it began to face budget difficulties, beginning from the period of the 1982-1984 world recession and followed by plunging domestic oil revenues in 1986.

By then, the government had conducted economic deregulation. Moreover, the GATT agreement, which Indonesia has ratified, the APEC declaration, which approved free trade in the regions and will take effect in 2010 and 2020 for developed and underdeveloped countries respectively, or Afta, which is estimated to take full effect in the year 2003, also provide additional pressure to implement economic change.

Facing the liberalization process, Indonesia urgently needs to dress itself up. Deregulation and debureaucratization of the economy is still an essential part of the government policy agenda. This trend would significantly affect future state enterprises in Indonesia.

The global free trade era leaves Indonesia no other choice but to push for efficiency. As the global economy has become borderless, an inward- or outward-looking policy being pushed independently is no longer relevant. Indonesia's main challenge today is to produce products efficiently and competitively, both for domestic and international markets.

In contrast, the establishment of Singapore's economic policy has been motivated by the "going international" concept from the beginning. Singapore's companies, both private and state, have already been pursuing joint ventures with multinational companies long before other nations in this region and other parts of the world. Therefore, when the liberalization of the world economy is finally realized, as it happens now, the state- owned enterprises in Singapore are well-prepared.

Nevertheless, Singapore continues in its efforts to improve its efficiency by restructuring its SOEs. Apart from the divestment policy of the GLCs, which has been implemented successfully, some statutory boards are in the process of being restructured into adopting the features of private companies.

This is to provide opportunity for the enterprises to be listed in the capital markets. For example, the old Telecommunications Authority of Singapore (TAS) has been split up into three entities: TAS, Singapore Telecom Pte. Ltd., and Singapore Post Pte. Ltd. Singapore Telecom has listed in the Stock Exchange of Singapore. The PUB-Public Utility Board will be corporatized in September 1995, followed by privatization in 1996.

Hence, Singapore's state enterprises have moved one step ahead of Indonesia's SOEs. In such a situation, consultations could be initiated for some joint work between Indonesia and Singapore on state enterprise policy reforms.

Singapore's success in managing its SOE may be a relevant lesson for Indonesia, as it embarks on reforms of its own SOE system. On the other hand, Indonesian state enterprises may be a good place for Singapore's SOEs to extend their investment abroad, as well as to transfer their expertise.

The writer is an alumnus of the Faculty of Business and Economics, Monash University, Melbourne, Australia.