Lessons from S'pore SOEs
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contributions to the GDP and employment, were withdrawn in 1968.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.