State companies: The dream that never comes true

Kafi Kurnia, Jakarta

The Javanese term gemah ripah loh jinawai (great prosperity and great fertility), a saying that Bung Karno, Indonesia's first president was fond of popularizing as one of the aspirations of the new Republic of Indonesia, reportedly and historically came from the era of the Pakuan Kingdom in the land Pasundan (West Java).

It was the dream of the founding fathers of this nation to see Indonesia great, rich and prosperous.

I was really charmed by this dream and story when I was an elementary school pupil, especially when the teacher told us stories about the greatness and magnificence of our kings in the past and also about how Indonesia was home to several legendary kingdoms from Sriwijaya to Majapahit.

This story and dream stayed in my mind, especially when I was told how Dutch writer Eduard Douwes Dekker, better known as Multatuli, referred to Indonesia as a chain of emeralds on the equator, and also when I heard music group Koes Plus refer to this country as a "pond of milk," a place where sticks and stones could turn into plants.

After I finished my university studies and got an opportunity to visit various cities and regions across the country, the saying "gemah ripah loh jinawai" always stuck in my imagination. I kept asking myself when would Indonesia get this great prosperity whenever I witnessed the great wealth of the country's natural resources.

August this year will be the sixtieth anniversary of the proclamation of the Indonesian republic, but to many people the dream that the founding fathers of Indonesia nurtured when the independence of Indonesia was proclaimed has gone even further from their reach.

Just for fun recently I surfed the Internet to find data about Indonesian state-owned enterprises (SOEs).

SOEs are among the country's biggest conglomerates, right? I downloaded a document entitled "Master Plan of SOE for 2000 - 2006" and learned that as per 2001 the assets of our 161 SOEs were worth Rp 772.5 trillion.

The pre-tax profits that SOEs reaped during the same period was reported to be only Rp 27.78 trillion, or just 3.6 percent of the worth of the assets. I also learned that 25 SOEs sustained losses. Perhaps we should be more deeply concerned about this matter because this is not a rosy picture of our SOEs.

Now take as a comparison the 2005 tax receipt target of Rp 319.44 trillion, and the non-tax revenue target of Rp 118.5 trillion set in the state budget.

From this simple calculation, again, I was emboldened to dream like this: If only our SOEs could grow and develop into gigantic corporations, they would surely make big contributions to state coffers from taxes and therefore enable the government to do many more things to improve the people's welfare.

I talked about this dream with a retired government official. He said many SOEs historically were the legacy of the colonial era, or were set up to complement the Republic of Indonesia right after independence.

The state-owned electricity company PLN, for example, is partly the legacy of Bandoengsche Electriciteit Maatschappij, which was founded in 1905. Likewise, state oil company Pertamina was previously North Sumatra Oil Fields, which the Japanese occupational administration handed over to the Republic of Indonesia in 1945.

By intuition, the state felt the need to be an economic manager in the spirit of Article 33 of the 1945 Constitution that stipulates that the entire land, water and natural resources of Indonesia are controlled by the state and will be used for the greatest prosperity of the people.

Unsurprisingly, therefore, some SOEs were founded in the spirit of this particular article, and possess the simple vision of merely protecting the country's natural resources. For many years, SOEs were managed in a highly bureaucratic manner and failed to develop in keeping with the changing times and societal attitudes.

Unlike ordinary business enterprises, which are set up purely to make profits, an SOE is frequently required to play a social role. In this context, it is unbecoming for an SOE to seek profits especially if it looks as if it were making this profit at the expense of the people. That's why, philosophically, an SOE usually adopts a different principle in terms of profit-making.

An SOE may be motivated to make profits to demonstrate the efficiency of its management, for example. Or, in another case, profit making may be intended to develop the business of a particular SOE so that in the long rung it will produce added value for the benefit of consumers and the people in general.

The most frequent criticism of SOEs is that they are generally tainted by corruption, collusion and nepotism and that their management is inefficient, bureaucratic and non-transparent.

Understandably, in the last few years, there have been strong demands that SOEs be privatized so that they will be more transparent and professional. I personally do not think that privatization is the only solution. More importantly, perhaps, is to find the right leadership that will be capable of breathing the spirit of entrepreneurship into SOEs, turning them into innovative and highly competitive business units.

Many companies in Indonesia are publicly listed but are still weak in their management so that they have lost their competitive edge.

Transparency in SOEs always starts with good corporate culture and good corporate governance. Clearly, privatization is not the only way to go.

While SOEs are not yet in good condition, their privatization will only mean selling state's assets at much reduced prices. Obviously, the state will sustain losses in this regard.

At present, 161 SOEs have been grouped into 37 major groups. A more advantageous strategy is perhaps to merge companies into viable groups so that they will become more efficient, and then advantageous synergy and alliance may be found for them.

Few people know, for example, that Pertamina owns six hospitals, 15 polyclinics and a nurses training college. If these business units were merged, for example, with an SOE dealing in the provision of health services, such as the other 13 hospital- owning service companies, a number of insurance companies and pharmaceuticals in the SOE portfolio existing today, we may well create the best "health care provider" in Indonesia.

Or, in another case, we may create a company that can promote Indonesian tourism and generate considerable foreign exchange earnings for state coffers if, for example, two airline companies, three tourism companies and a retail company in our SOE portfolio are managed by just one efficient holding company.

Or, in another case, we may create a company that can promote Indonesia's tourism and generate considerable foreign exchange earnngs to the state coffers if, for example, two airways companies, 3 tourism companies and one retail company in our SOE portfolio are managed in just one efficient holding company.

If several state-owned banks are merged with a number of state-owned insurance companies as well as several other state- owned financing companies, the result will be a giant consortiumthat may motivate small and medium-sized enterprises in Indonesia. As there are vast opportunities, this possibility will continue to develop.

What SOEs in Indonesia need is perhaps the same entrepreneurial touch. SOE management must be darng enough to shift from the bureaucratic management system to an entrepreneurial management system. This will ensure that the aspiration contained in the saying "gemah ripah loh jinawi" will become a reality.

The writer is the director of Jakarta-based marketing consulting firm PT Interbrand Indonesia.