State companies: The dream that never comes true

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.