State firms remain fettered

A fundamental element seems to remain absent from the restructuring programs for the 185 Indonesian state companies launched in 1989. The directors of four state enterprises complained, at a meeting on Wednesday, that they remained shackled by bureaucratic procedures and intervention.

The constraints obviously affect their managerial and operational flexibility at a time when they are forced to face keener competition as a result of the massive packages of economic reform measures. The unleashing of more private investors into the various sectors which were previously the captive market of public companies is still another factor.

The restructuring of state companies, done as part of the overall economic reform drive, was designed to improve their operational and financial performance. The program set out seven options for state firms to assist them in achieving the prescribed objectives: Change in legal status, sales of stocks on the exchange, consolidation or merger, joint ventures with private companies, sales to a third party, management contracts with private firms and outright liquidation. A system was also developed to monitor their financial performance annually in terms of liquidity, profitability and solvency.

We were encouraged by the requirement imposed on state companies to make multi-year (five-year) corporate plans and to set out clear-cut annual programs/budgets in early 1990 because that could enhance managerial autonomy.

Based on the parameters of financial soundness (liquidity, profitability and solvency), the number of unsound firms did decline sharply from 92 in 1988 to 57 in 1990 and to 53 in 1992 (the latest figures available) and the number of sound ones rose from 60 in 1988, to 100 in 1990, but declined to 96 in 1992.

But the implementation of the restructuring program has fallen way below expectations. Not only because few companies have been privatized (after all, ownership is not the most crucial factor) and only one has been liquidated, but because the transparency with which state firms are managed has not much improved to enforce a better accountability. And state company managements have not been granted adequate managerial autonomy.

We find it quite strange, though, that while state company managements are complaining over excessive meddling by supervisors (boards of commissioners) and the requirements that detailed reports to be sent to the finance minister, as the nominee shareholder for the government, and to sectoral ministries, the various forms of irregularities uncovered at many state firms by accountants of both the State Audit Agency and the Supreme Audit Agency seem to reflect an extreme lack of built-in supervision and stringent internal-audit procedures.

This anomaly unavoidably strengthens our fear that the meddling and arduous operational procedures, which the state company managements complained about, actually have nothing to do with the real supervision and internal financial control we know of in the corporate world. Instead, the unnecessary intervention, seems to reflect the strong tendency among many ministries to use state companies under their supervision as cash-cows. Indeed, many ministries, faced with severely restricted budget allocations, are often tempted to turn to state companies under their authority in order to cover expenditures outside of the state budget.

We think increased operational (managerial) and financial autonomy within a framework of accountability, is crucial for improving the efficiency of state companies. Hence, regulations and procedures for procurement, use of assets, deals with other parties and reporting requirements which do not contribute to enhancing efficiency need to be reviewed.