State firms remain fettered

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.