The good, bad and ugly sides of SOEs

The following is the second of two articles on state-owned enterprises by Sauri Hasibuan, assistant manager at Ernst & Young Consulting Corporate Finance Division, Jakarta

JAKARTA (JP): Bankrupting those state-owned enterprises (SOEs) suspected of improper accounting practices is hardly a solution, for that would mean most of them. So the government is trying to separate them into three groups: The hopeless, the bad and the prospective.

A realistic estimate, one senior consultant suggests, is that half will fall into the first group, 40 percent into the second, and only 10 percent into the third. The fate of the duds should be managed to ensure a gradual exit from the market.

As a first step, their bad debts are being transferred to the Indonesian Bank Restructuring Agency (IBRA) through its asset- management units, although it is not clear what these units will then do with them.

Those in the second group are being prepared for sale to foreign or domestic private investors. Those in the third group are possibly being listed on the stock market. Out of 167 SOEs, 71 are on the list of IBRA's restructuring program.

The process is painfully slow. SOE debts that must be restructured total Rp 18 trillion. A centerpiece of the preparations for sale is forced consolidation.

Indonesia has one behemoth, the PLN electricity firm. Its debts would eventually be returned to Bank BRI, as PLN's original lenders, which in turn would have to report to Bank Mandiri which has since taken over Bank BRI's lending facilities under which the PLN terms would have been agreed.

The arrangements are complex since PLN also has disputes with a multitude of foreign creditors. There is also talk on merging telecommunications firms Indosat and Telkom, plans on fusing all companies under the Strategic Industries Supervisory Agency into one, several regional banks into one, and so on.

In some cases, these mergers will help, especially when they are, in effect, takeovers of weaker management by the stronger. Sometimes they have also helped cut oversupply. Meanwhile, the energetic president director of PT Telkom, Cacuk Sudarijanto, was forced to resign despite the fact that the company's performance had improved under his stewardship.

But Telkom was fortunate that it had already entered international capital markets as its shares had been publicly listed since 1995. PLN is a different case though: is the company able to cut its workforce?

It has to look further into its revenue and expenditure. If the two components are on a par then you have an answer. Reducing expenditure seems a bit difficult since there has been a raise in employees' salaries. One solution is increasing the tariff through the consumer segmentation and differentiation.

But in many other cases, the mergers and privatization will only create mediocrity on a larger scale. Moreover, the government has not yet resolved a basic dilemma: if it sells the enterprise before it is restructured, it will only be able to do so at a pittance. The government needs cash to pay off liabilities at other enterprises too.

Yet the alternative, which is to restructure the enterprises in the hope of selling them for more, will be tricky. "Government cannot restructure itself," is the blunt assessment of one local investment banker.

One school believes that government should give more autonomy to its enterprises and managers in the hope that this will lead to more transparency and cleaner accounting.

A prominent economist states that privatization, which is a transfer of property rights, is not only meaningless but also positively counter-productive in a country that has not yet adequately defined these rights.

Without regulatory regimes and strict accounting standards, privatization could simply offer incentives for corruption. Another option is to disable an essential prerequisite for mismanagement, which is the SOEs' access to "soft" budgets.

Managers could not run their businesses against the law of economics, and officials could not pilfer from them indefinitely, if their source of cheap bank credits were removed. If the banks were capable of selecting borrowers and charging interest rates according to the perceived risk, the SOEs would soon learn to invest rationally and to run their operations for cash and not paper profits. And by putting teeth into the bankruptcy law so that insolvent firms were actually forced into liquidation, mismanagement would at last have a downside.

The most concrete impact that will be felt by Indonesia's SOEs with the arrival of the ASEAN Free Trade Area is the introduction of foreign competition and more stringent credit assessment by Indonesia's banking system.

Even so, change will be both dangerous and hard. A string of sudden bankruptcies would strain Indonesia's public finances. Unless and until Indonesia implements good corporate governance within all companies it will be of no relevance to plan the privatization of companies.

Telkom shares as well as those of Indosat have now become blue chip shares. Though if Telkom, which holds a telecommunications monopoly, had not been privatized, it is extremely likely that it would have suffered a similar fate to Garuda, which had assets dismantled and illegally sold because it lacked transparent accountability and good corporate governance.

On a larger scale, further delays in implementing good corporate governance may prove a catastrophic mistake. Worker unrest has been growing: the government is becoming fragile, especially if the economy turns down.

It would be better to be bolder now and fix the SOEs while the country needs their contribution the most.