The good, bad and ugly sides of SOEs

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.