Getting Real Reform of the SOEs
    Category: Column By : Alberto D. Hanani Read : 1148 Date : Thursday, September 05, 2013 - 05:40:27

    Indonesia's 140 SOEs are a powerful bunch that account for roughly 39% of GDP. Originally intended to control industries too vital for private hands, state firms have since become entrenched in the economy. Yet while the private sector plows forward, the majority of state enterprises remain woefully inefficient. While some regard inefficiency to be inherent to the state sector, evidence traces the problem back to corrupt bureaucratic tradition and a lack of good corporate governance. It is not to say SOEs cannot be run well and unleash their potential.

    Dahlan Iskan's appointment as SOE minister came when desperation for SOE reform had peaked. He is arguably the best man for the job, as he too shares the public's frustration over government inaction.

    In October 2011, Dahlan planned to rightsize and privatize the SOEs, but his objectives quickly became mired in the politics of bureaucracy. He promised the IPOs of Semen Baturaja, PTPN VII, and Pertamina in 2012; in the same interview, he discussed plans to reduce the number of SOEs by grouping them under holding companies. Several of his initiatives have already been blocked by Parliament or remain deadlocked. To date, Dahlan has made little progress.

    It's not just him. For years, the government has targeted ambitious rightsizing. In 2008, President Bambang Susilo Yudhoyono ordered the ministry to reduce SOEs from 138 to 89 firms by the end of 2009. He demanded high-achieving holding companies that could be profitable, with an eventual goal of 25 SOEs by 2015. The number today remains stagnant at 140.

    The problem is that ministry plans are being pushed forward within a bureaucratic structure that is pushing back. History reminds us that having distinct objectives is not enough; Dahlan must also win the support of political parties in order to ensure policy success.

    Dahlan should first adopt a two-pronged approach aimed at good corporate governance (GCG) and bureaucratic reform that will reduce—not combat—the forces hindering progress. With time, inefficiencies can be minimized through structural change of the overall bureaucracy and within the SOEs.

    Good corporate governance (GCG) has been driven by two forces. The 1998 Asian financial crisis brought about a regulatory approach, based on external pressure. Only in the past decade has this shifted an internally driven ethics approach, improving business sustainability and long-term shareholder value. By 2009, 83% of publicly traded companies had introduced corporate governance codes, and this number has grown.

    There are several ways to improve governance. A GCG internal strategy trains SOE managers on eliminating corruption and nepotism, leading to greater organizational efficiency. Bureaucratic reform is similar to GCG, focusing on state reorganization. Before Dahlan can fight institutional opposition, he must isolate the root problems of SOE reform. Since his appointment, all his promises have been crushed by the mutual forces of Parliament and other institutions.

    But the political roadblock runs deeper than Parliament. It is a testimony to decades of inept business practices, perpetuated by the bureaucracy, and the resulting inefficiencies hamper SOE growth. Dahlan must clear these roadblocks first by working towards a policy of good corporate governance and bureaucratic reform. Once structural and cultural resistance is minimized, the time will be ripe for SOE advancement.