(Polemical) status of State-owned Enterprise subsidiary: Is it also a State-owned Enterprise?

Anthony Budiawan
Managing Director of the Political Economy and Policy Studies (PEPS)

 IO – The polemical status of State-owned Enterprise (“SOE”) subsidiaries continues. Some believe that SOE subsidiaries are not in themselves SOEs, while others conclude otherwise, i.e. that SOE subsidiaries are also SOEs. 

In terms of the eradication of corruption, SOE subsidiaries are obviously SOEs as well, because the assets of SOE subsidiaries are part of SOEs’ assets (as the parent company). Therefore, such SOE subsidiary assets are also part of the State’s wealth, making anyone or corporation that damages the interest of SOE subsidiaries liable to be penalized under existing Corruption Laws. After all, they have damaged the finances of SOE subsidiaries, which are themselves part of SOEs, which in turn are within State assets. 

Those who opine that SOE subsidiaries are not part of SOE cite Article 1 Paragraph 1 of SOE Law, which states that “SOEs are enterprises that are wholly or mostly possessed by the State, through direct investments originating from separate State assets.” “Direct investments originating from State assets” is interpreted to mean that the capital must come from State wealth, in this case interpreted to mean originating from the State Budget (Anggaran Pendapatan dan Belanja Negara – “APBN”). In other words, SOE are enterprises whose direct majority shareholders include the Republic of Indonesia (RI). On the other hand, they state that “capital” or “share ownership” in SOE subsidiaries originates from SOE, not from State wealth, meaning that SOE subsidiaries are not part of SOE. 

The above interpretation is very weak and nonsensical. Why? Because: 

First, the establishment of an SOE subsidiary is a strategic decision intended to expand the parent SOE’s scope of business. Sometimes the scope of a company’s business is extremely limited, necessitating the establishment of a subsidiary in order to prevent conflict of interest. In other words, SOE subsidiaries are basically extensions of the parent SOE. Therefore, SOE subsidiary assets form part of the parent SOE’s assets. As the assets of parent SOEs are part of the State’s assets, SOE subsidiary assets are also direct assets of the State. 

Second, the above can be proven through consolidated finances. Legally, SOEs with majority ownership of their subsidiaries must perform consolidated financial reporting. In other words, all of the SOE subsidiary’s assets and liabilities are considered to be integrated to, and inseparable from, the parent SOE’s assets and liabilities. In other words, after consolidation, the SOE subsidiary is actually a false or unreal presence, as everything is included in the parent SOE, as a result of direct capitalization by the Government of RI. 

Third, the asset used by SOE as capital in the SOE subsidiary is a direct part of the State’s assets, because: 

(a) SOE subsidiary may only be established with the approval of the RI Government, as the SOE’s majority shareholder. If the Government rejects this, an SOE subsidiary could not be established, and the money for paid-in capital in the SOE subsidiary would be used as a dividend for the RI Government. In other words, paid-in capital in an SOE subsidiary can be interpreted as a State asset originating from the dividend. 

(b) The Indonesian Government may decide to divest the SOE subsidiary at any time, and the money originating from the divestment may be split up as dividends for the RI Government. Such money is recorded in the APBN, making it part of State wealth. 

Based on the above explanation, we can conclude that SOE subsidiaries are SOEs in nature, as they are part of the parent SOE’s assets.