Elections also encourage excesses in government spending for populist appeal, such as increasing quotas and subsidized fuel. The problem is the subsidy burden and additional subsidized fuel quota are not paid directly by the government. SOEs such as Pertamina must bear the difference in prices, with bills to be paid the following year. Another policy that tends to be populist, including accelerating the completion of infrastructure, will impose a serious burden on SOE finances.
Calls for reform
There are several potential strategies for transforming SOEs. The most urgent thing is to improve overall governance, and not to succumb to the temptation to take shortcuts by conducting an Initial Public Offering (IPO), in the effort to upgrade governance. The Government must firmly separate practical politics from executive and commissioner strategic posts in SOEs. A ‘special assignment’ does not mean that the appointment of directors and commissioners is to be in line with the political interests of the authorities, but rather that the function of effective coordination between institutions is streamlined. The supervisory function is even more ideal if the government insulates operational practices of SOE businesses from one another.
Improvement of state company governance demands severe punishment for directors, public accountants and internal supervisors who are proven to have committed fraud or strategies that are detrimental to a company. This is already stipulated in Government Regulation (PP) Number 23 concerning Amendments to Government Regulation Number 45 of 2005 concerning the Establishment, Management, Supervision and Dissolution of StateOwned Enterprises (SOEs). In Article 27 Paragraph 2 of the PP, it is stated that if there are state-owned companies that suffer losses, the directors must be responsible for these losses. The existence of a legal umbrella to emphasize the sense of responsibility of the directors is an entry point for enforcing the internal governance rules of SOEs. In addition, public accountants who are involved in manipulating state company financial statements need to be blacklisted so that they do not victimize other companies.
Next is an evaluation of all commercial assignments. If a project has a low IRR, then it should not be in the form of an assignment but fully borne by the state budget. Conversely, if the commercial prospects of a project are quite high, but the private sector is not yet interested, then a state company can become a pioneer of the project. With the evaluation of the assignment, it is hoped that the debt burden and risks borne by implementing SOEs will be contained.
The form of the assignment also needs to be constrained, so that there are no short-term interests in the political year involving SOEs. If the Government wants to increase the subsidy budget in order to control inflation and stability ahead of the election, then ideally Pertamina’s receivables will be paid in the same year. The government needs to prioritize the budget for paying subsidies so that Pertamina can expand its business, not just be busy looking for new debt financing.
Avoid false solutions
In order to resolve issues with problematical SOEs, it is necessary to have support from the public, and the will to close companies which have proven to be dead-weight losses. State companies that continue to be revived with a state budget injection, but do not improve performance and contribute to the economy should be lethal injection. But the process of shrinking the number of state-owned companies needs to be carried out carefully, so as not to blunder into a false solution.
One of the false solutions in shuttering SOEs which is very detrimental is that the SOE bankruptcy process is more often used as an exit strategy to escape responsibility. In several cases, such as that of Istaka Karya, a state-owned construction company, efforts to resolve responsibilities through bankruptcy have harmed the interests of many small business actors owed receivables from state-owned enterprises. Bankruptcy also tends to be complex, lengthy and often overrides the interests of small-scale vendors. As a result of an SOE bankruptcy, many vendors with receivables fail to qualify for priority in the sale of state company assets.
The template for an exit strategy through bankruptcy is quite dangerous for the reputation of SOEs. Vendors who want to become partners in infrastructure projects are nervous about prompt payments. If there is a delay, let alone a bankruptcy case, a vendor may be threatened with permanent closure.
A holding is also often used as a false solution, in the effort to resolve SOE financial problems. By implementing a holding, companies that are facing liquidity demands and debt repayments may ask for help from a healthier parent company. The practice of a holding as burden-sharing between SOEs is not considered an efficient way to solve a problem, because a holding actually aims to share knowledge and expertise to increase profits and achieve efficiency.
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The exit strategy of using a holding was also criticized for moving problems from one SOE to another state company. If left unchecked, the SOEs holding model will have a negative connotation, affecting creditor confidence to lend to the parent company, even though it might be in a financially sound condition, and impairing the productivity of workers in the holding company, because bonuses and benefits are not directly proportional to performance.
Another solution to transform SOEs is to move from extractive sectors to more innovative sectors. The strategy to restore the role of SOEs as the engine of economic growth must encourage value creation, not just value extraction. According to Mariana Mazzucato in the book “The Value of Everything”, a process of increasing value creation – such as innovation – tends to increase growth as well as economic quality, compared to encouraging value extraction, such as the fossil sector, mining and power generation from coal. SOEs must be diverted to work on business sectors that are innovative, exhibit added value and are not trapped in a fluctuation of commodity prices. Support is clearly needed from SOEs that focus on impactful infrastructure projects. (Bhima Yudhistira)