Hopes rise that Widodo will inject new life into Indonesia SOE reform

Construction warning signs are posted on the construction site of Indonesia's mass rapid transit in Jakarta on August 5, 2014.
Romeo Gacad | AFP | Getty Images
Construction warning signs are posted on the construction site of Indonesia's mass rapid transit in Jakarta on August 5, 2014.

At the weekend, Ignasius Jonan likes to visit Indonesia's crowded train stations, watching the locomotives come and go.

He is not a train spotter but the chief executive of the national railway company, a man on a mission to transform one of the country's many fusty, inefficient state-owned enterprises into a competitive, customer-focused business.

"I have to lead by example so I eat with my people, I smoke with my people and I work with my people," he says, trumpeting the fact that he has increased annual passenger capacity by 50 per cent to 270 million since he took over in 2009.

Mr. Jonan, a former Citigroup investment banker, is one of "a few good men" who were brought in from the private sector to revamp Indonesia's SOEs.

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Indonesia's 138 SOEs dominate large swaths of the economy, from transportation and banking to pawn shops and pharmaceuticals. They employ 800,000 people, control assets worth $350 billion and their revenues of $155 billion last year were equivalent to 18 percent of GDP.

But total profits were only $9 billion and Agung Wicaksono, a business school professor who advises the government on SOE reform, says only about 20 SOEs pay a regular dividend.

While China and India move ahead with ambitious plans to streamline and privatise parts of their outsized state sector, Indonesia's SOE overhaul has run out of steam, like other reforms promised by outgoing President Susilo Bambang Yudhoyono.

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However, hopes are rising that president-elect Joko Widodo, a former furniture trader and city mayor with a record of business-friendly reforms, can inject new life into the process after he takes office on October 20.

"There was no strong will from the Yudhoyono government to enforce transparency, good governance and market discipline on the SOEs," says Sofyan Djalil, who was Mr. Yudhoyono's minister for SOEs until 2009 and has been tipped for a possible post in Mr. Widodo's Cabinet. "This time we have the right leader because, although Mr Widodo is not a full supporter of free markets, he believes in the importance of efficiency and competitiveness."

Friderica Widyasari Dewi, the development director of the Indonesia stock exchange, agrees and believes Mr. Widodo will push more SOEs to conduct initial public offerings.

Analysts say that SOE reform is an important step toward making the country more competitive, as the economy has slowed to a five-year low, with gross domestic product growing at an annualised 5.1 per cent in the second quarter.

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In spite of a lofty target to cut the number of SOEs to just 25, he says the political will for change has evaporated because of rent-seeking politicians and SOE executives and an ideological climate in Indonesia "that looks at market forces with suspicion".

While Malaysia and Singapore set up separate holding companies to manage their state companies at arms length, Indonesia's SOEs are meant to be managed out of the SOE ministry.

But, in practice, many operate as independent fiefdoms or have to report to a variety of different ministries.

A few SOEs have managed to compete successfully with the private sector, including lenders Bank Mandiri and Bank Rakyat Indonesia, telecommunications company Telkom and cement maker Semen Indonesia.

Some perform vital public service obligations, such as national oil company Pertamina and passenger shipping line Pelni.

But many simply muddle along, according to Mr. Djalil, the former SOE minister, and the inevitable results are corruption, financial losses and a misallocation of resources that are needed to retool an economy that is suffering from a severe shortage of infrastructure.

Investors say that the private sector is also being crowded out.

"This is not just a problem in Indonesia, it's southeast Asia's biggest challenge," says Tony Fernandes, chief executive of AirAsia, the region's biggest no frills carrier. "Are governments regulators or are they in business? The problem is that they're doing both in most cases."

He says economic development is suffering as a result, with AirAsia reluctant to launch new flights to remote parts of Indonesia such as Ambon and Flores because of the uncompetitive landing fees charged by the state-owned airport operator, which seems indifferent to attracting new business.

It is a similar story in Mr. Fernandes' native Malaysia, where critics say that affirmative action policies targeted at the majority Malay community have created government-linked companies that suffer from cronyism, inefficiency and graft.

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Efforts to instil a culture of market forces started in 2004, in part led by Khazanah, the sovereign wealth fund. However, progress has been slow. Only 15 of 33 planned divestments of government-linked companies had been completed by last year, according to the Asian Development Bank.

In Indonesia, Mr. Widodo is also likely to find the going tough, as he faces a powerful bureaucracy and a new legislature that is controlled by his opponents.

Mr. Wicaksono, the business school professor, believes his best chance of success is to avoid the thorny issue of privatisation at first and focus on merging overlapping SOEs, curbing political meddling and bringing in more private-sector mavericks like Mr. Jonan.

Additional reporting by Jeremy Grant in Singapore