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June 2, 2020

INDONESIA: Doubling down on state enterprises

BY Bob Herrera-Lim

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( 5 mins)
  • Indonesia is allocating a substantial amount of stimulus money to its state-owned enterprises.
  • The government likely sees state firms as playing an important role in maintaining economic stability.
  • The longer-term outcomes could be mixed, however, given the political pressures on the sector and the weak institutional and governance capacities related to SOEs.

Of the country’s total IDR 641tn (USD 44bn) stimulus program, roughly one-fourth, or IDR 149tn (USD 10.2bn), will be used to support 12 state-owned enterprises (SOEs). The money for the state firms will be used for several purposes, including settling outstanding national government arrears, providing money for infrastructure and construction projects, and funding loan forgiveness programs to help local enterprises.

From pariah to champion

Indonesian state enterprises were a major component of the industrialization drive during the Suharto years (1967- 1998), but they were also a key source of political patronage and plagued by corruption and inefficiency. After the Asian financial crisis, there was an attempt to reform these firms and to shrink their role in the economy; however, the effort faced varying levels of political and social opposition, including resistance from powerful unions as well as the bureaucrats and politicians who benefited from them. Consequently, privatization was slow, and many times involved the sale only of minority stakes. The trend reversed between 2005 and 2010. Commodity prices boomed, which stoked nationalist pressures for Indonesia to capture a greater share of the value. Additionally, there was a perception that Beijing effectively used Chinese SOEs as levers to keep its economy growing during the global financial crises, and that Indonesia should have the same ability.

When President Joko Widodo took office in 2014, he did not have any strong ideological views towards SOEs. Instead, he saw them as “agents of development,” filling the gaps created by market failures and allowing a way around the government’s fiscal constraints. Until this year, the Indonesian government worked under a legal deficit cap of 3% of GDP, but SOE spending is not counted under this limit. For Widodo, SOEs could therefore finance and implement projects with extended gestation periods whose risk profile would generally be shunned by private investors.

Because of the nationalist sentiment that had built up for years and Widodo’s views on their role in the economy, it became a policy of his government to turn SOEs into both national development champions and investment vehicles. In 2015–2016, for the first time since the Asian financial crisis, the government did not privatize SOEs for two consecutive years.

Consequently, those in the infrastructure and construction sectors are actively building out high-profile projects, such as the USD 1.7bn Trans-Sumatra toll road, USD 2.9bn greater Jakarta LRT, and USD 5bn Jakarta-Bandung high-speed rail. Widodo also pushed forward with his plans to consolidate the state’s participation in 16 sectors, on the assumption that these large SOEs would increase overall investment capacity in Indonesia while avoiding the inter-SOE competition that denied them efficiencies of scale in the past. By next year, state oil and gas company Pertamina will control 60% of national oil output from barely 25% a few years ago after Jakarta took over expiring contracts held by foreign firms. State mining holding company PT Inalum early last year gained majority control of PT Freeport Indonesia, which operates the third-largest gold and copper mine in the world.

Stimulus doubles down with financial support

Of the IDR 149tn allocated for SOEs in the stimulus, Pertamina and the State Power Company (PLN) will receive roughly IDR 45tn (USD 3.3bn) each; the funds will compensate them for losses they have suffered the past few years for having had to sell energy and fuel at below-market rates. Other state entities that will receive substantial funding include the State Logistics Agency (Bulog), the airline Garuda Indonesia, the State Railroad Company (KAI), and the State Housing Developer (Perumnas). The latter three agencies are having cash flow problems, but Garuda is the one with the most immediate need and will receive roughly IDR 8.5tn (USD 550mn).

Funds will be provided to state financial firm Bapindo for credit guarantees targeted at small enterprises and to non-bank financial firm PT PNM for micro-credit. State construction firms will also receive different amounts — Jasa Marga, IDR 5tn (USD 348mn), Waskita, IDR 3tn (USD 208mn), Hutama Karya, IDR 2tn (USD 139mn) and Wijaya Karya, IDR 1tn (USD 69mn) – to finance land transactions. Hutama Karya, the developer of the Trans Sumatra Toll Road, will receive IDR 9tn (USD 625mn) as a government guarantee.


Despite some reservations about their growing economic clout and financial exposure, the overall perception is that SOEs have helped move some challenging projects forward, especially in infrastructure, which overall is positive for Indonesia. Meanwhile, Finance Minister Sri Mulyani Indrawati and State Enterprises Minister Erick Thohir, who moved aggressively last year to consolidate his control over the sector and to punish corruption at Garuda, have enough credibility to be seen as limiting the short-term financial and governance risks from the SOEs at manageable levels.

Indonesian state enterprises have historically been inefficient and resistant to reform. Should governance at the policymaking level weaken in Indonesia, then SOEs will likely increasingly seek to benefit from preferential policymaking or regulatory treatment. This could consequently crowd out the private sector. Enforcing good corporate governance and preventing corruption are also dependent on who holds the key economic portfolios.

In the near-term, the success of the recent infusions will likely depend on the overall performance of the economy: a gradual but sustained recovery locally and in global commodity prices could generate sufficient returns that would seemingly justify the government’s continued support for state companies. Conversely, a pronounced downturn or an uneven recovery could revive the same problems in the future, especially if these firms are forced to provide products or services at below-market prices. At that point, the state may come under pressure to provide further financial support.

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