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Soon to Come: State-Owned Holding Companies

Translator

Editor

27 January 2017 17:06 WIB

TEMPO/Dhemas Reviyanto

TEMPO.CO, Jakarta - There is no reason for the government to hastily set up new state holding companies. However desperate it may be, the government should do meticulous and careful business calculations and at all times adhere to the pertinent laws. 

The plan was spearheaded by State-Owned Enterprises (SOE) Minister Tanri Abeng in 1988, but was never fully implemented. So far, there are only three such firms and they are involved in fertilizer, cement and plantation/forestry businesses.

President Joko Widodo now wants to have this delayed project brought to the front burner during his administration. Two weeks ago, he approved SOE Minister Rini Soemarno's proposal to set up six new holding companies in oil and gas, mining, housing, highways, financial services and food sectors. Rini also plans to merge all SOE holdings into one super holding by 2019 replacing, her own ministry. 

It is important for the government to understand that merging SOE companies is not the only remedy to the problems suffered by SOEs.In several cases, this option indeed creates additional capital. But, on the other hand, sometimes business diversification and division are, instead, the solutions to boost performance and healthy competition. 

The idea of just merging companies for the sake of creating a bigger company should not be the basis for the initiative. The condition of each company must be checked and rechecked one by one and not scanned from the top, based on sectors. 

Likewise, this endeavor of establishing holdings and the super holding should not be viewed lightly, because instead of providing solutions and prospects, the plan could create new problems in terms of management and control, supervision, governance, financial burden, inefficiency, and so forth. 

Each SOE has its own characteristics, particularly from the financial point of view. Careless mergers can trigger cross defaults-financial woes from one SOE that can drag down the parent company. 

Unequal performance among SOEs is not a secret. The 2016 data from SOE performance-rating by the Infobank magazine shows that out of 122 SOEs, 58 are very good, 18 good, 12 fair and 25 not good. The remaining nine did not get any rating due to a lack of sufficient data. 

There are also legal problems that may potentially arise. One example could be the transfer of ownership which could provide the opportunity for backroom deals in the sale of a given company. Such fraudulent activities must be prevented through the involvement of all stakeholders, among others, lawmakers and other law enforcers. 

As the engine behind this initiative, Rini should solicit the participation of other institutions in this monumental endeavor. 'Going it alone' can potentially trigger unnecessary suspicions. Transparency is the key and should be paramount in any operational decisions. (*)

Read the full story in this week's edition of Tempo English Magazine



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