Thu, Aug 31, 2017

Consolidating Indonesia’s SOEs — Risk or Reward?

State-owned enterprises (SOEs) are key business players in Indonesia’s economy with their dominance in strategic industries. Indonesia’s constitution mandates the government to control “livelihood of Indonesians” industries, thus making the government the market leader in certain sectors. Four of the six largest Indonesian banks: Mandiri, BRI, BNI and BTN are state-owned. In the upstream oil and gas sector, state-owned Pertamina boasts the second-largest production capacity in Indonesia, behind Chevron Indonesia, but Pertamina will soon take over Chevron’s sites in Sumatra and Kalimantan Islands.

The Jokowi administration is creating several holding companies to consolidate numerous SOEs. Approximately 34 SOEs are projected to be government-owned through several holding companies; Pertamina (oil & gas), Danareksa (banking and financial services), Hutama Karya (toll roads & construction), Inalum (mining), PT PP, (housing) and Bulog (food and agriculture). Additionally, the consolidation of healthcare SOEs is under the Indonesian Healthcare Company.

This consolidation programme is for Indonesia to remain competitive with its Asean neighbours. Four major stateowned banks will make Danareksa one of the five largest financial services companies in Southeast Asia, with total assets of US$200 billion. With the exception of the high-profile acquisition of Thang Long Cement in Vietnam in 2012 by Semen Indonesia, an Indonesian state-owned cement holding company, knowledge of investments is scarce. Globally, Indonesian SOEs are behind their Southeast Asian counterparts in terms of recognition and prominence as investors.

Government regulations in Indonesia have made it difficult for Indonesia’s SOEs to expand further into the global stage. The government’s recent issuance of Government Regulation No. 72/2016 in December 2016, which allows the transfer of SOE’s capital into subsidiaries without consulting with the parliament is seen by many as a step in the direction to facilitate this expansion. This provides SOEs with more autonomy to deploy capital strategically.

Global expansion is vital if Indonesia’s SOEs’ are to generate new sources of profit outside their traditional markets. Indonesia’s largest banks, for example, are unknown outside of their home market in stark contrast to banks from Malaysia, Singapore and Thailand. Observers claim that the banking markets in these countries are not as exciting as Indonesia’s rapidly emerging market, making investments in neighbouring markets less promising for Indonesian banks in terms of profitability. However, profit and growth are not the only considerations for expanding globally. National pride, international political leverage and diversifying risks could justify foreign expansion.

To prominent Indonesian businessman John Riady, quoted in The Guardian newspaper last November, Indonesia is the biggest invisible thing on earth. Despite the country’s huge potential, many Indonesian businesses are domestically focused. For global recognition, the regulation changes in 2016 could pave the way for foreign investors to partner with Indonesia’s SOEs, both domestically and internationally. In Indonesia, partnerships like this will leverage the SOE’s dominance of local markets.

Despite the promising opportunities, SOEs are under constant scrutiny by law enforcement and anticorruption agencies in Indonesia. During the Yudhoyono administration, two of the largest state-owned construction companies, WIKA and Adhi Karya, were implicated in corruption scandals. The scandal incriminated high-profile politicians, the then Minister of Youth and Sport and the former chairman of the Democratic Party.

In the oil and gas sector, Pertamina was reported to be colluding with an oil and gas cartel, causing state losses of up to US$18.5 billion in 2012-2014 according to an independent auditor. This finding has been reported to the country’s Corruption Eradication Commission and remains under investigation. It is therefore crucial to identify potential risks prior to establishing business ties with an Indonesian SOE. Due diligence and understanding possible political and reputational issues might mitigate future risks.

This article was first published by Asian-mena Counsel, magazine for the In-House Community (


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