APSN Banner

Political picks cloud Indonesian SOE minister's restructuring bid

Nikkei Asia - June 16, 2021

Erwida Maulia, Jakarta – Jobs for a rock guitarist and a prominent cleric as commissioners at Indonesia's state-owned enterprises are among a clutch of appointments raising questions over SOE Minister Erick Thohir's restructuring push.

State-owned Telekomunikasi Indonesia, or Telkom, the country's largest telecommunications operator, recently rekindled debates over what many see as political appointments after it named Abdi Negara Nurdin – a guitarist with local rock band Slank and an ally of President Joko Widodo – into its board of commissioners.

Abdee Slank, as he is better known in Indonesia, has been an avid supporter of Widodo and is credited with mobilizing fellow musicians to garner wider public support for the leader – including through two huge live concerts in Jakarta ahead of presidential elections in 2014 and 2019.

Earlier in March, Said Aqil Siroj, chairman of the country's largest Muslim organization, Nahdlatul Ulama, was appointed president commissioner of state railway operator Kereta Api Indonesia. NU has played major roles in mobilizing Muslim voters' support for Widodo in the face of anti-Islamic smears launched by his opponents – Widodo's current vice president, Ma'ruf Amin, is a senior NU cleric.

Despite the lack of relevant background, Thohir has defended both appointments. He said Abdee's long experience in the entertainment industry will help Telkom and its mobile subsidiary, Telkomsel, develop local content to support their digital business expansion. Siroj's familiarity with social issues, meanwhile, will help KAI deal with land acquisition problems.

"Telkomsel and Telkom must not become a sunset industry, trapped with voice and text message businesses," Thohir told a media briefing on June 2. "And we must understand that in the railway industry, land acquisitions [often] concern social issues."

He added: "So although the appointments of the commissioners are causing a controversy, trust that we'll do our best. Don't make a fuss. We're committed to... transforming SOEs."

Thohir last week inaugurated the BUMN Leadership and Management Institute, which runs management and leadership classes among other events for SOE directors and commissioners. BUMN is the Indonesian acronym for SOEs.

Abdee and Siroj are just two of many names critics see as political appointments to SOE boards of commissioners. In a report released on Wednesday, the Indonesian chapter of Transparency International said that just 18% of 482 commissioners in 106 SOEs for which public information is accessible came from professional backgrounds. The remaining 82% were chosen based on "political considerations" and were drawn from the ranks of bureaucrats, politicians or their political allies and retired government or military officials.

"Commissioners are the easiest instrument for those in power [on which] to build, expand and maintain political support," Transparency International Indonesia Secretary-General Danang Widoyoko told an online briefing. "[Non-professional] interests are large, making meritocracy-based selections of commissioners and directors at SOEs hard to do."

While headline grabbing, appointments of political affiliates and those with connections to power are not new among Indonesian SOEs and predate Widodo's presidency. But they highlight the delicate balance that Thohir, a go-getter former majority owner of Italian football club Inter Milan, has to tread between political interests around him and his ambition to turn Indonesian SOEs into global players.

Widodo recruited Thohir to head his 2019 reelection campaign after he successfully led the organizing committee for the Asian Games in Jakarta the previous year. In October 2019, Thohir was sworn in along with other members of Widodo's new Cabinet.

Thohir's appointments of respected technocrats and professionals into SOE boards in the first several months of his job won applause. But then political appointments began to trickle in.

Toto Pranoto, associate partner at the University of Indonesia's BUMN Research Group, said that commissioner jobs are in particular more vulnerable to political appointments because unlike candidates for boards of directors, those nominated for the positions do not have to undergo competency screening at the SOE ministry's assessment centers.

"As long as they can show [good] performance, I think it's OK even though they might represent political affiliations," Pranoto said. "The public should be able to judge after a while. If they don't perform, then they should be sacked."

Xavier Jean, senior director for corporate ratings at S&P Global Ratings, said that experience and understanding of risks and opportunities facing their companies by management and boards are "a relevant credit factor."

"Today, the most pressing issue facing a number of Indonesian SOEs – large and small – is leverage, liquidity management and dealing with the cash flow shortage from COVID," Jean told Nikkei Asia in an email interview. "So for those, management and boards' credibility and track record in dealing with capital structure decisions and solvency will be of paramount importance."

Thohir in a hearing with lawmakers last week said consolidated SOE revenue dropped 25% to 1,200 trillion rupiah ($84 billion) last year, while net profit is estimated to have fallen 77% to 28 trillion rupiah due to impacts from the COVID-19 pandemic.

The income drops add to SOEs' growing debt woes, especially among those heavily involved in Widodo's ambitious infrastructure push, such as the state builders and utility company Perusahaan Listrik Negara. Indonesia's cumulative SOE external debt as of March reached $59.65 billion, nearly double the figure five years ago, according to data from Bank Indonesia.

"After a decade of debt-funded capital spending, capital structures in the SOE[s] have weakened considerably across sectors," Jean said. "We are also observing diminishing returns for investment."

He added one incremental dollar of capital spending among SOEs is now providing "less and less earnings," partially because many of the projects are taking place in less developed regions where populations are smaller and "project economics are less established."

The political appointments aside, Pranoto commended Thohir's program of redistributing top talent concentrated in the blue-chip SOEs – such as the major banks and Telkom – to their smaller counterparts, which have been having human resources problems. "The talent coaching process at the SOEs is becoming more massive," Pranoto noted.

He also views positively Thohir's consolidation moves in which he takes aim at the bloated structure of many SOEs, regroups some and seeks to shut chronically ill-performing companies for good. Thohir in March said he was working on reducing the number of SOEs from 142 to 41, and had earlier said he wanted to trim over 700 of their subsidiaries and sub-subsidiaries.

Oil and gas giant Pertamina is among those targeted. It had 127 subsidiaries before, but President Director Nicke Widyawati said last month the company has consolidated into six subholdings and 12 subsidiaries – though it was not immediately clear how the reduction was carried out.

Thohir has also overseen the consolidation of state pharmaceutical companies under vaccine maker Bio Farma, the merger of three lenders compliant with Shariah, or Islamic law, into Bank Syariah Indonesia, and the establishment of joint venture Indonesia Battery Corp. The actions are somewhat of a follow-up to his predecessor's policy, which saw the establishment of the state mining holding and an oil and gas holding.

His next plans include consolidation of geothermal energy companies and micro loan lenders as well as initial public offerings for some SOE subsidiaries. Among those reportedly preparing to go public this year are Telkom's tower subsidiary, Dayamitra Telekomunikasi, or Mitratel, and Pertamina Geothermal Energy and Pertamina International Shipping.

While the IPO plans are drawing much interest, the consolidation moves have been met with caution.

Jean said that on paper such consolidation could create more efficient operations and commercial and funding synergies, but the amalgamated SOEs so far still operate independently, with a large share of their strategic, funding and capital allocation decisions "made by each entity separately and less as a group."

"What's missing from the broader SOE amalgamation policy of the administration is clarity on the decision making, especially the time-sensitive ones," he added.

"The consolidation of SOEs also increases their complexity and can lead to reduced (or weaker) oversight by the government," he said. "The multiplication of corporate layers at large SOEs is a potential credit risk."

– Additional reporting by Ismi Damayanti.

Source: https://asia.nikkei.com/Business/Companies/Political-picks-cloud-Indonesian-SOE-minister-s-restructuring-bi