Economic Undertakings

Indonesian SOE Reforms: How Chinese Are They? – Notice

Luther lie

Jakarta ●
Fri, May 21, 2021

State-owned enterprises, reform, China, system, restructuring, opening on the stock market

Indonesian state-owned enterprises (SOEs), unlike Chinese state-owned enterprises, rarely make global headlines. But over the past two years, Indonesian state-owned enterprise reforms have been groundbreaking and deserve praise.

On April 30, the Indonesian Ministry of State-Owned Enterprises announced that 14 SOEs and their subsidiaries would go public. The aim is to expose these public enterprises and subsidiaries to market competition to force them to be more efficient and improve their financial performance. This publication comes less than a year after the ambitious restructuring of 142 public enterprises in 107. The remaining 57 public enterprises could be restructured in the coming years.

While this is not the first time that Indonesian state-owned enterprises have gone public, such a large number of actions by government-led companies are unprecedented in Indonesia.

What is Indonesia’s approach to SOE reform? Why did these reforms manifest themselves recently when the first Indonesian public enterprises were established almost 50 years ago?

At a glance, it seems that SOE reforms are simply following the logic of making money. But if we analyze the trend of reforms of state-owned enterprises in the country, we will find that they are modeled on China’s policy of gay zhi (transform the system).

Gay zhi is the second round of SOE reforms in China, which began after Deng Xiao Ping’s tour of southern China in 1992. The system was designed to solve the first set of SOE reforms that failed in China due to rampant corruption among managers of SOEs and growing losses. The increased autonomy of SOE managers and the lack of government oversight created moral hazard for these managers, who would personally benefit at the expense of SOEs.

In 1997, the 15e The National Congress of China has adopted a policy of massive privatization under the slogan “seize the big, let go of the small”. He has seen debt restructuring, public offerings and liquidations of state-owned enterprises; the creation of state holding companies; and joint ventures involving SOEs and foreign companies, among other initiatives.

While the economic output of Indonesian SOEs is significantly lower than that of Chinese SOEs, the scale of restructured Indonesian SOEs is as large, in relative terms, as that of Chinese SOEs. Indonesia’s approach to SOE reform is essentially similar to China’s gay zhi.

Like China, Indonesia has gradually reformed its state-owned enterprises to cope with the growing losses of state-owned enterprises, whether due to corruption or poor business judgment. Indonesia has also seen the establishment of holding companies of state-owned enterprises (e.g. Indonesia Financial Group in the financial services sector and Bio Farma in the pharmaceutical industry) and joint ventures between state-owned enterprises and foreign companies for the infrastructure development (eg PT Kereta Cepat Indonesia China). In addition to the public offerings, the Ministry of Public Enterprises announced the restructuring of the debt of 19 state-owned enterprises and the liquidation of 14 state-owned enterprises.

On April 2, Indonesian Minister of State-Owned Enterprises Erick Thohir visited Vice Chairman of the Commission for Supervision and Administration of Chinese State-owned Assets, Ren Hong Bin, to strengthen collaboration between enterprises Indonesian and Chinese public authorities. This visit will result in a stronger convergence towards the Chinese gay zhi model in Indonesia in the years to come.

Indonesia recently demonstrated its SOE reforms due to the urgency of Joko “Jokowi” Widodo administration’s key program: infrastructure development. Under the Jokowi administration, Indonesian state-owned enterprises undertook large-scale infrastructure projects – from financing (by state-owned banks) to construction and operation.

Indonesian state-owned enterprises have both the business objective of making a profit and a special mission to provide public goods and services for the greater well-being of the people. This special mission means that Indonesian state-owned enterprises develop infrastructure projects, especially in critical sectors, at a lower cost than their private counterparts. The key program is to accelerate infrastructure development, whether or not the project is price competitive – a task that private companies could not afford.

The reform of Indonesian state-owned enterprises is essential to achieve the infrastructure development goals of the Jokowi administration. With uncompetitive prices in projects, Indonesian state-owned enterprises can be haunted by nonperforming loans. This dualistic function of Indonesian SOEs – profit and public service – is also endemic for Chinese SOEs, which designed China’s large-scale infrastructure and economic development. But it is this dualistic function of Chinese state-owned enterprises that has allowed China to emerge as a miracle nation.

The Jokowi administration appears keen to recreate the Chinese miracle – which lifted millions of people out of poverty – to achieve a high growth rate in the Indonesian archipelago. Tracking the commitments of Chinese state-owned enterprises in large-scale infrastructure will also mean tracking reforms of Chinese state-owned enterprises. The “less is more” and “go global” policies are two examples of how Indonesian SOE reforms have become Chinese.

Following a trend similar to gay zhi, the number of Indonesian state-owned enterprises continues to decline. The State Enterprise Ministry announced that SOEs will continue to merge and acquire other enterprises to form SOE holding companies, and weak SOEs will continue to be restructured or liquidated by the SOE. Asset Management, PT Perusahaan Pengelola Aset (Persero).

With a larger pool of assets, Indonesian SOEs aim to “go global” and conquer global markets.

Lately, there has also been a tendency to allow private companies to develop infrastructure, whether through public-private partnerships or direct appointment. This is a promising trend as private capital can fill the funding gap when the state budget is tight. It’s the same promise China made when liberalizing its economy, but China has been criticized for failing to deliver on that promise due to the public sector’s tendency to move forward while the private sector recedes.

Reforms of Indonesian and Chinese state-owned enterprises gay zhi have surprisingly similar models. But since Indonesia and China inherited very different political systems, it is worth observing how the Chinese style gay zhi will materialize in Indonesia.

Will gay zhi provide what Indonesia needs in terms of miraculous economic development? This test will determine how the reforms of Chinese SOEs will be in Indonesia.


The writer is a banking and finance lawyer at Ginting & Reksodiputro in association with Allen & Overy. The opinions expressed are his own.

Leave a Reply

Your email address will not be published.