Indonesian State-owned Enterprises: The Challenge of Reform

Summary

The Indonesian Government has been struggling to find ways to manage its more than one hundred state-owned enterprises (SOEs). Only in his last administration did the New Order long-time leader Soeharto realize that there must be a concerted strategy to bring out the potential of the SOEs, long known only for being inefficient, mismanaged and cash cows for political groups and individuals. Democratization that came with the fall of Soeharto has brought pressure for reform of Indonesian SOEs. At the same time, however, democratization has also made the reform process difficult as more groups of stakeholders have a say in the process.

Neoliberal doctrine perceives ownership of companies by the state as suboptimal, if not destructive to the companies' value. Therefore, privatization of SOEs is seen not only as a means of generating revenue for the state budget — as that seems to be the primary aim of the Indonesian Government — but also as putting SOEs under market discipline as the driver for efficiency. In many of the privatization processes in Indonesia, the role of foreign parties has been quite significant in acquiring SOEs' shares divested by the Indonesian Government. The main reason is that after the 1997–98 financial crisis, not many big Indonesian businesses — especially the conglomerates most severely hit by the crisis — had the capital to acquire the divested shares.

However, economic nationalism seems to be the dominant theme in Indonesia's response to globalization. Article 33 of Indonesia's 1945 Constitution states that “Sectors of production that are important for the country and affect the life of the people shall be controlled by the State” (sub-para. 2) and “The land, the waters and the natural riches contained therein shall be controlled by the State and exploited to the greatest benefit of the people” (sub-para. 3). The above article serves as the main basis for economic nationalists to argue that foreign ownership over certain sectors — such as telecommunication, 1 most obviously shown by the Indosat case — should be limited.