Jokowi’s Reliance on State-Owned Enterprises Could Prove Risky

By Jacob Thomases —

People loiter on a rail bridge over the Musi River, in Tebing Tinggi, South Sumatra, Indonesia. Indonesia faces a significant shortfall in its infrastructure. Source: Erwinabdulrahman's flickr photostream, used under a creative commons license.

People loiter on a rail bridge over the Musi River, in Tebing Tinggi, South Sumatra, Indonesia. Indonesia faces a significant shortfall in its infrastructure. Source: Erwinabdulrahman’s flickr photostream, used under a creative commons license.

The revised 2015 budget passed by Indonesia’s House of Representatives on February 14 reflects President Joko “Jokowi” Widodo’s efforts to ramp up investment in infrastructure. It devotes $22 billion to planned infrastructure projects, a 53 percent year-on-year increase. An additional $3 billion will go to a plethora of state-owned enterprises (SOEs) that focus on electricity, infrastructure, construction, and mining. Major SOEs will also have the option to reinvest their dividends into future infrastructure projects rather than paying them out to the government.

Large SOEs have also been awarded new government contracts. Projects that are being or will be carried out by SOEs include a ferronickel smelter in East Halmahera, a fertilizer plant in Papua, an expansion of Sukarno-Hatta airport in Jakarta, and a $65 billion plan to boost the capacity of Indonesia’s unreliable electric grid. State-owned conglomerate Wijaya Karya expects its government contracts to nearly double in 2015.

The fact that SOEs will be leading Jokowi’s infrastructure drive, rather than the private sector, is a worrying sign. Indonesian companies have long been plagued by corruption, inefficiency, and political interference.

Jokowi, like many in his party, has embraced nationalist economic policies since the early months of his presidency. He has disappointed many international investors by favoring policies aimed at import substitution, domestic production requirements for foreign goods sold locally, and food self-sufficiency. But this should come as no surprise. As a populist, Jokowi openly suggested during his presidential campaign that SOEs would get first crack at government contracts. He also expressed skepticism toward the ASEAN Economic Community, scheduled to launch at the end of the year, which he said would expose Indonesia’s SOEs to regional competition.

But Jokowi may have chosen to work with SOEs because of a lack of alternatives. The private sector, both foreign and domestic, is not ready to invest in all of the projects Indonesia needs, mainly due to concerns about transparency and regulation. SOEs, meanwhile, do not need to jump through as many regulatory hoops or conduct any profitability studies, and can put shovels in the ground immediately.

Whatever the driving forces behind Jokowi’s preferential treatment of SOEs, the most important thing is whether his government can deliver on Indonesia’s badly needed infrastructure upgrades. If Jokowi grants more authority to SOEs without reining in their excesses, he will risk wasting more taxpayer money and receiving mediocre results. Chances are Jokowi will need to court foreign capital more aggressively, since reforms of SOEs with entrenched interests cannot be done overnight.

That’s why the Jokowi administration has taken major steps to improve the investment climate. The Finance Ministry has removed property taxes for companies in the exploration stage of oil and gas projects, and income taxes for companies investing at least $76 million in sectors that are prioritized by the government. Licensing, long a red-tape quagmire in Indonesia, has been streamlined with the introduction of a one-stop service that brings together 22 permit-issuing agencies in one location, shrinking the waiting period from years to weeks. Businesses have also been encouraged to partner with the government through public-private partnerships on power plants and deep-sea ports.

At the same time, State-Owned Enterprises Minister Rini Soemarno has been proactive in restructuring some of the 119 companies under her control. She has replaced the entire board of directors at state-owned airline Garuda Indonesia and oil company Pertamina, and has declared her intention to begin benchmarking some SOEs against their competitors in the private sector. These are positive steps, but will by no means transform Indonesia’s SOEs into models of good governance within a few years.

Indonesia desperately needs an infrastructure overhaul. Poor transportation networks, ports, and storage facilities have kept logistics costs high and economic growth about 3 percent lower than economists say it could be. By the government’s own admission, this overhaul will likely cost almost $500 billion over five years, far more than Jakarta can pay on its own. Jokowi will need to use a combination of financing measures and look beyond SOEs if he wants to fully realize Indonesia’s economic potential.

Mr. Jacob Thomases is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS.


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