JAKARTA -- The Indonesian government plans to inject huge amounts of cash into state-owned enterprises in hopes that strengthening their financial foundations will help accelerate infrastructure development.
Jakarta is looking to contribute, through a series of rights issues, 48 trillion rupiah ($3.83 billion) to 35 companies chosen from a broad range of industries.
The Ministry of State Enterprises has signed off on the capital increase plans, and they are now being debated in parliament as part of discussions on the 2015 supplementary budget. The plans are expected to be approved as soon as early next month.
Sharing the wealth
Under President Joko Widodo, the government aims to fuel economic growth by constructing power stations, ports, railroads and other infrastructure. Thanks to low crude oil prices, government spending on fuel subsidies is expected to drop sharply this year. The Widodo administration is looking to boost infrastructure-related expenditures by tapping into this windfall.
The recipients include Aneka Tambang, a major nonferrous metals company, Krakatau Steel and construction company Adhi Karya.
Aneka Tambang plans to build a refinery for alumina, a raw material for ceramics and other materials, in Kalimantan. Krakatau Steel plans to use the cash for modernizing plant facilities and other purposes.
Bank Mandiri, Indonesia's largest bank and key supplier of funds to a range of industries, is also expected to receive a capital injection. The bank will likely use the proceeds to improve its capital adequacy ratio and make capital investment.
A rights issue gives existing shareholders the right to purchase the new shares at a discount to the current share price. It enables the issuer to raise funds without increasing borrowing, thus avoiding interest payments.
Bank Mandiri, for example, plans to raise 9.3 trillion rupiah. The government, which holds a 60% stake, will purchase 5.6 trillion rupiah in shares, and institutional investors and other existing shareholders will cover the rest.
More money, more scrutiny
There were 119 state-owned enterprises in Indonesia as of the end of 2014. Their combined sales of 1,900 trillion rupiah made up nearly 20% of the country's gross domestic product for the year. However, their aggregate net profit came to just 154 trillion rupiah, as they generally suffer from low profitability.
Only a small proportion of the enterprises, such as the 20 listed companies, regularly pay annual dividends. Some critics argue that the government should focus on consolidating state-owned enterprises through mergers and acquisitions before increasing their capital.
Once the capital increases are completed, the recipients will likely come under increased scrutiny over their ability to manage projects and boost profitability.
Corporate governance is another issue at many state-owned enterprises. Widodo has embarked on the efforts to address the issue by, for example, drastically overhauling some of the management teams.