JAKARTA -- Dahlan Iskan, Indonesia's state-owned enterprise minister, was livid. It was 2014, and the construction of gas infrastructure had been plagued by delays, due to what he saw as "unhealthy competition" between two state companies: Pertamina Gas (Pertagas) and Perusahaan Gas Negara.
Iskan, who would leave office that year, issued a letter to oil and gas giant Pertamina, threatening to merge its unit Pertagas with the distributor PGN if they did not sort themselves out.
"The two companies have quarreled," Iskan said at the time. "And the victim is the country."
Indonesia has a long-standing issue with state enterprises cannibalizing each other in the same industry. This has led to a vicious cycle in which margins are squeezed and the government intervenes to keep the companies afloat, while vested interests stymie reform. Now, though, President Joko Widodo is attempting to turn state enterprises into efficient "agents of development" by bringing competing businesses under single holding companies.
Critics, however, argue that Widodo's reluctance to do anything that would lead to job cuts could hamper his efforts to create the efficient entities he envisions. As one skeptic conceded, laying off workers "is very sensitive, especially going into elections."
Iskan, back in 2014, was upset that the conflict between Pertagas and PGN had held up a gas pipeline project between Semarang, capital of the province of Central Java, and the port city of Cirebon in West Java. To this day, construction on the 255 km pipeline, tendered all the way back in 2006, has barely begun.
Widodo thinks his holding company system will help to avoid such predicaments. His government intends to unify 16 industries this way. The process has already been completed in the energy, mining and fertilizer industries. Another eight sectors are due for the same treatment by the end of the year.
The government hopes the umbrella companies will act as coordinators for the subsidiaries, enhancing their performance by streamlining strategies, reducing overlap, finding synergies and creating economies of scale. "Currently, we have to negotiate with five different companies for projects," said a construction industry insider, one of the sectors up for "holding-ization" or, as Indonesians call it, "holdingisasi."
"So it's good if we only have to negotiate with one company from now on."
Outright mergers between state enterprises would have been more effective in eliminating overlap and increasing efficiency. But the government was mindful that job losses would likely be the result -- political suicide in a country with a large working-age population headed for presidential and general elections in April. Strict labor rights protections are another obstacle.
The holding company method is gentler and politically safer, with less pressure on the units to take drastic measures.
The Widodo administration expects to save itself some money. "Initially, the government increased state capital injections into SOEs so they can have the financial capacity to implement the government programs," like building infrastructure across the country's 17,000 islands and developing downstream resource businesses, said Imaduddin Abdullah, a researcher at the Institute for Development of Economics and Finance in Jakarta.
The cash-strapped government, also restricted by a law limiting the budget deficit to 3% of gross domestic product, went the holding company route to "reduce the fiscal burden," Abdullah said.
In a way, Iskan's threat came true last April, when Pertamina became a holding company and took over the government's shares in PGN. The latter said potential operating synergies could contribute an additional five-year average of $65 million in earnings before interest, taxes, depreciation and amortization.
The new system also reduces the government's responsibility for directly overseeing all state enterprises, offering further time and cost savings. The hope is that less political influence will lead to more professional management as well.
Jakarta has always stressed that this endeavor is about more than reducing costs and improving efficiency. "The establishment of the holding companies should not be merely seen as a strategy to cut state capital injections," Widodo said back in 2016. "It is hoped that SOEs can become world-class companies."
Today, Pertamina is the only Indonesian state enterprise on the Fortune Global 500 list. The government hopes the reform will lift more of its companies into the ranks of the world's largest businesses. It wants national champions with stronger balance sheets, to allow for the higher leverage needed to take on major projects and grow through acquisitions.
Abdullah said the clearest benefits of holdingisasi have come in the mining industry.
In 2017, state refiner Indonesia Asahan Aluminium, known as Inalum, was turned into a holding company. The government transferred its 65% stakes in three listed companies -- nonferrous metal producer Aneka Tambang, coal company Tambang Batubara Bukit Asam and tin miner Timah -- to the new parent.
This boosted Inalum's total assets to $5.7 billion at the parent company level in 2017, up from $1.6 billion the previous year.
Indonesia's plan to bring state-run banks under a holding company would create Southeast Asia's fourth-largest banking group by assets. (Photo by Shinya Sawai)
Then, last year the holding company acquired U.S. miner Freeport-McMoRan's local unit, Freeport Indonesia, for $3.85 billion. The deal included Anglo-Australian giant Rio Tinto's participating interest in Freeport Indonesia's operations at the Grasberg mine in the province of Papua, one of the world's largest gold and copper pits.
Without the increased assets, "it was unlikely that Inalum could secure the huge funding to purchase the share of Freeport Indonesia," Abdullah said. Now, the company can at least start thinking about competing with the likes of Glencore and BHP.
State-owned enterprises have been a fact of Indonesian life since the early days of independence, when the government nationalized over 700 Dutch companies. Under Suharto, who ran the country from 1967 to 1998, "the number of SOEs grew even further, as there was no coordinating or supervising body and each state institution could create new SOEs and/or spin off subsidiaries deemed necessary to benefit the people," explained Siwage Dharma Negara, senior fellow at the ISEAS - Yusof Ishak Institute in Singapore.
Though there was a push for reform and even privatization in the late 1990s, as the country struggled to recover from the Asian currency crisis, there was persistent "opposition from some 'nationalist' groups that prefer to maintain the status quo," Negara said. The political volatility that accompanied the transition to democracy did not help the cause.
Twenty years on, Indonesia is still home to 114 companies that are majority-owned by the government, as well as a further 28 in which the government holds minority stakes. Including subsidiaries -- and the subsidiaries of subsidiaries -- the estimated number of state-related companies exceeds 800.
Listed state-owned companies make up 26% of the Indonesia Stock Exchange's valuation, a sign of their continued influence in the country's economy.
Some question the wisdom of trying to make some of the enterprises even more powerful. Skeptics argue this would only distort the domestic market further; even now, private construction companies often complain that government-run rivals are given preferential treatment over state projects.
In the banking sector -- set for the same holding company treatment in May, according to State-Owned Enterprises Minister Rini Soemarno -- many are reacting with a nonchalance that would seem to bode ill for the government. They question whether Jakarta can really create an internationally competitive financial institution as the country braces for the impact of the ASEAN Banking Integration Framework, which will allow Southeast Asian banks greater access to other regional markets.
The plan is for state-owned financial services company Danareksa to become the parent of Bank Mandiri, Bank Rakyat Indonesia, Bank Negara Indonesia and Bank Tabungan Negara, among others. While the four banks' combined assets amount to $249.2 billion -- fourth-largest in Southeast Asia -- one senior financier at an international bank in Jakarta said "we are not worrying that much" about competition from the new state-owned giant.
The financier added that there will still be a "huge gap" between Danareksa and its regional rivals even after the move, and said Indonesia's state banks have been spoiled, with most of their profits coming from net interest income.
"They make easy money," the financier said. "They don't have to reinvent the business to generate non-funded income. Investment banking, global markets -- they are not being considered even as profit centers for the banks. ... In terms of profit generation, they are still OK given the size of [the Indonesian market], but of course they need to be made aware that once it is open, they may lose the market share."
Another senior banker said that for state banks to be competitive after holdingisasi, they will need to restructure to reduce overlap and costs, including layoffs. "Only then would we feel threatened by them," he said.
There are huge question marks over whether Jakarta can do what it takes.
"One of the missions of SOEs is to provide employment, and when the stakeholders see the government laying off employees, they will be under criticism," said Roy Sembel, a professor at IPMI International Business School in Jakarta. "You are supposed to create employment but [if] your program reduces employees, politically it will come under attack."
Sembel did say there is a chance Widodo will go further if he wins the upcoming election, since Indonesian leaders can only serve two terms. "He can be braver in taking action that is useful for the country in the long run, but may be unpopular in the eyes of the population," he said. "That is a possibility."
