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Indonesia's growth strategy: Inject cash into state companies

JAKARTA -- The Indonesian government plans to inject huge amounts of cash into state-owned enterprises in the hope that strengthening their financial foundations will help to accelerate infrastructure development.

Wijaya Karya is one of the contractors involved in building Jakarta's Mass Rapid Transit, the city's first subway system.

     Jakarta is looking to contribute, through a series of rights issues, 48 trillion rupiah ($3.78 billion) to 35 companies chosen from a broad range of industries.

     The Ministry of State Owned 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 sometime in February.

Sharing the wealth

Under President Joko Widodo, the government aims to stoke economic growth by constructing power stations, ports, railroads and other infrastructure. Buoyed by low crude oil prices, the government ended gasoline subsidies in January. The Widodo administration is looking to use this windfall to boost infrastructure-related expenditures.

     The recipients include Aneka Tambang, a major mining and 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 plants.

     Bank Mandiri, Indonesia's largest bank and a 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 beef up loans to infrastructure-related companies.

     A rights issue gives existing shareholders the right to purchase 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.

     Among the biggest beneficiaries of the capital injection will be the construction industry. Indonesia's two leading state-owned construction companies, Wijaya Karya and Adhi Karya, said they expect the value of new contracts to surge by more than 70% this year to a combined 45.8 trillion rupiah.

     Wijaya Karya projects its new orders to increase 74% to 30.6 trillion rupiah, up from 17.6 trillion rupiah in 2014. Government contracts are expected to make up 52% of the total, compared with 27% last year. Adhi Karya is similarly confident. It foresees new contracts growing by 65% to 15.2 trillion rupiah.

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 accounts for 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.

     There are also lingering concerns about the construction companies' ability to move projects forward on schedule. Jakarta officials recently ordered Adhi Karya to remove steel pillars that were built for a monorail system in the city; the project began in 2004 but was delayed.

    The brighter business prospects have sent the two contractors' shares higher. Whether they maintain that momentum depends upon Widodo and his government pushing ahead with reforms.

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