In Indonesia, State-Owned Enterprise Reforms are Supporting Infrastructure Development Progress

Indonesia is an archipelagic nation that spans in length 1.5 times the distance from London to Istanbul. Home to more than 17,500 islands, it vastly needs infrastructure to connect the people, transport goods and services, and provide inclusive development. According to the World Bank (WB), however, the country’s infrastructure gap (as measured by its ranking on the WB’s Logistics Performance Index) is one of the highest in Southeast Asia. But that may be changing, thanks to President Joko Widodo’s massive infrastructure development program over the past eight years (he was re-elected to a second five-year term in 2019). “Pak Jokowi”, as he is known, is widely credited with spearheading large infrastructure projects – from seaports and toll roads to clean water supply systems and hospitals.

Infrastructure has been the top priority of Jokowi’s administration. Projects have varied from new construction to renovation and expansion of existing facilities. The government has employed innovative financing schemes, ranging from the issuance of sovereign bonds to the pooling of capital in a newly created sovereign wealth fund. Typically, particularly in the construction phase, these will involve state-owned enterprise (SOE) corporations (which aim both to make a profit, as any business, and benefit public welfare, and, in the Indonesian context, are distinct from public-purpose entities, also state owned, that provide public goods and services at low cost but may not generate a profit). These companies are expected to carry out the national social objectives of optimizing the people’s welfare rather than maximizing profit. They build at a lower cost than private businesses. In return, these corporations receive funding from the state, entailing frequent injections of capital to replenish their resources, amounting to billions of dollars a year – a US$4.8 billion allocation is expected in 2023. While the role of SOE corporations is essential for infrastructure development, the cycle of loss and recapitalization is unsustainable.

After decades of accumulated losses and the proliferation of new SOEs, recent reforms that have been implemented are undoubtedly historic. There has been significant consolidation of the sector – there are only 41 SOEs left, down from 142 in 2020. Further restructuring efforts are needed to ensure that these companies are on a stronger financial footing. In addition, managements need to be driven by commercial sense in making decisions. It is only when companies are profitable that they can then pursue social objectives. If they are not financially healthy, how can SOEs make investments in accordance with government policy without the moral hazard of expecting a capital injection if they should need it? If these entities operate at a loss for the public benefit but then keep asking the government to step in when they need support or a bailout, the government might as well be directly involved in projects, which would be simpler and more efficient.

Spending the people’s money: Construction of the Jakarta-Bandung High Speed Rail (graphic rendering at right), due to be completed at the end of 2022 (Credit: left, Akhmad Dody Firmansyah / Shutterstock.com; right, KCIC)

Corporations are involved in projects such as infrastructure so that they can multiply the funding government initially provided and enrich public welfare. When government corporations lose money and call for more capital from the state budget, particularly tax revenue – the people’s money, they deplete reserves and thus place restraints on the ability of society to meet its needs. This defeats the objective of a government’s involvement in commerce.

In just two years, the Ministry of SOEs (Kementerian Badan Usaha Milik Negara) has implemented various reforms, such as initiating joint ventures with foreign enterprises, establishing holding companies by sectors, launching initial public offerings, and restructuring 19 companies and liquidating 14. These are remarkable developments achieved in the 50 years since the country’s first SOE corporation was created. Other initiatives include the Ministry of Finance’s use of dormant state assets and its guarantee of infrastructure projects. Government-owned land, buildings and facilities that were previously abandoned are used by or leased to SOE corporations to facilitate their project development work. The Ministry of Finance, through the involvement of its special-purpose vehicle or SOE corporation, PT Penjaminan Infrastruktur Indonesia (Persero), mitigates the political and financial risks of projects and thus gives comfort to private businesses that join as investors.

These reforms benefit the people both directly and indirectly. In terms of direct returns, such reforms speed up the development of infrastructure projects that are needed to connect businesses, particularly small and medium-sized enterprises, strengthen the supply chain, and increase the quality of life. Some examples include Bio Farma, which manufactures a Covid-19 vaccine; the Temef Dam in East Nusa Tenggara, a region under water stress; and the Jakarta-Bandung high-speed rail, which is expected to be completed by the end of this year and would become the first such line in Southeast Asia. These are all strategically important projects carried out under the auspices of SOE corporations.

As for indirect benefits, the government aims to expose SOE corporations and their subsidiaries to market competition, improve their financial performance, and remake them as global players. If they earn good income, they would be able to pay back the state in the form of dividends and in turn benefit the people through various government programs and subsidies such as for electricity, which would be worth some US$30.5 billion to low income families and small enterprises. The ultimate goals: to create value for millions of Indonesians and drive unprecedented economic growth across the country.

Within the central government, it is the Ministry of SOEs and the Finance Ministry that are driving the reforms of the state-owned companies, which are supporting the country’s infrastructure development efforts. Local governments are also playing crucial roles as they are on the ground and know what type of projects communities need.

Infrastructure development, whether of large-scale projects such as airports or basic necessities such as bridges of only a few meters in length, remains a seemingly never-ending priority for such a large nation. The government in Jakarta has continuously sought to secure funding from domestic and foreign investors, such as China, the United Arab Emirates, and Saudi Arabia through its SOEs, which then forge partnerships to manage projects.

The infrastructure drive which already includes several large-scale contracts will continue well beyond 2024, when Jokowi’s current term ends. The decision to build a US$35 billion new capital, Nusantara, in the jungle of East Kalimantan will certainly provide a pipeline of development projects over the next two decades. All of this will constitute a major legacy of Jokowi’s presidency, reminiscent of but distinct from the achievements of Indonesia’s first two presidents – Sukarno, who built monumental structures such as the Gelora Bung Karno Stadium and the National Monument in Merdeka Square in Central Jakarta, and Suharto, whose main priority was economic growth.

The question is whether the crucial program of SOE reforms will continue after Jokowi leaves office. If state-owned enterprises are not kept on the path of greater efficiency, corporate responsibility, and competitiveness, this could hamper the progress of Indonesia’s crucial long-term infrastructure development plans.