Are State Owned Enterprises successful vehicles for attaining their governments stated objectives?

Abstract

The purpose of this study is to examine whether Indonesian Badan Usaha Milik Negara (BUMN) or State-Owned Enterprises (SOE) are successful vehicles for attaining government socio-economic and financial objectives. The motives for undertaking this study arise from the importance of SOEs in national economic and socio-political roles in developing countries like Indonesia, even after their privatisation. This thesis identifies the implications of policy changes for the Indonesian government’s objectives for SOEs. First, an historical examination of changes in the institutional and economic environment in Indonesia (Chapters 6-8) identifies substantial impacts on the evolution of the structure of SOEs and the government’s objectives for SOEs. The first stage of this analysis reveals that the “see-sawing” of economic policy between centralisation and market orientation led to changes in the structure and objectives of the SOEs. Initially, the state enterprises established during the Indonesianisation period (1945-1958) had multiple socio-political objectives with little concern for economic of financial objectives. The reforms during the nationalisation period (1958-1966) included the restructuring of previously nationalised companies as Perusahaan Negara, and the introduction of profit objectives for some Perusahaan Negara. In the corporatisation period (1966 – present), the Perusahaan Negara were reformed and divided into three types of entities: Persero, Perum and Perjan. The Persero are incorporated entities that have both commercial and social welfare objectives. The Perum are incorporated entities that are not commercial but have profit objectives and social welfare objectives. The Perjan are not incorporated (remaining as state agencies) and have only social welfare objectives. Perusahaan Negara poor performance and fiscal problem in the early 1980s encouraged the reform of Perusahaan Negara structure as Badan Usaha Milik Negara (BUMN/SOE). The introduction of partial-privatisation policy in 1991 encouraged profit and efficiency objectives for SOEs that could potentially be privatised. The implementation of fast track privatisation in 2002 caused significant changes in the SOEs structure and objectives. The government encouraged all SOEs to implement corporatisation principles in which emphasise financial objectives such as profit and efficiency. The government eliminated the Perjan structure, which it considered to have become a barrier to the implementation of full corporatisation and fast track privatisation. In practice, social welfare and non-economic remained a major Badan Usaha Milik Negara (BUMN/SOE) objectives. From the late 1990s, external pressure from international financial institutions was a significant factor in the government’s efforts to privatise the SOEs. In the second part of the historical analysis in this thesis, privatisation is shown to be a major influence on policies and SOEs’ objectives. Privatisation represents a fundamental change in the government-stated objectives and policies for SOEs, and included the introduction of an ‘open market’ policy, development of domestic capital market activities, and full implementation of corporatisation principles. However, privatisation in Indonesia is constrained by the 1945 Constitution of Indonesia regarding the control policy, which leads to different categories of SOEs with respect to privatisation and the importance of economic or financial objectives. There are now three categories of SOEs: those that have been identified as not available for privatisation, those that can be privatised but are still fully owned by the government, and those that have been privatised. As a consequence of the constitutional barrier and political interests, most privatisations of SOEs were partial. The continuation of government control over these partially privatised SOEs increased the potential for conflict between the greater emphasis on financial objectives arising from private investors and the government’s continuing socio-political objectives for these SOEs. This is emphasised in analysis of the most intensive period of privatisation (2002-2004). An examination of SOEs objectives in practices shows that privatisation policy makes some differences in regards to the government objectives and treatment for the SOEs. In addition to three different categories of SOEs, privatisation policy encourages the importance of profit and efficiency objectives which apply to all SOEs. In contrast, the content analysis (Chapters 8-9) reveals that the government inconsistency in implementing the new profit and efficiency policies and caused the absence of profit and efficiency objectives as part of the government objectives for numbers of SOE. The potential conflicting objectives arises between the government and SOEs when the SOEs have to deal with the pressure and changes from their markets. Building on the conceptually conflicting objectives identified in the historical analysis, the thesis then empirically assesses the extent of apparent conflicts within government objectives, and between the government’s and SOEs objectives, and the implication on the performance of SOEs with respect to government objectives. First, the extent of apparent conflicts emerges as the government introduces profit and efficiency objectives, while in practice; the government has never made any changes in the government-stated objectives for each individual SOE. Second, the company constitution and management objectives are more likely to make changes of the objectives in order to accommodate the changes in their market. Next, identifies the objectives for which objective (proxy) performance measures are available: these are financial performance and financial performance that represent the social welfare. Using these measures, the different types of performance of SOE’s are regressed against indicators of government-stated objectives for SOEs, whether the objectives make a different or affect the SOEs performance. Examination of the relations between the government-stated objectives and SOEs financial performance shows some weak negative relations between the government-stated objectives and SOEs financial performance. The reliance of many Indonesian SOEs on non-core business income (such as subsidies and asset disposals) and external financial support (such as soft loans from government-controlled lenders) indicates the inconsistency between the SOEs financial objectives and achieving the government’s social welfare and non-economic objectives.