Indonesia plans its own Temasek

Emerging Markets, May 2010

Indonesia plans to build its own version of Singapore’s Temasek – a vast holding company for all of its state-owned assets.

Representatives of the Ministry of State Owned Enterprises told Emerging Markets on Friday that they hope to reduce dramatically the number of state-owned companies in Indonesia from 141 today to 78 by 2014. A first stage, which will establish holding companies for individual sectors such as plantations or pharmaceuticals, has been discussed for some time, but the intention to put all these companies into a single holding entity marks an ambitious new strategy.

The ministry has identified Temasek and Malaysia’s Khazanah, which also uses a holding company structure for the oversight of state-owned assets, as role models, although the two have quite different approaches to their holdings.

“SOEs in essence have two missions: corporate value maximization, and instruments of social welfare,” said Ekoputro Adijayanto, special advisor to the state enterprises minister. “At the end of the day we are aiming for our SOEs to become more professional, transparent and well-governed, yet on a level playing field with their international peers.

“The road map ahead to achieve it is by sharpening the SOEs law and other relevant laws. Such laws will become the legal ground to finally establish a super holding company like Khazanah or Temasek.”

The plans have drawn a muted response from analysts. “It’s an interesting concept but I’m not sure what value it adds,” said an analyst at a major brokerage. “As a holding company, I see it as just another unnecessary management structure. It would be a real bun fight for positions. How do you put Bank Rakyat, Bank Mandiri and Bank Negara under one roof?”

Bundling management of state-owned enterprises into a single entity would be a colossal task. Indonesia’s SOEs had total revenue of more than Rp930 trillion, or US$100 billion, in 2009; their capital expenditure and operating expenditures are consistently greater than the entire capex budget for the Indonesian state. Their taxes and dividends alone accounted for 12% of national budget revenue in 2009 and they already represent 31.5% of the total market capitalization of the Indonesian Stock Exchange despite the fact that most are not yet listed.

The Ministry claims progress in SOE reform, arguing that the number of loss-making companies will reduce from 36 in 2006 to just eight this year. But long-standing plans for privatizations and restructurings are not yet complete, such as an IPO of airline Garuda Indonesia and PT Krakatu Steel, although Mr Suprapto insisted both would take place this year despite recent worries about Garuda’s debt load. The next concrete step is likely to be a holding company for several plantation companies, to be followed by an IPO, said Parikesit Suprapto, deputy minister for state owned enterprises. He said doing so would “increase efficiency of SOEs in order to strengthen our portfolio,” and called for state companies to be “instruments for national welfare based on corporate priorities.”

The plan raises many questions: who would manage such a holding company, how the ministry would avoid creating monopolies, and what level of intervention the holding company would seek to make in its member countries. Its two named role models have dramatically different approaches: Temasek is largely a passive shareholder in its companies, whereas Khazanah is closely involved, setting detailed evaluation measures for performance and sometimes intervening to replace management.