Using partially state-owned enterprises for development in Indonesia

ABSTRACT

The Indonesian government, under Joko Widodo, has begun to actively use partially state-owned enterprises (PSOEs) to achieve its development goals. This government has pursued its plans despite minority shareholders’ dissatisfaction with the shift in PSOEs’ corporate goals towards national development objectives. This paper investigates the state’s influence on PSOEs by analysing the government’s direct and indirect ownership, control of corporate governance and financial systems, and inter-firm relations. The paper demonstrates that the business system, under the government’s strong influence, has enabled Indonesian PSOEs to focus on carrying out development projects and shielded PSOEs from minority shareholders’ demands.

KEYWORDS:

• Business system
• Indonesia
• partially state-owned enterprise
• principal–principal conflict
• state capitalism
• state-owned enterprise

Acknowledgments

The author would like to thank Professor Chris Rowley, the APBR editor and four anonymous reviewers for their constructive comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Data from Bureau van Dijk’s Osiris. Data include Waskita Karya, Wijaya Karya, Pembangunan Perumahan, Adhi Karya and Jasa Marga. Jasa Marga is traditionally classified as a toll road operator, but it is included in this group because its construction revenue increased 234.3% in 2017 and surpassed the revenue from toll road operation. The construction revenue’s share increased from 47.0% in 2016 to 74.6% in 2017 (Jasa Marga 2018).

2. It is worth highlighting that, while the Indonesian government has been broadly insensitive to the movement of PSOEs’ share prices, it has sometimes regarded share prices as a litmus test for the viability of certain projects or policies. The government has rarely reversed the development strategy’s overall direction, but changes in share prices have occasionally nudged PSOEs and the Ministry of SOEs to adjust the details or the pace of implementation (Author’s interviews with corporate analysts in Indonesia’s leading financial firms, academics, and researchers specializing in SOE-related issues, Jakarta, November 2017).

3. Young et al. (2008) highlight that principal–principal conflicts are common in developing countries, where companies have concentrated ownership and control, and where the external governance system and protection of minority shareholders are weak. In developing countries, when companies have concentrated ownership, core management teams are often selected by or closely connected to the controlling shareholder. Therefore, managers are incentivized to fulfil the demands of controlling shareholders even if this strategy hurts the value of minority shareholders’ investments. If the investment value deteriorates as the controlling shareholder’s goals are pursued, minority shareholders ‘vote with their feet’ by disposing of shareholdings. However, the literature suggests that controlling shareholders can avoid this process by raising the dividend pay-out ratio.

4. 363 shareholding accounts, not 400, were analysed because the 2016 annual report of Krakatau Steel only provides the share ownership of the government, and that of Semen Baturaja provides share ownership of the two largest shareholders.

5. Aggregate ownership shares are low estimates as investors may hold additional shareholding accounts that fall outside of the twenty largestshareholding accounts.

6. Author’s interviews with Almizan Ulfa, a senior researcher at the Ministry of Finance, Jakarta, November 2017.

Additional information

Notes on contributors

Kyunghoon Kim

Kyunghoon Kim is a PhD candidate at the Department of International Development, King’s College London. His research focuses on the role of Indonesia’s state-owned enterprises in economic development. Kyunghoon has received MSc from the LSE and has worked as a research fellow at the Samsung Economic Research Institute, Korea.