Reformer's Drive to Change Indonesia State Firms Hits Roadblocks

By Janeman Latual 22 February 2013

JAKARTA — On an overcast Saturday in early January, the man in charge of modernizing Indonesia’s state companies suddenly lost control of his prototype electric sports car and plowed into the side of a mountain in East Java.

State-Owned Enterprises Minister Dahlan Iskan was unhurt, but the US $300,000 bright red “Tucuxi,” dubbed “Indonesia’s Ferrari” by local media, was a write-off.

It looks like his chances of pulling off an ambitious reform of the bloated state sector are heading the same way.

More than a year after his appointment, most of Iskan’s initiatives to fix state firms have either been revoked or blocked by parliament or remain stuck in ministries, according to government and parliamentary documents obtained by Reuters.

“The political challenge is still huge,” said Iskan, who started his career as a journalist and still writes a regular column in his newspaper, in an interview. “Life is like that. It’s difficult to make this country better.”

Iskan has abandoned plans to start mass production of the privately funded Tucuxi, named after a type of dolphin.

But criticism over the crash—he is being investigated by police for driving an unlicensed car on public roads, although no charges have been filed—dented his reputation and further sapped his political capital, making it even tougher for him to battle powerful vested interests.

It is a frustration that, according to those close to him, is motivating the media mogul to consider standing as a candidate in next year’s presidential election despite being viewed as a rank outsider.

“I would lie if I say I don’t want to, I want to,” Iskan said, when asked if he wanted the presidency.

He conceded he held only a small chance of winning, and declined to discuss his reasons for running because he was still a serving minister. But several people close to him said he saw the presidency as the only way to achieve change.

“Iskan is impatient over the lack of action just like any private sector guy. He’s frustrated with the political pressure especially from the parliament,” said a source close to Iskan who declined to be named due to the sensitivity of the issue.

President Susilo Bambang Yudhoyono, two-thirds of the way through his second and final five-year term, has made reform of state companies a priority in developing the G20 economy.

Yudhoyono turned for help to Iskan, who made his reputation turning the near-bankrupt Jawa Pos Group into one of Indonesia’s biggest media companies.

Just over a year since his appointment in late 2011, Iskan has struggled to implement any of his ambitious plans. On Jan. 23, he announced that he might have to cancel all his planned initial public offerings (IPOs).

It is not the first time Yudhoyono has picked a reformist and then failed to give them protection. His highly respected finance minister, Sri Mulyani Indrawati, became so exhausted by relentless politically motivated criticism she left in 2010.

Indonesia’s 140 state-controlled firms account for a huge chunk of Southeast Asia’s biggest economy—their total revenues are estimated to have hit 1,500 trillion rupiah ($155 billion) last year, or nearly a fifth of gross domestic product.

Several of the companies have complete or near control of key industries such as energy, power and agriculture that underpin Southeast Asia’s biggest economy.

“There is an ownership fetish—the state wants to act as a entrepreneur,” said James Castle, chairman of CastleAsia, one of Indonesia’s leading consultancies for foreign firms.

“They are everywhere, acting like private companies, and they crowd out the private sector.”

Even Iskan’s attempt to take control of the appointment of senior state company managers has largely failed.

In November 2009, Yudhoyono, criticized over repeated power cuts, gave Iskan the job of heading state electricity monopoly PT Perusahaan Listrik Negara (PLN) and agreed to allow him to choose his own board. The appointment was seen as a success.

As state-owned enterprises minister in 2011, he wanted similar freedom to make appointments free of political considerations. He discovered quickly that wasn’t so easy.

Executives connected to political party chiefs and the presidential palace are on the board of more than half of the top 25 state firms, according to state-owned enterprises ministry data and the companies documents from 2012.

Two presidential decrees, issued in 2005 a year into Yudhoyono’s first term, gave the authority to choose top managers of state firms to a “Final Assessment Team” (TPA) led by the president.

“These are, of course, assignments … they are missions from the government,” Firmanzah, a special adviser to the president with responsibility for administration and financial matters, said in defense of presidential staff appointments.

“This is to push for good governance.”

Iskan has also antagonized members of two parliamentary commissions with oversight of state companies.

“He is not an expert in bureaucracy, politics and lobbying. He’s a businessman,” said Muhammad Said Didu, chief commissioner of state planter PT Perkebunan Nusantara IV.

He faced a setback only a few months into the job when he was forced to revoke his first decree to give more flexibility to executives in state firms to take major business decisions.

Parliament warned Iskan the decree, which gave his ministry such powers as deciding share buy backs, was illegal.

“My questions are: Does he have the authority to do that? And is it in line with the state-firms law?” said Harry K. Harman, vice chairman of one of the parliamentary commissions overseeing state firms, who is from Yudhoyono’s party.

Differences of interpretation and overlapping, sometimes conflicting, laws also hinder Iskan’s attempts at major reform and can make executives afraid to act for fear of prosecution.

In 2012, he planned five state firm initial public offerings. Only one, builder PT Waskita Karya, went to the market and that had already been approved by parliament back in 2008, before he came into office.

Last month, he announced that all IPO and rights issue plans by state firms would probably be postponed because of technical and regulatory issues.

He declined to discuss a plan to create one of the world’s largest palm-oil and rubber firms with $5.6 billion in assets, which had once been set for completion in March 2012.

“Changing the law in this country is like changing the Koran,” senior Iskan aide Wahyu Hidayat told Reuters. “Next to impossible.”

Additional reporting by Fathiya Dahrul and Neil Chatterjee