SOEs in the construction industry have been involved in highly leveraged infrastructure projects that have resulted in cash flow mismatch and debt default. — The Jakarta Post
A sign that the government budget will face higher fiscal risks in 2025 became clear when state-owned enterprises (SOEs) minister Eric Thohir requested the House of Representative to approve additional capital injections of 44 trillion rupiah into various SOEs.
The capital injections will be used to save several toll road projects being built by heavily indebted state-owned construction and property developers.
PT Hutama Karya whose major projects include the trans-Sumatra toll road racked up cumulative losses of 4.9 trillion rupiah between 2020 and 2022 before it made profits amounting to 1.9 trillion rupiah in 2023.
It had received a capital injection totaling 47.4 trillion rupiah from the government.
PT Waskita Karya, another state-owned construction company, has been losing money since 2019, and its cumulative losses stood at 19.6 trillion rupiah as per 2023.
Its debts have reached 60 trillion rupiah or nearly six times its equity, and it is currently in negotiation with 21 banks on restructuring its 41.2 trillion rupiah in debts.
The government has also given 3.2 trillion rupiah in additional capital injection to PT Kereta Api Indonesia (PT KIA) to be used to cover the cost overrun in the construction of the Jakarta-Bandung High Speed Railway, estimated at US$1.49bil caused by delays, accidents and cost miscalculations.
SOEs in the construction industry have been involved in highly leveraged infrastructure projects that have resulted in cash flow mismatch and debt default.
This is because once SOEs start investing in the projects, they are exposed to liquidity risks as they wait for their infrastructure projects to become operational and generate cash flow.
But not all SOEs have experienced financial distress. SOEs in finance and energy performed well last year. State-owned banks have produced robust profit growth.
The two largest SOEs in the energy sector Pertamina, the state oil company, and state electric company PLN have also performed well.
Pertamina, whose task to supply and distribute fuel oil across the vast archipelago is daunting, remains in a strong financial position.
Although its revenue in 2023 fell 10.7% to US$75.8bil, largely due to disparities in selling prices, its net profits increased 6.7% to US$4.4bil.
It has received US$5.6bil in subsidy reimbursement from the government and its long-term liabilities are US$30.9bil, 75% of its equity.
PLN, the second-largest energy SOE, managed to increase its revenue 10.5% to 487.4 trillion rupiah in 2023.
It has benefited from the government-fixed low price of coal, which it uses for 60% of its power generation.
Its net profits rose 53.5% to 22.1 trillion rupiah.
Pertamina and PLN will face tough years ahead as pressures to reduce fossil fuel use mount and the energy transition accelerates.
They have to set aside capital for investment in green energy and will face higher costs in their operations, which could squeeze their long-term profits.
Non-performing SOEs create implicit liabilities where the government is required to cover business losses and debts.
As these SOEs pose fiscal risks to the government budget, it is important to strengthen supervision of these SOEs.
But supervision of SOEs is not an easy task because of their sheer numbers and assets.
The government has reduced the number of SOEs, through forming holdings, mergers and acquisition, from 118 in 2018.
The SOEs combined assets totalled 11.15 quadrillion rupiah as of December 2022, 57% of gross domestic product (GDP).
SOEs’ net profits in 2022 jumped 172% to 351 trillion rupiah, from 130 trillion rupiah in 2021 as the impact of Covid-19 faded.
In addition to the SOEs that belong to the central government, the regional governments also have their own enterprises (BUMD).
There are now 1,133 BUMD across the provinces, whose combined assets stood at 894.5 trillion rupiah at the end of 2022.
BUMD are expected to contribute revenue to their respective regional government budgets, but this has not happened, since their return on equity is only 5.5% compared with 10.9% for SOEs.
As a result, regional government budgets still rely heavily on transfers from the central government. Supervising the vast number of SOE and BUMD operations and assets is not an easy undertaking.
As a result of weak supervision, many SOEs have been plagued with corruption and collusion with third parties that have caused huge losses.
High quality
To prevent this bad governance from recurring, SOEs need high quality supervision.
At the company level this task is empowered to a board of commissioners (BoC).
An article on limited liability corporations stipulates that the duty and responsibility of a BoC is to supervise the company’s activities and to give advice to the board of directors.
But these obligations are not an easy task.
To implement these tasks a BoC should be manned by people who have professional knowledge and experience of corporate management, as well as in the nature of the business of the company.
Because at the end of day the BoC of a SOE will be held accountable for the performance of its SOE.
Important stakeholders
It should be noted that the stakeholders of SOEs are not limited to the traditional stakeholders (employees, customers and vendors), but being state companies, the most important stakeholder is the people, in the form of taxpayers.
That is why it is disheartening to learn that the government still takes lightly the role of supervision, as the BoC members of many SOEs are appointed mainly as political patronage, giving financial rewards to loyalists and those who supported the winning ruling party in the presidential election, without regard to their professional background or experience. — The Jakarta Post/ANN
Winarno Zain is an economist and a commissioner at a publicly listed company. The views expressed here are the writer’s own.
