State-Owned Enterprises Minister Rini Soemarno. (Reuters Photo/Nyimas Laula)

Holding Companies to Support Gov't Plans for SOEs: Minister


DECEMBER 19, 2017

Jakarta. The government has ambitious plans to turn Indonesia's state-owned enterprises into world-class multinational companies, dominating nearly all sectors in the country, from telecommunications, mining, oil and gas, to construction. However, several inefficiencies are hampering the growth of these companies due to overlapping businesses and failed attempts to align their strategies.

To realize its ambitious plans, while also improving the performance of state-owned companies, the government has decided to merge them under sectoral holding companies.

This led to the government establishing state-owned aluminum producer Indonesia Asahan Aluminium (Inalum) as a mining industry holding company on Nov. 29.

Inalum, which now controls mining firms Aneka Tambang (Antam), Timah and Bukit Asam, has potential assets of around Rp 90 trillion ($6.6 billion).

Meanwhile, state-controlled construction companies are currently facing negative cash flows as they require large amounts of money to finance medium- and long-term infrastructure projects. This has eroded investor confidence, with the stock values of Waskita Karya, Wijaya Karya and Adhi Karya having plunged over the past year.

Investor Daily recently interviewed State-Owned Enterprises Minister Rini Soemarno, who oversees Indonesia's 118 state-owned companies. The following is an excerpt from the full interview with the minister after state-controlled toll operator Jasa Marga's debut listing of rupiah-denominated global bonds, termed komodo bonds, on the London Stock Exchange.

What will be the next step following the success of the komodo bonds in the international market?

We encourage other state-owned enterprises to follow Jasa Marga's move, especially companies that require large amounts of funding in the energy, telecommunications and electricity sectors. We are also interested in issuing a green bond – a debt offering to fund projects that support sustainable development – which is now getting a good response in the global market.

Is the global bond issuance part of the ministry's strategy to boost the performance of state-owned enterprises?

Indonesia is deemed an attractive market for offshore funds. Foreign investors understand our economic potential in a range of sectors, from mining, forestry to marine. If these sectors can be optimized, the country's growth will accelerate remarkably. I also see that state-owned companies have extraordinary potential, which can help to reduce the country's poverty rate through employment and several social activity programs.

Are there any hurdles that hamper the growth of state-owned enterprises?

What I see now, is that there are several state-owned enterprises that are still conducting ineffective business. Once I saw gas pipelines belonging to PGN [the country's biggest gas utility] and Pertagas [Pertamina Gas], operating side by side. Those two products must be merged. Another example is state-controlled ports each having their own tugboat services. We see it as unnecessary. A similar problem also emerged in mining companies, as each of them has heavy equipment. Such equipment can be shared and operated inside holding companies. That is why we see how important it is to establish holding companies.

Holding companies are still creating public debate, especially in mining. How will you address that?

The establishment of state-owned holding companies will have a positive and highly strategic impact on their businesses. The move will make state-owned enterprises more efficient, increase their debt leverage, which will be followed by double-digit investment. It will also strengthen their balance sheets. In the mining sector, we must develop a value-added downstream industry, which requires us to purchase expensive technology. If mining companies are working on their own, they cannot optimize their capabilities.

Unfortunately, China imports raw materials from us, which it then processes into value-added products. Indonesia has the seventh-largest bauxite reserves in the world and we are ranked as the number-one exporter of this raw material. Bauxite can be processed into aluminum products, which increases the value by as much as 60 times. We should not merely export raw materials. In the energy sector for example, we are currently facing challenges due to dwindling oil and gas reserves. Now we must acquire oil wells abroad, such as through Malaysia's Petronas or Petrobras. It requires vast capital, with a strong, positive balance sheet.

When will an oil and gas holding company be created?

Next year we prioritize banks and financial-related companies, along with state-owned oil and gas companies.

Several state-controlled firms have significant debts, which created negative perceptions with investors. Do you think this is the main reason for their undervalued stock?

Eroding confidence by foreign investors in state-owned infrastructure enterprises is only temporary, as the debt is allocated to more productive posts. The result will improve on the medium and long term. We do not allow them to pay dividends using their debt proceeds.

However, state-owned enterprises with huge debt usually secure large investments. We set the debt-to-equity ratio at a maximum of three times. Such state-owned enterprises definitely post lower net profit, but take a look at their earnings before interest, tax, depreciation, and amortization [Ebitda], which are usually positive.

Several state-owned enterprises plan to acquire projects and businesses. For example, Jasa Marga wants to acquire the Trans-Java Toll Road, operated by Waskita Karya. What is your take on these prospective corporate actions?

I will not interfere with corporate actions between state-owned enterprises. They can manage their businesses on their own, but they need to remember to focus on their core businesses and competencies. Meanwhile, the government is accelerating toll road construction, in which land acquisition is still the main problem. We always bring cases to court when we have land disputes with citizens living in the vicinity of our construction projects. The court process requires a certain amount of time as it is supposed to be completed in a month. For example, there are 372 residents who oppose the government's plan to acquire land for the Medan-Binjai Toll Road project in North Sumatra. Meanwhile, foreign investors are also interested in investing in the toll road due to its interesting returns.

President Joko Widodo has instructed state-owned enterprises to merge their subsidiaries. What progress has there been?

We are currently identifying subsidiaries that can be merged. For toll roads, each segment is owned by a separate entity, because that is required by law.

How many state-owned enterprises plan to go public next year?

Three or five subsidiaries will go public next year. One company will be the result of a merger of several subsidiaries, so it will be large.