Development of SOEs: Driving change within an enterprise

By Dr. Tanri Abeng 
Laying corporate foundation
State-owned enterprise (SOE) reform must be institutionalized to be sustainable. To this end, while restructuring is taking place, a strong corporate foundation is essential to the long-term success of value creation. The following elements need to be looked at when creating strong corporate fundamentals.
 

Master plan
The master plan is required to outline the general objectives to be achieved in the restructuring process. It should also outline the strategy, policy, guidelines, methodology, process and a system for the implementation of the reform programmes. It should provide timing and in the reform process.
In the context of Indonesia, the first master plan that we produced was developed with the assistance of the Asian Development Bank (ADB) and the second (which incorporated the creation of holding companies and the mergers) was produced with the help of consultants.
 

Management system
I learned from my previous professional career with multinational corporations, the importance of developing a uniform system of management that is understandable and acceptable by all members of the organisation throughout the world. Indonesia’s 144 SOEs and their 1000-plus subsidiaries required a comprehensive management system covering management principles, functions, responsibility, authority, accountability and even a common language for effective communication. 
The management system drives the process of change from a bureaucratic culture to a corporate culture. The system also facilitates the exchange or mobility of executives among SOEs. In terms of management development, exchange of executives creates cross-fertilization in the area of management breadth and creativity.
 

Corporate leadership
My experience in business over the years has made me well aware of how important good leadership is, in corporate management. In the case of Indonesia, transforming 158 SOEs from 17 technical ministries to a single and new ministry was exceptionally difficult. Major SOEs were mostly run by bureaucrats and retired military personnel as well as police force - plus politically connected individuals. Restructuring and management change are time-consuming when dealing with people with the mindset of bureaucrats and the culture of a monopolist. The corporate foundation therefore, must be institutionalized, particularly in the area of governance and leadership development. The only competent leaders can deliver change structurally and culturally. 
In my view, the greatest management challenge today and in the future is managing change with all its complexity. Change is necessary if the organisation is to survive, much less grow in the long run. But who can drive the required changes? Only leaders with vision, courage, unquestionable professional competence and integrity.
For SOEs, leadership development is one of the key agendas for the ministry in Indonesia and to this end it has established an Institute for Corporate Leadership through a foundation owned by the SOEs. This institute was modelled after General Electric’s Centre of Excellence at Crottonfield, New Jersey, USA. In fact, the first CEO briefing attended by 300 top executives from both SOEs and the private sector featured Jack Welch of General Electric as the keynote speaker. The aim of this institute is to facilitate continuous learning for Indonesian executives to bring their professional competence up to the standard required to be effectively competitive internationally.
 

Corporate governance and ethics
The stakeholders of SOEs are more complex compared to those of private sector corporations. Politicians, bureaucrats, regulators, customers and the public at large may all claim to be stakeholders. Therefore, corporate governance is the core of the corporate foundation.
Companies must clearly define the structure and the process through which they are managed in order to create value and satisfy the needs of all stakeholders. The relationship between the shareholders, commissioners and directors should be defined through a legal framework. Further, authority, responsibility and accountability of corporate officers are clearly defined in line with the principle of transparency and fairness. SOEs also must consistently follow the ethical way of doing business as a matter of corporate policy.
 

Remuneration system
The pay scale of executives should be based on responsibility and accountability rather than factors such as status or position. A new system of remuneration should be introduced that is based on equity and fairness internally and competitiveness or attractiveness externally. 
The main objective of the system is to motivate people to be committed and to contribute to the achievement of corporate goals. A fair and competitive remuneration system makes it relatively easy to recruit, develop and retain people as the most valuable asset of the corporation.
 

Lessons learned:Strike while iron is hot 
To ensure the success of a programme of SOE reform, it is important to introduce reforms at the appropriate time:  that is, when they are needed and resistance to reform is relatively low. This is most likely to occur during an economic crisis.
An economic crisis generates budgetary pressures for governments and in doing so force them to look for ways to make the public sector more efficient and to mobilize new sources of government revenue.  At the same time, because such crises expose the flaws of the existing SOE policies, they shift the balance of power and influence within society away from groups that oppose reform and toward groups that favour it. Reformers should thus take advantage of economic crises to promote their cause. If they don’t, opportunities will be lost. 
The Indonesian case demonstrates this lesson well. As we have seen, the Indonesian government did little to promote SOE reform when the economy was booming during the late 1980s and early 1990s. With the economy in good shape, it did not seem necessary for the government to speed up its SOE reform programme. In addition, anti-reform groups were simply too strong for reform to be politically possible.
The Indonesian case suggests that fast-track privatization is problematic for different reasons.  When my ministry tried to push through a series of quick privatizations during 1998-99, it encountered enormous opposition from SOE managers, vested interest groups and nationalistic elements within society. As a matter of policy, the term privatization implied only partial sales of SOEs through strategic partners and/or an IPO through the stock exchange.
In some instances, particularly in the area of strategic infrastructure (port, airports, etc.), concessions were given to private partners. In all instances, the government maintained the majority of the privatized SOEs. This is adapted to allow the government, through the SOEs Ministry to continue value creation programme while empowering the SOEs to become the engine of economic development by the power of synergy.
 

Go for restructuring and privatization in parallel 
At the heart of the second wave of SOE reform was the idea that reform should be tailored to suit the circumstances of the enterprise concerned, with restructuring and privatization done together. Specifically, those enterprises with small improvement gaps should be privatized early, those enterprises with large improvement gaps should be restructured first and then privatized and those enterprises considered vital to the national interests should not be privatized at all. 
The focus should be on maximizing value, not on selling assets quickly.  Only by following this approach will SOE reform really serves the national interest.
Our restructure and privatize in parallel approach promised to do this. On the one hand, it would enable us to sell state assets at a decent price because the companies being sold would be healthy and efficient after restructuring. On the other, it would also reduce nationalistic concerns because assets would not be sold off quickly and cheaply.
 

Forge alliance with pro-reform elements in society
Reform is not simply about vanquishing opponents of reform but also about gaining the support of groups that favour reform. It is therefore necessary to do whatever one can to forge alliances with these groups. In our case, we attempted to do this through the establishment of the Public Policy Committee. This body consisted of a collection of leading academic, political and business figures who were asked to provide input in the policymaking process at key points in that process.
Although the Public Policy Committee met only a few times, it proved to be an effective means of mobilizing support in the communities from which representatives were drawn. We also tried to develop a strong relationship with the World Bank, International Monetary Fund and ADB by seeking their input in relation to such key reforms as the development of the step-by-step privatization system.
One group with which we failed to forge a strong alliance, however, was the media. As a member of Golkar and a supporter of Habibie, I became a target for anti-government journalists who doubted our commitment to reform. As a result, we had difficulty in selling our reforms to the public.  
No matter what we did, no matter how well-intentioned, the media would criticize us and accuse us either of corruption or of selling the country short. This was an image problem that we were ultimately unable to overcome. Unskilled in the area of public relations and faced with a rapidly changing political environment, we were unable to convince people that we were trying to do the right thing rather than preserve the status quo.
 

Reform and capital market
The choice of the Indonesian government to maintain control of all SOEs was the correct one. There were a few tools the government used to pursue this objective, out of which listing on the stock exchange, joint venture agreements and offering concession, particularly to foreign investors were common. 
SOEs have also contributed to the development of the Indonesian capital market. Twenty SOEs are listed on the Jakarta Stock Exchange. While this number represents only 4 percent of total listed companies, with US $ 90 billion capitalization, SOEs represent 25 percent of JSX Market capitalization.
Yes, SOE performance in terms of the level of efficiency and profitability is still not equal to the private sector. However, SOEs are also delivering public service obligations as well as pioneering businesses that are not attractive to the private sector. Critical to the SOE optimum value creation objective is the government’s commitment to debureaucraticize and depoliticize the management operation of SOEs, which still is a challenge that looms large on the entire process.

(Dr. Tanri Abeng was Indonesia’s first State-Owned Enterprises Minister and holds over four decades of experience at the helm of private corporations, serving in government and heading public institutions. He is Chairman of PERTAMINA, an Indonesian state-owned oil and natural gas corporation based in Jakarta, and Newcrest Mining Limited Indonesia. He is also presently Publisher of Globe Asia and President Commissioner of PT Alcatel-Lucent Indonesia)