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Transforming the BUMN Into an Indonesian State Holding Company

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Transforming the BUMN Into an Indonesian State Holding Company Transforming the BUMN into an Indonesian State Holding Company Karen Agustiawan Senior Fellow, Asia Energy and Sustainability Initiative Ash Center for Democratic Governance and Innovation May 2015 Transforming the BUMN into an Indonesian State Holding Company Karen Agustiawan Senior Fellow, Asia Energy and Sustainability Initiative Ash Center for Democratic Governance and Innovation May 2015 table of contents Executive Summary 1 section 1 The Value-Add of a Temasek Holdings-Style Company for Indonesia 3 1.1 The key features of Temasek Holdings 3 1.2 Current context 4 1.3 The pros and cons of a Temasek-style company 5 1.3.1 The advantages of a holding company 5 1.3.2 The disadvantages of a holding company 8 1.4 Why Temasek Holdings is the model to follow 9 section 2 Steps to transform the BUMN 9 2.1 phase 1: Roadmap to transform the BUMN 10 2.2 phase 2: Legislation to institutionalize the transformed role of the BUMN 10 2.3 phase 3: Incorporation of the BUMN as a commercial entity 12 2.4 phase 4: Establishing fundamentals and fostering growth 13 section 3 Suggested structure of holding company for Indonesia 14 appendix 1 Organizational structure of Temasek Holdings 16 transforming the bumn into an indonesian state holding company executive summary This report argues for a state holding company structure to hold all state-owned enterprises (SOEs), in a drastic revamp of the Badan Usaha Milik Negara (BUMN). The time is ripe for a fundamental rethink of the structure of SOEs in Indonesia. With a proliferation of SOEs in large swathes of the economy, there is great po- tential to extract greater value from these companies. In brief, the formation of a Temasek-style Indonesian SOE holding company will achieve better corporate gov- ernance, performance control and strategic direction for these SOEs. The SOE holding company will embody the profit-maximizing and value-creating urges of a private company while ensuring that government ownership of strategic assets is maintained. The compelling case for a single holding company. • The government will exit the direct management of SOEs to allow a profit- driven, commercial company to achieve that goal. Government will focus instead on its proper role as a policymaker/regulator, avoiding potential “crowding out” effects and conflicts of interests. • Economies of scale and scope can be harnessed from the consolidation of SOEs under a parent holding company, for example through centralizing shared services such as skills training and technology development under the parent company. This will include the consolidation of all professional services such as Sucofindo, Penas, PTSI etc. as a sub division of the parent holding company. • Such a structure can also better ensure a coherent strategic direction among the subsidiary companies, in line with national policy goals. • It would also allow for greater access to financial resources and more efficient capital allocation in order to invest in productive assets for long-term profitability and to latch on to opportunities in international markets. • Market forces and opportunities will guide the activities of Indonesian SOEs and this will compel them to make the necessary gains in efficiency and productivity or risk being completely eliminated from the market. Structure of the SOE holding company A SOE holding company in the mould of Singapore’s Temasek Holdings is pro- posed below. 1 transforming the bumn into an indonesian state holding company The parent company will serve as the HQ for corporate oversight and governance. It will also centralize shared services such as human resources, R&D, professional services and training. In essence, the holding company will strive to ensure strong and capable leadership within each subsidiary, and excel in their respective sec- tors through feasible business strategies and value creation. It also seeks to op- timize the competitive and regulatory landscape by virtue of its clout. By macro-managing, the holding company monitors each subsidiary SOE’s perform- ance while allowing each of them to execute their own decisions. When scope for cooperation arises, the holding company can serve to bring together relevant par- ties in joint ventures. 2 transforming the bumn into an indonesian state holding company section 1 The Value-Add of a Temasek Holdings-Style Company for Indonesia 1.1 The key features of Temasek Holdings Temasek Holdings is an investment company owned by the Government of Sin- gapore. It acts principally as Singapore’s holding company for virtually all state- owned enterprises (SOEs) in a broad spectrum of industries: financial services; telecommunications, media and technology; transportation and industrials; life sciences, consumer and real estate; as well as energy and resources. Since its in- ception in 1974, total shareholder return was 16% compounded annually 1, deliv- ering respectable returns for its sole shareholder—Singapore’s Minister for Finance2. In the early 1960s, the Singapore Government embarked on an industrial- ization drive to boost the fledging economy of newly independent Singapore. The public sector assumed an entrepreneurial role in which it co-invested in compa- nies in various sectors to encourage inflows of foreign direct investments as well as to facilitate technology transfers from joint ventures with foreign multinational companies. Some of these sectors were of strategic and national importance to Singapore’s well-being. The creation of Temasek occurred in the context of rapid industrialization in the 1970s, when the Government decided to adopt a more macro view of the economy and to focus on policymaking, instead of behaving like a venture capi- talist. Previously, assets owned by the state were directly held by the Singapore Government under the Ministry of Finance. However, in order to allow the Ministry to focus on its core responsibilities of prudent policymaking and enforcing regu- lations, Temasek was incorporated in 1974 to hold and manage state investments and assets on a commercial basis. It also allowed the Singapore Government to manage Government-Linked Companies (GLCs) at arms’ length, reducing the gov- ernment’s footprint in the private sector and allowing market forces to thrive in a competitive environment. In other words, the government does not “interfere with the operations of the GLCs” and GLCs “operate as a commercial entities”. As a key institution in Singapore, Temasek is also designated a Fifth Sched- ule entity under the Singapore Constitution, with certain safeguards to protect its past reserves. Any transaction which is likely to result in a draw of Temasek’s past 1 http://www.temasek.com.sg/abouttemasek/corporateprofile 2 Under the Singapore Minister of Finance (Incorporation) Act (Chapter 183), the Minister for Finance is a body corporate. 3 transforming the bumn into an indonesian state holding company reserves is subject to the approval of the President. This is meant to prevent a fi- nancially imprudent government from squandering past reserves. The incorporation of Temasek Holdings reflects the early realization by Sin- gapore’s leaders that its enterprises needed to be run commercially in order to be successful. Temasek is run as a commercial company and is neither a statutory board nor a government agency. Under the Singapore Constitution, Temasek safe- guards past reserves accumulated before the current term of government. The President’s approval is needed before a draw on past reserves can occur. Regular intervals of reserves certifying statements to the President are mandatory. Other than specific safeguards to protect the integrity of Temasek board appointments and its past reserves (given its importance to the nation), Temasek continues to operate fully and independently as a commercial investment holding company. 1.2 Current context Temasek Holdings is currently one of the world’s largest sovereign wealth funds and has investments spanning six continents and many industries. While it still manages the strategic and legacy assets of the Singapore Government, Temasek has successfully ventured internationally in search of potentially lucrative invest- ment opportunities. Additionally, Temasek also contributes to the Singapore Gov- ernment Budget from its investment returns. The investment company’s holdings are currently categorized into five main segments: 1) Financial Services; 2) Telecom, Media & Technology; 3) Trans- portation & Industrials; 4) Life Sciences, Consumer & Real Estate; and 5) Energy & Resources. The sovereign wealth fund takes on the role of an engaged shareholder by managing its portfolio as an active investor by increasing or decreasing its invest- ment holdings to create and shape risk-adjusted returns for the long term. Temasek protects its own interests by exercising its shareholder rights, including voting at shareholders’ meetings where needed. Temasek’s portfolio companies are guided and managed by their respec- tive boards and management teams. This means that the holding company directs neither their business decisions nor operations. From a portfolio point of view, it monitors and benchmarks the returns and performance of each company in com- parison to its peers, and expects each of its portfolio company to make disci- plined decisions based on sound business interests. Board Members of Temasek are appointed, reappointed or removed by the Minister of Finance. The President’s concurrence is required to provide an addi- tional layer of insulation from any undue government influence. 4 transforming
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