Institutional challenges in Indonesia’s state-driven development

Jokowi-nomics is ‘state-driven’, especially in the area of infrastructure expansion. The Jokowi government has emphasised that state-owned enterprises (SOEs) are ‘agents of development’ and worthy of policy support. The Indonesian government aims to strengthen SOE investment capacity through fiscal and financial policies in the short-term and establish sectoral holding companies in the medium-term.

There are concerns about the negative effects of this strategy on private business. But there is a more immediate challenge. Does the Indonesian government have the institutional capacity to effectively pursue such a plan?

While the government has provided strong policy support to SOEs, few institutional mechanisms allow for close consultation and coordination between the stakeholders of state-centred development strategy. As a result, conflicts have arisen in various SOE-led development projects.

At the beginning of 2016 two of the largest SOEs clashed. Conflicts arose between Perusahaan Listrik Negara (PLN) and Pertamina Geothermal Energy (PGE) during a purchase deal for electricity generated from geothermal plants. PGE argued that higher energy prices were an inevitable cost of continued renewable energy exploration, while PLN argued that it could not afford to pay such high prices. As the conflict intensified, the Ministry of Energy and Mineral Resources even suggested creating a new utility SOE that would focus only on renewable energy so that PLN could focus its own efforts elsewhere.

PLN has also been in direct conflict with the Ministry of Energy and Mineral Resources. PLN sees many of the energy policies issued by the the Ministry as unprofitable. One example is PLN’s opposition to the Ministry’s push towards expanding the bio content of diesel used in the power industry. Minister for Energy and Mineral Resources Sudirman Said, upon observing these conflicts, described PLN as a ‘disobedient child’ and pointed out that if the Ministry of SOEs is PLN’s father, then his Ministry is its mother. He emphasised that PLN should focus not only on financial performance, but also on its public-oriented obligations.

There have also been cases where government ministries have disagreed with the direction of SOE-led development projects. In early 2016, the Ministry of SOEs and the Ministry of Transportation clashed during the initial phase of the high-speed railway project — a joint venture between Indonesian and Chinese SOEs — which was assigned to Kereta Cepat Indonesia–China.

The public spat came soon after Jokowi launched the construction stage at the groundbreaking ceremony in January 2016. The Ministry of SOEs, with four of its companies involved in the project, tried to speed up the process but the Ministry of Transportation demanded more time for issuing the permit. The Ministry of Transportation was concerned with various issues, including the environmental impact, exclusivity rights, concession period and life span. During the bidding process in 2015, the Ministry of SOEs is known to have supported China while the Ministry of Transportation supported Japan.

There are doubts about the capacity of the Ministry of SOEs to solve such conflicts. Minister for SOEs Rini Soemarno is one of the most visible and influential officials in the Jokowi administration. She headed the President’s transition team, has survived two cabinet reshuffles and has gained Jokowi’s trust. But some members of Jokowi’s Democratic Party of Struggle (PDI-P) have requested that Jokowi dismiss Rini. According to speculation, this is because of Rini’s close relationship with Sukarnoputri, the PDI-P chairwoman, which ended after Rini entered Jokowi’s administration without Sukarnoputri’s consent.

Jokowi has refused to remove her from the cabinet, but Rini has one hand tied behind her back. In 2016, a special committee of the People’s Representative Council (DPR) recommended that Jokowi remove Rini from her position on account of her alleged mismanagement of a SOE in the port operation sector. Rini is already banned from attending any DPR meetings. As a consequence, it was Sri Mulyani, a finance minister newly appointed in July 2016, who had to begin the discussion on the establishment of holding companies with the DPR’s Commission VI and try to gain legislative support.

The government’s capacity to solve conflicts between stakeholders involved in SOE-led economic development will be tested further as sectoral holding companies are established. SOEs and ministries with different vested interests are expected to collide when deciding which firm will act as the parent company and how the new board of directors will be composed.

Holding companies are likely to have stronger power vis-à-vis the government compared to individual SOEs, making it more difficult for the government to supervise SOEs. SOEs under holding companies would also be able to escape close surveillance of the DPR and the public unless additional monitoring mechanisms are put in place.

The government will also need mechanisms that enable constructive public–private dialogue. This is because a number of major SOEs are partially listed on the stock exchange, meaning that private shareholders will have to be consulted prior to executing any plans.

There have been some improvements in the quality of Indonesia’s state bureaucracy since the Asian financial crisis, but there is still a long way to go. The Indonesian government needs to devote substantial efforts and resources to strengthening its institutional capacity — something more than ‘mental revolution’ — if it aims to continue its active development strategy in the constrained fiscal environment.

This is expected to be more challenging for the Indonesian government compared to the East Asian countries of the past as pursuing state-driven development under democracy requires inclusive political and economic institutions.

Kyunghoon Kim is a PhD candidate at the Department of International Development, King’s College London.