Last month, when we met in Jakarta to discuss the collaboration between the State-Owned Enterprises (SOEs) Ministry and the Asian Development Bank (ADB), we reflected on Indonesia's remarkable development progress. After years of strong policy leadership, the country stands on the cusp of upper middle-income status.
However, not unlike the ancient sailors of Homer's Odyssey, who had to pass by two mythical sea monsters in order to reach their destination, Indonesia also faces two looming burdens. First, the need to engineer a recovery from the coronavirus disease (COVID-19) pandemic while also maintaining fiscal discipline. Second, preparing the economy and society for the transition to a net-zero world.
It will not be possible to get there without reimagining the role of SOEs in Indonesia. Drawing on our personal experiences in the private and public sectors, we believe this is both possible and essential.
Indonesia's SOEs play an outsized and critical role in the country's economic life. Together, they have $600 billion in assets, equal to more than half of Indonesia's annual gross domestic product. They play a key role in a range of critical industries—including electricity, pharmaceuticals, air navigation services, food distribution, and logistics, to name a few—that must be part of the solution to the dual COVID-19 and climate challenges.
In order for SOEs to become a key part of the solution, we need less "S" (state) and more "E" (enterprise). This is why the SOEs Ministry launched an ambitious 5-year reform road map in 2019, initiating some of the most comprehensive changes in the history of Indonesian SOEs. ADB is supporting the government on this agenda, which has three key areas of focus.
First, the ministry is restructuring SOEs to make them more efficient by tightening focus on their core businesses and consolidating complementary firms. The ministry intends to reduce the total number of SOEs from 108 in 2019 to 41 by 2024. This more limited number of firms is now overseen by 12 industry specific clusters within the ministry, under the direct leadership of two deputy ministers.
Second, transparency and the quality of governance must improve. The ministry has for example established an integrated management system to allow real-time monitoring of SOE finances and human capital, enabling quick and accurate decision-making at the highest levels. Forty-one SOEs have already attained the International Organization for Standardization certification for their antibribery management system.
Heightened strategic focus and improved governance lead naturally to the third pillar of the reform effort: improvements in human capital and leadership quality. The ministry has strengthened the selection criteria for SOE board of commissioners and directors; has begun actively recruiting talented executives, including from the private sector; and is investing in training programs to upskill existing managers and workers. Indonesia's SOEs must have the best possible talent.
We are only at the midpoint of the ministry's reform road map, but the results are promising. In 2021, SOEs achieved sixfold growth in consolidated net profit compared with 2020. More can be done in the coming years.
As we move forward, the transparency and scrutiny that comes with public ownership can help drive further reform. A recent ADB assessment found that divestment of state ownership through public listing improves SOE performance.
In line with these findings, the ministry is actively promoting public listing of SOEs on the stock exchange. As the first step on a long journey toward greater gender balance and diversity, the ministry is also working to ensure women hold 25% of board seats at each SOE and millennials fill 10% of director positions by 2023.
As this reform agenda begins to take hold, we can imagine a future where strong, efficient, transparent Indonesian SOEs play a positive role in driving economic change throughout society. SOEs can lead the way in new and innovative business models as long as they collaborate rather than compete with private capital to deliver greater economic, social, and environmental value for the country.
This collaboration will be most critical in efforts to address the threat of climate change. Indonesian SOEs, restructured and refocused, with improved systems and governance, are now better positioned to take on green investments that might be too high-risk for private investors, and to develop them to the point at which the private sector can step in and take them forward.
We can see this in the efforts to reduce carbon emissions, where the government and ADB are partnering on an innovative energy transition mechanism to accelerate the retirement of coalfired power plants and replace them with clean, renewable sources of energy. The newly established consortium, Indonesia Battery Corporation, which is collaborating with leading global players to create a new end-toend electronic vehicle battery ecosystem, provides another example of how SOEs can catalyze action before the private sector is able to step in.
As with all such activities, it will be critical to ensure that the state’s role is limited, and that it is not permanent.
Restructured and reformed, Indonesia's SOEs can deliver much greater value. We are already well along the journey to ensuring that they are more efficient stewards of public investment.
Once properly reformed, as long as their roles are well defined and limited, they can become anchor strategic partners to the private sector, helping ensure that benefits of economic growth reach all Indonesians, even despite the difficult challenges that lie ahead.
