The corporate sector in Indonesia has been recovering in recent years from the financial crisis of 1997–98. This paper analyzes the performance of the Indonesian nonfinancial corporate sector in recent years and discusses remaining challenges and vulnerabilities. The decline in corporate leverage may have resulted to a large extent from supply-side constraints. Indonesia was the country most severely affected by the Asian financial crisis, with GDP declining by 13 percent in 1998. Despite modest bank intermediation, bank financing has regained prominence as a source of corporate financing in recent years.


The corporate sector in Indonesia has been recovering in recent years from the financial crisis of 1997–98. This paper analyzes the performance of the Indonesian nonfinancial corporate sector in recent years and discusses remaining challenges and vulnerabilities. The decline in corporate leverage may have resulted to a large extent from supply-side constraints. Indonesia was the country most severely affected by the Asian financial crisis, with GDP declining by 13 percent in 1998. Despite modest bank intermediation, bank financing has regained prominence as a source of corporate financing in recent years.

IV. Public Enterprises in Indonesia1

A. Introduction

1. Over the past five decades, public enterprises have played an important role in Indonesia’s economy. The number of State-Owned Enterprises (SOEs) increased dramatically after independence in 1945 as the new constitution stipulated that “sectors of production which are important and affect the life of the people shall be controlled by the State.” By 1980, some 70 percent of total investment was made by the public sector and SOEs accounted for about 70 percent of overall economic activity. A substantial shift in economic policy has taken place since the 1980s, with deregulation resulting in the growing role of the private sector. Nonetheless, the SOE sector remains important, and is estimated to account for up to 40 percent of GDP,2 reflecting its key role in the oil and gas and electricity sectors, as well as its continued presence in industry (cement, fertilizer, steel, mining), agriculture (plantations), and transport.3

2. This paper provides a brief overview of the public enterprise sector and attempts to assess any fiscal risks that may arise from its operations. To this end, Section B provides information on the size of the sector, and its key financial characteristics. Notwithstanding data constraints, some possible fiscal risks are then discussed in Section C using a new framework being developed by the Fund’s Fiscal Affairs Department.4 Finally, the paper draws some conclusions and provides recommendations to further limit risks.

B. An Overview of the Public Enterprise Sector

3. There are public enterprises in many sectors of the economy, although they dominate in only a few industries. As of August 2005, there were 158 SOEs spread over most business sectors, including financial services, insurance, services, construction, manufacturing, telecommuni–cations, airlines, electric power and oil and gas. These companies vary in size from monopolies to relatively small service companies, with the 22 largest SOEs accounting for more than 90 percent of assets, equity and net income (Table 1). SOEs are most heavily represented in the following sectors of the economy:

Table 1.

SOE Characteristics in 2004

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Sources: Indonesian authorities, Ministry of State-owned Enterprises, and Ministry of Finance.

Bank Mandiri (bank), PLN (electricity), Pertamina (oil and gas), BNI (bank), BRI (bank), Telkom (telecommunications), Jamsostek (insurance), BTN (bank), PUSRI (fertilizer), and Bulog (logistics).

  • Banking and finance. Twenty public financial institutions account for about 50 percent of total SOE assets, as well as about 40 percent of the SOE sector net profits.

  • Electricity: The state-owned electricity company (PLN) is the largest of the nonfinancial public corporations, accounting for about 20 percent of public assets.

  • Oil and Gas: The state-owned oil company (Pertamina), holds about 12 percent of public assets and recorded 30 percent of the net profits by the public enterprise sector.

  • Telecommunications: The government has a 51 percent share in Telkom, which generates about a fifth of SOE net profits.

The remaining 135 public companies generate less than 20 percent of all SOE net profits, with the fertilizer, gas, cement and airline companies having the largest assets.

4. The contribution of the public enterprise sector to the central government budget has increased substantially in the last five years. Receipts in the form of corporate taxes have increased by more than 140 percent to about Rp 13 trillion (0.5 percent of GDP) in 2005, while dividends5 have averaged about 0.3 percent of GDP in the last four years (Figure 1). Most of these revenues have come from the banking sector, Pertamina and Telkom. The improved performance reflects the return to profitability following the Asian financial crisis of SOEs due to higher growth in the economy and higher commodity prices. Privatization receipts were equivalent to 0.2 percent of GDP in 2004, with divestment from some state-owned banks through IPOs and the sale of strategic stakes in a few companies being the main contributors.

Figure 1.
Figure 1.

Contribution of SOEs to the State

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 318; 10.5089/9781451818376.002.A004

Sources: Ministry of Finance; and Fund staff estimates.

5. Data on financial accounts of individual SOEs are available at the Ministry of State-Owned Enterprises (MSOE). 6 However, the government does not publish statistics for the consolidated public sector. Information on publicly listed companies is available on the MSOE website, but there is little dissemination of information on other enterprises. Using data on publicly listed companies, and that provided by the MOF on some other key companies, an analysis of the performance of nonfinancial public corporations7 indicates that:

  • The balance sheets of nonfinancial SOEs have strengthened. Total assets grew by 61 percent during 2001–04, largely because of higher retained earnings and, to a lesser extent, asset revaluation (including for PLN and Pertamina). On the other hand, there was only a small increase in liabilities. The debt to asset ratio therefore declined to about 43 percent in 2004, from 66 percent in 2001. The equity position of many SOEs increased significantly, as profits were retained in the business.

  • The overall performance of nonfinancial SOEs has been improving. While SOE revenues have almost doubled in the last four years, net profits, which depend to a large extent on the state-owned oil company, were volatile and only increased by 10 percent in the last four years, reaching Rp 20 trillion in 2004. This was nonetheless equivalent to the entire overall surplus of the nonfinancial SOE sector of about 0.6 percent of GDP in 2004.8 Excluding Pertamina, net profits increased by 20 percent during 2002–04 to about Rp 11 trillion. Return on assets improved in 2004, but return on equity continues to remain below its 2001 level.

  • Losses were equivalent to about 0.3 percent of GDP in 2004, with PLN accounting for one-half of the total (after taking into account subsidy payments from the government). About one-fifth of the total number of non financial SOEs reported losses in 2004, with some such as PLN and the state-owned airlines company (Garuda) experiencing losses in each of the past three years. The number of companies experiencing losses has been broadly unchanged since 2001.

Table 2.

Key statistics for Nonfinancial SOEs

(In trillions of Rupiahs)

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Sources: Indonesian authorities and Fund staff estimates.

C. Assessment of Fiscal Risks

6. Public enterprise operations pose fiscal risks in many countries. In some cases, quasi-fiscal activities (QFAs) are not appropriately compensated through the budget, leading to losses. In other cases, excessive borrowing has undermined profitability. Companies that consistently run losses and/or accumulate excessive debt often need to be rescued by the government. As the quantification of QFAs and contingent liabilities pose significant methodological challenges, the key issue becomes: how to identify the companies that represent the main sources of fiscal risk and that therefore should be monitored more closely?

7. A framework developed by the Fund’s Fiscal Affairs Department9 is aimed at assessing the fiscal risks posed by the public enterprise sector. The main motivation for its development was to assess which public enterprises should be covered by the fiscal indicators and targets on which national fiscal policies are based. Such a framework uses criteria related to four broad areas of performance: (i) managerial independence (pricing and employment policies); (ii) relations with the government (subsidies and transfers, quasi-fiscal activities, and regulatory and tax regime); (iii) financial conditions (profitability, market access, creditworthiness); and (iv) governance structure (periodic audits by external auditors, publication of comprehensive annual reports, shareholders’ rights).

8. This next section uses the above framework to help identify possible sources of fiscal risk for Indonesia’s SOEs. The overall fiscal risk in Indonesia in the short-run remains limited, as SOE losses are small and a sound legal framework is in place. The main risks are the existence of public service obligations for which enterprises need to be adequately compensated by the government and slippages in the implementation of the existing corporate governance framework.

Criterion 1: Managerial Independence

This criterion helps determine if there is government interference in employment and wage policies, and through price setting at below cost.

9. Appropriate mechanisms have recently been put in place to strengthen managerial independence. First, the SOE law (UU 19/2003) sets a clear ownership policy as the state is not allowed to become involved in the day-to-day management of SOEs and must allow them full operational autonomy. Second, the same law clearly states that SOE employees are not part of the civil service, implying that the government cannot set wages for nonfinancial SOEs nor affect the hiring decisions by the Board of Directors. Finally, clear rules on conflict of interest for members of the Board of Directors and Board of Commissioners have been established through a ministerial regulation.10

10. However, the existence of Public Service Obligations (PSOs) can weaken managerial independence. A number of SOEs have been used by the government to provide public goods and services to the public. These include the provision of electricity or water supply to remote rural areas and infrastructure investment in poor areas. The state also regulates prices in many sectors, especially in the energy and transport industries. The provision of such services has on occasion adversely affected the finances of the supplying company, as PSOs are not always adequately costed by the government, even when explicit subsidies are provided (see section below).11

Criterion 2: Governance Structure

This criterion focuses on whether a basis for accountability to the public is in place. This requires effective outside audits and the dissemination of information to enable the public and minority shareholders, when applicable, to monitor operations of the SOE.

11. Indonesia has a sound corporate governance framework. A 2002 Ministerial decree detailing the corporate governance responsibilities of SOEs conforms broadly with OECD guidelines in this area. Key provisions include: (i) the preparation of annual financial statements that must be audited internally and by an independent auditor (not necessarily the Supreme Audit agency); (ii) publication of SOE annual reports in a timely manner; and (iii) equal treatment for all shareholders, including consideration of minority shareholders’ rights in managing the SOE.

12. However, delays can occur in auditing and publishing financial statements. Over 20 of the 151 public companies, including the state-owned oil company, have not yet had their 2004 financial statements audited. SOE annual reports are made public in the case of publicly listed companies, or if the companies are about to issue corporate bonds (as was the case for PLN). However, when applicable, minority shareholders are being provided the necessary information.

Criterion 3: Government Relations

This criterion tries to ascertain whether the government maintains an arm’s length relationship: are SOEs subject to the same regulations and taxes as private firms in the industry? If subsidies exist, are transactions transparent and fully compensated by the budget? Do SOEs perform uncompensated functions or costs not directly related to their business objectives?

13. Public enterprises are subject to the same tax provisions as private firms. All firms must pay VAT and corporate income taxes. VAT exemptions are applied to all sales to which they are subject, regardless of whether they are from a public or private enterprise. However, when tax arrears occur, the government may, on occasion, not impose late payment penalties on SOEs.

14. Subsidy payments to a few SOEs remain important. Subsidies have averaged 4 percent of GDP in the last three years (Figure 2). Subsidy payments have essentially been made to Pertamina (as domestic fuel prices have not always been adjusted to reflect fully changes in international prices), as well as PLN and the fertilizer company (tariffs/prices have remained fixed in recent years). But, payments have often been subject to delays. For example, fuel subsidies are paid late in the year and are subject to an end of year reconciliation exercise, with the government examining in detail the recoverable costs and allowable margins.

Figure 2.
Figure 2.

Subsidies to SOEs

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 318; 10.5089/9781451818376.002.A004

Source: Ministry of Finance; and Fund sfaff estimates.

15. The inadequate costing of PSOs results in QFAs. 12 While it is difficult to assess the magnitude of existing QFAs, some preliminary data on the energy sector in 2005 show two main sources for QFAs:13

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    Lack of compensation of PSOs : A comparison of the actual sales prices for retail fuel products in 2005 with the actual market prices for fuel (including the retail margin) show that subsidy costs of about 0.3 percent of GDP have been absorbed by Pertamina, as Pertamina was reimbursed for only the imported cost of fuel plus a standard fee per barrel14 According to a new regulation on Pertamina’s PSOs, the government’s subsidy payments to Pertamina in 2006 would now include a 15 percent margin. Based on PLN’s calculations, the company would have needed an additional 0.1 percent of GDP to fully recover its operating costs.

  • article image
    Payment arrears. Little information is available on inter-enterprise arrears, although these were sizable in the energy sector at end-2005. Pertamina implicitly subsidized other public enterprises, such as PLN and Garuda, which were not able to pay for their fuel supply (about 0.6 percent of GDP)15. On the other hand, this also led to Pertamina accumulating tax arrears to the government, which according to the Ministry of Finance reached 0.8 percent of GDP by end-March 2006.

Criterion 4. Financial Health of Companies

This criterion is meant to provide a perspective on the magnitude of risks of specific companies. It can help identify whether a firm’s finances are sustainable and profitable.

16. The overall financial performance of SOEs has strengthened during the last four years, although the improvement was uneven across sectors, as discussed above. Thirty SOEs experienced losses in 2004, with total losses reaching about 0.3 percent of GDP. Some of the largest and most sustained losses were observed in the electricity sector (e.g., PLN) and the airlines industry (e.g., Garuda). While the highest profits in the SOE sector in 2004 were observed by Pertamina, its performance is hampered by partial compensation of its costs. A look at these three key companies’ financial ratios16 shows (Figure 3).

Figure 3.
Figure 3.

Pertamina Financial Ratios

(In percent)

Citation: IMF Staff Country Reports 2006, 318; 10.5089/9781451818376.002.A004

Source: Company financial statements.
  • Pertamina: Net profit margins increased during 2003–05 as revenues from higher oil prices outpaced the growth in operating expenses. The debt-to-asset ratio has remained relatively stable at slightly below 40 percent, as net borrowing has been flat.

  • PLN : The company experienced losses in the last three years17 reflecting only partial compensation for tariffs set below cost (see above), the high cost of fuel and gas inputs, and significant transmission losses. The return on investment is low as shown by average returns on assets and equity that are close to zero. Its debt ratio has increased reflecting: (i) a high proportion of two-step loans18 to finance the company’s operations and long term investments; and (ii) deferred tax payments. Nevertheless, recent corporate bond issues show that PLN can still access the market on terms that are comparable to the sovereign.

  • Garuda: Losses during the last three years reflect lower demand and higher fuel costs. Garuda has been unable to pay Pertamina fully for its fuel, and has a debt ratio of close to 77 percent despite having restructured its have left Garuda unable to renew its fleet and it has reportedly postponed delivery of new aircraft.

Figure 4.
Figure 4.

PLN Financial Ratios

(In percent)

Citation: IMF Staff Country Reports 2006, 318; 10.5089/9781451818376.002.A004

Source: Company financial statements.
Figure 5.
Figure 5.

Garuda Financial Ratios

(In percent)

Citation: IMF Staff Country Reports 2006, 318; 10.5089/9781451818376.002.A004

Source: Company financial statements.

17. The financial position of the energy companies could be improved with a better risk management strategy. PLN should consider adopting a foreign exchange risk management program since at least 50 percent of its input costs are in foreign currency (including fuel, lubricants, spare parts, and power purchased from independent power producers), while its revenues are in domestic currency. Pertamina should consider hedging purchases and/or sales of crude and petroleum products to reduce its exposure to commodity price fluctuations and exchange rate risk.

D. Conclusions and Policy Recommendations

18. The overall solid financial health of the public enterprise sector and a sound corporate governance framework limit short-term fiscal risks. An overall operating surplus in 2004, combined with a low overall debt ratio and relatively few loss-making companies has allowed public enterprises to increase significantly their contributions to the government budget. A large increase in budget transfers to SOEs is therefore unlikely in the near-term. Risks are also mitigated by a sound regulatory framework that should ensure that SOE financial accounts are regularly audited by an independent auditor and subsequently provided to MSOE.

19. However, the existence of QFAs and inadequate compensation of PSOs by the budget has weakened the financial position of some public enterprises. The competitiveness of these companies has therefore been undermined, as they have had to limit maintenance expenditures and postpone needed investments. In addition, the lack of regular independent audits of some large companies, along with the lack of consolidated information on SOE financial operations and liabilities hinders fiscal management.

20. The announced creation of a fiscal policy office is a good step towards systematic monitoring of SOE operations and risks. The immediate priorities should be to:

  • Collect a database on SOEs with information on the number of employees, the legal status, the share of government ownership, the annual turnover, the operating balance, total liabilities, and arrears over the last three years.

  • Identify loss-making or vulnerable enterprises which may need closer monitoring.

  • Enforce the requirement that SOEs should submit quarterly data on their liabilities.

  • Require all SOEs, including Pertamina, to be audited by reputable private auditors and to publish their annual reports in a timely manner.

21. Finally, the following measures could help improve SOE profitability : (i) implementing financial performance contracts, with managers held accountable if targets are not met; (ii) taking steps to prevent SOEs from accumulating arrears towards suppliers, other SOEs or the tax authorities; and (iii) ensuring that PSOs are adequately identified, costed, and fully compensated in a timely manner.


  • Asian Development Bank, 2004, Indonesia SOE Corporate Governance, Manila (September).

  • Asian Development Bank, 2005, Progress Report on the State-Owned Enterprise Governance and Privatization Program, Manila (September).

  • Asian Development Bank, Privatisation and Restructuring of State-Owned Project, Manila (April).

  • Pangestu, Mari, 1993, The Role of the State and Economic Development in Indonesia; The Indonesian Quarterly, Vol. XXI, Vol. 3, pp. 253 –283.

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  • Pangestu, Mari, 1996, “The Role of the Private Sector in Indonesia,” Jakarta: Centre for Strategic and International Studies.

  • McLeod, Ross, 1997, Survey of Recent Developments; Bulletin of Indonesian Economic Studies, Vol. 33, pp. 3 –44.


Prepared By Amine Mati (FAD).


Little information is available on the contribution of SOEs to the economy. Both the AsDB progress report on SOE reforms in 2005 and a 2003 report by the Ministry of State-Owned Enterprises give figures as high as 40 percent for the share of SOEs in GDP. An earlier study (Pangestu, 1996) quotes only 15 percent.


SOEs also represent about 35 percent of the value of all listed securities. This reflects the sales of shares in a number of public companies to the private sector.


See“Public Investment and Fiscal Policy: Lessons from Pilot Country Studies” (see Public Investment and Fiscal Policy–Lessons from the Pilot Country Studies, The framework was first developed to assess which public enterprises should be covered in national fiscal accounts.


Under current regulations 50 percent of profits are paid as dividends although this sometimes depend on the company and budget needs.


Financial statements on SOEs’ performance have to be submitted quarterly to the Ministry of State-Owned enterprises (MSOE) and to the appropriate line ministry.


Banks and financial institutions were excluded from the analysis as the financial sector is monitored and regulated by Bank Indonesia and the capital market supervisory unit.


A measure of the nonfinancial SOE cash balance from the financing side shows an overall surplus of 0.5 percent of GDP in 2004 when looking at changes in bank loans and deposits (main source of information). Preliminary information for 2005 shows a deficit of 0.3 percent of GDP.


This framework is presented in (see Public Investment and Fiscal Policy–Lessons from the Pilot Country Studies,


Of the 158 SOE registered, Board of Commissioners in only 6 companies had a representative from the relevant line ministry. This greatly reduces the possibility of conflicts of interest.


However, steps are underway to improve the costing methodologies of POSs and to ensure that SOEs are adequately compensated.


An activity is designated as a QFA if it is of a fiscal nature but financed by a public, or in some cases, private corporation rather than the budget. Subsidies not fully covering the operational costs or investment required to meet a social target imposed by the government would constitute a QFA.


This does not include QFAs reported in the transportation sector (loss making terminals and rail network, low passenger fares); and infrastructure (low cost housing, or toll roads (tariff caps and building of non commercial roads) as information on the cost of such operations is not available.


Pertamina estimates that it should be refunded for the standard 15 percent retail margin shown in the industry.


Estimates from Pertamina. This is continuing in 2006 as PLN is reportedly accumulating about 0.1 percent of GDP a month in debt as it is currently functioning by not paying for its fuel supply.


These ratios are net profit margins (measured as net profit over total sales), return on assets (measured as net profits over total assets), and debt ratio (measured as total liabilities over total assets).


PLN actually had for the first time in four years a positive operational profit, but still had an overall net loss following interest on the tax for asset reevaluation and tax expenses.


These are long term multilateral and bilateral loans to the Indonesian Government that are then re-lent to the company to finance its projects. There is no collateral for these loans.

Indonesia: Selected Issues
Author: International Monetary Fund