Received: 27 November 2017 Revised: 4 February 2018 Accepted: 21 March 2018

DOI: 10.1002/app5.238

ORIGINAL ARTICLE

Matchmaking: Establishment of state‐owned

holding companies in Indonesia
Kyunghoon Kim

Department of International
Development, King's College London,
London, UK
Correspondence
Kyunghoon Kim, Department of
International Development, King's
College London, Bush House (NE) 4.01,
40 Aldwych, London, WC2B 4BG, UK.
Email: kyunghoon.kim@kcl.ac.uk;
sidkim0208@gmail.com
Abstract
Under the government of President Joko Widodo,
Indonesia's state‐owned enterprises (SOEs) have
become the driver of the national development strategy.
The current administration is actively using SOEs to
conduct development projects based on the belief that
SOEs are able to fix market failures and support the
fiscally constrained government. In order to strengthen
the role of SOEs, the Indonesian government is
pursuing a medium‐term plan of creating sector‐based
holding companies. The government expects that these
state‐owned holding companies (SOHCs) will enable
SOEs to expand investment and benefit from synergies.
However, considering political hurdles in implementing
this policy, the process of establishing SOHCs is
expected to advance gradually. The government also
continues to face challenges clarifying and communi-
cating the rationale behind creating SOHCs. This
paper examines the current political economic context
of SOE ownership reorganisation in Indonesia and
diverse views on the expected consequences of
forming SOHCs.

KEYWO RDS
corporate governance, economic nationalism, state capitalism,
state‐owned enterprise, state‐owned holding company

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This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial‐NoDerivs License, which permits
use and distribution in any medium, provided the original work is properly cited, the use is non‐commercial and no modifications or
adaptations are made.
© 2018 The Authors. Asia and the Pacific Policy Studies published by John Wiley & Sons Australia, Ltd and Crawford School of Public
Policy at The Australian National University.

Asia Pac Policy Stud. 2018;5:313–330. wileyonlinelibrary.com/journal/app5 313

314 KIM

1 | INTRODUCTION

In spite of a radical privatisation plan devised in the aftermath of the 1997 Asian financial crisis,
Indonesia's state‐owned enterprises (SOEs) continue to be present in various economic sectors.1
Some SOEs still enjoy near‐monopolistic power, and many others in more liberalised sectors
have held onto their dominant positions. Since the crisis, there have been two major compo-
nents of reorganising the government's SOE ownership in Indonesia, namely, privatisation
and establishment of state‐owned holding companies (SOHCs), both of which have been imple-
mented gradually.
Since President Joko Widodo (Jokowi) was sworn into office in October 2014, the Indonesian
government has been pursuing a SOE‐driven development strategy to stimulate national
advancement. As a consequence, privatisation has been abandoned as a major policy goal.
Instead, the Jokowi administration has made a significant effort to create sector‐based SOHCs,
which would own and manage state enterprises. The Indonesian government expects that these
SOHCs will have enhanced investment capacity enabling SOEs to drive the country towards
its economic potential.
This paper reviews the Indonesian government's policy to establish SOHCs and analyses
the debates surrounding the current SOE reorganisation strategy. Section 2 discusses the over-
all landscape of Indonesia's SOE sector and highlights major characteristics that are a result of
incremental SOE ownership restructuring. This section also shows that SOEs are the central
actors in the Jokowi government's development strategy. Section 3 describes Indonesia's cur-
rent SOE ownership arrangement and presents a brief history of SOHCs. Section 4 highlights
the key components of the current plan to create SOHCs and details recent legal and political
challenges in establishing SOHCs. Section 5 reviews the potential consequences of creating
SOHCs in Indonesia and policy implications. This section focuses on concerns regarding man-
agement capacity, synergies, corporate governance, and market competition. The final section
concludes the paper.

2 | I N D O N E S I A'S SOEs A ND REVIVAL OF S TATE

C A P I TA L I S M

After numerous foreign companies were nationalised under the Sukarno government (1945–
1967), SOEs began to play a central role in the Indonesian economy (Lindblad, 2009). During
the Soeharto era (1967–1998), the SOE sector swelled significantly, as the government invested
the revenue from commodity exports in expanding existing SOEs and establishing new enter-
prises to meet citizen's basic needs and lead industrialisation. During the oil boom of the
1970s, Pertamina, a national energy company, grew into the “the most powerful centre of
economic power in Indonesia,” as its revenue was invested in SOEs across a wide range of
economic sectors (Robison, 2009, p. 152). By the 1980s, SOEs were operating in various strategic
1
This paper defines SOEs as entities separate from public administration of which central government has direct own-
ership. SOEs include public enterprises whose capital is not divided into shares and are fully owned by the government
(perusahaan umum or Perum), state‐owned limited liability companies in which the government owns at least 51% of
equities (perusahaan perseroan or Persero), companies in which the government holds less than 51% of equities, and
those that are classified as other state business entities. This definition is broader than the Indonesian government's def-
inition of SOEs (badan usaha milik negara or BUMN), which only includes Perum and Persero. When it is necessary to
specify these entities, this paper uses the term “SOE (BUMN).”
KIM 315

industries, and many occupied leading positions (Hill, 1987; World Bank, 1981). The SOE sector
often faced financial constraints, but repeatedly survived difficult circumstances with govern-
ment support. SOEs were also used as a source of political patronage and formed an important
part of President Soeharto's franchise (McLeod, 2005). Plans were announced to improve the
performance of SOEs, but the actual implementation of the reform policies was slow (Pangestu
& Habir, 1989; Robison & Hadiz, 1993). Despite the social pressures to solve the problems of
SOEs, the government maintained that the SOE sector should play a pivotal role in the economy
(Gonzalo, Pina, & Torres, 2003). Hill (2000, p. 107) observed that the limited progress in SOE
reform compared “with Indonesia's bold reforms elsewhere and with other countries' overhaul
of the state enterprise sector, are particularly striking.”
In the late 1990s, Indonesia was in turmoil as the Asian financial crisis collapsed economies
across the region. In the process of negotiating a rescue deal, the Indonesian government and
international organisations recognised SOEs as a source of corruption and economic ineffi-
ciency. As a result, the incoming government devised policies to shrink the SOE sector and
“privatize all but a few selected enterprises within the next decade” (Government of Indonesia,
1998). However, the implementation was slow, as the government faced strong social and polit-
ical opposition, which was strengthened during the process of selling shares in Semen Gresik
and Indosat to foreign companies. After graduating from the IMF programme in 2003, the
Indonesian government continued to seek opportunities to sell government stakes in SOEs for
the following decade in the aim to strengthen its fiscal position amid weak tax revenues and ris-
ing fuel subsidies (Figure 1). However, the privatisation plan was less ambitious compared with
that of the immediate aftermath of the crisis and was implemented cautiously, which led to the
government often missing privatisation targets. Privatisation was conducted, but it involved
divestment of minority stakes in the majority of cases, as before. The establishment of holding
companies, another pillar of the SOE reform plan, was also slow. During this period of gradual
ownership reorganisation, the SOE sector as a whole experienced a rapid expansion from the
mid‐2000s as Indonesia recorded stable and healthy economic growth (Carney & Hamilton‐
Hart, 2015). As the country became a service‐driven economy and enjoyed a commodity boom
between the mid‐2000s and early 2010s (Hill, 2015), SOEs in the banking, telecommunication,
energy, and mining sectors recorded impressive growth. As a result, two of the key features of
Indonesia's SOE sector are remarkable.

FIGURE 1 Privatisation of state‐owned enterprises, Indonesia

316 KIM

First, SOEs remain powerful and continue to operate in diverse business sectors. As of 2016,
there were 148 SOEs in Indonesia, and their total assets were equivalent to 56.9% of the country's
GDP.2 According to the Global Industry Classification Standard, SOEs are found across 37 indus-
tries.3 The assets of SOEs are highly concentrated at the top, with the 10, 20, and 30 largest
companies accounting for 76.7%, 87.0%, and 92.1% of SOEs' total assets, respectively. The largest
SOEs are leading companies in their respective industries: For example, Pertamina's market share
was 96.0% in the special fuel retail sector, and Perusahaan Listrik Negara accounted for 72.8% of
the total installed electricity generation capacity in 2016. In terms of assets, the largest telecom-
munication service provider, the two largest banks, and the four largest construction firms in
Indonesia are SOEs. Mining SOEs are major producers in their segments, such as tin, copper,
gold, silver, nickel, and bauxite. SOEs hold dominant positions in various transportation infra-
structure sectors, such as toll road, railway, seaport, and airport operations, and manufacturing
sectors, such as cement, steel, train, ship, airplane, and defence industries.
Second, there are numerous SOEs of which the Indonesian government holds partial owner-
ship, a phenomenon that is also observed in other major emerging economies (Bruton, Peng,
Ahlstrom, Stan, & Xu, 2015; Musacchio & Lazzarini, 2014; OECD, 2016). In 2016, there were 89
fully state‐owned enterprises and 59 partly state‐owned enterprises (PSOEs) in Indonesia. Of the
59 PSOEs, the government owned over 50% of 34 companies and held an ownership share equals
to or less than 50% of 25 companies. The presence of PSOEs is particularly visible among largest
of the SOEs. Of the 30 largest SOEs in terms of assets, there were 17 PSOEs. Of these 17 PSOEs,
the government ownership share of 14 companies was over 50%. Many PSOEs are the product of
partial privatisation over the past two decades. Full privatisation, and even privatisation of majority
stakes, has been rare in Indonesia, and the government continues to be the dominant owner of most
privatised SOEs. Many large SOEs have been partially privatised through share listing, resulting in
SOEs accounting for 26.5% of the total domestic market capitalisation in 2016. Other mechanisms
behind the government's partial ownership include establishment of joint ventures, acquisition of
strategic assets, and shifting ownership to other SOEs.
When Jokowi entered office in 2014, the government's SOE sector strategy changed signifi-
cantly. SOEs were now chosen to take on a more active role in economic development. Jokowi
has repeatedly referred to SOEs as the agents of development (agen pembangunan) and
reminded them that their major goal should be to contribute to national advancement. Jokowi
has been critical of past governments' use of SOEs as cash cows and profit maximisation as
SOEs' priority. The President noted that the duty of SOEs in the construction sector is “to build
as much infrastructure as possible rather than simply enjoying profits from the existing ones”
(Antara, 2017a). With this policy direction, privatisation has largely been excluded from govern-
ment agenda. 2015–2016 was the first time since the Asian financial crisis that the government
did not privatise SOEs for two consecutive years.4
The Jokowi government's decision to actively use SOEs in economic development, particu-
larly in infrastructure expansion, is based on two factors. First, the government has little room

2
Corporate financial data from the audited central government financial report and GDP data from Statistics Indonesia
were used.
3
GICS consists of 68 industries. SOEs are assigned an industry according to their major business operation; therefore, if
all of their business activities are included, then the number of industries in which they are present is expected to be
higher.
4
During the first half of the Jokowi administration, the government planned to privatise only four SOEs in serious finan-
cial difficulties. These four SOEs were small, accounting for just 0.07% of the SOE sector's total asset in 2015.
KIM 317

to increase investment alone. The current administration did significantly expand infrastructure
spending and support to SOEs in initial years after reducing energy subsidies. A decline in inter-
national energy prices during this period made cutting fuel subsidies relatively simple. However,
the government has since faced strong pressures to expand social spending amid high inequal-
ity, while being constrained by its fiscal rule that limits annual fiscal deficits to 3% of the GDP.
Indonesia, with one of the lowest tax revenue ratios, has recently been trying to improve its
fiscal position through various measures, such as the tax amnesty programme, though the
immediate effects have been limited. As a result, turning SOEs into investment machines has
been regarded as a viable option to solve immediate economic challenges.
Second, changes in the development strategy are related to a decade of the private sector's
limited participation in infrastructure development. Arousing the interests of private investors
has been difficult due to slow regulatory reform in Indonesia (Davidson, 2015; World Bank,
2013). Instead, Jokowi believes that SOEs can finance projects with long gestation periods and
fix capital‐market failures. Experts on SOEs have commented that Jokowi's SOE strategy is less
ideological‐driven and more pragmatic.5 Many have noted that Jokowi acts like a business‐
minded corporate strategist who, given the surmountable challenges and the tools in hands,
has devised a straightforward plan to achieve national goals. For Jokowi, the most important
national goal has been “upgrading the infrastructure, fixing the infrastructure, building infra-
structure” (Bloomberg, 2017).
Under the Jokowi government, SOEs have been carrying out projects in various economic
areas. SOEs are leading Jokowi's major development programmes, such as the “one fuel price
policy” and “35,000 megawatt electricity project,” as well as ventures in line with Indonesia's
long‐term reindustrialisation goal. SOEs in infrastructure operations and construction sectors
are actively participating in projects that are expected to improve national connectivity. SOEs
are carrying out headline‐grabbing projects, such as the “trans‐Sumatra toll road”, “Greater
Jakarta light rail transit,” and “Jakarta‐Bandung high‐speed rail.” State enterprises are also
increasingly taking over projects previously owned by the private sector with little progress,
such as the “Bocimi toll road.” Although corporate analysts have raised concerns on the side
effects of SOEs' rapid expansion, most have agreed that the pace of infrastructure development
has accelerated under the current SOE‐led strategy.6
The government's direct project funding, as well as financing tools, such as preferential lend-
ing by state‐owned banks, project guarantees, and asset securitisation, is supporting SOE partic-
ipation in development programmes. Although the aim of these measures is to implement
specific projects, the government also aims to develop the SOE sector so that state enterprises
can finance future projects without relying on government budget. Therefore, the government
has been pursuing policies to strengthen SOEs' capital structure, which would bring fundamen-
tal changes to SOEs' capacity. On top of reducing energy subsidies by two‐thirds and doubling
infrastructure‐related spending, another major change in the government budget in the first
2 years of the Jokowi administration was a dramatic increase in state capital injections
(penyertaan modal negara or PMN) into SOEs. Previously, post‐crisis governments mainly used
PMN for supporting ailing SOEs and establishing agencies to stimulate private infrastructure
investment. However, under the Jokowi government, PMN was given to a wide range of SOEs
to support expansion. In 2013–2014, only three SOEs (BUMN) received PMN, whereas this
number increased to 43 in 2015–2016. PMN into SOEs (BUMN) in 2015–2016 was 2.5 times

5
Author's interviews with academics, researchers, and corporate analysts, Jakarta, November 2017.
6
Author's interviews with corporate analysts of Indonesia's leading financial firms, Jakarta, November 2017.
318 KIM

FIGURE 2 State capital injection into state‐owned enterprises (BUMN), Indonesia

larger than the aggregate amount of the previous decade (Figure 2). As a share of total govern-
ment expenditure, the recent PMN was similar to a level last seen in the early 1980s.
However, increasing PMN for SOEs could only be a one‐off solution due to political and
fiscal difficulties. Disbursement of PMN in 2016 was frozen for half a year because policy oppo-
nents in the National House of Representatives argued that social spending should be prioritised
over PMN. These opponents were also critical of weak mechanisms used to monitor SOEs
receiving PMN (Jakarta Post, 2015a, 2015b, 2016a). Therefore, the government searched for a
more sustainable way to expand the SOE sector and decided to establish sector‐based holding
companies. In December 2015, the Minister of SOEs, Rini Soemarno, presented a plan to create
SOHCs across 16 sectors to the President (Jakarta Post, 2015c). Since then, Jokowi has
emphasised the importance of creating SOHCs and argued that they would enable the SOE sec-
tor to strengthen their contribution to national development, as well as give birth to world‐class
companies (Jakarta Post, 2016b).

3 | P REVI OU S EFFO RTS TO ESTA BL I SH S OH CS

Indonesia currently has a unique SOE ownership arrangement in which the Ministry of
SOEs represents the government as the owner of most SOEs.7 In a group of countries with a
centralised SOE ownership model, Indonesia's structure is rare, as there is a stand‐alone
ministry responsible for SOE ownership.8 More common types of centralised ownership
arrangements are ownership under a department or an agency in a ministry, or under a com-
pany‐type structure with a separate legal identity. According to the World Bank's categorisation
of 16 countries with a centralised ownership arrangement, Indonesia was the only country with
a ministry‐level ownership structure (World Bank, 2014, p. 82).
When designing the SOE reform plan following the Asian financial crisis, the Indonesian
government proposed the idea of creating SOHCs, though the focus was firmly on privatisation
7
As of 2016, the Ministry of SOEs carried out the government's ownership role for 143 of 148 SOEs. There were five SOEs
under the Ministry of Finance: two specialised in infrastructure financing, one in mortgage financing, one in export
financing, and one in geothermal energy development.
8
The Ministry of SOEs was established in 1998, dissolved in 2000, and re‐established in 2001. Previously, Indonesia had
adopted a dual model with line ministries and the Ministry of Finance being jointly responsible for governing SOEs.
KIM 319

(Ulfa, 2017). After Indonesia was relieved of the drawn‐out effects of the crisis in the mid‐2000s,
the government began to pay greater attention to SOHCs. Under the reorganisation plan, SOEs
were divided into three groups: those going to remain as stand‐alone companies, those to be
merged with one another, and those to become subsidiaries of sector‐based SOHCs. The govern-
ment prioritised creating SOHCs in fertiliser, cement, plantation, and mining sectors, while also
considering SOHCs in logistics, energy, and tourism sectors (Wicaksono, 2008). In the longer
term, the government envisioned to create a super‐holding company similar to Singapore's
Temasek Holdings or Malaysia's Khazanah Nasional.9 These companies were seen as a success-
ful model of SOE management in which the government had adopted a more arms‐length
approach to SOEs' operational decision‐making. With this plan, Sofyan Djalil, the reform‐
minded Minister of SOEs from 2007 to 2009, told a group of journalists that, “It is my wish that
I am the last minister of state‐owned enterprises” (Financial Times, 2007).
Creating sector‐based holding companies was aimed at achieving three major goals. First,
the government hoped to strengthen SOEs' corporate performance by creating synergies
and economies of scale and reducing inefficiencies in operations and financing. Second, the gov-
ernment aimed to professionalise the management system by distancing SOEs from politics. After
establishing SOHCs, the management role over groups of SOEs is centralised at designated hold-
ing companies that devise a strategy to maximise their group's performance. This reorganisation
was expected to cause many SOEs to move away from the direct influence of politicians, as well as
the technical ministries, thereby granting greater independence to SOEs. Third, with SOHCs, the
government would be relieved of its direct responsibility of overseeing all the SOEs dispersed
across various industries. Instead, the government hoped to use this energy and budget else-
where. Due to these merits of creating holding companies, a number of countries, such as
Malaysia and Singapore, which have company‐type structures adequate for managing SOEs, have
seen an impressive performance of their state enterprises (World Bank, 2014, pp. 88–93).
During President Susilo Bambang Yudhoyono's two terms in office (2004–2014), the estab-
lishment of SOHCs gradually moved forward, and four SOHCs were created. In the cement
and fertiliser manufacturing sectors, there already existed operating holding companies,
Semen Gresik and Pupuk Sriwidjaja, since 1995 and 1997, respectively, after the government
had transferred the other SOEs' equities. Under the coordination of these SOHCs, SOEs,
which had become subsidiaries after the establishment of SOHCs, were supposed to cooperate
with one another in general business activities, financing, procurement, and capacity develop-
ment. However, because each subsidiary maintained its own strategy‐making and governance
mechanisms, collaboration efforts were limited and conflicts often arose. The holding compa-
nies maintaining their operating businesses complicated the matter further. To overcome
these problems, the Yudhoyono government turned operating holding companies in the
fertiliser sector and the cement sector into strategic holding companies in 2011 and 2012,
respectively. Subsequently, these strategic holding companies had a new corporate entity,
Pupuk Indonesia and Semen Indonesia. Operating companies, including the spun‐off operat-
ing holding companies, became subsidiaries of these strategic holding companies, which were
the sole body responsible for devising corporate strategy without an operating business (Pupuk
Indonesia, 2017; Semen Indonesia, 2017).
9
The World Bank categorises company‐type SOE ownership structures into holding companies and investment compa-
nies. Holding companies are entities that manage government assets in the portfolio, and investment companies are
active strategic investors of the government. Temasek Holdings and Khazanah Nasional fall into the latter category,
yet they are defined as super‐holding companies throughout this paper, as the Indonesian government prefers to use this
term.
320 KIM

In 2014, two new operating holding companies were established. The government shifted
90% of the shares of 13 SOEs in the plantation sector to Perkebunan Nusantara III and 100%
of the shares of five SOEs in the forestry sector to Perhutani. These two holding companies have
continued their operating businesses and owning the shares of other SOEs. Since their forma-
tion, these holding companies have undergone organisational transformation to adjust to the
new ownership structure. It is uncertain whether the companies will develop into strategic hold-
ing companies, as in the case of those in the cement and fertiliser sectors (Perhutani, 2017;
Perkebunan Nusantara III, 2017).
The characteristics of SOHCs established in this period vary, reflecting different historical
backgrounds and reorganisation strategies across sectors. First, the SOHCs' subsidiary owner-
ship patterns differ. For instance, although the government has shifted all of its ownership in
SOEs to SOHCs in the cement sector and the forestry sector, it continues to own 10.0% of all
SOHC subsidiaries in the plantation sector. In the fertiliser sector, the government has
relinquished all of its ownership in all subsidiaries except Rekayasa Industri in which it con-
tinues to hold 4.97% of the ownership. Second, the government's ownership shares in SOHCs
differ. Although the government fully owns SOHCs in the fertiliser, plantation, and forestry
sectors, it owns 51.0% of the holding company in the cement industry.

4 | T H E C U R R E N T PL A N A N D CH A L L E N G E S
Under the Jokowi government, the emphasis on creating SOHCs has shifted from profes-
sionalisation and streamlining to corporate expansion. As the government sought capital that
would enable SOEs to treble investment between 2016 and 2018, the establishment of SOHCs
became a central component of SOE strategy (Jakarta Post, 2016c). The government has contin-
ued to highlight the benefits of reducing duplication and creating operational synergies yet
expects the most significant changes to come from a higher leverage to fund SOEs' expansion.
For example, the establishment of a holding company in the mining sector is expected to
increase the size of aggregate assets from 65.6 trillion rupiahs to 182 trillion rupiahs, an increase
of approximately 116 trillion rupiahs. An increase in debt leverage would contribute to an
increase of 114 trillion rupiahs, whereas synergies would increase assets by two trillion rupiahs
(Jakarta Post, 2016d). The government believes that leverage ratios can be raised significantly
with the size of corporations (for a discussion on the relationship between firm size and lever-
age, see Booth, Aivazian, Demirguc‐Kunt, & Maksimovic, 2001; de Jong, Kabir, & Nguyen, 2008;
Fan, Titman, & Twite, 2012; Gungoraydinoglu & Öztekin, 2011). In the mining industry, the
government hopes that the debt‐to‐equity ratio of SOHC can be between 2 and 3, considering
its aggregated equity size (Tempo, 2017). In 2016, the weighted average debt‐to‐equity ratio of
four individual state mining companies involved in this SOHC was 0.45.10
Compared with the past, the current method of SOHC establishment is more uniform, and
industry coverage is much broader. Since revealing the plan to create 16 SOHCs, the Ministry of
SOEs has been focusing on six sectors, namely, oil and gas, mining, housing construction, infra-
structure construction, financial services, and food commodities. In August 2016, the Ministry of
SOEs designated six fully state‐owned companies to act as SOHCs in these sectors (Antara,
2016a). The plan involved these companies holding government's equities in SOEs, which are
fully or partly owned by the state, in respective sectors. The next set of industries in which
10
This figure is for mining companies in which the central government held over 50% of shares before the establishment
of a SOHC.
KIM 321

the government plans to create SOHCs is maritime transportation, ship and heavy equipment
manufacturing, pharmaceuticals, and insurance (Antara, 2016b). The government aims to cre-
ate operating holding companies in most sectors, meaning that designated SOHCs will maintain
their operating businesses at the time of establishment. The government has appointed individ-
uals with relevant expertise to lead designated SOHCs. For example, in 2017, Elia Massa Manik,
who had led the plantation holding company, Perkebunan Nusantara III, was appointed as
president director of a national oil and gas company, Pertamina. Budi Gunadi Sadikin, who
had overseen a major acquisition deal when leading Bank Mandiri, was appointed as president
director of a state‐owned mining firm, Inalum (Antara, 2017b; Jakarta Globe, 2017). The Jokowi
government has also maintained a long‐term vision of creating a super‐holding company
(Kementerian BUMN, 2016).
In order to increase the speed of implementation, the government needed an overarching leg-
islation to establish SOHCs across various sectors. Previously, the legal basis of SOHC formation
was determined on a case‐by‐case basis, and the establishment process was time‐consuming.
Weak legal foundations meant that the bureaucratic hurdles and resistance from political and
social arenas were able to slow down the process. Although there exist practical concerns, as will
be discussed in the next section, the creation of SOHCs was vulnerable to opposition from actors
with vested interests. Politicians in favour of economic nationalism opposed any policy that
appeared to weaken direct government control of SOEs (for a discussion on the recent resurgence
of economic nationalism in Indonesia, see Aspinall, 2015; Davidson, 2016; Robison & Hadiz,
2017). Also, the establishment of SOHCs meant that the existing relationship between politicians,
bureaucrats, and individual SOEs had to be reorganised. Losing the status of a SOE (BUMN) and
becoming a subsidiary of another SOE worried workers and managers who have enjoyed certain
privileges and security. To overcome these obstacles, the government required legal basis to trans-
fer SOE shares to designated holding companies, irrespective of the sector. Therefore, the govern-
ment enacted the Government Regulation 72/2016 (PP 72/2016) at the end of 2016 to amend the
Government Regulation 44/2005 (PP 44/2005) concerning “Procedures and Administration of
State Capital Investments in State‐Owned Enterprises and Limited Liability Companies.” Since
this amendment, conflict surrounding PP 72/2016 has consumed much of the government's
energy and time. Despite extensive planning, the establishment of SOHCs was stuck in the imple-
mentation stages, and the government repeatedly missed target deadlines during 2016 and 2017.
The main point of contention was Article 2A of PP 72/2016. This article allows central gov-
ernment to transfer state capital in SOEs (BUMN) or limited liability companies (LLCs) to other
SOEs (BUMN) or LLCs without using the state budget mechanism. Therefore, the transfer of
capital, as defined in Article 2A, does not require the approval of the National House of Repre-
sentatives. Many parliamentarians have since argued that PP 72/2016 weakens the House's
power over SOE affairs and erodes quality of governance. Some critics have even argued that
Article 2A could provide an opportunity for the government to hand over SOE (BUMN) shares
to private entities. Critics were suspicious that the government, albeit not necessarily the cur-
rent one, may seize the opportunity to carry out murky privatisation without knowledge of
the House.11 Based on these arguments, PP 72/2016 was accused of contradicting a long list
of legislations with higher hierarchy, including Articles 23 and 33 of the Constitution, Article

11
These arguments were twofold. First, critics argued that government could directly sell or transfer SOE shares to pri-
vate entities without the approval of the House. Second, after SOEs become the subsidiaries of holding companies, critics
argued that sales of these subsidiaries would be decided by the General Meetings of Shareholders and would not require
the approval of the House.
322 KIM

4(2) of the SOE Law (UU 19/2003), and Article 24 of the State Finance Law (UU 17/2003;
Dewan Perwakilan Rakyat, 2017; Hukumonline, 2017a, 2017b). This check‐and‐balance argu-
ment has often involved nationalistic rhetoric. Some lawmakers have suggested the possibility
of Pertamina's assets being transferred to multinational company Chevron and the National
Monument (Monas) being sold to foreigners. The conflict escalated as lawmakers of Commis-
sion VI and Commission XI of the House of Representatives, who are in charge of SOE affairs
and state finances, respectively, asked the government to revoke PP 72/2016 (Jakarta Post,
2017a; Kompas, 2017a).
Despite opposition, the government maintained its firm stance. The government disagreed
that PP 72/2016 contradicted other laws and repudiated the possibility of the government using
Article 2A to hand over SOEs (BUMN) to the private sector (Kementerian BUMN, 2017a). The
government highlighted that Article 4(1) of the SOE Law (UU 19/2003) already states that SOEs'
capital is separate from the state budget, and the management of SOE capital is not based on the
state budget system. Also, the government argued that PP 72/2016 should be interpreted as a part
of PP 44/2005 and that the critics have misinterpreted Article 2A by overlooking other articles in
PP 44/2005. Article 23 of PP 44/2005 states that “sales” of government shares in SOEs (BUMN)
must be implemented according to the legislations on privatisation. Those legislations are Article
82(2) of the SOE Law (UU 19/2003) and Article 24(5) of the State Finance Law (UU 17/2003),
which require consultation with and approval from the House when selling SOEs (BUMN).
Therefore, the government argued that Article 2A of PP 72/2016, a clause for transferring state
capital, cannot be a legal basis upon which privatisation is carried out. Moreover, Article 6 of
PP 44/2005 states that the government's provision of capital, including “transfers” of government
shares in SOEs (BUMN), to private LLCs is only possible in circumstances where it is necessary to
save the national economy. Such an act requires approval of the House, as mandated by Article
24(7) of UU 17/2003. Furthermore, the government emphasised that its control over SOEs will
not be weakened because it will own 100% of holding companies and golden shares, as known
as Dwiwarna shares, in SOEs (BUMN) that will become future subsidiaries of SOHCs.12
After almost 3 months of intense debate, the issue was brought to the Supreme Court. A
group of individuals and organisations, including the Muslim Students Association Alumni
Corps (Korps Alumni Himpunan Mahasiswa Islam), represented by a former Chief Justice of
the Constitutional Court, Mohammad Mahfud, filed a petition for judicial review of PP 72/
2016. The Supreme Court's decision (Putusan 21 P/HUM/2017) in June 2017 was a victory for
the government, as it confirmed the legitimacy of PP 72/2016. This decision allowed the govern-
ment to continue its SOE ownership reorganisation plan. Since this point, the Ministry of SOEs
has reiterated its intentions to speed up the establishment of SOHCs, starting with those in the
oil and gas and mining sectors (CNN Indonesia, 2017a).
A holding company in the mining sector has been established first. The government has paid
particular attention to the mining sector, believing that the holding company will be able to par-
ticipate in purchasing shares of Freeport Indonesia when divestment agreements between the
Indonesian government and Freeport Indonesia's parent, U.S.‐based Freeport‐McMoRan, is
complete (Antara, 2017c).13 The government also expects that the enhanced investment capacity
12
Dwiwarna shares give the government special voting and veto rights in a range of major governance issues including
appointment and dismissal of executive directors and commissioners and amendments to the articles of association.
13
As of 2016, the Indonesian government owned 9.36% of Freeport Indonesia, the largest copper and gold mining com-
pany in the country. This ownership has resulted from the company handing over the equities upon the government's
request in the 1970s and the 1990s (Leith, 2003). The 2017 divestment rule requires foreign mining companies, including
Freeport Indonesia, to gradually divest at least 51% of their shares to Indonesians.
KIM 323

will contribute to developing downstream industries. Three mining SOEs that have been desig-
nated as subsidiaries held an extraordinary general shareholders meeting in November 2017,
and proposed changes to their articles of association were approved (Inalum, 2017; Kementerian
BUMN, 2017b). The oil and gas holding company was established in April 2018 after the govern-
ment approved the transfer of its stake in Perusahaan Gas Negara to Pertamina. The govern-
ment expects that the holding company will be able to accelerate the development of energy
infrastructure and expand oil and gas production (Kementerian BUMN, 2018).
Even after the Supreme Court's decision clarified the legality of PP 72/2016, the House of
Representatives can still delay SOHC establishment in the future. The Ministry of SOEs needs
to consult not only the Commissions of the House of Representatives responsible for state
enterprises and state finance but also those overseeing industry‐level matters in order to move for-
ward the process. Because many parliamentarians continue to argue that PP 72/2016 weakens the
supervisory role of the House of Representatives, they are expected to be uncooperative during this
process. Furthermore, although the Minister of SOEs, Rini Soemarno, has become one of the most
powerful figures in the Jokowi cabinet, conflicts between the House of Representatives and the
Minister have endured. Since her appointment in October 2014, Rini has been acting as a central
figure in Jokowi's development strategy. She has survived cabinet reshuffles and became the Min-
ister of SOEs for the longest undisrupted period in January 2018. However, she has been prohibited
from attending meetings at the House of Representatives since December 2015, after a special
inquiry committee uncovered a corruption case involving a port‐operating SOE. Even though her
direct connection to this case was not proven, the committee recommended that Jokowi dismiss
her. This conflict is connected to the disapproval of Rini by Megawati Sukarnoputri, a former
Indonesian President and current chairwoman of Jokowi's political party, the Indonesian Demo-
cratic Party of Struggle (Partai Demokrasi Indonesia Perjuangan), from the start of the administra-
tion. It is known that a close relationship between Rini and Megawati was disrupted when Rini
entered the cabinet without the consent of Megawati who is the leader of the largest party in the
House of Representatives. Since the ban, the Finance Minister, Sri Mulyani Indrawati, has been
attending important meetings at the House of Representatives in place of Rini. However, due to lim-
ited information on SOEs available to other ministers, the discussion and coordination between the
Ministry of SOEs and the House of Representatives has been slow (Detikfinance, 2016; Jakarta Post,
2016e, 2017b). These political factors indicate that the SOE ownership reorganisation plan could
face more hurdles in the near future.

5 | P R A C T I C A L CO N C E R N S AN D P O L IC Y I M P L I C A T I O N S

Despite the merits of creating holding companies highlighted in Section 3, the success depends
much on the context of the country in which this policy is pursued. Since the Indonesian gov-
ernment announced its intention to create sectoral holding companies following the Asian
financial crisis, there have been debates on the effects of this ownership reorganisation method.
Although the legal conflicts on PP 72/2016 have abated, the debates on these more fundamental
issues are not likely to end. In fact, as the Jokowi government has been pursuing a monothetic
approach to SOE reorganisation across a wide set of industries, criticism has intensified. This
section summarises the concerns surrounding management capacity, synergy creation, gover-
nance mechanisms, and the crowding‐out effects of SOHCs.
First, the current plan to transfer SOE ownership to fully state‐owned companies has
aroused questions on the management capacity of SOHCs. Currently, SOEs that have been
324 KIM

partially privatised are, for the most part, the largest companies in their respective industries.
On the other hand, smaller SOEs with limited expected benefits from privatisation have largely
remained fully owned by the government. In the financial industry, the fully government‐
owned company Danareksa is expected to become the holding company of the country's listed
banking giants. Danareksa is the smallest company in the grouping with assets equivalent to
just 0.1% of the group's aggregate assets. The assets of Bank Mandiri, the largest SOE in the
grouping, are almost 290 times larger than Danareksa's. Although this is an extreme case, a sim-
ilar picture is apparent in other sectors, such as mining and construction industries. In these
cases, the balance of power is expected to lie with the subsidiaries, leading to a situation where
“children control their parents,” and the SOHCs' coordinating capacity will be limited.14 More-
over, the situation will become even more complex when SOHCs with limited management
capacity must deal with larger SOEs' minority private shareholders.
Second, the expected synergies from creating SOHCs are ambiguous. In terms of operations,
the overlap of SOEs' business segments and geographical areas is limited in some sectors, which
raises questions on the potential for synergies. Increasing cooperation between subsidiaries of
SOEs that operate in the same sector or geographical areas may be beneficial, but the potential
of the influence and management capacity of SOHCs to reach this level is uncertain. In terms of
finance, corporate size is not the only factor influencing leverage capacity.15 SOEs performing
strongly with good credit ratings may be “dragged down” by poorly performing SOEs under
the same SOHC.16 In these circumstances, the investment capacity of the former may be hurt
while having limited positive effects on that of the latter.
Rushing to create SOHCs without designing adequate internal control mechanisms and
analysing post‐integration effects would lead to disappointing outcomes. Therefore, the govern-
ment needs to examine and strengthen the capacity of designated SOHCs in managing and coor-
dinating future subsidiaries. If balancing power between SOHCs and future subsidiaries is
challenging due to technical and political reasons, then the government must consider changing
parent companies. Moreover, future subsidiaries should search for synergies and dis‐synergies in
operational and financial aspects prior to SOHC formation. While exploring ways of maximising
potential synergies, the government must also consider how it would deal with the negative
effects of integrating companies with different characteristics. Also, the government must discard
the plan to create SOHCs in certain sectors if dis‐synergies are expected to significantly outweigh
top‐line synergy estimates. Instead, other SOE reorganisation methods, which have largely been
overlooked by the current administration, such as privatisation, closure, and mergers, as well as
ways of improving individual SOEs' performance, should be considered.
Third, there are concerns surrounding corporate governance. The current structure of
Indonesia's SOE sector is already complex. As a result of vertical and horizontal diversification,
many SOEs have a pyramidal ownership structure with numerous subsidiaries. The total num-
ber of SOE (BUMN) subsidiaries, often called the children and grandchildren (anak cucu), is
estimated to be 800 (Kompas, 2017b). Because the requirement to reveal information on subsid-
iaries, which are technically not classified as SOEs (BUMN), is weak, and the oversight capacity
of stakeholders is limited, corruption often occurs in these subsidiaries. Also, these subsidiaries'

14
Author's interview with researchers at Indonesia's major economic think tank, Jakarta, November 2017.
15
Corporate analysts of Indonesia's leading financial firms noted that the government's method of calculating the
expected increase in assets and the contribution of leverage to this was unclear. Some commented that the numbers were
exaggerated or too optimistic. Author's interviews, Jakarta, November 2017.
16
Author's interview with Faisal Basri, a political economist at the University of Indonesia, Jakarta, November 2017.
KIM 325

commissioners are frequently politicians and former directors of their parent companies, who
use the enterprises as “retirement homes.”17 Although the proponents of SOHC establishment
argue that holding companies will be able to monitor these subsidiaries more closely and pro-
fessionally, some believe that adding another layer to the SOE ownership structure will make
monitoring even more difficult for stakeholders. Critics argue that after the establishment of
SOHCs, the grandchildren will become great grandchildren.
Currently, the role of House of Representatives and public oversight bodies, such as the
Audit Board (Badan Pemeriksa Keuangan), in overseeing activities of SOHCs' subsidiaries is
vaguely defined. To resolve this issue, the government should establish new mechanisms or
institutions that fill the gap through negotiations with stakeholders. Individuals or groups
that have previously slowed down SOE ownership reorganisation are often viewed as rent‐
seekers with vested interest, though some believe that they play an important role in checks
and balances in democratic Indonesia.18 For example, some argue that the 6‐month long
debate on PP 72/2016 strengthened the government's position by clarifying uncertainties in
the legal basis. Granting a stronger supervisory role over SOHCs and their subsidiaries to
stakeholders may not only strengthen governance but also repair the relationship between
the Ministry of SOEs and the House of Representatives, which are crucial in pushing forward
the reorganisation plan.
Finally, there are concerns surrounding the effects of SOHCs' presence on competition envi-
ronment. Private businesses have already begun to contest the Jokowi administration, which has
been strengthening support to SOEs and promoting cooperation between SOEs in order to reduce
“unhealthy” competition among them. Complaints have been particularly strong in the construc-
tion sector, in which SOEs have been assigned key infrastructure projects and enjoyed recent
expansions in government infrastructure investments. From 2014 to 2016, the aggregate assets
and revenues of four listed SOEs in the construction sector increased 168.9% and 53.3%, respec-
tively.19 On the other hand, the assets of listed private construction firms increased by just
13.8%, whereas their revenues shrank by 5.8%. Private construction companies, represented by
business associations such as the Indonesian Builders Association (Gabungan Pelaksana
Konstruksi Nasional Indonesia or Gapensi), and the Indonesian Chamber of Commerce and
Industry (Kamar Dagang dan Industri Indonesia or Kadin), have criticised unfair opportunities
in government projects (Jakarta Post, 2016f, 2017c). These complaints are not just based on the
government's recent preference but also the path‐dependence nature that has resulted in SOE
dominance for decades. Based on the listed construction companies' assets, the size of the largest
private company was just one third of the smallest SOE, or one tenth of the largest SOE, in 2016.
The aggregate size of the 15 listed private companies was just one fifth of the four listed SOEs.
Similar concerns have also been raised in other industries, such as transportation sectors (Jakarta
Post, 2016g). There are worries that the creation of SOHCs would intensify dominance of the state
sector, because enlarged capital would enable SOEs to expand and diversify. Also, if SOEs under
the same umbrella coordinate during tender and procurement, they could harm competition.
Some believe that complaints from the private sector, particularly in the infrastructure
industry, are groundless given its opportunities in the past two decades. Also, many corporate
analysts argue that domestic private companies simply do not have the financial and

17
Author's interview with Almizan Ulfa, a senior researcher at the Ministry of Finance, Jakarta, November 2017.
18
Author's interview with Ahmad Erani Yustika, a political economist at the University of Brawijaya, Jakarta, November
2017.
19
Corporate financial data from Osiris database were used.
326 KIM

operational capacity to carry out large‐scale projects that the Indonesian government is pursu-
ing.20 However, the large presence of SOEs, as well as the potential effects of SOHCs on market
competition, could have adverse effects on the Jokowi government's efforts to attract private
investment. The government's medium‐term infrastructure plan indicates that 30.7% of the total
funding between 2015 and 2019 must come from private investors. Given the significant eco-
nomic and social changes during the past decade, Indonesia needs to consider revising the
SOE Law (UU 19/2003) and the Competition Law (UU 5/1999) to reflect the private sector's
concerns on the dominance of SOEs in various economic areas. Accordingly, the responsibility
of the Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan
Usaha or KPPU) over SOE‐related affairs requires careful review. Currently, the KPPU's role
in matters concerning SOEs and SOHCs is constrained by other legislation governing state
enterprises (CNN Indonesia, 2017b; Jawa Pos, 2017; KPPU, 2013).

6 | CONCLUSION

The Jokowi government is carrying out SOE‐centred development strategy to overcome the lack
of private interest in vital projects and its limited fiscal capacity. The government believes that the
creation of SOHCs plays a pivotal role in enabling SOEs to expand future investment. However,
an analysis of the recent difficulties in implementing related government regulation shows that
SOHC establishment will remain challenging for the foreseeable future. Furthermore, the
government's consensus building efforts on establishing SOHCs have been weak. Although
SOHCs in certain sectors are expected to contribute to achieving the stated motives and the
government's long‐term development goal, the rationale for other sectors continues to be ambig-
uous. In other words, the adequacy of a one‐size‐fits‐all SOHC formation strategy across sectors is
questionable. The plan does not sufficiently reflect Indonesia's heterogonous collection of SOEs in
diverse industries. There are also significant uncertainties surrounding the effects of SOHC estab-
lishment on SOE performance, governing mechanisms, and market competition. It seems that
the government is not seriously considering other methods of reorganising SOE ownership. If
the government moves forward with the current ownership reorganisation policy centred on
SOHC establishment without sufficiently explaining the rationale behind it, the implementation
stage could become vulnerable to nationalistic rhetoric that clouds the key issues of strengthening
SOE contribution to national development, as seen during the debate on PP 72/2016.
Although successive governments have repeatedly emphasised their long‐term goal of creat-
ing a super‐holding company with the aim of allowing greater independence and political
insulation, the current sectoral holding company design does not take into account the key
components that make super‐holding companies what they are. It is not the SOE ownership
structure that has automatically resulted in market‐oriented behaviour of, for example,
Singaporean SOEs, but rather the institutional and legal basis that have supported more auton-
omous corporate strategy‐making mechanisms while improving oversight apparatus. Further-
more, the government tends to overlook the compatibility of creating an independent and
profit‐oriented super‐holding company with the Articles 33(2) and 33(3) of the Constitution,
which are often referred to as the basis of the government's control over SOEs.21 Without
20
Author's interviews with corporate analysts of Indonesia's leading financial firms, Jakarta, November 2017.
21
Article 33(2): Branches of production that are important to the state, and that affect the public's necessities of life, are
to be controlled by the state. Article 33(3): The earth and water and the natural resources contained within them are to
be controlled by the state and used for the greatest possible prosperity of the people.
KIM 327

meaningful reinterpretation of these articles and consensus building, any significant plan to
reorganise SOE ownership is expected to involve more talk and less action in Indonesia.

ORCID
Kyunghoon Kim http://orcid.org/0000-0002-3460-4553

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How to cite this article: Kim K. Matchmaking: Establishment of state‐owned holding

companies in Indonesia. Asia Pac Policy Stud. 2018;5:313–330. https://doi.org/10.1002/
app5.238