Government-run companies in Indonesia are unhappy with the level of bureaucracy that plagues the financial system, making it difficult for them to run their business smoothly, particularly their treasury-related functions.
State-owned enterprises (SOEs) find it difficult to raise offshore financing. This is because of a law known as ‘Pertujuan Kredit Luar Negeri’ which translates into ‘International Credit Approval’ that these entities need to go through in order to get the green light to issue an offshore bond or obtain and foreign loan.
“If I want to borrow even US$1 million from Singapore or Hong Kong, I have to go through these six ministers to get their approval on a sheet of paper,” said a chief financial officer (CFO) of a mining and metals company to Asiamoney PLUS in an interview in Jakarta on May 29. “Do you know how long it took me to borrow about US$300 million to finance out projects? It’s like giving birth – it took us nine months from start to finish.”
This is a problem particular to SOEs. Private companies are not governed by such regulation and are free to raise funding offshore as and when they wish, notes the CFO.
Although it took the mining and metals company nine months to get the approval to borrow US$300 million offshore, it is confident that the process can be shorten to three months, which is its long-term goal. Currently, the corporate is already able to execute such deals within six months.
“The shortening of procedures will eventually happen if you become a frequent issuer because they know who I am, they know I’m not doing funny business and that the money is part of our expansion programme,” said the CFO. “The first issuance was hard because it was stuck with the Minister of SOE for two months because the lawyers were not sure whether or not we need to get approval because this law dates back to 1972.”
The law controls the amount of debt that SOEs can borrow in international markets. It was brought in because some of these entities had gone on a credit spree and the government was worried about the knock on effects to the economy.
“Every Tom, Dick and Harry was borrowing offshore and the economy was lopsided because there was too much offshore debt. I can understand that was a concern, but that was 40 years ago. Things have now changed. The government needs to change,” said the CFO.
Strict laws related to SOE hedging are another problematic area. This is because the state would have to bear the loss if any of these derivatives were to move against their favour. If this were to happen, board members of these government-run entities could be severely punished.
“If you make a gain on anything, it’s a joy but if you make a loss it’s a loss to a state and that’s a fundamental offence and you will go to jail. That’s pretty much it,” said a Jakarta-based CFO of a commodities trading company.
As a result, many SOEs prefer to leave their foreign exchange (FX) positions open on their balance sheet, potentially bearing the risk of loss or gains when the currency moves in or out of their favour.
Perusahaan Listrik Negara, a government-owned corporation that has a monopoly on electricity distribution in Indonesia, has approximately US$5 billion of unhedged FX positions, says a source. While such exposures are deemed risky, the consequence of hedging a position incorrectly is far more serious.
Instead of having exposure to numerous currencies, SOEs use the more conservative approach of just managing one – the Indonesian rupiah.
“We are an SOE company and the shareholders fear the government policies with regards to currency hedging. So it’s very conservative and we have no exposure to foreign currency,” said a Jakarta-based director of finance at a construction company. “Like Garuda, because all of their sales are in foreign currency and their expense is in Indonesia rupiah, the company is riskier than us.”
Garuda Indonesia is the state-owned flag carrier in Indonesia.
Delay in receivables
In addition to having to face obstacles with raising funding overseas and hedging activities, SOEs operating in certain businesses also face challenges in getting receivables on time. This is again due to a high level of bureaucracy they have to overcome.
This is especially true for companies that operate in the construction sector, where the level of cash forecasting is relatively predictable.
“Based on the contracts that we secure, we are able to invoice them on quite a predictable basis, but there are many government procedures in the office that needs a lot of time to deal with. The level of regulation and bureaucracy can prolong the receivables by quite a bit,” said the director of finance at the government-owned construction company.
The finance director notes that sometimes receivables can be extended from two to three months, which does not help with working capital management. As a result, such SOEs have resorted to using bank lines in times of tight liquidity.
“The facilities offered by our banks are more than we require,” he added. “So we have no problem with our liquidity.”