Indonesia's Ministry of State-Owned Enterprises has begun conducting a feasibility study over how to re-organize state-owned assets following the recent election of President Susilo Bambang Yudhoyono. Under the auspices of deputy SOE minister Mahmuddin Yasin, the study is examining whether to create one or two investment agencies, which would be run by the SOE ministry.

State-owned assets are currently held by a number of different government entities including the Ministry of Finance, Ministry of State-Owned Enterprises, Central Bank and PPA (PT Perusahaan Pengelola Aset Negara). The latter is in the process of divesting a series of bank stakes handed over to the government by their former family owners after the financial crisis. Once these stakes are sold, however, PPA will be wound up in the same way as IBRA, which was originally charged with the restructuring and privatization of the Indonesian banking sector.

Government officials say the new cabinet believes this is an opportune time to set up a proper investment agency and introduce a layer of corporate ownership between the government and the companies it still owns stakes in. As one puts it, "The idea is to separate policy decisions and government ownership to reduce potential conflicts of interest."

Officials say the country first conducted a feasiblity study on the subject four years ago, but decided to abandon it shortly afterwards. However, since then a number of things have happened, which have persuaded the current cabinet to re-consider the idea.

Neighbouring Malaysia, for example, re-grouped all state-owned assets under Khazanah earlier this year with a view to emulating Temasek's success in Singapore. Indonesia has also been engaged in a successful privatization programme that has left the government with a number of stakes it is unlikely to sell, but need to be managed.

Officials say the main question is whether to create one or two investment agencies. If there are two, then one would look after all the "good" assets and one would look after the "works in progress."

Specifically, the "good" assets would include the state's stakes in companies, which are run along fully commercial lines such as Telkom, Indosat and Bank Mandiri. The "bad" assets would encompass all those companies where the government still needs to complete a lot of restructuring work and act as an agent of change. These include inefficient state-owned monoliths such as PT Pertamina, the country oil and gas operator.

Government officials say there are currently about 166 state-owned companies. Of this number, 11 are listed, 76 are profitable and the group as a whole has been budgeted to generate roughly Rp11.5 trillion ($1.3 billion) in dividends during 2004.

The Ministry has grouped SOE's into four for asset valuation purposes. Group one includes energy, telecoms and mining and is already calculated to have an asset base of Rp500 trillion ($56 billion). Group two includes finance, banks, construction and services. Group three comprises logistics, hospitality and travel, while group four houses agro industries, pulp and paper and media.

As one specialist explains, "The companies would benefit because management would have clarity of ownership and strategically they would know where they stand. The government would also benefit because it would be more difficult to accuse it of conflicts of interest. A portfolio approach to managing these assets should also generate greater synergies."

Two other key decisions that have yet to be taken include what do with the dividend income and how much independence the "good" agency might have. For example, Temasek and Khazanah pay an annual dividend to their respective governments, but they retain some of the dividends they earn for re-investment purposes.

Government officials say budget deficit concerns make it likely that virtually all dividend income will go straight back to state coffers. If this is the case, then it will be far more difficult for any new agency to make new investments in its own right, since it will not have an earnings stream to finance them.

As such the two agencies may simply end up as a way for the government to re-organise its assets in a more efficient manner. Officials say it is currently very time consuming to get Ministry of Finance approval on day-to-day matters.

"Whatever happens the ultimate owner of the shares will be the Ministry of Finance," the official comments. "But instead of monitoring these companies on a day-to-day basis, the MOF will simply give an annual approval to the new agency, which will manage the assets for it."