Public enterprises have existed in Indonesia since the early nineteenth century. They were established by the Dutch colonial government especially in the field of public utilities such as rail transportation and electricity generation and distribution. The number of enterprises increased dramatically after national independence in 1945 with the nationalisation of a number of Dutch private enterprises and the establishment of new public enterprises.
The early public enterprises and those created since 1945 had different legal bases for their existence. In order to put them on a proper footing, Law No 19/1960 was enacted to regularise the control and management of these bodies. The process of reorganisation and consolidation of these enterprises continued during the 1960s and in 1967 a Presidential Decree laid the foundation for the present form of enterprises. The decree was formalised by Law No 9/1969 which required all enterprises to conform to one of three forms, i.e. the departmental agency (Perjan), statutory body (Perum) and public company (Persero).
In addition, there is another form of public enterprise as represented by Pertamina (the State Oil and Natural Gas Enterprise) and 8 state-owned banks which have been set up under specific individual statutes.
There are also regional public enterprises owned and controlled by the various regional governments. Their activities, usually localised in nature and utility oriented - include such operations as water supply and banking.
There are about 220 public enterprises in Indonesia. Departmental agencies were established and regulated under the Companies Act (Indische Bedrijvenwet) of 1927 as amended and supplemented.
These forms were set up as non profit-making public service undertakings, but as enterprises are expected to operate efficiently. Departmental agencies are integral parts of ministries and usually headed by a President Director. Although a departmental agency's budget is controlled by the particular Ministry involved, unlike a government department, a departmental agency can utilise its own revenues to finance operational costs. Deficits are topped up from annual appropriations, but surpluses are returned to the government.
Currently departmental agencies are engaged in two lines of business - rail transportation and pawn brokerage. A departmental agency, such as the State Railways, is allowed to function independently and is responsible directly to the Minister concerned.
Departmental agencies are required to submit accounts on an annual as well as a quarterly basis. The balance sheet also includes the "inter administration accounts" with the State Treasury. These accounts are presented to the Minister concerned, the Minister of Finance, and the Supreme Audit Institution (SAI).
Statutory bodies are set up under Law No. 19 of 1960. They are legal entities and wholly owned by the government. Their activities are mainly in strategic industries which the government decided it should regulate and control. These activities include electricity generation and distribution, the management of harbours, telecommunications, employee insurance, postal services and housing.
Pertamina, the State Oil and Natural Gas Enterprise, and eight state-owned banks are set up under specific individual statutes.
Public companies are created under the Commercial Code by a notarial-deed registered with the local District Court of Justice. The Indonesian Government holds all or the majority of shares in these companies. Most public companies came into existence through the nationalisation of particular private enterprises after national independence. Others were established in areas deemed to be vital to the economy which private entrepreneurs found unprofitable for investment. About 157 in total, public companies form the largest public enterprise category and are engaged mostly in commerce (e.g. the various state-owned trading houses engaged in import, export and distribution), industry (e.g. the Sriwijaya Fertiliser Plant, Gresik Cement Plant, the Krakatau Steel Plant, and Padalarang Paper Mill) and agriculture (e.g. management of state-owned palm oil, rubber, sugar, tea, coffee, coconut and tobacco plantations).
Except for departmental agencies which are managed by President Directors, all other public enterprises are managed by boards of managing directors.
The President Director of a departmental agency is appointed by the President of the Republic, while the directors are appointed by the appropriate Minister. The board of a statutory body is appointed by the President on the recommendation of the respective Minister, and after consultation with the Minister of Finance. The board of a public company is appointed by the shareholders in general meeting; that is, by the Minister of Finance in his capacity as custodian shareholder of the government and on the recommendation of the Minister concerned.
The Board of Pertamina and the boards of the state-owned banks are appointed by the President. The board of a regional government-owned enterprise is appointed by the head of the respective regional government. The board of each public enterprise, including those owned by the regional governments, is appointed for a term of office of five years.
The President Director of a departmental agency and the board of a statutory body are responsible to the appropriate Minister. The Board of Bank Indonesia (the Central Bank) and the board of other state-owned banks are responsible to the government. The Board of Pertamina is responsible to the Board of Government Commissioners. The board of a public company is responsible to the Minister of Finance in his capacity as shareholder.
In implementing their policies, the boards of public enterprises generally function independently of the government, except in certain matters pertaining to the procurement of goods and the award of contracts over specified amounts, in which case the procedures prescribed by the government have to be followed. Control is also exercised over the determination of some prices or tariffs, such as the price of petrol, the tariffs for rail transportation and others.
The staff of departmental agencies are recruited in the same manner as those of the ministries, whereas the staff of all the other public enterprises are recruited by their respective boards of management. Staff are appointed on a permanent basis except for specialists recruited under contract, as in the case of Pertamina. Most personnel in public enterprises are suitably qualified and normally receive in-service training, but there is still a need for professionals at the middle and upper levels of management. Movement of trained managers between public enterprises and the private sector is not common in Indonesia.
The salaries, allowances and pensions of all public enterprise employees are by law required to be regulated by the government. Although such control is exercised in practice, formal government regulations to this effect have not yet been issued.
With the exception of departmental agencies which have to be subsidised by the government, statutory bodies and public companies in most cases generate sufficient income to cover operating costs. All public enterprises which require government assistance are given subsidies and loans.
Subsidies to public enterprises are given largely for meeting deficits in operating expenditure, for investments, or for topping up of costs due to reduced prices enforced by the government. Except for public companies - which have some autonomy in fixing rates, fees and product prices - the government exercises almost complete control. Subsidies are only granted after thorough government investigation. Hidden subsidies to enterprises take the form of tax facilities and import duty exemptions, monopolistic status for enterprises, such as Garuda Indonesian Airways and deferment of profit and dividend payments to the government.
Public enterprises can borrow from the domestic or foreign market. Borrowings by departmental agencies are guaranteed by the government. Statutory bodies may borrow on the domestic market with government approval and the borrowings of public companies are sanctioned at general shareholders' meetings or, in the case of public companies fully owned by the government, by the Minister of Finance. Borrowings for all public enterprises on the international market are made by the government.
All loans are borrowed and applied for approved purposes only and are required to be repaid within fixed periods at specified rates of interest. The government undertakes responsibility for all loan defaults by enterprises but does not enter into specific guarantees Loans from the government for housing, agricultural projects, and assisting disadvantaged economic classes are given at preferential interest rates, but otherwise attract normal rates.
Public enterprises are required to distribute their net surpluses in accordance with existing government regulations. Unprofitable enterprises which are not going concerns may be rehabilitated by giving additional funds or closed down by the government. In respect of Pertamina and the state-owned banks, this line of action can only be taken by the government in conjunction with Parliament. The government would assume responsibility for assets and liabilities of public enterprises that have to be shut down. In the case of statutory bodies, the decision to dissolve or liquidate is a matter for the government, but in the case of joint ventures, liquidation procedures applicable to private companies apply.
In Indonesia, control over public enterprises is exercised by the responsible Minister through:
In the case of departmental agencies, individual Ministers control the appointment of staff through the Secretary General of the relevant ministry. With statutory bodies, autonomous bodies and public companies, staff appointments are arranged by the board of the enterprise concerned.
Ministers exercise financial controls over public enterprises only to the extent indicated above, i.e. the responsible Ministers authorise the annual work programme and budget plan, review periodic reports and approve the annual financial statements. A Minister does not have the power to direct the payment of funds to a destination nominated by him.
Central agency controls for the appointment and dismissal of staff of departmental agencies - and for their conditions of service - operate in the same way as for other staff of government departments. However no such restrictions operate for statutory bodies, autonomous bodies and public companies, which have more direct control in personnel matters.
Central agency controls of various types are also evident in the budgeting arrangements for public enterprises. The work programme and budget of both departmental agencies and statutory bodies are approved by the responsible Minister and the Minister of Finance. In the case of autonomous bodies, such as the Bank Indonesia and the state-owned banks, the work programme and budgets require approval only from the Minister of Finance, while those of Pertamina are approved by the Board of Government Commissioners. The work programme and budget of public companies are approved by the shareholders; that is by the Minister of Finance or the respective Ministers in accordance with the authority delegated to them. Periodically the board of an enterprise submits a report on its financial accountability to the responsible Minister.
Other central agencies exercise controls over the operations of public enterprises where relevant. As mentioned previously, both the procurement of goods and all contracts over and above a specified amount must have the approval of the technical Ministry concerned and/or that of the State Secretariat. As from 1 April 1988, however, the power to grant such approvals has been entrusted to the Coordinating Minister for Economy, Finance and Industry. Similarly, the transfer and/or sale of fixed assets require the prior approval of the Minister of Finance.
The government has also established an internal control apparatus, viz. the Agency for the Control of Finance and Development which stands for Badan Pengawasan Keuangan dan Pembangunan (BPKP), to examine the financial accountability of public enterprises. This body evaluates accounting systems and, where necessary, provides directions and recommendations for improvement.
Public enterprises are only allowed limited autonomy by the government. Two parties are involved in their control: internal management which is entrusted with the executive function of the enterprise, and government officials who are appointed to give guidance to individual enterprises. The division between the functions of the board of management and the guiding function of appointed officials has not always been clearly defined. At times this involves greater interference by appointed officials in the internal affairs of the enterprises than originally intended by the government.
Departmental agencies are not required by the government to earn a specified rate of return on capital. Their main objective is to provide services, not to earn profits. Similarly, the rate of return is not specified for other forms of public enterprises. However these are expected to operate profitably. Out of their income after taxes, payments into designated reserve funds and other proper deductions, the government obtains its share of the profits in the form of a contribution to the Dana Pembangunan Semesta (DPS) or overall development fund in the case of statutory bodies, byway of dividends in the case of public companies, and a specified percentage of their net income after taxes in the case of autonomous bodies, in accordance with applicable laws and regulations.
In principle all public enterprises are required to pay taxes applicable to private enterprises. In addition, public enterprises are required to make dividend payments to the government. In certain cases, particular enterprises are exempted from the payment of import duties. Other controls which affect pricing policies are exercised by the government.
In those cases where a subsidy is deemed necessary to support the financial operations of a public enterprise, the subsidy is paid from the central budget. Further, public enterprises do not provide free or discounted services to central government, which pays the same tariffs as other consumers.
The term 'Board of Commissioners' is used here to differentiate it from the board of a public enterprise which exercises the executive function within the organization. In this text, the latter is referred to as 'Board of Managing Directors' or 'Board of Management'. The term 'Board of Commissioners' is also used in the generic sense. In the case of statutory bodies, the term should read "Board of Supervisors", in that of Pertamina "Board of Government Commissioners", whereas in the case of public companies the term stands as it is presented in this text.
With the exception of departmental agencies, all types of public enterprises are controlled by board of commissioners. Members of boards of commissioners are appointed by the President of the Republic of Indonesia (in the case of statutory and autonomous bodies) and by the Minister of Finance (in the case of public companies). All expenses incurred in discharging the duties and responsibilities of the boards of commissioners of statutory bodies and public companies are borne by the respective enterprises, and are specifically identified in their budgets. Boards of Commissioners operate effectively free from political interference within the limits specified in the statutes of the respective enterprises.
Several public enterprises in Indonesia have management information systems which in some cases are computerised. Quarterly, semi-annual and annual reports on the performance of the enterprises are submitted to the responsible Minister and the Minister of Finance. Where necessary, the responsible Minister discusses these periodic reports with the top management of the enterprise concerned. The Minister can also issue directions as a result of these discussions.
Accounting standards for the public sector have been prescribed by the government. The Agency for the Control of Finance and Development (BPKP) previously mentioned, as the internal control agency of the government, evaluates the accounting systems of public enterprises, expressed its opinion on the fairness of presentation of their financial statements, and where necessary provides directions and recommendations for improvement.
Although the form of the financial statements of a public enterprise is not subject to the approval of the SAI, management is not the sole authority in this matter. The BPKP, as an authority external to management, has the obligation to approve the form of the financial statements. Neither the SAI nor BPKP participates in the preparation of financial statements: this is the responsibility of the individual public enterprise.
The legislature controls public enterprises mainly through parliamentary commissions. These may request relevant information from the responsible Minister or from the enterprise itself during the course of hearings which are usually open to the public.
The legislature does not control borrowings by public enterprises. However, parliamentary questions concerning borrowings may be asked at a hearing.
There is no requirement for individual enterprises to report annually to Parliament. In the absence of such a provision, the legislature has to rely on its own investigations through parliamentary commissions in order to obtain information.
The Supreme Audit Board of Indonesia as SAI and, therefore, the external auditor of the government, does not conduct a general audit of public enterprises and subsidiary companies, relying instead on the BPKP which has the responsibility for the audit of the annual financial statements of public enterprises.
The SAI concentrates on key points rather than detailed issues. Accordingly, the attention of the SAI is focused on such matters as procurement, contracts, sales, accounts receivable and compliance with statutory obligations.
In the case of banks,loans made by banks to finance government programmes are also subject to SAI audit. These include specific schemes - such as Mass Guidance Credit, and Credit for the Intensification of the Smallholder's Sugarcane Plantation. However, the effectiveness of audits of bank loans has been impeded by legislation governing banking secrecy. It is not part of the role of the SAI to act as consultant or adviser to management of public enterprises, on the grounds that such a situation would impair the independence of the SAI. Similarly, the SAI is not empowered to correct decisions of management or to issue instructions of any kind to the management of public enterprises.
In the absence of managerial and directive powers over public enterprises, the SAI is able to reveal and hopefully correct deficiencies in administration through its reports to the responsible Minister and to Parliament. Accordingly, corrective actions emanate from sources other than the SAI.
In accordance with applicable laws and regulations, the SAI does not conduct a general audit of public enterprises, but examines only certain activities such as procurement, production and marketing. Substantial reliance is placed on the work of the BPKP as the Government's internal control apparatus.
In carrying out the audit, the SAI implements what are referred to as 'desk audits' and 'field audits'. Desk audits are undertaken by the staff of the SAI within its own premises. Documents, reports and accounts of public enterprises are submitted to the SAI together with those submitted by the BPKP and are examined and assessed on a continuous and routine basis throughout the year. In contrast, field audits are undertaken by the SAI at the premises of the particular public enterprise. Field audits are generally more productive than desk audits. Not only do "on site" audits provide the opportunity for the SAI to ascertain the precise nature of an enterprise's activities and operating conditions, but audit queries and findings can be discussed directly with management. While desk and field audits are essentially complementary, the former have been restricted by interruptions in the flow of documents required for audit. Currently, an effort is being made by the SAI to ensure a smoother flow by appealing to the Government to direct the necessary documents to be submitted regularly for audit.
In recent years the SAI has moved into the area of management audits in order to obtain more substantial findings. This has proved beneficial without detracting from the relative importance of the financial audits undertaken. The SAI expects to continue maintaining a proper balance between financial and management audits.
The general objectives of the SAI in conducting these various types of audits of public enterprises are to:
In pursuing these objectives, the scope of the audit undertaken is sufficiently broad to cover:
There is a statutory requirement for public enterprises in Indonesia to have an internal audit function. Each enterprise is responsible for the establishment of its own internal audit unit which reports directly to the chief executive of the particular enterprise. In assisting management in the control of the operations, the internal audit unit monitors compliance with statutory provisions and budgetary requirements. It also evaluates the systems of internal control and proposes necessary improvements.
The effectiveness of the internal audit function varies according to the enterprise. In those cases where the SAI is of the opinion that internal audit is ineffective, the SAI will request the responsible Minister to implement desired changes.
Internal auditing is undertaken by individual enterprises without external assistance. Audit committees are not common. Similarly, commercial auditors are not engaged to perform the internal audit function.
There is some doubt as to whether the SAI has the power to engage commercial auditors on contract. In the absence of specific legal authority to do so, the SAI does not contract work to commercial auditors.
Public enterprises are empowered to appoint commercial auditors. This power, however, is subject to approval by the BPKP in individual cases. Where a commercial auditor is appointed, the audit is generally restricted to a regularity audit involving only the annual financial statements. That auditor is not authorised to conduct performance audits.
The audit carried out by the SAI in relation to public enterprises is a fairly narrow one. Basically the audit is transaction based in nature. However, substantive and compliance testing using sampling techniques are employed where expedient.
The SAI operates three special staffing groups for the audit of public enterprises. Specific audit guidelines are issued for such audits. The staff engaged in the audit of public enterprises receive formal training. The shortage of professional audit personnel has affected audit objectives and targets, and has resulted in the adoption of audit methods considered to be more appropriate and suitable for the type of staff employed.
There is no requirement for the SAI to audit and report on the financial statements of public enterprises annually. Most of the major enterprises are subject to audit at least once every two years, but others are audited less frequently.
The decision by the SAI to conduct selective audits and the relatively low frequency of these audits sometimes results in overlapping with other audits, especially those of the BPKP. Although such overlapping does not always relate to audit objectives but rather the actual timing of audits, both the audits and the enterprise under audit tend to be affected adversely.
During the course of the audit the SAI audits only certain activities of each enterprise. In addition the BPKP carries out general audits, the relevant findings of which are taken into account by the SAI.
As mentioned previously, other audits may be carried out by the SAI in relation to certain activities. Management audits of particular enterprises have attracted some attention in recent years.
The audit reports of the SAI on each public enterprise are submitted to the responsible Minister. The SAI submits its annual report to the legislature.
The enabling statutes impose time limits for the submission of the various reports. Generally, reports have to be submitted within three to six months after the close of the financial year.
Audit findings and reports of the SAI are followed up and appropriate action taken. Both the management of individual enterprise and the responsible Minister have a vested interest in initiating remedial action should the circumstances warrant. Parliamentary commissions, too, may refer to audit findings and reports in the course of their investigations of particular enterprises.