Corporatising SMEs and cooperatives

Indonesia has 57 million micro, small, and medium enterprises (MSMEs). However, these MSMEs have long been left behind in economic terms because they lacked economies of scale, did not have sufficient management experience and suffered from limited access to financing. How can we harness the potential of these individual setups so that they can be part of the driving force behind a country’s economy?

The business sector in Indonesia is made up largely of businesses that fall into four categories: multinational companies (MNCs, or foreign investors), national company conglomerates, state-owned enterprises and MSMEs. Tanri Abeng, who is President Commissioner of PT Pertamina and former Minister of State-Owned Enterprises, Indonesia, said that like MNCs all over the world, MNCs in Indonesia have access to advanced levels of technology, were already established in the market and have excellent management systems. “They will continue to grow in any country they operate,” he said.

The second set of players was just as fast growing: in Indonesia, the conglomeration of national companies has been blossoming especially during the past 15 years. Tanri cited the example of Djarum, the third-largest cigarette company in Indonesia: “Fifteen years ago, it was only a cigarette company. Today, they own the largest private bank. They own property all over Jakarta and Indonesia, and they own plantations. They have become a conglomeration of companies.”

The third segment came under the Ministry of State-Owned Enterprises, which oversees the development of all state-owned enterprises in Indonesia. In the past 15 years, the Ministry has grown its assets from USD 150 billion to USD 600 billion and today it owns 140 corporations.

Bottom of the pyramid
While these other components have been developing speedily, what about MSMEs? According to Tanri, MSMEs have grown in number but not in assets: “They still sit at the bottom of the pyramid and the gap is widening between the three big business actors and the MSMEs.”

Fewer than 5,000 large corporations occupy the top position while 57 million MSMEs form a hefty chunk at the base of Indonesia’s economic landscape. “They don’t have the scale. They don’t have access to the market. They don’t have access to financing,” Tanri said. He saw opportunities for the mass of MSMEs to establish “people-owned enterprises”—a scheme that would corporatise MSMEs into scalable businesses. Under this strategy, microenterprises would be grouped into cooperatives, each consisting of, for example, 1,000 farmers or small businesses. Each five to 10 cooperatives would then make up a Badan Usaha Milik Rakyat (BUMRA) or people-owned enterprise.

In an extremely competitive market, small enterprises cannot compete with bigger companies. “But

once they are in the BUMRA structure, they will be able to create scale. They will be able to access the market. They will be able to be cost effective from inputs, production to distribution,”

Tanri said.

Introducing structure and systems
The BUMRA can deliver and provide overall management in terms of production, distribution, marketing, financing, accounting and information technology. He added “The BUMRA will link MSMEs to the market and their produce will be linked directly to the industry, so the industry will have guaranteed raw materials and the BUMRA will have a guaranteed market,”

This will also mean that individual MSMEs can enjoy economies of scale by combining with others in the same playing field. “For example, these enterprises are only able to buy fertiliser at very expensive prices, but now they don’t have to do that,” Tanri said. “Everything will be sourced from the BUMRA, and the BUMRA will, through the scale of its operation, be able to access input inexpensively, provide the management and the marketing. With this, the BUMRA will enable cost-effective production and distribution for small and medium enterprises.”

He recommended that each BUMRA be set up as a limited liability company governed by two boards—a Board of Supervisors (or Commissioners) and a Board of Directors. The Boards should be accountable to the management for the operation of the businesses.

Opening doors
One of the most important outcomes of the corporatisation process will be the improved financial viability of the businesses. Out of Indonesia’s 57 million MSMEs, there are currently 55.8 million that are not bankable. With BUMRA, business risks will be reduced, making individual enterprises more attractive to potential funders. “I think financial institutions should be able to provide funding with similar risks as to the multinational corporations, state-owned enterprises and the national company conglomerates,” Tanri said. “Therefore, with BUMRA you put the MSMEs at the same level as all the other players in the economy.” The restructuring of MSMEs into corporations will also help decentralise growth in Indonesia. “60 percent of money circulating in Indonesia is concentrated in Jakarta. Once we decentralise this, the money will be spread throughout the country.

It is an opportunity to stop urbanisation, which is a problem in a country like Indonesia, where Jakarta is growing because the people who do not have jobs in the villages have to come to Jakarta. But once we are able to structure the small-medium enterprises into scalable, corporate settings, this will allow production, distribution and income growth in rural areas,” he added.

Tanri hoped that the model would eventually help alleviate poverty and create economic opportunities in rural areas. “You will be able to create more employment and at the same time close the gap of inequality in equity which is a problem in developing countries. Once the BUMRA is in place there will be tremendous growth coming from the bottom of the pyramid, which will create stability,” he said, adding that the key was to ensure that all parties were properly trained—including corporate and economic players as well as those in government.

Saying that “the wealth of a nation is created by businesses,” Tanri estimated that once the right structure, management and financing were in place, Indonesia would see 8 percent economic growth. “This should apply to all developing countries similar to Indonesia, that is countries with an agricultural, fishery and natural resource base. (In these countries), MSMEs will become the new force in terms of generating wealth for the nation.”

___________________

This article is based on a session from the 12th WIEF.