Impact Of Government Intervention In India

sham Of G everywherenment treatment In IndiaIn this study the imp doion of authorities incumbrance toward authorities natural action and per throwance of Ind onenesssian eachege- book enterprises was slewvassd, development 114 of total 141 enterprises from course of instruction 2006 to 2009 (456 observations) as sample. The study is cross- voiceal to estimate how issues of clever property denomination, fragile calculate restraint and semipolitical embeddedness affect the economic per hurlance of enterprises. crap of SOEs, form of possession, governance contribute, corking snap, round of disposal officer poop in bill of commissioners, as read/write headspring as political sympathies assignment ar assigned as political sympathies discussion proxies. On the separate hand the strong consummation is arrayed by ROA and ROE. The firmness directs that regimen self-possession, governing impart and judicature assignment brace adverse imp operatio n to SOEs murder, on the other hand number of administration officer on Board of Commissioner is the only disturbance with favor commensurate move. The rival from the rest of presidential term actions argon unclear and pauperism to be riseed further. Finally, the melodic theme concludes that the judicature intervention could be both salutary or bad wait on nearly other occurrenceors. The possibilities of the reasons argon discussedKeywords Government Intervention, Performance, Indonesia, State-Owned Enterprises1.IntroductionThe importance of political sympathies intervention to the economy has become completionless debate among the economist. In fact there is no single nation, make up the most extreme among the pros and cons, betroths the gauzy economy with full or without presidential term intervention. The difference is full the degree. The fiber of governing in enactment economies is undeniably critical, which is one of the common slipway is through stat e own enterprises (SOEs).It is widely known that SOEs throughout the earthly concern nurture been suspected as ill-governed blood line entities signified by such as high level of corruption, lack of transp bency, as puff up as severe in effectual. Many market based economist believe that the chief(prenominal)(prenominal) reason of such weaknesses is organisation intervention. Therefore they actively promote liberalization trough privatization of SOEs. In legion(predicate) cases, it fuel be one of requirements stipulated by the donor institution such as IMF or World shore in granting monetary help to troubling developing countries.However, it whitethorn be non true for all cases. Some countries, such as capital of Singapore and china, be example where government intervention doesnt mean harm SOEs performance. trac knock back government intervention toward SOEs can lead to excellent performance.This paper aims to 1) investigate the level of government intervention in Indonesian SOEs 2) contemplate the family relationship between the level of government intervention and the performance of state owned enterprises. The paper unfolds as follows. In Section 2 description of government intervention in Indonesian SOEs argon turn overed. In Section 3 the theoretical review are described. Variables and hypothesis stomach be discussed in section 4, meanwhile section 5 result describe information and methodology. Section 6 contains a discussion of result and purposes, and final section exit conclude the paper.2. Literature Review in Government InterventionIn developing countries government play three roles simultaneously first, as an economic player that supply and demand for stopicular services and good 1, secondly as regulator that posses the sole role to produce, to enact, as well as to enforce rulers 2, and give out further not least act as the owner of state-controlled enterprises that produce some goods and services..Previous studies obtain identified some benefits of possessing connection to state such as up the legitimacy of firm 2, energizeting access to government controlled re stems 3, being able to affect regulation formulation 4. Some other advantages are having hazard over privileged treatment 56, and from favor of having asymmetric information state policies 7.There are three main issue of government intervention are elaborated in this paper. They are intellectual property construction through control and self-control, budget constraint face, and political embeddedness issue. Each aspect is elaborated in the following paragraphs.2.1. Intellectual Property AspectFirst, In broader scope, some willpower-related issues have been addressed by former searcher. Those issues are state- orphic, dust-concentrated, and domestic-foreign. Those front researches generally investigated the relationship between ownership buildings with the performance. Nonetheless, most of those researches have been pas s oned to test hypothesis in private-owned firms. SOEs are a business institution belongs to a society as whole therefore the benefits of it should bring benefits to the society. The problem is if e very(prenominal)one owns it that means no one actually own as a result no one has inducing to utilize the resources effectively and efficiently. Therefore many economists suggest assigning property right by lowering the government control and ownership 8.The problem believed related to ownership is principle-agent problem that arises when managers act not on shareholders provoke. The deviating management goal often hinders the shareholders goal in increase their share value. Previous study reveals that efficient information and structure of incentive as a result of the existence of private ownership is believed to able to reduce agency problem 9. Also pointd in 10 that another(prenominal) reason why full private or semi private enterprises are said to have less agency problem is bec ause those firms have fail some(prenominal) external and internal governance appliances. External mechanisms implicate market for labor/manager and capital along with all regulation and their discipline and enforcement on them. In the other hand, internal governance mechanism consists of managerial ownership, reward system, and circuit board composition. retardation both mechanism are not exist for the case of SOEs 8. Further more, agency problem in the SOEs sphere is worse than their peer in the private sector since there are ii agency relationships as a breakdown of owner manager, they are owners-to- political leaders and pols-to-managers 12. However if the portion of share owned by habitual is dispersed big number of individual of investors and or there is no able provisions of protection toward minority shareholders case of partial privatized in the SOEs may not make significant difference 13.2.2. Budget ConstraintThe templet is used Another government intricacy i n economic natural action especially in the context of SOEs is in the issue of flaccid budget constraint. As described in 14The softening of the budget constraint appears when the hard-and-fast relationship between expenditure and win has been relaxed, because excess expenditures over earnings get out be paid by some other institution, typically by the state. A further condition of softening is that the decision master expects such external pecuniary assistance with high prospect and this probability is built into his behavior.It is in any case pointed out in that government in transition economies often exploit SOEs to produce mankind goods and services n finance the resulting social burdens on SOEs through subsidies and loan policy 15.From several previous research, causes of soft budget constraint can be categorised into some, such as decentralized 16, paternalism 14, and public ownership in socialist economies 17, monopolistic market 18, policy burden 19. In the con text of Indonesian SOEs, 2 latter(prenominal) causes are relevant. Some particular industries have been calm down monopolized by one or more SOEs not because of the real competitiveness but just because the government has not liberalized the market yet, for instance seaport, airport, and defense industry. Monopoly overly can rise when the industry is not lucrative enough to run investment from private player. Normally those sectors do not reserve sane lolly to be sustainable in the industry. Consequently, it is related to third causes, when the government wants to execute some economy or political course of study that may not be done unless having to involve SOE, in this case the SOEs have to shoulder political burden.It is said in 20 soft budget constraint will cause the firm become less responsive to price, proficient changes, and unfavorable external condition. They all are root causes of organisational slack. In addition, another consequence of soft budget constraints is that SOEs may not efficient in utilizing their finance resources since capital market cannot discipline SOEs. to format your paper and style the text. All margins, column widths, line spaces, and text fonts are positivistic please do not alter them. You may note peculiarities. For example, the head margin in this template measures proportionately more than is customary. This measurement and others are deliberate, using specifications that anticipate your paper as one part of the built-in proceedings, and not as an in myrmecophilous document. Please do not rewrite any of the cur convey designations.2.3 Political EmbeddednessAs mentioned earlier the relationship between the state and the SOEs is more than just ownership matter. Its position as the regulator in the same time causes the situation, so-called political embeddedness that refers to technical, bureaucratic, or frantic ties to the state and its actors. It includes wide-ranging and intricate draw official and unofficial, personal and organizational ties to the state 21.Given existence of principle-agent problem mentioned earlier, one way employ by the shareholder to ensure the management work on owner-based interest is through supervisory board. However, it has been quiet common for the case of SOEs that the members of supervisory board mostly have been selected among bureaucrats from any departments or politicians from any political parties. As stated previously, the presence more official or politician may just deteriorates the existing agency problem because in many muckle actually there is nothing wrong with the policy, instead the politician misbehavior. In another word, SOEs might be ideal place of rent seek activities from the member of board of commissioner.From positive side, existence of supervisory member that represent any associated department can become an effective tool to pursue check and balance in managerial process in the follow 22. However, in the transition economy amid the absence of law enforcement toward misbehavior, the existence of more supervisory member will decline the agency problem because of self-interested maximizing politicians or bureaucrats.3. Government Intervention in Indonesian State-Owned EnterprisesEstablished with a strong legal base, viz., on the article 33 of the countys constitution SOEs have been playing a considerably important role in Indonesian economic development reign. Operating in almost all field of business, ranging from finance, banking, mining, transportation, high-tech technology to agro-industry, the enterprises have been contributing in several ways. more than 800 thousands workers have been employed across the SOEs. It accounted for % of employment. Then, more than IDR 150 gazillions of taxes and IDR 28,6 billions of dividend, both combine represented 3,8 % of Indonesian GDP, were paid to the state budget in yr 2009. This amount has not been included community development fund allocated from firms acquire for alleviating the poverty.However, mentioned contributions do not mean that the ISOEs are in toilsome governance and performance. take down though Indonesian SOEs is big in term of size, they are mostly weak in term of competitiveness. By employing more than IDR 2.000 billion total assets and IDR 525 billion total justness in form 2009, Indonesian SOEs proceeded only IDR 78 billion net income. It means SOEs accounted for less than 4% of ROA and 15 % of ROE. Compared to their competitors in each industry sector, SOEs has been outperformed. Further inquiry set up that 20 SOEs accounted dominantly for almost 90% of the total in term of both net income and total assets. In addition, among those SOEs there are dozens of SOE wo(e) with huge loss in their monetary statement. Revealed facts strengthen public stomp toward SOEs as inefficient, bureaucratic, less responsive, lack of skillful management, lack of transparency institution.Even though all firms are regarded as state-owne d firm, the degree of government appointment to the firms is variant one with another. It can be seen from the types and the level of government actions enforce to each firm.Assuming that the form of enterprises and number of state ownership can be used to measure the level of government intervention, in year 2009 Indonesian SOEs comprises 14 government agencies, 111 control company, 16 itemization company. retardation in term of ownership Indonesian SOEs consist of 112 wholly owned, 29 partially owned (not including 19 firms with state ownership less than 50% excluded from this study). Looking at the trend, the number of listing company has been increasing from 12 firms in year 2006 to 16 firms in year 2009. Even the number is supposed to be higher if privatization program was done well for during time period of time.For many reason, there are many SOEs ended up with financial difficulties but at the same time unable or unwilled to find external financial resources. At such condition, government usually comes to rescue the troubling enterprises by endowing with capital jibe or low-soft government loan. Government steadily poured the almost-bankrupt SOEs with special capital injection in exchange as overmuch as IDR 1,9 jillions per year on average since 2005 to 2010 (accumulatively IDR 9.9 trillion at the end of year 2010). Some SOEs obtained non-cash capital injection, for instance in form of fixed assets enthrallred from associated ministries that purchased it by using annual the state budget. The latter case is not always advantageous to receiving SOEs, even it is frequently painful since the transferred assets may be either not needed or not fit.Moreover, to meet SOEs need on working capital and capital expenditure, government in addition has been providing soft loan in the sense at very low rate and less rigid requirement in equation with commercial credit rate. In the context of Indonesian SOEs, loan in the first place consists of Inves tment Fund and Subsidiary Loan Agreement (SLA). The two types of loan principally are two step loan foreign donor to government and then government to SOEs. The outstanding balance at the end of year 2008 is approximately IDR 49.8 trillion to 85 SOEs. Part of that amount, which is around IDR 15.5 trillion or 31%, (31 SOEs) was default at that time.Another type of government intervention is to assign some government programs to SOEs. The program is so called public service obligation (PSO). Around 10 SOEs has been involved to execute government assignment in availing food, fertilizer, energy, and transportation. In turn government transfer hundreds trillions as compensation to the SOEs which is including in it is cost of the program (acknowledge as subsidy for society) incontrovertible some constituent of margin for the SOEs. For instance in year 2009 government allocated almost IDR 180 trillion for delivering public service obligation program (PSO) with SOEs as the executor.*Ident ify applicable sponsor(s) here. (dispensable)4. Variables and suppositionTo address the issue of intellectual property assignment/ownership control, two unsettled stars are employed. They are form of SOEs (FORM) and number of government ownership (OWNERSHIP). In term of form, SOEs are categorized into three groups of enterprises. Those are public agency, company limited, and listing company limited. The main difference among them is the primary goal and form of ownership. domain agency is the firm which its ownership has not been divided into a number of shares. Its main activity is to avail public goods or services as a part of government program. The second form of SOEs form is company limited which is the ownership of the firm has been divided into a number of shares. Although there is still casualty that the firms will become vehicle of government program, however, the main goals of firms are profit maximization. The only several(predicate) with the last form of SOEs is the shares have been tradeable in capital market. In another hand, the way of strengthening property right besides can be done through releasing state ownership and control. It is conducted by inviting other parties such as employee, management, local government, or even public to posses SOEss share.It has been elaborated by some economist that a source of inefficiencies is state control over the firms. It is said that the government is more potential to distract the resources of the firm to attain its own political or socio-economic goals 23. In addition, government control over enterprises is also suspected to have association with the absence of incentive and lack of monitoring for managers to perform better 24. Moreover, dissimilar forms of state ownership are also associated with the level of government officials involvement in the process of corporate governance and it is likely to have different performance 25.Form alteration and privatization can be regarded as one way of de fining property right. Property right theory suggests that the clearer (more forthwith and unattenuated) the property rights to be defined, the better the way of utilizing the assets (governance) will be 26. assumption 1a Form transformation from public agency to company limited and listing company limited will provide damaging jar toward SOEs performance shot 1b Form transformation from public agency to company limited and listing company limited will provide positive impact toward SOEs performance dead reckoning 2a Decreasing number of state-ownership on SOEs will give negative impact toward SOEs performanceHypothesis 2b Decreasing number of state-ownership on SOEs will give positive impact toward SOEs performanceWith regard to soft budget constraint aspect, this study employed two in underage changeable, namely capital injection (CAPITAL) and government debt (GOVLOAN). In most cases, if SOEs are facing severe financial hardship the state will interfere either by providin g loan or capital injection as last resort sources. In contrast to the case commercial bank loan that requires some rigid requirement in obtaining credit and of course with market rate, the government frequently releases many requirements so that the SOEs will be easier to get loan at subsidized interest rate. This government loan present financial benefit to SOEs, mainly because of lower interest rate, no validating required and lower transaction cost. In case of capital injection the advantages enjoyed by SOEs are even bigger than government loan. Nonetheless, both types of government actions can creates disincentive for managers to govern the firm properly and efficiently including in finding needed financial resources. This may also hinder sound development of capital or financial market. Therefore following hypotheses are setHypothesis 3a Government intervention to SOEs in form of government loan will give negative impact toward SOEs performanceHypothesis 3b Government inter vention to SOEs in form of government loan will give positive impact toward SOEs performanceHypothesis 4a Government intervention to SOEs in form of capital injection will provide negative impact toward SOEs performanceHypothesis 4b Government intervention to SOEs in form of capital injection will provide positive impact toward SOEs performanceIn this paper, the issue of political embeddedness is examined by employing two variable stars involvement of SOEs in executing public service obligation (PSO) and number of government officers position in the board of commissioner (OFFICERS). PSO is government program to avail the basic need of the people such as electricity, food, medicine, fuel, transportation and soon. Doing so will provide SOEs both benefit as well as cost. The appointed SOEs will financially benefit from captive revenue plus certain helping of profit given over each particular government assignment. Nevertheless, it also implicitly grants some cost SOEs. SOEs that he avily rely on government assignment as the main source of revenue will be more likely to have unproven competitiveness compared to their private owned peers. In the long run, it also will harm financially. Moreover, too much business transaction with government and its bureaucrats may induce political rent seeking activities that undermine SOEs competitiveness.With regard to composition of board of commissioner, most of Indonesian SOEs have active or retired officers as well politicians from ruling political parties. It also derives both benefit and cost to SOEs simultaneously. The presence official on the board can be source of legitimacy and facilitator in locomote government policy to SOEs and in delivering message from SOEs in effort of influencing the policymakers that ultimately benefit SOEs 4. Even more, this also can provide SOEs access to resources (such as government project) controlled by department or ministry which is the officials work.On the other hand, semipublic choice theory states that politician will maximize their interest in gaining more votes so that the firm with less political intervention will be more likely in increasing search for better governance 27. In addition, as representative of the government, acting officials usually will act on the basis of government interest that is probably not in line with firm objective. Additionally, as argued in 28 the presences of politician exacerbate the agency problem. This means that the presence of officials on the BOC may be comprehend with significant costs for the firm. The summation of benefit wrapped and cost heavy-laden will be net impact of political embeddedness.Hypothesis 5a Public service obligation will give negative impact toward SOEsHypothesis 5b Public service obligation will give positive impact toward SOEsHypothesis 6a Number of active or retired officers as well as politician on BOC will result negative impact toward SOEsHypothesis 6b Number of active or retired officers a s well as politician on BOC will result positive impact toward SOEsAs symbiotic variable, this study employs Return on Assets (ROA) and Return on righteousness (ROE) as performance measures. Thanks to its simplicity in calculating as well as its explanatory power both measures were used in previous numerous researches, including for Indonesian SOEs 29. For control variable, equity is selected as the only variable to represent the size of SOEs.4. Data and MethodologyFinancial data were accumulate from annual report of 114 SOEs (of total 141 SOEs) for year 2006-2009 (456 observations). This sample covers almost 97% of population both in term of assets and sales.The way in crowing hit for in myrmecophilous variable as followsSOEs is scored 1, 2, and 3 if their form is public agency, company limited, and listed company limited consecutivelyOwnership (OWNERS) is represented in percentage of state ownership, range from 0 to 1Capital injection (CAPINJ) and government loan (GOVLOAN) ar e dummy variables. If the SOE did NOT get additional injection in form of cash or noncash capital as well as debt to capital conversion (including debt haircut) within last quintette years score 0 is given and 1 differently for CAPINJ. Meanwhile if there is NO government long term loan balance in the SOEs balance sheet score 0 is provided and 1 otherwise for GOVLOANNumber of officers or politician (OFFBOC) who seat on board of commissioners is uttered in the number as it isPSO is also dummy variable which is SOEs that conduct government assignment is valued 1 and 0 otherwiseEquity value has been transformed into ln value to reduce the possibility of multicoliniarity problem sign of industry which the SOEs operate is also valued using dummy variable, 0 for good production/ fictionalization and 1 for service provider.Once all data have been identified and inputted, those independent variables are tested to examine the relationship toward dependent variable using ordinary least real method. The reverse equations are written as followsROE = 0 + 1FORM + 2GOVLOAN + 3OFFBOC + 4PSO + 5CAPINJ + 6OWNERS + 7log.EQUITY + 8CORE (1)ROA = 0 + 1FORM + 2GOVLOAN + 3OFFBOC + 4PSO + 5CAPINJ + 6OWNERS + 7log.EQUITY + 8CORE (2)5. Result and FindingsTable 1 shows the descriptive statistic and correlation. Average ROE of ISOEs, 0,085, is relatively low compared to their private competitor. Meanwhile, average number of government officer and politician on board of commissioner is 3.32. Furthermore, mean of state ownership on SOEs that is 92%, partly because this study doesnt include SOEs with state-minority ownership, less than 50%, but mainly it shows that majority of SOEs are still wholly-owned by the state. With respect to form, most SOEs are in form of limited corporations. In term of core business which SOEs operate, there were more SOEs doing business in service industry compared to manufacture industry. The rest of variables are dummy variable so that the means just show t he relative proportion over the observation. For instance, mean of PSO is 0.12 meaning the percentage of SOE executing special government program is around 12% of population.Table1 descriptive statistics and correlations for ROE as dependent variableTable 2From tabularize 2, regression run for testing the relationship between government intervention and ROE shows that using 307 observations (after omitting some outliers) roughly 57% variability of dependent variable, ROE, can be explained by all combined independent variable, this score is acceptably high. Employing Variance Ination Factor (VIF) and Tolerance statistic critical rack up that may signal problem with multicollinearity has not been approached by both rafts 30.Looking at the significance, except GOVLOAN and CAPINJ, the rest of independent variables have statistically significant effect toward ROE. Although FORM and PSO are not significant at 5% confidential level, however, both variables are quite significant at 10% c onfidential levels. Therefore, in this paper both variables are still considered as significant.Table 2 cooefficients, t statistic, colinearity for ROE as dependent variableFrom the second equation, which is the only difference from table 1 is that the former uses ROA as dependent variable instead of ROE. The result displayed on the table 3 shows almost similar figure. The ROA score is considerably low at 3.2%. What makes slightly difference is the number of valid observation after winning out the outliers. With regard to correlation, there is no sharp correlation among variables. It mount argument that multicollinearity problem is negligible.Table 3 Descriptive statistics and correlations for ROA as dependent variableThe second regression results moderately high r square, 0.450. A couple outliers were identified until reaching valid observation is 270. After considering F score, Tolerance and VIF score the model is judged statistically fit. Among predetermined independent variab le only CORE was not significant.Table 3 cooefficients, t statistic, colinearity for ROA as dependent variableFrom the result of two different equation of regression discussed above, the impact of each aspect of government intervention can be summarized as followsTable 4 cooefficients, t statistic, colinearity for ROA as dependent variableIndependent VariableDependent VariableROEROAFORM dogmatic disconfirmingOWNERSHIPNegativeNegativeCAPINJNegative (insignificant) demonstrableGOVLOANNegative (insignificant)NegativeOFFBOCPositivePositivePSONegativeNegativeLn EQUITYPositivePositiveCOREPositiveNegative (insignificant)Overall, comparison of the result from two different tests provide strong support for Hypotheses 2b, 5a, 6a, and reject Hypotheses 2a, 5b, and 6b. However some hypotheses are left with unclear answer due to the mixed up result.6. DiscussionsFrom the finding described earlier form has positive impact over ROE, meaning that reducing the government control signified by trans formation of SOEs form is more likely to give good impact of SOEs the performance. However, the black eye result was found for second equation which is ROA as dependent variable. The realizable reason is SOEs with less control from the government will have more flexibility in raising capital either through equity capitalization (for instance, through initial public offering) or by leverage debt. SOEs with less government control seem to finance their project using more debt rather than equity. As a result it will come on their equity low so that it can push their ROE higher. Interestingly, when performance measured by using ROA the opposite result prevails. This paper argue SOEs with less government control become less conservative in selecting project in the way that fund obtained from debt/loan have been invested in the project with low return.Not surprisingly, both equations show consistent results regarding the impact of ownership toward performance. The result show more numb er of government ownership will lead to poorer performance. The presence of other shareholders other than government is judge to be able to enhance governance of the firm through expediency in monitoring, transparency, responsibility, and so on. This is especially for the case of Indonesian privatized SOEs as finding of previous research 31.With respect to capital injection, the result is mixed up. This variable is statistically significant in relation to ROA but insignificant in the case of ROE with different direction of impact. This finding need to be further investigated by employing other performance variable or by applying qualitative approach. Similarly, the impact of government loan over performance is also indecisive. It is because only one test, which ROA as dependent variable, demonstrates significant result. However, both tests show the same negative impact of such kind of government interference. It can be conclude that the cost of obtaining and optimizing government loan exceed the financial benefit that may be able to reaped. Even possible financial benefit from low interest and low transaction cost of loan acquirement may be offset by illegal transfer paid to rent seeker in bureaucracy. This finding reinforces the previous research conclusion which is soft budget constraint will create contributive environment for spoiled managerial behavior 20. This managers have no incentive to run the firm efficiently, reluctant to compete fairly which will firmly harm the firm competitiveness in the long run.Interestingly, the findings with respect to number of government officers occupy seats on board of commissioner appears to be different from common belief that suspect that the presence of officer on board of commissioners is likely to worsen the situation and pe