Research Group LM FEB UI: BUMN (SOE) in the Covid-19 Pandemic Vortex
Nino Eka Putra ~ PR of FEB UI
DEPOK – (July-August 2020) BUMN Research Group, FEB UI Management Institute, Dr. Yasmine Nasution and Arza Faldy Prameswara released their writings published by BUMN Track Magazine, in the Perspek tif column, pages 24-26, entitled “SOEs in the Covid-19 Pandemic Vortex.” The following is the article.
“SOEs in the Covid-19 Pandemic Vortex”
Many think that the recovery process from the Covid-19 pandemic has not been going as fast as it should have , even resulting in a new situation that is permanent, or known as the new normal. SOEs need to see the medium-term and long-term impacts of a company’s going concern risk after the Covid-19 recovery.
The Covid-19 pandemic is spreading more widely than previously thought. The pandemic, which originally originated in China has now developed into a global pandemic with a very high risk level as determined by the WHO. Indonesia itself is categorized as a country with the highest fatality rate in Southeast Asia. Seeing the average number of additional positive patients up to the beginning of May, many think that Indonesia has not yet reached the peak of the virus spread curve. This has resulted in uncertainty for the business community as to when the pandemic will end and what countermeasures should be taken by the government.
Government directives to prevent transmission of the virus through quarantine and work from home have resulted in a different response by the business world; whether to temporarily stop business or remain doing business as usual. Should a business decide to stop operations in an effort to reduce the spread of the virus, the business will lose revenue. If the business chooses to do business as usual, then this will sacrifice the health of workers and society in general, and the pandemic will spread wider.
A study conducted by Yasmine Nasution and Arza Faldy Prameswara of the BUMN Research Group Management Institute of the Faculty of Economics and Business (LM FEB) Universitas Indonesia concluded that the uncertainty of stopping business activities due to the pandemic has and will affect the company through several channels. First, from the input side, the pandemic affects raw materials, labor (decreased demand and supply of labor) and financial sources. Second, the pandemic affects the production operational process (fixed operating costs, decreased production capacity, decreased labor efficiency). Third, in terms of output and market, the pandemic affects product delivery. In other words, the pandemic is causing increasing costs of doing business in almost all sectors.
Obstacles to business activities and localized quarantines will affect both domestic and overseas supply chains, which in turn will lead to fluctuations in prices and availability of raw materials. Conversely, a decrease in company revenue will disrupt the company’s cash flow which will then have implications on decreasing solvency and the company’s internal funding capacity. Meanwhile, the cost of capital will tend to increase in line with the increased risks of the financial markets.
Furthermore, according to Yasmine, the production process was also affected by the pandemic along with disruptions to input and market uncertainty. The company’s production capacity is not optimal and efficiency is not achieved as an implication of reducing working hours. Business entities that lose income, will lay off workers in order to reduce losses in the middle of ongoing fixed costs, such as utilities, land and equipment rent, salaries, and taxes.
Finally, the impact of the pandemic is clearly visible from the consumer side, from the delivery of products and changes in consumer behavior in the market. The company will experience difficulties in distributing products along with disrupted activities of retailers, sales agents and distributors. As a result, the availability of products is disrupted, especially for some products that are still very much needed, such as staples, cleaning tools and medicines. Meanwhile, decreasing consumer purchasing power will result in lower demand for various products.
BUMN in the Middle of a Pandemic
The pressure that occurs on various lines of the Indonesian economy does not escape the impact on one of the cogs or agents of national development, namely BUMN. The crucial role of BUMN in Indonesia cannot be separated from the operation of BUMN companies in strategic sectors that provide public services, such as transportation, food, infrastructure, and many more. With total assets reaching more than Rp8,100 trillion, the contribution of BUMN in the economy cannot be denied.
The study of BUMN Research Group LM FEB University of Indonesia also stated that apart from the issue of BUMN pareto conditions, optimization of financial performance, and rightsizing of BUMN, this pandemic condition had a significant impact on almost all state-owned companies. Until now, the process of mapping the impact of the Covid-19 pandemic on the performance of BUMN is still in progress, but the Ministry of BUMN estimates that the financial performance of BUMN in 2020 will decline significantly. This is due to several aspects throughout the BUMN business process that are affected by current conditions.
For example, BUMN with high dependence on imported raw materials, such as Pertamina, pharmaceutical BUMN, and food BUMN will be disrupted due to international trade restrictions and falling exchange rates. Meanwhile, commodity-based BUMN such as plantation BUMN and mining BUMN will also experience difficulties amid fluctuations in commodity prices and export restrictions. Meanwhile, BUMN with large debt obligations, such as BUMN Karya, will experience significant challenges with disruption of cash flow.
Shifts in consumer behavior have had a significant impact on the transportation and accommodation sectors. In this regard, transportation BUMN, such as Garuda Indonesia or Kereta Api Indonesia (KAI), are facing a significant reduction in passengers during the pandemic. The declining level of mobility has also contributed to a decline in the performance of BUMN engaged in the tourism sector and its supporters, such as Angkasa Pura and Hotel Indonesia Natour. Meanwhile, the decline in company performance led to an increase in credit risk which in turn had implications for disrupting operational performance and increasing liquidity risk for Himbara.
Meanwhile, the government has committed to budgeting around IDR 405 trillion to tackle the pandemic and promote economic recovery. However, the government cannot do this without the involvement of other actors, one of which is BUMN. BUMN as a development catalyst has enormous capacity in accelerating economic recovery, considering that BUMN is present in almost all sectors of the economy. So that it is not only at the forefront of tackling a pandemic, such as BUMN Pharmacy, but also contributes to business development efforts through diversification which then produces a multiplier effect on the economy. In addition, there is a potential synergy between BUMN and BUMD (Regional SOE) or the private sector which can also restore the business climate to a more conducive environment.
BUMN Resolution to face New Normal Condition
Until now, there is no certainty whether the pandemic situation has passed the peak of the curve, seeing that the additional positive patients nationally is still quite fluctuating and has not shown a downward trend. Various studies have produced predictions about when this pandemic situation will end, however, no one has been able to confirm the results of these estimates. Various studies also show that business actors’ sentiment tends to be negative about turning points or recovery from this crisis.
Many think that the recovery process from this pandemic will not run quickly, it will even result in a new situation that is permanent or known as the new normal. In this case, BUMN needs to look at the medium and long-term impact of the company’s going concern risk after the Covid-19 recovery.
Several business risks need to be considered by BUMN management or the Ministry of BUMN as shareholders, after the pandemic period ends. First, the risk of dependence on imported raw materials. Several BUMN have a significant import component in their operational costs. Long-term business sustainability needs to be taken into account by learning from the pandemic conditions where the supply chain is significantly disrupted and world commodity prices fluctuate very significantly. For this reason, efforts to reduce imports of oil or raw materials for medicines, as well as strengthening the upstream value chain, need to be continuously improved.
Furthermore, there is the risk of developing foreign markets, either through international trade or strategic cooperation. In recent years, several BUMN have expanded significantly and have begun to develop regional and international markets. As for the post-pandemic, several studies stated that there would be a deglobalization phenomenon. This needs to be anticipated by BUMN with a significant non-domestic market share. Several domestic utilization efforts through downstream are the right steps to diversify risks.
Then, the exchange rate risk also needs to be considered, considering that several BUMN have obligations or revenues in foreign currency. Finally, the risk of debt management has implications for disrupted company liquidity. Learning from the pandemic conditions that coincided with the maturity of quite large debts of several BUMN, efforts to prevent liquidity risk need to be implemented by policy makers going forward.
We want BUMN to be the main driving force in the context of economic recovery after the Covid-19 pandemic. Although currently many BUMN are experiencing difficult situations, optimism for improving business conditions is maintained. BUMN performance also needs to be continuously improved by taking into account going concern risks, so that in the future we have BUMN that are relatively resistant to crisis conditions and can contribute to maintaining the stability of the national economy. (hjtp)
Source: BUMN Track Magazine. No. 148 Year XIII July – August 2020. Pages 24 – 26.