JAKARTA (TheInsiderStories) – Indonesia’s State-owned enterprises (SOEs), especially construction and power companies, which are involved in the government-led infrastructure projects are currently being plagued by weakening balance sheets, as they have been borrowing extensively to fund their part.

According to the government’s data, about 20 listed SOEs have seen their leverages gone up significantly with debt-to-EBITDA level soared to about five times from one times in 2011.

As the central government has limited funds at its disposal, SOEs as key agents of the infrastructure development has duty to fulfill the financing. However, this raised problems cause these SOEs have to borrow heavily to secure working capital budgets for some large projects.

Unfortunately, the projects are often delayed and take many years before starting to generate revenue. Even worse, some projects outside the island of Java may not be profitable at all.

If this trend continues, then the SOEs could be forced to cease all investment within the next five years to control their finances, renegotiate debt or ask for recapitalization from the government.

In total, there are 26 SOEs recorded US$363.5 million loss last year. That was lower than $421 million in 2016. These improvements were a result of some measures that have been taken to improve the financial performance of the 12 state companies suffering losses in 2017.

Inefficiency is still a problem in the management of many state companies, including PT Garuda Indonesia Tbk (IDX: GIAA), had suffered losses more on operational efficiency.

The flag carrier has suffered losses lately more on tariff war and inefficiency by serving unprofitable international routes.

The country`s largest steel maker PT Krakatau Steel Tbk (IDX: KRAS) reported large losses on a number of factor such as steel dumping by China.

Therefore, state companies have to improve efficiency by create synergy to be more competitive, and merger should be considered among companies operating in the same line of business.

The Joko Widodo’s administration is strongly supporting SOEs to lead economic development in certain sectors such as infrastructure, but at the same time the government is adopting liberalization policies in other sectors. Moreover, private business are protesting the dominance of SOEs in the economy and pressuring the government to create a level playing field.

The Indonesian government has reiterated that SOEs are responsible for their own business expansion and should not expect the government to step in when losses arise. State capital injections into SOEs increased from $222 million in 2014 to $4.6 billion in 2015.

However, the government plans to shift the focus to fiscal sustainability during the second half of the administration, and the capital injection into SOEs is expected to shrink from Rp50.5 trillion in 2016 (revised budget) to Rp4 trillion in 2017. That leaves the SOEs with only one option to fund their expansion: debt.

The major highlight on SOEs debt is Jakarta-Bandung high-speed railway project. The government awarded the project to a consortium of Chinese and Indonesian SOEs over Japanese firms in 2015. One of the major reasons was that China did not require funds from the Indonesian government.

China Development Bank disbursed a total of $3 billion to three state-owned lenders, PT Bank Mandiri Tbk (IDX: BMRI), PT Bank Rakyat Indonesia Tbk (IDX: BBRI), and PT Bank Negara Indonesia Tbk (IDX: BBNI).

The SOE segment’s share in Indonesia’s debt increased gradually in the first half of the 2010s. At the end of 2015, SOEs accounted for 6.1 percent of bank loans and 19.8 percent of external debt. The shares are expected to rise at an accelerated pace as SOEs’ major infrastructure and factory construction projects begin in the coming years.

However, it is difficult to imagine that the government will turn a blind eye if the SOEs carrying out social-oriented activities or the nation’s long cherished infrastructure projects face financial troubles.