Corporate Governance of Sugar Mills in East Java: A Transaction Cost Economics Perspective

ABSTRACT: Despite Indonesia’s overall achievements during the past two decades, the economy is encountering a series of problems. One of the biggest challenges is the unsatisfactory performance of the state-owned enterprises (SOEs). Subsidisies and uncovered loans to the SOEs have drained the government’s fiscal resources, and the signing off of employees creates many social problems. Compared with the SOEs in other sectors, state-owned sugar mills face more serious crises which not only jeopardise the social fabric, but also endanger the production. Research results strengthen the statement that the basic problem in sugar mills is management inefficiency resulting in high transaction costs. This research compares the transaction costs between state-owned (Ngadiredjo) and privately-owned (Kebon Agung) sugar mills. The study shows that in Kebon Agung Sugar Mill transaction costs are higher than production costs, while in Ngadiredjo Sugar Mill the reverse is true. However, the high transaction  costs in Kebon Agung Sugar Mill cannot be attributed directly to inefficient institutions, because Ngadiredjo Sugar Mill incurred high costs for plants, land preparation, and fertilizer, which decreased the proportion of transaction costs. If  analyzed in detail, the following facts are revealed: (i) market transaction costs in Kebon Agung Sugar Mill are higher than in Ngadiredjo Sugar Mill. This is because Kebon Agung Sugar Mill has established cooperation with sugarcane farmers in the form of extensions and transport subsidies; and  (ii) the political transaction costs proportion in Ngadiredjo Sugar Mill is higher than in Kebon Agung Sugar Mill because of the imposition of many ‘illegal’ fees.

Keywords: transaction cost economics, corporate governance, sugar mill, East Java

Author: Ahmad Erani Yustika

Journal Code: jpmanajemengg070017

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