Indonesia Business Review 2002 - Part 2

Indonesia in for another year of sluggish growth

Friday, December 27, 2002 Vincent Lingga, The Jakarta Post, Jakarta 

Indonesia is likely to end its fifth consecutive year of economic crisis with moderate growth but is in for another slowdown in expansion in 2003 as the country grapples with adverse internal factors and an unfavorable external environment.

The nation missed a number of growth opportunities generated by strengthening political and macroeconomic stability in the first half of the year, because of lagging policy reforms and an often adversarial relationships between the House of Representatives and the executive branch of the government.

The overall condition worsened after the Oct. 12 bomb attacks in Bali that created a new uncertainty as it revealed the country's vulnerability to terrorism, increased the country's risks and, consequently, business risks, and further slowed down the process of regaining foreign confidence in the economy.

Most analysts predict this year's economic growth (in terms of real gross domestic product) at 3.2 percent to 3.5 percent, lower than the government target of 4 percent, or about similar to the 3.3 percent posted in 2001, but much lower than the 4.8 percent expansion in 2000.

The World Bank is similarly downbeat about economic prospects in Indonesia. In its latest assessment after the attack, the World Bank predicted economic expansion of 3.2 percent this year.

The government revised down its growth target from 5 percent to 4 percent for 2003 after the Bali bomb blast but even this expansion is considered by most economists as too optimistic. Most analysts predict the economy will muddle through in 2003 at this year's moderate pace at the most, unless the government strengthens its leadership of the reforms with the full support of the House.

Though the growth is very modest by the country's pre-crisis performance, some economists still consider the increase respectable for a country grappling with the complications caused by its transition from an authoritarian, centralized government to a democratic, decentralized administration.

However, the expansion is far from enough to cope with the problems of unemployment and under-employment, which are currently estimated at 40 million people, let alone to absorb the 2.5 million new job seekers entering the labor market annually.

Nor will an economic expansion of less than 4 percent be able to significantly reduce the incidence of poverty. Such moderate growth will ensure the economy remains fragile.

Consumer demand has and will remain the main driver of growth, especially in 2003 when spending by political parties geared up for the 2004 election will increase.

The contribution of external demand to growth will, however, remain weak because the economic upturn in the United States seems likely to be slower than expected, while Japan will still be mired in recession and the recovery in Europe will be sluggish at best.

Economic weaknesses in Latin America will continue to cast a pall over the emerging markets in Asia while the possibility of armed conflict in the Middle East threatens to add a further element of uncertainty.

Worse still, the competitiveness of Indonesian exports, which is already suffering from adverse business conditions due to mounting labor strife, inimical regulatory and judicial systems, inefficient and corrupt customs and tax service and crumbling infrastructures in many provinces, has further been eroded by increased security and business risks in the aftermath of the bomb blast in Bali.

Not much can be expected from private investment spending as most big business groups are still struggling to restructure mountains of bad debts while small and medium-scale firms are hindered by the fragile banking industry.

Mining and agro-based industries, including fisheries and plantations, which are supposed to be the most promising among resource-based businesses, are unfortunately embroiled in complications in the learning process after regional autonomy implementation in 2001.

Foreign investors will continue to stay away due to the poor business condition, higher risks and anticipated political turbulence in the run up to the 2004 general elections.

The most prospective avenue for capital inflow now is the acquisition of the distressed assets and sale of viable state companies. But this prospect cannot be fully realized because narrow-minded politicians often resort to whipping up inordinate nationalistic sentiment to gain popular support.

Yet more worrisome is that this negative sentiment will likely continue in 2003 when the national agenda will be highly politicized before the 2004 election.

Privatization, another alternative to woo capital, will continue to be debilitated by the lack of government leadership in gaining political consensus for the program, which is sorely needed to finance the state budget and improve state companies' competitiveness.

Strong opposition from vested-interest groups, including politicians and senior officials who often collude with trade union leaders to maintain state companies as their cash cows, has virtually stalled divestment.

The uncertainty about Indonesia's relations with the IMF after the current extended facility agreement ends in December 2003 will make investors jittery since, in spite of its past mistakes and shortcomings, this multilateral institution is still an opinion leader on Indonesia for international creditors.

The international market will most likely feel more comfortable if Indonesia remains under the oversight of the IMF, especially in the run up to the 2004 elections when pressure for more populist policy measures usually mounts.

The end of the IMF program will, however, increase market confidence if it is based on Indonesia's good policy performance that enables it to leave the IMF's crisis management unit.

The public sector is not in a financial position either to pick up the slack in private investment spending. Overburdened with foreign debts of about $74 billion and a similarly huge sum in domestic debts, the government has little leeway to provide stimulus to the economy. Moreover, as business performance will remain weak at least until 2004, the government cannot significantly increase tax receipts.

Even though the government has planned to extend its bonds maturing in 2003 and 2004 through reprofiling programs or the issuance of treasury bonds, it needs to have a stronger macroeconomic environment to be able to refinance or restructure these bonds on market-based terms.

Foreign debt service burdens will again threaten to undermine its fiscal consolidation in 2004.

Since the Paris Club III agreement rescheduled only foreign debts and interest payments due by the end of 2003, the government will have to begin fully servicing its debts maturing in 2004 and in subsequent years, unless it renegotiates another rescheduling agreement. But such a deal is contingent upon Indonesia remaining under the IMF program.

Unless the economy is able to regain annual growth of 5 percent to 6 percent, it will be impossible for the government to reduce its stocks of debt. Hence, its domestic and foreign debt service burdens that now already siphon off more than one third of Indonesia's fiscal revenues will continue to severely limit the public sector's investment capacity.

Asset recovery and loan restructuring by the Indonesian Bank Restructuring Agency, the most important instrument created to manage the economic crisis, have made faster progress, though often in a controversial style due to allegations of corruption.

Next year will also pose another challenge for Indonesian businesses as the ASEAN Free Trade Area will start full operations in January. At a time when most local industrial companies are already hard hit by higher business risks and consequently the rising cost of doing business, they will experience tougher competition from suppliers in Malaysia, Thailand, Singapore and the Philippines.

Yet still more worrisome is the capability of the customs service to accurately verify the minimum 40 percent ASEAN content, the basic requirement to make products traded within AFTA eligible for the preferential tariff arrangements of 0 percent to 5 percent.

Even now producers of garments, electronics, footwear, electric appliances and food commodities have been adversely affected by imports and smuggled products, compelling the government to roll back its trade liberalization policy by imposing non-tariff barriers and raising import tariffs.

However, any measures against market mechanisms are vulnerable to failure and often cause new problems as they provide discretionary power to government institutions, most of which are either incompetent or hopelessly corrupt.

All these risks make it even more imperative than ever for the government to exert a stronger leadership of its structural reforms to offset the setbacks caused by the impact of the Bali bomb blasts on political, security and economic stability.

Higher economic growth is urgently needed to reduce poverty because, as more than half the people still live on the brink of poverty, even the slightest economic deterioration could plunge these unfortunates into absolute poverty.

Next year is a crucial moment for attaining stronger macroeconomic stability before the impending political turbulence surrounding the 2004 elections.

The risks of political upheaval are high as competition between political parties (there are now more than 200 parties registered to take part in the elections) will escalate.

However, a robustly growing economy with stronger macroeconomic stability will be able to weather the turbulence. Middle- and high-income earners will likely be more capable of rationally responding to political campaigners, who may resort to emotional, narrow-minded themes to gain popular support even at the cost of the long-term economic good.

Indonesia's major economic events and market performance throughout 2002

Jan. 2: The rupiah ends its first day of trading of the year at 10,380 against the U.S. dollar, while the Jakarta Composite Index closes at 383.45 points.

Jan. 29: The International Monetary Fund (IMF) approves the first loan tranche of the year worth US$341 million for Indonesia, signaling continued support for the government. The move fails to significantly lift the Jakarta currency and stock markets.

March 14: The government sells a 51 percent stake in the country's largest private bank, BCA, which is regarded as a milestone toward restoring foreign investor confidence in the country.

April 26: The IMF approves a US$347 million loan tranche for Indonesia, the second of the year, but urges the country to push ahead with reform warning there is no room for complacency.

Aug. 26: President Megawati Soekarnoputri officially submits to the House of Representatives the draft 2003 state budget, which features a sharp cut in subsidies and hikes in tax revenues.

Oct. 12: Massive explosions rock two nightclubs in the country's popular resort island of Bali, claiming close to 200 lives and leaving hundreds injured. On the next trading day, the Composite Index plunged 10.35 percent to 337.48, its lowest level in four years, while the rupiah dropped 3.55 percent to 9,330

Nov. 8: IBRA sells a controlling 51 percent stake in Bank Niaga to Malaysia's leading financial group, Commerce Asset-Holding Berhad (CAHB).

Nov. 27: All factions of the House of Representatives unanimously pass the government-proposed draft 2002 state budget into law during a plenary session. The approved budget includes revisions of various economic assumptions to better reflect the impact of the Bali bombings.

Dec. 7: The IMF approves its latest loan tranche to the country. The loan amounts to US$365 million.

Dec. 15: Singapore Technologies Telemedia (STT) is named the winning bidder for the government's 41.9 percent stake in state-owned telecommunications firm PT Indosat at a price of Rp 5.6 trillion (about US$610 million), marking the largest sell-off to date in the country's privatization drive.

Dec. 23: The rupiah closes at 8,885 per dollar, while the stock index ends the year on 425.60 points.

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The dilemma IBRA faces in resolving bad loans

Wednesday, August 28, 2002  Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

Raising revenues for the state budget is only one of the objectives of the Indonesian Bank Restructuring Agency's (IBRA) massive auction sale of Rp 135.4 trillion (US$15 billion) in bad loans which began last month, and not the most important one for that matter.

Releasing the thousands of corporate debtors from the bondage of their bad debts and putting them in the care of bank creditors that are capable of restructuring the dud loans and refinancing and restoring the corporate debtors to sound operations is much more important for economic recovery.

Still equally crucial is the need for improving banks' intermediation through the expansion of their loan portfolios to reduce their dependence on the interest revenues from government bonds, which were issued in 1999 to recapitalize almost all the largest national banks in the country.

Recapitalized banks were facilitated to acquire the bad loans by allowing them to pay the distressed assets with government bonds and to ally with non-bank finance companies to manage and restructure the bad loans into current credits before they were put into banks' loan books.

This way, the banks would not risk their capital adequacy ratios falling below the minimum 8 percent level and, at the same time, would allow the government to retire its bonds early, thereby decreasing its debts and the amount of bond interest that it has to pay annually.

Unfortunately, though, the objectives of reinvigorating indebted corporations and creating sound businesses through restructuring and refinancing, as well as early retirement of sizable amount of government bonds could not fully be achieved.

Because only around 50 percent of the assets sold were bought by banks and securities/investment companies that teamed up with banks, while the rest were acquired by small investors, which would most likely be incapable of restructuring the loan assets and refinancing the debtors' businesses.

Only Rp 4.46 trillion of the Rp 23.1 trillion sale value was paid in government bonds.

The auction succeeded in selling only 1,454 loans worth (principals only) Rp 81.6 trillion out of the 2,582 loans with a face value of Rp 135.4 trillion. It succeeded in raising Rp 23.1 trillion, or a recovery rate of just 28.3 percent.

That reflected a 71.7 percent loss or about equal to the 72 percent loss in the value of the rupiah in relation to U.S. dollars.

This also meant the debtors got discounts averaging more than 70 percent of their debt principal or a total of Rp 58.5 trillion. This was part of the cost of the economic crisis that the taxpayers now are burdened with.

The latest data shows that there is still more than Rp 189 trillion in bad loans at IBRA that have yet to be restructured or sold off.

There were several reasons as to why the results of the mammoth loan asset sale were way below expectations.

Chief among them was the inadequate information available on the bad loans that made most bidders unable to reasonably assess the commercial viability of the loan assets and to estimate the return on their investment.

IBRA seemed unable to disseminate complete information on so many loan assets, or it did not have, in the first place, adequate information or proper legal documentation when those debts were dumped into its hands at the height of the banking crisis in 1998 and 1999.

On this information factor, Bank Mandiri, a new bank set up in 1999 as the result of the merger of four state banks, appeared to have been in a very advantageous position because it was these former banks that supplied around Rp 178 trillion of the Rp 292 trillion in bad loan assets taken over by IBRA from closed, nationalized or recapitalized banks in 1998 and 1999.

Another reason, as disclosed by an informed source, was that many of the corporate debtors were rotten businesses that did not have any chance at all of surviving, even with generous refinancing packages.

Still another factor was that many loans were not adequately secured with collateral, which was not uncommon before 1997, especially among state banks that were highly vulnerable to political pressure and rife with corruption.

These rotten businesses were companies which had thrived only because of the special privileges and facilities they got under Soeharto's authoritarian rule that was notorious for collusive practices between officials and particular businesspeople.

IBRA should have liquidated these corporate debtors in the first place, using its extrajudicial powers, as stipulated in Government Regulation No.17. 1999, instead of wasting its resources trying to restructure them, let alone offering them to other creditors or investors.

After all, IBRA's tasks are not only to restructure bad loans and recover distressed assets. Equally important is the job of consolidating the corporate sector, cleansing of all rotten enterprises and unsound business practices.

Allowing these unfeasible corporate debtors to survive would be unfair competition to sound companies which have worked hard to settle their debts, especially if these bad debtors can get discounts of up to 70 percent of their debts.

Another problem IBRA discovered, after being discouraged by one defeat after another at the Jakarta bankruptcy court, was that it was hopeless to deal with the largely incompetent and corrupt court system.

IBRA is therefore faced with a dilemma. In view of its past record of being able to restructure less than 100 debts a year, IBRA may take more than a decade to work out the thousands of bad loans still under its management, much longer than its mandate which will expire in early 2004.

Moreover, the longer the bad loan assets stay under IBRA the worse will be the quality of the assets.

Conducting another massive auction of both restructured and un-restructured loans as it did last month would risk giving away commercially viable and rotten businesses to unscrupulous debt collectors and serious, yet under-capitalized investors which would not have enough resources to restore corporate debtors with promising businesses to sound operations.

High-level political resolve and decisions are required to resolve the dilemma.

Instead of constantly criticizing IBRA as an incompetent and corrupt institution, it is high time for the House of Representatives to help the government further empower IBRA to dispose of corporate debtors that no longer have business prospects.

Quickly disposing of corporate debtors with rotten businesses would not

only clean up the economy of "zombie" enterprises but also would enable IBRA to focus its attention on restructuring loan assets backed by good business prospects and disposing them at a reasonable recovery rate.

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Investment, growth prospects remain gloomy

Tuesday, August 27, 2002 Vincent Lingga, The Jakarta Post, Jakarta

Most analysts view the government's estimate of 5 percent economic growth for 2003 as too optimistic since consumer spending, one of the biggest locomotives of economic expansion besides export, is expected to slacken as a result of the contractible fiscal policy, while foreign investment will likely remain moribund.

Private spending will decrease along with a decline in consumers' disposable income as the government will extract more than what it will inject into the economy through a vigorous tax collection, the addition of

services subject to value-added tax and a higher property tax rate.

Nevertheless, the government seems confident that favorable macroeconomic conditions, supported by the stronger political stability, will be conducive for bolstering export and investment in order to offset any decline in the contribution of consumer spending to growth generation.

This confidence can be seen from the budget projection, which more than doubles the target of export growth to 7 percent next year from the estimated 3 percent increase this year.

However, this projection seems too high as the latest indicators from the world's economic powerhouses, the

United States, Japan and Europe, portend a lower economic expansion for next year.

Moreover, the increasingly radical labor movement has made many importers overseas worried about the ability of Indonesian companies to deliver such fashion-sensitive goods as footwear, textiles and garments, and are consequently shifting their orders to other countries.

Worse still, the manufacturing sector could encounter keener competition from the import sector as more goods from neighboring countries, such as Thailand, Malaysia and the Philippines, may inundate the domestic market under the ASEAN Free Trade Area beginning in January.

Investment spending, which is expected to be the third source of fuel for growth, is not promising either. Not only will the government's investment in development spending decrease by 5 percent in real terms, but it will not provide much stimulus for private investment as only a very small portion of the spending will go to the development or maintenance of physical infrastructures.

The bulk of the public sector's investment will be allocated to poverty alleviation and public welfare programs, such as education, health and housing.

Certainly, the majority of foreign investors will most likely remain on the sidelines, waiting for a significant improvement in law enforcement, a business-friendly stance on the part of regional administrations and less rigid labor regulations.

Moreover, the manufacturing sector does not provide much opportunity for green-field investment projects as it still operates below its designed capacity. Resource-based ventures, such as mining, fisheries, plantations and other agro-based industries, which are supposed to be the most prospective businesses, are rendered unfeasible due to the hostile regulatory environment caused by the excesses of the start-up process of regional autonomy.

Domestic investment is out of the question because many businesses remain hostage to bad debts, the condition of the banking industry is still fragile and interest rates are persistently high.

The budget estimates the central bank's benchmark interest rate at an average 13 percent compared to 16 percent this year. This means lending rates will range from 18 percent to 20 percent because national banks continue to be inefficient with intermediation costs varying from 5 percent to 7 percent.

Is the prospect for higher growth really so hopelessly grim?

Not necessarily, if the government and regional administrations are fully aware of the exigencies of the situation and set the right priorities accordingly, while improving cooperation and coordination.

omestic investment, for example, continues to be commercially feasible and is, in fact, sorely needed to modernize plant

This would only be possible if resource-based businesses, such as wood, fisheries, mining and plantations, are released from the prison of their debts to reopen their access to new credit lines.

Likewise, foreign investors are still interested in coming in, but through the acquisition of business assets

managed by the Indonesian Bank Restructuring Agency and of certain state companies.

Most important, though, is for the President or the chief economics minister to provide effective leadership for the top-priority programs that are most influential to bolstering export and investment.

The national political leadership also needs to go all out with effective communications to convince regional administrations of how vital a business-friendly environment is to attract investment, without which the regional economy will never expand to improve people's welfare.

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IBRA finds itself in another mess for its loan sales

Monday, August 26, 2002

Vincent Lingga, The Jakarta Post, Jakarta

The Indonesian Bank Restructuring Agency (IBRA) seems not to be fully aware yet that credibility and accountability should be its basic capital in executing its primary task, which is disposing of the billions of dollars of distressed assets under its management.

Or is this agency, the most vital instrument for the economic crisis management, so fully controlled by corrupt officials that it is truly a den of thieves, as many have alleged?

Almost all the major deals it has made since 2000 have been dogged by controversy, battered by allegations of collusion and corruption. This despite its supervision by an independent oversight committee, ombudsmen, an internal audit department and State Minister for State Enterprises Laksamana Sukardi, supposedly one of the Cabinet members with impeccable integrity.

IBRA's auction of Rp 135.4 trillion (US$15 billion) of bad loans last month, billed as the mammoth asset sale of the year, ended in another controversy, causing uproar in the mass media and forcing the government to set up a special task force to investigate allegations of conflicts of interest and corruption.

The auction process started in early June with steps to ensure a high standard of transparency. These steps included conducting an information campaign through investor forums and the IBRA website, and establishing clear-cut step-by-step procedures and legal safeguards to prohibit original debtors from taking part in the bidding.

The massive asset sale was warmly welcomed, as it was expected to achieve three strategic objectives: releasing corporate debts from the IBRA "hospital" to new creditors, allowing banks to expand their loan portfolios and reducing the government's domestic debt and its spending on the interest on bonds.

About 231 domestic and foreign investors submitted bids, resulting in Rp 81.6 trillion in bad loans being sold for Rp 23.1 trillion, or a recovery rate of 28.3 percent. This rate was not bad, compared to the 20 percent recovery rate achieved by the asset managers in South Korea and 27 percent in Thailand.

But suddenly, boom! Allegations of collusion and corruption erupted, and rumors began to fly of several IBRA officials buying luxury cars.

As it turned out, a shareholder and key executive of PT Anugra Cipta Investama, one of the biggest winning bidders, is Wicaksono Abadiman, a cousin of Mohammad Syahrial, deputy to the IBRA chairman in charge of asset management.

Yet more damaging to the credibility and perceived fairness of the auction is the fact that Abadiman is a former president of state-owned PT Bahana Securities, which together with another state firm, Danareksa Sekuritas, had been a financial adviser to IBRA and was heavily involved in valuing distressed assets at IBRA, including a good portion of the bad loans entered into the auction.

Why is this seemingly small matter so damaging to the credibility of the auction process?

Because information is the key for investors to assess the business prospects of debtors, and to set their bid prices accordingly. It is quite obvious, therefore, that asymmetrical information is quite a big disadvantage.

Anugra Cipta should not have been allowed to take part in the auction, not only because Abadiman is a cousin of Syahrial, one of the key decision-makers at IBRA, but primarily because he was virtually an insider who had been well informed of many of the distressed assets put on sale.

State minister Laksamana set a good example of good governance in May by deciding not to appoint his elder brother as the new president of state-owned PT Garuda Indonesia, even though Samudra Sukardi was the most qualified candidate for that position, judging by his technical competence, his managerial record and the full support he received from the state company's employees.

But this time, he did not intervene to prevent a conflict of interest.

Possession of information was naturally a great advantage, because quite a large portion of the bad credits being auctioned had not yet been restructured. Investors would still have to restructure the dud loans they bought, a process that would require formidable negotiations with corporate debtors about new terms, repayment schedules and even some refinancing packages.

Anugra Cipta enjoyed another huge advantage because it allied itself with Bank Mandiri, the country's largest bank, which was set up in 1999 as the result of a merger of four state banks. These now defunct banks handed over Rp 178 trillion of about Rp 292 trillion in bad loans IBRA took over from closed, nationalized and state banks in 1998 and 1999.

True, there is no regulation that bans the relatives of IBRA officials from taking part in transactions with the agency. But if IBRA is truly serious about maintaining a high degree of credibility, developing good governance and high standards of business ethics, it should have prohibited the relatives of senior officials with decision-making authority and those with inside information from doing business with IBRA.

IBRA never seems willing to learn from its past mistakes, including the alleged collusion-ridden auction of Indomobil, the country's second largest automotive group, last December.

A two-month investigation by the Business Competition Supervisory Commission earlier this year pieced together solid evidence showing that the three final bidders in that auction -- PT Alpha Sekuritas Indonesia,

PT Bhakti Asset Management and PT Cipta Sarana Duta Perkasa -- conspired to determine the winner of the tender.

The evidence clearly described how two bidders, Alpha and Cipta Sarana, shared information and knowledge for their bids. This conspiracy, the commission stated, was made possible because Pranata Hajadi was an investor in both Alpha and Cipta Sarana.

It is sad to note that except for Bank Mandiri, most of the 20 largest winning bidders of last month's auction are investment or securities companies, with little capital and not much experience in debt restructuring, let alone refinancing capability.

The strategic objectives of bad loan sales can only be achieved if most of the buyers are banks, capable of restructuring the debts and refinancing the corporate debtors to enable them to resume full-capacity operations.

Given its messy image, IBRA might learn a lesson from Indian Minister of Privatization Arun Shouri, who also faces constant criticism from fellow ministers, trade unions and parliamentarians anytime he disposes of a state company.

Yet in less than two years, Shouri has succeeded in selling 22 state companies, raising $2.2 billion.

As part of his overriding attention to maintaining the integrity and credibility of every deal he makes, Shouri goes the extra mile.

Shouri turns over all documents to the Indian auditor general (the equivalent of Indonesia's Supreme Audit Agency) the day after each sale, even though he is not legally required to do so.

IBRA may also be well-advised immediately to hand over all documents to the Supreme Audit Agency after each major transaction, to prevent controversy and to uncover early on any wrongdoing that may have occurred.

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Courts overturn antitrust body's rulings

Tuesday, July 30, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The current court battle between the Business Competition Supervisory Commission and the six business parties it ruled in May to have conspired to rig the tender for the government's 72 percent stake in Indomobil, is a litmus test of whether the antitrust body really has the teeth to protect the market and business sector from unfair competition.

The alleged sham competition for the controlling ownership of the country's second largest automobile group is the first major case handled by the commission within the enforcement of Law No.5/1999 on the prohibition of monopolistic practices and unfair business competition.

The case will also be a crucial test of whether the court system is technically competent and exceptionally honest in judging cases involving complex, sophisticated modern business practices.

Early indications, though, have only confirmed the public's perception of the court system as a grossly incompetent and corrupt institution. This can, among other things, be seen in the quality of the decisions taken by the Central and West Jakarta district courts that ruled in favor of the objections from three of the six business parties that the Commission ruled were involved in the conspiracy.

However, the court battle is not over yet as the final legal judgment on the case will depend on the Supreme Court because the commission has decided to appeal against the courts' rulings.

The Nov. 26 to Dec. 4, 2001 tender of PT Indmobil Sukses International, which was ceded to the government in 1998 by the Salim Group to settle part of its huge debts to the central bank, were controversial from the outset, setting off a wave of allegations of collusion and corruption.

The decision by the Indonesian Bank Restructuring Agency (IBRA) to conduct the entire tendering process in just three weeks, which resulted in a disastrously low price, raised a lot of troubling questions.

Consultant PricewaterhouseCoopers (PwC) had earlier recommended the tendering process take at least 21 weeks, given the size and complexity of Indomobil, its subsidiaries and its contracts with car principals overseas. But IBRA hired Deloitte & Touche FAS as the financial adviser and speeded up the process to a mere two steps -- final bid and due diligence -- in only three weeks.

Obviously, only insider parties were willing to submit bids, because other interested bidders were disadvantaged by asymmetrical information to make a proper assessment of Indomobil within such a short period of time.

The result was predictably a fire sale on Dec. 4, 2001 at only Rp 625 a share for a total transaction value of Rp 625 billion, much lower than the average Indomobil average price of Rp 735 on the Jakarta Stock Exchange in November and way below the government's acquisition price of Rp 2,500 per share in late 1998.

This value was much lower than its value of between Rp 850 billion and Rp 1.1 trillion, as assessed by PwC in 2001, and the Rp 650 billion-Rp 853 billion range, as estimated by Deloitte.

It was also surprising that Indomobil's car principals overseas and creditors did not raise any objection and appeared comfortable, even though the winning bidder, PT Cipta Sarana Duta Perkasa, was an unknown company set up only in December, 1998, without any records of significant business operations.

This strengthened the suspicion that the winning consortium, which was led by PT Trimegah Securities, consisted mainly of businesses or investors that were insiders or at least former business partners of the Salim family or group.

Most analysts and many IBRA officials had considered the sale price unusually low because the economic and political situation in late 2001 was much more stable than in 1998 and the automobile market outlook looked much brighter.

Using its authority, as stipulated in Law No.5/1999, the commission conducted six weeks of preliminary examinations of the tendering process starting on Feb. 4, which were followed up with investigations from March 19 to the end of April.

This process involved the questioning of dozens of witnesses from business parties to government officials and the examination of about 170 documents.

The commission, as required by law, read out its 114-page ruling in a session opened to the public on May 30.

The investigation concluded that the three final bidders -- PT Alpha Sekuritas Indonesia, PT Bhakti Asset Management and PT Cipta Sarana Duta Perkasa -- had conspired in a concerted action to determine the winner of the tender in violation of Article 22 of Law No. 5/1999.

Deloitte considered the Commission's rulings against it as entirely irrelevant and faulty, claiming that as an adviser it was authorized only to make recommendations and the final decision was up to Holdiko as the seller to make.

However, closing its eyes to such egregious violations of bid procedures, as found by the commission, did not bode well for Deloitte's reputation and integrity.

Deloitte was expected to at least show some moral courage by resigning from its job contract to maintain its integrity. Forfeiting its consultancy fees could have been better for its reputation, its most valuable asset, than being part, however indirect, of the parties engaged in a questionable or rigged transaction.

Yet the Indomobil case showed how the hiring of a foreign consulting company, which is supposed to have a good international reputation, did not automatically lend credibility to a transaction.

There are now two opposing opinions among the business community and analysts. One camp is worried the commission could be overzealous to intervene in almost any questionable transactions if it wins final legal validity for its rulings on the Indomobil case.

Another group of businesspeople and lawyers is similarly concerned that overturning the commission's rulings would inflict irreparable damage to its effectiveness in enforcing the antimonopoly and anti-unfair business competition law.

Judging the commission's decisions simply on technicality, as the district courts did, would not resolve the key issue about the enforcement of Law No.5/1999, especially because the rulings appear to be solidly constructed based on well-documented material evidence.

Any judgment by the Supreme Court on the commission's rulings should, therefore, verify the evidence and indications of conspiracy as outlined in the commission's ruling and answer questions about the commission's authority to examine business parties and about the kinds of transactions eligible to be investigated.

Any legal verdict short of clarifying these issues will not be able to resolve, once and for all, the controversy over the allegedly rigged tender.

The Attorney General's Office investigations of IBRA officials suspected of being involved in the sham competition, as recommended by the commission in its rulings, will also help to straighten this issue.
Evidence of conspiracy pieced together by the commission.

Supporting its conclusion that concerted action was taken to create the sham competition, the commission produced the following evidence:

Two bidders -- Alpha and Cipta Sarana -- shared information and knowledge for their bids and made 20 similar markups in their bid documents. This collaboration was made possible because Pranata Hajadi was not only an investor but also played an active in the management of both Alpha and Cipta Sarana.

The three bidders submitted the same suggestion to Holdiko to abolish the requirement to make an additional bid deposit of Rp 50 billion and to change the procedures for the payment of the bid deposit.

Bhakti was actually not qualified to be a final bidder because it signed a confidentiality agreement as a precondition to obtain memos, procedures for the submission of the bid, the draft conditional share purchase and loan transfer agreement just one day before the bid's submission deadline.

Cipta Sarana, the winning bidder, was entirely unqualified to bid because it did not sign any confidentiality agreement, never sent any letter of interest to Holdiko and did not legally obtain the memos, procedures for the submission of the bid, the draft conditional share purchase and loan transfer agreement from Holdiko.

Cipta Sarana changed the composition of its shareholders and the boards of its directors and commissioners on Dec. 11 against the bid's rules, which prohibited such changes within 60 days after the Dec. 5 deadline for the submission of the bid.

Deloitte, as Holdiko's financial adviser, together with Holdiko failed to prevent collusive tendering by allowing the three final bidders to take part in the tender, even though they did not meet the required procedures for the bid's submission, thereby inflicting heavy losses to the state.

Because the government, as the seller, suffered a potential loss of Rp 288 billion, the commission ruled that Cipta Sarana pay a penalty of Rp 288 billion, PT Trimegah Securities (head of the Cipta Sarana consortium) was ordered to pay Rp 10.5 billion, Alpha Rp 1.5 billion, businessmen Pranata Hajadi and Jimmy Masrin together Rp 10.5 billion, Bhakti Rp 1 billion, Deloitte Rp 10 billion and Holdiko Rp 5 billion.

The commission has also prohibited both Trimegah Securities and Deloitte from being involved in the future sale of assets held by IBRA for two years, but it stopped short of recommending the annulment of the tender in view of its tremendous impact on the state budget.

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Semen Padang bosses rebel against shareholders

Monday, June 03, 2002 Vincent Lingga, The Jakarta Post, Jakarta

The imbroglio over state-owned PT Semen Padang cement manufacturer in West Sumatra took another twist after the company's management refused to convene an extraordinary shareholders meeting to replace its board of directors.

It is now already one month after state-owned PT Semen Gresik, which owns 99.99 percent of Semen Padang, asked for the meeting. Based on the company's statutes, publicly-listed Semen Gresik can ask for an injunction from the district court in Padang to force the Semen Padang management to implement the shareholders' request.

However, informed sources said Semen Gresik seemed doubtful that the district court would have the courage to issue such an order because Semen Padang, with support from the governor and the provincial legislature, has stepped up its campaign for a total spin off from Semen Gresik.

That is quite a bizarre, chaotic situation and a blatant violation of the property rights of the Semen Padang shareholders, including the investing public through their ownership of 23.46 percent of Semen Gresik and

Cemex Asia Holdings Ltd. of Mexico with 25.53 percent.

The Semen Padang management, headed by Ikhdan Nizar, has taken an increasingly rebellious stance since receiving the order from Semen Gresik, going all out to defend its position.

In the meantime, the company, burdened with heavy short-term debt, may default on Rp 627 (US$67 million) billion in loan repayments due this year.

The management and board of commissioners have asked for support from the West Sumatra governor and legislature to oppose the shareholders' order and even helped organize mass demonstrations in the province early last month to build up public opinion and support for its campaign.

They shamelessly argued that since Semen Padang was now under the control of the West Sumatra administration and legislature, the shareholders could not ask for any change in the management without prior consultation with the governor.

The directors seemed to be too senseless and mindless to realize that the move by a group of West Sumatra people last October to unilaterally take "control" of Semen Padang and the legislature's decision to endorse the action, were entirely illegal and did nothing to change the legal status of the company.

Citing the 1995 Law on Limited Liability Corporations, the commissioners and management argued that the board of directors could be replaced before the end of their tenure only if they performed poorly.

The management flaunted its achievements by reporting a 20.86 percent rise in sales revenues to Rp 1.35 trillion (US$145 million) in 2001 and a 4.4 percent increase in gross operating profit to Rp 185.78 billion.

However, an analysis of Semen Padang's financial report for 2001 concluded that, similar to its miserable position in 2000, the company remained the worst performer among the three cement units in the Semen Gresik Group.

Semen Gresik in Surabaya, East Java and Semen Tonasa in South Sulawesi, are the other two units.
Semen Padang is even on the verge of defaulting on Rp 244 billion in short-term liabilities due in August and another Rp 383 billion later this year.

The company did make a turnaround last year with a net profit of Rp 34 billion, against a loss of Rp 46 billion in 2000. But this earning was much lower than the Rp 43 billion profit gained by Semen Tonasa, which has a smaller production capacity.

Moreover, Semen Padang's profit last year was attributed largely to the sharp decline in its foreign exchange losses to Rp 51 billion from Rp 166 billion in 2000.

Semen Padang's gross profit margin (earnings before interest) was only 13.9 percent, as against Semen Gresik's 26.3 percent and Semen Tonasa's 16 percent, its return on assets was only 1.8 percent, compared to Semen Gresik's 4.7 percent and Semen Tonasa's 3.3 percent.

Worse still, its return on equity was a mere 4.5 percent, as against Semen Gresik's 10.2 percent and Semen Tonasa's 6.4 percent. Its liquidity position was also dangerously low at 0.7, compared to Semen Gresik's 1.4 and Semen Tonasa's 1.2.

Still more worrisome, Semen Padang's net debt/equity ratio was 104 percent, compared to Semen Gresik's 33 percent and Semen Tonasa's 58 percent.

So strapped is Semen Padang for cash and so high is its risk factor that most major banks seem to have shunned the company, forcing it to borrow in February Rp 200 billion through the issuance of six-month notes to the state-owned Jamsostek labor insurance company at an annual interest of 21.75 percent.

Several analysts wondered why Jamsostek still took such a great risk by buying Semen Padang's debt instrument while its management was revolting against the company's shareholders.

They estimated that Semen Padang would have to quadruple its sales revenues to about Rp 5 trillion -- something that is surely impossible to achieve -- to be able to pay the Rp 627 billion in debts maturing this year.

The company's production costs increased steeply even though most of its mineral inputs and the coal to fire its kilns are sourced nearby. This only validated the allegations of many, that there have been some questionable deals done by Semen Padang with politicians, officials and crony businesspeople in West Sumatra, who are cosponsors of the spin-off campaign.

But despite its cash flow problems, Semen Padang has spent a great deal on the spin-off campaign from Semen Gresik.

The company even deducted 10 percent of the annual bonus of its employees to raise more funds for the campaign.

The Semen Padang trade union claims that the deduction was made with the consent of the employees themselves, but many workers have quietly complained about the arbitrary cut.

While squeezing its own employees, Semen Padang recently gave away Rp 270 million in cash "gifts" to many provincial legislators, according to local legislator Moh. Zen Gomo, who claims to be the only one of the 55 members of the province's assembly that rejected the cash "gift".

So desperate was the management to develop a favorable public opinion environment for its spin-off campaign that it once considered putting an equity stake in a local daily newspaper, Mimbar Minang.