Indonesia Business Review 2002 - Part 1B

Crooked importers are customs service stooges 
Thursday, March 07, 2002

The Indonesian Importers Association (Ginsi), which claims around 3,300 members across the country, is the most vocal critic of the customs service for its miserable failure to curb smuggling. Ginsi chairman Amirudin Saud shared his views about the government's decision to set up an interministerial antismuggling team and about customs service problems in an interview with The Jakarta Post's Vincent Lingga.

Question: How do you view the Cabinet's decision late last month to set up an interministerial team to combat smuggling that will also include the National Police?

Answer: I think the team would not be effective because the main problem is not physical but rather administrative smuggling, whereby crooked importers collude with customs officials to underinvoice their import prices, thereby slashing their duties and taxes, or customs officers lack the technical competence to assess real import prices. The police are certainly not trained to assess customs duties. So the root problem is mentality or the high venality of customs officials. I am even afraid that the customs service would simply use the team to validate or endorse whatever decisions it would take.

Q: Doesn't the Customs Law stipulate that the basis for valuation of customs duties is the import transaction value?

A: You are right. The Geneva-based World Trade Organization also stipulates such a provision. But that does not mean that importers are free to declare any value they choose, nor is the customs service relieved of the responsibility to determine import prices on a shipment-by-shipment basis. Professional customs valuation is still needed, especially when importers can easily manipulate their invoices in cooperation with companies overseas.

This is the main reason why we have strongly urged President Megawati Soekarnoputri to take contingency measures to reintroduce a preshipment inspection of imports (PSI) as Soeharto boldly did in 1985. Many industries that are our export leaders have been crying out over unfair competition from smuggled or underinvoiced imports.

Q: But how would preshipment inspection help reform the allegedly crooked mentality of customs officials?

A: No, PSI would not directly help reform the customs service. Yet we need PSI right now as many industries are dying. People tend to see the impact of smuggling or underinvoicing only in terms of the loss of state revenues from import duties, value-added tax and income tax. The most damaging effect is the unfair competition imposed on our manufacturing industries. The reform of the customs service, like the development of good governance in the public sector, will take more than five years. We cannot wait that long.

The Cabinet's decision on the antismuggling team is a magnanimous acknowledgement that the customs service has miserably failed to reform itself over the past five years after it regained its import inspection authority in April, 1997 simultaneously with the termination of the PSI system. Then by all means, let the duty valuation be given to a third party under PSI until the customs service completely reforms its organization and mentality.

Don't forget, besides its devastating impact on domestic industries, state revenue losses caused by underinvoicing of imports are also huge. We estimate them at Rp 33.3 trillion (US$3.1 billion) in 1998, Rp 27.4 trillion in 1999, Rp 37.1 trillion in 2000 and Rp 34.9 trillion in 2001. The University of Indonesia estimated that loss at about $610 million in 2000 alone.

Q: Why do you put the blame entirely on customs officials for underinvoicing? Shouldn't crooked importers, who may also belong to your association, should also be held responsible for that collusion?

A: That is entirely nonsense. I have always asked customs officials to notify me on what they call bogus importing companies with unknown addresses so that I can deal with them myself. But the customs service has never come up with a clear reply. Why? Because what they call crooked importers are really their stooges involved in the contraband trade. Problems such as the existence of bogus importing companies never occurred under the PSI system in 1985-1997.

Moreover, retired senior customs officials often are engaged in forwarding services. Why don't you investigate, for example, who owns or manages PT Swakarsa Bhakti Mandiri, a major forwarding company?
Customs and duties director general Permana Agung claims there are more than 30 state and private institutions involved at seaports so the customs service should not be held solely responsible for things that go wrong with imports or exports.

That is another big nonsense. True, there are many institutions engaged at ports but when it comes to the clearance of goods from ports it rests primarily with the customs authority. The port administrator cannot release goods from the port without the prior approval of customs.

Permana's statement late last month at the Jakarta port of Tanjung Priok that the port administrator had released two luxury cars from the port without clearance from the local customs service was strange and entirely questionable. How could imports or exports get out of the port terminal without clearance from the customs service? If such a thing did happen, the only explanation is that some customs officials colluded to make it possible.

Q: Some industrialists claim that smuggling has also been rampant through the duty rebate system for the importation of inputs for export-oriented factories, after the customs service took over the export inspection service from state-owned PT Sucofindo last August. How could that happen?

A: Export-oriented companies can get reimbursement of the duties paid on basic materials imported for processing into export goods. So, for example, a garment exporter can import fabric duty-free if it can be proved that the fabric will subsequently be processed into garments for export.

The problem is that, after the customs service took over the inspection of exports from Sucofindo, which had done the job professionally for more than a decade, there has been as yet no adequate technical capacity at the customs service to verify whether the volume of duty-free materials imported by export companies is really used wholly for producing goods for export.

Specific skills are needed to determine the coefficient of inputs into final products, and there are numerous industrial products that have to be verified. Without verification competence, quite apart from collusion, a factory can import basic materials duty-free to a much greater extent than it actually needs for production. It can then sell the balance to the domestic market.

-----------------------

War-room leadership needed to end crisis

Tuesday, February 19, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The government and economic players in the real sector seem to live in different worlds.
While the economic crisis is entering its fifth year, the government is still talking about concepts, mulling over a recovery plan.

Vice President Hamzah Haz said last week the government would launch early next month a new package of integrated economic-recovery programs to boost the real sector and the financial services industry.

Earlier in October, chief economic minister Dorodjatun Kuntjoro-Jakti talked about the need for a new package of emergency measures to prevent the economy from total collapse. But nothing came of his statement.

Businesspeople, however, don't see any need for a new package of ambitious measures, reiterating instead what they repeatedly suggested last year: An effective crisis management center.

In their view, the diseases that caused the economic bleeding have been accurately diagnosed, and the right medicines have been prescribed. What is really needed are quick decisions and action programs to stop the economy from bleeding.

But for such a spirit to envelop the government, the president and the whole Cabinet should work in the spirit of a nerve center or a "war-room" where problems can quickly be fixed by executive fiat at the highest level.
Rapid bureaucratic action is possible only when the government is truly aware that it is faced with a critical situation and accordingly professes a real sense of urgency.

remarks only strengthen the public perception that the government does not have any sense of crisis at all, nor does it see any need to act quickly, firmly and decisively.

Thinking and acting as if the economy is by no means mired in a critical condition, while thousands of small, medium and large-size businesses are crippled by bad debts, more than 40 million people are either wholly unemployed or under-employed and almost 50 percent of the assets of all major national banks consist of illiquid government bonds is a fatal self-delusion.

It is this attitude of perpetual denial that prompted then president Soeharto and his successors, B.J. Habibie and Abdurrahman Wahid, to backtrack on emergency reform measures sorely needed to cope with the crippled economy, thereby destroying their credibility.

Saddening to note, Megawati Soekarnoputri's government, instead of learning from the fatal mistakes of the previous administrations, appears to be deluded by the same mindset. The whole game now is "business as usual".

The well-designed, correctly-sequenced, and internationally-endorsed reform measures, as stipulated in its latest reform package launched last December, seemed to be formulated only to impress the International Monetary Fund.

No wonder the credibility of the Megawati government is now at its nadir after only seven months in power. The virtual absence of any confidence-building action has put it under constant public suspicion regarding any major decision or measure it intends to make or has taken.

The government cannot even change the management of its own companies without setting off employee revolts or prompting analysts to cry foul.

It is not clear what Hamzah meant by a new package of measures as his statement was short of details but long on recounting the costs of the economic crisis.

But whatever the new package might be, anything short of the 53-point reform measures stipulated in the December 2001 package would be unable to stop the economic hemorrhaging, or help generate a sustainable recovery.

Without significant progress in bank and corporate debt restructuring, the reform and privatization of state companies and the recovery of assets currently managed by the Indonesian Bank Restructuring Agency, and legal and governance reform, the macroeconomic situation will remain fragile and the recovery process will never gain a strong footing.

As analysts have often argued in this newspaper, a faster pace of asset recovery will reinvigorate thousands of companies through the infusion of new capital and new management and will help plug the budget hole.

An accelerated process of corporate debt restructuring will enable thousands of businesses to regain access to new working capital loans. The government can also sell these restructured loans to the banks or exchange them with the bonds issued to recapitalize those banks. This in turn will reduce the bond interest cost, which has been one of the main causes of the large budget shortfall.

Equally positive impacts will accrue from the privatization of selected state companies as proceeds from the sales will help cover the budget deficit and new investors will improve the efficiency of the companies.

The reduction of wasteful subsidies and more vigorous tax collection would enable the government to set aside larger appropriations for the social safety net programs and other labor-intensive projects for economic pump priming.

All these measures are the essence of the December reform package. They are also by and large the kind of emergency measures implemented by other crisis-hit countries such as Thailand and South Korea, which have now seen a much stronger economic recovery.

What is fatally missing in Indonesia is a sense of urgency among the three branches of the government -- the executive, legislature and judiciary -- as reflected in the "business-as-usual" manner in which the government is managing the economic crisis.

While the other crisis-ridden countries have acted quickly and firmly by mobilizing all their political, social and economic resources to attack their economic woes, Indonesia has been embroiled most of the time in political bickering, scapegoating and the blame game.

There have been no measures or deals significant enough to spur a virtuous circle and rebuild confidence in the political and technical capability of the government.

Just look at the rupiah exchange rate. It has been hovering at Rp 10,500 to the dollar since last September.
Even though Indonesia's situation is admittedly much more complex than the other countries in that the nation is having to learn about democratic practices in the midst of its economic crisis, it could have done much better, had the government and all political and social organizations put aside their respective group interests and firmly united in addressing the economic crisis.

However, such an overall supportive climate is possible only if the government is capable of building up a favorable public opinion environment. This in turn can be created only if Megawati is able to provide effective leadership and her Cabinet ministers are capable of providing the proper management and coordination of all the reform measures.

Herein lies the rationale of the businesspeople's demand that the government set in motion a crisis management mechanism directly under the president where well-coordinated action programs can quickly be decided and any problems in their implementation can be settled at the highest level.

Instead of being embroiled in public squabbles over policy decisions, Cabinet ministers should be united in pushing through any policy measures that have been taken.

A united stance, a quick but highly-accountable decision making process and well-coordinated action programs will lend credibility to the government and create bureaucratic and legal certainty, a prerequisite for reinvigorating national investment and wooing foreign direct investment.

The blunt fact is that the economy is now in such a dire situation that it will never be able to recover strongly without a heavy dose of foreign capital injection.

It is worth remembering that foreign direct investment brings in higher standards of accountability, transparency and corporate governance. One should also remember that it was corruption, collusion and the miserably low standards of accountability within the public and private sectors that were primarily responsible for destroying the foundations of the economy

-----------------------------

Unshackling imports from corrupt customs

Tuesday, February 05, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

President Megawati Soekarnopurti is under pressure to take bold measures to bring back a system of pre-shipment inspection of imports, first introduced by the Soeharto regime in the mid-1980s, to free up a vital segment of the economy from the hands of corrupt customs service officials.

Over the last three months, almost all industrial associations and foreign chambers of commerce have urged the government to deal firmly with what they have characterized as a grossly incompetent and corrupt customs service.

In early December, Megawati herself set aside one hour for a special meeting with the executive board of the Indonesian Importers' Association, led by Amirudin Saud, who pleaded for the government to unshackle imports from the corrupt customs officials by reintroducing the pre-shipment inspection of imports (PSI) that began in 1985.

The President might not have been surprised by Amirudin's reports, which described the damages inflicted on the economy by inefficient, incompetent and highly customs officials.
After all, the customs service is an arm of a government that has been perceived as one of the most corrupt in the world.

Certainly, the Customs Directorate General is no less corrupt than, say, the taxation service.
A nationwide study of corruption conducted last year under the sponsorship of the World Bank and United Nations Development Program confirmed that the customs and tax services were the most corrupt public institutions in Indonesia.

The reform program agreement with the International Monetary Fund (IMF), signed on Dec. 13, stipulated elaborate measures, including implementation schedules, to improve tax administration, while minimizing tax evasion, and cleaning up the tax offices of corrupt officials.

But not a single program was cited for the customs service. The agreement only stipulated that "the government will formulate a plan by June 2002 to improve customs procedures ... "

The question arises, then, if inefficient tax service is damaging the economy, should it instead require more immediate remedial measures than customs?

The answer, of course, is a resounding no.

It is the incompetent and corrupt customs service which, in fact, is causing the more serious damage.
The most harmful effect of inefficient tax administration is state losses in revenue, as the government continually gets far less than what is due from taxpayers.

But corruption and incompetence within the customs service has far-reaching damage to the economy.
Violations of customs regulations also distort the domestic market. When the duties paid and taxes levied on foreign goods is much less than that which is mandated by law, unfair competition against domestic products results.

Producers of textiles, garments, electronics, electric appliances, and footwear, all major export commodities, have repeatedly complained about contraband goods that are eroding their share of the domestic market.
These goods enter either through conventional smuggling, or a form of administrative smuggling in which under-invoicing of import prices takes place.

Still more egregious is the fact that delays in import clearance and customs officials' demands for bribes from importers have made exports far less competitive, as most Indonesian companies still depend on imported raw materials, intermediate inputs, parts, and components.

Since manufacturers cannot calculate how much time will be needed to clear their imports, most are compelled to build up stocks of imported raw materials or inputs to secure continuous production.

But this increases inventory costs and debt interest burdens, because working-capital loans, which charge high interests, become tied up far longer than need be in stocks.

Foreign investors have complained about what they see as excessive discretionary powers exercised by customs officials, letting them interpret the rules as they like.

State revenue losses from the under-invoicing of import prices are no less damaging, especially now, when the state budget is suffering from a huge deficit.

A 111-page research report of the Economic and Social Research Institute of the University of Indonesia, led by senior economist Muhammad Ikhsan and issued in December, concluded that under-valuation of imports (outside oil and gas) led to US$1.2 billion in losses for the year 2000.

The problem began after importers failed to properly pay duties and the 10 percent value added tax.
The losses amounted to almost $US950 million in the first six months of 2001 alone.

But the study did not address losses stemming from the underpayment of luxury sales taxes, and the 2.5 percent income tax imposed on imports.

Ikhsan explained that the losses were calculated based on an analysis of non-oil imports as recorded by the Central Bureau of Statistics. The final figures were determined by comparing tariff rates that should have been collected, with what was actually collected as reported by the finance ministry.

Amirudin of the importers' association came up with an estimate of even bigger losses: some $3 billion a year.
The research institute has recommended that the government reintroduce pre-shipment inspection for imports (PSI). Researchers have argued that the benefits of such a system to the economy, state budget and business climate will, overall, far outweigh the costs of such a system.

The corruption-plagued customs service was stripped of its import inspection authority in 1985 when the government introduced PSI system for imports.

The PSI was ended in April 1997 when the customs service, thought to have cleaned up its act and reorganized, was given its inspection authority back.

The customs service then promised to streamline import inspection procedures and root out corruption by introducing an electronic data interchange (EDI) system.

Customs officials said that the communications system would allow customs, import and banking officials to more effectively determine and receive of customs duties and taxes via a modem transmitted to the customs officials' EDI clearing house.

According to Amirudin, however, the customs service was back to "business as usual" only a few months after resuming its inspection authority.

Amirudin and other business leaders insisted that a corrupt mindset -- rather than technical incompetence or lack of equipment -- was the core problem. It is, indeed, all but impossible to expect the customs service to be an island of virtue in a sea of corruption.

Corruption is a disease that cannot be cured within one or two years, and certainly cannot be treated in isolation from other government and state institutions.

But problems within the customs service are urgent.

Customs and Excise Duty Director General Permana Agung, however, has defended the conduct of his office, saying that the criticism is only part of a campaign to have him removed.

He added that delays in import release cannot be solely be blamed on the customs service, because there are some 30 government institutions which play a role at seaports.

Amirudin, nonetheless, insisted that the current system has benefited only importers eager to collude with corrupt customs officials.

No wonder, many have said, that industrial associations have demanded that the PSI be reintroduced immediately, recalling its success during its years of existence between 1985 and 1997.

In 1996, the Ministry of Finance reported that, under the PSI system, customs collection rose dramatically from Rp 960 billion in fiscal 1986-1987 to Rp 3.5 trillion in l995-1996.

Though the achievements should be attributed partly to the steady increase in imports, they were nonetheless considered quite impressive because the average import tariff fell sharply -- from 22 percent to 9.5 percent during that period.

The importers' association said that the PSI system cut down on the costs of imports by more than 70 percent, while reducing the time needed to import goods by 86 percent.

The PSI system also minimized physical contact between importers and customs, thereby removing the points at which collusion and corruption could take place. Under that system, importers passed through only two customs counters, compared to more than 35 before.

One counter served as a check of the surveyor's inspection ports; the other, for the physical location and release of imports.

There were additional benefits, too. The PSI system was able to detect discrepancies between the imports ordered, and the contents of the shipment such that importers could be assured that the quality and quantity of what they would receive would fully conform with their wishes.

Importers have been so displeased with the current system that they said they are even willing to bear the costs of the PSI to gain certainty in import flows, and to avoid any more contact with customs officials than is necessary.

It is high time for the Cabinet to address the customs problems, especially now, as Indonesian exports are facing tougher competition, and the government is strapped for additional revenues to plug its gaping budget hole.

Djimanto, secretary general of the Footwear Association, has asked why, when the economy was better in 1985, the government acted so decisively, in contrast to now, as the economy is ailing severely.

Re-launching PSI may not be so difficult now that the government-owned surveyor company, PT Sucofindo, has built up decades of experience and has gained a strong international reputation in commodity inspection service.

Moreover, importers have said they would be willing to bear the cost of inspection to secure on-time delivery of imports to create more certainty in the customs process.

Even if the PSI is funded by the budget, the surveyor's fee, amounting to about 0.5 percent of the value of shipments inspected, will still be negligible, compared with the bigger duty and tax revenues to be collected under the system.

More important still are the bigger benefits to be accrued from smooth import flows, and the removal of a major source of high costs to the economy.

The costs can be minimized if the government focuses the PSI system on imports from countries considered highly vulnerable to "irregularities" such as Hong Kong, Singapore, Taiwan, China, India and South Korea.

---------------------------

Bali to open specialist center

Monday, January 21, 2002 Vincent Lingga, The Jakarta Post, Jakarta

President Megawati Soekarnoputri will open an international center in Bali next month, which will provide mid-career and senior executives in the public and private sectors the skills and knowledge necessary to be effective leaders in an increasingly complex and challenging global environment.

Called The Executive Center for Global Leadership (ECGL), the institute will bring internationally renowned academics, business and government leaders from around the world to conduct world-class professional development programs.

"It will be a unique training center where executives from the public and private sectors can interact with each other, learn from each other's experiences under the guidance of outstanding business and government leaders," noted Tanri Abeng, one of ECGL's founders.

Tanri said ECGL would not simply duplicate what local business schools have been doing and would go further than simply grooming competent managers with high technical skills.

"We aim at training quality leaders, who are both entrepreneurial and managerially competent with a global mindset and high sensitivity to differences in cultures, ethics and human behavior," added Tanri.

The opening ceremony will also feature Thailand's Prime Minister Thaksin Shinawatra, as the keynote speaker, and Coordinating Minister for Economy Dorodjatun Kuntjoro-Jakti, as a luncheon speaker.

He said his two decades of managerial experiences at multinational companies, another six years of directing a national conglomerate and 20 months of working in the public sector as the minister for state enterprises led him to believe that there is an imperative need for a leadership training center like ECGL.

Tanri, who was dubbed the million-dollar manager in the early 1990s due to his impressive managerial track record, seemed unperturbed by the miserable end of his political career that implicated him in the Bank Bali loan scandal.

Even though his investigations by the Attorney General's Office led to nothing, and he was never declared a suspect, his personal integrity is still perceived by many as tainted by his deep involvement in the game of power politics in 1998 and 1999.

He said he did not harbor any political ambitions by launching ECGL other than helping the nation to groom more capable leaders in all sectors.

"Our prolonged economic crisis has made more imperative than ever the need for executives, in both the private and public sectors, to be imbued with the essential elements of leadership and overriding values that enable them, not only to create cohesion and cooperation within an organization, but also to communicate and inspire confidence," he asserted.

Tanri's vision is shared by many other business and government leaders, as can be seen in the list of ECGL founders, including State Secretary Bambang Kesowo, Coordinating Minister for Social Welfare Jusuf Kalla, who is himself a former businessman, Aburizal Bakrie, president of the Indonesian Chamber of Commerce, businessman Pontjo Sutowo, Robby Djohan, Henry Leo and Andi Indra Kesuma.

The ECGL Board of Trustees also boasts an impressive list of national and international figures such as Ian Buchanan, vice president and partner of Booz Allen & Hamilton, Tan Sri Dato Seri Jeffrey Cheah Fook Ling, chairman of Malaysian Sunway Holdings Inc., Arthur E. Johnson, vice president of Lockheed Martin Corp., James R. Moffett, chief executive officer of Freeport-McMoRan, Sabam Siagian, former Indonesian ambassador to Australia and currently director of The Jakarta Post and Ben J.M. Verwaayen, vice chairman of Lucent Technologies.

Leading change, efficiency and integrity in government, privatization, corporate governance and managing in a value-adding environment are some of the short-term course programs offered by ECGL for the next three months.

"One of our annual flagship programs is called the Chief Executive Officer forum, which will bring in one outstanding chief of state to an annual brainstorming session with corporate leaders in Bali," Tanri added.

As the programs are being designed and led by lecturers and presenters from famous institutes such as William F. Miller of the Stanford Institute, Henri-Claude de Bettignies of INSEAD, Robert Klitgaard of the Rand Graduate School, Gregory Maassen of the Rotterdam School of Management, James O'Toole of the Aspen Institute, Roger S. Leeds of the John Hopkins University, the course fees do not come cheap.

A three-day program will cost almost US$2,500, including lodging and meals at the ECGL campus in the Bali Handara Mountain Resort, which also offers a golf course.

"Bali's renowned center of culture and natural beauty will be another attraction of the ECGL as it provides inspirational surroundings for course participants to learn, confer, discuss, reflect and think," Tanri added.

Read full post »

Indonesia Business Review 2002 - Part 1A

Lending to small businesses is rewarding

Wednesday, March 27, 2002

 

As large enterprises remain debilitated under mountains of bad debt, most banks, starved of loan assets, are zeroing in on lending to small-and-medium-scale enterprises (SMEs), which before the 1997 economic crisis were shunned by big banks as highly risky borrowers. But who are the SMEs really and how costly and risky is lending to these businesses?

Pramukti Surjaudaja, chief executive officer, M. Adrianto Setio, senior executive, and Andyani Pusparini, corporate communications head of Bank NISP -- the recipient of the 2001 Corporate Governance Award and a bank that has focused its lending on SMEs for more than 60 years -- shared their experiences in an interview with The Jakarta Post's senior editor Vincent Lingga.

Question: Why have SMEs suddenly become attractive to most banks, including the biggest banks?

Answer: The 1997 crisis proved how agile and flexible SMEs are. Most of them not only survived the crisis but also continued to thrive because they were not highly leveraged and not exposed to foreign exchange risks. While most big businesses are still struggling with huge bad debts, SMEs now form the majority of creditworthy borrowers.

But isn't lending to SMEs different from serving big borrowers? How can big banks realign their credit-assessment capability in such a short time?

Even though the fundamentals of credit assessment are generally the same for big businesses and SMEs, big banks that used to focus on big corporate loans sometimes need to develop expertise for the SME credit market. The assessment and management of SME borrowers is time-consuming; requiring field work, direct monitoring, indirect checks through trade or bank references. It is a lot of hard work, especially because most of the time you don't have audited financial reports to start with.

You have to nurture good rapport with the owners and management. Bank NISP has been strongly entrenched in the SME credit market and we don't feel threatened by the keener competition caused by the entry of big banks. In fact, many banks, which claim to have extended SME credits, only give consumer loans, not business loans for productive purposes.

Risk assessment, including credit evaluation, has been considered the main weakness of Indonesian banks. How does Bank NISP manage its risks?

Lending to SMEs requires much harder work, as many of them don't even have what we call modern bookkeeping, and the segregation of responsibilities between the management and owners is not clear. That is why "knowing your customer" becomes even more crucial here either through field visits and indirect checks of the characteristics of the borrowers.

For example, collateral is not the most important factor in our credit decisions. Bank NISP will not approve a loan application even though it is supported by collaterals worth ten times as much if we assess that the business proposition is not feasible. We find that loans often turn sour because of over-lending and the loan is not entirely used for the business it is allocated for.

Moreover, Bank NISP operates regional credit committees and a central credit committee with clear-cut scopes and segregation of authority and responsibility. Any loan must be approved by at least three of the seven members of each committee. Loans above Rp 5 billion must be approved by one of the commissioners.

The additional benefit of this structure is that Bank NISP branches can concentrate resources on servicing customers and marketing products.

But lending to SMEs seems to be greatly rewarding, as shown by NISP's financial report of 2001.

Bank NISP's pretax income posted a handsome rise of 32.44 percent to reach Rp 93.7 billion (US$9.37 million) last year. Lending increased 44 percent to Rp 4.4 trillion, third-party deposits rose 48 percent to Rp 5.9 trillion and total assets expanded 36 percent to Rp 7.1 trillion.

While many other banks recorded loan-to-deposit ratios of below 25 percent, Bank NISP posted 66.37 percent as of last December. In contrast to many other banks, whose earning assets consisted mostly of marketable securities, loans made up 68 percent of Bank NISP's earning assets.

There are now more than 414,700 bad SME debts worth Rp 40 trillion, which have mostly been taken over by the Indonesian Bank Restructuring Agency from closed or nationalized banks. Wasn't Bank NISP affected by the wave of bad debt?

Bank NISP was by no means spared of the problem. Its non-performing loans suddenly rose from an average 2 percent to 3 percent before the crisis to more than 28 percent in 1998. But we acted quickly to help restructure and refinance our SME clients. We even subsidized our credits when Bank Indonesia tightened its money policy in 1998 and 1999 and jacked up its benchmark interest rate to as high as 70 percent.

We showed them that Bank NISP is their friend and business partner in good times as well as bad times. As you know, Bank NISP has about 13,000 SME borrowers. Manufacturing took up 42.6 percent of its loans, the services sector 22.4 percent and trading sector 20 percent. Consumer financing accounted for only 6 percent.

Bank NISP's non-performing loans have decreased steadily to 6.11 percent in 2000 and 4.09 percent, as of last December.

How did Bank NISP's directors manage to deal with so many shareholders, including four foreign institutional shareholders with a combined stake of 42.46 percent?

First, as a publicly traded bank, which is 20.81 percent owned by the investing public, Bank NISP must meet the tough disclosure requirements imposed by the capital market. Good corporate governance is another top priority. Bank NISP, for example, is supervised by three independent commissioners. But Bank NISP is proud to have such highly reputable shareholders as the International Finance Corporation, a unit of the World Bank, Moore, Hurst and Stiles Investment Ltd.

But our hard work is worthwhile indeed. Singapore-based Asian Banker research institution last December voted Bank NISP the 2001 Best Retail Bank for Indonesia under its annual Asian Banker Excellence in Retail Financial Services Awards.

Earlier in November, Hong Kong-based Asian Business magazine listed Bank NISP the best among banks in Indonesia in its 'Asia's Most Admired Companies' poll.

Also late last year, Bank NISP received the Acceptable Corporate Governance award from the Jakarta Stock Exchange, based on assessments by the Asian Development Bank and the National Committee of Corporate Governance.

----------------------------

Saga of the convicted central bank governor

Tuesday, March 19, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

Bank Indonesia, which until early February still rejected Bank Bali claims as ineligible, suddenly reversed its policy. Erman Munzir, director of the banking development division at the central bank, at Pande's request, assigned a special team from the bank examination division to examine the claims, a process that took almost one month.

The team concluded that Bank Bali claims to Bank Tiara and Bank Dagang Nasional Indonesia were valid transactions in accordance with the March, 1998 joint decree of the minister of finance and Bank Indonesia on the requirements for claims to be eligible for payment under the government blanket guarantee.

Erman notified IBRA Chairman Glenn Yusuf of the conclusion in a letter that also mentioned the existence of the cessie agreement between Bank Bali and Era Giat Prima.

Pande then worked at full speed, processing the claims with a sense of great urgency. He sent a memo on April 14, 1999 to Glenn recommending immediate payment of the Bank Bali claims.

On May 18, 1999, the ruling (March 1998 decree) on the requirements for the eligibility of claims for payment was amended specifically to make the Bank Bali claims valid and eligible for payment.

Rudy, Djoko Tjandra and several other Golkar executives met with minister Bambang at his residence on the evening of May 25. Bambang himself admitted that this meeting was one of at least three he made with them in May.

Between May 24 and May 27, a series of meetings between IBRA and Bambang's officials took place at the finance ministry to discuss the Bank Bali claims, the amendment of the ruling and the issuance of government bonds.

Then on May 31, minister Bambang issued IBRA with a power of attorney to make the payment of Bank Bali claims. He then sent a memo to the central bank requesting that it open the relevant account for the payment.
IBRA deputy chairman Farid Harianto also sent a memo on June 1 to the central bank governor, requesting the payment as IBRA chairman Glenn was on vacation overseas.

According to Harianto, he made the memo to the central bank governor in response to Bambang's reminder that the Bank Bali claims be paid on that day (June 1, 1999).

The panel of judges who tried Sjahrir decided last Wednesday that Sjahrir had violated prudential banking rulings by approving the payment of the claims only on the basis of a request from the IBRA deputy chairman, stating that the letter of request should have been signed by IBRA Chairman Glenn Yusuf.

Later in the afternoon of June 1, 1999 Pande informed Munzir at Bank Indonesia that IBRA was going to ask for the payment of Bank Bali claims. Then, Pande and IBRA deputy chairman Farid Harianto went to the Bank Indonesia office at around 7 p.m. to oversee the payment process.

Sjahril remained at his office until the Rp 904.6 billion in Bank Bali claims was credited to the Bank Bali account at the central bank.

Of that amount, Rp 546 billion was immediately transferred by Bank Bali to Era Giat Prima's or Djoko Tjandra's clearing account. And starting on June 3, 1999, the Era Giat Prima account triggered a flurry of money transfers to numerous companies and officials, including Golkar leaders.

The payment to Era Giat Prima was discovered by Standard Chartered Bank during a due diligence investigation on about July 20, 1999, made in the light of its plan to acquire 20 percent of Bank Bali. Also, later in July, Rudy lost Bank Bali, as it was taken over by IBRA.

The payment, which was later called the Bank Bali scandal, began to explode in the mass media in late July 1999. Amid the public uproar, Era Giat Prima and other recipients of the fee transferred back the money to a Bank Bali escrow account in mid-August, 1999.

Sjahril thought that was it.

But then in early 2000, Sjahrir got into trouble with then president Abdurrahman Wahid, who wanted him to resign, a request he defiantly rejected. Sjahril was later declared a suspect in a corruption case within the Bank Bali scandal in June, 2000 and was immediately put by then attorney general Marzuki Darusman, a Golkar leader, into detention for six months.

However, Sjahrir, who remained the central bank governor even during his detention, was released in December 2000 but as a defendant. As if nothing happened, he returned to his job, but had to appear at the court once a week.

While Sjahrir's trial was under way, Abdurrahman himself was removed by the People's Consultative Assembly in July 2001 for his alleged involvement in a corruption case related to the misuse of Bulog funds, which also put Akbar under detention.

-----------------------------

Saga of the convicted central bank governor

Monday, March 18, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

Bank Indonesia Governor Sjahril Sabirin is now a convict after he was found guilty of corruption by the Central Jakarta District Court on Wednesday for violating prudential banking rules in relation to what is popularly known as the Bank Bali scandal.

Chairman of the Golkar party and Speaker of the House of Representatives Akbar Tandjung, a suspect in the Bulog fund scandal, was earlier put into detention by the attorney general.

But both officials remain in office. Bizarre, isn't it?

Certainly not in Indonesia, which has been languishing in a multidimensional quandary since 1998 because of the complications of the economic crisis, the transition from three decades of authoritarian rule to democracy and from strong, centralized government to regional autonomy.

It is business as usual. Neither seems to have become demoralized, stubbornly clinging to their respective state posts. They are not legally required to temporarily relinquish their posts. Nor have they shown any moral courage to do so.

Like most other senior officials convicted of corruption or facing graft charges, both Sjahril and Akbar insist they are innocent, claiming they are simply the victims of political power games.

Are they?

This is an area within the authority of the court to decide.

However, insofar as Sjahril's case is concerned, there are a lot of questions looming over the manner in which the government has so far handled the Bank Bali scandal, which was partly responsible for killing then president B.J. Habibie's chance of reelection in October, 1999.

PricewaterhouseCoopers (PwC), which investigated the scam, concluded in its 135-page report, which was supplemented by more than 35 documents as supporting evidence, that there were numerous indications of noncompliance, irregularity, misappropriation, undue preferential treatment, concealment, bribery and corruption and fraud found in the processing and payment of Bank Bali interbank claims.

It recommended several senior officials and businessmen for further investigation but so far only four, including Sjahril, have been taken to court.

Strange, though, three earlier defendants, Rudy Ramli, Pande Lubis and Djoko Tjandra, were acquitted of all charges by courts in 2000.

PwC conducted a special investigation of the fund scam in September, 1999 at the request of the chairmen of the Indonesian Bank Restructuring Agency (IBRA) and the Supreme Audit Agency.

Here is a recap to refresh our memory of the Bank Bali scandal, which started to explode in the mass media in late July, 1999, and was later investigated by a special House committee.

Sometime in October-November, 1998, Bank Bali president Rudy Ramli was approached by several politically well-connected businessmen, who offered assistance to recover Bank Bali's interbank claims for a fee.

At that time, Rudy was on the verge of desperation, having spent almost one year getting the claims settled, but both IBRA and the central bank, in charge of verifying the claims, rejected them as ineligible for payment under the government blanket guarantee for bank deposits and claims.

The guarantee scheme is managed by IBRA, an agency under the Ministry of Finance.

Since Rudy already considered the claims a total loss, he did not see any harm in accepting the offer. He and another Bank Bali director, Rusli Suryadi, signed on Jan.11, 1999 a "cessie agreement" with PT Era Giat Prima, an unknown company managed and owned by Djoko Tjandra, a politically well-connected property developer, and Setya Novanto, a deputy treasurer at the Golkar party.

Also around October-November, 1998, then finance minister Bambang Subianto, who supervised IBRA, offered one of his long-time friends, Pande Lubis, formerly an executive of a state bank, a senior position at IBRA. Pande later accepted the offer and joined IBRA in December, 1998 as a deputy chairman (one of four).

Then on Feb. 11, 1999, Rudy was invited to a special meeting at Hotel Mulia that was also attended by A.A. Baramuli, a Golkar leader and Chairman of the Supreme Advisory Council, Novanto from Era Giat Prima, Bank Indonesia Governor Sjahril Sabirin, Minister of State Enterprises Tanri Abeng, Pande Lubis from IBRA and several other senior officials.

During the meeting Baramuli allegedly asked Sjahril to give special attention to speeding up the processing and payment of Bank Bali's interbank claims to Bank Dagang Nasional, Bank Umum Nasional and Bank Tiara, which had been closed and put under IBRA.

Also around February, Baramuli asked minister Bambang to replace IBRA chairman Glenn Yusuf with Pande but to no avail. Then, in March, Baramuli went over Bambang's head and suggested directly to then president B.J. Habibie that Pande be named IBRA chief. But Habibie was convinced by Bambang that Pande was not qualified to lead IBRA.

Then things suddenly moved, starting in mid-February. Pande took over all files of Bank Bali claims and arranged a series of meetings with Bank Indonesia officials and Bank Bali executives starting in mid-February to reexamine and process the Bank Bali claims.

-----------------------------

Beware of Mitsui Leasing and ACA 

Monday, March 18, 2002 By Vincent Lingga

The recent floods jolted me into a painful awareness that PT Mitsui Leasing Capital Indonesia, through which I bought a Toyota Corolla sedan in 2000, failed to inform me adequately about the insurance cover for the car the company had purchased with PT Asuransi Central Asia (ACA).

Upon digging into the bundle of documents on the credit and car purchase agreements to look for the insurance policy and contract, I found only a one-page document bearing the ACA letterhead containing a very brief summary about the insurance policy.

The document only explains that Mitsui has covered the car with a three-year insurance contract of a compound method (gabungan), with three additional clauses, Nos. 32, 33 and 37. In another document containing the breakdown of the consumer loan, Mitsui mentions only that the type of the car insurance is all-risk.

But it does not cite the amount of the premium for the three-year coverage, nor does it inform me of my rights under the insurance coverage, or what the term "all risks" means.

Upon inquiring at Mitsui, one of my office staff members was told that the original insurance policy and contract were kept by Mitsui. A copy of what Mitsui claimed to be the insurance contract was later faxed to my office. But what I got was only a copy of what is called the Indonesian Standard Automobile Policy, not the specific contract with ACA.

The copy of the contract does not explain the difference between what is defined as a standard insurance policy and the insurance contract of a compound method with additional clauses Nos. 32, 33 and 37 Mitsui had signed for my car.

Is this the way Mitsui and ACA treat their customers?.

After all, the cost of the insurance was additional to the loan that had to be repaid. A company professing good corporate governance should have informed me of all my rights even without my having to make a specific request. Hence, beware of dealing with Mitsui Leasing and ACA, they might exploit your ignorance.

Read full post »

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.

---------------------

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.

-----------------------

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.

-------------------------

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.

-------------------------

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.

-------------------------

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.

Read full post »