View Point: National banks sensible about foreign players' role

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, May 31 2015, 11:02 AM

The Federation of Private Domestic Banks (Perbanas) made a lot of sense when it recommended to the House of Representatives that the banking bill, which will begin to be deliberated in August, should not stipulate a fixed percentage for a cap on foreign ownership in banks.

The suggestion is relevant because the latest version of the banking bill after its last revision early this year stipulates a 40 percent cap on foreign ownership in banks and requires foreign investors who now control local banks to divest their majority shares within 10 years after the law takes effect.

Perbanas chairman Sigit Pramono reminded the House on Wednesday that the foreign investors, who now control 11 publicly listed banks, had been invited by the government during the height of the Asian financial crisis in 1998 to help strengthen the banking industry.

Pramono warned that the compulsory divestment by foreign investors into minority ownership even within 10 years after the enactment of the new law could shock the stock exchange and the banking industry in general.

The next big question is which national investors will be able and willing to spend billions of dollars to take over the banks’ shares.

The Perbanas recommendation boils down to a demand that whatever restrictions on foreign ownership of local banks will be stipulated in the banking bill should include a grandfather clause (not retroactive).

The House should also realize that a bank is a capital-intensive and capital-hungry business that requires steady capital replenishment to be able to grow and expand. Hence, partnerships between local and foreign banks are good for the whole banking industry.

Regarding bank capital, for example, the Basel-based Bank for International Settlement (BIS), which oversees the global banking industry, has launched what it calls Basel III capital requirements. This rule requires two liquidity ratios which are designed to ensure that banks can survive liquidity pressures. The liquidity ratios are Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

The LCR focuses on a bank’s ability to survive a 30-day period of liquidity disruptions. Basel III regulations require the LCR to be greater than 100 percent so that the bank’s liquid assets are sufficient to survive these pressures.

The NSFR focuses on liquidity management over a period of one year and the NSFR should be greater than 100 percent so that the calculated amount of stable funding is greater than the calculated required amount of stable funding. The above new rules are tough and have the potential to dramatically change bank balance sheets, and are scheduled to be enforced in 2018.

Indeed, many analysts and politicians have expressed grave concerns over the increasing foreign ownership of banks in Indonesia, arguing that would make it extremely difficult for Bank Indonesia (the central bank) to guide monetary policies and bank lending for national economic development.

The latest data showed that 11 of the 41 banks listed on the stock exchange are controlled by foreign shareholders and six other banks had minority foreign shareholders. Foreign investors held almost 41.5 percent of the total market capitalization of the publicly traded banks.

But we should not blame foreign investors for their dramatic increase in ownership of banks in the country. Foreign investors (mostly banks) entered Indonesia upon the invitation of the government which was forced by the 1998 economic crisis to nationalize all major private banks and bail out all state banks.

But when economic rationale and the need for good corporate governance eventually required the government to sell almost all of the nationalized banks to the private sector, it was mostly foreign investors who won the competitive bids thanks to their financial strength, technical and managerial competence.

We do not really see the increasing foreign ownership of banks as an issue. It instead indicates positive foreign investor perception of the country’s long-term economic outlook. Foreign investors would not have been interested in staking out more capital for our banking industry if the economic conditions had not been improving because a bank can thrive and grow robustly only in an expanding economy.

The experiences of many countries, such as South Korea, Thailand, Malaysia and Mexico, point to the great benefits of the entry of major international banks with high reputation for the development of good governance practices.

Look how almost all of our best professional bankers were formerly executives of foreign banks in Indonesia or overseas, or had built up years of work experience with foreign banks.

True, a bank is not simply a business entity in an ordinary sense, given its vital role as the purveyor of lifeblood (credits) for the economy, its fiduciary responsibility and the multiplicity of transactions it is involved in.

This is precisely why the principles of good corporate governance for banks are much tougher and more elaborate than those for other business entities. That is why not everybody who can put up adequate capital can have controlling ownership of a bank.

Those who want to become controlling owners and members of the management and supervisory (commissioner) boards of a bank have to pass a “fit-and-proper test” from the central bank to assess their technical competence, business vision and philosophy and integrity.

Put another way, banks are the most heavily regulated and supervised industries. Good governance and corporate responsibility are the prerequisites for the integrity and credibility of market institutions as banks themselves are institutions of trust.

All these supervisory and regulatory frameworks can make us rest assured that it is not the nationality of bank owners that matters, but the capital resources, business philosophy, technical competence and integrity of the major or controlling shareholders.

Of utmost importance is for the Financial Services Authority to strengthen the legal and regulatory framework for the banking industry and issue guidelines for foreign banks to increase their contribution to the national economy, not only through lending but also the transfer of expertise in risk management and dissemination of best prudential practices.
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The writer is senior editor at The Jakarta Post.

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The week in review: Investor-state dispute

The Jakarta Post | Vincent Lingga | Editorial | Sun, May 17 2015, 5:51 AM 

There is nothing new in the statement by Coordinating Economic Minister Sofyan Djalil on Monday that the government would soon revise more than 60 bilateral investment treaties because the same issue has been raised by Cabinet ministers, senior government officials and lawmakers since early 2014. 

We were, however, surprised to learn that Sofyan failed to explain how far along the review was and which of the bilateral investment agreements would be given top priority. He only emphasized that the government needed to make a new set of guidelines to ensure that both national interests and foreign investors got fair and balanced protection. It is not clear as to whether revisions will be made only to treaties that are soon to expire or if the revisions will be across the board. 

As early as last year, Mahendra Siregar, then the chief of the Investment Coordinating Board, had stated that the government was drafting a new template for the investment treaties and promised that the new set of guidelines would be introduced to foreign partners within that year.

 It is true that many of the investment treaties signed in the late 1960s, soon after the enactment of the 1967 Foreign Investment Law, and in the 1970s, are now outdated in relation to the many laws in the economic sector made over the past four decades. But given the rash of lawsuits filed against the Indonesian government by foreign investors at the international tribunal, notably the Washington-based International Center for Settlement of Investment Disputes (ICSID), a unit of the World Bank, the issue of arbitration to settle disputes seems to be one of the most crucial issues within the revision of the investment agreements.

The government apparently has been frustrated by the clauses in the investment treaties that empower foreign investors, in cases of dispute over policies or changes in contracts, to sue the government at an international tribunal, thus bypassing national laws and courts.

Indonesia is not the first country to become fed up with foreign investors who could easily exploit the clauses on arbitration or the investor-state dispute settlement (ISDS) system.

Not only such emerging economies as South Africa, India and Brazil, but also developed countries such as Australia and Germany and regional economic groupings like the European Union have shown their utter disillusionment with the ISDS clauses stipulated in bilateral investment treaties.

Indonesia seems to have been one of the most adversely affected because most of the investment agreements were signed in the mid-1960s and 1970s, when the government was disadvantaged by its desperate need for foreign investment to lift the economy out of virtual bankruptcy. Its institutional capacity for negotiations with foreign parties also was still low.

The government then signed the investment agreements with their ISDS clauses without fully realizing that the arbitration provisions left it vulnerable to litigation that foreign investors could take up under the loosely worded clauses to win claims that they had been treated unfairly.

 Concerns over the ISDS system, which has for decades been a fixture of investment treaties, have been increasing even in developed countries, as multinational companies have exploited woolly definitions of changes in contracts or policies to claim huge compensation for losses.

The European Commission last year suspended negotiations with the US on the investment chapter of the transatlantic deal and is poised to launch public consultations over whether to include a dispute settlement mechanism. 

The ISDS provisions were originally designed to attract foreign investors by protecting them from discrimination or expropriation, but the enforcement of these clauses has been seen by most developing countries as disastrous. The filing by a foreign investor of a lawsuit against a government at the ICSID, for example, could immediately result in negative publicity and exact big costs for hiring foreign lawyers or consultants.

There is also a perception in Indonesia, which has big extractive industries yet has a weak law enforcement system and a corrupt bureaucracy, that the treaty-based ISDS system tends to favor foreign investors.

What is needed is new investment treaties that are more equitable in protecting national interests and the interests of foreign investors.

But requiring or forcing foreign investors to settle disputes only at local courts or a national tribunal without any chance of the last resort to go to international tribunal, would scare away investors, given the notorious reputation of our corrupt court system.

Businesspeople rightly argue that a fair, independent and transparent arbitration mechanism is vital to protect investors’ interests from unfair treatment, and most foreign investors are doubtful that they would get a fair hearing in the legislative and court processes, especially if the opponent was the government or a well-connected local. 

Hence, whatever changes are to be made in the ISDS system within the revised bilateral investment treaties should take into account the urgent need for a credible court system and national arbitration.

We still need a steady flow of foreign investment to bring in expertise, new technology and international best practices to the business world. But the government also needs to see to it that foreign investors cannot so easily file lawsuits at the ICSID or other international tribunals.

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Infrastructure problems: A lack of preparations

Vincent Lingga, The Jakarta Post, Baku | Opinion | Wed, May 06 2015, 7:01 AM
Infrastructure was one of the topics in the series of seminars held here on the sidelines of the Asian Development Bank (ADB) annual meeting on May 2 to 5 because investment in infrastructure has increasingly been recognized as critical for economic growth and welfare. 

Indeed, infrastructure investment has the potential for increasing efficiency and competitiveness, promoting both international linkages and domestic integration and raising output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.

But the initiative of China, the world’s second-largest economy, to set up the Asian Infrastructure Investment Bank (AIIB) that so far has attracted almost 60 developed and developing countries as the founding shareholders, has turned into an issue of geopolitics involving Japan and the United States. 

The ADB apparently tried to avoid protracted geopolitical issues by setting “Preparing bankable projects and removing impediments to private financing” as the central theme of a seminar on Saturday that presented six panelists consisting of bankers, investors and Azerbaijan’s Finance Minister Samir Sharifov.

The panelists agreed that the existence of large infrastructure gaps across a large and varied set of countries reflects a combination of institutional and financial constraints, as well as pressure from rising demand and the best way to speed up infrastructure development is through public-private partnership (PPP) programs because of the limited financing resources of governments. 

But despite the potentially large pool of long-term savings available, securing the necessary financing on adequate terms is often a challenge, reflecting in part issues related to the appropriability of the returns on infrastructure investment, regulatory risks and long gestation periods. 

A key issue in confronting these difficulties is how to define the roles of the private and public sectors in such a way that infrastructure gaps can be closed while good service delivery is ensured and both investors’ and taxpayers’ interests are protected. 

As Gordon Bajnai, chief operating officer of the Paris-based Meridiam Group, a leading global infrastructure company, says, PPPs are a good concept because the government still owns the project or facility. But the project should not be politically motivated, but be based on really essential needs and should be managed by highly competent officials in view of the complex supply chains involved.

Koray Arikan, senior executive of the Dogus Group, one of Turkey’s largest conglomerates, which also is active in the construction business, observes that the problem is not the lack of financing but the dearth of financially viable and well-designed projects supported with credible overall risk analyses.

Jose Isidro Camacho, managing director of Credit Suisse Asia Pacific, says the prerequisites are a strong regulatory framework, a strong legal system and the long-term credibility of the project because investors look for economic predictability, not for economic certainty.

Camacho and Arundhati Bhattacharya, the CEO of the State Bank of India, share the view that there is sufficient capital available in Asia and long term funds from pension and insurance firms like infrastructure that secures a long-term, stable stream of revenues.

Returns from debts secured against real assets are also high because financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. 

But the acute lack of project preparation and development seems quite obvious in Indonesia, which has since 2005 been offering hundreds of projects under the PPP program, but very few of them gained investor interest because the government did not or hesitated to allocate adequate budgets for hiring professional consulting firms and advisors to undertake preparatory work.

Whereas the upfront cost of preliminary project development more than offsets the comparative cost of delay or failure to realize important public services and infrastructure, or the increased costs private investors must charge to overcome unmitigated risks.

 The panelists see project development as an important tool for catalyzing professional development of complex infrastructure and services and a key contributor to realizing investable, bankable projects.

It is apparently because of this wide gap of project preparation that ADB last September set up the Office of PPP (OPPP) to enhance its role in supporting and enabling governments of developing countries to secure larger private investments in infrastructure development. 

An ADB study last year found that lack of project preparation is a key contributor to the failure of projects with private sector participation. Too often projects are put out to competitive bidding lacking proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, environmental or social safeguards, uncertain resource assessments and properly-secured land.

The OPPP provides assistance to developing members to set up their regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. TAS are fee-based advisory services provided by the ADB over the entire range of activities associated with the development and implementation of PPP projects.

The OPPP helps developing members prepare a pipeline of ready-to-finance infrastructure investments by assisting with due diligence and helping to address impediments to investment decisions, supporting project design, preparations and structuring.

The ADB further expanded its capacity to design and structure bankable infrastructure projects by signing a PPP co-advisory agreement with eight global commercial banks from Japan and France on the sidelines of the ADB annual meeting here. 

Under the agreement, the ADB and the eight banks can work together to provide independent advice to governments in developing Asia on how best to structure PPPs to make them attractive to the private sector and to manage the subsequent PPP bidding process. The governments will, however, make the final choice of the PPP winning bidders.
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The author is senior editor at The Jakarta Post. 

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ADB ups lending and grant resources

Vincent Lingga, The Jakarta Post, Baku, Azerbaijan | Business | Mon, May 04 2015, 7:34 AM

The Asian Development Bank (ADB) is to increase its lending and grant resources by 50 percent to as much as US$20 billion annually after the board of governors approved a groundbreaking initiative to combine its lending operations: the Asian Development Fund (ADF) for poor countries and ordinary capital resources for middle-income members.

ADB President Takehiko Nakao told a news conference on the first day of the 48th ADB annual meeting in Baku on Saturday that the initiative, deliberated since 2013, would become effective in 2017.

“Combined with cofinancing, ADB’s annual assistance will reach as much as $40 billion in coming years from $23 billion in 2014,” Nakao added.

Last year alone, the Manila-based ADB leveraged a record $9.2 billion in cofinancing, which, combined with $13.7 billion from its own resources, saw total assistance reach $22.9 billion. 

Also in 2014, ADB and the Islamic Development Bank extended their cofinancing partnership until 2017, allocating up to $2.5 billion for projects across sectors including transportation, energy, urban development, social services, agriculture and private sector development. 

Nakao said that under the initiative, the ADB’s ordinary capital resources (OCR) would almost triple to about $53 billion in 2017 from $18 billion now. This will benefit middle-income coutries such as Indonesia, as they are currently entitled only to get loans from the OCR granted at maket-based rates, while the Asian Development Fund provides concessional loans and grants to poor countries.

 Acording to ADB reports, since its establishment in 1966, ADB has approved $30.19 billion in sovereign and nonsovereign loans, $432.06 million in technical assistance and $429.98 million in grants for Indonesia.

The ADB current country partnership strategy (CPS) for Indonesia focuses on inclusive growth and environmental sustainability, with priority given to natural resource management, education, energy, finance, transportation and water supply.

According to Nakao, the latest decision by the board of governors is a win-win situation because it will increase financial support for poorer members and expand capacity for operations in middle-income countries and the private sector. The merger of the two lending resources, he said, would also enhance ADB’s risk-bearing capacity and strengthen its readiness to respond to future economic crises and natural disasters. 

Nakao dismissed fears that the launch of the China-led Asian Infrastructure Investment Bank (AIIB) would lead to a battle over staff and projects, insisting that additional sources of finance such as the AIIB were welcome in view of the huge infrastructure gap in the region, which, he claimed, required at least US$8 trillion over the next 10 years.

“We will collaborate, cofinance and complement each other,” added Nakao after a meeting on Friday with Liqun Jin, secretary-general of the Multilateral Interim Secretariat of the Asian Infrastructure Investment Bank (AIIB).

More than 67 coutries in Asia — including Indonesia — Europe and Latin America have joined AIIB as founding shareholders, but Japan, perceived to be the dominant shareholder in the ADB, has not yet made up its mind.

The ADB, Nakao said, had answered questions from the AIIB at the staff level about procurement systems and safeguard policies, as well as legal issues. 

He acknowledged, however, that the bank needed to embark on initiatives to improve its work in the region. “We must make efforts to reform ourselves by increasing our lending capacity and strengthening knowledge and streamlining procedures,” Nakao added. 

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Finance Minister Bambang promotes new growth model

Vincent Lingga, The Jakarta Post, Baku | Business | Tue, May 05 2015, 8:04 AM 

Finance Minister Bambang Brodjonegoro said on Sunday the 1998 Asian economic crisis and the 2008 global financial crisis had prompted Indonesia to adopt a new growth model that emphasized inclusive and sustainable development with less dependence on commodities and on the international market.

“In the 1990s, Indonesia and most other developing countries in Asia emphasized high growth led by exports too much, but the two crises have prompted us to design and pursue a new growth model focusing on inclusive and sustainable growth,” Bambang told a seminar on Asian growth potential on the sidelines of the Asian Development Bank (ADB) annual meeting in Baku, Azerbaijan.

He added that the 2008 global financial crisis also provided Indonesia with the highly valuable lesson that it was not economically sustainable to depend too heavily on commodities and the international market. “So in 2009 when most countries suffered economic contraction, Indonesia was still able to grow by 4.9 percent because we relied on domestic consumer spending as the main growth driver,” said Bambang, who spoke as one of eight panelists at the seminar.

He cited macroeconomic and financial-sector stability, reduced dependence on commodities, downstreaming (adding value) of natural resources and connectivity to global supply chains as several of the main prerequisites for inclusive and sustainable growth.

Another panelist, China’s Finance Minister Lou Jiwei concurred saying that China also had embarked on a new program to stimulate domestic consumption to spur growth.

“After the 2008 global financial crisis we have become more realistic and set our new normal growth level down to 7 percent from an average 10 percent previously,” Jiwei noted.

ADB president Takehiko Nakao cited the latest ADB Asian economic outlook report as charting a still positive picture of the Indonesian economy this year, saying the government’s policy reforms would have an impact on economic growth sooner than expected.

The ADB forecast the Indonesian economy would grow by 5.5 percent this year and 6 percent in 2016, far more optimistic than estimates from the World Bank and the International Monetary Fund (IMF), which predicted the economy would grow by 5.2 percent this year.

But the ADB projection is based on the assumption that the new government’s rapid reform momentum is maintained, especially the acceleration in infrastructure building and budget disbursement.

Swiss governor of the ADB Beatrice Maser Mallor also emphasized the importance of inclusive growth for sustainable development because only with jobs could people have purchasing power.

The ADB “Asian Development Outlook 2015” report forecasts that developing Asia will maintain its strong economic growth of 6.3 percent this year and in 2016 supported by soft commodity prices and recovery in the major industrial 
economies.

Two other panelists at the seminar, Indian Finance Minister Arun Jaitley and Azerbaijan’s Finance Minister Samir Sharifov, also shared the same view that falling commodity prices were creating space for policy makers across the region to cut costly fuel subsidies and initiate other structural reforms. 

The finance ministers regarded this opportunity as one to build frameworks that would support more inclusive and sustainable growth in the longer term, pointing out that with such diverse circumstances in the region, different keys are needed to unlock growth. 

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ADB stronger on poverty alleviation, infrastructure

Vincent Lingga, The Jakarta Post, Baku | Business | Wed, May 06 2015, 8:02 AM 

The 67-member Asian Development Bank (ADB) ended its annual meeting on Tuesday with a 50 percent boost to its lending and grant resources to as much as US$20 billion a year and stronger institutional and financial capacity to help developing members prepare bankable infrastructure projects.

“This will scale-up our operations to eliminate poverty and promote sustainable development in the region,” ADB president Takehiko Nakao noted at the closing news conference in Baku, Azerbaijan. 

Nakao cited poverty, besides lack of infrastructure, as one of the region’s most pressing development challenges, pointing out that 544 million Asian people still lived on less than $1.25 a day. 

“However, according to a new measure developed by ADB last year, about 1.4 billion Asian people are categorized as poor — about 40 percent of the region’s total population. This is unacceptable,” Nakao added.

In infrastructure, ADB will focus on using the public-private partnership (PPP) plan more effectively, ensuring the operational sustainability of infrastructure projects and applying the highest standards for safeguard policies to protect people and the environment.

Nakao said ADB had undertaken rigorous vulnerability assessments for projects, as relatively small upfront investments based on such assessments could save lives and avoid large-scale infrastructure rehabilitation costs later.

He reiterated that ADB would cooperate and co-finance with the China-led Asian Infrastructure Investment Bank (AIIB) but based on “our shared understanding of the importance of international safeguard standards”.

In a related development on the sidelines of the ADB meeting here, the governments of Japan, Canada and Australia committed to providing a total of $64 million for an ADB facility to help developing member countries such as Indonesia prepare, structure and place PPP infrastructure projects in the market.

“Although there is keen interest to attract private investment into infrastructure, many countries still struggle with key success factors, mainly adequate implementation resources to prepare, structure and place transactions in accordance with international best practices,” noted Ryuichi Kaga, head of ADB’s PPP office, which was established last September.

Kaga cited Indonesia as a developing member that badly needed capacity building for infrastructure project preparations under the PPP plan.

The financial support will further be backed by the stronger institutional capacity ADB will gain from its PPP co-advisory agreement with eight global commercial banks to provide independent advice to governments in developing Asia on how best to structure PPP projects to make them attractive to private investors.

The eight banks are Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Credit Agricole CIB, HSBC, Mizuho Bank, Macquarie Capital, Societe Generale and Sumitomo Mitsui Banking Corporation.

ADB has estimated that developing Asia needs to spend $8 trillion between 2010 and 2020 on national infrastructure. Many governments hope to boost finance for energy, roads, railways, ports, airports, water and other key infrastructure through PPP projects.

The Indonesian government itself has estimated it needs at least $80 billion within the next year to speed up its infrastructure development. 

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