Indonesia Business Review 2001 - Part 2

Government must go all out to protect Semen Gresik deal

Tuesday, October 23, 2001 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The government should go all out to prevent the spin-off of Semen Padang from the publicly listed Semen Gresik Group (SGG), as demanded by a group with vested interests led by Semen Padang management, which claims to represent the aspirations of the West Sumatra people.

Should the spin-off take place, the credibility of the whole privatization program, which is a core component of the nation's economic rehabilitation, could be destroyed, and foreign investors would shun resource-rich West Sumatra.

The group's arguments about the dignity of the Minangkabau people with regard to their ancestral land and its concerns about the risk of foreign cement companies abusing their market power are entirely false.

The group has been using the spin-off demands as ammunition to block the government from exercising its put option (the right to sell its remaining 51 percent holding in SGG) with Mexico's Cemex, which now owns 25.5 percent of the company.

The current management of Semen Padang and other rent seekers of the vested-interest group are scared of losing their lucrative business if Cemex takes control of Semen Padang.

The issue has nothing to do with anti-foreign investor sentiment among the local people. The group's real objective is to retain Semen Padang as a cash cow that its members can milk any time they like.

That is currently the status of Semen Padang because, despite its acquisition by state-owned Semen Gresik in 1995, Semen Padang remains an independent enterprise, with its own board of directors and commissioners, having its own internal audit and its own procurement and marketing system.

No wonder that Semen Padang, which allegedly is ridden with collusion like many other state companies, is the worst performer among the three cement units owned by SGG.

The other two units are Semen Tonasa in S.Sulawesi and Semen Gresik in East Java. The three units together have a total capacity of more than 17 million metric tons.

The SGG consolidated financial report for the year 2000 shows that Semen Padang lost Rp 46 billion, booked the lowest operating profit margin and suffered the lowest export prices. All this was caused by questionable practices in its marketing and procurement systems.

The SGG annual shareholders meeting in Jakarta in June reprimanded the management of Semen Padang for its gross inefficiency, questionable pricing policies, poor marketing mix strategy and very poor communications and cooperation with the other SGG members.

Recent reports from media in Padang and Jakarta showed how leaders of the spin-off team, who included not only Semen Padang directors but some legislators and businesspeople close to the West Sumatra governor, had allegedly benefited either from supplying materials to Semen Padang, local marketing or exporting Semen Padang products.

The local people of West Sumatra, notably those in Lubuk Kilangan subdistrict where the Semen Padang industrial complex is located, do not really care who owns the company so long as it creates maximum benefits for the local community.

Statements by the Lubuk Kilangan community on various occasions, the last one in late September, demanded only that Semen Padang concentrate on recruiting locally, assist the community to establish a cement distribution company, implement environment-friendly operations and contribute more to community development.

However, since the spin-off team is much better organized and more generously funded and able to meet with House leaders, senior officials and newspaper reporters in Jakarta, the voice of the vested-interest group has apparently been much louder.

By forging ahead with its put option to sell its remaining 51 percent holding in SGG to Cemex, the government would generate multiple benefits for the three cement units and the whole economy as well.

Among the immediate benefits would be:

* The best selling price of around US$1.72 per share, or more than 275 percent of the current SGG share price on the Jakarta stock exchange, bringing in about $520 million (Rp 5.2 trillion) to the cash-starved government at negligible transaction cost.

* Facilitating full integration of the three cement units that should have taken place in 1995 when Semen Gresik acquired Semen Tonasa in South Sulawesi and Semen Padang, but failed to materialize until now due to opposition from Semen Padang management and some local leaders.
The synergy resulting from the integration would create great benefits through much lower costs in financing, information-sharing, elimination of redundancies in internal audits, management, local and export marketing and procurement.
Most important of all is that the three cement companies would be fully subject to stock market regulations, especially those regarding disclosure and audit standards, and compliance with the principles of good corporate governance.

* This landmark deal would kick start the process of regaining foreign investor confidence in Indonesia at a time when the country's risk premium is increasing due to local reaction to the U.S.-led attacks on the alleged bastions of terrorism in Afghanistan.

However, succumbing to the demands for spin-off from the vested-interest group would wipe out whatever remaining confidence foreign investors still had in the government's privatization program.
Much more devastating would be the flagrant violation of stock market regulations because the spin-off would almost certainly be rejected by the minority shareholders (Cemex and the investing public, which holds 23.50 percent).

Equally damaging would be the legal entanglements caused by SGG commitments to its domestic and foreign creditors, who obviously lent to SGG on the merits of its business plans that were based on the operational prospects of three cement units.

Semen Padang had, as of last December, outstanding debts of Rp 617 billion to ABN Amro Bank and Rp 281 billion to state Bank Mandiri, entirely guaranteed by SGG.

With a spin-off, Semen Padang would have to renegotiate its debts as a stand-alone company, obviously with a higher risk premium, meaning that it would have to pay interest rates much higher than the current ones under the SGG corporate guarantee.

An analyst concluded, after perusing the 2000 SGG annual report, that the higher interest rates alone would almost double Semen Padang's interest expenses to Rp 70 billion, or nearly 40 percent of its operating income.

No wonder that senior government officials have asserted that the Semen Gresik deal could make or break both the whole privatization program and the government's credibility, especially as the most promising candidates among state companies for privatization are resource-based enterprises that are located in the provinces.

Meanwhile, Cemex understandably does not wish to continue in uncertainty. Indonesia is not the only place for cement investment for Cemex, which owns and operates 66 cement plants and almost 500 ready-mix concrete and aggregates plants in North and South America, the Caribbean, Europe, Africa and Asia.

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Business leader warns of damaging impact of anti-U.S. protests

Friday, October 12, 2001 Vincent Lingga, The Jakarta Post, Jakarta

The unqualified success of President Megawati Soekarnoputri's recent state visit to the United States and her powerful speech to business leaders at a gala dinner in Washington could be eclipsed if the current anti-American crusade goes overboard, warned Indonesian business leader Tony Agus Ardie.

Tony said despite their preoccupation with the devastating impact of the Sept. 11 terrorist attacks in New York and Washington, American businesspeople remain greatly interested in investing in Indonesian development, notably in harnessing the country's abundant natural resources.

"During a roundtable discussion held before the gala dinner at the Ritz Carlton hotel, American business leaders were straightforward in presenting their views to President Megawati about their role in the Indonesian economy and the problems they are encountering in implementing that role," Tony said.

As the chairman of the United States committee of the Indonesian Chamber of Commerce and Industry, Tony was the sole representative of Indonesia's business community at the meeting which was attended by around 24 CEOs of American companies with major interests in Indonesia. Megawati was accompanied by the economics ministers that joined her entourage.

"I observed later at the gala dinner how impressed the American business community was with Megawati's speech which they said was powerfully written and well delivered. Several businessmen and senators I met after Megawati left for Tokyo even noted that her speech struck a chord in relation to many issues that resonated with the core of American thinking," Tony said.

But this investment would be wasted if no new American capital began to flow into the country next year after the dust of the aftermath of the terrorist attacks settled down. This may well happen, he added, if the nation could not manage its emotional response to the attacks on Afghanistan and began to threaten American interests here.

"A number of businessmen I met in Washington and New York told me how they could still contribute to the Indonesian economy by helping small and medium-scale enterprises (SMEs) set up links with the export market chain, as has been done so far in Bali and several other provinces," he said.

American buyers, according to Tony, can help Indonesian SMEs select the right products for the U.S. market and train locals to produce according to the designs, patterns or other specifications preferred by consumers overseas.

"But this can only happen if we act as good hosts to foreign guests." Here, I think, lies the important role of the next Indonesian ambassador to the United States in following up the positive impression left behind by President Megawati.

The businessmen and senators I talked to suggested that the new ambassador be at least of the same caliber of former ambassador Dorodjatun Kuntjoro-jakti, now coordinating minister for the economy and industry, who is a U.S.-trained economist," he said.

According to Tony, there are two names currently circulating in Washington as the candidate for the new Indonesian ambassador to the U.S. They are Sri Edi Swasono, a U.S.-trained economist, former chairman of the Indonesian Cooperatives Council and now professor at the school of economics, University of Indonesia.

The other is Soemadi D.M. Brotodiningrat, a career diplomat, who is now Indonesia's ambassador to Tokyo and a socio-political scientist by training.

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Crisis management essential

Tuesday, October 09, 2001 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The Indonesian government, which has been criticized for sorely lacking a sense of urgency in dealing with the economic bleeding, could learn from South Korea's success in repairing its economy in the early 1960s.

When the South Korean government proclaimed in 1962 its commitment to rebuild the war-ravaged economy through an 'export or perish" campaign, then-president Park Chung Hee set up an institutional mechanism that functioned as the nerve center for crisis management.

Park began conducting monthly National Export Promotion meetings attended by economics ministers, top bureaucrats, leaders of business associations, representatives of the largest exporting companies and top bankers to discuss concerted efforts to promote exports and to fix any problems faced in the national drive for economic recovery.

Far from being a perfunctory meeting, the gathering, chaired by Park himself, was a brain-storming session that brought the country's political leadership face to face with representatives of the main economic agents, all working diligently with the sole purpose of translating political resolve into real action by the bureaucracy and the business community.

Any issues related to the export drive such as credit financing, port clearance, imports of inputs and incentives were settled at the highest level. Park's leadership kept all officials on their toes and they had to be well-prepared with intelligent answers to the president's tough questions.

The monthly meeting made bureaucratic action more important than bureaucratic rules and rigidities, resolving problems by executive fiat on the spot, all with the clear objective of repairing the economic ruins through export promotion.

The results, according to Korean government reports, were quite dramatic, with exports rising from US$52 million in 1962 to $84.5 million in 1963, expanding to $121 million in 1964 and increasing steadily to reach $$15.1 billion in 1979 and $20 billion in 1981. Last year, Korean exports totaled $134 billion.

The recounting of this economic success is not meant to suggest that Indonesia choose the same priority and follow the path of the authoritarian government of Park, who was assassinated in late 1979.

But Indonesia can learn a great deal from the Korean experience in how it effectively conducted crisis management, setting correct priorities, building up a favorable public-opinion environment and mobilizing all the resources available to implement top-priority programs.

The combination of the leadership provided by Park and the proper management and coordination given by his economics ministers created a thoroughly conducive environment for the export drive.

The business community, represented in the decision-making process, received a strong stimulus to participate in the national drive.

The fundamental rationale of Park's crisis-management is that a critical condition requires quick and efficient decisions.

Certainly, the political and social circumstances in Indonesia now are much different from those in Korea when Park led the government. The condition here is much more complicated as President Megawati Soekarnoputri's government is coping with an economic crisis at a time when the nation has just begun to experiment with democratic practices.

But Megawati could still adapt Park's crisis-management method to cope with the economic bleeding, a crisis which all public opinion polls agree should be the top priority for the government.

The correct cure to stop the economic bleeding has been prescribed in the reform agreement with the International Monetary Fund: Fast resolution of the $60 billion in distressed assets and corporate debts held by the Indonesian Bank Restructuring Agency, privatization of a selected number of state companies, banking reform and fiscal consolidation. The latter refers to phasing out of wasteful subsidies for fuel and electricity and vigorous tax campaign.

Without significant progress in these long-delayed areas of reform, which are related to and influence each other, virtually nothing else in the way of sustainable economic recovery will take place.

Of utmost importance is that President Megawati conducts her Cabinet sessions according to the format and under the sense of crisis Park enforced in his monthly National Export Promotion meetings, constantly urging officials and business leaders into quick action.

A high pace of asset recovery, certainly at deeply discounted prices, not only will generate additional revenues to the cash-starved government but will also bring in new investors to rehabilitate the distressed assets to sound production operations.

Likewise, restructured corporate debtors will get new access to working capital loans to fuel production. The privatization of selected state companies will create a similarly positive impact on both the state budget and macroeconomic stability.

As more distressed assets get rehabilitated, more corporate debtors get restructured and more state companies are put under efficient management, the pace of the economic recovery will pick up.

Consequently, more jobs and tax revenues will be generated.
The faster the economic engine runs, the sooner banks will be able to resume their intermediation function to pump lifeblood to the economy through lending operations.

As the pace of the economic recovery picks up, so will the public's support of the other reform measures. Further down the line this confidence-building condition will create more supportive circumstances for other painful reform measures such as phasing out wasteful subsidies to remove the big hole in the state budget.

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Stronger case for faster privatization

Friday, October 05, 2001 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

No one disagrees with the notion that privatization is fundamentally a political transformation and an uphill task, especially for such a fragile democracy as Indonesia. It will exact a major change in the government's role in the economy and in society as a whole.

But the experience of developing countries, which took the political courage to bite the bullet, prove that privatization of state companies is greatly effective in improving macroeconomic efficiency through the creation of a more competitive market.

Its microeconomic benefits are equally far-reaching, including more efficient and consequently more profitable enterprises, a significant increase in investment, broader technological base and managerial depth and better products at lower costs to the consumers.

Extrapolate these potential benefits against the current Indonesian condition, where most of the 185 state companies with total assets of Rp 850 trillion (US$89.5 billion) are inefficient and barely profitable with a government that is severely strapped for liquidity and one can easily see why privatization has been made a core element of the country's economic reform program.

Proceeds from privatization will immediately help plug the big hole in the budget and consequently speed up fiscal consolidation. Profitable companies generate more tax revenues and dividends. More importantly, since many state companies operate in upstream industries, their higher efficiency will also contribute to the competitiveness of thousands of downstream industries.

However, only around five state companies have been privatized over the past four years, due partly to political uncertainty, but mainly because of strong opposition from the House of Representatives and vested-interest groups, notably employees, managers and senior officials, as well as other political groups of a nationalist or populist bent.

Admittedly, privatization, like other reform measures, initially cause destabilizing impacts as redundant employees and complacent managers in inefficient companies are afraid of losing jobs and many senior officials with political power over these enterprises are worried about losing their cash cows.

But empirical evidence from research shows that no country, most notably crisis-ridden ones such as Indonesia, which has been mired in a deep multi-dimensional crisis since late 1997, can make significant gains without first undergoing short-term pains.

Inordinately nationalist groups, who see the handing over of control of inefficient companies to foreign investors as the surrender of national sovereignty to foreigners, seem afraid of the political manipulation and economic sabotage associated with several multinationals in the past.

But these groups may not realize how desperate the country's economic condition has been, where tens of millions of people are unemployed and millions of children cannot afford even primary education and basic health services -- not to mention hundreds of thousands of locally-dislocated families living in makeshift settlements under inhumane conditions.

True, while the possibility of foreign domination of the economy and the risks of foreign companies abusing their market power should be guarded against, one should remember that thousands of foreign companies have established their businesses in the country since 1967, but no legal evidence of major cases of economic sabotage or abuse of market power has so far been found.

On the contrary, almost all the major business groups associated with corruption and collusion with the government in the past and alleged to be partly responsible for the economic crisis, are not foreign-controlled but national enterprises.

The 2001 state budget is now less than three months from its end, yet not a single cent of the Rp 6.5 trillion (US$665 million) has so far been collected.

How will the cash-strapped government cover this shortfall, when the budget is also being threatened with another large hole, as only half of the Rp 27 trillion revenue target from asset sales by the Indonesian Bank Restructuring Agency have so far been realized?

Should it take an even more devastating fiscal crisis before the government and the House finally adopt the political courage to push through the privatization of state companies that are better left to private investors to develop?

Certainly, every transaction should be carried out with high standards of transparency and accountability as deals within the privatization program are highly vulnerable to corruption.

However, since privatization has been central to the government reform program since 1998, it is hard to believe that the government has not yet formulated a broad legal and political framework for the program and set clear-cut guidelines on which companies are best privatized through the stock market and which through strategic sales (private placement).

What is perhaps still needed is the fine tuning of the standard operational procedures, the step-by-step process for public share offerings and strategic sales to secure transparency and accountability and to close any loophole that may still be exploited by highly venal officials.

Obviously, selling state companies now will not fetch the highest prices, given the high risks associated with uncertainty over law enforcement and the initial stages of decentralization of political and fiscal autonomy to Indonesia's provinces and districts.

It is completely irrational to expect what is possible only in the best of times from transactions done in the worst of times, especially in view of the bleak outlook of the global economy due to the impact of the Sept.11 terrorist attacks on the United States, the world's economic powerhouse.

Moreover, given the 20 to 30 percent excess capacity hanging over the manufacturing industry, as a consequence of the economic slump, direct investment would not likely flow through greenfield projects but through asset acquisition, as the 2001 World Investment Report of the United Nations Conference on Trade and Development shows.

But further delays or foot-dragging in the privatization program would not only weaken the nascent economic recovery but could also discourage foreign creditors, notably sovereign (government) creditors.

After all, why should they use their taxpayers' money to help a government that still wastes its own taxpayers' money supporting inefficient businesses?

Or the question could be rephrased: Does a government, which continues to waste its money supporting inefficient and corruption-infested companies, still deserve more development aid in the form of soft loans with an annual interest rate of less than 2 percent and maturity of over 30 years?

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The Semen Gresik dilemma

Friday, September 28, 2001 By Vincent Lingga

JAKARTA (JP): The cash-starved government will raise almost Rp 5 trillion (US$520 million) if it exercises a put option to sell its 51 percent stake in the Semen Gresik cement holding company to Mexico's Cemex before Oct. 26.

Since the price to be paid by Cemex will be almost twice as high as the current Semen Gresik share quotation on the Jakarta Stock Exchange, and given the big hole in the state budget, the option should be too good a deal to let pass.

But what should be a landmark deal for its own assets is now bogged down in an imbroglio which, if not resolved, could scare the hell out of foreign and domestic investors and heighten Indonesian sovereign risks.

The government on Wednesday asked Cemex to extend the deadline to provide it more time to solve the problems with Semen Padang and Semen Tonasa.

"... we are seriously considering (the request)," Cemex Indonesia's president Francisco Noriega said on Thursday. The roots of the problem are the demands from the people in West Sumatra and South Sulawesi that the government spin off the Padang and Tonasa plants from Semen Gresik.

Former president Abdurrahman Wahid, apparently in a bid to appease regional disillusionment, approved the demands in February 2000 without realizing the grave consequences of his decision on Semen Gresik as a publicly-listed company and on the government's credibility regarding the sanctity of contract.

Spinning off the two cement units, which account for almost 60 percent of Semen Gresik's total production capacity of 18 million metric tons, will not only hurt the interests of the investing public and Cemex which own 23.46 percent and 25.53 percent of the company, respectively.

Such a drastic corporate measure is not within the government's jurisdiction, but rests with the minority shareholders to decide. That is if the government does not want to violate the securities market rules which it has pledged to enforce to strengthen the capital market.

Both the investing public, which bought Semen Gresik shares, and Cemex, and which acquired its holding through a competitive bid in 1998, put their money in the government-controlled company primarily because of its major role (a 37 percent share) in the country's total cement production capacity of 46 million tons.

Obviously, if the two subsidiaries were spun off, Semen Gresik would become a much smaller company. Such a faulty deal would also be a bad precedent for the government's privatization program -- a core element of its economic reform program.

The demands for the spin-off appear to be based on strong nationalistic sentiment against foreign investors. In this case it is Cemex, the world's third-largest cement group with more than 65 plants, which last year produced 80 million tons of cement, in more than 30 countries throughout Asia, Africa, Europe and North and South America.

But the central issue actually boils down to what the local people see as unfair distribution of the pie.
Like many other legal entanglements encountered by companies in various provinces, Semen Gresik faces one of the time bombs left behind by the authoritarian, centralized government under former president Soeharto.

"I had warned then finance minister Mar'ie Muhammad against the grievances ... before he approved the acquisition of Semen Padang (in West Sumatra) and Semen Tonasa (in South Sulawesi) by Semen Gresik in 1995," asserted Basril Djabar, chief editor of the Singgalang daily in Padang.

All three cement companies were then wholly owned by the government. As no one dared to argue with Soeharto, the deal went ahead despite the deep dissatisfaction of the West Sumatra people, added Djabar, who says he is a member of the West Sumatra team fighting for the locals' interests in Semen Padang.

The problem, he said, is that the local people had been willing to cede their traditional property rights to 400 hectares of limestone quarries to Semen Padang out of their high sense of solidarity to support national development.

"But when Semen Padang was acquired by Semen Gresik and later privatized, that was an entirely commercially-motivated deal, which had by no means been in the minds of the Minangkabau people when surrendering their land," he said.

"What further angered the people was that the commercial transactions were then concluded without taking into consideration any sort of compensation for them. This severely bruised the dignity of the Minangkabau people," he added.

Djabar hastily added that the demands do not in any way represent negative sentiment toward Cemex, nor against other foreign investors. The local administration and people have worked hard to make West Sumatra the most hospitable place for both foreign and domestic investors, he said at a meeting with Cemex Indonesia's president Francisco Noriega and vice president Vicente Saiso.

Djabar said the West Sumatra legislature had delivered a petition to President Megawati Soekarnoputri early this month again demanding the government divest Semen Padang from Semen Gresik.

"The spin-off will return Semen Padang to a wholly government-owned company; only then can we sit down again to negotiate a win-win settlement," he said.

The South Sulawesi people imply that their demand for the spin-off could be compensated with an equity stake in Semen Gresik.

"My monitoring of the people's aspirations concludes that they see the price paid by Cemex for Semen Gresik shares as too cheap," said Bunyamin, the Jakarta correspondent of the Makassar-based Fajar daily newspaper, at the same meeting.

Noriega categorically denied that Cemex bought Semen Gresik at a fire-sale price, pointing out that it won the stake through a competitive bid and paid $1.38 a share, a 127 percent premium over Semen Gresik's share price on the Jakarta Stock Exchange.

"We were invited by the government to contribute to the country's development and we joined Semen Gresik in good faith," Norieg said, "believing that with the broad and strong base of our skills and technology, and our good track record in operating more than 60 cement plants around the world, we will be able to cultivate Semen Gresik to become a world-class cement company."

He said sound business profit is surely the primary motive, but that this was a long-term objective because when Cemex bought into Semen Gresik, Indonesia was at the height of its political and economic crisis, its cement industry suffering from a huge excess capacity due to the plunge in demand.

"In fact, based on Semen Gresik's share price now, we suffer, on paper, a loss of $80.2 million, meaning that the market value of our stake is now 38 percent less than our initial investment in 1998. But we had anticipated this because we invest with a the long-term perspective," Noriega said.

Cemex's agreement with the government in 1998 requires the Mexican company to pay $1.72 per share, almost twice as high as Semen Gresik share quotation now, if the government exercises its put option for its remaining 51 percent stake.

Noriega added that Cemex has also greatly contributed to expanding Semen Gresik's exports to new markets and even to countries where Cemex has cement operations.

"Semen Gresik's exports increased 137 percent in 1999. Semen Padang exports alone expanded by 145 percent, of which 66 percent were generated by Cemex's trading networks," he said.
Given the desperate need for foreign investment and the fact that until now not a single cent of the Rp 6.5 trillion targeted from the sale of state companies has been raised, the government should do its best to resolve the issue with locals in the two provinces.

Allowing the spin-off, even with adequate compensation for the investing public and Cemex, which could reach hundreds of millions of dollars, would amount to acknowledgement that the government had sold a company with legal problems to the public and foreign investors. This would not only sabotage the whole deal with Cemex, but would cast great doubt over the whole privatization program as well as the government's credibility regarding the contracts it has signed. Still more damaging, the government could land itself in a messy litigation case filed by the investing public

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Empower state audit agency

Monday, September 17, 2001 By Vincent Lingga

JAKARTA (JP): The government's commitment to improve the efficiency and effectiveness of its budget management and its financial accountability remains largely a verbal pledge, as shown by the findings made by the Supreme Audit Agency (BPK).

The report on BPK's audit of the 1999/2000 budget and the financial accounts of several state companies conducted in the first semester of this year discovered 1,933 instances of deviations from budgetary rules and irregularities in financial management, involving Rp 3.3 trillion (US$371 million).

The auditors also found irregularities involving over Rp 1 trillion in potential losses to the state.
But what makes the prospect for a higher standard of accountability look even poorer is the fact that most of the ministries and government institutions that were audited do not see the deviations and irregularities as serious wrongdoings.

Budget Director General Anshari Ritonga said the irregularities could not immediately be blamed on the audited institutions, further arguing that the deviations did not automatically cause state losses.

Ritonga even implicitly admitted that no significant progress had been made regarding BPK's recommendations for better financial accountability in the public sector.

"I have not yet read the audit report. But I assume the findings were very much similar to BPK's previous audits, namely deviations from rules or breaches of procedure that did not necessarily inflict losses on the state," Ritonga said, in commenting on the BPK report to the House of Representatives last week.

The Ministry of Mines and Energy, where BPK found irregularities involving almost Rp 79 billion, said the BPK report to the House was outdated because it did not include "the clarifications and correction we made immediately at a follow-up meeting with BPK auditors."

"The clarifications and correction we made have reduced the amount involved in what BPK considered irregularities to a mere Rp 150 million. We are now further investigating these few cases of deviations," Minister Purnomo Yusgiantoro added.

According to Purnomo, projects under construction often cannot fully meet budgetary rules or procedures due to unexpected problems in the field, such as delays in the delivery of materials or equipment, or land acquisition.

The question now is: Does the Supreme Audit Agency, the sole agency mandated by the Constitution to conduct an independent audit on state finances, and the government institutions, speak a different language or use different terms of reference in reading the audit findings?

"Not at all," asserted BPK Chairman Satrio Budihardjo 'Billy' Joedono.
"We strictly apply the State Treasury Law and other regulations, rulings and presidential decrees on budget management and financial accounts," Joedono said in an interview.

The problem, according to him, is that the government's tolerance of breaches of rules or deviations from regulations seems to have been stretched to such a level that things, which cannot immediately be classified as malfeasance, can simply be justified post hoc.

"But as an auditor that wants to build a high standard of accountability we always insist on zero tolerance on any aberrations or deviations from rules, even though they do not immediately inflict losses. We always check what was done against what is required by the law or regulations", Joedono added.

"After all," he said, "good discipline starts with strict adherence to the rules of the game, to every provision of the law, however petty it might seem to be."

The fact that the Agency auditors often find, time and again, similar breaches of rules, shows that most government institutions seem ignorant of BPK audit findings and recommendations.

Even the House itself rarely uses BPK's audit reports as a reference to exercise its control over the government.

"The bulky report (consisting of hundreds of pages) usually ends up in the House archive immediately after delivery by the BPK chairman," Benny Pasaribu, Chairman of House Commission IX for state finances and banking, said.

Pasaribu added that if House members thoroughly read the BPK reports they could be more informed and focused in the exercise of their oversight of the various ministries.

But the technical jargon and such vague or unintelligible phrases in the report such as "deviations from austerity and budget efficiency", "deviations from order and discipline in law enforcement" or "deviations from the effectiveness of financial management" do not help attract the attention of House members.

Obscure phrases even make the report boring and hard to digest.

Joedono argued that the Audit Agency could not use bombastic or pompous words or make wild accusations simply to attract the attention of House members, otherwise BPK or its auditors might end up in messy litigation, on charges of defamation.

"After all, we are not a judicial agency that makes investigation and formulates charges.

"But we have made some improvements in our reports to make them much easier to comprehend. The reports are now supplemented by executive summaries on the various sectors that were audited, and each of the House Commissions was given the summary that covers the sectors under its oversight," he said.

The main problem seems to be rooted in the lack of enforcement power and follow-up mechanisms of BPK. Moreover, there is a lack of clarity in the mandate, scope, role and degree of independence of BPK, the Development Finance Comptroller (BPKP) and the inspectorate generals, which serve as internal auditors at ministries.

There is no systematic follow-up mechanism to ensure implementation of audit findings, and BPK audit findings are not made available to the general public.

That is because the Constitution's provision that requires BPK to report its audit results to the House is interpreted narrowly and rigidly as if to mean that only the House can have access to its audit findings.

After the establishment of BPKP in 1983, the government did not pay much attention to the role of BPK, as evidenced by the meager resources allocated to the agency to develop its human resources.

"Some institutions sometimes object to giving access to our auditors, arguing that they have been audited by BPKP. And we can do nothing about it," Joedono said.

Until now, he added, the Audit Agency, like other state institutions, remains subject to zero growth in new recruitment, despite the extension of its auditing work to include individual income tax revenues and state banks, which were previously inaccessible to BPK auditors.

There is also an urgent need to review the internal audit framework of the government and to rationalize the roles and responsibilities of both BPK and BPKP.

Joedono acknowledged the work of both audit agencies often overlapped, causing inefficiency.

Joedono confirmed that the government had recently introduced accounting standards for public accounts, but it would likely take some time before the accounting system in the public sector was fully integrated.

No wonder, therefore, that the government is not yet able to produce a consolidated report that captures all budgetary and non-budgetary transactions as well as state companies' and local administrations' finances.

This certainly inhibits effective monitoring of government financial transactions.

"The annual budget implementation report to the House consists only of a cash flow statement. It is not a balance sheet in the real sense," Joedono asserted.

Worse still, the general public has never been informed that even this cash flow statement rarely gains a clean bill of health from BPK.

"We did not give any opinion regarding the government budget report to the House for fiscal year 1999/2000 (ended in March, 2000)," Joedono disclosed.

Needless to say that catchwords such as "transparency and accountability" that the government often pronounces as the basic principle of good governance require appropriate institutions and public reporting requirements and a central agency, which can enforce fiscal discipline in a transparent and accountable manner.

Enhanced transparency in the reporting of the government's financial position also requires an appropriate integrated government accounting system that is not yet in place in the country.

The House must ensure that BPK, as the sole independent audit agency of the government, is not only maintained but strengthened.

Proper exercise by the House of its oversight role over the work of BPK and its audit findings and implementation of Bepeka recommendations would go a long way to curbing malfeasance in the public sector.