Indonesia Business Review 2001 - Part 1

The essence of Megawati's U.U. visit

Monday, September 17, 2001

President Megawati Soekarnoputri's visit to the United States is of great importance to present the new posture of Indonesia's government to American leaders and the business community, says Tony Agus Ardie, who is also leading a business delegation to the U.S. He spoke to The Jakarta Post's Senior Editor Vincent Lingga, reflecting confidence in the American economic strength despite Tuesday's tragedy.

Question: How do you see the visit at this point in time?

Answer: It is undoubtedly quite an opportune time for both leaders to establish a good understanding and exchange views about ways of further strengthening bilateral ties. For Megawati herself, it is a great opportunity to learn first-hand about the U.S. foreign policy stance in the aftermath of the Sept. 11 terrorist attacks that President George W. Bush sees as an act of war against the U.S.

Many see the U.S. visit mostly as an economic mission. What is its relevance now that the American economy is in deep recession?

That is quite true, in view of the composition of Megawati's entourage and her itinerary. The economy should indeed be the primary objective, given the depth of our bilateral economic ties and Indonesia's hunger for foreign capital. The U.S. takes more than 25 percent of our exports, it's one of the largest foreign investors in Indonesia and commands a great influence both in the International Monetary Fund and the World Bank.

I don't think the recent terrorist attacks will have any impact on American economic fundamentals. It will remain the largest source of technology and the greatest influence in the global financial market. What we see now are temporary panic reactions. Certainly the terrorist attacks will not help business confidence, especially now, when the U.S. economy is slumping after more than a decade of robust growth. But I am convinced this economic powerhouse will soon manage well.

What is the main objective of the business delegation you are leading in parallel with Megawati's visit?

More than 25 Indonesian businesspeople will visit the U.S. Most of them will take part in business meetings in Washington and New York where President Megawati and several economics ministers will also attend. Several delegates will also go to Houston to attend an Indonesian energy conference that is slated to be opened by Megawati herself.

However, the delegation of the Indonesian Chamber of Commerce and Industry (Kadin) that I am heading, as chairman of Kadin's U.S. Committee, will concentrate on the development of relations between the small- and medium-scale enterprises (SMEs) of both countries through a series of forums in Washington and New York.

Don't forget that despite its reputation as the largest capitalist country, SMEs play a very important role in the U.S. economy.

Its small business development scheme is one of the best-managed under the Small Business Act. Indonesia has now been increasingly aware of the vital importance of SMEs after the collapse of most conglomerates in the 1997 crisis and could learn a great deal from the U.S. Besides meeting with businesspeople, we will also hold talks with Senator Christopher S. Bond, Chairman of the Senate Committee on Small- and Medium-scale Businesses.

What do you expect from the business forums in the U.S. ?

Many tend to see business missions overseas at this time of crisis as a waste of money, especially now, when investors have practically deleted Indonesia from their business plan maps. On the contrary, such a mission is even more important now to establish personal contacts, and for networking.

As most foreign investors have stopped visiting Indonesia, they now rely mainly on mass media stories or reports by analysts. The problem is that after the crisis analysts now tend to be inordinately pessimistic about our country, often predicting a doomsday scenario.

But the business meetings that will also present economics ministers as resource persons will be a greatly effective forum for providing the right perspective on Indonesia's problems and future outlook.

The meetings will also be a great opportunity for our ministers and senior officials to straighten out many controversial issues regarding the imbroglios that have of late entangled a number of foreign investors in Indonesia.

Both the officials and Indonesian business delegates could enlighten their American counterparts on the right perspective of the problems Indonesia is now encountering, notably in the transition from centralized government to regional autonomy.

They could honestly and proportionally explain what the government is doing to handle the temporary euphoric reactions in many provinces, what the future outlook really is and what the government is doing and will continue to pursue regarding law enforcement and other matters of the greatest concern to investors. (Vincent Lingga)

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The rigors of debt mousetrap

Tuesday, September 11, 2001 By Vincent Lingga 

JAKARTA (JP): The rigors of the debt trap, which has gripped the government since 1998, will steadily and so sharply increase the portion of inflexible spending items in the state budget within the next few years that the government investment's capacity will remain very small.

The 2002 draft state budget clearly shows how two of the most inflexible expenditure items -- foreign and domestic debt servicing and amortization and personnel costs -- will by themselves take up almost 87 percent of total routine spending or 78 percent of total tax revenues.

No wonder, therefore, that the appropriation for the development (investment) budget next year, though up nominally by 4 percent, will decline by 6 percent in real terms (adjusted for inflation), despite the urgent need for a larger allocation for improving basic infrastructure, the maintenance of which has virtually been ignored since the 1997 economic crisis.

The two expenditure items above are considered the most inflexible as it will be impossible for the government to decrease, let alone postpone, them irrespective of the level of its revenues. Certainly, personnel costs will not decrease but will instead have to rise, at least incrementally.

Likewise, debt service and installments will steadily mount until the mountain of debts is cut significantly.
Unlike the period before the 1997 crisis when the government's liabilities consisted only of foreign debts, the government's bail-outs of the banking industry in 1998 and 1999 have exploded its domestic debt (bonds) to a level almost as high as its foreign debts now, thereby increasing its total debt mountain to as high as US$150 billion.

Obviously, bond interest payments cannot be reduced, otherwise all the largest state and private banks, which were recapitalized with government bonds, would collapse because almost 70 percent of their revenues are still derived from bond coupons.

The bond interest cost to the budget could become even greater than that allocated in the budget if the central bank's benchmark interest rate were higher than that assumed for the budget estimate.

For the next fiscal year, for example, the Rp 59.6 trillion ($7 billion, based on Rp 8,500 per the dollar) appropriated for bond interest payments will rise by Rp 2.2 trillion for every one percentage point increase over the average benchmark interest rate, which is assumed at 14 percent next year.

Nor can bond redemption be rescheduled, otherwise the public's trust in the government's creditworthiness would collapse, and with it the banking industry.

Bond rollovers also will not bode well for the recovery of the banking industry as these debt instruments are largely illiquid in the absence of a secondary market.

But the heaviest pressures on the budget will occur between 2003 and 2009 as more bonds become due, starting with Rp 13.5 trillion in 2003, rising to Rp 52.4 trillion in 2004, Rp 55.9 trillion in 2005 and Rp 59 trillion 2006.

Bond redemption will remain large in the three subsequent years, ranging from Rp 65 trillion in 2007, Rp 66.44 trillion in 2008 and Rp 69.5 trillion in 2009.

Even more depressing is that these annual huge payment obligations do not yet include bond interest costs, though their amount will decline steadily as more bonds are redeemed.

Likewise, foreign creditors allow only rescheduling of debt principals and even this relief is subject to tough negotiations and stringent conditions.

Moreover, only sovereign creditors grant such relief, while multilateral agencies such as the World Bank and Asian Development Bank, which usually account for almost two-thirds of Indonesia's official incoming aid annually, never grant such a facility.

The 2002 budget proposal, for example, still allocates Rp 41.5 trillion ($4.8 billion) for the amortization of debt principals, even though the government has assumed that sovereign creditors will approve another debt rescheduling (Paris Club III) for debts maturing between April 2002 and early 2003, in addition to the rescheduling already approved for $2.8 billion in debts maturing between last January and next March.

Set against these horrendous debt repayments, it is needless to reiterate the vital importance of speeding up asset sales, the privatization of state companies and debt restructuring to allow for early retirement of a large portion of the bonds, notably the ones that charge variable rates.

Even if only about 30 percent of the approximately Rp 630 trillion worth of distressed assets now held and managed by the Indonesian Bank Restructuring Agency (IBRA) could be recovered, they would still be of great help to the state budget, at least during the next two to three years until the economy regains its robust growth.

Without a significant contribution from asset sales and the privatization of state companies, the fiscal deficit will explode to an unsustainable level, with a devastating impact on the whole economy.

It is certainly impossible to meet these bills only with tax revenues because the tax revenue base cannot be expanded in leaps and bounds, given the inadequate tax administration capacity and relatively low economic growth, at least until 2005.

The government's commitment to raising Rp 6.5 trillion from the sales of state companies and Rp 42.8 trillion from asset sales and debt restructuring next year is therefore a very bold, yet strategic move because Rp 24 trillion of the total will be used to redeem early bonds with variable interest rates. These are the debt instruments most vulnerable to interest variations.

But these immense debt obligations are not the only threats that could at any time explode the 'ticking' fiscal time bomb.

The government still faces fiscal risks from its contingent liabilities related to government guarantees for bank depositors, state company loans and the exchange rate for corporate debts rescheduled under the Indonesian Debt Restructuring Agency (INDRA).

These contingent liabilities are not included in the 2002 draft state budget because they remain potential liabilities for as long as they do not become actual debts. But these off-balance sheet obligations will become an additionally pressing burden to the state budget once they turn into actual debts.

On top of the mammoth figures on actual debt burdens cited above, these contingent liabilities are potentially another ticking time bomb in the fiscal balance.

For example, the Rp 40 trillion in new bonds the government will issue to replenish the reserve fund for the blanket guarantee for bank deposits and claims will not impose any interest costs until they are used to settle the obligations of a failing bank.

But the risk of another wave of bank failure, thought not as tremendous as that in 1997-1999, is here to stay until macroeconomic stability is entrenched, and the economic, legal and security risks are kept to a reasonable degree to allow for normal calculation of business risks.

Likewise, the government guarantee for the predetermined foreign exchange rate used for corporate foreign debt rescheduling under the Jakarta Initiative will not exact any liabilities on the budget unless the dollar exchange rate against the rupiah is weaker than the predetermined level.

Yet still more worrisome is the fact that at a time when its own financing resources are being severely restricted by the huge sum of its inflexible spending items, the government is required to play a larger role in developing and maintaining basic infrastructure, at least until private investment begins to pick up again.

Businesspeople have complained about higher production and distribution costs in various provinces due to the lack of maintenance of infrastructure soon after the 1997 economic crisis.

The government should act fast to rehabilitate it, otherwise a crumbling infrastructure could sabotage the recovery process. But the government cannot afford an adequate investment budget to improve, let alone develop, basic infrastructure, which is mostly capital-intensive and has a long gestation (pay back) period.

The problem, though, is that private investment in such basic infrastructure as roads, seaport, airport, power generation and telecommunications will not likely return unless the imbroglios that are now gripping investors in various infrastructure projects are satisfactorily resolved.

One cannot imagine what would happen to the basic infrastructure that is so pivotal to sustain the economic recovery process if private investment did not begin to return to this sector in one or two years' time.

For the huge debt burden will keep the public sector in a cash-strapped condition for the next few years yet.

It is therefore imperative that such disputes as those between the state electricity company (PLN) and independent power producers and between PT Telkom and AriaWest be settled quickly and satisfactorily before they degenerate into messy litigation.

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BCA: Major deal of the year

Monday, September 03, 2001 By Vincent Lingga

JAKARTA (JP): Barring opposition from the House of Representatives, the strategic sale of 51 percent of Bank Central Asia (BCA) could become the deal of the year.

The winning bidder will, in one stroke, be able to control Indonesia's largest retail bank with a depositor base of about seven million, 2,075 ATMs that are linked to the international settlement system and 795 branches across the country.

The government's bold decision to further divest 51 percent of its remaining 60.30 percent stake in the bank, and not 30 percent as previously planned, therefore deserves full support from the House because the transaction could jump-start the consolidation of the banking industry.

The deal could become the catalyst, an icebreaker in rekindling the interest of foreign investors, who have so far written Indonesia off from their business plans.

The offer should be more attractive now that the political uncertainty has been removed, and the stake put up for auction will allow the new investors (buyers) to control management.

However, many things could still go wrong even before the bidding process starts.

It is therefore most imperative for the government to do it right by involving, right from the outset, all stakeholders -- House members, employees, the investing public and customers -- in the process.

What is most important is that the bidding process should be designed in such a way that the deal will be seen as fair and credible by the stakeholders, particularly the market.

A conducive public opinion environment is vital, especially since the government divestment of BCA has caused a lot of controversy and allegations of corruption, collusion and nepotism.

BCA's initial public offering of 22.5 percent of its shares was postponed several times before it was finally launched in May 2000. Its secondary issue in July left behind allegations of price manipulation and a further divestment of 30 percent through a strategic sale in June, which ended in tatters as only two investors submitted bids at very low prices.

The government often wrongly assumes that the public is not knowledgeable enough to comprehend complex financial transactions. Hence, why bother with disseminating information that they cannot digest.

On the contrary, given the bitter experiences of the past, the first step in the whole process should be a massive campaign to sell the divestment plan to the stakeholders by enlightening them on why the deal is so pivotal for the consolidation of the banking industry and the sustainable recovery of the economy.

The public should be made well-informed on how the transaction will give greater value to BCA, its employees, its investing public, who now own 32.2 percent of the bank, and on how foreign investors will accelerate the bank's growth.

The House should be especially convinced that foreign control of BCA will not mean foreign domination of the national banking industry. Foreign banks now account for only about 10 percent of the total banking assets in the country.

House members need not make a comparative study overseas, however great is their penchant for such a foreign tour, to learn about the great benefits accrued from a foreign bank entry into the national banking industry.

The stronger economic recovery in Thailand and South Korea has been attributed partly to a fast consolidation of their financial industry brought about by foreign investors.

Take Korea, for example. The Korean government recapitalized in 1998 the Korea First Bank, one of the largest banks in that country, by injecting US$1.2 billion. But the government sold 51 percent of the bank to Newbridge Capital for only $500 million in January 2000.

Even this low price was sweetened with a clause stipulating that the Korean government would take over any loans that turned sour within a year after the acquisition transaction.

But Newbridge spectacularly succeeded in rehabilitating the bank within one year, turning it around from a loss of $850 million in 1999 to a respectable profit of $243 million in 2000.

A recent study by the International Monetary Fund (IMF) shows that foreign institutions (investors) have increased their role in the banking industry in crisis-ridden countries, especially in the late 1990s.

n Latin American countries, for example, the foreign banks' share of the domestic banking industry ranged from 18 percent in Brazil to as high as 53.5 percent (of total bank assets) in Chile.

In Central Europe, foreign domination of the national banking industry was even more stronger, ranging from 53 percent in Poland to as high as 80 percent in Hungary.

Restrictive policies before 1997 had kept the foreign institutions' share of national banking industries in Asia relatively small. But their role has been expanding rapidly, especially since the 1997 financial crisis, with a range of 7 percent in Thailand, 12 percent in Malaysia and 17 percent in South Korea.

The IMF report that compiles empirical evidence gathered from studies in various countries concludes that a foreign bank entry brings in competitive pressure to the industry to increase efficiency and help improve quality, pricing and availability of financial services.

As most major foreign banks have developed a good training system, they also have become the source of skilled banking personnel who will introduce the practices and technology of the foreign banks when they move to domestic banks.

Foreign banks have a more sophisticated system for evaluating and pricing credit risks associated with derivative products. They have more stringent disclosures, accounting and reporting requirements that are closely aligned with international practices, thereby gaining stronger trust from the public.

During the height of the economic crisis in Indonesia in 1998, foreign banks in Jakarta indirectly added to the stability of the banking system by allowing domestic residents to do their capital flight at home.

Although rich residents lost trust in national banks, not all of them transferred their financial assets overseas. Many simply shifted their deposits to foreign bank branches in Jakarta, thereby helping stabilize the overall stock of deposits.

The divestment will not be able to entirely recoup the Rp 60 trillion (US$6.6 billion) in bonds the government injected to recapitalize BCA in 1999.

But without new investors, BCA capital could erode steadily to a point that would force taxpayers to make a new recapitalization.

With so small a loan portfolio (8.5 percent of Rp 96.2 trillion total assets), and the bulk of its capital consisting of liquid government bonds, BCA significantly needs fresh funds to expand lending to generate earnings growth over time.

True, BCA has almost seven million savings accounts, totaling over Rp 40.5 trillion, which provide the bank with a strong cushion for funding.

But this large number does not automatically translate into account profitability, the factor that counts most for the bank's earnings. It seems the average account balance at the bank is relatively small, and individual customers with low balances are not a steady source of revenue for the bank as most limit their banking transactions to regular usage of the ATM network.

Demand deposit accounts at BCA, which normally make most of the high-value transactions to generate fee-based income, totaled only 16,208 with a Rp 18.43 trillion balance as of last December.

It should be noted realized that the 51 percent strategic sale will not bring in additional funds to the bank as the proceeds will be entirely transferred to the state budget.

Whoever wins BCA's majority stake should not only think long-term. The new owners should be willing to inject fresh funds, both to improve the bank's capital structure and to further modernize its information technology.

Amid the globalization of the financial services industry, banking is now inherently an information, communications and computation intensive industry.

Efficient and credible banks are vital to the economy because they reallocate money or credit from savers to borrowers and are at the heart of the clearing system to help individuals and firms fulfill transactions. No wonder that, in spite of the mounting deregulation drive all over the world, banks remain the most regulated industry.

It is no exaggeration then to say that the strategic sale of BCA could make or break the new LoI with the IMF.

The deal is also a litmus test as to whether foreign investors have now reconsidered Indonesia as a potential place for business.

The issue here is not primarily whether BCA is attractive or not, but whether investors want exposure to the Indonesian banking sector in view of the weakness of the legal system and the persistently fragile economic condition that makes banking operations still highly risky.

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Asset sale critical for recovery

Monday, August 27, 2001 By Vincent Lingga

JAKARTA (JP): State Minister for State Enterprises Laksamana Sukardi should immediately embark on a nationwide public relations campaign to convince political leaders that disposing of the multibillion dollars of distressed assets currently controlled by the government is one of the most effective ways of speeding up the economic recovery.

The cash-starved economy cannot afford further delay in the sale of the distressed assets currently managed by the Indonesian Bank Restructuring Agency (IBRA), the country's most powerful economic organization, now under Laksamana's direct supervision.

The rationale raised by strong proponents for delay among the House of Representatives -- waiting for the market condition to improve in order to gain much better prices -- is quite sensible and legitimate.

But this position is only viable in a normal situation. It is not feasible for distressed assets and certainly not possible in the current climate where the economy continues to bleed, the state budget deficit is about to explode to a unsustainable level and the quality of the Rp 600 trillion (US$69 billion) worth of assets (book value) under the management of IBRA deteriorates.

The dilemma here is that, without a significant jump-start in asset sales, the nascent recovery will remain fragile. Endless debate about the issue of a 'fire sale' or that 'the country may risk being controlled by foreign investors' will only prolong the suffering of victims of the economic crisis.

Inordinate nationalistic sentiment against foreign investors buying the assets will not get the nation anywhere. Instead, what the nation may inherit is a lost generation of millions of children deprived of basic education and health, and millions of unemployed people losing their dignity.

Asset sales will produce several substantial benefits to the economy. First of all, the measure will generate additional revenue for the government, enabling it to contain its budget deficit.

Without a significant, steady cut in the debt burden, the budget deficit could eventually explode to an unsustainable level, thereby increasing the country's risk, as perceived by the international market, worsening the economic woes.

More important than raising cash is the fact that asset sales will speed up corporate restructuring, as the buyers (new investors) will certainly move fast to improve business efficiency in order to increase the value of their investment. As more of the debt-ridden business entities become healthy, the economic recovery will strengthen and this process will in turn increase the value of remaining assets that have yet to be disposed of.

Experiences of asset acquisition by foreigners in Thailand and South Korea, which have been enjoying stronger recoveries, show that the employees of acquired companies welcomed new investors as a better alternative than foreclosure or joining an unemployment queue.

New investors bring with them an international reputation, greater professionalism and higher expertise. Rather than lamenting that they belonged to a bankrupt company, workers felt that they were chosen as partners by new investors.

This raised morale.

Certainly, selling distressed assets in a volatile economic climate such as the one Indonesia is now mired in, could only be possible with substantial discounts. Even with very cheap prices, very few foreign investors have been interested in entering the country, given its weak legal system, security problems in several provinces and the legal limbo in various provinces caused by the transition from a centralized government to regional autonomy.

Just look at the first tender of a shareholding in Bank Central Asia, supposed to be the jewel among the assets held by IBRA, several few months ago. Theoretically, large, wealthy foreign banks such as Citibank, Hongkong and Shanghai Banking Corporation Ltd., ABN Amro Bank, which have been aggressively expanding operations in the country, should have fallen over each other in an attempt to grab that stake, given BCA's important role in Indonesia's payment system, with extensive networks and modern information technology.

But only two investment companies made bids for the 30 percent equity. IBRA sent out a lot of invitations but virtually nobody came to the party because of the risks. Worse still, the two interested investors --

Newbridge Capital and Indonesia Recovery Company Ltd. -- were treated badly. Following a controversy over the bidding process, the BCA stake is now being retendered.

House of Representatives legislators, who have strongly criticized fast asset sales, should realize that Indonesia is not the only country trying to sell distressed assets. Two other crisis-hit countries, Thailand and South Korea, are also in the market, and their overall condition is much better than Indonesia's.

As most national companies are now suffering from a depressed domestic market, heavy debt burdens and the excesses of bad practices (corruption, collusion and nepotism) in the past, most of the disposed assets could fall into the hands of foreign investors.

This phenomenon may raise a new wave of nationalistic sentiment over the risk of the economy being controlled by foreign interests, but the alternatives under the current conditions are severely limited. The problem is like a chicken-and-egg scenario.

Either the government holds firmly to or sit on the distressed assets and letting the economy remain in the doldrums or allows foreign capital to provide new strength until the national capacity is reinvigorated to take over the lead again.

Well-managed, highly competitive business units, though controlled by foreign shareholders, contribute more to the people's welfare through employment, tax payments and transfer of technology and expertise, than the national business conglomerates that dominated the economy before the 1997 economic crisis ever did through their corruption and collusion with government leaders.

No one can say that the nation is on the verge of insolvency because the debts are still negligible compared to the total value of the country's economic assets. But these assets cannot generate revenue without being oiled by adequate working capital and investment.

Without fresh capital inflows, the economy could entirely collapse under a devastating liquidity crisis. Just look at the national debts. Government debt alone is much bigger than our gross domestic product (GDP). Including corporate foreign debt, the nation's total liabilities are now almost 150 percent of the GDP.

However, new direct foreign investment under the present circumstances is feasible, mostly through asset acquisition, because most economic sectors are still underperforming, with excess production capacity as a result of the 14 percent economic contraction in 1998.

In fact, foreign acquisition of assets could serve as a catalyst for other investors to enter the country and accelerate the corporate restructuring process through the introduction of good governance practices.

As more restructured companies operate soundly, they become viable corporate borrowers for banks, which have until now been restricted to small-scale business and consumer loans.

The government, therefore, urgently needs to break the ice in asset sales. Most importantly though, is that the transaction should be conducted through an open, competitive bidding system to attract the best investors with a long-term interest in the country's economy.

Similar to asset sales, corporate debt restructuring that is also under IBRA's responsibility, needs to be speeded up to enable the debt-ridden businesses to regain access to new credit lines to fund operations.

Needless to say, corporate entities play an important role in putting productive capital to use and providing gainful employment. They are the engine of the economy and unless they are rehabilitated there will be no real recovery.

Restructured debts will also greatly assist banks as they can eventually buy back or exchange their recapitalization bonds with the restructured loans, thereby expanding their credit portfolio at minimal expense and cutting down the state budget costs of financing the interest payments on bonds, which this year alone amounts to Rp 61.2 trillion ($7.2 billion).

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Market will give Cabinet benefit of the doubt

Friday, August 10, 2001

President Megawati Soekarnoputri's Cabinet is an excellent start for the new government to work with, Hadi Soesastro, an economist and executive director of the Centre for Strategic and International Studies, told The Jakarta Post.

By I. Christianto & Vincent Lingga

Question: How do you see President Megawati's Cabinet?

Answer: The Cabinet is much better than what had been anticipated by the market. What I am greatly impressed with is her bold move to appoint technocrats (Dorodjatun Kuntjoro-jakti and Boediono), whom she has never worked with, to the most important economic portfolios.

Doesn't that decision lend high credibility to her Cabinet?

Precisely. That is what I greatly admire about her; putting aside her political party interests to form a working team that gains market and political acceptance. Previously, most analysts expected that only one or two technocrats would be appointed to the economic portfolios, given the competing political party interests she had to cope with.

Don't you have any reservations about the Cabinet?

Again, I should stress that the market praise of the Cabinet is a good asset to capitalize on. But the Cabinet has to get to work immediately to prove itself. Megawati has just created a garden full of beautiful flowering plants, but one still wants to see whether the plants will be able to bloom in the garden. But I'm quite sure the market will give the Cabinet the benefit of the doubt.

Do you think the accommodation of major party members in the Cabinet will guarantee full cooperation of the legislature?

Theoretically, it should. But then we will have to see whether the political party leaders understand the consequences of their participation in the Cabinet.

The House had intervened too much in the government under Abdurrahman Wahid's leadership. But that was partly because then chief economic minister (Kwik Kian Gie) encouraged the House members to meddle with the technical details of policy measures such as privatization and asset sales. The then ministers did not want to be blamed for any possible mistakes that might occur later.

What's the Cabinet's top priority regarding the economy?

Top priority on the economic agenda continues to be fiscal sustainability, including prudent debt management, bank restructuring and asset recovery.

But will the Indonesian Bank Restructuring Agency (IBRA) be able to meet its tasks of asset recovery and debt and bank restructuring?

I think IBRA itself should first undergo total restructuring. I don't see a high standard of transparency and accountability at the agency. When established, IBRA claimed to be an organization full of highly competent professionals, but it has turned out to be the most backward and non-transparent of institutions. It is understandable that IBRA's highly paid staff want to take advantage of the limited operation period of the agency while trying their best to avoid any responsibility for any actions they make.

What about the role of the central bank, Bank Indonesia?

Bank Indonesia is expected to act as an anchor to provide confidence to the market. But this supposedly independent institution is also rotten; devoid of accountability. It should have been dissolved, replaced with a completely new, clean central bank just like what was done in the Philippines.

Is it a good idea?

Well, this is a matter of organizational culture. IBRA and Bank Indonesia were not well prepared to execute their tasks.

How do you see the privatization program for state-owned enterprises (SOEs)?

The government has so far focused the privatization program on the most commercially lucrative among the 160 or so SOEs. This approach is not correct as it zeros in on raising cash instead of an overall reform to make them competitive.

Privatization should also include overall reform of all SOEs, including the small ones, to make them highly competitive and attractive to investors.

The government should act firmly on its privatization, not allowing itself to be held hostage by the House. There were several cases where the House was able to cancel a privatization project. This will scare away domestic and foreign investors.

How do you see the appreciation of the rupiah?

There are two factors why a currency strengthens; conducive climate and intervention from the central bank. The intervention will only work only if it is in line with the expectation. Not all kinds of intervention will work even with an injection of hundreds of millions of dollars to beef up the rupiah rate.

When Megawati took power (July 23), the climate was in line with the market expectation, then the central bank boosted the climate with an intervention of a reported US$150 million.

I would have done the same if I were the central bank governor but for different reasons. The bank governor would have intervened to show that the market was very happy with the fall of Abdurrahman Wahid.

How do you predict the state budget for 2002?

The current budget envisages a deficit of some Rp 54 trillion. The government expects to get Rp 20 trillion in foreign loan disbursements, Rp 27 trillion from asset recovery by IBRA and Rp 6.5 trillion from privatization of SOEs.

But like most other analysts, I doubt that the government will be able to achieve the target revenues from asset sales and privatization.

So you see, it will be an uphill task to plan the 2002 state budget. The government will most likely need a month or so to prepare its budget proposal. A lot of things must be considered, for instance, the impact of fiscal decentralization which will affect the central government's revenue, the plan to increase civil servants' wages and how to repay and service domestic and foreign debts.

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RI state companies to face bumpy road of reform

Features News - Sunday, May 06, 2001

Indonesia, Inc., Privatising State-Owned Enterprises; Tanri Abeng; Times Academic Press, Singapore, 2001; 224 pages By Vincent Lingga

JAKARTA (JP): Tanri Abeng has this message of caution for officials responsible for raising Rp 6.5 trillion (US$542 million) from the sale of 12 state-owned companies this year: "Don't go for fast-track privatization".

"When I tried to push through a series of quick privatizations I encountered enormous opposition from state company managers, vested interest groups and nationalistic elements," Tanri says in his book Indonesia Inc.

The 224-page book, written in English and published recently by Times Academic Press, Singapore, documents Tanri's experiences in trying to reform the 164 state companies in operations when he was the minister of state enterprises under former president Soeharto from March to May 1998, and then under former president B.J. Habibie between May 1998 and October 1999.

He describes how, in an environment characterized by very little public trust in the government, it was even more difficult to persuade people that ministers or other officials were trying to do the right thing.

"The effect of all this was to severely undermine our attempts to promote privatization," he says.
Tanri, who in the early 1990s was dubbed the million-dollar manager due to his great success in managing several foreign businesses, tells us how he found himself entangled in the government bureaucracy and power politics, having to navigate through different sets of conflicting interests.

He served in the last two months of Soeharto's more than three decades of authoritarian rule, observing how Soeharto treated the government as a vast Javanese kingdom and used state companies as cash cows for his family members and close associates.

Strikingly different, Soeharto's successor Habibie ran his cabinet like a chief executive officer chairing the board meeting of a large conglomerate, involving his ministers and key advisers in vigorous, open debates on policy matters.

It was against this backdrop of volatile bureaucratic and political climates that Tanri struggled to execute his task of restructuring the largely inefficient and corruption-infested state companies at a time when the country was mired in its worst-ever economic crisis.

As well as intervention from the Soehartos and their cronies, Tanri faced the delicate challenge of warding off meddling by other cabinet ministers who had also used state companies to their personal benefit.

The problems arose from the fact that, before the creation of a special ministry of state companies in March 1998, these enterprises were under the supervision of the various ministries, depending on the nature of their business.

Even before starting his job, Tanri was faced with the formidable task of setting up a ministry, organizing its structure and recruiting staff within a severely limited budget allocation.

He initially planned to set up a holding company, instead of a ministry, following the successes of Malaysia's Khazanah Holdings and Singapore's Temasek Holdings which manage state companies and government investments. He was forced to scrap the plan though, because it required a new law as a legal basis, something that could take years to enact.

The book is not simply an account of his experiences, but more an analytical review of how the politics of reform in state companies in a developing country like Indonesia should be conducted.

The findings of his diagnosis of the main problems besetting state companies are not much different from the conclusions of past studies on Indonesian public-sector companies made by academics: excessive government intervention, overly bureaucratic decision making, poor-quality managers and lack of accountability.

But the book delves deeper into describing the master plan he formulated immediately after the ministry was in place. This masterplan outlines the policies, methods and procedures his ministry would use for the reform and privatization process, serving as a main guide for all policy measures related to state companies.

He also describes a step-by-step approach to state company reform and privatization, explaining in detail the procedures and steps that should be taken in launching an initial public offering, private placement or finding a strategic alliance.

Tanri designs blue prints for the restructuring of state companies according to their industry and outlines efforts to increase their market value through what he calls value-creation programs.

Ultimately, Tanri's every move within the privatization process put him in the spotlight, leading to accusations by analysts and politicians that he lined his own pockets, as well as raising funds for the Golkar Party, which then supported Habibie.

Judging from the procedures and the step-by-step approach he set for every stage of the privatization process it would actually be rather impossible for him or his officials to skim off money for themselves.

One of the procedures, for example, required all money paid by investors for shares in state companies to go directly to the ministry of finance. As in a company, the functions of cashier and bookkeeper are separated.

Yet due to the pervasive distrust of the Habibie administration, which was seen by the public simply as an extension of the Soeharto regime, allegations of corruption soon became the main issue he encountered in his short career.

Public suspicions were not the only challenge facing his ministry though. With foreign and domestic investors having withdrawn their money during the peak of the crisis in 1998, it was then extremely difficult to find buyers for state companies.

Then state company managers and parties with a vested interest in the companies mounted strong opposition to the privatization, fearing that they would lose their lucrative positions with the entry of new investors, or shareholders.

Under pressure to raise money for the state budget, Tanri selected Semen Gresik as the first company to be privatized. As soon as he announced the plan publicly, including the steps and procedures for the bidding, two securities firms closely aligned with the Soehartos approached him.

Makindo allied with Swiss Holderbank cement company, and Bhakti Investama (partly owned by Soeharto's daughter Titik Prabowo) aligned with German Heidelberger cement company, wanted to bid for Semen Gresik.

"Worried that this might lead to a special deal for Holderbank entirely in violation of the system-based program I promote, I then approached Soeharto and outlined my intention to follow my-step-by-step privatization system ... and to my pleasant surprise, he told me 'to do what is in the best interest of the country'."

After several rounds of bidding, Mexico's Cemex was finally selected as the winner with the highest bid, paying a 112 percent premium on Semen Gresik's share-market value.

Despite the obstacles and unfavorable economic conditions, Tanri eventually succeeded in selling the shares

of five state companies, bringing $1.03 billion into the state coffers between March 1998 and September 1999.

Tanri also claims in his book that his restructuring efforts succeeded in increasing the number of sound state companies, based on the government-set parameters, from 81 in 1997 to 89 in 1998.

Unfortunately, however, Tanri seemed to slip deeper into power politics by mid-1999, joining the Golkar

Party campaign to secure Habibie's election.

He was implicated in what is now known as the Bank Bali scandal -- the alleged embezzlement of state funds through a transaction with Bank Bali -- and was investigated by the Attorney General's Office.

Even though most primary defendants in the scandal have been acquitted by the court, and investigations have not yet resulted in any case against Tanri, his image as a first-class corporate manager was tainted.

Notwithstanding this perception, however, the concept, method, step-by-step approach and procedures he developed for the reform and privatization of state companies are an instructive insight on how the daunting task should be executed in a fully transparent and highly accountable manner.