Asia Times: No breaking the bank that Salim built


	August 15, 2001	atimes.com

Southeast Asia

No breaking the bank that Salim built
By Bill Guerin

JAKARTA - May 14, 1998, the second and worst day of riots in Jakarta, saw the destruction of Liem Sioe Liong's family home, burned to the ground by crazed rioters. For good measure, they had painted Anjing Suharto (Suharto's dog) on Liem's portrait and paraded it through the streets.

Less than two years later, on April 10, 2000, more than 1,000 pension fund managers, insurance company leaders and bank and security house executives attended a glitzy event in the Jakarta Hilton Convention Center's biggest room. They were there to see the pre-launch of Liem's Bank Central Asia's Initial Price Offering (IPO) slated for the end of that month.

Liem Sioe Liong, the founder of the Salim group, was once one of the richest men in the world, according to Fortune and Forbes. He built an empire and infrastructure that touched every Indonesian in one way or another. After befriending Suharto in the 195Os, the ethnic Chinese Liem, after changing his name to Sudono Salim, was No 1 crony when Suharto took power in 1965. Over the next 31 years, so much wealth was generated that in the early 1990s Liem's money machines generated almost 5 percent of Indonesia's economic output.

The world's largest flour mill, Bogosari, with a monopoly on the import, milling and distribution of flour, enjoyed control of 80 percent of the flour market. Other cash cows included Indofood Sukses Makmur, the world's largest noodle producer, which had 90 percent of the instant noodle market of more than 200 million people; and IndoCement, Indonesia's biggest cement producer supplying 70 percent of the cement for the country's construction booms, and which owned two power plants. Indocement still retains at least a 30 percent-stake in each of the plants, one in West Java and one in Kalimantan. The latter plant, still under construction, is to supply power to PT Indo Kodeco Cement, in which Indocement indirectly owns a 71.4-percent stake. Indomobil, with the biggest automotive sales revenue in Indonesia, and which holds a monopoly license to import cloves, the production of Indonesia's sweet-smelling cigarettes, much in the same vein made the empire.

Ethnic Chinese such as Liem provided the military and the Suharto elite with management skills, trading connections with the rest of the Chinese exiles and most of all, absolute discretion.

The proposed sell-off of 40 percent of the total shares of Liem's flagship, publicly-listed Bank Central Asia (BCA), which has sparked so much controversy recently, is only one part of a jigsaw that, when complete, paints a portrait of the whole Indonesian economy. Who runs the country, who provides the jobs, why there is always the need to walk a tightrope to balance ethnic issues, how the country would collapse without conglomerates - these are all parts of the whole picture.

BCA was taken over on May 28, 1998, after it had experienced a massive rush for a couple of days following the riots a fortnight before. During the rush, BCA enjoyed liquidity assistance (BLBI) from Bank Indonesia. This liquidity assistance was later converted into the government's share in BCA, making it the majority shareholder with 92.8 percent, while Salim held the remaining 7.2 percent.

This nationalization by the Indonesian Bank Restructuring Agency (IBRA), a consequence of the government injecting some Rp48 trillion (US$5 billion) of taxpayers' money in liquidity support, is why the sale of BCA shares is so necessary in an effort to recoup the cost of the bail-out.

IBRA is now under heavy pressure to conduct the sale of the bank in an open and transparent manner. Ah, transparency! Different meanings depending on who says it and when.

Transparency was a popular platform during most of former president Abdurrahman Wahid's watch and the term is being bandied about even more since the events of July 23 when he was replaced by Megawati Sukarnoputri. The "transparency" of the past where the BCA and its original owners, the Salim Group, are concerned, is abundantly clear to most Indonesians. Crony capitalism, to them, gave Liem and other Chinese vast wealth virtually on a plate. The ethnic and economic resentment towards the Chinese in general and "Um Liem" in particular is a de facto tenet in Indonesian society. It is hard not to taste the fear the ethnic Chinese tycoons and their poorer kith and kin must have felt when Suharto fell and the blood started spilling.

Conversely, it was the lack of transparency that finally cast a giant shadow over the leviathan. In the peak years from 1981 to 1995, most Indonesian conglomerates financed their capital needs with loans from their own banks. The central bank did limit such intercompany loans to 20 percent of a bank's portfolio, but these were powerful owners who simply ignored the regulations. Fifty percent of the BCA's loans, most of them in US dollars, were to other Salim companies. Hence, when the rupiah plummeted down to earth in late 1997, the BCA was left carrying the can with $2 billion worth of debt. The Salim Group, by using BCA funds for capital, and violating the legal lending limit requirement, had shot itself in the foot.

IBRA has been stalling over the sell-off. One reason is the altruistic need to sell assets into a harder market when it could expect higher prices, causing a delay that has unfortunately alienated many foreign investors. There is also widespread suspicion that IBRA has never wanted to sell Indonesian assets to foreigners. This seems hardly fair to an agency tasked with righting the wrongs of the past and creating wealth and capital for the country. Nevertheless, cynics see this as proof that deals have been done with the conglomerates.

The man in the street, student, unemployed or low paid worker, whatever, simply resents the idea of a crony comeback. This is where the conflict between the past and the future interface. The understandable emotion in the street parliaments belies the need to protect value and not destroy it.

The BCA is the best of many examples of the point. Most commercial company transactions in Indonesia and a large slice of the consumer market deposits and current accounts are with Bank Central Asia. It has more branches - 795 - across the archipelago than any other bank, and overseas branches in New York, Hong Kong, the Bahamas and Singapore. The BCA has more than 1,800 strategically located ATMs in cities in Indonesia, ensuring wide accessibility for its customers, and its ATM card is also a debit card that is accepted in many major stores in Indonesia.

The BCA's savings account, "Tahapan BCA", is also the most popular savings account in Indonesia. The bank has about 2 million customers who make an average of 1 million transactions daily. The BCA has integrated its service into offices, ATMs and the Internet, with its excellent "klikBCA" online banking facility.

Now the government, via IBRA, plans to sell a 30-percent stake in BCA through private placement some time this month. A total of 22.5 percent of government ownership was sold off through the first IPO in May 2000, and the government agreed with the International Monetary Fund to sell another 40-percent stake in BCA. The government initially planned to sell this 40-percent stake via private placement to obtain optimum proceeds, but the House of Representatives demanded a double-track mechanism via a combination of secondary offerings and private placement to help maintain transparency amid strong rumors of a Salim Group comeback.

IBRA then sold the first 10 percent through a secondary public offering that ran from July 4 -6. This was risky. If the entire 40 percent stake were offered through private placement, strategic investors would have been happier to pay a premium price.

IBRA was supposed to announce the winning bidder for the 30-percent BCA shares block in late June, but balked, saying it wanted to pursue a better deal. Even now it remains unclear who the bidders are.

The latest of IBRA's six chairmen in three years, I Putu Gede Ary Suta, has pointed out that confidentiality agreements preclude disclosure of bidders' names and has also warned bidders of the legal consequences if they join hands with the Salim Group in buying BCA shares.

Amid this uncertainty came the news of BCA share manipulation shortly before the bank underwent its secondary public offering. The Capital MarketSupervisory Agency (Bapepam), following a preliminary probe into the charges), has narrowed its investigation down to 14 stock investors and 15 securities firms, from a total of 172 securities firms examined, in relation to the suspected manipulation of BCA share prices

Between May 15 and June 12, several securities companies had dominated the purchase of BCA shares, causing price surges. But from June 13 until June 29, the same securities companies dominated the selling of BCA shares,leading the market into panic selling that drove down the price of the shares. Investors manipulating BCA share prices would derive capital gains by buying cheap and selling high, although if found guilty of manipulating share prices they face penalties of up to Rp15 billion and jail terms of up to 10 years

Both the second IPO and the bidding process for "strategic" investors floundered in controversy and allegations of collusion and corruption against several House members and executives of IBRA. The bidding is now to be reopened following widespread protests that only two final bidders, investment companies Newbridge Capital and Indonesia Recovery Company Ltd (IRC), were short-listed from more than 50 initial bidders, which included many foreign banks interested in establishing a foothold or expanding operations in Indonesia. Transparency?

Newbridge Capital at least had the right credentials following its successful turnaround of Korea First Bank less than 18 months after its acquisition, but what about IRC? This company is reputed to be an investment vehicle for the Salim family, born of the financial reengineering son Anthony is so fond of. Anthony Salim was appointed CEO of his father's empire in 1992 and transformed the group from an old-fashioned trading house into a sophisticated global conglomerate.

IBRA needs to work with Salim to ensure returns are delivered to shareholders, be it to IBRA, the government, (read taxpayers) or the eventual new private owners. There is no place for emotion.

With a new government in place, any encouraging signs of growth in Indonesia's economy could make the issue pivotal. Glenn Yusuf, then IBRA chairman, said in 1999, "The debtor has a choice. They can play hardball with me or they can work together with me." This confrontational approach failed dismally, and in the ensuing months encouraged many conglomerates to lobby the politicians, and even then-president Wahid himself, with the result that pending legal action against three conglomerates was blocked by Wahid.

This family empire built over more than half a century, although temporarily devastated by Indonesia's economic collapse, is not going to go under. The widespread tentacles of crony capitalism, the difficulties in generating true reform in a country where conglomerates still dominate the economy, the dangers to stability inherent in branding any Chinese ethnic tycoon as a criminal; these and other factors are why Indonesia will not bite the bullet and go the last mile to bring down the Salim Group.

Certainly, the monopolistic licenses, franchises and concessions that made Liem a baron in coffee, rubber, sugar, wheat, flour, noodles, rice and cement have gone. But the infrastructure of his empire still, to a large degree, holds Indonesia together. Liem himself wrote in a recent group annual report, "Our companies are intimately involved in the day-to-day lives of literally millions of Indonesians."

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