Asia Times: Choppy seas for Indonesia's economic admiral


	November 9, 2001	atimes.com

Southeast Asia

Choppy seas for Indonesia's economic admiral
By Bill Guerin

JAKARTA - International lenders have this week given Indonesia six months to prove commitment to reform, in return for up to US$4 billion in loans to plug the gaping hole in next year's budget.

The pressure is on yet again to expedite the sale of state assets and restructure the diverse portfolio of the Indonesian Bank Restructuring Agency (IBRA), and it is no longer an issue to be debated endlessly in the House of Representatives.

The World Bank warned of the consequences of the lack of reforms by the government of President Megawati Sukarnoputri. "Official creditors are becoming increasingly wary of pledging support for policy reforms when the track record gives little comfort," the bank said in a report out this week

Donors may withhold some $900 million of a promised $2.6 billion and the World Bank adds, for good measure, "So their [loans] disbursement should not be a foregone conclusion."

This is the new ball game facing the latest Indonesian administration. Disbursements of ongoing and new loans pledged by the Consultative Group on Indonesia (CGI) may depend on Indonesia's policy performance. What are the issues that encourage such bluntness from lenders? Simple. The annual meeting of the CGI, now under way in Jakarta, wants faster economic restructuring, privatizations and a clampdown on corruption.

All of these impact on, and are impacted by the tasks of the State Minister of Investment/State Enterprises, Laksamana Sukardi, who also controls IBRA, born out of the need to oversee the restructuring of the fallen banking system, and a 650 trillion rupiah ($76 billion) bank bailout in 1998.

Laksamana, through IBRA, supervises billions in bad debts accrued by these banks and their assets surrendered as collateral. He controls assets with a book value of at least $50 billion, including companies pledged by former bank owners, bad debt from bailed-out banks and the richly diverse assets of the banks themselves.

The sell-off of IBRA assets ought to be much easier than the implementation of the long planned privatization program, but both critical missions are well and truly off the path, smothered by powerful vested interests, rampant nationalism, and decades of gross imbalance of revenue splits between the provinces and Jakarta.

The stewardship of the 44-year-old Laksamana Sukardi, reappointed by Megawati to the same portfolio he held under her predecessor Abdurrahman Wahid, is now the focal point of a "mission impossible" to right the wrongs of three decades of rule by Suharto. At the same time, Megawati inherits the consequences of 20 months of political bickering which, in an administration of which she was vice president, managed precious little in the way of reform.

The rupiah has steadily weakened from 8,200 to the US dollar after Megawati assumed power on July 23, and announced her gotong royong (mutual cooperation) cabinet. There is growing disbelief and disenchantment over the seeming inability of her administration to implement the economic reform programs wanted by the international moneylenders. The events of September 11, setting off fears of a global recession and a major conflict between the West and Islam, have made it even more difficult for Jakarta to get down to work, and consequently the rupiah is now back to a level of around 11,000, the same as in the final days of former president Wahid.

Laksamana (the name means admiral in Indonesian) was dismissed by Wahid six months into his watch, amid wild and unproven allegations of corruption. Laksamana left gracefully, although he continued to build a high media presence, culminating in the launch, a year ago, of his own built-in media infrastructure, the web-based forum and analysis portal, Laksamana.net

He had started off his first stint with a bang, when, in November 1999, he went highly public with accusations that Marimutu Sinivasan, owner of the debt-riddled Texmaco group, had used his ties to former president Suharto to seek sanction for $1 billion in loans from the state-owned Bank Negara Indonesia (BNI). The issue petered out, but not before Wahid himself ordered a moratorium on further investigation of the Texmaco group, and the government failed to honor a promise to the International Monetary Fund (IMF) that it would transfer Texmaco's bad debt from BNI to IBRA.

Laksamana is a reformist, one of few in Indonesia, and his closeness to Megawati was the reason for optimism that he could kick start the top-heavy IBRA into action. Indonesian watcher Jeffrey Winters, a long standing friend of Laks, as he is known to his friends, said at the time, "His choice symbolizes a determination to clean things up and run them according to the rule of law." This was based on the somewhat cozy idea that Laksamana, like his leader, Megawati, is somehow symbolic of reform and good governance.

This immediate post-Suharto period, however, has been characterized by a lack of whole-hearted commitment to reform programs, combined with bad policy making, all in an atmosphere of mutual distrust between the IMF and the various Indonesian "economic teams".

Well connected, powerful and clever debtors, a bureaucracy noted for its resistance to change, and a parliament unable to decide a common policy towards privatization, are only some of the problems faced by Laksamana. His Herculean task of winning back investor confidence and beefing up the government's coffers is little different from when he was in the post before, except that now he has to somehow get Indonesians, especially its legislators, to accept that the actual value of IBRA's assets is much lower than the original book value of 650 trillion rupiah. I Putu Gede Ary Suta, IBRA's latest in a long line of chairmen, estimates the true value as closer to 167 trillion rupiah.

The weak and vulnerable rupiah makes the task of reforming the state enterprises (BUMNs) that much more difficult. It is this weak currency, after all, which has given the BUMNs such false protection against fierce competition and the need to be professional.

The setbacks in the planned sale of state-owned cement producer PT Semen Gresik to Mexican cement giant Cemex SA de CV have further spooked nervous foreign investors and last week Standard & Poor's downgraded the country's sovereign credit rating to CCC, with a negative outlook.

Public support for selling off IBRA assets once owned largely by ethnic-Chinese businessmen is almost guaranteed, but clearly the state-owned companies are another matter and, under the guise of protecting national interests, the power elite and the upper echelon of public-sector executives, will make sure their vested interests are protected by fighting to the bitter end.

The history of the Wahid administration was one of blatant interference, even in the routine decisions of IBRA, but worse still, allowed legislators free rein to preach from the nationalist platform whenever the issue of asset sales was debated. For many legislators the mere mention of assets sales is like a red rag to a bull - they believe it is akin to selling off the country.

The sell-off of Bank Central Asia (BCA), for example, the country's best retail bank, is going nowhere fast. Before Laksamana took over, IBRA had made two futile attempts to float off a 30 percent stake in BCA to a strategic investor, but there were only two bids, both desperately low and both allegedly linked to the bank's former owner, Anthony Salim.

The Chinese tycoons need to be encouraged to bring back from abroad very large sums of money, perhaps up to $10 billion, but this will only be when these super-players believe that they, and their assets, will be safe in their country of birth, Indonesia.

Laksamana has been advising Megawati, one way or another, since 1993 and the two families are reportedly very close. Laksamana's grandfather was a friend of Megawati's father, and Indonesia's founding president, Sukarno. In the early 1990s Megawati, thanks mainly to Suharto's effective muzzling of her, was not politically or business-wise part of the "in" crowd. Megawati rewards loyalty, and this minister will not lack her personal and presidential support, but will it make any difference? Even if the admiral was able to get the investment machine rolling again and improve the fallen image of the country, it will be a long time before Indonesia sees steady growth in investment.

Laksamana still needs to address the inconsistency in deregulation packages, the ultra-slow pace of getting things done due to bureaucratic sloth, the inaccuracies inherent in a system bereft of computerization, and of course, the corruption that adds substantial under-the-table added costs to doing business. He has to clear the decks in the largely comatose BUMN arena, and encourage professionalism and a capitalistic "business is for profit" ethic among these large, top-heavy organizations.

IBRA, tasked with completing its asset disposal program by 2004, has only sold a fraction of the assets under its control. After countless agreements and pledges to reduce public debt, now more than 100 percent of GDP, precious little cash has been raised. Throughout the first half of this year, privatization generated nothing at all and only 11.25 trillion rupiah was achieved from IBRA asset sales. The budget deficit, on the other hand, is estimated at 42.1 trillion rupiah, around 2.5 percent of GDP.

External financing from the CGI is expected to plug the gap, and the privatization and asset sales were meant to cover the balance. As mentioned, the stalled divestiture of Semen Gresik, the country's largest cement producer, shows the scale of the problem, and just what confronts Laksamana. The world's third largest cement manufacturer, Cemex, struck a deal with Jakarta that would have given it majority ownership in Semen Gresik. Cemex was ready and willing to buy its 51 percent by coughing up $287 million for a 35 percent stake and another $131 million to acquire the publicly-owned 16 percent.

To date, the deal remains in limbo. A powerful mix of vested political and local interests has succeeded in sidelining a sale which, in one fell swoop, would have given Indonesia millions of dollars - more than the last, long delayed $400 million IMF aid tranche, that precipitated such attention to the commitment, or lack of it, of the Indonesian administration.

Earlier, the House of Representatives (DPR), insisted on reviewing a $350 million deal to sell 260,000 hectares of palm oil plantations, and went into full confrontational mode, insisting that IBRA must seek parliament's approval before selling any state assets. In the end, reason and logic prevailed, but the issue further scared would-be strategic foreign investors, and the die was cast for further battles.

Laksamana was reported in August of saying that some people were willing to pay millions of dollars to keep him out of the cabinet, and, while saying that his job was not to conduct a witch-hunt of corrupters, he cited the need to fight KKN (corruption, collusion and nepotism) and the "abusive power" of the cronies of the past, as the main challenge for the country.

He does not shy from the challenge and realizes that he may be on a hiding to nothing anyway. He has also been quoted as agreeing that IBRA and the BUMNs formed a lucrative portfolio, and that if he failed, then the party to which he belongs, the Indonesian Democratic Party of Struggle (PDI-P), will blame him, and this would also impact on the chances of the party - and its leader Megawati - in the general elections scheduled for 2004.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti lays the blame fair and square on the legislators, "We have lost precious time and may well not complete the transaction before the end of the year," Dorodjatun said on Wednesday in a speech to the CGI leaders.

Failure to complete the BCA deal this year would be the third delay of its sale since the sale program kicked off early last year, and would mean that Indonesia was reneging on part of its August 2001 Letter of Intent (LoI), which forms the basis of the $400 million loan package from the IMF. This was suspended last year mainly due to the Wahid government's delay in the BCA sale

The new LoI commits Megawati's government to help plug the 2001 state budget deficit with 27 trillion rupiah from the proceeds of asset sales and another 6.5 trillion rupiah in privatization proceeds. If much of the money does not come from a BCA sale, where will it come from?

The softly-spoken ex-banker, in control of 1,300 trillion rupiah worth of state assets, bigger than Indonesia's GDP, has, then, a fundamental role in the success, or otherwise, of the Megawati coalition and the economic fate of 210 million people.

He may have little choice now but to wait and watch, as extremely poor market sentiment, coupled with doubt from the lenders, causes a delay while those who matter judge whether or not this latest administration has any commitment, or even has the power to introduce reform.

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