Mon, 02 Oct 2006
Indonesia must push pace of reform or get left behind by other countries

David O'Brien, Jakarta

The issue of continued slow recovery of the Indonesian economy and in particular the perception of Indonesia as a suitable investment destination has again hit the spotlight. I particularly enjoyed the views expressed by Budiono Kusumohamidjojo in his article in The Jakarta Post of Sept. 18 and his conclusion that there is a need for courageous reforms.

At the macro economic policy level the right messages seem to regularly be issued, however actual changes in transparency, attitudes and processes remain notoriously slow.

The need for a sense of urgency first occurred to me after a recent Japanese investment forum. Here it became clear that the rest of the world is moving on and Indonesia seems to struggle to acknowledge the need to adapt to the rapid pace of change.

A review of surveys of investors by the Japanese bi lateral body JBIC provides an informative insight as to investors thinking over time. In 1998 Indonesia ranked in third place behind China and U.S. for Japanese external investment. By 2005 Indonesia had fallen to eighth place, having been usurped by India, Thailand, Vietnam, Russia and Korea.

This was further reiterated in the most recent World Bank publication on business competitiveness. Indonesia had slipped slightly further behind. In releasing the report it was pointed out that the issue was not so much a lack of reform in Indonesia rather than the pace of reform relative to competitors.

The longer term strategic thinking of the government is now reported to have shifted. Rather than be a mere exporter of natural resources the new direction is to utilize those resources within Indonesia. Foreign companies are now being encouraged at high levels to relocate energy dependent industries to Indonesia rather than import raw materials.

It is a laudable aim and will require great skill in implementation to be successful. Lower priced energy is certainly a plus but without the difficult micro economic reforms in the legal, education, labor and overall business environment it may not be enough to justify shifting industry.

About a month ago, at yet another investment seminar, BAPEPAM (Capital Markets Regulatory Authority) presented a comprehensive list of reforms it planned to undertake. The guests, including representatives of the Australian regulatory arm, ASIC enthusiastically greeted the plan.

As with the seemingly endless seminars that lead to no results, there are well drafted blue prints in place that seem to lack implementation. In the meantime Indonesian companies take advantage of the laxness and further harm the perception of the country for investors.

The recent history of Bumi Resources would seem to raise a number of questions in relation to transparency to the market and limited examination by the regulators. In May of this year to much fanfare it announced the signing of a sales and purchase agreement for US$3.25 billion in relation to key assets it controls.

The mines Kaltim Prima Coal and Arutmin had been earlier acquired for a price said to be in the region of $650 million. They were originally purchased from foreign owned firms that were required to sell down their controlling interest in line with the existing mining law at the time. This required divestment of a controlling stake in the mine to local investors after ten years of operation.

At the time of the announcement it appeared to be an opportunistic sale of key mines at a time of record commodity prices. However one of the most closely watched commodity price indices, the Reuters/Jefferies CRB Index, is now 16.5 percent below its May high, at a level last seen in July last year.

Some eyebrows were raised when the buyer was revealed to be a shell company owned by the Jakarta investment bank, Renaissance Capital.

Renaissance Capital was established in 2002 by a group of Deloitte Touche Tohmatsu partners. The firm faced conflict of interest concerns when both auditing IBRA (Indonesian Bank Restructuring Agency) and having a separate division advising on restructuring and divestments. The non audit team subsequently made the move to establish Renaissance.

Renaissance and its subsidiary Recapital Advisors have since been involved in the acquisition of a number of assets overseen by PPA. This is the entity created to dispose of those assets not divested by the end of the regulated term of IBRA.

In late 2005 this included the acquisition of 71.6 percent of Bank BTPN. This bank was formerly associated with Bakrie. In this case Credit Suisse assisted in raising $46 million to finance the deal. This transaction obviously served as a trial run for this new, much more ambitious play with all the same players back again.

Questions about the deal were first raised when it was announced nearly $1 billion of the proceeds would be directed at a major coal to liquids investment with South African technology leader SASOL. Something seemed awry when SASOL denied any knowledge of the deal within a week.

Credit Suisse and Renaissance spent months running around global capital markets in an attempt to raise $2.1 billion in debt. Another $700 million was committed by a Singaporean bank in the form of an exchangeable bond. The smaller proportional balance of equity proved just as difficult to source.

The information memorandum forecast to support such level of borrowings gave estimated EBITDA of $583 million. Subsequent events have surely led to many red faces and caused untold harm to any reputation that Indonesia was recovering as a location for lenders.

First half results have now been reported at an EBITDA level of $118 million. The fall was attributed to adverse weather conditions. However volumes of coal sold were not markedly different from forecast and sales prices have continued at as strong a level as forecast. The issue must therefore be on the cost side of things and one would assume that the mines now facing additional costs per tonne of coal mined.

At the same time as these new financial numbers found their way to the press, along came news of other previously undisclosed liabilities. There are alleged unpaid royalties in excess of $100 million and unpaid taxes of $40 million.

There would appear to be some cash flow difficulties for a business that in May was looking to secure $3 billion in debt funding. In the real world the regulator would be asking serious questions about disclosure of material information and the real purpose of the deal.

Structural reforms are how other countries are sustaining ongoing high levels of growth. It is hoped Indonesia hastens its own reforms to gain the trust of the investment community.

The writer is a Technical Advisor at CSA Strategic Advisory which assists businesses address change by originating strategy and successfully executing. He may be contacted at dobrien@csadvisory.com.



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