Asset sale critical for recovery

Asset sale critical for recovery

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).

The author is a staff writer of The Jakarta Post.