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.