Bankrupt or zombie firms

The latest annual survey of medium and large companies conducted by the Central Bureau of Statistics for its Manufacturing Industry Directory 2002, did not capture the pervasive sense of pessimism in the business community.

The summary findings of the survey, which were released on Tuesday, with the directory itself still being printed, instead seemed to show that the manufacturing sector is doing well.

The survey found that 835 medium and large manufacturing firms closed down in 2002, 2,049 went inactive and 767 others downsized, resulting in the layoff of 138,088 workers.

But the survey, which covered a total of 22,240 industrial establishments, also found 1,497 new manufacturing firms coming onstream in the same year, generating 133,793 new jobs.

Even at the height of the economic and political crisis in 1998, the bureau's manufacturing survey did not express the depressed condition most businesspeople felt. That year's survey found 1,686 new manufacturers had started up and only 1,545 had closed down.

It is therefore misguided to judge the true condition of the manufacturing industry wholly on the findings of the survey, as it covers only the names, addresses, products and number of employees at medium-sized manufacturers (with 20 to 99 employees) and large-sized ones (employing 100 or more workers).

The survey does not gather data on actual production. Nor does it specify whether the manufacturers covered by the survey have been handed over to the Indonesian Bank Restructuring Agency (IBRA) as distressed assets (collateral for bad debts).

Further making the survey's findings less than reliable as a proper analysis of the manufacturing sector is the extreme ambiguity in which the bureau classifies manufacturing firms as shutdown and inactive.

It is impossible to ascertain from the survey whether those companies classified as shutdown are technically bankrupt, have been declared legally bankrupt by the Commercial Court or district court, or have been liquidated or not.

But the Central Bureau of Statistics cannot be blamed for these deficiencies. The difficulty encountered by the bureau in distinguishing closed down and inactive companies from technically and legally bankrupt ones only reflects the decimated system of bankruptcy proceedings under the current bankruptcy law, which has hindered corporate restructuring, one of the core reforms needed to fuel economic recovery.

The absence of an efficient and effective bankruptcy mechanism has not only undermined the process of corporate restructuring, as debtors can make successive appeals to protract the process, but also has created a large number of zombie companies.

Further impeding the resolution of the mountains of debt owed by thousands of companies is the loss of confidence in the bankruptcy (commercial) court and district courts, as many of their decisions are perceived to be either technically incompetent or heavily influenced by corruption.

Just witness how IBRA, despite its extrajudicial powers, has so far lost most of its cases at the Commercial Court and how weak the government seems to be vis a vis large debtors. The loss of confidence in bankruptcy proceedings can also be noted from the annual number of bankruptcy cases filed with the Commercial Court, which fell from more than 100 in 1999 and 2000 to less than 40 over the last two years.

Unreliable bankruptcy proceedings also have distorted market competition as zombie firms, which have simply stopped servicing their debts, have advantages over those firms which painstakingly endeavor to service their debts.

Yet more damaging to long-term sound economic growth is the loss of opportunity created by the economic crisis to rid the corporate sector of inefficient businesses that in the past thrived, mostly on the benefits of corruption, collusion and nepotism.

As long as the insolvency mechanism is ineffective in providing a credible threat of bankruptcy against bad debtors, banks will remain highly averse to new lending, which is badly needed to fuel a higher pace of economic activity.

These problems make it imperative to amend the bankruptcy law to allow for a more efficient and credible process, and to address the competence and integrity of the Commercial Court by completely reviewing its mandate, procedures and operations.