Government scraps IBRA's controversial debt repayment plan

Berni K. Moestafa and Febiola Desy Unidjaja, The Jakarta Post, Jakarta

The government has scrapped the Indonesian Bank Restructuring Agency's (IBRA) controversial debt extension plan, and has instead slapped a three month deadline on bad debtors to repay their debts.

"We basically went back to the deal they (the debtors) agreed to in 1998, but made additional provision for law enforcement," Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti told reporters after Thursday's Cabinet meeting.

The decision ended a nearly two-month review on the debt extension plan, which critics said favored indebted conglomerates at the public's expense.

In 1998, the conglomerates agreed to repay some $13 billion in state-funded emergency loans to their banks, that they had misused.

This was on top of some $43 billion in recapitalization bonds that the banks received, and on which the state budget continues to pay out $5 billion a year in interest.

But even though about $60 billion was spent on bailing out the banks, most owners have yet to start repaying the $13 billion that they have admitted misusing.

Their debt settlement agreements with the Indonesian Bank Restructuring Agency (IBRA) expire this year.

Within 30 days starting on Thursday, Dorodjatun said, legal counsel would evaluate the compliance of all debtors.

The outcome would be a list of cooperative and uncooperative debtors. The latter, upon receiving notification from state legal counsel, would have three months to settle their obligations.

"Legal action may include, but not be limited to, asset sequestration, criminal charges of corruption, jail, and travel bans," Dorodjatun said.

He was unable to explain how all this would be brought about.

Previous attempts to rein in errant bad debtors through legal means have proved futile. IBRA lost nearly all of the cases it brought to court.

Coordinating Minister for Security Affairs Susilo Bambang Yudhoyono admitted that debtors had taken advantage of legal loopholes, and said the government would have to "remove those loopholes."

Asked how this would be achieved, he said there was as yet no action plan. "We're building our plan on a case by case basis."

The country's infamous legal system has become one of the main reform targets of international donors like the World Bank and the International Monetary Fund (IMF).

But progress, if any, has been slow. With the government lacking the political will to purge corruption among judges, the court room has turned out to be the preferred battleground for the conglomerates.

This has been compounded by IBRA's weak legal position under the 1998 debt settlement deals it signed with the conglomerates.

One independent legal review of the Salim Group's Master of Settlement and Acquisition Agreement (MSAA) described the deal as unreasonable, unfair and void.

IBRA officials said the MSAA prevented effective prosecution, as debtors could only be classified as uncooperative at the end of the four year deal.

Under the MSAA, debtors are supposed to repay their debts by handing over assets of equal value to IBRA.

But the scheme, designed with the help of foreign consultants, prevents IBRA from securing more assets from debtors should the pledged assets decline in value.

This has resulted in the low recovery rate of about 20 percent that IBRA realized from the sale of Salim assets valued at Rp 52 trillion in 1998.

Five conglomerates agreed to settlement deals worth some Rp 88 trillion under the MSAA scheme. But IBRA said that only the Salim Group had complied with its MSAA.

The government has now decided to stick to the original deals without incorporating a debt restructuring scheme, dashing hopes of improving IBRA's recovery rate.

"Justice is expensive," said State Minister for State Enterprises Laksamana Sukardi in response to a question as to whether the government had compromised the recovery rate to assuage the public clamor that bad debtors would be brought to justice.

The question of priorities is one that has been dividing the government since IBRA first proposed the debt extension plan last December.

IBRA chief I Putu Ary Suta was reportedly complaining about how he was supposed to recover the money when Thursday's Cabinet meeting decided to drop his debt extension plan.

Elsewhere, Reuters has reported that the IMF welcomed the decision, calling it an encouraging move in the direction of providing better legal certainty.