Govt policy on asset dispositions under IBRA

Govt policy on asset dispositions under IBRA

The following is an excerpt from the address of Coordinating
Minister for Economy, Finance and Industry Kwik Kian Gie at a
luncheon among others organized by the Indonesia-Australia
Business Council on Tuesday.

JAKARTA: The question of the role of the government in the
domestic economy has taken on new meaning over the past two
years. Through bank closures and restructurings the government
has taken control of over Rp 500 trillion in face value of
assets. Add to that the value of state owned enterprises and the
government now controls assets with a value of more than twice
the total capitalization of all of the companies listed on the
Jakarta Stock Exchange.

The new government has given considerable thought to the issue
of the role that the government should play in the economy. While
the government strongly believes that it must strengthen the
legal framework of the economy and ensure that the benefits from
economic growth are broadly distributed, it recognizes that many
of the excesses of the past arose because the government was too
actively involved in the detailed operation of the economy. For
this reason, it is our intention to actively reduce the level of
government control of the productive assets of the economy. This
is true, both with respect to the assets held by the Indonesian
Bank Restructuring Agency (IBRA) and the state-owned enterprises.

As the topic of today's discussion is asset dispositions under
IBRA, I will first discuss our policies with respect to those
assets, before briefly commenting on the privatization of state-
owned enterprises.

Most discussion of IBRA focus on its role in providing
resources to the budget to finance the debt service on the large
stock of public debt that has been issued over the past year to
restructure and refinance the banking system. While revenues from
IBRA's asset sales are of critical importance to fiscal
sustainability over the next few years, IBRA's role in supporting
the recovery of the economy is of even greater importance. This
means that as we evaluate the sale of assets, we need to consider
the social benefit of the sale, not just the level of funds that
will accrue to the budget. If the recovery that began earlier
this year is to be sustained, we need to effectively utilize all
of the assets of the nation. Given the size of the assets
controlled by IBRA, it is of the utmost importance that we ensure
that they are in the hands of the people who can most efficiently
utilize them. While the distractions of the past few months have
kept IBRA from proceeding as rapidly as was hoped, the way is now
clear for IBRA to begin to resolve the disposition of many of its
assets.

The modalities by which assets will be disposed will
necessarily be diverse. Clearly some assets are best sold through
open tenders. Others are best floated on domestic stock
exchanges. Others may require the participation of strategic
investors in the company prior to sale. Some may simply need to
be liquidated. We will rely on the professional staff that has
already been assembled at IBRA to make these decisions on a case-
by-case basis.

A number of specific issues must be addressed to our efforts
to effectively begin the process of disposing of IBRA's assets.
First, we encourage the participation of foreign investors in the
tenders for IBRA's assets. While I would be lying if I said that
I would not prefer to see IBRA's assets purchased by Indonesians,
we recognize that in many instances foreign firms will be able to
bring market knowledge and technology to the table that make
IBRA's assets worth more to them than to Indonesian firms.
Therefore, on behalf of the Government I wish to encourage
foreign investors to take an active role in pursuing the
acquisition of these assets.

Second, there has been a tremendous amount of printer's ink
consumed in discussions of whether IBRA should wait to sell
assets after the economy has turned around or should dispose of
them quickly. Let me be clear that IBRA is not a holding company,
nor is it an asset management company for the long run. IBRA's
role is to safeguard the assets transferred to it until such time
as they can be prepared for sale. We are keenly aware that there
are significant costs associated with managing the assets that
IBRA currently controls. In addition, like all of you businessmen
here today, the Government understands the time value of money.
It is certainly better to receive a billion rupiah today than to
receive a billion rupiah a year from now. Therefore, it is not
sufficient cause for IBRA to withhold and asset from sale that it
believes that it will receive more for an asset if it is sold
next year. Instead, in order to hold an asset, IBRA must be paid
enough more next year to cover both the costs of managing and
maintaining the asset and to compensate the government for its
cost of capital for the period. We believe that for most assets,
it is better to dispose of them in a quick but orderly fashion
rather than to hold them for the future.

Finally, if it has not been clear already, let me say that the
Government has no interest in using IBRA to redistribute assets.
At the same time, we are not interested in recreating a system
where a small number of companies control vast segments of the
economy. However, we will accomplish the latter goal through the
application of our law on monopolies, and not through the
selective distribution of assets to favored groups or
individuals.

At the same time, it is important for IBRA to be a dynamic
participant in the process of restructuring the debt of the
corporate sector. There is hardly a case of domestic debt
restructuring that does not involve IBRA, therefore its attitude
towards this process will determine how smoothly the negotiations
proceed.

The Government is taking steps to support IBRA in its efforts
to work with debtors to resolve all of the problem loans. For
instance, the Government is giving careful consideration to the
conditions under which it believes that it would be appropriate
for IBRA to agree to debt reductions as part of a restructuring
plan. At the core our review is the understanding that it is
better to put assets back to work then to leave them idle to
uphold a principle. However, haircuts will only be offered
according to transparent policies which will be reviewed by the
Independent Review Committee, and which will be subjected to
independent review as part of subsequent audits of the operation
of IBRA.

It is also important for IBRA to continue to work closely with
the other institutions involved in resolving the problem of
corporate debt defaults. Therefore, we are encouraging IBRA to
expand its cooperation with the Jakarta Initiative Task Force. At
the same time we are examining ways to strengthen the operations
of the Jakarta Initiative in cases where IBRA is not the lead
creditor.

We in the Government as well as the management team at IBRA
remain particularly concerned about transparency in IBRA's
operations. Given the central role in the economy that has been
thrust upon IBRA, it is important that its decisions be free of
even the appearance of impropriety. Therefore the Government is
taking steps to insulate IBRA from political interference. At the
same time, the management of IBRA is examining its own internal
controls to see where they can be strengthened and it is
developing new ways by which the public will be kept informed of
its activities. One step that IBRA will be taking is to publish
all of the audit reports of its activities. In this way, the
public will know how IBRA operates and can judge for itself
whether there are any problems in its activities. IBRA also
intends to create an ombudsman's office so that it can better
respond to questions and concerns raised by people outside of the
organization.

While the subject of the privatization of state-owned
enterprises was not included among the topics for discussion
today, I do not believe that we can talk about IBRA asset
disposal without also at least mentioning the Government's
policies on privatization. First, we are currently engaging in an
intensive review of the previous Government's plan for
privatization and the procedures used in privatization during the
past administration. Based on these reviews, we hope to shortly
develop our own program for privatization using improved
procedures. It is our goal to accelerate the privatization of
state-owned enterprises, particularly in those instances where
there is no compelling reason for state ownership while acting
decisively with respect to heavily-indebted companies that have
little prospect of future profitability. In this way we hope to
improve the efficiency of the economy while raising revenues and
minimizing the drain on state funds from loss-making enterprises.

At the same time, the government will be taking steps to
strengthen corporate governance within state owned enterprises.
In particular, we will be requiring that all state-owned
companies prepare detailed annual financial reports that will be
made available to their ultimate shareholders, the public.