Fri, 03 Dec 1999

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.