IBRA finds itself in another mess for its loan sales

IBRA finds itself in another mess for its loan sales

Vincent Lingga, The Jakarta Post, Jakarta

The Indonesian Bank Restructuring Agency (IBRA) seems not to
be fully aware yet that credibility and accountability should be
its basic capital in executing its primary task, which is
disposing of the billions of dollars of distressed assets under
its management.

Or is this agency, the most vital instrument for the economic
crisis management, so fully controlled by corrupt officials that
it is truly a den of thieves, as many have alleged?

Almost all the major deals it has made since 2000 have been
dogged by controversy, battered by allegations of collusion and
corruption. This despite its supervision by an independent
oversight committee, ombudsmen, an internal audit department and
State Minister for State Enterprises Laksamana Sukardi,
supposedly one of the Cabinet members with impeccable integrity.

IBRA's auction of Rp 135.4 trillion (US$15 billion) of bad
loans last month, billed as the mammoth asset sale of the year,
ended in another controversy, causing uproar in the mass media
and forcing the government to set up a special task force to
investigate allegations of conflicts of interest and corruption.

The auction process started in early June with steps to ensure
a high standard of transparency. These steps included conducting
an information campaign through investor forums and the IBRA
website, and establishing clear-cut step-by-step procedures and
legal safeguards to prohibit original debtors from taking part in
the bidding.

The massive asset sale was warmly welcomed, as it was expected
to achieve three strategic objectives: releasing corporate debts
from the IBRA "hospital" to new creditors, allowing banks to
expand their loan portfolios and reducing the government's
domestic debt and its spending on the interest on bonds.

About 231 domestic and foreign investors submitted bids,
resulting in Rp 81.6 trillion in bad loans being sold for Rp 23.1
trillion, or a recovery rate of 28.3 percent. This rate was not
bad, compared to the 20 percent recovery rate achieved by the
asset managers in South Korea and 27 percent in Thailand.

But suddenly, boom! Allegations of collusion and corruption
erupted, and rumors began to fly of several IBRA officials buying
luxury cars.

As it turned out, a shareholder and key executive of PT Anugra
Cipta Investama, one of the biggest winning bidders, is Wicaksono
Abadiman, a cousin of Mohammad Syahrial, deputy to the IBRA
chairman in charge of asset management.

Yet more damaging to the credibility and perceived fairness of
the auction is the fact that Abadiman is a former president of
state-owned PT Bahana Securities, which together with another
state firm, Danareksa Sekuritas, had been a financial adviser to
IBRA and was heavily involved in valuing distressed assets at
IBRA, including a good portion of the bad loans entered into the
auction.

Why is this seemingly small matter so damaging to the
credibility of the auction process?

Because information is the key for investors to assess the
business prospects of debtors, and to set their bid prices
accordingly. It is quite obvious, therefore, that asymmetrical
information is quite a big disadvantage.

Anugra Cipta should not have been allowed to take part in the
auction, not only because Abadiman is a cousin of Syahrial, one
of the key decision-makers at IBRA, but primarily because he was
virtually an insider who had been well informed of many of the
distressed assets put on sale.

State minister Laksamana set a good example of good governance
in May by deciding not to appoint his elder brother as the new
president of state-owned PT Garuda Indonesia, even though Samudra
Sukardi was the most qualified candidate for that position,
judging by his technical competence, his managerial record and
the full support he received from the state company's employees.

But this time, he did not intervene to prevent a conflict of
interest.

Possession of information was naturally a great advantage,
because quite a large portion of the bad credits being auctioned
had not yet been restructured. Investors would still have to
restructure the dud loans they bought, a process that would
require formidable negotiations with corporate debtors about new
terms, repayment schedules and even some refinancing packages.

Anugra Cipta enjoyed another huge advantage because it allied
itself with Bank Mandiri, the country's largest bank, which was
set up in 1999 as the result of a merger of four state banks.
These now defunct banks handed over Rp 178 trillion of about Rp
292 trillion in bad loans IBRA took over from closed,
nationalized and state banks in 1998 and 1999.

True, there is no regulation that bans the relatives of IBRA
officials from taking part in transactions with the agency. But
if IBRA is truly serious about maintaining a high degree of
credibility, developing good governance and high standards of
business ethics, it should have prohibited the relatives of
senior officials with decision-making authority and those with
inside information from doing business with IBRA.

IBRA never seems willing to learn from its past mistakes,
including the alleged collusion-ridden auction of Indomobil, the
country's second largest automotive group, last December.

A two-month investigation by the Business Competition
Supervisory Commission earlier this year pieced together solid
evidence showing that the three final bidders in that auction --
PT Alpha Sekuritas Indonesia, PT Bhakti Asset Management and PT
Cipta Sarana Duta Perkasa -- conspired to determine the winner of
the tender.

The evidence clearly described how two bidders, Alpha and
Cipta Sarana, shared information and knowledge for their bids.
This conspiracy, the commission stated, was made possible because
Pranata Hajadi was an investor in both Alpha and Cipta Sarana.

It is sad to note that except for Bank Mandiri, most of the 20
largest winning bidders of last month's auction are investment or
securities companies, with little capital and not much experience
in debt restructuring, let alone refinancing capability.

The strategic objectives of bad loan sales can only be
achieved if most of the buyers are banks, capable of
restructuring the debts and refinancing the corporate debtors to
enable them to resume full-capacity operations.

Given its messy image, IBRA might learn a lesson from Indian
Minister of Privatization Arun Shouri, who also faces constant
criticism from fellow ministers, trade unions and
parliamentarians anytime he disposes of a state company. Yet in
less than two years, Shouri has succeeded in selling 22 state
companies, raising $2.2 billion.

As part of his overriding attention to maintaining the
integrity and credibility of every deal he makes, Shouri goes
the extra mile.

Shouri turns over all documents to the Indian auditor general
(the equivalent of Indonesia's Supreme Audit Agency) the day
after each sale, even though he is not legally required to do so.

IBRA may also be well-advised immediately to hand over all
documents to the Supreme Audit Agency after each major
transaction, to prevent controversy and to uncover early on any
wrongdoing that may have occurred.