Laksamana Sukardi's priorities

Laksamana Sukardi's priorities

By James Castle and Todd Callahan

JAKARTA (JP): President Megawati Soekarnoputri's new
government brings with it the hope that privatization and IBRA
asset sales can be put back on track. The President is already
off to a good start by selecting a strong team to handle the key
economic portfolios and elevating the state owned enterprises
portfolio back to ministry status. The decision this week to
place the Indonesian Bank Restructuring Agency under the control
of State Minister of State Enterprises, Laksamana Sukardi, also
indicates greater seriousness about expediting asset sales and
restructuring IBRA's troubled portfolio.

Much of the economic pain Indonesia has suffered since its
1997/1998 has been self inflicted -- the result of bad policies
and a lack of commitment to reform programs that various
administrations have agreed to with the International Monetary
Fund in return for financial assistance.

Nowhere has this been more apparent than in the government's
policies concerning privatization and asset sales. Although the
authorities have signed numerous agreements and pledged to reduce
public debt, which currently stands at more than 100 percent of
gross domestic product, little has been done to raise cash by
privatizing state owned enterprises and disposing of billions of
dollars worth of assets under the control of IBRA. Through the
first half of this year, for example, no proceeds have been
generated from privatization and only Rp 11.25 trillion has been
collected from IBRA asset sales.

Why the hold up? In the past, government officials have
explained the slow pace of progress as the result of a weak
market and low investor interest. In fact, it is no secret that
many high officials continue to believe it is in the nation's
best interest to postpone sales, ostensibly until a more
conducive atmosphere allows for higher prices. This rationale was
used last year to delay divestment of government stakes in
companies such as Bank Central Asia, Bank Niaga, PT Pupuk Kaltim,
PT Indofarma and Perkebunan IV.

Related to this point is the complaint that the IMF should not
involve itself in setting timelines for the sale of specific
assets, insisting this practice only lowers prices by creating a
buyer's market.

While there may be an element of truth to the last point, it
is wrong to assign blame to the market. Indeed, if the market
were such an important factor, other national restructuring
agencies in Southeast Asia would not be outperforming IBRA by
such huge margins. Thailand, for instance, also has "market"
problems but its Financial Restructuring Agency had disposed of
70 percent of the assets on its books through the third quarter
of last year.

IBRA, which is tasked with completing its asset disposal
program by 2004, has only sold a fraction of the assets under its
control. The fact is that investors' asset valuations might be
lower than some officials' expectations, but the appetite for
purchases is still very healthy. The type of political
uncertainty Indonesia has been facing affects price much more
than appetite. Despite the political troubles which, in any
case, now seem in decline, there remains a great appetite for
Indonesian assets.

In the final analysis, the real impediments to accelerating
privatization and the disposal of nationalized assets are the
usual suspects: political disagreement and vested interests.
These are the real barriers to progress. In Indonesia's case, a
lot of internal squabbling has occurred between the executive and
legislative branches over prices, which assets should be divested
and whether majority stakes should be sold. In numerous cases an
increasingly assertive legislature has moved to block deals,
citing national interest, transparency concerns and a host of
other reasons.

Powerful vested interests have also weighed in to hamper
progress. It is hardly surprising that many well-connected
businessmen and politicians dislike the privatization process or
IBRA's initiatives. Simply put, these initiatives do not benefit
them and, as a result, they often attempt to frustrate the
process. An indication of the powerful forces at work, according
to one foreign consultant, is the flurry of telephone calls that
the Director General of State Owned Enterprises receives every
time he wants to privatize something. These calls, needless to
say, are not from proponents of change.

Numerous cases involving foreign investors expose the level of
resistance that has characterized the privatization process and
IBRA disposal program to date. They also reveal a strong
resistance to foreign investment in many official quarters.

One involves the government's stalled divestiture of state-
owned Semen Gresik, the country's largest cement producer. In
1998 Cemex, the world's third largest cement manufacturer,
completed an agreement with the government that would have given
the Mexico-based company a 51 percent stake in Semen Gresik.
To get a majority holding, Cemex was prepared to pay US$287
million to the government for a 35 percent stake and another
US$131 million to acquire 16 percent from the public. Additional
sweeteners such as a pledge to invest US$50 million in Semen
Gresik made the offer even more attractive.

Unfortunately, however, the deal failed to materialize.
Contrary to some reports, price was not the problem as Cemex's
offer of US$1.38 per share actually represented a 226 percent
premium over the weighted-average price of the stock during the
previous six months.

Instead, politics and vested interests conspired to kill the
sale. After protests by local residents at two Semen Gresik
subsidiaries, opponents of the acquisition succeeded in
persuading the government to back away from the agreement. In the
interim Cemex purchased a 25 percent stake -- 14 percent from the
government, 11 percent from the market -- with the understanding
that it would be allowed to pursue a majority holding at a later
date. Three years later, Cemex is still waiting.

For purposes of comparison, it is worth noting that the total
value of the deal, if it is ever consummated, will be more than
US$ 500 million, 25 percent more than the $400 million IMF aid
tranche that has been delayed for nearly one year.

In other sectors, the picture is not much brighter. PT Telkom,
the state telephone company, has announced its intention to buy
out the foreign investors in regional telephony. The amount at
stake in the five joint-venture operations is well over US$1
billion. In the mining sector, foreign investors are being forced
to sell half of their equity in Kaltim Prima Coal under
antiquated divestment requirements.

Subject to final negotiations, the amount of foreign capital
being forced out of Indonesia in this case is somewhere between
$225 and $350 million. One might well ask why Indonesia is
eligible for any public support from international institutions,
when so much private money is being rejected.

In another prominent case, the House of Representatives
insisted on reviewing a US$350 million deal that IBRA concluded
with Malaysia's Kumpulan Guthrie Berhad for the purchase of
260,000 hectares of palm oil plantations. Claiming the sale was
not in the nation's interest, legislators argued that IBRA was
obligated to seek Parliament's approval before selling any state
assets. Since the deal had already been legally concluded, calls
for a review raised hackles in Kuala Lumpur and fueled suspicion
that lawmakers wanted to renege on the agreement. In the end the
deal went ahead after much lobbying, but the damage was done.

The case diminished Indonesia's already battered credibility
with other potential investors, strained its important
relationship with Malaysia and raised more questions about the
ability of IBRA to move ahead with asset sales.

The President has named her team the Gotong Royong Cabinet,
which underlines the importance she places on cooperation. To
spur a broader economic recovery, let us hope that the new spirit
of cooperation enables the government to move ahead with
privatization, asset sales and other important elements of
economic reform.

James Castle is the founder of CastleAsia. Todd Callahan is a
technical advisor to PT Jasawenang Citrasempurna, CastleAsia's
Indonesia affiliate.