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.