MSAA: A tough nut to crack after four years

MSAA: A tough nut to crack after four years

Berni K. Moestafa, The Jakarta Post, Jakarta

The plan was debatable from the onset: To whitewash the crime
if one returned the abused money. That was the idea behind a 1998
deal with five former bankers to recoup more than Rp 96.53
trillion (about US$10.7 billion), which they had misused.

Since then, the Master of Settlement and Acquisition Agreement
(MSAA) has survived four years of recurring criticism from
virtually all sides -- except from the ex-bankers who defended
it.

Law experts denounced the MSAA as legally void, bank analysts
viewed it as unrealistic, politicians said it was unfair and
government officials voiced their own doubts over the agreement.

All to no avail. The MSAA expires this year, with just about
one-third of the misused money recovered and no prosecution in
sight.

Signed in Nov. 1998, the MSAA lies at the heart of the
government's problem regarding recalcitrant debtors, whose crime
is growing every year by trillions of rupiah in the form of
interest payments the government must pay.

The ex-bankers are some of the country's most influential
business tycoons. Leading the pack is Bank Central Asia's (BCA)
Salim Group, Indonesia's largest conglomerate, followed by the
now defunct Bank Dagang Negara Indonesia (BDNI), formerly owned
by Sjamsul Nursalim.

Others are Bank Umum Nasional (BUN), co-owned by timber tycoon
and golfing buddy of former president Soeharto Mohamad "Bob"
Hasan; Bank Surya, formerly owned by Soeharto's cousin
Sudwikatmono and Bank Risjad Salim, once owned by Ibrahim Risjad.

When the economic crisis struck in 1997, their banks were at
the epicenter. The crisis devastated mainly companies they owned
and to which these banks had channeled most of their loans in a
violation of bank regulations.

Bank Indonesia (BI) injected some Rp 144 trillion in liquidity
support loans to help the banking sector cope with massive
withdrawals from panicky depositors in early 1998.

The five banks accounted for the biggest share, at Rp 96.53
trillion.

Although the owners could face criminal charges for their
inter-group lending it was not immediately known that they had
also abused most of the liquidity support. The money was used to
help affiliated firms, invest in new projects and also to
speculate against the rupiah.

As BI cannot loan money, the government had to inject it with
bonds to replace the liquidity support loans.

They are part of the total Rp 630 trillion in government bonds
issued under what is now said to be one of the world's costliest
bank bailout programs.

Still, the government closed down seven ailing banks in April
1998. In August that year it closed three more, among them BDNI,
and nationalized four others, including BCA. All had received
BI's liquidity support, amounting to more than 500 percent of
their capital. The Indonesian Bank Restructuring Agency (IBRA)
took over these banks.

Former owners were initially told by the government to repay
the liquidity support by Sept. 21, 1998. However, they missed the
deadline and instead offered their assets to the government to
sell.

IBRA accepted the proposal but analysts immediately raised the
alarm, calling it an early indication of the government's failure
to effectively recoup the massive loans.

Bambang Subianto, who was the finance minister at that time,
admitted: "It would have been easier for us if it were in cash,
because if it were in the form of assets we would have had to
revalue them and if the assets were in the form of companies the
revaluation would have been even more difficult."

In October, two weeks after the first deadline, then president
B.J. Habibie decided to extend the payment period by one year,
but still demanding a cash settlement.

This deadline was again scuttled following the International
Monetary Fund's (IMF's) call for more "flexibility", according to
foreign news reports.

In a letter to Habibie, IMF Asia Pacific Director Hubert Neiss
agreed that the repayment period "should be as short as possible"
but warned, "if all assets are dumped in a fire sale under
currently depressed economic conditions, the return for the
government would be very small."

On Nov. 2, Habibie said he wanted ex-bankers to pay at least
30 percent of their debts in cash within one year. It marked the
last proposal by the government before, eight days later, the
MSAA took hold of the loan recovery attempt.

Under the MSAA, the ex-bankers had to surrender assets, which
would be sold to cover their debts. A release and discharge
clause freed them from liability to possible prosecution upon
settling their debts.

The deal also called for the establishment of holding
companies to manage and sell the assets. "If the sale of assets
fails to meet targets due to carelessness on the part of the
holding company then IBRA will promptly take the necessary
measures to correct this," Bambang said.

It remains unclear as to who exactly designed the MSAA. IMF-
appointed foreign consultants were reportedly involved as were
legal consultants of the ex-bankers. But neither confirmed any of
this.

The government itself appeared cautious over the deal. In
1999, then coordinating minister for the economy, finance and
industry Kwik Kian Gie noted the agreement would result in huge
losses to the state because the assets pledged were insufficient
to cover the debts.

His successor, Rizal Ramli, voiced similar concern the
following year, and it prompted the government to seek a
"consensus" with the House of Representatives.

Following this, the government demanded ex-bankers pledge
additional assets to cover a likely shortfall in their value.

Rizal said the Salim Group, for instance, owed some Rp 53
trillion but surrendered assets that turned out to be worth only
Rp 20 trillion.

The move was enough to get Salim to inject again some of his
assets. But criticism gravitated back to the MSAA, which did not
require the group to pledge more assets every time its proceeds
fell short.

An independent legal review ordered by Rizal found the MSAA of
Salim as unfair and void.

Law firm Tumbuan and Pane pointed that IBRA had practically no
management control over its assets, such that the debtor was the
most responsible party for any decline in asset value.

It also questioned why the assets were managed by a holding
company owned by Salim and IBRA, calling this a "debt repayment
of the shareholders (Salim) as a debtor to itself."

The law firm added that the release and discharge clause was
only binding upon IBRA, meaning outside parties, like the
Attorney General's Office, could still prosecute Salim.

Despite the findings, no attempt was made to revise the MSAA.

In August 2000, the Supreme Audit Agency (BPK) revealed that
nearly all of the liquidity support had been abused and cited
that the potential loss amounted to Rp 138 trillion. But, as
BPK's findings renewed public criticism against the former
bankers, the MSAA was left untouched.

That changed earlier this year when IBRA proposed to revise
the controversial agreement. With the MSAA deadline looming,
IBRA, however, offered instead an even more lenient version of
the deal.

The proposal, covering also two other types under the ex-
bankers debt settlement program, extended the payment period by
up to 10 years and effectively lowered the interest rates.

After the plan was leaked to the media, a wave of public
criticism buried the proposal but at the same it also led the
government to decide to keep the MSAA as it was.

As the deadline has now expired, IBRA has begun recommending
the ex-bankers be released and discharged.

Some analysts and politicians voiced protest again but in the
four years that the MSAA existed it has effectively defied public
pressure to change.

The government furthermore insisted it must go ahead with the
MSAA to ensure "legal certainty" for the debtors.