Perplexity of asset sales

Perplexity of asset sales

The protests by farmers in Riau province and politicians in
Jakarta against the sale in November of around 260,000 hectares
of oil palm plantations, through a competitive bid, to Malaysia's
Kumpulan Guthrie Berhad is the latest in a series of perplexities
hitting major asset acquisition by foreign investors in
Indonesia.

Canadian Manulife Financial Corp. is still embroiled in a
legal entanglement after legally buying the shares of bankrupt
Dharmala Sakti Sejahtera in PT Asuransi Jiwa Manulife at US$18
million through a government-authorized auction in October.
Earlier in 1999, British Standard Chartered Bank's bid to acquire
20 percent of Bank Bali failed amid local-employee protest.

Even Mexican Cemex's acquisition of 25 percent of state-owned
Semen Gresik in 1998 is still facing opposition from local
politicians in the areas where the company owns cement mills.
They claimed the foreign investor's equity participation was
useless to the company's future growth. The government eventually
bowed to their demand and is now completing the legal process of
separating the Padang cement unit from the company. Now Semen
Gresik is facing a similar demand from local politicians in South
Sulawesi for spinning off the Tonasa mill from the company.

This imbroglio obviously is adversely affecting the asset
recovery by the Indonesian Bank Restructuring Agency (IBRA) and
privatization of state companies, which together are responsible
for raising almost 13 percent of budget revenues for the current
fiscal year, and adds to the major obstacles to new investment in
the country.

The 1997 economic crisis has seemed to fuel anti-foreigner
sentiment among an increasing number of politicians who welcomed
and highly praised foreign investors during the period of robust
economic growth until 1996. They now accuse foreigners of trying
to buy up Indonesian assets at virtually throw-away prices, and
blaming them for the myriad of economic woes the nation is now
encountering.

They seem unaware that the country, though richly-endowed with
huge natural resources and already owning a broad base of
production assets, is now like a highly-leveraged company
suffering a severe liquidity crisis, deprived of working capital
to put the assets into productive operations.

The bailout of the crippled banking industry has now made the
government the owner of an additional $60 billion in production
assets but at the same time one of the largest sovereign debtors
in the world.

Many politicians may not realize that speedy, efficient
disposal of the assets, notably the estimated $30 billion worth
of ongoing concerns currently managed by IBRA, is crucial not
only to help prevent the fiscal deficit from exploding to a
devastatingly unmanageable level. Yet more importantly, the
production assets need to be put to optimum operation under good
management. And governments, anywhere in the world, are usually
not good at operating commercial entities. The longer the assets
are under the government, and in this case, IBRA, the quicker
will their quality deteriorate.

Ideally, the assets should be sold as much as possible back to
national private investors but the problem though is that all
major business groups are now almost buried in debts.

The national investment capacity will remain crippled until
the economy achieves a sustainable recovery and regains growth
high enough to rebuild a large pool of savings. But until this
condition is attained, the economy urgently needs a kind of
bridging finance which now can only be supplied by foreign
investors.

It should be realized that it is extremely difficult to
convince foreign businesspeople to invest in the country now in
view of the political uncertainty, security problems in many
areas and the complex problems associated with the devolving of
political and fiscal power to local administrations. Even many
national businesspeople remain hesitant to make new investments,
preferring to keep their financial assets overseas. The few
foreign investors like Cemex, Manulife, Kumpulan Guthrie who made
the plunge are surely not profiteers intending to make a fast
buck in a short time. They are instead bona fide investors who
have bought into the future of the country.

Needless to say that the government should stand firm in
protecting the investors who have bought its assets. Strongly
safeguarding foreign investors' acquisitions is by no means an
indication of a lack of nationalist sentiment. The issue here has
nothing to do with nationalism but concerns a credible legal
system, an effective law-enforcement system, without which no
value can be attached to the country's natural wealth.