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.