Political moves key to economic cure

By Sofyan Wanandi

The following article is based on a paper presented at the "Indonesia Update 1998" Conference in Melbourne from Sept. 25 to Sept. 26, 1998. This is the first of two articles.

MELBOURNE: To many Indonesians, and the so-called reformists in particular, the country has not yet entered the post-Soeharto era. The transition government under President Habibie is seen as just a continuation of the Soeharto regime without Soeharto. This is perhaps correct if judged on the basis of the practices of governance. Here, nothing seems to have changed. It is perhaps too early to expect that the practices of governance can change overnight. What is expected is not the results as such, but clear signs that changes are being made. Indeed, such signs are nowhere to be seen.

However, from the perspective of the Indonesian business community there are already changes, not in terms of practices of governance but in the political agenda of the government that have a direct bearing on the business community. Although the economic policies of the Habibie government lack coherence, the general thrust of its policy towards business is quite clear. The emphasis now is on small enterprises and cooperatives. This is not unjustified in view of the fact that small enterprises and cooperatives are very weak and play only a marginal role in the economy.

There has always been a strong belief that the Indonesian economy should rest on three pillars: the state, private enterprise, and cooperatives. This is not the cause of uneasiness on the part of the business community. What worries them is the fact that the government is not interested in a revival of existing big businesses that are currently in deep trouble. The big uncertainty on their part comes from the feeling that the government is basically hostile to them. Will small enterprises and cooperatives be promoted at the expense of the larger businesses? Does the policy essentially have racial overtones? Are all of these concerns at all justified?

Unless these issues are clarified, confidence in the business community will remain low. This holds true not only for Indonesian-Chinese businesses but also for the much wider local business community, and perhaps for the foreign business community as well.

Soeharto had been a strong proponent of an economic framework that rests on the three pillars referred to above. He introduced various policies over the years to strengthen the weakest link in that framework, namely cooperatives and small enterprises. The Ministry of Cooperatives was established quite early during his reign and huge amounts of resources were directed to the cooperatives especially during the time when the Minister of Cooperatives was also the head of the State Logistics Agency (BULOG). The Ministry of Industry also introduced various schemes (e.g. LIK or lingkungan industri kecil) to assist small scale industries.

Various schemes of "partnership" (kemitraan) were also introduced on the basis that not only the state should be involved in the strengthening of the cooperatives and small enterprises but that the large private enterprises are equally responsible. The results were not encouraging on a national scale, although there are individual success stories. In later years, Soeharto, who became very impatient, took things into his own hands and established the Jimbaran Group. This was an even bigger disappointment as nothing concrete came out of the initiative.

Much can be said about the above policies and initiatives. An objective assessment of their meager results points to their two main causes, namely poor governance and the politicization of the program. It should be a matter of concern to all that the current policies will have the same fate because, as proposed earlier, the practices of governance have not changed, and the project is a highly political one. And it is not improbable that the government would find scapegoats for its failure. The previous head of BULOG has become the first victim, ironically not because of the agency's corrupt practices.

What about the other pillar, namely the state or more precisely state-owned enterprises? Many of the large state enterprises are in financial difficulties. Garuda Airways is in deep trouble and Robby Djohan, an experienced banker recruited from the private sector, has been given the task to rescue the enterprise. Perusahaan Listrik Negara (PLN), the state electricity company, is technically bankrupt.

While the new minister in charge of privatizing state enterprises has removed the head of the company, who was held responsible for deals with private power producers that were forced on him, it remains unclear how the enterprise will be rescued. The plan to privatize Semen Gresik, which was to become the first privatization exercise, ran into trouble with the parliament and public opinion because the negotiations were regarded as non transparent. Pertamina, the largest state owned enterprise, is also in deep financial trouble.

It has begun to rid itself of the rent-seeking activities of the Soeharto clan that had cost Pertamina dearly in foregone revenues and higher charges. Having done so, in order to survive Pertamina still needs to do much more. It must formulate its new mission and adopt a new business orientation. This is a challenge faced by all state enterprises. Having Tanri Abeng, Indonesia's first "one billion rupiah professional manager", in charge of state enterprises (with the exception of Pertamina) is not a guarantee that the challenge will be successfully responded to. Tanri must go beyond raising funds for the government coffers by privatizing state enterprises.

The third pillar, the "modern" private sector is in total disarray. Only a few of the large conglomerates will survive. Some were structurally weak long before the crisis. Others easily fell victim to the crisis because they had over-invested, become over-leveraged and over-stretched.

But there are also healthy enterprises that are having a hard time coping with the crisis situation that has already lasted for more than one year. Some continue to make their debt service payments but there is a strong incentive for these companies to join in the debt moratorium of their foreign and domestic borrowings.

The banking sector, which in itself did not have large foreign exposure, unlike the case of Thailand and Korea, has become the victim of the debt moratorium or rescheduling. Some banks, including the banks that have been liquidated and frozen, were also in trouble before the onset of the crisis. They had large problem loans and had severely violated the prudential requirements. Of course the bad ones must be penalized.

Yet, separating the good ones from the bad ones does not seem to be an easy task. Partly, this is due to weak corporate governance resulting in poor transparency and accounting practices. Partly, it is because the mechanisms and the regulations are not in place. In other words, there is a lack of an exit policy, as put forward by the 15 economists that signed the Declaration on the Recovery of the Economy in early August.

IBRA, the banking restructuring agency, has to start from scratch and is confronted with real problems of financing the restructuring. INDRA, which is trying to assist in resolving the external debt of the private sector, has produced a framework which still lacks a mechanism for implementation. The more worrying part is that the attempts to separate the good from the bad has become highly politicized.

In a recent television talkshow, Soegeng Sarjadi from the Kodel Group, expressed his concern that the government and public opinion cannot discriminate between the good and the bad because the problems have become so politicized: all the big ones must be bad; all conglomerates must be bad; all Chinese-Indonesian businesses must be bad; all the businesses of Soeharto's children must be bad; all businesses of his cronies must be bad. What then is left?

The overall environment for business is far from conducive. To some, most likely Soeharto's children and cronies, there is a witch hunt taking place. If improper procedures are used, this could have a negative effect on the business environment. To others, perhaps the big Chinese-Indonesian conglomerates, there is the danger of hostile takeovers by groups sponsored by the government.

Recent noises from within the government about a policy of asset redistribution have increased such concerns. Asset redistribution may mean redistribution to the government's new cronies. Still, some other groups feel that the government will force them out of their businesses, to be replaced by cooperatives or other business units that are government sponsored.

Such signals have been made by the government towards participants in the food distribution system. Whatever the case, in general the Chinese-Indonesian community feels most uneasy with the uncertain situation about their place and acceptability in the society, not only in business.

They feel that if their participation in business is no longer welcome, they are essentially unwelcome in the society. No assurances have been made at all by the Habibie government. More reason for concern was the statement by Abdurrahman Wahid (Gus Dur) that four ministers in the present cabinet are anti-Chinese.

Sofyan Wanandi is Chairman and CEO of the widely diversified Gemala Group.