RI recovery: A distant mirage

RI recovery: A distant mirage

The following is the first of two articles on economic
recovery by Sidhesh Kaul, a regional commentator on political and
economic issues based in Jakarta.

JAKARTA (JP): The statutory auditors for the Indonesian Bank
Restructuring Agency (IBRA) recently released their audit
results. The auditors, Hans Tuanakota & Mustofa (HTM), remarked
in the report that the data relating to those banks under IBRA's
supervision and control that were either frozen or taken over or
simply recapitalized, did not fulfill the criteria of
completeness, existence, accuracy, valuation, ownership and hence
were classified as un-auditable.

This opinion from HTM raises doubts that either IBRA was not
transparent enough with the auditors or that IBRA's execution of
the bank's recapitalization, or closure, or take-over, as the
case might be, was based on grounds that were questionable.

In any case the situation demands that a full audit -- a
financial as well as a management audit -- be conducted so that
the lapses can be identified and remedial corrections put in
place. IBRA's credibility is vital to the recovery process and no
stone should be left unturned in allaying concerns about IBRA's
ability and competence as the country's biggest asset manager.

Although founded in 1998, IBRA got its first set of
regulations in 1999 under Regulation No. 17/1999 which delineated
the authority, duties and responsibilities of IBRA. This
regulation was silent on accounting policies and it was only in
March this year that IBRA acquired an accounting policy system
(vide a decision letter in 2000 from the Minister of Finance).

The recent release of this accounting policy provokes thinking
that the powers that seem to be playing a reactive role and that
there are no cohesive guidelines on recovery -- only half hearted
attempts at being perceived as meeting the requirements of the
International Monetary Fund (IMF).

The lack of a policy-guided approach is hindering IBRA's
efforts at seeking any legal remedies against recalcitrant and
uncooperative debtors as evidenced by the recent string of failed
attempts on the part of IBRA in the Indonesian courts.

Progress at IBRA has been painfully slow. As a recovery
institution, IBRA manages about Rp 6 trillion in assets. These
assets were inherited by IBRA through the liquidation, take-over
and recapitalization of Indonesian banks.

Most of these are in the form of loans that have been
collateralized at values that are unimaginably high when compared
to recoverable or market value. This phenomenon has gone largely
unnoticed by both the Indonesian government and the IMF.

During the boom times most Indonesian corporations sought
funds for projects and machinery for expansion that were
deliberately over valued. The difference between the actual costs
of the projects and machinery lined the pockets of the owners who
in turned greased the palms of the rent seekers within the
banking and state apparatus.

Corporations double-financed their sales sometimes in active
connivance with the state's export-import insurance body (ASEI).
Some conglomerates that had their own banks within their
corporate umbrella profited even more as they booked "extra"
income simply from the timing of payments and on interest rate
arbitrage (thanks to the Bank Indonesia's conveniently protective
interest-rate spread).

In fact Indonesia, at one point during the boom years, was a
country where corporations could borrow overseas and delay the
deployment of borrowed capital towards productive use in the real
sector, and instead re-direct it towards earning interest at
local dollar rates (that were marginally higher than the overseas
rates).

But alas, the tyranny of economics -- the magic of making
money out of thin air trifled with the basic fact that earnings
is a zero sum game and ill-gotten gains from those blatant
practices today have become Indonesia's burden.

Transfer pricing was rampant with profits of corporations
being booked overseas. Company surpluses were often deployed
towards off-balance sheet derivatives that held the golden
promise of gains that were far beyond the wildest expectations --
the gains once again lining the owner's pockets while the company
had to be content with the fact that seed monies were returned,
but very often even this did not happen.

The net result of this systematic bloodletting has been that
most Indonesian corporations have productive assets that are far
above market cost and generate revenues that are simply not
enough to repay debts.

The treacherous partnership between hungry rent seekers within
the state apparatus, backward-bending bankers and greedy owners
has crippled Indonesia beyond the bounds of reasonable repair and
has resulted in a massive betrayal of the ordinary Indonesian.