The cost of the release and discharge policy

Lin Che Wei, CFA, Banking analyst, Jakarta

Reading about all the public demonstrations against the hike in fuel prices and electricity rates, the release and discharge policy and the government's response to these issues, I was reminded of a cha-cha dance class. Two steps forward, two steps backward and you end up in the same place where you started, nothing changed, nothing improved and in the end all you get is tired.

President Megawati Soekarnoputri stuck her neck out earlier this month to justify her economic policies by saying that she made the unpopular decision to cut fuel and electricity subsidies because she did not want the country to choose the wrong path. What is interesting is that her resolution only lasted for days, as Indonesian government reversed this "unpopular policy" due to public pressure.

The key question is whether release and discharge is a credible policy and whether it has any strategic consequences. We should focus not only on the direct economic consequence of this policy, but we must also look at whether this policy sets an example that might create a moral hazard in the future.

Release and discharge is the final step of a massive bail-out scheme that aims to transfer the burden of debt from selective private debtors to make it a public burden.

The first step is the ridiculous blanket guarantee program and credit liquidity program, which basically pays all the depositors irrespective of their size. The public, through the Indonesian government, were forced to pay all depositors, be they small, medium, large or in extreme cases the funds of bank owners themselves.

The second step is the controversial Master Settlement and Acquisition Agreement (MSAA) and the Master of Refinancing and Notes Issuance Agreement (MRNIA), which allow debtors to pay money owed to the government using assets that were not properly valued and verified. As a result, the value of the assets received by the government was much less than the money owed by debtors.

The third step is another controversial sale of assets back to the debtors, like Indomobil and PPAK, which basically allowed the owner to buy back their assets at a huge discount after the government absorbed the losses.

The issuance of a release and discharge order is the final step, which basically will provide so-called "legal certainty" and immunity to these debtors. What a nice scheme to rob the country.

Why do all these debtors need release and discharge? A presidential Instruction (Inpres) regarding the release and discharge issue is a generic Inpres. It does not stipulate the name of the debtors to be given release and discharge nor does it specify the clear criteria that must be met for release and discharge.

This presidential instruction is a product of the "paternalistic system" that continues to flourish in the Indonesian climate of political protection and patronage. It gives the power to the Indonesian Bank Restructuring Agency (IBRA) to interpret which debtors qualify for release and discharge status.

There would be nothing wrong with this generic Inpres if it was given to a credible institution led by credible and reputable officers supported by a strong legal system. But to give it to the institution that just sold a huge amount of debt to the previous owners at a huge discount and allegedly paid bribes to members of House Commission IX to receive approval for it actions is a big mistake. The huge power to interpret the presidential instruction and determine who should receive release and discharge is a power that can be easily abused.

The presidential instruction on the release and discharge scheme was designed in such way as the officials who should be responsible for their actions as individuals do not dare accept the consequences of their policies. As a result, they push the most powerful person in the country to provide a mandate to back up these controversial policies.

My question is where are those people who are signing a disastrous blanket guarantee, where are those people who are signing the unfair MSAA agreement? What action have we taken against those people who sell state assets back to their owners at huge discounts without any proper process. All these people are hiding behind an institutional name and using their position to justify the bail-out program. And release and discharge is the last step of this unjust process.

Similar to the fuel price increase, our President is a person who seems willing to adopt an unpopular policy as regards the release and discharge issue. Providing legal certainty to debtors so the economic wheel can start to turn again is a very bad excuse.

First, a policy based on unfair and unequal distribution of burden will never stand for long. Even though it is supported by all government bodies, the police, IBRA, the Attorney General's Office, the President. But do not forget that this policy is not supported at all by people who will have to pay the bill of this bailout.

This unfair policy is bound to be revisited and reviewed in the future. As a result, even though debtors might receive a strong letter confirming that they are no longer liable for their debts, even if they receive legal certainty, they will never receive certainty in real terms. What is the meaning of legal certainty in a country where the legal system is full of corruption?

Second, some of the supporters of release and discharge argue that these debtors will never bring back their capital and start up business again if the government does not provide them release and discharge. This might be true. However, do not forget that this does not guarantee that these debtors will bring their capital back and start up business again even if the government gives them a release and discharge letter. The financial impact of providing release and discharge is relatively limited, as we do not expect the state will receive any substantial amount of funds by issuing release and discharge. However, the intangible costs will be very high because providing release and discharge to unqualified debtors will create a moral hazard likely to become a trigger for another round of crisis.

Preventing a country like Indonesia from becoming an angry, failed country, and making it adopt responsible policies is not an easy task. And preventing young students and professionals from becoming angry protesters and making them instead responsible members of society also is not an easy task.

In connection with the release and discharge issue, the government should lay a clear legal framework and prosecute uncooperative debtors. The government should also do asset verification to ensure that all the obligations have been fulfilled by all these debtors before issuing release and discharge. The details of the transactions should also be made as transparent as possible for public scrutiny.

My favorite political joke this month is about how the Indonesian government has implemented a Hood Robin policy. If Robin Hood steals from the rich and gives to the poor, then Hood Robin is someone who does exactly the opposite, stealing from the poor and the middle class to give the resources to the rich and powerful.

The government is lifting the subsidies from the poor and the middle class to allow them to sustain a huge debt due to the transfer of the private debt of the rich to the public debt. Due to public pressure the government has refrained from taking more from the poor and middle class, but will it continue to give to the rich by continuing with the controversial release and discharge policy? Let us see whether President Megawati will continue with her "cha-cha" policy.