The cost of the release and discharge policy

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.