War on mismanagement
James Kallman, Rully Aprianto and Erwin Ariadharma, PT. Grant Thornton Indonesia, Jakarta
By revoking the Financial Sector Policy Committee (FSPC) declaration that recommends Shareholders' Obligation Settlement Program (PKPS) be extended to last for 10 years, the government has fired the first shots in its war to bring the economy under control. Indonesia must treat this as a war not a crisis, employing the full arsenal of resources and will that a war demands.
For just as in a military "war" as opposed to a military "action," successful prosecution can only be achieved when there is united political will fully backed by the nation as a whole.
Whether or not the Indonesian people fully understand the consequences of the government's decision is open to question though, for a snap poll conducted by PT Grant Thornton revealed that while 90 percent of respondents had heard about PKPS, around 40 percent admitted that they neither understood the PKPS issue nor the consequences of any extension.
The economic meltdown of 1997 had such a negative impact on Indonesian banks that the highly exposed and mismanaged banks became technically bankrupt. To rescue the banks, Bank Indonesia (BI) through its Liquidity Rescue of Bank Indonesia (BLBI) scheme, provided bulk sums as loans.
The ex-bank owners (debtors) have the duty to settle these loans according to agreements -- named Penyelesaian Kewajiban Pemegang Saham (PKPS) -- made between themselves and the government. In total, the ex-owners of 33 banks who signed the PKPS have a total obligation of Rp 130 trillion, or put another way, one tenth of Indonesia's total debt.
Recovery of these vast sums of money has been slow to say the least. Based on data gathered from the Indonesian Bank Restructuring Agency (IBRA), only Rp 20 trillion has actually been paid back. Part of the problem lies with the fact that the PKPS agreements are divided into three patterns -- MSAA (Master Settlement and Acquisition Agreement), MRNIA (Master Refinancing and Notes Issuance Agreement) and loan acknowledgement document APU (Akta Pengakuan Utang).
The public largely sees these as being very favorable for the debtors who were known to have political connections, whereas in reality PKPS should be managed for the benefit, not to the cost, of the people. Furthermore, the three-formula system has muddied the waters, making it hard to discover who has repaid what, or draw any firm conclusions as to the relative benefits of the three formulas.
PT Grant Thornton Indonesia welcomes the announcement by the economics minister, Dorodjatun Kuntjoro Jakti that debtors will be divided into two types -- those that have, or still continue to meet their obligations and those who have broken their promises -- and will be given just three months to finalize the obligations of their agreements before firm legal action is taken against those who have been recalcitrant.
Yet this is but the first step and what is needed are actions for today. Grant Thornton has produced its own basic guidelines for the prosecution of the war on mismanagement with detailed steps to be taken.
1. Improve transparency in public disclosure. Openly disclose all results achieved so far in the recovery of these debts. While the agreements were made between the individual debtors and the government, as 10 percent of the nation's total debt is at stake, the Indonesian people have the right to know who owes what and how much has been repaid. This would also provide information on which benchmark best practices could be established.
2. Establish legal certainty. Presidential Decree No. 19 authorizes IBRA to seize the assets of recalcitrant debtors without resorting to time-consuming court procedures. The powers vested under this decree must be fully utilized, even to the degree of issuance of international warrants for the seizure of assets overseas. Make life so legally miserable for them that settlement of their obligations would be the only alternative.
3. Ensure asset value retention. Bad debts never get better, but assets managed by debtors often decline in value.
As it is now over three years since the assets were pledged, a quick assessment of all significant assets should be carried out by an independent party to ascertain the quality of current management and approximate market value of the asset today. Such independent evaluations can often recommend improvements in business management that will maintain if not enhance asset value.
4. Improve asset sale transparency. Many of the assets held by BPPN are coveted by foreign investors, though bureaucratic obstacles often mean that maximum value cannot be gained for the asset. A transparent listing of all assets and when available for bid, as well as greater coordination between the various government agencies and simplification of procedures would go a long way to attracting foreign investors.
5. Be fair to other debtors and stakeholders. If you borrow a $100 thousand you're beholden to the bank, yet if you borrow a $100 million the bank is beholden to you. That is not fair, nor is the fact that conglomerates have been given better deals than SMEs. All debtors in Indonesia, large and small, should be dealt with in exactly the same way -- fairly.
Deals should be the same for the large and the small and should not change whereby the holdout gets a better deal; in fact to the contrary. The government must be crystal clear in communicating what it intends to do, what it is doing and what it has done, a so-called regular war-room briefing.
If the government has fired the first shots in its war against mismanagement, it must be clearly understood that this is just one of the first battles in a long war. No one can expect Indonesia's fortunes to magically improve overnight, nor to improve without hard work and sacrifice.
However, if all Indonesians pull together in that war-time spirit of belief in a just cause then eventually the war can, and will, be won. This is our second war of independence -- this time for financial independence -- another war that we can all be proud of being a part of, together.