War on mismanagement

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.