Jay Solomon, Jakarta – With as many as four state-owned companies priming to hit the Jakarta Stock Exchange in 1997, it looks likely to be a banner year for the Indonesian privatization programme. Market conditions are perfect for floating new shares as the exchange trades at all-time highs. As Singapore-based Jardine Fleming economist Rajeev Malik puts it: "Indonesian privatizations are seen as having the best bang for the buck in the region."

Despite this optimism, financial analysts in Jakarta offer a stern warning. If 1997 follows the script set during Indonesia's two 1996 privatizations-the initial public offering of Bank Negara Indonesia and the second placement of telephone operator Telekomunikasi Indonesia-things could be less-than-rosy for investors. International investment banks were largely frozen out of securing any underwriting fees, both local and foreign brokerages cried foul over an inability to secure shares, and-judging by the 82% jump in BNI's share price since its listing-even the Indonesian treasury seemed to get a raw deal.

But if so many got left out in the cold during last year's government sell-off, just who did benefit? Certainly a few major local underwriters took home good profits from underwriting and placing fees, but some foreign and local investment professionals are convinced large portions of the new shares were hoarded by prominent local businessmen and institutions, many of them apparently linked to Indonesia's first family.

"BNI was placed strictly to make a few chosen businessmen rich," charges the president-director of an Indonesian brokerage house, who insisted on not being named. "It was obscene in that it was just a straight transfer of wealth from the government to private individuals."

The November 25 BNI offering did provide a big boost to the domestic securities industry, though. For the first time, the government placed all 1.1 billion BNI shares domestically, rather than on overseas bourses. It used three Indonesian underwriters-state-owned Danareksa Sekuritas, Bahana Securities, and Makindo.

Priced at just 850 rupiah (36 U.S. cents) per share, the IPO was more than four times oversubscribed. Pent-up demand drove BNI's share price up 47% upon its listing, and it has continued up to 1,550 rupiah on January 21. BNI's IPO was a primary factor in helping drive the Jakarta Stock Exchange index up 29% from lows sustained after the July 27 riots.

But for a number of reasons it was a less-than-ideal privatization. For one, the 82% rise in BNI's share price suggests the government undersold state assets. While that would not cause much fuss if the shares were spread around, the problem was that other than the three big local brokerages, both Indonesian and foreign investors complain that they were cut out of the action.

"All of the subunderwriters during the issue were just scavenging for shares and the truth is that there were none left," says an Indonesian sales executive at a European bank. Numerous other brokers, working both for foreign and local banks, say they received as little as 1% of their requested allocations.

"As much as half of the shares were preplaced through nominees" representing well-connected Indonesians, says the sales executive. "Often this is through a state pension fund or insurance company." Adds another angry member of the Indonesian financial community: "BNI technically wasn't a privatization at all."

Due to less-than-adequate enforcement of disclosure requirements in Indonesia, it is virtually impossible to verify such charges. Despite repeated efforts to contact senior officials at Bapepam, the government's capital-markets regulation agency, the Finance Ministry, and the government's privatization team, no senior official could be found to comment on the issue. Asked if Bapepam was investigating the BNI privatization, one agency official replied that allegations had only been made in the press.

But BNI wasn't the only privatization where fingers pointed towards powerful interests. Representatives of several top international investment banks say they pulled out of the second Telkom placement in December for fear of running afoul of the United States' Foreign Corrupt Practices Act.

A top executive at an international investment bank that bid for the deal told the REVIEW how American banks Goldman Sachs, Morgan Stanley and Merrill Lynch-as well as European banks SBC Warburg and Jardine Fleming Securities-all had been called in by Indonesia's government to bid on the underwriting contract. But the executive claims the banks were being asked to allocate as much as half of their shares to an offshore company controlled by a businessman with close links to Indonesia's first family-with attractive financing.

"At this point we all had to pull out," said the banker. "We knew we could be in violation of the FCPA, and it just wasn't worth it. It obviously made me furious as I had spent weeks trying to secure it."

To understand this shift to a more domestic role in Indonesia's privatization programme, analysts assert that one must turn to the 1995 IPO of Telkom, Indonesia's third privatization after tin company Tambang Timah and long-distance telephone company Indosat. At that time, four global underwriters-Merrill Lynch, Goldman Sachs, Lehman Brothers and SBC Warburg-and four locals combined to float 25% of the company (12.5% abroad, 10% domestically, with 2.5% undecided). It was 1995's largest IPO in Asia, but it ran into trouble.A lack of cooperation between the eight underwriters plagued the process, as did a slackening global investment climate. Ultimately, due to lack of demand, the Indonesian government ended up slashing the number of shares being offered, as well as the price, in order to save the deal. The government got less than 60% of the $3 billion it hoped to raise from the offering.

A former Merrill Lynch executive who worked on the deal recalls that "during Telkom's IPO, local brokerage companies argued that foreign companies should not be so involved in the underwriting process and that not such a large portion should be placed overseas. When Telkom went astray they could effectively argue that the locals deserved a break."

Some of Indonesia's business leaders felt the country would be better served staying with international players, and practices, but were shunted aside, according to financial sources. "Before, the target was to get the shares to key foreign investors. Now it is to get them to important local businessmen-cheap," charges the Jakarta-based chief of a European bank.

Toll-road company Jasa Marga, Krakatau Steel, mining company Aneka Tambang, and the massive electricity company Perusahaan Lestrik Negara are the main companies the government is targeting for privatization this year. But with so much derision among foreign investors, one would wonder how many still want a piece of the pie.

The truth is, however, that foreign investment banks and investors aren't going away. According to an attorney whose firm represents one of the banks that withdrew from Telkom: "Everyone would like to say that these investment banks are going to pull out, but they're not. The bottom line is that they are driven by greed, and until their fear of losses exceeds potential gains they will continue to pitch for these projects and keep their mouths shut."