Warren Caragata – Before Indonesia can truly get back to the job of successfully running and economy, the nation needs a functioning financial system. It is only a dream.
Chalk it up to the deep-breathing exercises that Edwin Gerungan does every morning on rising, and the power-walking that follows. Gerungan is surprisingly calm given that he has probably the toughest job in Indonesia: chairman of the Indonesian Bank Restructuring Agency. Not only is he responsible for managing almost all of the nation's banking system, IBRA also controls a huge range of assets from shrimp farms to Bali tourist resorts. The total is estimated by the World Bank to be worth $58 billion that's right, billion in banks, companies, property and mostly dud debt. "There are nothing but problems here," he told Asiaweek in a recent interview in his office on the top floor of a central Jakarta office tower that IBRA inherited from a failed company.
Gerungan is the fifth person to head the agency since it was established in the last months of Suharto's rule in 1998 and the third in less than a year. Before taking the chairman's job, Gerungan, 52, was a senior vice-president at state-owned Bank Mandiri. Before that he spent 25 years at Citibank in Jakarta, rising to be a vice-president. He seems calm on the outside, but Gerungan would be excused if he were rather uneasy about job security in his new job.
After three months as chairman, Gerungan's office still suggests a man ready to leave on a moment's notice. There are no family pictures on the credenza, no personal knickknacks, none of the touches that usually mark the office of the man in charge. Other than a plastic canister of Jacob's biscuits, the office is so bereft of personal effects that before the interview begins, an IBRA staffer volunteers to hang a painting above the desk.
Little wonder if he is insecure: Gerungan is responsible for restoring Indonesia's banking system to health, reviving the economy and dismantling Suharto's entire ugly legacy. "The complexity of the problems here is probably more than anywhere," he says. Talk about understatement. IBRA was established in 1998 to rescue a basket case of a banking system that included more than 200 poorly capitalized, opaque institutions burdened with billions of dollars in bad debt and usually owned by the debtors. IBRA today controls assets equal to 57% of GDP. Meanwhile it has become an inefficient, less-than-competent, sometimes corrupt bureaucracy supported, to use that term loosely, by a weak central government. The problems don't end there. IBRA is at the epicenter of a struggle over Indonesia's economic soul. On one side are the still-powerful forces of the old regime Suharto's children and cronies. And on the other are economic reformers and activists who want retribution for the pain they see inflicted on the country by sweetheart deals and outright corruption.
The stakes are high: If IBRA fails to sell off the troubled assets, real improvements in corporate transparency and governance will founder. Cronies who dominated the economy under Suharto could return in full force. "The conglomerates don't want to give up," says Sri Mulyani, an economics professor at the University of Indonesia and a former economics adviser to President Abdurrahman Wahid. Regardless of what happens to Wahid, there is no reason to believe that any successor will have the legitimacy and talent to adjudicate this dispute. "The pursuit and punishment of Indonesia's super-elite for past corruption lies at the heart of Indonesia's nation-building process and will take its toll on growth for years to come," the Standard & Poor's bond-rating agency says in a recent report. In this tug of war for Indonesia's future, IBRA is the rope.
Says Jakarta business consultant James Van Zorge of Van Zorge Heffernan: "IBRA is going to decide on the future division of wealth of this country." That is no exaggeration. IBRA acquired its assets in exchange for helping banks in two ways: first by injecting capital and second by taking on the worst of the banks' bad loans. Critics of the agency say IBRA has actively avoided asset sales because they will expose a giveaway to the cronies, who often own the banks that were helped. The argument is that the assets that IBRA received are nowhere close to full compensation. "The government should have been honest enough to say that the money is not going to be recovered," says Eko Budianto, a former IBRA deputy chairman, who left last year in a fight over what he says was political interference. If the agency manages to recover 20 to 40 cents on the dollar, which experts say is realistic, it means that bailing out the banks will cost Indonesia perhaps $40 billion, equal to 144% of the government's annual budget. Mar'ie Muhammad, chairman of IBRA's oversight committee, says the agency should get on with selling the assets. "We should recognize that the damage has been done."
But the agency is in no hurry to reveal a potentially enormous hole in its finances. In the last two years, it has unloaded all of about $3.8 billion worth, only 8% of the estimated value of its total holdings by World Bank estimates. And each day of inaction increases the threat that something really serious could happen, a severe economic jolt or political crisis that could spawn a new round of business failures and debt insolvencies. Even after almost $70 billion in capital injections, Indonesia's banks are far too shaky to withstand more than a minor tremor. Meanwhile, as long as IBRA fails to sell assets, it's unlikely that real reforms or accountability will be imposed on crippled companies.
IBRA figures to be around for decades trying to sort out the whole mess, says Jim Castle, an economic consultant in Jakarta who heads the Indonesia-US Chamber of Commerce. When it was founded, it was supposed to wrap up its work in seven years. He says the agency needs to stay focused or risk being overwhelmed. "IBRA is there to sell assets," says Castle. "Until they do that, they're a failure." The main barrier to asset sales has always been the opposition of Indonesia's old elite, who harbor hopes that delay will give them more opportunities to regain assets. The cronies often still wield tremendous power and stir great public animosity.
Late last year, bowing to public outrage that Liem Sioe Liong (a.k.a. Sudono Salim) was buying back assets that had been taken by IBRA, the government blocked Indonesia's No. 1 crony from any more bidding. (But not before Liem repurchased a company called Karimun Granite and a piece of QAF, a Singapore-listed food company that had been handed over to IBRA.) The case of Bank Danamon is another illustration of the ongoing tussle with tycoons. Late last year, on less than an hour's notice and with no explanation, Gerungan's predecessor as IBRA chairman, Cacuk Sudarijanto, fired Milan Shuster, Bank Danamon's president. Shuster was one of the few foreigners to head an Indonesian bank and was well-regarded in the business community for his ambition to remake Danamon, formerly owned by close Suharto associate Usman Admadjaja, into one of Indonesia's best-run financial institutions.
Danamon officials familiar with the situation say Shuster was pushed aside in part because he repeatedly challenged Cacuk and the government to take his side in disputes with Admadjaja. According to testimony Shuster gave to a parliamentary committee after his October ouster, he refused to keep quiet about a loan of $16 million from Admadjaja to the bank that Danamon still carried on its books as a liability even after it collapsed. Shuster argued that, because Admadjaja's equity in Danamon disappeared when the bank crashed, the loan should also have been wiped out. However, that hasn't happened.
The final straw may have been a battle between Shuster and Admadjaja over a lease the bank's main branch had with one of Admadjaja's companies. Shuster felt the terms of the lease were outrageous and wanted to break it. He eventually succeeded though without Cacuk's cooperation, which he had sought. IBRA now pays in one year what it was paying Admadjaja in one month. Cacuk and Admadjaja did not agree to be interviewed, and Shuster will not comment on his ouster.
By definition, IBRA's job is to cut deals with the old Indonesian elite. Even with the purest of motives the agency would be open to allegations that it has caved in to or even colluded with the cronies. But IBRA and the government have done nothing to appease suspicions.
Deals are often cut behind closed doors, raising concerns about favoritism. One example is the controversial deal restructuring $2.7 billion in debt owed to IBRA by Texmaco, a huge textile and engineering group owned by Marimutu Sinivasan. While critics insist that the deal favors Sinivasan, interviews with numerous people involved in the negotiations suggest that isn't true. (Wednesday night, the government said it has approved Texmaco's debt restructuring, though details were intially unclear.) But making a conclusive judgment is impossible because important details have not been publicly released.
Both the International Monetary Fund and the World Bank have joined the critics in calling for greater transparency. The government, says Mark Baird, the World Bank's Indonesia chief, "must avoid the appearance of insider deals." The public's hatred and suspicion of the cronies is sometimes strong enough to derail IBRA's plans. When the agency early last year tried to dispose of Indonesia's second-largest bank, Bank Central Asia, a public backlash against the involvement of Liem, once Indonesia's richest man and one of Suharto's closest cronies, helped kill a plan to make the bank look better to a prospective buyer.
Rampant nationalism also prevents IBRA from holding a fire sale of its sickly assets. The government early last year rejected a proposal to sell a minority stake in BCA to a foreign bank which would have restructured the operations and pursued greater efficiency. Sources close to IBRA say that the agency and the Wahid government feared a nationalist backlash against the sale. The misplaced idea that somehow the price of key assets will improve with time is deeply ingrained at IBRA and throughout the government. It reflects a widely held nationalist fear that foreigners will swoop in like vultures to pick up valuable assets at cut-rate prices. As a result, a 22.5% stake in the bank was sold through an initial public offering in May. The IPO was a major disappointment; IBRA earned only $107 million, about half what it had hoped for. A further sale of BCA slated for late last year has been delayed in hopes that market sentiment will improve in a few months. IBRA now says it will sell the stakes in BCA and Bank Niaga by the end of June. But unless outside investors are permitted to bid, the sale prices will be far less than true market values. The IMF is not satisfied by another promise of future action and has refused to release the next $400 million loan tranche from its financial support package. "You can't just keep promising every quarter," says the IMF's Jakarta representative John Dodsworth.
Still, some foreign buyers have been allowed to participate, and the agency is slowly moving ahead. IBRA had the best year of its short life in 2000, selling $2.2 billion worth of companies and bad loans, which was a shade above the target set for it by Indonesia's Parliament. The biggest single triumph came about 11 months ago when it received more than $500 million from the sale of its controlling stake in Astra International Indonesia's top car maker to Singapore's Cycle and Carriage. IBRA capped off the year with a $370 million sale of 24 palm oil plantations formerly owned by Liem to Malaysia's Kumpulan Guthrie.
Gerungan cites the accomplishments in 2000 as evidence that criticisms of the slow pace of asset sales are misplaced. "The speed is already there," he insists. If so, it is a pace that will not get the job done, which is something Gerungan clearly implied his first day on the job when he said he would push the agency to act more quickly, echoing comments from Rizal Ramli, the senior economics minister, that IBRA should "accelerate the process." In fact, Gerungan is already laying plans to push more assets out the door by setting up a joint venture with one or more big investment banks. The investment banks would take up to $500 million in bad loans, restructure them and share any profits with IBRA.
IBRA as an institution may simply be out of its depth with all its assets, overwhelmed by the scope of the problems it faces. Budianto, the former deputy chairman, recounts a story from his time at the agency. At one point, as IBRA was closing failed banks the agency could not identify the intended destination of $106 million in cash that came in. "We didn't know what belonged to what," says Budianto. He says debtors were in some cases making payments even though their creditor banks were officially shut down. In other cases, bank accounting was shoddy, and payments were not always posted to the appropriate loans. It took Budianto's staff three months of detective work to reconcile most of the items more than $10 million could never be accurately placed.
The experience of a mid-sized North American communications enterprise that came to Indonesia with the intention to invest in one or more companies is an indictment of IBRA's competence. An executive of the enterprise, who spoke to Asiaweek on condition he and his company remain anonymous, says the firm spent a year and about $2 million investigating various assets, most of them officially under IBRA's care. The stories he tells are a litany of IBRA woes. The first problem, which everyone encounters, was the inability to talk to anyone. Telephone calls to IBRA would rarely be returned. Meetings would be set up and cancelled at the last minute. And when it seemed useful meetings might actually take place, the businessman says sometimes no one would show up on IBRA's side. Three months into the process, according to the executive of the prospective North American buyer, he was still trying to get an answer to a question he asked the first day: The bumbling "got to be a joke." Worse, IBRA sometimes did not know anything about some of its assets.
The executive once asked about the debt load of a particular firm under the agency's control. "We don't have those records," was the reply. "You were never sure what you were buying," the executive says.
Ultimately, the company decided it had been through enough: "High risk didn't equal a high return." Such IBRA horror stories, Castle says, are commonplace. "That's an experience repeated all too often." As a result, "people give up." Government critics are certain that corruption plays a role in some IBRA decisions or inaction. But charges of malfeasance, outside the infamous Bank Bali scandal, are unproven. Bank Bali gave IBRA its biggest black eye and helped end the presidency of Wahid's predecessor, B.J. Habibie. The bank, which had been taken over by IBRA, paid a 60% commission to a firm linked to Habibie's Golkar party to recover interbank loans from IBRA. Beyond that, a recently published study by PricewaterhouseCoopers on global business transparency concluded that Indonesia is the world's second-most corrupt economy next to Russia. So it is hardly surprising that IBRA stands accused by its critics of impropriety. The agency "has become a field for growing corruption,' says Amien Rais, speaker of the People's Consultative Assembly and one of the Wahid government's most vocal opponents.
Other evidence of impropriety is circumstantial at best. An investigation by the state audit agency has raised questions about IBRA's payment of consulting fees, which last year amounted to $68 million. Some of that money could be used for bribes, an auditor publicly suggested. Nevertheless, accounts of widespread corruption inside IBRA remain unproven. Mar'ie Muhammad says that, except for the Bank Bali case, "there is no evidence of large-scale corruption." Given its daunting litany of problems, what are the chances Gerungan can turn things around? No one questions his honesty or commitment. But he is a political neophyte with few protectors. That suggests he is independent, but it also means he may not be able to muster political support when he needs it. Laksamana Sukardi, a former minister in Wahid's cabinet, worked with Gerungan at Citibank and believes his friend will have problems: "Citibank was like a simulated environment, everything is in order," he says. "When you get out of Citibank, it's like working in the jungle." And there's no ruder jungle than the chairman's suite at IBRA. Gerungan has told friends he is prepared to resign if needed.
Gerungan's experience in the no-nonsense private sector may make him the right person to streamline a bureaucracy that has quadrupled in size over the last year and now occupies parts of two office towers.
But IBRA's refusal to confront the ruinous realities of the Suharto era reflects the failings of the government that runs it. If Habibie never really wanted to sell off the cronies' assets, Wahid is too weak to do so. To move the assets out the door, to get the loans restructured, IBRA needs political cover and a government with the clout to protect it from interference. "If the president and top legislators don't support it, not much will happen," Castle says. It will take more than a little democracy to clean up the economic mess made by Suharto and his cronies. For Wahid and for IBRA, the hard part has barely begun.