Wrangles in Indonesia unsettle investors

JAKARTA – Foreign investors looking at Indonesia with rose-tinted glasses will be disillusioned by what they see today: protracted wrangling between local firms and multinationals and an investment climate punctuated by creeping nationalism and political uncertainty.

Big corporate deals, which act as a barometer of a country’s economic health, look precariously on the verge of falling apart. Standard Chartered Bank’s decision to withdraw from Bank Bali was the first salvo fired to dent investor confidence, something that the new Minister for Investment and State Enterprises Laksamana Sukardi was quick to concede.

But more was to follow. Last week, the US consortium Newbridge Capital’s planned takeover of Indonesia’s largest auto maker, PT Astra International, ended in a spat which could scupper the deal and more significantly, highlight the potential investment minefields that continue to exist.

Newbridge, which stands to acquire a 40 per cent stake in Astra, charged that the Astra management was attempting to obstruct a due diligence process.

If the matter is not resolved, Newbridge could follow Standard Chartered’s footsteps and pull out potentially sizeable direct investments from the country.

At the heart of the problem is the Indonesian Bank Restructuring Agency (Ibra) whose track record in selling assets to foreign investors has been anything but a success.

As an agency in charge of broken banks, it was set up to rebuild Indonesia’s financial sector after the devastating impact of the economic crisis.

On paper, it looks good as one of the most powerful institutions in the country. So does Jakarta’s policy of selling Ibra assets that marked a volte-face from the Habibie government that opposed any such sale.

Ibra controls about 235 trillion rupiah (S$55.23 billion) in bad debt and more than 550 trillion rupiah in assets, making it the single biggest stakeholder in the economy. It is also Astra’s largest shareholder, having a stake in 40 per cent of the company.

Under pressure to raise 17 trillion rupiah for the state budget by March, Ibra moved to seal a deal with Newbridge earlier this month. It stands to receive more than 3.5 trillion rupiah if the transaction is closed in February as scheduled. Analysts believe that the road ahead to any agreement is “fraught with uncertainty” because of Ibra’s seeming inability to sell assets.

Newbridge lamented in a statement highlighting its stand on the whole issue: “These developments have been very disappointing. It is unfortunate that the authority and legitimacy of Ibra is being challenged and effectively dismissed by Astra.”

Astra president Rini Suwandi argues that Ibra only became an “insider party” late in the game. As a consequence, it was not allowed under the securities laws to obtain propriety information about Astra, which is also a major player in agri-business and financial services.

But there are perhaps deeper reasons for Astra’s stance. For one, it smacks of strong nationalist undertones. Astra, after all, is Indonesia’s largest private company and regarded as a “national asset”.

Sources say Ms Rini is linked closely to the central axis faction in the Cabinet opposed to any foreign influence in the economy.

Astra was also reportedly irked that Ibra’s appointment of Newbridge was done without a competitive bidding process. It preferred a more transparent process involving a larger number of bidders.

Ironically, it is a local firm making that charge of Ibra now. International investors have long been highly critical of the bidding process. A foreign banker cited as an example, a recent auction of vehicles by Ibra. The tender was awarded to a company whose bid price was lower than the highest bidder.

Investors, as a result, have little faith in Ibra, which one businessman described as “the new hotbed of corruption”, given the lack of clear guidelines in the agency.

Ibra is not the only factor holding up transactions and a return of foreign investment in Indonesia. Regulatory delays are also caused by the difficulty of securing a licence to start a business.

The Capital Investment Coordinating Board (BKPM) is the licensing authority for foreigners to own shares in Indonesian firms. Like Ibra, it lacks proper guidelines to determine equity ownership.

Currently, the BKPM issues a “negative list” approved by Parliament that shows sectors closed to foreign investors. But another proposed negative list is circulating in the bureaucracy that has caused some confusion as to where foreigners can put their money.

The law is also vague as to whether investors ought to have Indonesian partners and how much percentage they can hold. A Jakarta-based corporate lawyer who looks after the interests of foreign investors here says that all this has somewhat punctured the confidence of the small and medium-sized foreign firms keen to do business in Indonesia.

Many have backtracked on signing deals with local firms. But others say that the big players are waiting in the sidelines even if they are not putting their money into the country.

The main complaint of these companies is not Ibra and BKPM. They see such agencies and the regulatory delays that follow as symptoms of a problem that has its real roots in the weak and corrupt legal system.

Taking legal action against debtors, for example, can be a very costly affair. One investor lamented that he had to pay as much as 50 to 60 million rupiah in bribes at every stage of a court hearing. This was in addition to the lawyer’s fee. Jakarta might have introduced the bankruptcy law, but until now, rarely have the courts ruled in favour of the foreign investor.

Interest in legal proceedings against debtors have somewhat been quashed by the prevailing climate of witch-hunting army generals.

At the national level, two policy initiatives will have repercussions for foreign investment.

The new regional autonomy laws have lent a degree of uncertainty for the businessmen keen to venture into far-flung provinces of the sprawling archipelago.

There does not appear to be a clear chain of command in handling practical problems such as issuing licences and drawing up contracts. Corruption is expected to rear its ugly head here as well, given the multitude of players involved right down to village level.

For Singapore businessmen, it is unclear how autonomy will affect areas such as Batam where the republic has investments. Indonesia’s industrial showcase comes under the Batam Industrial Development Authority (Bida) which is supposed to report directly to President Abdurrahman Wahid.

In practice, however, this could be difficult. Bida is still strongly influenced by Habibie loyalists who are bound to remain the chief arbiter or power centre for investments in the area.

A second policy has been to slow down the pace of privatising state-owned enterprises (SOEs) that began with great momentum under the Habibie administration.

Some 144 firms were initially supposed to be regrouped under 10 or 12 holding companies with foreign investors poised to take over some, bringing in management and technological expertise.

The previous government had even hired top consulting firms such as Arthur Andersen and Booz, Allen and Hamilton to step up the speed of privatisation. Consultants from Booz, Allen and Hamilton now say that there is no clear direction under the new government for reforming state-owned enterprises.

It is not just blue-chip companies on the Jakarta Stock Exchange such as Astra International that are falling prey to nationalist stirrings; there also appears to be little interest in giving away PT PAL or PT PLN, among other SOEs, to foreigners, given their immense strategic value.

The negative reaction of senior government officials to the President’s announcement that the state-owned Garuda would come under the management of Singapore Airlines (SIA) is instructive.

Mr George Soros’ goal of acquiring a major stake in the state-owned PT Telkom does not appear promising too. Telkom’s investment chief Setiawan Sulistyono says that he would prefer the telecommunication firm to be under Indonesian control rather than the Soros Fund.

“If Soros becomes a strategic partner in Telkom, he will seek a position in Telkom management,” he says. “If he can adjust to the current management, there will be no problem, but if he cannot, theoretically there will be a problem.”

The new government is certainly pro-foreign investment, judging from President Abdurrahman’s aim of bringing in overseascapital to rebuild the battered economy.

Despite slowing down SOE privatisation, Jakarta has been keen to sell Ibra assets to foreigners. These are the best bids for any foreign company.

Moreover, the idea of cooperatives and small and medium-sized firms being the economy’s backbone seems to have died a natural death with the political exit of its proponent, former Cooperatives Minister Adi Sasono.

But nascent nationalism is emerging in subtle ways to send a clear warning to international investors that they might not necessarily be welcome.

A coalition government with different political factions jockeying for power against a background of foreign pressures couldmake the nationalist calls even stronger.

The chief economic ministers in the Indonesian Cabinet are divided on what direction the country should take, given their different political loyalties and ideology.

The latest Van Zorge Report notes that Finance Minister Bambang Sudibyo could move increasingly out of sync with other ministers as the central axis takes on an increasingly oppositionist role vis-a-vis the President.

There have been a number of signs of tension between Mr Sudibyo and Attorney-General Marzuki Darusman and Mr Laksamana.

The latter two apparently excluded the Finance Minister from their moves to attack corruption. And Mr Laksamana appears to be in the midst of waging a turf battle with Mr Sudibyo regarding influence over state banks.

Clouding all this, of course, is political uncertainty in Indonesia. While businessmen welcome a leadership change, they believe the new government is fraught with problems.

Of main concern is Mr Abdurrahman’s health. Whatever policies the ailing and semi-blind Islamic cleric is pursuing to bring in foreign capital could end with a change in leadership.

Latent tension between the civilians and military over a human rights probe does little to boost investor confidence when talk of a Pakistan-style coup d’etat in the offing make its rounds in the capital.

This is not helped by calls for separatism in resource-rich Aceh and other provinces.

The crystal ball is still far from rosy. No wonder money is yet to come back in Indonesia in a big way.