ECONOMICS: Indonesian flip flop
Far Eastern Economic Review
Oct 22, 1998
By Salil Tripathi and John McBeth in Jakarta
Indonesia promised investors a brave, new, open world with rapid
overhauls of its lumbering state-owned enterprises and its archaic
bankruptcy laws. But hope has turned to disappointment as vested
interests continue to frustrate privatization efforts. And as our second
story shows, a new bankruptcy law isn't helping to clear commercial
It seemed a deal too good for Indonesia to refuse. In July,
Mexico's cement giant, offered to pay double the market value for a 51%
stake in Semen Gresik, Indonesia's biggest state-owned cement producer.
The agreement would have put $418 million in state coffers and fulfilled
about a quarter of Indonesia's privatization commitment to the
International Monetary Fund this year. Most importantly, it would have
sent a signal to world markets that Indonesia was serious about reform
of state enterprises.
Instead, Indonesia balked. Yielding to xenophobia and other pressures
from bureaucrats, politicians and trade unions, the government haggled
over terms and slashed the stake on offer. Suitors from Germany and
Switzerland fled. Ultimately, in late September, the government sold
Cemex just a 14% stake in Semen Gresik, still at double market value;
Cemex acquired a further 6% from public shareholders.
Jakarta hails the deal as a major breakthrough: "We have broken
ice -- privatization will now accelerate," claims Tanri Abeng,
Indonesia's minister of state enterprises. But others say it is a
fiasco. Worse, potential investors are running scared as Indonesia's
privatization programme shudders to a halt after barely leaving the
kerb. "The government is not able to deal with vested interests and that
is placing the whole privatization programme in jeopardy," says a top
American banker based in Jakarta.
Indeed, analysts say the Semen Gresik mess is symbolic of the
of Indonesia's privatization programme. Five of the 12 companies
originally up for grabs have been withdrawn from the market. The
cancellations, combined with the reduced Semen Gresik sell-off, mean
Indonesia will raise only $200 million from privatization this year,
well short of the promised $1.5 billion. The budget gap will be even
wider and Indonesia will have to fund the deficit by printing more
money. That, warns Tim Condon, chief economist at Morgan Stanley Dean
Witter in Hong Kong, will boost inflation.
Foreign bankers -- briefly elated by Jakarta's apparent intention
reform the state sector -- are eyeing the whole process with scepticism.
There are many signs of government foot-dragging: Work on a key report
on restructuring due in October has yet to begin, while banks selected
to advise the remaining seven companies slated for privatization have
yet to receive official approval. "The government has lost its sense of
urgency," says another banker.
The size of the problem is not lost on some senior government
officials. Abeng, the minister in charge of restructuring, acknowledges
that the delays and scale-downs will affect the economy. At first,
foreign investors hailed Abeng for his business acumen and lack of ties
with politicians. A private-sector veteran, Abeng served as head of the
local units of U.S. industrial giant Union Carbide and Dutch brewer
Heineken before taking over as chief executive of Bakrie Group, a
diversified Indonesian business concern. He immediately put 12 companies
on the block, including port, airport and highway operators, mining
companies, plantations and telecommunications firms. By June, Abeng had
named nine investment banks to act as financial advisers to the 12
The 12 firms represented the best hopes for privatization among
Indonesia's bloated state enterprises. With assets of 461 trillion
rupiah ($50.6 billion), Indonesia's 159 state-owned enterprises together
can return no more than a 2.5% profit on their assets. Seven out of 10
enterprises are loss-makers. Despite the drain, Abeng's reform plans
soon faced opposition from Suharto-era bureaucrats and politicians. He
received a lukewarm response from top cabinet officials such as
Coordinating Minister for the Economy Ginanjar Kartasasmita. Business
leaders say Abeng's moves affronted the old guard who have no wish to
see their lumbering, inefficient enterprises sold off.
Under such pressure, Abeng's message quickly became garbled.
Dutch steel giant Ispat expressed interest in a 49% stake in locally
based Krakatau Steel. Abeng approved Ispat's application to conduct due
diligence on Krakatau, then hastily withdrew it after complaints from
potential rival suitors. Then Abeng's list of potential privatization
candidates began to shrink. After the aborted Krakatau deal,
Telekomunikasi Indonesia, the biggest of the 12 companies originally
slated for sale, was taken off the block. Abeng then ruled out
asset-sales in three public-service firms: seaport manager Pelindo,
airport operator Angkasa Pura and highway contractor Jasa Marga. "It is
not possible to sell assets in these firms at the present time," Abeng
says, citing a poor political and economic climate.
Short-term improvements in key economic indicators have also
some traditionalists into thinking no drastic action is needed to get
the economy back into shape. The rupiah has strengthened recently,
foreign reserves have posted a slight rise, foreign aid is trickling in
and the country has rescheduled some of its crippling debt. "This has
given Indonesia breathing space and lulled Indonesia into a false sense
of complacency," says another U.S. investment banker in Jakarta.
Cemex, meanwhile, is biding its time. It has two seats on Semen
Gresik's five-member board and can raise its stake later. Industry
observers say Cemex has a long-term Asian strategy -- it already
operates in Singapore and the Philippines -- and plans to gradually
build market share in Indonesia's low-cost cement industry. A Cemex
official failed to respond to inquiries about the Semen Gresik
transaction other than to say: "It's a good deal for us."
However, the company received a frosty welcome from the rank-and-file
employees. When East Java-based Semen Gresik acquired plants in Sumatra
and South Sulawesi, the deals sparked anti-Javanese unrest. The idea of
Mexicans taking over horrified the fiercely parochial workers, who
staged anti-privatization protests. Abeng acknowledges that the prospect
of a foreign owner laying off workers and stepping on ethnic
sensibilities was a factor in scaling back the sell-off. "We had not
anticipated the level of cultural resistance," he says.
Analysts say if that is the sort of welcome mat Indonesia is
foreign investors, the country's restructuring may take longer than
anticipated. Even more worrying, if Jakarta faces so many hurdles
selling off one of its more attractive enterprises, privatizing the rest
of the state sector may be an insurmountable objective.