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Bulletin of Indonesian Economic Studies
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AN ASSESSMENT OF THE ASSET MANAGEMENT
COMPANY MODEL IN THE REFORM OF
INDONESIA'S BANKING SECTOR
Jake Redway
To cite this article: Jake Redway (2002) AN ASSESSMENT OF THE ASSET MANAGEMENT
COMPANY MODEL IN THE REFORM OF INDONESIA'S BANKING SECTOR, Bulletin of Indonesian
Economic Studies, 38:2, 241-250, DOI: 10.1080/000749102320145075
To link to this article: http://dx.doi.org/10.1080/000749102320145075
Published online: 17 Jun 2010.
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Date: 19 January 2016, At: 20:25
Bulletin of Indonesian Economic Studies, Vol. 38, No. 2, 2002: 241–50
AN ASSESSMENT OF THE
ASSET MANAGEMENT COMPANY MODEL IN
THE REFORM OF INDONESIA’S BANKING SECTOR
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Jake Redway*
Latham & Watkins, Singapore
Lack of satisfactory progress with reform of the banking sector may imply that the
chosen remedies were unworkable in the Indonesian context. These remedies,
suggested by the international community, appear not to have taken proper account of the commercial and political ramifications of the new institutions and
mechanisms that were to be put in place. Of key importance is the practical difficulty of finding suitable buyers for banks and assets taken over by the new bank
restructuring agency. Almost the entire corporate sector was in distress as a result
of the crisis, while foreign buyers were reluctant to commit themselves given an
inadequate legal system as well as significant nationalistic opposition to the sale of
corporate assets to foreign entities. This article discusses reasons for the failure to
achieve several principal objectives of the reforms, and canvasses alternative approaches that might be more successful.
As Indonesia comes to terms with its
third government in four years, it may be
timely to reassess the utility of the asset
management company model as the basis
for Indonesia’s efforts to rehabilitate and
reform its banking sector. In particular, it
is worth considering whether the failure
of successive governments to pursue the
remedies prescribed by the international
community for Indonesia’s banking sector represents solely the obstinacy of corrupt and misguided politicians, or is
evidence that the remedies may not be
workable in the Indonesian political context. The former characterisation is frequently repeated in the international
financial press and is freighted with
moral judgments. The latter, while reflecting a less satisfying moral outcome, may
be the more realistic view.
Much has been written about the macroeconomic assumptions behind the well-
intentioned programs promoted by the
International Monetary Fund (IMF). Most
of the literature is critical. Indeed, it has
become fashionable to blame the IMF for
exacerbating the financial crisis, by failing to analyse the nature of the economic
problem properly or to appreciate adequately the weaknesses specific to
Indonesia’s banking sector. Criticism has
also been levelled at the lengthy list of reform initiatives included in the IMF’s
many Letters of Intent with Indonesia.
Little has been said, however, about the
commercial and political ramifications of
the new institutions and mechanisms put
in place by the Indonesian government to
implement the reforms recommended by
the IMF, the World Bank and other advisors. If the original macroeconomic analysis was not correct and the reform agenda
too ambitious, it may be that other analyses were also faulty and had unintended
ISSN 0007-4918 print/ISSN 1472-7234 online/02/020241-10
© 2002 Indonesia Project ANU
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242
Jake Redway
consequences. Indeed, the medium and
longer-term implications for the political
economy of Indonesia of these institutions
and mechanisms may prove to be of
greater significance to Indonesia’s wellbeing than the lingering after-effects of any
near-term economic prescriptions.
Since IBRA did not yet exist, decisions would have to be made about the
ministry or agencies of the Indonesian
government to which IBRA would be
subordinate. Likewise, staff would
need to be hired so that IBRA could
carry out its functions.
THE STRUCTURES FOR REFORM
The mechanisms and institutions for
implementing Indonesia’s financial sector reform were conceptually quite
straightforward.
First, a new government agency would
be established with responsibility for
overseeing and implementing the reforms—the Indonesian Bank Restructuring Agency (IBRA) (Johnson 1998: 47–9).
IBRA is only one of several Asian asset
management companies established in
the mould of the original Resolution
Trust Company (RTC) formed in the US
to address the American savings and
loan crisis of the 1980s.
Non-performing loans would be transferred from Indonesia’s failed or failing
financial institutions to IBRA, which
would package and resell them at a discount in the market. The assets of failed
financial institutions would be disposed
of at value, in transparent market transactions. The balance sheets of failing financial institutions would be relieved of
bad assets to facilitate their rehabilitation.
The government would apply the proceeds to reduce the costs to the national
budget.
In dealing with owners of financial
institutions found to have transgressed
regulatory requirements or otherwise to
have behaved inappropriately in the
management of their institutions, again
precedents from the American savings
and loan crisis were available. Owners
would be prosecuted vigorously and their
assets seized to satisfy the unperformed
obligations of their respective financial
institutions.
DISTINGUISHING
THE PRECEDENTS
Precedents are valuable. They embody
the collective wisdom accumulated with
respect to specific subject matter. They
must, however, be used with care. Doing
what has been done before can be counterproductive, if circumstances differ
markedly. A list follows of some significant points of difference between the situation faced by those trying to address the
savings and loan crisis in the US and
those trying to address the banking crisis in Indonesia.
The savings and loan crisis of the
1980s was an isolated phenomenon in
an otherwise healthy economy. The existence of financial institutions outside
the savings and loan sector was not
threatened, and the American economy
as a whole was sound. In Indonesia, the
entire economy was in a state of collapse
analogous to that of the Great Depression of the 1930s. The financial sector
had imploded. Had the savings and
loan crisis occurred at the height of the
Great D epression, would President
Roosevelt have suggested the establishment of the RTC?
The establishment of an RTC-like entity, the transfer to that entity of non-perfo rm ing lo ans and their r esale in
securitised bundles through auctions
assumes a broad, solvent pool of purchasers and a legal environment that
permits purchasers to value and enforce
their rights in respect of the assets they
acquire. If Indonesian creditors cannot
collect from Indonesian borrowers, how
realistic is it for foreign investors to ex-
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The Reform of Indonesia’s Banking Sector
pect that they will have greater success
in collecting the value of the assets they
purchase?
The savings and loan industry in the
US was principally a mortgage or real estate-based financial industry. America is
possessed of deep reserves of financial,
accounting and legal specialists, as well
as numerous large institutions specialising in the management of real estate assets. Such assets are relatively easy to
manage. A plan in which large pools of
real estate assets were seized, managed
by neutral parties on an interim basis and
then sold to a solvent pool of buyers was
feasible in the savings and loan crisis in
America. In contrast, assets seized in Indonesia come from all industrial sectors.
Manufacturing firms producing automobiles, tyres, petrochemicalsand food products, not to mention agrarian enterprises
such as palm oil plantations and shrimp
farms, require specialisedmanagement expertise to run them as well as the ability to
deal with significant labour problems.
When entire regions depend upon these
industries for tax revenues and employment, the process inevitably becomes political. If one excludes the current owners
and their management teams (with all the
deficiencies they may have), specialised
management skills of the type required are
limited in Indonesia.
Indonesia is a post-colonial society
with latent, albeit mild, nationalistic tendencies. Buyers of Indonesian assets can
only be (1) foreigners or (2) Indonesians
with substantial economic resources—
who, in general, are the very same people
being compelled to dispose of their assets. While foreign advisors may have
great confidence in the ability of foreign
strategic investors to improve the transparency and operational characteristics
of Indonesian management, post-colonial Indonesians may understandably be
circumspect about seeing entire sectors
of their industry pass into the control of
243
foreign companies, particularly at distressed market prices. It is unlikely that
any OECD nation would ever accept the
degree of foreign penetration that would
result from the contemplated sale of assets demanded by foreign advisors of
Indonesia’s government.
America is a legalistic (some would
say hyper-legalistic) society with a
strong tradition of law and order and a
puritan heritage. Deposits placed at savings and loan institutions enjoyed the
express guarantee of the government.
Owners who abused their institutions
clearly transgressed acceptable norms,
both legal and cultural, for the US. Without apologising for the misbehaviour of
Indonesian bank owners, points of difference do need to be noted. There was
no express government guarantee for Indonesian bank deposits at the time of the
financial crisis. There is no question that
Indonesian bank owners used the deposits to make loans to their own companies
in excess of legal, and healthy, limits.
That said, the observation of one disgraced Indonesian bank owner is illustrative of a way of thinking not totally
devoid of logic. ‘Who else were we going
to lend to? In a country like ours, without
enforceable laws, the only people you can
be sure will pay you back are your own
companies.’
EVALUATING THE
REFORM INITIATIVE
Few are prepared to declare the reform
initiative to date a success. From the perspective of the foreign advisor, there is
little to give a sense of accomplishment.
The privatisation of state enterprises
was declared a principal objective of
Indonesia’s financial and economic reforms. Although a few examples may be
cited to the contrary, the privatisation
initiative has failed to take off. In reality,
Indonesia has effectively imposed state
oversight and control on the financial
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244
planning of a substantial portion of
Indonesia’s privately owned industrial
assets by placing them under the control
of IBRA.1 The recent announcement that
Indonesia’s Minister of State Enterprises
will now have supervisory responsibil ity for IBRA signals the defeat of this IMF
objective. Instead of solving Indonesia’s
financial sector crisis, arguably a problem has been created in the real sector of
the economy.2
Implementation of the rule of law
was declared a principal objective of the
reform initiative. As in other parts of
the world, multilateral organisations
initially pressed for statutory reform
when the statutes in place were in
fact adequate, and enforcement was the
real issue. Sadly, although the need for
enforcement has finally been recognised,
attention now focuses only upon enforcement. No comment is made about ‘equal
protection’ under the law. Given the ineffectiveness of Indonesia’s judiciary, foreign pressure has mounted for a single
conviction to demonstrate that it has the
power to deliver justice. The result has
been vigilante justice, with the political
process seeing the manoevring of potential defendants to position others as the
‘scapegoat’. More cynical observers note
the opportunity for the office of the attorney general to profit personally from
these ‘investigations’. Reformers, both
Indonesian and foreign, seem totally
unconcerned about the arbitrary and
political manner in which ‘justice’ is being pursued in Indonesia. This will
probably prove to be a mistake. The
politicisation of judiciary proceedings
and vigilante justice can be as debilitating as non-enforcement.
Reduction of corruption (KKN) was
declared a principal objective of the reform process. The limiting, if not eradication, of KKN was sought through
‘transparent auctions’ and the ousting
of Indonesia’s current economic elite.
Jake Redway
Auctions, transparent or otherwise, can
occur only when there is a pool of solvent buyers. Indonesia’s post-colonial
sensitivity makes it difficult for a government trying to establish lasting
political foundations to see foreign purchasers as the principal prospective
buyers. The government understandably finds it even more difficult to sell
the country’s industrial assets at distressed prices. The apparent need of
Indonesia’s domestic political reform
movement to ‘demonise’ the Soeharto
cronies makes it difficult for members of
the Indonesian elite, to the extent that
they continue to control substantial financial resources, to be the prospective
purchasers. Indeed, the ‘politics of scandal’ impedes sales to any Indonesian
purchaser, since all are uniformly suspected of (and indeed may be) fronting
for former owners. Rather than ‘transparent auctions’, there are no sales.
In a perverse way, IBRA may have become a magnet for corruption. Substantial productive Indonesian assets have
been centralised under the control of a
single government agency. That agency,
below its top management level, is
staffed by many former bank employees.
Not surprisingly, the relatively shallow
pool of Indonesian nationals with the
technical expertise to deal with financial assets is sourced mostly from the
very banks that had accumulated the
problem loans. As these banks were
closed or downsized, laid-off workers
naturally found their future employment in the single largest financial institution hiring employees, IBRA. Since
the agency lacks the operational expertise to manage the assets under its control, it must continue to rely upon the
former owners, and management loyal
to the former owners, to handle day-today operations. The IBRA employees
responsible for the assets quite naturally
have also become a conduit for infor-
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The Reform of Indonesia’s Banking Sector
mally resolving problems. The result is
stagnation as the former owners and the
government struggle for control over
IBRA and the assets—both financial and
real—that it controls.
Lastly, the current course of conduct
may inadvertently be encouraging a
continuation of old ‘bad practices’ rather
than the institution of internationally
recognised ‘best practice’. The institutional legacy of the Soeharto era is a constitutionalframework intended to provide
the context for a strong presidential office
and a relatively weak legislature inhabited by numerous fragmented political
parties based more on personal than philosophical ties. With Soeharto gone, the informal patrimonial support for the
presidency has also gone, or perhaps it is
better to say that it is subject to renegotiation. As the post-Soeharto political order
tries to find its feet, opportunities for the
trading of financial and political favours
abound. If the political structures are not
able to accommodate debate and resolution of the issues in a forthright manner,
perhaps they can be resolved behind the
scenes. There is good, if circumstantial,
evidence to indicate that the Salim Group
and IBRA have largely completed the repurchase, at a substantial discount, of the
core group assets administered by IBRA,
by parties friendly to the Salim Group. As
the collection of debts from Indonesia’s
financial and political elite becomes increasingly politicised,members of the elite
understand that their assets are worth
more when hidden and used as bargaining chips.
WHAT WENT WRONG?
Well-intentioned reformers, both foreign
and Indonesian, have failed to consider
adequately the political context of financial sector reform. Several factors have
been at work.
First, to some extent, this failure may
have resulted from the compartmentali -
245
sation of modern society. The discipline
which, at the end of the 19th century, was
referred to as ‘political economy’ has now
become two disciplines, political science
and economics (the latter sometimes referred to as the ‘dismal’ science). The collapse of the Indonesian financial sector
was seen primarily as an economic, not
a political, problem.
Second, the multilateral institutions
that generally address financial crises
are not as sensitive to host country political issues as they perhaps should be.
They do not have the staff to play a political role in the local economy, even if
it were desirable that they perform this
intrusive role at all. Not long ago, the
IMF and its staff of economists would
discuss economic issues with the Minister of Finance or the head of the centr al bank in the hos t c o untr y. In
Indonesia, IMF representatives can now
be seen speaking to the heads of political parties and to members of parliament. This intrusiveness into day-to-day
political life is new. It is not clear that
the multilateral institutions are prepared to perform this function, or
whether it is an appropriate function for
them to perform at all.
Third, from an Indonesian perspective,
reformers may have been overwhelmed
by the newness of the experience of crisis. The Indonesian financial crisis was
of an order of magnitude comparable to
that of the Great Depression. Nobody in
contemporary Indonesia had had any
experience in dealing with a problem of
such dimensions. Given the opacity of
governance in Indonesia in the later Soeharto years, it may have taken some time
for institutions to form which could address it. Such institutions, if they could
be formed at all, would need time to obtain and organise the information necessary to deal with the problems that arose.
Time was in short supply at the onset of
the crisis.
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246
Ironically, Indonesia, among the
Asian nations, may have been peculiarly vulnerable. It has a history of being receptive to advice from foreign
sources. The ‘Berkeley Mafia’—a group
of Indonesian economists trained at the
University of California, Berkeley, in the
late 1950s who went on to dominate economic policy making during the Soeharto era (Arndt 1997: 41–2)—reflected
a transplanting of foreign advice into the
Indonesian system. Notwithstanding
nationalistic and emerging market protectionist concerns, which are universal
and understandable, Indonesia has
generally been receptive to suggestions
for financial liberalisation and economic development. Its nationalism has
largely been latent. Given the ‘newness’
of the financial crisis and the lack of experience in dealing with such problems,
Indonesians naturally looked to foreign
advisors as having greater experience
than themselves, assuming that they
would know what to do. Only gradually has it dawned on Indonesian reformers that the financial reformers from
abroad may not have understood the
situation properly.
Several other specific factors may not
adequately have been taken into account.
The Legacy of KKN
The Soeharto regime was in place for so
long that there is no one old enough or
experienced enough to manage a major
industrial enterprise or government program who did not have to accommodate
himself or herself to the ways of New
Order society. In short, anyone who might
be qualified to play an important role in
any reform effort has a ‘record’. Not unlike the situation that existed at the end
of the Soviet era, or indeed in Japan and
Germany after World War II, there is a
need to accommodate past practices
when forming the political basis for any
reform initiatives.
Jake Redway
A Weak Government
A reform initiative of the scope contemplated by the IMF Letters of Intent was
‘revolutionary’, requiring a strong government if it was to have any chance of
being implemented. A new government
coming to power in uncertain times is
rarely a strong government, at least in its
early years. If one views the overthrow of
Soeharto as a ‘revolutionary event’, the
new order displacing the old ‘New Order’ has yet to identify itself. Rather, politicians in a weak government are looking
for support simply to stay in government.
Reformers, both Indonesian and foreign,
may need to make allowance in their
plans for more time and more room for
compromise. The alternative model is a
government of Leninist discipline and
determination. History provides little
support for the proposition that such
governments accelerate reform over the
longer term.
Nationalism
Indonesia is a post-colonial society.
Having reclaimed its independence and
regained control over its productive economic resources, it is unlikely that a reform program calling for the sale of
substantial economic assets to foreigners at distressed prices would enjoy
much political support. Even if such
sales could be effected, a destructive
backlash might subsequently occur. Indeed, it seems likely that, as Indonesia
recovered its economic health, efforts
would be made to regain control over
such assets.
An Economic Elite
Indonesia is a poor country. The educated elite that controls its economic assets, and that has the educational and
technical capabilities to manage them, is
relatively small. Once the previously ruling economic elite is excluded from participating in Indonesia’s economic future,
The Reform of Indonesia’s Banking Sector
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this leaves few people qualified to perform the role. When reformers sought to
displace the current owners, it was not
clear who would replace them—other
than foreign managers, who would be
unlikely to be acceptable.
WHAT IS TO BE DONE?
Priorities have to be clarified. Politicians
must then prepare the populace for a feasible, modified reform initiative that
more accurately reflects these priorities.
Politics is often described as ‘the art of
the possible’. Initial reform efforts for
Indonesia’s financial sector probably
tried to do too much, too fast.
Is the primary objective in Indonesia
today to purge the country of KKN and
financial wrongdoers, or to restart the
economy? There is little evidence of the
rise of any political movement wishing
to radically alter the traditional ways of
doing business in Indonesia. KKN did
indeed reach unacceptable levels near
the end of the Soeharto regime, and a
reduction to lower and more acceptable
levels would certainly be feasible. However, to reduce KKN within a short period of time to the levels prevailing in
OECD countries would require a radical political initiative. It is not clear that
the political institutions exist to pursue
such an agenda. If they were formed, the
likely result would be the destruction of
Indonesia’s contemporary management
and political elite.
If the primary objective is to restart
the Indonesian economy, generating
wealth and growth that can outpace
population increases, past practices
may have to be accommodated within
any new political initiative for banking
sector reform. In the end, KKN is a domestic political issue that will need to
be resolved by Indonesians, in a manner that they themselves decide. In the
past foreign lenders accommodated
KKN, and some may even have abetted
247
it, but embarrassment over such past
behaviour should not distort the current
reform effort.
To be implemented successfully, the
shape of any reform movement should
ultimately be acceptable to Indonesians,
and be deemed by them to be politically
feasible. Here are at least two options.
First, reformers might continue down
the existing road, but in a new fashion.
The state might abandon all pretence
that there has been no nationalisation of
assets. The Minister of State Enterprises
might utilise assets from existing state
enterprises as well as IBRA-administered
assets to rationalise and restructure the
economy. Advocates could argue that, by
mixing and matching assets, more efficient enterprises would be created.
The state sector provides the only
source of operational management skills
that could displace those of the current
owners. This might help to break the
current political stand-off between the
government and the owners of the distressed assets. The result could resemble
Malaysia’s current mix of private but
politically dominated conglomerates.
This might appeal to the Muslim groups
who see Malaysia as a model to be emulated.
The new government would doubtless
appreciate the opportunities for political
patronage in such a restructuring of
Indonesia’s enterprises. Existing owners
and those Indonesians seeking to manage seized assets would doubtless compete vigorously for the privilege of
helping to shape and manage the new
economy.
This points in the direction of a more
statist economy with little transparency.
Any ostensible increases in efficiencies in
corporate groupings or asset utilisation
would be overseen by a politicisedbureaucracy rather than by market forces.
An alternative would be to move the
political focus away from prosecution
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248
and KKN and to depoliticise the issue.
This might entail replacing the ‘politics
of punishment’ with the ‘politics of redemption’. Foreign advisors may find
the moral implications of this strategy
difficult to accept, but realistically, if improving the economy is paramount,
greater accommodation may be necessary. As matters stand today, the first
wave of financial sector reform has set
the nation’s economic elite and its government at odds in what is effectively
an economic civil war. The economic
elite has no financial or political interest in supporting the efforts of the government or implementing its reform
program. Its members can only lose. A
program that replaces the stick with a
carrot, and that contains the following
elements, might be considered.
(1) The government would forswear
further prosecution of former bank owners and recalcitrant borrowers in exchange for their cooperation in once
again generating economic growth.
(2) The financial ‘sins’ that are to be
forgiven would be fully stipulated between the former bank owners and recalcitrant borrowers on the one hand,
and the government on the other.
(3) Indonesia’s current economic
elite would be granted the opportunity
to repay its outstanding obligations to
the government on commercially reasonable terms in lieu of seizure or confiscation of assets.
(4) Indonesia’s current economic
elite would grant the government equity
in such enterprises in a proportion that
would reward it for its participation in
an extended repayment program.
Indonesia’s economic elite is unlikely
to compromise on financial restructuring until there is a stable government
with which it can work out long-term
relations. The sooner the government
can focus upon economic growth, the
more quickly it will become stable.
Jake Redway
Disclosure might be required as a condition to the right to enjoy the benefits of
an amnesty. A requirement to disclose
financial details would facilitate cooperation and disclosure of the relevant
economic data for Indonesia. It would
also, in aggregate, compromise the economic elite and the government in such
a way that greater disclosures might in
future become a part of Indonesian economic life. There should be no illusion
that full disclosure would in fact occur.
Substantial disclosure would represent
meaningful progress.
If the objective is to reduce KKN and
punish wrongdoers, then the full economic
power of the state may need to be brought
to bear. A ‘new elite’ rather than foreign
investors would enter the economy. Indonesia might move in the direction of Malaysia rather than Singapore Inc.
If the objective is to improve the
economy, allowing Indonesia’s economic
elite to work out its obligations to the government in a commercially reasonable
manner would ally its interests with those
of the government. Purists will point to
this as a danger, and they would be correct. That said, economic elites always
influence their governments, and Indonesia may benefit more from the reinvestment of the financial resources and
management expertise of its elite than
from the marginal utility of curtailing its
influence. The influence is there, in all
events, and it may be more helpful if harnessed to achieve economic growth.
The requirement that former bank
owners and recalcitrant borrowers grant
a portion of the equity in their enterprises
to the government would allow such
equity to be sold over time in the Indonesian public market. This would widen
the population of public investors in
Indonesia’s enterprises, which would be
good both for politics and for Indonesia’s
capital markets. Foreign investors might
enter the companies as financial rather
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The Reform of Indonesia’s Banking Sector
than strategic investors. This would be
more consistent with Indonesia’s stage
of economic development and its postcolonial history.
Whichever option is pursued—and
there are many besides those noted
above—consideration should be given to
implementing legislation that separates
the business of banking from the real
economy. If there is a lesson to be learned
from Asia’s financial crisis, it is that banking and industrial enterprise do not mix.
If sound credit decisions are to become
more likely in Indonesia’s political economy, banks (and their owners) should
not own industrial enterprises, and industrial enterprises (and their owners) should
not own banks. This flies in the face of
trends currently popular in OECD countries, but foreign advisors should recognise
that Indonesia’s economy at the start of
the new millennium is much closer to the
late Victorian economies of the West than
to current Western economies.
Given its relative paucity at present, it
is unlikely that the pool of regulatory and
249
financial supervisory expertise in Indonesia will develop in the near term to the
point where there is the capacity to supervise a sophisticated modern capital
market and financial sector along the
lines of developed OECD economies. In
the wake of the Enron collapse, this may
now be an easier point for foreign advisors to absorb. Rather than trying to pretend that there are no differences between
the emerging markets and the developed
nations, it may be prudent to stick with
what is simple and draw defendable
lines for Indonesia’s economic development. Such lines could then be reexamined as Indonesia’s economic
development proceeds.
Finally, although multilateral institutions should continue to give advice,
they should probably withdraw from
playing an active role in Indonesian
political debate. Solutions that are in the
first instance initiated by and acceptable
to Indonesians stand a better chance of
being implemented, and of being sustainable.
NOTES
*
1
2
Jake Redway is a partner of Latham &
Watkins, an international law firm. He
has practised in the financial services
sector for many years and was active in
Indonesia during the recent crisis.
Management of IBRA-controlled assets
is supposed to be exercised in accordance
with agreements entered into between
the agency and the former owners of the
assets. These agreements attempt to impose IBRA control over all material financial decisions, by requiring that they
be approved by an IBRA-appointed
board. ‘Operational management’ remains with the former owners.
Perhaps the saddest example of the effects of the law of unintended consequences is the case of Astra International,
Indonesia’s principal automobile manufacturer. Before the crisis, Astra was considered by many to be the Indonesian
enterprise closest to the advanced eco-
nomic model held up by Indonesia’s
economic reformers. Ironically, as a result of an earlier bank failure, ownership and control of the company had
passed out of the hands of a single Indonesian family, and ownership was, by
Indonesian standards, broadly held.
When IBRA seized the assets of bank
owners, it came into possession of a significant and controlling block of Astra
shares by accumulating 2–5% blocks
from former bank owners. This block
was then sold to a Singapore company.
(The very fact that Astra’s shares were
widely held may be one reason that it
could be s ol d w ith out e ntre nche d
organised resistance.) Thus Indonesia’s
one true ‘publicly held’ company passed
into the control of a single owner, and a
foreign one at that. If one considers the
ultimate beneficial owner of Cycle &
Carriage in Singapore, the argument
250
Jake Redway
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may be made that the whole process has
gone full cycle, except that the family
that now controls the company is English rather than Indonesian. It will be
interesting to see how the new ‘controlling’ shareholder and management come
to terms over time.
REFERENCES
Arndt, H.W. (1997). ‘Bruce Glassburner,
1920–1996’, Bulletin of Indonesian Economic
Studies, 33 (2): 41–8.
Johnson, Colin (1998), ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies, 34 (2): 3–60.
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
AN ASSESSMENT OF THE ASSET MANAGEMENT
COMPANY MODEL IN THE REFORM OF
INDONESIA'S BANKING SECTOR
Jake Redway
To cite this article: Jake Redway (2002) AN ASSESSMENT OF THE ASSET MANAGEMENT
COMPANY MODEL IN THE REFORM OF INDONESIA'S BANKING SECTOR, Bulletin of Indonesian
Economic Studies, 38:2, 241-250, DOI: 10.1080/000749102320145075
To link to this article: http://dx.doi.org/10.1080/000749102320145075
Published online: 17 Jun 2010.
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Date: 19 January 2016, At: 20:25
Bulletin of Indonesian Economic Studies, Vol. 38, No. 2, 2002: 241–50
AN ASSESSMENT OF THE
ASSET MANAGEMENT COMPANY MODEL IN
THE REFORM OF INDONESIA’S BANKING SECTOR
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Jake Redway*
Latham & Watkins, Singapore
Lack of satisfactory progress with reform of the banking sector may imply that the
chosen remedies were unworkable in the Indonesian context. These remedies,
suggested by the international community, appear not to have taken proper account of the commercial and political ramifications of the new institutions and
mechanisms that were to be put in place. Of key importance is the practical difficulty of finding suitable buyers for banks and assets taken over by the new bank
restructuring agency. Almost the entire corporate sector was in distress as a result
of the crisis, while foreign buyers were reluctant to commit themselves given an
inadequate legal system as well as significant nationalistic opposition to the sale of
corporate assets to foreign entities. This article discusses reasons for the failure to
achieve several principal objectives of the reforms, and canvasses alternative approaches that might be more successful.
As Indonesia comes to terms with its
third government in four years, it may be
timely to reassess the utility of the asset
management company model as the basis
for Indonesia’s efforts to rehabilitate and
reform its banking sector. In particular, it
is worth considering whether the failure
of successive governments to pursue the
remedies prescribed by the international
community for Indonesia’s banking sector represents solely the obstinacy of corrupt and misguided politicians, or is
evidence that the remedies may not be
workable in the Indonesian political context. The former characterisation is frequently repeated in the international
financial press and is freighted with
moral judgments. The latter, while reflecting a less satisfying moral outcome, may
be the more realistic view.
Much has been written about the macroeconomic assumptions behind the well-
intentioned programs promoted by the
International Monetary Fund (IMF). Most
of the literature is critical. Indeed, it has
become fashionable to blame the IMF for
exacerbating the financial crisis, by failing to analyse the nature of the economic
problem properly or to appreciate adequately the weaknesses specific to
Indonesia’s banking sector. Criticism has
also been levelled at the lengthy list of reform initiatives included in the IMF’s
many Letters of Intent with Indonesia.
Little has been said, however, about the
commercial and political ramifications of
the new institutions and mechanisms put
in place by the Indonesian government to
implement the reforms recommended by
the IMF, the World Bank and other advisors. If the original macroeconomic analysis was not correct and the reform agenda
too ambitious, it may be that other analyses were also faulty and had unintended
ISSN 0007-4918 print/ISSN 1472-7234 online/02/020241-10
© 2002 Indonesia Project ANU
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242
Jake Redway
consequences. Indeed, the medium and
longer-term implications for the political
economy of Indonesia of these institutions
and mechanisms may prove to be of
greater significance to Indonesia’s wellbeing than the lingering after-effects of any
near-term economic prescriptions.
Since IBRA did not yet exist, decisions would have to be made about the
ministry or agencies of the Indonesian
government to which IBRA would be
subordinate. Likewise, staff would
need to be hired so that IBRA could
carry out its functions.
THE STRUCTURES FOR REFORM
The mechanisms and institutions for
implementing Indonesia’s financial sector reform were conceptually quite
straightforward.
First, a new government agency would
be established with responsibility for
overseeing and implementing the reforms—the Indonesian Bank Restructuring Agency (IBRA) (Johnson 1998: 47–9).
IBRA is only one of several Asian asset
management companies established in
the mould of the original Resolution
Trust Company (RTC) formed in the US
to address the American savings and
loan crisis of the 1980s.
Non-performing loans would be transferred from Indonesia’s failed or failing
financial institutions to IBRA, which
would package and resell them at a discount in the market. The assets of failed
financial institutions would be disposed
of at value, in transparent market transactions. The balance sheets of failing financial institutions would be relieved of
bad assets to facilitate their rehabilitation.
The government would apply the proceeds to reduce the costs to the national
budget.
In dealing with owners of financial
institutions found to have transgressed
regulatory requirements or otherwise to
have behaved inappropriately in the
management of their institutions, again
precedents from the American savings
and loan crisis were available. Owners
would be prosecuted vigorously and their
assets seized to satisfy the unperformed
obligations of their respective financial
institutions.
DISTINGUISHING
THE PRECEDENTS
Precedents are valuable. They embody
the collective wisdom accumulated with
respect to specific subject matter. They
must, however, be used with care. Doing
what has been done before can be counterproductive, if circumstances differ
markedly. A list follows of some significant points of difference between the situation faced by those trying to address the
savings and loan crisis in the US and
those trying to address the banking crisis in Indonesia.
The savings and loan crisis of the
1980s was an isolated phenomenon in
an otherwise healthy economy. The existence of financial institutions outside
the savings and loan sector was not
threatened, and the American economy
as a whole was sound. In Indonesia, the
entire economy was in a state of collapse
analogous to that of the Great Depression of the 1930s. The financial sector
had imploded. Had the savings and
loan crisis occurred at the height of the
Great D epression, would President
Roosevelt have suggested the establishment of the RTC?
The establishment of an RTC-like entity, the transfer to that entity of non-perfo rm ing lo ans and their r esale in
securitised bundles through auctions
assumes a broad, solvent pool of purchasers and a legal environment that
permits purchasers to value and enforce
their rights in respect of the assets they
acquire. If Indonesian creditors cannot
collect from Indonesian borrowers, how
realistic is it for foreign investors to ex-
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The Reform of Indonesia’s Banking Sector
pect that they will have greater success
in collecting the value of the assets they
purchase?
The savings and loan industry in the
US was principally a mortgage or real estate-based financial industry. America is
possessed of deep reserves of financial,
accounting and legal specialists, as well
as numerous large institutions specialising in the management of real estate assets. Such assets are relatively easy to
manage. A plan in which large pools of
real estate assets were seized, managed
by neutral parties on an interim basis and
then sold to a solvent pool of buyers was
feasible in the savings and loan crisis in
America. In contrast, assets seized in Indonesia come from all industrial sectors.
Manufacturing firms producing automobiles, tyres, petrochemicalsand food products, not to mention agrarian enterprises
such as palm oil plantations and shrimp
farms, require specialisedmanagement expertise to run them as well as the ability to
deal with significant labour problems.
When entire regions depend upon these
industries for tax revenues and employment, the process inevitably becomes political. If one excludes the current owners
and their management teams (with all the
deficiencies they may have), specialised
management skills of the type required are
limited in Indonesia.
Indonesia is a post-colonial society
with latent, albeit mild, nationalistic tendencies. Buyers of Indonesian assets can
only be (1) foreigners or (2) Indonesians
with substantial economic resources—
who, in general, are the very same people
being compelled to dispose of their assets. While foreign advisors may have
great confidence in the ability of foreign
strategic investors to improve the transparency and operational characteristics
of Indonesian management, post-colonial Indonesians may understandably be
circumspect about seeing entire sectors
of their industry pass into the control of
243
foreign companies, particularly at distressed market prices. It is unlikely that
any OECD nation would ever accept the
degree of foreign penetration that would
result from the contemplated sale of assets demanded by foreign advisors of
Indonesia’s government.
America is a legalistic (some would
say hyper-legalistic) society with a
strong tradition of law and order and a
puritan heritage. Deposits placed at savings and loan institutions enjoyed the
express guarantee of the government.
Owners who abused their institutions
clearly transgressed acceptable norms,
both legal and cultural, for the US. Without apologising for the misbehaviour of
Indonesian bank owners, points of difference do need to be noted. There was
no express government guarantee for Indonesian bank deposits at the time of the
financial crisis. There is no question that
Indonesian bank owners used the deposits to make loans to their own companies
in excess of legal, and healthy, limits.
That said, the observation of one disgraced Indonesian bank owner is illustrative of a way of thinking not totally
devoid of logic. ‘Who else were we going
to lend to? In a country like ours, without
enforceable laws, the only people you can
be sure will pay you back are your own
companies.’
EVALUATING THE
REFORM INITIATIVE
Few are prepared to declare the reform
initiative to date a success. From the perspective of the foreign advisor, there is
little to give a sense of accomplishment.
The privatisation of state enterprises
was declared a principal objective of
Indonesia’s financial and economic reforms. Although a few examples may be
cited to the contrary, the privatisation
initiative has failed to take off. In reality,
Indonesia has effectively imposed state
oversight and control on the financial
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244
planning of a substantial portion of
Indonesia’s privately owned industrial
assets by placing them under the control
of IBRA.1 The recent announcement that
Indonesia’s Minister of State Enterprises
will now have supervisory responsibil ity for IBRA signals the defeat of this IMF
objective. Instead of solving Indonesia’s
financial sector crisis, arguably a problem has been created in the real sector of
the economy.2
Implementation of the rule of law
was declared a principal objective of the
reform initiative. As in other parts of
the world, multilateral organisations
initially pressed for statutory reform
when the statutes in place were in
fact adequate, and enforcement was the
real issue. Sadly, although the need for
enforcement has finally been recognised,
attention now focuses only upon enforcement. No comment is made about ‘equal
protection’ under the law. Given the ineffectiveness of Indonesia’s judiciary, foreign pressure has mounted for a single
conviction to demonstrate that it has the
power to deliver justice. The result has
been vigilante justice, with the political
process seeing the manoevring of potential defendants to position others as the
‘scapegoat’. More cynical observers note
the opportunity for the office of the attorney general to profit personally from
these ‘investigations’. Reformers, both
Indonesian and foreign, seem totally
unconcerned about the arbitrary and
political manner in which ‘justice’ is being pursued in Indonesia. This will
probably prove to be a mistake. The
politicisation of judiciary proceedings
and vigilante justice can be as debilitating as non-enforcement.
Reduction of corruption (KKN) was
declared a principal objective of the reform process. The limiting, if not eradication, of KKN was sought through
‘transparent auctions’ and the ousting
of Indonesia’s current economic elite.
Jake Redway
Auctions, transparent or otherwise, can
occur only when there is a pool of solvent buyers. Indonesia’s post-colonial
sensitivity makes it difficult for a government trying to establish lasting
political foundations to see foreign purchasers as the principal prospective
buyers. The government understandably finds it even more difficult to sell
the country’s industrial assets at distressed prices. The apparent need of
Indonesia’s domestic political reform
movement to ‘demonise’ the Soeharto
cronies makes it difficult for members of
the Indonesian elite, to the extent that
they continue to control substantial financial resources, to be the prospective
purchasers. Indeed, the ‘politics of scandal’ impedes sales to any Indonesian
purchaser, since all are uniformly suspected of (and indeed may be) fronting
for former owners. Rather than ‘transparent auctions’, there are no sales.
In a perverse way, IBRA may have become a magnet for corruption. Substantial productive Indonesian assets have
been centralised under the control of a
single government agency. That agency,
below its top management level, is
staffed by many former bank employees.
Not surprisingly, the relatively shallow
pool of Indonesian nationals with the
technical expertise to deal with financial assets is sourced mostly from the
very banks that had accumulated the
problem loans. As these banks were
closed or downsized, laid-off workers
naturally found their future employment in the single largest financial institution hiring employees, IBRA. Since
the agency lacks the operational expertise to manage the assets under its control, it must continue to rely upon the
former owners, and management loyal
to the former owners, to handle day-today operations. The IBRA employees
responsible for the assets quite naturally
have also become a conduit for infor-
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The Reform of Indonesia’s Banking Sector
mally resolving problems. The result is
stagnation as the former owners and the
government struggle for control over
IBRA and the assets—both financial and
real—that it controls.
Lastly, the current course of conduct
may inadvertently be encouraging a
continuation of old ‘bad practices’ rather
than the institution of internationally
recognised ‘best practice’. The institutional legacy of the Soeharto era is a constitutionalframework intended to provide
the context for a strong presidential office
and a relatively weak legislature inhabited by numerous fragmented political
parties based more on personal than philosophical ties. With Soeharto gone, the informal patrimonial support for the
presidency has also gone, or perhaps it is
better to say that it is subject to renegotiation. As the post-Soeharto political order
tries to find its feet, opportunities for the
trading of financial and political favours
abound. If the political structures are not
able to accommodate debate and resolution of the issues in a forthright manner,
perhaps they can be resolved behind the
scenes. There is good, if circumstantial,
evidence to indicate that the Salim Group
and IBRA have largely completed the repurchase, at a substantial discount, of the
core group assets administered by IBRA,
by parties friendly to the Salim Group. As
the collection of debts from Indonesia’s
financial and political elite becomes increasingly politicised,members of the elite
understand that their assets are worth
more when hidden and used as bargaining chips.
WHAT WENT WRONG?
Well-intentioned reformers, both foreign
and Indonesian, have failed to consider
adequately the political context of financial sector reform. Several factors have
been at work.
First, to some extent, this failure may
have resulted from the compartmentali -
245
sation of modern society. The discipline
which, at the end of the 19th century, was
referred to as ‘political economy’ has now
become two disciplines, political science
and economics (the latter sometimes referred to as the ‘dismal’ science). The collapse of the Indonesian financial sector
was seen primarily as an economic, not
a political, problem.
Second, the multilateral institutions
that generally address financial crises
are not as sensitive to host country political issues as they perhaps should be.
They do not have the staff to play a political role in the local economy, even if
it were desirable that they perform this
intrusive role at all. Not long ago, the
IMF and its staff of economists would
discuss economic issues with the Minister of Finance or the head of the centr al bank in the hos t c o untr y. In
Indonesia, IMF representatives can now
be seen speaking to the heads of political parties and to members of parliament. This intrusiveness into day-to-day
political life is new. It is not clear that
the multilateral institutions are prepared to perform this function, or
whether it is an appropriate function for
them to perform at all.
Third, from an Indonesian perspective,
reformers may have been overwhelmed
by the newness of the experience of crisis. The Indonesian financial crisis was
of an order of magnitude comparable to
that of the Great Depression. Nobody in
contemporary Indonesia had had any
experience in dealing with a problem of
such dimensions. Given the opacity of
governance in Indonesia in the later Soeharto years, it may have taken some time
for institutions to form which could address it. Such institutions, if they could
be formed at all, would need time to obtain and organise the information necessary to deal with the problems that arose.
Time was in short supply at the onset of
the crisis.
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246
Ironically, Indonesia, among the
Asian nations, may have been peculiarly vulnerable. It has a history of being receptive to advice from foreign
sources. The ‘Berkeley Mafia’—a group
of Indonesian economists trained at the
University of California, Berkeley, in the
late 1950s who went on to dominate economic policy making during the Soeharto era (Arndt 1997: 41–2)—reflected
a transplanting of foreign advice into the
Indonesian system. Notwithstanding
nationalistic and emerging market protectionist concerns, which are universal
and understandable, Indonesia has
generally been receptive to suggestions
for financial liberalisation and economic development. Its nationalism has
largely been latent. Given the ‘newness’
of the financial crisis and the lack of experience in dealing with such problems,
Indonesians naturally looked to foreign
advisors as having greater experience
than themselves, assuming that they
would know what to do. Only gradually has it dawned on Indonesian reformers that the financial reformers from
abroad may not have understood the
situation properly.
Several other specific factors may not
adequately have been taken into account.
The Legacy of KKN
The Soeharto regime was in place for so
long that there is no one old enough or
experienced enough to manage a major
industrial enterprise or government program who did not have to accommodate
himself or herself to the ways of New
Order society. In short, anyone who might
be qualified to play an important role in
any reform effort has a ‘record’. Not unlike the situation that existed at the end
of the Soviet era, or indeed in Japan and
Germany after World War II, there is a
need to accommodate past practices
when forming the political basis for any
reform initiatives.
Jake Redway
A Weak Government
A reform initiative of the scope contemplated by the IMF Letters of Intent was
‘revolutionary’, requiring a strong government if it was to have any chance of
being implemented. A new government
coming to power in uncertain times is
rarely a strong government, at least in its
early years. If one views the overthrow of
Soeharto as a ‘revolutionary event’, the
new order displacing the old ‘New Order’ has yet to identify itself. Rather, politicians in a weak government are looking
for support simply to stay in government.
Reformers, both Indonesian and foreign,
may need to make allowance in their
plans for more time and more room for
compromise. The alternative model is a
government of Leninist discipline and
determination. History provides little
support for the proposition that such
governments accelerate reform over the
longer term.
Nationalism
Indonesia is a post-colonial society.
Having reclaimed its independence and
regained control over its productive economic resources, it is unlikely that a reform program calling for the sale of
substantial economic assets to foreigners at distressed prices would enjoy
much political support. Even if such
sales could be effected, a destructive
backlash might subsequently occur. Indeed, it seems likely that, as Indonesia
recovered its economic health, efforts
would be made to regain control over
such assets.
An Economic Elite
Indonesia is a poor country. The educated elite that controls its economic assets, and that has the educational and
technical capabilities to manage them, is
relatively small. Once the previously ruling economic elite is excluded from participating in Indonesia’s economic future,
The Reform of Indonesia’s Banking Sector
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this leaves few people qualified to perform the role. When reformers sought to
displace the current owners, it was not
clear who would replace them—other
than foreign managers, who would be
unlikely to be acceptable.
WHAT IS TO BE DONE?
Priorities have to be clarified. Politicians
must then prepare the populace for a feasible, modified reform initiative that
more accurately reflects these priorities.
Politics is often described as ‘the art of
the possible’. Initial reform efforts for
Indonesia’s financial sector probably
tried to do too much, too fast.
Is the primary objective in Indonesia
today to purge the country of KKN and
financial wrongdoers, or to restart the
economy? There is little evidence of the
rise of any political movement wishing
to radically alter the traditional ways of
doing business in Indonesia. KKN did
indeed reach unacceptable levels near
the end of the Soeharto regime, and a
reduction to lower and more acceptable
levels would certainly be feasible. However, to reduce KKN within a short period of time to the levels prevailing in
OECD countries would require a radical political initiative. It is not clear that
the political institutions exist to pursue
such an agenda. If they were formed, the
likely result would be the destruction of
Indonesia’s contemporary management
and political elite.
If the primary objective is to restart
the Indonesian economy, generating
wealth and growth that can outpace
population increases, past practices
may have to be accommodated within
any new political initiative for banking
sector reform. In the end, KKN is a domestic political issue that will need to
be resolved by Indonesians, in a manner that they themselves decide. In the
past foreign lenders accommodated
KKN, and some may even have abetted
247
it, but embarrassment over such past
behaviour should not distort the current
reform effort.
To be implemented successfully, the
shape of any reform movement should
ultimately be acceptable to Indonesians,
and be deemed by them to be politically
feasible. Here are at least two options.
First, reformers might continue down
the existing road, but in a new fashion.
The state might abandon all pretence
that there has been no nationalisation of
assets. The Minister of State Enterprises
might utilise assets from existing state
enterprises as well as IBRA-administered
assets to rationalise and restructure the
economy. Advocates could argue that, by
mixing and matching assets, more efficient enterprises would be created.
The state sector provides the only
source of operational management skills
that could displace those of the current
owners. This might help to break the
current political stand-off between the
government and the owners of the distressed assets. The result could resemble
Malaysia’s current mix of private but
politically dominated conglomerates.
This might appeal to the Muslim groups
who see Malaysia as a model to be emulated.
The new government would doubtless
appreciate the opportunities for political
patronage in such a restructuring of
Indonesia’s enterprises. Existing owners
and those Indonesians seeking to manage seized assets would doubtless compete vigorously for the privilege of
helping to shape and manage the new
economy.
This points in the direction of a more
statist economy with little transparency.
Any ostensible increases in efficiencies in
corporate groupings or asset utilisation
would be overseen by a politicisedbureaucracy rather than by market forces.
An alternative would be to move the
political focus away from prosecution
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248
and KKN and to depoliticise the issue.
This might entail replacing the ‘politics
of punishment’ with the ‘politics of redemption’. Foreign advisors may find
the moral implications of this strategy
difficult to accept, but realistically, if improving the economy is paramount,
greater accommodation may be necessary. As matters stand today, the first
wave of financial sector reform has set
the nation’s economic elite and its government at odds in what is effectively
an economic civil war. The economic
elite has no financial or political interest in supporting the efforts of the government or implementing its reform
program. Its members can only lose. A
program that replaces the stick with a
carrot, and that contains the following
elements, might be considered.
(1) The government would forswear
further prosecution of former bank owners and recalcitrant borrowers in exchange for their cooperation in once
again generating economic growth.
(2) The financial ‘sins’ that are to be
forgiven would be fully stipulated between the former bank owners and recalcitrant borrowers on the one hand,
and the government on the other.
(3) Indonesia’s current economic
elite would be granted the opportunity
to repay its outstanding obligations to
the government on commercially reasonable terms in lieu of seizure or confiscation of assets.
(4) Indonesia’s current economic
elite would grant the government equity
in such enterprises in a proportion that
would reward it for its participation in
an extended repayment program.
Indonesia’s economic elite is unlikely
to compromise on financial restructuring until there is a stable government
with which it can work out long-term
relations. The sooner the government
can focus upon economic growth, the
more quickly it will become stable.
Jake Redway
Disclosure might be required as a condition to the right to enjoy the benefits of
an amnesty. A requirement to disclose
financial details would facilitate cooperation and disclosure of the relevant
economic data for Indonesia. It would
also, in aggregate, compromise the economic elite and the government in such
a way that greater disclosures might in
future become a part of Indonesian economic life. There should be no illusion
that full disclosure would in fact occur.
Substantial disclosure would represent
meaningful progress.
If the objective is to reduce KKN and
punish wrongdoers, then the full economic
power of the state may need to be brought
to bear. A ‘new elite’ rather than foreign
investors would enter the economy. Indonesia might move in the direction of Malaysia rather than Singapore Inc.
If the objective is to improve the
economy, allowing Indonesia’s economic
elite to work out its obligations to the government in a commercially reasonable
manner would ally its interests with those
of the government. Purists will point to
this as a danger, and they would be correct. That said, economic elites always
influence their governments, and Indonesia may benefit more from the reinvestment of the financial resources and
management expertise of its elite than
from the marginal utility of curtailing its
influence. The influence is there, in all
events, and it may be more helpful if harnessed to achieve economic growth.
The requirement that former bank
owners and recalcitrant borrowers grant
a portion of the equity in their enterprises
to the government would allow such
equity to be sold over time in the Indonesian public market. This would widen
the population of public investors in
Indonesia’s enterprises, which would be
good both for politics and for Indonesia’s
capital markets. Foreign investors might
enter the companies as financial rather
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The Reform of Indonesia’s Banking Sector
than strategic investors. This would be
more consistent with Indonesia’s stage
of economic development and its postcolonial history.
Whichever option is pursued—and
there are many besides those noted
above—consideration should be given to
implementing legislation that separates
the business of banking from the real
economy. If there is a lesson to be learned
from Asia’s financial crisis, it is that banking and industrial enterprise do not mix.
If sound credit decisions are to become
more likely in Indonesia’s political economy, banks (and their owners) should
not own industrial enterprises, and industrial enterprises (and their owners) should
not own banks. This flies in the face of
trends currently popular in OECD countries, but foreign advisors should recognise
that Indonesia’s economy at the start of
the new millennium is much closer to the
late Victorian economies of the West than
to current Western economies.
Given its relative paucity at present, it
is unlikely that the pool of regulatory and
249
financial supervisory expertise in Indonesia will develop in the near term to the
point where there is the capacity to supervise a sophisticated modern capital
market and financial sector along the
lines of developed OECD economies. In
the wake of the Enron collapse, this may
now be an easier point for foreign advisors to absorb. Rather than trying to pretend that there are no differences between
the emerging markets and the developed
nations, it may be prudent to stick with
what is simple and draw defendable
lines for Indonesia’s economic development. Such lines could then be reexamined as Indonesia’s economic
development proceeds.
Finally, although multilateral institutions should continue to give advice,
they should probably withdraw from
playing an active role in Indonesian
political debate. Solutions that are in the
first instance initiated by and acceptable
to Indonesians stand a better chance of
being implemented, and of being sustainable.
NOTES
*
1
2
Jake Redway is a partner of Latham &
Watkins, an international law firm. He
has practised in the financial services
sector for many years and was active in
Indonesia during the recent crisis.
Management of IBRA-controlled assets
is supposed to be exercised in accordance
with agreements entered into between
the agency and the former owners of the
assets. These agreements attempt to impose IBRA control over all material financial decisions, by requiring that they
be approved by an IBRA-appointed
board. ‘Operational management’ remains with the former owners.
Perhaps the saddest example of the effects of the law of unintended consequences is the case of Astra International,
Indonesia’s principal automobile manufacturer. Before the crisis, Astra was considered by many to be the Indonesian
enterprise closest to the advanced eco-
nomic model held up by Indonesia’s
economic reformers. Ironically, as a result of an earlier bank failure, ownership and control of the company had
passed out of the hands of a single Indonesian family, and ownership was, by
Indonesian standards, broadly held.
When IBRA seized the assets of bank
owners, it came into possession of a significant and controlling block of Astra
shares by accumulating 2–5% blocks
from former bank owners. This block
was then sold to a Singapore company.
(The very fact that Astra’s shares were
widely held may be one reason that it
could be s ol d w ith out e ntre nche d
organised resistance.) Thus Indonesia’s
one true ‘publicly held’ company passed
into the control of a single owner, and a
foreign one at that. If one considers the
ultimate beneficial owner of Cycle &
Carriage in Singapore, the argument
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Jake Redway
Downloaded by [Universitas Maritim Raja Ali Haji] at 20:25 19 January 2016
may be made that the whole process has
gone full cycle, except that the family
that now controls the company is English rather than Indonesian. It will be
interesting to see how the new ‘controlling’ shareholder and management come
to terms over time.
REFERENCES
Arndt, H.W. (1997). ‘Bruce Glassburner,
1920–1996’, Bulletin of Indonesian Economic
Studies, 33 (2): 41–8.
Johnson, Colin (1998), ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies, 34 (2): 3–60.