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Corporate Restructure in Indonesia
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CORPORATE RESTRUCTURING IN INDONESIA
Statement by Mark Baird, Country Director, World Bank
At the JITF/IBRA Conference on Corporate Debt Restructuring
November 2, 2000
The World Bank shares and supports the Indonesian Government's overarching objectives of reducing poverty and improving the quality of life of the Indonesian people. Fundamental to achieving these aims will be ensuring, firstly, that the economic recovery currently underway gathers and maintains momentum, and secondly, that Indonesia continues on a path of sustainable broad-based economic growth which delivers benefits to all sections of the population, including the poorest.
An immediate obstacle threatening the achievement of these aims is the massive debt burden still carried by Indonesia's corporate and banking sectors. Indonesian corporate debt in mid-2000 amounted to around US$120 billion: US$85 billion for large private corporations and US$35 billion for state-owned enterprises and SMEs. Of the total, 49 percent was owed to foreign creditors and 72 percent was denominated in foreign currencies. Of the large corporate debt, three-quarters is non-performing and in need of restructuring. The longer it takes to restructure these debts, the greater will be the cost to Indonesia of the restructuring, the longer it will take to mobilize new private investment to drive economic recovery and sustained growth, and the greater the vulnerability of Indonesia to future crises.
The structural problems that led to the 1997 financial crisis existed to varying degrees in all of the affected East Asian countries. But they were more severe in Indonesia, which was consequently hit harder than other countries in the region. I do not need to describe the problems at length here. In summary, they included:
- a high dependence on foreign borrowing by Indonesian corporates
- little reliance by corporates on equity finance
- the absence of an effective legal and judicial system to settle contractual disputes and apply a viable bankruptcy regime
- a heavily concentrated family corporate ownership structure which depended for its success on non-transparent relationships with government and with banks
- poor corporate governance, particularly concerning disclosure and enforcement
- limited competition and prevalence of anti-competitive behavior
- an overextended state-owned enterprise sector that imposed special demands and received special favors from government while crowding out productive private investment.
Shortly after the onset of the crisis these problems were compounded by the turmoil of Indonesia's political transition, regional unrest and outbreaks of violence which further damaged investor confidence. Government has begun taking steps to address many of these problems but much more remains to be done. There is no doubt that the speed of recovery, sustainability of growth and the reduction in Indonesia's vulnerability to future crises will depend on the extent to which these problems are successfully tackled.
Corporate restructuring has started
After a slow start, the Government took a number of steps early this year to improve the corporate restructuring framework. These included the creation of the Financial Sector Policy Committee (FSPC) to oversee the corporate restructuring process. IBRA's rules were modified to allow more flexibility in reaching commercially acceptable restructuring agreements and legal protection was provided for IBRA staff implementing the new rules. JITF's mandate was strengthened by allowing it (through FSPC) to apply time bound mediation procedures and to refer non-cooperative negotiating parties for remedial action by the Attorney General. JITF was also empowered to offer carrots to cooperative negotiating parties, in the form of tax and other exemptions.
The new framework has started to deliver results. IBRA has now entered into restructuring agreements or initiated legal action to resolve 70% of its loans to the Top 21 obligors. IBRA has also outsourced commercial loans (borrowers between Rp.5-50 billion) to local financial institutions, and plans are now underway to dispose of its entire SME and retail loan books by the end of 2000. As of late October, 50 companies with aggregate debt of US$10.1 billion were actively involved in JITF mediation. 27 cases, with a total debt of US$5.3 billion, had concluded binding restructuring agreements between creditors and debtors with JITF's assistance. Meanwhile foreign banks are now indicating that a number of agreements with large debtors have either been reached or are imminent.
But there are many issues to be resolved and most of the hard work still lies ahead
Firstly, there are growing concerns about the quality of restructuring. IBRA has decided to handle the largest debtors itself. In so doing, it has taken on responsibility for the quality of restructuring. Deep operational restructuring is needed not only to maximize the future viability of the enterprise, but also to minimize the future risks for the Government and the burden on Indonesia's taxpayers. IBRA will also be under intense public scrutiny in settling these large debts with its high-profile debtors and must avoid the perception of insider deals, which represent a large reputational risk for the Government.
Concerns about the quality of IBRA's restructuring agreements were raised at the recent Consultative Group for Indonesia meeting in Tokyo. Indonesia's donors stressed the importance of adhering to a clear set of principles aimed at maximizing revenue recovery for the state and ensuring transparency and consistent application of the process to all large debtors. The foundation of any restructuring plan should be an independent professional assessment of the future viability of the enterprise. This assessment should explore all options for recovery, including the closure or sale of loss-making and non-core units. It should also include an estimated level of sustainable debt, based on independent due diligence. Following approval by the FSPC, there should be full disclosure of the broad terms and underlying rationale for the proposed restructuring – so that parliament and the public can assess whether in practice the principles have been followed. These principles are now under discussion and need to be finalized and applied as soon as possible.
Secondly, IBRA should take additional measures to accelerate its loan sales. For example, it might make sense forIBRA to remain focused on restructuring its Top 21 obligors and promptly move to sell the Rp.140 trillion (approximate book value) in unrestructured smaller corporate loans on which it has yet to make much progress. This would mean facing up to the reality that the real market value of these loans is lower than the book value and that financial proceeds from sales may therefore be low. By way of comparison, Thailand's Financial Sector Restructuring Authority (FRA) realized only 22% on unsecured business loans. However, further delay in selling these loans would itself likely result in a fall in the ultimate realization. To defuse potential criticism about "fire sale" prices, IBRA could take potential bidders up on their interest to share any upside on loan recoveries.
Thirdly, additional "sticks and carrots" could be applied to accelerate corporate restructuring throughout the economy. Additional "sticks" could include: the appointment of more ad hoc judges to insolvency cases; more technical assistance for insolvency judges; greater use by IBRA of its PP-17 powers; and withdrawal of permits (e.g., to do business with the Government, access to Government credits, listing on the JSX) for recalcitrant debtors. Additional "carrots" could include removal of the remaining legal, tax and regulatory impediments to corporate restructuring.
Finally, if broad-based growth is to resume, Indonesia will need to go beyond the short-term debt restructuring measures and address in earnest the structural weaknesses and vulnerabilities that led to the crisis in the first place. Although action has been initiated in some areas there is a huge and critical agenda to be pursued in the areas of legal and judicial reform, improvements in corporate governance and competition policy, acceleration of the privatization of the state owned enterprise sector and promotion of small and medium enterprises.
So in conclusion
The World Bank's sights are set firmly on working with our partners to help the Government design and implement policies and programs that will eradicate poverty in Indonesia, and on ensuring the sustainability of these policies and programs over the medium term. Achieving these objectives will not be possible without urgent attention in the short term to achieve the transparent, equitable and rapid resolution of Indonesia's corporate debt burden. We have devoted substantial resources since the onset of the crisis to working closely with the Government, IBRA and the JITF on corporate restructuring. But the job of rebuilding Indonesia's economy has only just started, and we are committed to maintaining our support to Indonesia until the job is done.
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