Backed by the I.M.F., a Reformer Tackles Indonesia's Barons
NY Times July 28, 1999
Backed bythe I.M.F., a Reformer Tackles Indonesia's Barons
By WAYNE ARNOLD
JAKARTA, IndonesiaThe Klub Bimasena at the luxurious Dharmawangsa Hotel is a tribute to whatremains of Indonesia's conspicuous wealth. Built on the site of the formermint as an urban refuge for the country's oil barons, it has private suiteswith built-in saunas, a lounge serving cognac and cigars and a spacious gymwhere each morning Indonesia's repo man, Eko Budianto, can be found on atreadmill, getting in shape to go after some of Indonesia's wealthiestpeople.
Eko, 38, heads the asset management division of the Indonesian BankRestructuring Agency, the government agency in charge of an estimated $35billion bailout of Indonesia's banks. Eko's job is to get the corporatecronies who helped create the mess to cough up roughly $23 billion they owethe banks. If they don't, he has carte blanche to seize their assets, evenif it means enlisting the army to help him.
"I see myself as a loan workout officer with a big stick," Eko said.
Student protests may be more romantic, and investigations into theill-gotten wealth of former President Suharto sexier, but the work beingdone by Eko and his colleagues at IBRA, as the agency is known, representsthe brass tacks of Indonesia's reformers. IBRA staff members see themselvesas an integral part of that political transformation, cuff-linked RobinHoods painstakingly reversing 34 years of government-sanctioned larceny.
It is a staggering task. Since it was set up in January last year as partof a $40 billion International Monetary Fund rescue package, IBRA has takencontrol of almost 50 failed banks, and with them stakes in roughly 200companies. This 105 trillion rupiah portfolio includes Indonesia's largestautomaker, its largest tire maker and its largest shrimp farm. Its realestate holdings make it one of downtown Jakarta's biggest landlords. Addthe 220 trillion rupiah in bank loans it has inherited, and IBRA controlsnearly a fifth of Indonesia's entire economy.
"They own everything," said one American investor in Jakarta who hopes tobuy some of IBRA's holdings. "There's no use talking to borrowers anymore.You have one-stop shopping."
IBRA aims to sell off these assets bit by bit to help the government offsetthe tremendous cost of rebuilding the nation's banks, an essentialingredient to economic growth, but a burden so large that economists say itcould cut into programs for Indonesia's poor. IBRA hopes to raise 17trillion rupiah by spring.
The decision of what to sell and when, however, is fraught with financialand political risks. A reformist agency created by a deeply unpopularlame-duck government, IBRA has few political friends. Selling sooner wouldplease foreign investors looking for bargains, but it would mean going headto head with some of the nation's most powerful individuals, tycoons withdeep connections to the current government. Selling later would fetchhigher prices, but would risk alienating foreign investors and leave IBRAsubject to the whims of Indonesia's incoming coalition government.
All the while, the agency has had to please its patrons at theInternational Monetary Fund, which is due to sign a new letter of intentsoon releasing an additional $1 billion in loans to Indonesia, subject toprogress on bank restructuring. Yet given its difficulties, observers say,IBRA is less likely to uproot crony capitalism than to serve as itsinadvertent caretaker until the day when the cronies can buy their empiresback.
"They're running out of time," said Andrew Macintyre, an associateprofessor of international relations at the University of California, SanDiego. "It's going to be harder for IBRA to operate in the new environmentthan the old environment."
IBRA's challenges reflect those facing regulators on a smaller scale acrossAsia, especially in Thailand and South Korea, as they battle entrenchedold-boy networks to bring accountability and long-term health to theireconomies.
"What you want to see is court cases against lots of crooks," said HughYoung, managing director of Aberdeen Asset Management, whose $1.5 billionin funds are invested largely in Asia. "But given the cultural impedimentsin Asia, I don't think you'll see it."
Eko said he is not afraid of such confrontations. Two-thirds of the 155trillion rupiah in loans he is trying to recover is owed by just 200companies, many of which belong either to Suharto's family or to hisfriends.
Eko advised some of the borrowers while working at Chase Manhattan Bank inthe late 1980s. Among his clients was Mohamad "Bob" Hasan, a plywoodmagnate and close friend of Suharto's.
A decade later, Hasan was just one of some 200 debtors whom Eko obliged tomake an appearance at IBRA's Spartan aerie atop the headquarters of one ofthe banks it took over last year. One by one, they trooped up to the 30thfloor to discuss how they would repay their debt to the country, not onlyHasan but even Suharto's youngest son, Hutomo "Tommy" Mandala Putra.
Eko is well cast for his role as IBRA's steely negotiator. A former martialarts champion with a rugby player's build, he now spends his spare timehunting wild game in the jungles of Sumatra and is as comfortable talkingabout his favorite .308 caliber rifle as he is explaining the intricaciesof corporate debt restructuring.After earning an MBA in the United States, where he also went to college,Eko worked at Chase for eight years, moving from the bank's credit unit tofinancing coal mines and gas pipelines. He left in 1993, and after a yearat the American Express Bank, joined Indonesia's Bank PDFCI.Eko was charged with cleaning up the development bank's own bad-loan mess,but his efforts were ultimately for naught. The bank was borrowing dollarson a short-term basis and handing out long-term, low-interest-rate rupiahloans. When the rupiah crashed in 1997, Bank PDFCI found itself in asqueeze, having to pay off dollar loans with less valuable rupiah.The final straw came, Eko said, when the company that built the luxuriousDharmawangsa Hotel and Klub Bimasena defaulted on its loan to Bank PDFCI.Foreign lenders pulled in their credit lines, and by August last year BankPDFCI had become one of the 48 banks closed by IBRA.The same month that IBRA took over Bank PDFCI, one of the bank'scommissioners, Glenn Yusuf, resigned to assume the helm at IBRA, a movethat has raised questions because Yusuf is also president of agovernment-owned investment bank that is advising IBRA along with LehmanBrothers and J.P. Morgan. Foreign experts in Indonesia dismiss the apparentconflict of interest, however, pointing to a shortage of financialexpertise in the country."There are very few players who can work on the kinds of transactions thatIBRA has to work on," said Morgan McGrath, regional manager for SoutheastAsia at Chase Manhattan, who once employed not only Eko but several otherexecutives now working at IBRA. "Their experience will serve them well."It was Yusuf who brought Eko aboard at IBRA. Since joining, Eko has beenslowly putting pressure on Indonesia's big debtors. In June, IBRA publishedthe names of the country's 200 largest corporate borrowers. Second on thelist, with 3.5 trillion rupiah in loans, is Timor Putra Nasional, the autocompany controlled by Tommy Suharto. No. 5, with 2.9 trillion rupiah indebt, is a petrochemical company owned by the timber tycoon PrajogoPangestu and Suharto's second son, Bambang Trihatmodjo.IBRA gave the debtors until June 30 to sign a letter committing them todiscuss restructuring with IBRA. All but 26 signed. As for the others,IBRA's accountants will decide whether they are healthy enough torestructure. Those that are too ill to survive or prove uncooperative willface litigation and possible foreclosure by Eko and his newly appointedbailiffs."The debtor has a choice," he said. "They can play hardball with me or theycan work together with me."In February, the government gave IBRA the authority to seize debtors'assets without going through the courts. Eko said IBRA also has assurancesfrom the armed forces chief, Gen. Wiranto, that the army will back IBRA up.Eko expects trouble. He said he now travels with four bodyguards.Some worry, however, that Eko isn't the one who needs protection. "There'sno protection for victims," said James Redway, a lawyer representing theIndonesian tire maker Gadjah Tunggal for the Philadelphia-based law firmMorgan, Lewis & Bockius.Still others say IBRA's special powers may not be so powerful after all. Itis still not clear whether the title to property seized by IBRA goes withit, something that could worry investors looking to buy Eko'srepossessions.But the bigger source of irritation is the pace of the sales. Foreigninvestors trying to get in on the ground floor here complain that theagency is stalling in the hopes that it won't have to sell to foreigners.Ernest Bower, president of the U.S.-ASEAN Business Council, said, speakingof asset sales, "If you're going to create wealth and accumulate capital inthe economy, you've got to start, even if initially you're going to haveforeigners picking up some of this stuff."IBRA says it is in the process of selling assets and plans an initialpublic offering of Bank Central Asia by the end of this year. But itconcedes it is stalling: Signs of growth in Indonesia's economy mean itwill be able to earn more for its assets later. "We're not in a rush tosell," said Christovita Wiloto, an IBRA spokesman.In the meantime, IBRA appears to have struck what many fear is a Faustianbargain with former cronies, letting them stay involved in the managementof their indebted companies. Foremost is Bank Central Asia, which was ownedby Suharto's long-time financier and associate Liem Sioe Liong and his son,Anthony Salim, before it was nationalized last year.Most of the bank's loans were to companies in the Salim Group, but IBRAdetermined that Bank Central Asia was simply too big to shut down, becauseit was the nation's de facto payment system, with more branches strewnacross the archipelago than any other bank. Rather than tear a gaping holein the Indonesian economy, the bank was left intact, with Salim in controlas the manager most capable of delivering returns to the bank's newshareholder."What you have to ask is whether you're destroying value," Eko said of thedecision. "This is what people on the street are too emotional tounderstand."Yet some warn that such compromises may set the stage for the biggestdisappointment of all, a crony comeback. Redway said he watched a similardrama unfold in Russia. "When the Soviet Union collapsed, there was no onewho hadn't participated in the old system," he said. The people mostcapable of running the new Russia turned out to be the same ones who hadrun the Soviet Union. In Indonesia, he predicts, there will be a period ofreconciliation, and then "everything will be forgotten."
Backed bythe I.M.F., a Reformer Tackles Indonesia's Barons
By WAYNE ARNOLD
JAKARTA, IndonesiaThe Klub Bimasena at the luxurious Dharmawangsa Hotel is a tribute to whatremains of Indonesia's conspicuous wealth. Built on the site of the formermint as an urban refuge for the country's oil barons, it has private suiteswith built-in saunas, a lounge serving cognac and cigars and a spacious gymwhere each morning Indonesia's repo man, Eko Budianto, can be found on atreadmill, getting in shape to go after some of Indonesia's wealthiestpeople.
Eko, 38, heads the asset management division of the Indonesian BankRestructuring Agency, the government agency in charge of an estimated $35billion bailout of Indonesia's banks. Eko's job is to get the corporatecronies who helped create the mess to cough up roughly $23 billion they owethe banks. If they don't, he has carte blanche to seize their assets, evenif it means enlisting the army to help him.
"I see myself as a loan workout officer with a big stick," Eko said.
Student protests may be more romantic, and investigations into theill-gotten wealth of former President Suharto sexier, but the work beingdone by Eko and his colleagues at IBRA, as the agency is known, representsthe brass tacks of Indonesia's reformers. IBRA staff members see themselvesas an integral part of that political transformation, cuff-linked RobinHoods painstakingly reversing 34 years of government-sanctioned larceny.
It is a staggering task. Since it was set up in January last year as partof a $40 billion International Monetary Fund rescue package, IBRA has takencontrol of almost 50 failed banks, and with them stakes in roughly 200companies. This 105 trillion rupiah portfolio includes Indonesia's largestautomaker, its largest tire maker and its largest shrimp farm. Its realestate holdings make it one of downtown Jakarta's biggest landlords. Addthe 220 trillion rupiah in bank loans it has inherited, and IBRA controlsnearly a fifth of Indonesia's entire economy.
"They own everything," said one American investor in Jakarta who hopes tobuy some of IBRA's holdings. "There's no use talking to borrowers anymore.You have one-stop shopping."
IBRA aims to sell off these assets bit by bit to help the government offsetthe tremendous cost of rebuilding the nation's banks, an essentialingredient to economic growth, but a burden so large that economists say itcould cut into programs for Indonesia's poor. IBRA hopes to raise 17trillion rupiah by spring.
The decision of what to sell and when, however, is fraught with financialand political risks. A reformist agency created by a deeply unpopularlame-duck government, IBRA has few political friends. Selling sooner wouldplease foreign investors looking for bargains, but it would mean going headto head with some of the nation's most powerful individuals, tycoons withdeep connections to the current government. Selling later would fetchhigher prices, but would risk alienating foreign investors and leave IBRAsubject to the whims of Indonesia's incoming coalition government.
All the while, the agency has had to please its patrons at theInternational Monetary Fund, which is due to sign a new letter of intentsoon releasing an additional $1 billion in loans to Indonesia, subject toprogress on bank restructuring. Yet given its difficulties, observers say,IBRA is less likely to uproot crony capitalism than to serve as itsinadvertent caretaker until the day when the cronies can buy their empiresback.
"They're running out of time," said Andrew Macintyre, an associateprofessor of international relations at the University of California, SanDiego. "It's going to be harder for IBRA to operate in the new environmentthan the old environment."
IBRA's challenges reflect those facing regulators on a smaller scale acrossAsia, especially in Thailand and South Korea, as they battle entrenchedold-boy networks to bring accountability and long-term health to theireconomies.
"What you want to see is court cases against lots of crooks," said HughYoung, managing director of Aberdeen Asset Management, whose $1.5 billionin funds are invested largely in Asia. "But given the cultural impedimentsin Asia, I don't think you'll see it."
Eko said he is not afraid of such confrontations. Two-thirds of the 155trillion rupiah in loans he is trying to recover is owed by just 200companies, many of which belong either to Suharto's family or to hisfriends.
Eko advised some of the borrowers while working at Chase Manhattan Bank inthe late 1980s. Among his clients was Mohamad "Bob" Hasan, a plywoodmagnate and close friend of Suharto's.
A decade later, Hasan was just one of some 200 debtors whom Eko obliged tomake an appearance at IBRA's Spartan aerie atop the headquarters of one ofthe banks it took over last year. One by one, they trooped up to the 30thfloor to discuss how they would repay their debt to the country, not onlyHasan but even Suharto's youngest son, Hutomo "Tommy" Mandala Putra.
Eko is well cast for his role as IBRA's steely negotiator. A former martialarts champion with a rugby player's build, he now spends his spare timehunting wild game in the jungles of Sumatra and is as comfortable talkingabout his favorite .308 caliber rifle as he is explaining the intricaciesof corporate debt restructuring.After earning an MBA in the United States, where he also went to college,Eko worked at Chase for eight years, moving from the bank's credit unit tofinancing coal mines and gas pipelines. He left in 1993, and after a yearat the American Express Bank, joined Indonesia's Bank PDFCI.Eko was charged with cleaning up the development bank's own bad-loan mess,but his efforts were ultimately for naught. The bank was borrowing dollarson a short-term basis and handing out long-term, low-interest-rate rupiahloans. When the rupiah crashed in 1997, Bank PDFCI found itself in asqueeze, having to pay off dollar loans with less valuable rupiah.The final straw came, Eko said, when the company that built the luxuriousDharmawangsa Hotel and Klub Bimasena defaulted on its loan to Bank PDFCI.Foreign lenders pulled in their credit lines, and by August last year BankPDFCI had become one of the 48 banks closed by IBRA.The same month that IBRA took over Bank PDFCI, one of the bank'scommissioners, Glenn Yusuf, resigned to assume the helm at IBRA, a movethat has raised questions because Yusuf is also president of agovernment-owned investment bank that is advising IBRA along with LehmanBrothers and J.P. Morgan. Foreign experts in Indonesia dismiss the apparentconflict of interest, however, pointing to a shortage of financialexpertise in the country."There are very few players who can work on the kinds of transactions thatIBRA has to work on," said Morgan McGrath, regional manager for SoutheastAsia at Chase Manhattan, who once employed not only Eko but several otherexecutives now working at IBRA. "Their experience will serve them well."It was Yusuf who brought Eko aboard at IBRA. Since joining, Eko has beenslowly putting pressure on Indonesia's big debtors. In June, IBRA publishedthe names of the country's 200 largest corporate borrowers. Second on thelist, with 3.5 trillion rupiah in loans, is Timor Putra Nasional, the autocompany controlled by Tommy Suharto. No. 5, with 2.9 trillion rupiah indebt, is a petrochemical company owned by the timber tycoon PrajogoPangestu and Suharto's second son, Bambang Trihatmodjo.IBRA gave the debtors until June 30 to sign a letter committing them todiscuss restructuring with IBRA. All but 26 signed. As for the others,IBRA's accountants will decide whether they are healthy enough torestructure. Those that are too ill to survive or prove uncooperative willface litigation and possible foreclosure by Eko and his newly appointedbailiffs."The debtor has a choice," he said. "They can play hardball with me or theycan work together with me."In February, the government gave IBRA the authority to seize debtors'assets without going through the courts. Eko said IBRA also has assurancesfrom the armed forces chief, Gen. Wiranto, that the army will back IBRA up.Eko expects trouble. He said he now travels with four bodyguards.Some worry, however, that Eko isn't the one who needs protection. "There'sno protection for victims," said James Redway, a lawyer representing theIndonesian tire maker Gadjah Tunggal for the Philadelphia-based law firmMorgan, Lewis & Bockius.Still others say IBRA's special powers may not be so powerful after all. Itis still not clear whether the title to property seized by IBRA goes withit, something that could worry investors looking to buy Eko'srepossessions.But the bigger source of irritation is the pace of the sales. Foreigninvestors trying to get in on the ground floor here complain that theagency is stalling in the hopes that it won't have to sell to foreigners.Ernest Bower, president of the U.S.-ASEAN Business Council, said, speakingof asset sales, "If you're going to create wealth and accumulate capital inthe economy, you've got to start, even if initially you're going to haveforeigners picking up some of this stuff."IBRA says it is in the process of selling assets and plans an initialpublic offering of Bank Central Asia by the end of this year. But itconcedes it is stalling: Signs of growth in Indonesia's economy mean itwill be able to earn more for its assets later. "We're not in a rush tosell," said Christovita Wiloto, an IBRA spokesman.In the meantime, IBRA appears to have struck what many fear is a Faustianbargain with former cronies, letting them stay involved in the managementof their indebted companies. Foremost is Bank Central Asia, which was ownedby Suharto's long-time financier and associate Liem Sioe Liong and his son,Anthony Salim, before it was nationalized last year.Most of the bank's loans were to companies in the Salim Group, but IBRAdetermined that Bank Central Asia was simply too big to shut down, becauseit was the nation's de facto payment system, with more branches strewnacross the archipelago than any other bank. Rather than tear a gaping holein the Indonesian economy, the bank was left intact, with Salim in controlas the manager most capable of delivering returns to the bank's newshareholder."What you have to ask is whether you're destroying value," Eko said of thedecision. "This is what people on the street are too emotional tounderstand."Yet some warn that such compromises may set the stage for the biggestdisappointment of all, a crony comeback. Redway said he watched a similardrama unfold in Russia. "When the Soviet Union collapsed, there was no onewho hadn't participated in the old system," he said. The people mostcapable of running the new Russia turned out to be the same ones who hadrun the Soviet Union. In Indonesia, he predicts, there will be a period ofreconciliation, and then "everything will be forgotten."
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