Why Jakarta Is Keeping Foreign Buyers at Bay

Megawati can't overcome political resistance to privatization

Indonesians may be shouting "Down with America" these days, but foreign investors remain surprisingly bullish about the world's largest Muslim nation. On Nov. 1, Singapore Telecommunications Ltd. bought a minority stake in a state-owned, cellular-phone company. Meanwhile, Cemex of Mexico is pleading with the government to sell it a controlling stake in cement maker Semen Gresik.

Trouble is, the government of President Megawati Sukarnoputri can't muster the will to sell state-owned assets to foreigners. Jakarta's privatization program was supposed to raise $3.4 billion this year to help balance the budget and meet International Monetary Fund conditions for new loans. Megawati vowed to raise $2.7 billion by yearend from sales of minority stakes in banks rescued in 1998, plus $650 million from sales of state-owned companies.

NARY A PENNY. But not a penny has been raised. At best, the government may swap $1 billion in rehabilitated loans to Indonesian banks for bonds. Describing privatization as "the core component of the government's broader strategy for reinvigorating the economy," the World Bank warned in a Nov. 6 report that continued stalling could prompt foreign lenders to withhold $900 million in loans this year.

A formidable array of forces is blocking the privatization program. Parliament is refusing to endorse sales at market value. Increasingly assertive provincial governments are blocking the sale of local plants. Even members of Megawati's government are warning her not to sell out to foreigners. According to foreign executives in Jakarta, staff at the Indonesian Bank Restructuring Agency (IBRA) actively discourage investors. Felia Salim, IBRA's deputy chairman, denies this. "There's no lack of commitment to sell," she says. To get the job done, she adds, "we'll become acrobats in the next two years."

Perhaps, but in the meantime investors are skirting the government and buying minority stakes from private investors. That's what SingTel did when it acquired a 22% stake in state-owned PT Telekomunikasi Selular for $602 million.

No investor is more dogged than Cemex. In 1998, it acquired a 25% stake in Gresik, Indonesia's largest cement maker. Yet the central government has not allowed Cemex to exercise an option to raise its stake to 51% and assume management control. The deal is being blocked by bureaucrats on the islands of Sumatra and Sulawesi, where two Gresik plants are located. Citing the new Regional Autonomy Law, the local administrations claim ownership of those plants--and want them spun off. "Cemex is a test case," says Hadi Soesastro, executive director of the Center for Strategic and International Studies in Jakarta. "Unless it's done, people will not find the privatization program credible."

HONEYPOT. Things are not much better in the finance industry. Earlier this year, IBRA rejected Newbridge Capital's bid to buy Bank Central Asia, widely regarded as Indonesia's best-managed commercial bank. An Indonesian banker involved in the negotiations says Newbridge had demanded a controlling stake. Meanwhile, Bank Mandiri, which owns 23% of the assets of the entire banking system, is planning to go public by next April. But first, the government wants it to acquire Bank Internasional Indonesia, which is saddled with bad loans to the now-bankrupt Asia Pulp & Paper Co. "Mandiri is being used as a political honeypot," says a Singapore-based investor. Mandiri President Eddy Neloe insists his bank will acquire BII on "commercial terms" or "walk away." Neither outcome will help Mandiri's IPO.

As investors wait for those deals to go through, the investment environment could deteriorate. Amid the growing anti-Western backlash, diplomats worry that even a minor incident--say, the beating of a foreigner at a Jakarta bar--could trigger a stampede of Westerners. "That would be the death knell for foreign investment in Indonesia," says a veteran American manager. And that's just one more reason for the government to hurry up and divest--before investors lose interest.

By Michael Shari in Singapore

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