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JAKARTA — Foreign investment in Indonesia has been locked in a downward spiral. Despite optimism at the appointment of the current government, the country has barely been able to attract capital from outside. The terror attack against the United Stated on Sept. 11 only partly explains the negative sentiment.

Foreign direct investments (FDI) over the first 10 months of this year have dropped roughly 50 percent compared to the same period in 2000. In total, there have been $6.5 billion worth of FDI approvals. This stands in stark contrast to the $434 billion Indonesia was able to attract in 1997 before the Asian currency crisis struck.

Businessmen from abroad usually have a whole list of complaints about Indonesia. The foremost reasons for avoiding or even leaving the country are rampant corruption, the collapse of the judiciary system and a lack of security, says Mark Baird, country manager of the World Bank in Jakarta. The terrorist attack against the United States, the war in Afghanistan and the mixed reactions in Indonesia have only exacerbated the problem.

Legal bankruptcy

Typical for the lack of legal security are the two bankruptcy cases the International Finance Corp. (IFC), the private sector investment division of the World Bank, has tried to settle through the courts. “It is not that the IFC has lost both cases, but the verdicts of the court were clearly inspired by corruption.” an independent analyst says. The IFC has frozen all investment-decisions in Indonesia since then.

Although the construction of a credible judiciary system, the improvement of security and the battle against corruption are urgent matters, analysts say there is no quick fix.

“Even if they start taking the right measures today, it will take a long time before we can feel the effects,” says a foreign financial consultant in Jakarta.

That is why analysts are looking out for some sign of decisiveness from President Megawati Sukarnoputri.

The focus of attention is the privatization program the government agreed upon with the International Monetary Fund shortly after it came to power.

The divestment of two state-owned companies is attracting a lot attention.

“The sale of Bank Central Asia and cement producer Semen Gresik is truly the most important issue for foreign investment sentiment,” says Liny Halim, bank analyst at ING Barings in Jakarta.

BCA was nationalized in 1998 by the Indonesian Bank Reconstruction Agency (IBRA), which was founded in the height of the Asian currency crisis to take over the long list of falling banks and their assets.

Today IBRA controls over $60 billion worth of assets. Up until today merely 8 percent has been returned to the private sector.

Selloff frozen

According to the initial agreement between the IMF and the Indonesian government, BCA should have been sold before the end of 2000. But then President Abdurrahman Wahid decided to cancel the privatization plan because the offer of the last remaining bidder, Newbridge, was considered too low.

The IMF found itself forced to freeze disbursements of the credit program of in total $5 billion because Jakarta had clearly departed from the path of restructuring.

“It is actually quite an attractive party for foreign investors,” says Liny Halim about BCA. The third-largest bank of Indonesia is known to be the healthiest and best managed in the country.

Moreover, it possesses the largest up to date network of automatic teller machines. No wonder there is no lack of interest among foreign investors. Among the names circulating in the local press as possible bidders were the British-based Standard Chartered, Bank of China and ABN Amro of the Netherlands.

Shortly after taking power, Megawati agreed upon a new letter of intent with the IMF in August. But again, the government will be unable to fulfill its promises, analysts warn. Pressured by the only recently powerful Parliament, the government decided to split the sale of BCA in two. Initially bidders can obtain 30 percent of the stocks with an option to buy 21 percent at a later stage.

That is where some investors lost interest, say analysts. The Indonesian judiciary lacking any credibility, nobody knows whether the bidder will ever hold a majority stake.

“Under such circumstances the remaining interested parties are not willing to buy a premium,” according to Liny Halim.

Little experience

Only nine bidders for BCA remain on the short list today. Apart from Standard Chartered and Malaysian Plantation Group, owner of Alliance Bank — a relatively small bank in Malaysia — they are all local investors with no or little experience in the financial sector. Investigative journalists of the weekly magazine Tempo have suggested that Anthony Salim is behind some of the consortiums.

Salim Group, the biggest conglomerate of Indonesia, is forbidden from taking part in the bidding because it still has enormous debts to the state.

Analysts say only Stanchart lives up to the qualification of a strategic partner the government says to be looking for. But Standard Chartered already once had its fingers burned in Indonesia. When in 1999 it bought a majority stake in BankBali local personnel denied the new management access to the head office.

After a tug of war Standard Chartered decided to withdraw. “We did not have a very happy experience with Bank Bali,” said Stanchart’s chairman, Patrick Gillam in a recent interview with Bloomberg News.

This is exactly why analysts do not expect Stanchart to make the highest bid. “But the price is only the last criterion,” says minister for state owned enterprises Laksamana Sukardi. “More important is the credibility.”

But analysts say the government will have a hard time convincing Parliament of this. There is a growing resentment of what is being perceived as a sellout of the nation’s crown jewels to foreign opportunists.

Nationalistic mood

This nationalistic sentiment has also been a major reason for the stumbled privatization of cement producer Semen Gresik. There already is eager interest from a foreign investor to takeover. The Mexican cement giant Cemex already owns 25 percent of the stocks and wants to purchase another 50 percent.

Initially there was agreement with the government about the terms and timing, but two subsidiaries of Semen Gresik, one in Sumatra and one in Sulawesi, have refused to be taken over by foreigners. The provincial government has even gone as far as taking over the factories refusing orders from Jakarta.

Faced by increasing autonomous behavior from the regions, the central government backed down and decided to postpone the sale of Semen Gresik indefinitely.

Again Indonesia will not be able to live up to expectations. After retreating on Semen Gresik, IBRA announced last week that the bidding deadline for BCA will be extended to the end of January. But Limy Halim of ING Barings expects the government will need perhaps even a year. “Unless they decide to favor another crook,” she says.

In the meantime the value of the assets of IBRA is declining rapidly. “From a book value of $65 billion three years ago, we believe the assets’ real worth may now be closer to $20 billion, or 30 percent of their book value,” says a report by Morgan Stanley Economists.

In light of the slowing world economy the IMF seems to be willing to let it pass. Foreign investors are less forgiving. They see another reason to avoid Indonesia and wait for the price to drop even further.

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