Indonesia: History revisited
By Bill Guerin

JAKARTA - Distressingly little has changed in Indonesia from the previous received wisdom that the country's leaders could use state-owned enterprises, including financial institutions, as their personal piggy banks. Many officials controlling these enterprises remain well connected and, with elections ahead in 2004, the wheeling and dealing appear to be well under way.

In the same week as the Consultative Group on Indonesia (CGI) pledged $2.8 billion in loans, a high-level government meeting was called by President Megawati Sukarnoputri to address recent lending scams at state-owned Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI). Summoned to attend were the coordinating ministers for political and security affairs and the economy as well as the national police chief, the military chief, the head of the national intelligence agency, the attorney general and the Bank Indonesia governor.

The BNI scandal centers on the improper disbursement of Rp1.7 trillion (US$200 million), a much larger sum than the $78 million involved in an earlier politically linked scandal, Baligate, that put the moneyed elite in the public eye just before the last elections.

It is hardly surprising then that State Enterprises Minister Laksamana Sukardi, whose remit includes ultimate responsibility for state banks, told reporters after the meeting, "The president said all who are involved in the case must be investigated. No one is untouchable." The scandals, described as "really humiliating" by Sukardi, threaten to depress business and market confidence on the eve of Indonesia's withdrawal from the International Monetary Fund (IMF).

With next year's national elections looming and with parties feverishly building up war chests to finance their campaigns, suggestions by local media of the possible involvement of well-connected people and key politicians in the scandal have spooked the elite. The political dimensions have encouraged the House of Representatives Commission IX for financial affairs plans to set up its own special committee to probe the scandal, and the Supreme Audit Agency (BPK) has been asked to assist in the investigation to make sure there are no other fraud cases that may have been covered up by BNI management.

On the face of it, the government appears to be promising that justice will appear to be done. The police are handling the BNI affair, while the BRI case is being handled by the Attorney General's Office.

However, as Faisal Baasyir, the vice chairman of Commission IX pointed out, "We need to form the committee to ensure that the police and the prosecutors won't play around with the investigation of the fraud cases."

BNI has been under fire with the recent revelation of a Rp294 billion (US$34.7million) lending fraud, in which three bank branches approved loans to local companies supported by cash collateral deposits. However, the deposits did not belong to the companies concerned.

The scandal later spread to the state-owned BRI, the country's fourth largest in terms of assets, which reported $34.6 million in crooked loans. Despite the uproar over the fraud, BRI is to go ahead anyway this week with its planned issue of Rp500 billion (US$58.8 million) in bonds.

The precedent for involvement of top politicians ahead of a general election already exists. The Baligate scandal five years ago, though involving a private, not a state bank, touched two presidents, several ministers and top officials from the central bank and the Indonesian Bank Restructuring Agency (IBRA). It spread outwards to Washington, the IMF and the World Bank.

Revisiting the epic suggests the passage of time may have changed little in Indonesia and helps to explain what is going on now. Baligate grabbed the headlines because it involved Setya Novanto, the deputy treasurer of the then-ruling Golkar Party, and seriously endangered BJ Habibie's presidential candidacy. Golkar had fancied its chances good for getting their man Habibie re-elected. The ensuing alarm and despondency caused by the scandal, and the mere possibility of the World Bank making good on its threat to cancel a $43 billion bailout was enough to concentrate the minds.

Faced by increasing media pressure, Novanto and his business partner Djoko Tjandra arranged to repay the $78 million in question to Bank Bali. However, the media were having none of it. The idea that it was enough for a thief just to pay back what he had stolen sparked intense media investigations. It was concluded that Habibie's informal re-election committee, Tim Sukses (Team Success), was to have benefited from the $78 million, to buy off a majority share of votes in the People's Consultative Assembly (MPR).

The pace quickened. On August 16, IMF deputy managing director Stanley Fischer joined the attack by insisting, "a satisfactory resolution of the Bank Bali case requires a thorough and independent investigation to be completed as soon as possible". Next day the Coordinating Minister for the Economy, Finance and Industry Ginandjar Kartasasmita, himself under investigation for graft, was virtually ordered to allow international accounting experts PricewaterhouseCoopers (PWC) to audit not only the Indonesian Bank Restructuring Agency (IBRA) but also the country's central bank, Bank Indonesia.

Besides the suspension of IMF and World Bank credits, the scandal and its political overtones were a blow to IBRA's program for recapitalizing and selling off distressed banks. As rebuilding the collapsed banking sector was a keystone of the policies to kick start the economy, things began to get nasty. Political considerations overshadowed all else as the elite fought for positions.

The MPR was set to choose the next president two months on, in November, and Megawati's Indonesian Democratic Party of Struggle (PDI-P), realizing they had a golden bullet, promptly claimed that one of Habibie's younger brothers, four cabinet ministers, two Golkar party leaders and five businessmen were directly involved in the Bank Bali transaction.

The PDI-P went further, saying they had "complete and accurate information" and "concrete facts" describing where and when the suspects met and what they discussed and agreed to commit. They later did just that, by publishing the evidence.

Abdurahhman Wahid, at the time leader of the National Awakening Party (PKB), and heading Indonesia's largest Moslem organization, the 30 million-strong Nahdlatul Ummat (NU), repositioned himself by rescinding his July 21 statement supporting PDI-P's candidate Megawati.

The timing of the announcement was hardly a coincidence. With Habibie as a candidate, the Muslim parties were the swing vote and with Habibie floored by the scandal, the Muslims could field their own candidate, confident that Golkar members would choose virtually anyone over Megawati.

Weak law enforcement meant that months were wasted trying to finesse the Bank Bali case into the civil courts. When the dust finally settled and criminal trials got underway every one of the major suspects was acquitted.

Back to the present. State Enterprises Minister Sukardi, with exquisite understatement, says the government has conflicting roles as regulator, supervisor, owner and manager of banks, and that this could "ruin" the domestic banking system.

He said last week that the state should now sell its remaining banking assets as soon as possible to improve supervision and good governance and overseas professionals should be hired to run them if necessary.

But privatizing the state-owned enterprises carries no guarantee of good corporate governance. It represents a code of practice designed to protect the importance of the interests of the public.

In more developed countries the role of the state in economic activities is very small and the conflict between vested interests and opportunities for violating good corporate governance lie within management.

The collapse of Enron, WorldCom, and others was proof enough that company management bonuses related to stock option programs that in turn depend on increased share prices encourage creative and risky accounting practices.

The difference in a developing country like Indonesia, where government involvement is substantial, is that violations of the code are more generally manifest in corruption by government officials. This is exactly what happened in the Bank Bali case.

Attitudes of top officials highlight just some of the difficulties. Bank Indonesia's initial aloofness was par for the course. Though the central bank is still the main authority for banking supervision, Senior Deputy Governor Anwar Nasution immediately blamed the scam on Bank BNI executives, who he said had disregarded standard procedures and rules governing such transactions.

The transactions escaped the scrutiny of internal auditors and directors as well as supervisors at Bank Indonesia, the central bank, who are mandated to conduct both on-site and off-site inspections of banks.

BNI has said it has since recovered $15 million, around a third of the total loans involved in the fraud. But an arrogance that hints at protection is evident among the BNI directors, who seem more concerned about returning the loot to minimize the bank's losses rather than finding out what mistakes were made or finding out who is guilty.

Likewise BRI president Rudjito, who said he saw no reason for he himself or the other directors to resign. "We are not leaning toward that kind of action (resignation). The most important thing is that we have informed our shareholders of the fraud," he said glibly.

B J Habibie himself, addressing an Association of Indonesian Muslim Intellectuals (ICMI) meeting Sunday, said that rampant corruption, injustice and distortion of democratic practices is the price Indonesia had to pay for reform.

"The law is taking sides with the haves, not the have-nots," he said.

Though it is highly unlikely Megawati herself will have been linked in any way to the more recent scandals, it is not impossible that senior members of her party, PDI-P may now be running scared.

As the Indonesian economist Sjahrir put it, "Since most political parties are preparing themselves for the next election, a lot of dirty laundry might be aired in public. Thus, I am not very optimistic about the prospects of privatization."

Judge Soedarto, who freed the man widely seen as the main mover of the "money swap" over a technicality, had sent a signal to the other suspects, and the corruptors waiting in the wings, that white-collar crime does indeed pay, at least in Indonesia.

Baligate touched all Indonesians, in one way or another, and if it had been kept under wraps, it might have changed the course of destiny. Habibie, with his enormous support from Golkar and the moneyed elite, might well have been re-elected and, for better or worse, led his country towards a different fate.

The World Bank and the IMF, when cranking up pressure for an independent public inquiry into the fiasco, called on the Habibie government to "publicly reveal all information about the case and prosecute those involved".

They added, somewhat needlessly, "This matter needs to be resolved not only because of the large sums of money involved, but also because of the greater confidence and credibility issues at stake."

In the same year, 1998, four collapsed state-owned banks were amalgamated into a new institution (Bank Mandiri), creating the largest bank in the country. The government still holds the lion's share of 80 percent in Bank Mandiri, a fact that has also sparked concern about possible political influence ahead of the elections in 2004.

Megawati, weighing the possibilities, appears to have chosen to make her stance clear at the outset, rather than risk public comment from the lending organizations as she prepares to fight for a second term in office.

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