Asiamoney: Indonesia cash roundtable

Asiamoney, July 2011

Indonesia’s economy is buzzing, its budget flush with foreign inflows and its currency soaring – all of which represents both opportunities and challenges for the finance arms of Indonesian corporates. Asiamoney brought together treasurers, CFOs and CEOs from a diverse range of Indonesian companies in a roundtable sponsored and developed by Bank Negara Indonesia.

PARTICIPANTS

Djaja Tambunan, Chief Financial Officer, PT Antam, a leading mining company

Ketuk Budi Wijaya, President Director, Lippo Karawaci, the real estate arm of the Lippo group

ANS (Steve) Kosasih, Finance Director, Perum Perhutani, the largest state-owned forestry enterprise in Indonesia

Wisnu Kuncoro, President Director, Energy Solution, a Krakatau Steel subsidiary

Abubakar Zaini, Finance & Administration Director, Energy Solution

Tiorida, Finance & Accounting Manager, PT Cikarang Listrindo Power Company

Kemal Imam Santoso, Deputy President Director, Askes, a social health insurance company serving 1,100 hospitals, clinics and pharmaceutical companies and with 18 million civil servant members.

Krishna Suparto, Managing Director, Bank Negara Indonesia

Iwan Kamaruddin, General Manager, Transactional Banking Services, Bank Negara Indonesia

ASIAMONEY

I wanted to start with the broader picture of Indonesia: one of the most vibrant economies in the world. How is that economic dynamism affecting the finance functions of your companies?

Djaja Tambunan, Antam: Indonesia is well positioned for growth. It’s gone through a phase of recession fairly unscathed. Antam covers the whole of the country, from gold reserves in Sumatra to bauxite in Kalimantan, a gold refinery in West Java and Nickel operations in eastern Indonesia. For a company like us, with a diverse range of businesses and locations, trying to understand where our money is at any point in time, and how to deploy it and manage the liquidity properly, is a challenge. It’s not because the banks don’t provide the services. But the infrastructure, particularly in technology, is a challenge: there are over 17,000 islands, not all of which are linked through high speed cable. So if we want to reconcile our positions in terms of cash, treasury and liquidity management it becomes a challenge for the banks.

Ketuk Budi Wijaya, Lippo Karawaci: Lippo Karawaci was established after we merged eight companies in 2005. We became a broad-based property company. We manage 25 malls across Indonesia, and in three to four years will add 20 more hospitals and 50 malls. So the management of these operations has become double, triple what it was in 2005. We deal with more than 100,000 residents and many projects: right now we have six new hospitals and four malls under construction. Our 25 malls account for 2.2 million square metres of gross floor area – 25% of the total mall space in Indonesia – and we have more than 10,000 people working with us. So given the diversity and geographical  spread  of our projects, cash is king. We have to manage our cash very carefully.

When we moved from our old bank, Lippo, and sold it to Khazanah, we were dealing with new guys – strangers. Before, we were complacent, just dealing with a bank like our cashier: transfer this and that amount and we will follow with the documentation later. But dealing with new banks, everything changed. We combined our internal treasury process with the cash management processes, and outsourced some of the job to BNI. The treasurer is very happy with the process and we keep introducing BNI to other subsidiaries now.

Asiamoney: Steve, what’s happening in the forestry sector?

Steve Kosasih, Perum Perhutani: Indonesia has grown bigger and better. The rupiah is getting stronger, which is tough if you are selling commodities. It would be nice if our commodity prices had also increased, as they have for Antam, but in Perum Perhutani, where most of our end product goes for export, we have to find ways to be able to be creative in our sales and marketing so as to meet our revenue targets, because the same amount of dollar gets a different amount of rupiah these days.

We would like to have our liquidity faster. We are quite a labour-intensive company: we manage 25,000 people across 2.4 million hectares of forestry. We are industrializing our company now and going upstream a bit because we need to get better revenues for our bottom lines; and when it comes to dealing with third parties, liquidity is king. That’s where BNI and we need to talk: there is a need for more products. I would also like to see all the money in one pot. Basically we manage an integrated cash management solution with BNI.

Krishna Suparto, BNI: One important thing Steve has said is that aside from cash collection and payment, he looks at governance. That’s a very important step. He doesn’t want money and accounts to be unaccounted for everywhere. That’s a solution we discuss.

Wisnu Kuncoro, Energy Solution: We are an energy company, a subsidiary of Krakatau Steel, and take care of their energy needs. Sources of energy have become important in Indonesia recently: the demand is higher than the supply and it is very hard to find primary energy. Krakatau Steel itself has high consumption of electricity compared to other industrials, and because of this scarcity it has decided to change from gas-based to coal-based technology, as we believe gas will be hard to find in the near future. Our position as an energy company is struggling because of this availability of primary energy; so in the near future we will develop combined cycle capacity of 120MW, and make a joint venture with a Korean company to build a co-generation power plant with a capacity of 200MW.

Previously we had no interest burden from debt. But we believe that as the economic situation in Indonesia becomes better and better, with higher liquidity, a strengthening rupiah and many dollars coming into the country, it’s very easy to find money now. It’s a convenient time to make capital expenditure.

We have to do some housekeeping, and one of the most important areas is to strengthen our position in collecting and distributing our money. We have a scenario to create direct links between customers and suppliers, and we hope it can be done through BNI’s transactional banking team.

Tiorida, Cikarang Listrindo: Similar to Energy Solutions, our company is one of the independent power producers in Indonesia. We supply power to industries in Jakarta. Our capacity is 650MW and is growing to 750MW. Most of our customers are export-oriented. For our connections we use a virtual account, which allows the company to gain better collection and enhanced reconciliation and reporting capabilities and services from the bank.

Asiamoney: The insurance sector must be an area of enormous potential and growth.

Kemal Imam Santoso, Askes: Askes may not be the right company to represent the insurance sector in Indonesia because we are social insurance. But that is the most beautiful thing, because the first line of our P&L is fixed: our revenues come from the government. However, due to changes in the government system – so that the local authorities play a more major role and pay the civil servants – premium collection has become a different ballgame. 50% is paid by the federal government, and for those civil servants who work in local government, the rest of the premium is paid by them. Before this, collection premium went through just one authority; now it’s going through about 417.

On the cash management, we are trying to have a much better platform in managing claims. Liquidity is the most important thing. We need to mitigate claims and set aside reserves; we manage the funds we receive in premiums and try to get the best out of the cash, while maintaining liquidity as well. So cash management plays three important roles.

First and foremost is good corporate governance and transparency. Second is maintaining liquidity. And third is the yield. Other than that, we are trying to find an efficient way to manage all our floating cash. So we are moving from a traditional model, whereby each regional office is allocated some cash, and are trying to pull it all together into one.

Another challenge is security, of course. We are still in this ambience of: if I’m not holding the cheque, I’m not sure where that money is going. Although internet penetration is doubling or tripling every year in this country, that ambience is still there.

With the government commitment towards more transparent budget management, state owned enterprises will play a very important role in executing the political commitment to management of cash in this country. We face an interesting situation. A lot of cash management in government institutions is quite rigid, whereas corporations have more room to maneuver in managing their cash better. I would say more and more government programs will be carried out by corporations.

Another point is reporting to the public. Cash management provides you a report as and when you want, in the middle of the night. It’s much easier: you don’t have to get people together for three days and nights to reconcile a number.

One area that is going to be interesting is IT security. Askes is a social health insurance company, not an IT company and we have no appetite to go into IT. It is very inefficient to do everything internally: it’s a burden to our capex. We want to focus on our core competence and outsource IT, treasury – if I can even outsource payroll I will do so. Then we can focus on risk management actuaries, and managing costs – that’s it.

Asiamoney: Krishna, we’ve heard six client views about what they want. As a service provider, what do you think?

Krishna: It’s interesting to hear CFOs wanting support to know where and when their money is, and wanting to be in their core competencies and letting banks be their partners. And the idea of going beyond cash management in partnership – that’s in line with our business model and strategy, we want to continue in that direction. Corporate governance is another important area. We have one client, an educational institution, which has never received an unqualified opinion [a key accounting recognition]. We helped to consolidate their accounts – hundreds of them – and set up collection, payment and reporting. And last year they got an unqualified opinion for the first time. That’s something we hope for: not just financial benefits, but other areas that improve continuously around governance.

Iwan Kamaruddin, BNI: From our area of service focus in transactional banking, everything we’ve heard is what we live for now in BNI – continually seeking ways to assist our clients achieve their business and operational goals. We have heard much of the purported strategies: let us focus on our core competencies. Companies want to get away from the nitty gritty of time-consuming processes, and move to more controls and analysis. If a partner bank can assist with effective outsourcing, they can become a strategic partner to help achieve the goals of the company.

From the transaction point of view, on questions like how can we make our collection faster, we want to provide tools so companies can manage the top as well as the bottom line. We should be able to take manual processes away from them and help them focus on risk management, not collection and reconciling. We are investing in technology, people and processes to address the points being made around the table.

Asiamoney: Outsourcing involves building new relationships and trust with banks. What’s involved and how do you mange it?

Abubakar Zaini, Energy Solution: Most of our cash is in a pool where we work with another bank. Hopefully in the near future we can increase our cooperation with BNI on cash management. We are ready to start with banks to improve our cash management processes, because previously we did all the payments manually.

Tiorida: We only use limited outsourcing. Our main focus is on collections. [PLEASE ADD TO THIS IF YOU WOULD LIKE]

Djaja: I was just listening to Steve saying: cash is king. I remember during the economic crisis in 2008 saying: cash is no longer king. Cash is God. We were facing tremendous pressure especially since  our cash cost for Nickel  was higher than its market price, hence  we had to conserve our cash. In the old days, many companies were very comfortable doing Banking transactions  manually; most of us at this table have come from global banks, and all of us have encountered this. I believe BNI understands this and is now telling its clients to improve efficiency and move away from executing transactions manually using better communication systems. Banks want to help take care of payroll, payments, and reconciliation where possible.

Antam is has  on nine separate subsidiaries and five business units in various parts of the country. Educating staff in terms of using electronic banking as a means of executing transactions is a challenge, and if it doesn’t start from the top, people don’t get used to seeing that it’s going to improve things. BNI will need to face the challenge of educating its client base, for example by saying: we have a platform to allow things like supply chain management to help with your business.

For example, some companies are  rated better than others, which means they are able to attract  better terms and conditions when they borrow. On the other hand suppliers  in the same supply chain may be rated lower than the buyer  and may not have access to cheap funding. Supply chain financing combines the two, so if a client like Antam has a number of customers or suppliers to deal with, BNI would be able to integrate the supply chain system within one platform. Banks get access to customers they didn’t have before, and the ability to provide funding to a customer they didn’t know;  while Antam helps to facilitate the supply chain link.

Asiamoney: We’re hearing of a need for communication around security. What’s your response?

Iwan: When we speak of technology there’s no going around the topic of security. It’s a high priority for us because technology is going to be the biggest enabler for the success of the business. Our number one priority has been to ensure the channels of communication around a tech solution are secure. Yes, education is important, but the security part has to come through that education, because before a client wants to use a system he has to have full assurance that there are no problems with security. Because of the central bank’s involvement in all the things we do, we have to satisfy them that we have a robust security platform before we can go to clients.

Djaja: People know you’ve invested millions of dollars in the security system. That’s not what I get worried about. I get concerned when people have a secure password, but often pass it on to subordinates when they are too busy to use it. Managing transparency and good governance are still at an early stage in our society.

Krishna: We are a permissive society.

Djaja: We often hear people say:” I’m too busy to go to the ATM, here’s my card and PIN, can you (to secretary/staff) help pick up my money. Many executives ask their secretaries or drivers to pay the phone bill and give them the access code. This is what needs to  be more controlled.

Krishna: It’s a good comment. We are not talking about physical hardware and firewalls, but a mentality. There are very strong and strict standards, with interim spot checks, but alongside the physical security is the mentality switch.

Iwan: We’re speaking of accessibility to critical information. Banks can do so much: recently we’ve had increased requests from clients to share what banks are doing to safeguard the assets they have in the bank. We have spot audits, we check on activity of accounts, we validate and make sure that usage and verification of systems is under control. But it all boils down to the owner of the access being responsible for that. If they misuse that or are careless, there’s little the bank can do.

Asiamoney: Djaja mentioned supply chain financing – a hot topic. What are you doing in that area?

Krishna: It’s a big buzzword now and we are working hard on it. We know that our clients will continue to become more sophisticated and will have multiple choices of raising funding, whereas once it was only the bank. We see that. We are going through the supply chain, giving credit to companies within it, because we know that so long as they have good performance they will continue to get business, and when they do, we will do more financing and more transactional work for them. That’s our business model.

Kemal: We get cash from the federal government, but through four or five different banks. The collection of premium would be very efficient if we were getting the cash from the government through this backbone [supply chain management]. We wouldn’t have to go into the painful detail of reconciliation – let the banks handle that. This is an area where BNI can play a much more important role. That would be an area where cash management can go above and beyond its current platform: it would solve 70% of my problems already.

Ketut: We employ a lot of people and have so many projects, it’s a huge operation. BNI can go to our contractors and finance our projects through them – this is what they are doing now. We open the books. When I come to BNI, I say: anything you need to know, ask me – don’t ask my subordinates. We see an opportunity for them to tap our contractors, our suppliers, our customers.

We use a broad range of services from transactional up to risk management. On outsourcing, when we merged the eight companies our mindset had already changed: there would be no strong IT guys in our organization. In Indonesia we’re gadget guys, we buy a lot of computers and software, but often it’s just duplicating, computerizing our bad processes. Outsourcing was from the beginning a mindset instilled in our organization. We said: no major recruitment in IT. Everything you need, your outsource it. What you keep inside is only project management. What I need to know is, how much is payroll per month? I don’t need to send the cheque myself.

Steve: As with any other company that produces goods not services, the supply chain is key. A large chunk of our costs is in logistics, and that really costs a lot: the opportunity losses, the dead money piling up in stocks. In the past – and still a bit today – we have had money waiting in our partner for five months, during which time its value might decrease, particularly given the decreasing value of dollars. We need the money faster and that can only happen if our logistics are financed properly.

There are three things about Perhutani. Firstly, when we cut logs, it has definitely got to be done in-country because we cannot export logs. The process from procuring the logs until sale takes a long time. If you could shorten it with logistics financing it would be a good solution. Secondly, the products we do export directly, two weeks or a month of delayed payments are bad for out logistics because we need cash. We need a lot of money for payrolls: 63 billion rupiah per month. That’s why we need more money and faster.

Third, when we provide raw materials to our partners and they sell the end products, we have to wait for them to take the raw material, turn it into something sellable and sell it. Only then will the money come to us. That’s time-consuming and value-decreasing – and that is why supply chain financing is one of the key things in the entire cash management system.

Iwan: What we see from companies, especially when they are led by CFOs with a good background in finance, is a demand for more sophisticated service integration. It’s a lot to do with how things can work automatically within systems: how to bring the grand strategy, speed and collection with issues of geography and network into one system. We are trying to find a model or platform that is workable. What Indonesia presents to most people is the challenge of geography and network.

Djaja: Let me give an example of technology and how it’s changed. Not long ago, our suppliers or contractors  would come in and submit a physical bid. This manual process  took up a lot of time and efficiency. We said we wanted to do things differently  so people could put their bids in electronically. Many  customers at the time said they couldn’t do it since they did not have access to computers. So we said, OK, we will help by setting up PCs in our offices so suppliers could come in and submit their bids electronically on our premises to reduce fraud and improve transparency. Well, people eventually liked it since there was  less paperwork, and  more transparent .  We eventually  linked this with our   accounting system to suppliers could track their payment on line. And the fantastic thing is, the people who used to line up to use our computers eventually opted to buy and install their own computers to avoid lining up.

Krishna: That’s very interesting – a social mindset change.

Djaja: It’s like when people say they’re used to signing the chequebook, but then realize they are spending 30 minutes looking for the chequebook and have to do 3,000 of them in a month. A lot of senior people in companies are not comfortable dealing with electronic banking. But I  think this is going to help them in the long run. Banks have to say: don’t be afraid, this is not going to bite you, it will make your life easier.

Kemal: The most important thing is if the consumer can see an immediate reward, it’s a quick win. We are an impatient people. In our case, we hook up about 300 doctors in the centre of Java who set up a network with us. We have installed a system where they key in everything and they can monitor how many are coming to this or that doctor. And the instant reward is they can see how many members are under his or her management. They feel secure and certain. And the minute we explain this to doctors, they quickly set it up.

Asiamoney: How does the energy sector use technology?

Wisnu: Our industry is a bit different to those that produce goods; we get raw materials then produce electricity. But IT still plays an important role for us, especially to help us to automate our processes. We have an internal IT system for planning, procurement, logistics and finance, through our sister company, Krakatau Information Technology. Over the last 10 years we have always had complaints from suppliers over the period of paying the invoice. It used to take three or four weeks, but we put in a policy to ensure every invoice would be paid in less than two weeks by introducing technology. We can then reduce our cost of procurement because suppliers know that in two weeks they will be paid. Also, for industrial customers, we are preparing a pre-paid method for electricity, and IT can help us manage those needs.

Asiamoney: Some of you have raised the point of foreign inflows, and the change in the exchange rate. How does this affect your jobs?

Steve: With the decreasing value of dollars, what we need to go is get rupiah as fast as possible. But sadly most of our income is dollars. The rupiah is good for Indonesia but not good for exporters. You need to mitigate the currency risk.

We are trying to improve on two sides. One, on the LC, we are trying to do zero financing. Two is the logistics part. When we hand over our raw materials to our partners, before they can be produced as finished goods and sold as export products and we get the money – which will take five months – our counterpart will need to issue a bank guarantee for the raw materials. We don’t want the guarantee for the raw materials but for the portion of the money we are going to get. We need everything to be rupiah-based, because our P&L is in rupiah and out bottom line is in rupiah. No matter how good the dollar is, at the end of the day we need to report to the government in rupiah.

It’s easy to sell commodities, but commodities have no loyalty, no brand. And if you don’t use coal, you won’t get power, but you can live without wood. So we have to use a smart way of penetrating the industry. We are going into a new business now: forestry chemicals, using the pine saps. These are the rising stars of the business, almost 50-50 in terms of revenues. Their dollar values are going down but the value of the forest chemical product was $700 and is now $2800 – it’s up four times in three years. And it is almost guaranteed not to go down because production will always be below the level of demand. We are building essentials to produce the derivatives of these pine tree saps – a huge investment – but it’s fully integrated, and we can do a lot of it with the banks.

Asiamoney: The exchange rate must be a big issue for Antam – dealing in a volatile commodity which is priced in dollars, which are themselves volatile.

Djaja: The most important thing is the ability to hedge when required.  Bank Indonesia now restricts the use of  exotic derivatives. In a way that’s good, because it means there is less room for  speculators out there. But on the other hand you are left with very few options for hedging: that is plain vanilla hedging  for both  currency and interest rate exposure..

Antam is a dollar earner. As the rupiah continues to strengthen that’s good for the average Joe on the street but for exporters like us, we do feel the pain.  From a revenue perspective we may be growing from year to year, but from a currency perspective we get hammered when the rupiah starts strengthening.

Ketut: Our debt is in dollars. We sell homes and services in rupiah but we have a US$400 million bond outstanding, and we don’t have any opportunity to sell in dollars. Sometimes we hedge, and we have a fund to use in case of emergency; we put some of our dollars in Singapore, because we have some logistics there too.

We have an asset-light strategy. As a property company we are scared of accumulating assets while at the same time accumulating debts; usually the property companies get hit first in a crisis as they cannot service the interest, never mind the principal. So we are carefully managing our exposure in foreign currencies. A lot of my shareholders complain: why do you hedge it? But in Indonesia it’s only in the last year and a half that the money keeps flowing in. That is not sustainable in my view. I’m still scared. If it is not hedged, maybe you need to appoint another CEO, because I couldn’t sleep at night.

Foreign fund flows into Indonesia are very tempting. But we have to manage our debt carefully.

Djaja: Everyone believes that  the economic environment is very conducive: the economy picking up, good liquidity, no issues like the US and Europe. But what always concerns me is the possibility of another  recession,- even though  Indonesia has gone through several recessions and the  the rupiah moved  from 2500 to 17,000 in a matter of  days. We live in volatile times, but there are certain tools that banks can provide to mitigate some of that risk.

Asiamoney: Krishna talked about wanting to understand the role of the CFO. Has the role of the finance function changed, even though the financial crisis didn’t really hit here?

Ketut: I think the role of the CFO is more critical now. We handle many of our assets through a trust [a REIT] in Singapore so we can tap the costs of finance there, which are much lower. We have to push assets into that trust. This is a critical task for a CFO: packaging assets, injecting them and building new projects.

Abubakar: The main problems for are exchange rate risk, and how to generate funding at a lower rate. For me, the toughest job is to get lower cost of funds for the company, especially to finance expensive projects. In our case there is a mismatch between our revenues and costs because we have to buy gas from PGN in dollars and we get our revenue in rupiah. In future we will negotiate with our customers to convert our revenues into US dollars. Indonesia is a volatile country: maybe at the moment it’s stable, but crisis could return again.

Djaja: The role of the CFO has never really changed, to be honest. I always tell my board members: my role is linked to all of you, whether HR, CSR, project financing or the CEO. The CFO is a partner, a supportive model.

It’s changing in Indonesia. It used to be that the finance director was simply responsible for payments and receivables. The CFO now has a more strategic role to play.

Steve: As business expands, the strategic part that used to be handled exclusively by the CEO is being shifted a bit to the CFO. I’ve seen more and more companies where the CFO is the business and investment head, handling new capital expenditures and investments. The CEO role is so strategic and political nowadays: he is the icon of the company and the CFO runs the business. It might not be suitable for the accountant type who used to be the CFO in the old days. Sometimes we can save a company, or make it more profitable, just by doing great finances.

Krishna: I think fundamentally the role has changed. Initially it was a bean counter, but now it’s a strategic role in creating shareholder value and facing the investor base. It’s very important we help companies go to the next level. It’s a continuous challenge and a moving target.