Bapindo's contract management: A second-best therapy?<\/p>\n
-----------------------------------------------------------------<\/p>\n
The government is planning to set up a contract management
\noperation with a foreign bank to overcome problems at scandal-
\nridden Bapindo. Economist Rizal Ramli argues that removing
\npolitical interference from the banking system is a prerequisite.
\n-----------------------------------------------------------------<\/p>\n
JAKARTA (JP): The current Bapindo credit fraud scandal opens
\nup a new dimension. By now, it is clear that Eddy Tansil's debt
\namounts to a total of Rp 1.7 trillion, including interest
\npayments. Most likely, Bapindo's losses amount to Rp 900 billion.<\/p>\n
Technically and legally, Bapindo can be classified as
\nbankrupt. However, there is an implicit government guarantee
\nbecause Bapindo is a state-owned bank -- a reason why there was
\nno rush on Bapindo and why it has not collapsed, unlike Bank
\nSumma.<\/p>\n
The government now intends to solve the problem at Bapindo by:<\/p>\n
(1) Injecting new capital into Bapindo's coffers. The
\ngovernment of Indonesia has to cover Bapindo's losses, most
\nlikely by selling its shares in PT Indocement.<\/p>\n
(2) Contracting out the management of Bapindo to a foreign
\nbank. That foreign bank will take over the management of Bapindo
\nfor the next five years.<\/p>\n
The pros and cons of such a plan are now being debated among
\nthe public, particularly the question of contracting-out the
\nmanagement of Bapindo to a foreign bank.<\/p>\n
There were many cases in the past of technical assistance to
\nIndonesian banks, including Bapindo. But if indeed the government
\nintends to grant a full management contract to an expatriate
\nbank, it will have to modify the existing loss in order to
\naccommodate such an arrangement.<\/p>\n
But there is also the question of what the real causes of
\nBapindo's problems are. Some argue that the primary cause of the
\nproblems at Bapindo is excessive interference by external powers
\nin the process of credit approval, such as in the case of
\nTansil's loan.<\/p>\n
Involvement<\/p>\n
This political meddling has drawn widespread media coverage,
\nespecially the likely involvement of the former Coordinating
\nMinister of Political Affairs and Security, Admiral (ret.)
\nSudomo, by "instructing" the director of Bapindo to grant Rp 1.3
\ntrillion in loans to Tansil. Furthermore, it is widely known that
\nTansil distributed more than US$100 million in bribes to several
\nhigh ranking officials. The public has the right to know which
\nhigh ranking officials received such bribes, and to demand their
\nresignations.<\/p>\n
For medium-size loans, Bapindo follows normal banking
\nprocedures. Borrowers must submit a feasibility study, go through
\na credit review process, present sufficient collateral, and sign
\na loan agreement. In Tansil's case, however, all normal banking
\nprocedures were bypassed. For a loan worth over half a billion
\ndollars, no loan agreement was signed and the value of the
\ncollateral was highly inflated. Such blatant violations of normal
\nprocedures were made possible by the political interference of
\nofficials higher placed than Bapindo's directors.<\/p>\n
Considering the fact that Bapindo's directors are government
\nofficials directly responsible to then Finance Minister J.B.
\nSumarlin, and despite the fact that Sudomo was one of the highest
\nranking security officials in this country at that time, it is
\nvery difficult for the directors to refuse repeated formal and
\ninformal requests from either of the two.<\/p>\n
Once the Tansil fraud became known within the bureaucracy,
\nthere were systematic attempts to cover it up. The "qualified"
\nprovision in the BPPKP (central audit board) audit, which
\nidentified the fraud, was altered and modified into one without
\nqualifications. The BPPKP official in charge of the Bapindo audit
\nwas later discharged from his position, indicating a high-level
\nattempt to cover up the fraud.<\/p>\n
The sequence of events in the Bapindo case indicates that the
\nproblem goes well beyond the standard question of
\nprofessionalism. The normal credit procedures were bypassed
\nbecause of political interference. The solution to the problem
\ncannot be confined to improving the banking system and banking
\npractices within Bapindo. It has to go further to include the
\nlegal removal of political interference in the operation of the
\nbanking system. Otherwise, we may mistaken the secondary cause of
\nthe problem for the root, resulting in a second-best therapy.<\/p>\n
Analogous<\/p>\n
The government's solution to the case of entrusting the
\nmanagement of Bapindo to a foreign bank is analogous to the one
\napplied in the case of the Directorate General of Customs. The
\nprimary problems plaguing this office were deep-rooted corruption
\nand poor management capacity. To solve the problem, the
\ngovernment contracted out part of the function of the office to a
\nSwiss firm, SGS. After two years, a government review concluded
\nthat the directorate was not ready to again take over the
\nfunction of SGS. Only after a second two-year contract did the
\ncustoms office reassume part of its earlier function. Already,
\nthere are reports that long-standing problems of corruption and
\ndelays have resurfaced in the office.<\/p>\n
I am afraid that history will repeat itself at Bapindo.
\nBecause we are not ready to address head-on the primary problem
\nof Bapindo, corruption and external political interference, I am
\nafraid that after the management contract is over, we are going
\nto go back to square one again.<\/p>\n
By opting to choose a second-best solution, i.e. contracting
\nout the management of Bapindo to a foreign bank, we are only
\npostponing the best resolution to the problem: weeding out
\ncorrupt and unqualified staff and eliminating political
\ninterference in the banking system.<\/p>\n
The other important weak link in the organization of the
\nIndonesian state bank is the "lame-duck" role of the
\ncommissioners. It is widely known that their appointments are
\nbased on a system of patronage rather than professionalism. The
\nposts are usually handed out to high ranking officials of the
\nMinistry of Finance as a way to supplement their meager official
\nincomes. Many of them have neither professional experience in
\nbanking nor the capacity to act independent of the bank
\ndirectors. A revitalization of the role of the commissioners by
\nappointing independent professionals would greatly strengthen the
\norganizational structure of state banks.<\/p>\n
On the policy level the government has to redefine the
\nfunction of Bapindo. Bapindo has traditionally been known as a
\ndevelopment bank lending out long-term credit to finance capital
\nprojects. If the management of Bapindo were indeed contracted out
\nto a foreign bank with a strong reputation for retail banking, I
\nam afraid that the arrangement will be misplaced. The experiences
\nof Japan, Germany, and South Korea indicate the importance of a
\nlong-term development bank to accelerate industrialization.<\/p>\n
The writer is managing director of Econit, an advisory group
\nin economics, industry and trade.<\/p>",
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