Bapindo's contract management: A second-best therapy?
Bapindo's contract management: A second-best therapy?
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The government is planning to set up a contract management
operation with a foreign bank to overcome problems at scandal-
ridden Bapindo. Economist Rizal Ramli argues that removing
political interference from the banking system is a prerequisite.
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JAKARTA (JP): The current Bapindo credit fraud scandal opens
up a new dimension. By now, it is clear that Eddy Tansil's debt
amounts to a total of Rp 1.7 trillion, including interest
payments. Most likely, Bapindo's losses amount to Rp 900 billion.
Technically and legally, Bapindo can be classified as
bankrupt. However, there is an implicit government guarantee
because Bapindo is a state-owned bank -- a reason why there was
no rush on Bapindo and why it has not collapsed, unlike Bank
Summa.
The government now intends to solve the problem at Bapindo by:
(1) Injecting new capital into Bapindo's coffers. The
government of Indonesia has to cover Bapindo's losses, most
likely by selling its shares in PT Indocement.
(2) Contracting out the management of Bapindo to a foreign
bank. That foreign bank will take over the management of Bapindo
for the next five years.
The pros and cons of such a plan are now being debated among
the public, particularly the question of contracting-out the
management of Bapindo to a foreign bank.
There were many cases in the past of technical assistance to
Indonesian banks, including Bapindo. But if indeed the government
intends to grant a full management contract to an expatriate
bank, it will have to modify the existing loss in order to
accommodate such an arrangement.
But there is also the question of what the real causes of
Bapindo's problems are. Some argue that the primary cause of the
problems at Bapindo is excessive interference by external powers
in the process of credit approval, such as in the case of
Tansil's loan.
Involvement
This political meddling has drawn widespread media coverage,
especially the likely involvement of the former Coordinating
Minister of Political Affairs and Security, Admiral (ret.)
Sudomo, by "instructing" the director of Bapindo to grant Rp 1.3
trillion in loans to Tansil. Furthermore, it is widely known that
Tansil distributed more than US$100 million in bribes to several
high ranking officials. The public has the right to know which
high ranking officials received such bribes, and to demand their
resignations.
For medium-size loans, Bapindo follows normal banking
procedures. Borrowers must submit a feasibility study, go through
a credit review process, present sufficient collateral, and sign
a loan agreement. In Tansil's case, however, all normal banking
procedures were bypassed. For a loan worth over half a billion
dollars, no loan agreement was signed and the value of the
collateral was highly inflated. Such blatant violations of normal
procedures were made possible by the political interference of
officials higher placed than Bapindo's directors.
Considering the fact that Bapindo's directors are government
officials directly responsible to then Finance Minister J.B.
Sumarlin, and despite the fact that Sudomo was one of the highest
ranking security officials in this country at that time, it is
very difficult for the directors to refuse repeated formal and
informal requests from either of the two.
Once the Tansil fraud became known within the bureaucracy,
there were systematic attempts to cover it up. The "qualified"
provision in the BPPKP (central audit board) audit, which
identified the fraud, was altered and modified into one without
qualifications. The BPPKP official in charge of the Bapindo audit
was later discharged from his position, indicating a high-level
attempt to cover up the fraud.
The sequence of events in the Bapindo case indicates that the
problem goes well beyond the standard question of
professionalism. The normal credit procedures were bypassed
because of political interference. The solution to the problem
cannot be confined to improving the banking system and banking
practices within Bapindo. It has to go further to include the
legal removal of political interference in the operation of the
banking system. Otherwise, we may mistaken the secondary cause of
the problem for the root, resulting in a second-best therapy.
Analogous
The government's solution to the case of entrusting the
management of Bapindo to a foreign bank is analogous to the one
applied in the case of the Directorate General of Customs. The
primary problems plaguing this office were deep-rooted corruption
and poor management capacity. To solve the problem, the
government contracted out part of the function of the office to a
Swiss firm, SGS. After two years, a government review concluded
that the directorate was not ready to again take over the
function of SGS. Only after a second two-year contract did the
customs office reassume part of its earlier function. Already,
there are reports that long-standing problems of corruption and
delays have resurfaced in the office.
I am afraid that history will repeat itself at Bapindo.
Because we are not ready to address head-on the primary problem
of Bapindo, corruption and external political interference, I am
afraid that after the management contract is over, we are going
to go back to square one again.
By opting to choose a second-best solution, i.e. contracting
out the management of Bapindo to a foreign bank, we are only
postponing the best resolution to the problem: weeding out
corrupt and unqualified staff and eliminating political
interference in the banking system.
The other important weak link in the organization of the
Indonesian state bank is the "lame-duck" role of the
commissioners. It is widely known that their appointments are
based on a system of patronage rather than professionalism. The
posts are usually handed out to high ranking officials of the
Ministry of Finance as a way to supplement their meager official
incomes. Many of them have neither professional experience in
banking nor the capacity to act independent of the bank
directors. A revitalization of the role of the commissioners by
appointing independent professionals would greatly strengthen the
organizational structure of state banks.
On the policy level the government has to redefine the
function of Bapindo. Bapindo has traditionally been known as a
development bank lending out long-term credit to finance capital
projects. If the management of Bapindo were indeed contracted out
to a foreign bank with a strong reputation for retail banking, I
am afraid that the arrangement will be misplaced. The experiences
of Japan, Germany, and South Korea indicate the importance of a
long-term development bank to accelerate industrialization.
The writer is managing director of Econit, an advisory group
in economics, industry and trade.