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. -----------------------------------------------------------------
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.