Best investor for BCA

Given the fragile state of Indonesia's banking industry, despite the almost $65 billion in taxpayers' money already spent on its restructuring and recapitalization, it is market credibility and a good track record in bank management, not the highest price, that should become the primary criteria for selecting the winning bidder for a 51 percent stake in Bank Central Asia (BCA).

True, a higher price will generate more revenue for the cash- starved government. But if the equity stake is awarded to the bidder offering the highest price and the reputation of the successful bidder does not generate public trust, BCA will remain in a fragile condition as its market credibility will continue to depend mainly on the government's blanket guarantee on bank deposits and credits.

Notwithstanding BCA's position as the largest retail bank in the country, with over 8 million accounts, 800 branches, 2,100 ATMs and total assets of Rp 99 trillion (US$.9.9 billion), the bank is still vulnerable. One should not forget that Rp 60 trillion of the bank's assets consist of virtually illiquid bonds issued by a government that is groaning under mountains of debt. The bank's loan-to-deposit ratio is only about 17.2 percent, meaning that its income is still derived largely from taxpayers' money (bond interest).

Yes, BCA is potentially a solid bank, but this potential will be meaningless if it is not developed by a highly-capable management team and supervised and supported by highly credible shareholders. BCA is a feasible investment proposition only for investors with a long time horizon, as it will take at least three years to develop BCA into a strong financial institution that meets international standards under Indonesia's adverse economic and political conditions.

Obviously, the ideal winning bidder would be one offering the highest price and possessing a high level of market credibility and a good track record in bank management. But such an ideal outcome may well remain elusive, given the considerable political and economic risks that banking operations currently face in this country.

Moreover, it is probably unreasonable to expect a high premium price from the transaction because the House has required that the divestment be conducted in two stages -- 30 percent in the first stage and 21 percent in the second.

This condition has made the deal much riskier, especially since the government has become notorious for failing to fully meet its commitments. Not a single bonafide investor would be willing to shell out sufficient capital to acquire a 30 percent share of BCA without also being able to control its management.

If the government were rational enough to adopt confidence- building as its primary objective for the BCA sale, then seven of the nine shortlisted final bidders would be automatically excluded from the race.

None of these seven bidders, including the three foreign-led consortia (Thailand's Dynamic Choice and Malaysian Plantation and Farallon Capital of the U.S.) can demonstrate an impressive record in international-standard bank management. Their acquisition of BCA would not in any way contribute to raising BCA's market credibility above the other national banks.

The four locally-led consortia in this group of seven are also unable to boast of any achievements in banking operations. Furthermore, they are all part of business conglomerates which, in the eyes of the public, would be unable to manage the bank as an independent, arm's-length lender to business. The people still clearly remember how excessive connected lending practices had contributed to the downfall of most major banks in 1997-1998.

The market will remain jittery about a bank controlled by a business group, unless the blanket guarantee remains in effect. But this guarantee scheme is merely an emergency measure intended to remain in force for only another one to two years, after which market forces will be allowed to screen out unviable national banks.

This leaves two worthy candidates -- Standard Chartered Bank of Britain and investment company Newbridge Capital of the United States. These two bidders not only boast good records in bank management but have also demonstrated their long-term commitment to investing in the country.

Standard Chartered tried to acquire 20 percent of Bank Bali in 1999 but failed after the exposure of what eventually became known as the Bank Bali scandal. Newbridge, buoyed by its successful acquisition of an Astra International electronics subsidiary in Batam, has taken part in almost all tenders for major state assets over the past two years, though without any success. Newbridge was in fact one of the two final bidders in the first BCA tender in June, which was abruptly canceled by the government without clear explanation.

Hopefully, building international trust in BCA will become the primary criterion for selecting the winning bidder, which is scheduled to be announced within the next few weeks.