Cloud over BCA sales

The government divestment of Bank Central Asia (BCA), which is to be retendered this week, is supposed to be much more attractive than the first failed bidding in the middle of this year, because the offer has been sweetened with a larger stake and, most importantly, the political rot that hung over the economic outlook has been stopped by Megawati Soekarnoputri's rise to the presidency in late July.

However, a new uncertainty is now looming, threatening to discourage more potential investors from bidding for the country's largest retail bank. The devastating impact of the Sept. 11 terrorist attacks in New York and Washington, together with the uncertainty and tension caused by the massive crackdown to be launched on terrorist bastions around the world have increased the downside risks for the global economy.

Most major international financial institutions, notably banks, which were hoped to be the ideal strategic investors in BCA in order to increase its value, are either counting their losses or facing the larger risk of credits turning sour amid the downward cycle of the economy.

It is a universal basic tenet in the financial service industry that whenever the economy is facing large downside risks banks must build up a strong capital cushion to maintain internationally mandated minimum capital adequacy of 8 percent of risk-weighted assets. Consequently, new investment or expansion will mostly be put on hold.

Unfortunately too, the House of Representatives added a last- minute hitch to the strategic sale of the 51 percent equity in BCA, requiring that divestment be made in two stages: 30 percent in the first phase and the remaining 21 percent in the second. Who would be willing to invest so much money in a bank in a fragile economy such as Indonesia's without immediately being able to take over control of management? Even without the new uncertainty fueled by the tragedy in America, investing in Indonesia already needs a lot of guts, given the transition to fully fledged democracy and to regional autonomy with all its implications in law enforcement.

The problem, though, is that a strategic investor in BCA is so vital to jump-start the process of restoring investor confidence, to speed up the restructuring of the banking industry and to help plug the big hole in the state budget, that the government cannot afford to botch up again this strategic sale. It is no exaggeration to say that the BCA sale is the first litmus test of the credibility of the Megawati government in implementing reform measures.

If the government is serious about getting the best strategic alliance for BCA to bolster its market credit standing and speed up its restructuring, there is no other choice than to make the offer much more attractive by guaranteeing that the winning bidder will be granted full control of management and the first right of refusal for the remaining 21 percent equity stake. Without such a solid guarantee, it will be extremely difficult to attract investors with a long-term intention to develop BCA, especially as the founding shareholders (the Salim family) still own more than 7 percent of the bank and are rumored, directly or indirectly, through associates, to control a large portion of the 32.5 percent already sold in the first and second public offerings.

Obviously, the government will not be able to get as high a premium price as the gains likely to accrue from a divestment that is conducted entirely in a single tender.

But a two-phase divestment is not without a large potential benefit either, provided full control of management is immediately given to the winning bidder of the 30 percent portion. As the owner of the remaining 21 percent, the government will stand to reap a sizable benefit from the higher value expected to be created by the strategic investor in BCA by selling its stake after one or two years under the management of the new investor.

But most strategically of all, a privatized Bank BCA with internationally acceptable standards of operation will have very positive reverberations on the banking industry as the main lifeblood artery of the whole economy.