Cloud over BCA sales

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.