Further delay of BCA sale unwarranted

Riyadi Suparno, The Jakarta Post, Jakarta

The sale of the government's controlling stake in Bank Central Asia (BCA) has again hit a snag, with sudden opposition from inside the Cabinet.

The opposition from State Minister of National Development Planning Kwik Kian Gie comes as the sale process reaches its final stage -- in selecting a winner from the four remaining bidders.

Kwik rightly argued that the government was still bankrolling BCA with around Rp 9 trillion (US$873 million) in interest payments per annum, arising from the government's Rp 58.2 trillion recapitalization bonds injected into the bank.

Therefore, Kwik further contended that it would be a huge mistake for the government to sell its 51 percent stake for about Rp 5 trillion -- far from enough to cover the government's obligation to pay bond interest to the bank for this year alone.

However, Kwik's opposition was too late and not wise.

Such an argument should have been submitted to the International Monetary Fund a year ago, not at the end of the bidding process.

The sale of BCA has been incorporated several times in the government's letters of intent to the IMF.

Kwik, however, does not seem to be backing down.

His argument is that he wants to save as many cents as possible from the government's Rp 648 trillion of bonds issued to save most of the country's troubled banks.

Without serious efforts, Kwik predicts that the government will potentially lose a staggering Rp 450 trillion. And that includes potential losses from BCA.

However, Kwik's efforts to minimize the losses this time are pursued in the wrong way.

Kwik's contention that the government would get only Rp 5 trillion for the Rp 58.2 trillion bonds injected into BCA is a misplaced argument.

When the bonds were issued, BCA was in the red, and thus the Rp 58.2 trillion bonds brought up BCA's equity and capital adequacy ratio into the black.

Because of this bond injection, BCA equity rose to Rp 9.4 trillion as of the end of 2001. That is the book value buyers are willing to pay, plus a premium, and not the value of the government's bonds in BCA.

Meanwhile, the Rp 58.2 trillion in bonds issued by the government for BCA were to cover both BCA's unpaid Bank Indonesia liquidity support or BLBI (of around Rp 35 trillion) and the bank's bad loans.

The government issued the bonds for BCA only after the Salim Group, the former controlling shareholder of BCA, pledged to the government assets totaling Rp 52 trillion to repay BLBI and cover intra-group loans.

Therefore, the government got assets in exchange for the bonds issued for BCA and other banks.

If only the government had the money in the first place to recapitalize BCA, it would not be burdened with the bond and Rp 9 trillion per annum in interest payments to BCA.

Any buyer of BCA, if they have the choice, would not like to see more than 50 percent of the bank's assets filled by papers, which do not sell well in the market.

Kwik seems to have discounted this reality that the government received assets supposedly worth at least Rp 52 trillion or the same amount the Salim Group owed the government.

Later, after being verified independently, these pledged assets -- currently managed by PT Holdiko Perkasa (a new company established by the Indonesian Bank Restructuring Agency) -- turned out to be worth less than Rp 20 trillion. So it was the government's mistake in the first place.

The first very mistake the government made was its decision to accept assets to repay debt through the Master of Settlement and Acquisition Agreement (MSAA). Secondly, it did not really verify the assets being pledged by conglomerates. And thirdly, it still entrusted the former owners to manage those assets.

Should all these mistakes be transferred into the new buyer of BCA by withdrawing the government's recapitalization bonds or exchanging the bonds with goodwill? It would be very unfair for the buyer, and the buyer would surely not accept it.

So, who must cover the losses from the recapitalization of BCA? As a consequence of the MSAA with Salim, the government could only ask for more assets to cover the "misrepresentation" which would range from Rp 2 trillion to Rp 4 trillion. Thus, it must be the government -- the taxpayers -- which will in the end cover the losses.

Considering all the past mistakes the government has made, what the government and also all parties concerned could do now is minimize the losses by obtaining the maximum price for BCA shares, getting the highest recovery rate of assets under Holdiko and of BCA's non-performing loans taken over by the Indonesian Bank Restructuring Agency (IBRA).

Some experts calculate that acceptable rates of non-performing loan recovery is around 20 percent, with Holdiko's assets recovery at 40 percent.

Here Kwik is expected to play his role so that the government, in this case IBRA, could get a higher rate of recovery for assets and loans.

What about the best price for BCA shares?

Banking analyst Mirza Adityaswara from the Business Reform and Reconstruction Corp. has the formula. He uses price to deposit ratio to calculate the price of BCA shares, considering that the bank has strong deposit franchise value.

Using bank acquisitions in Thailand in the period of 1998 through 2000 as comparison, Mirza contended that Thai banks were acquired at 15 percent to 20 percent of the price to deposit ratio.

At Rp 1,700 per share, BCA is trading on an 11 percent price to deposit ratio. Hence, there is the possibility that the acquisition price may go above Rp 2,000 per share, even above Rp 2,500 per share because bidders must add the controlling premium.

If the government gets Rp 2,500 per share for BCA, a 40 percent rate of the assets held by Holdiko and a 20 percent recovery rate for the BCA non-performing loans, then the total recovery rate for BCA would be 56 percent.

However, will the government get Rp 2,500 per share for its controlling stake in BCA? Very unlikely. Bids from the two most talked-about bidders for BCA shares -- Standard Chartered consortium and Farallon Capital consortium -- reportedly are at Rp 1,780 and Rp 1,775 respectively.

If that is the case, then, Kwik should again play his role to get the best price for BCA. At least then he would have a strong reason to demand a further delay in the BCA sale.

To do this, Kwik better coordinate with his colleagues in the Cabinet so that any effort to get the best price for BCA would not spoil the entire process and sacrifice other important things, such as the target to get the best financial institution to take over BCA.