Threats to the BCA sale

Threats to the BCA sale

Bank Central Asia (BCA), Indonesia's largest retail bank, is
certainly the most controversial of the US$ 65 billion-worth of
assets that were taken over by the Indonesian Bank Restructuring
Agency (IBRA) amid the country's worst-ever banking crisis in
1997-1999.

BCA's initial public offering of 22.50 percent of its shares
was postponed several times before it was finally launched in
May, 2000. Its secondary issue last July left behind allegations
of price manipulation. Its sale to strategic investors ended in
tatters last August as only two investors, neither of them a
bank, submitted bids.

The second bid to sell the government's 51 percent stake in
the bank was launched late last year in what most analysts,
including the International Monetary Fund, acclaimed to be a
transparent and fair bidding process. It has now reached the last
stage of selecting the winner.

However, the heightening controversy, the swirling allegations
of unfair treatment of bidders and a threat by employees to
revolt against the strategic sale of BCA, could still abort what
has long been expected to be the deal of the year.

What went wrong?

First of all, we think, the government failed to develop a
positive climate of public opinion for the deal. It miserably
failed to implement an effective communications campaign to brief
the general public, notably the bidders and BCA stakeholders, on
the technicalities of the step-by-step process of the bidding.

Many issues that caused heated controversy seemed to be
triggered by an inadequate knowledge of the technical details on
the requirements that had to be met and the numerous steps of the
bidding process that had to be passed by bidders, as well as the
rights of the government along the way.

We realize that the factor of confidentiality, which binds the
government in its dealings with the bidders, imposes restrictions
on what it can disclose while the bidding process is still under
way.

But detailed, candid explanations, for example, about how the
secrecy of the bidding documents is safeguarded, why the fit-and-
proper test conducted by the central bank is so vital, why a
bidder that can bring in synergy is so crucial for the long-term
good of BCA, should help enlighten the public on the objectives,
transparency and fairness of the transaction.

Also damagingly lacking within the information campaign are
clear and strongly built points of argument to help the public
comprehend why the government has had to divest its stake in BCA
and why high credibility and professional integrity and
competence in the banking industry are much more important than
the bidding price or the nationality of the bidders.

A properly informed public could understand and accept why two
of the four final bidders -- the GKBI cooperatives and Bank
Global-led (I thought it was Bank Mega-led) consortiums -- that
happen to be Indonesian companies, failed to pass the central
bank's fit-and-proper test and had to exit the race.

What the government is now facing is an inadequately informed
public that is highly vulnerable to rumors or wild allegations.
This, in turn, will put the government on the defensive, forcing
it to react with fragmented information any time a rumor
circulates, but never able to put the whole issue in its proper,
complete perspective.

The fact that only two bidders -- Farallon investment company
of the United States and Standard Chartered Bank of the UK -- got
as far as the final round made the competition appear not
entirely fair. Measured against the most important requirements
-- high credibility, professional integrity and competence in the
banking industry -- the contest now seems unintentionally to have
been lop-sided in favor of Standard Chartered.

But the controversy and the possibility of several bad losers
trying to discredit the whole bidding process are not the only
delicate issues the government has to resolve in the final
process of the bidding.

Threats by trade union leaders at BCA to prevent the bank from
being sold to foreign investors could still sabotage the deal. It
is not yet too late for the government and BCA's management to
enlighten its employees on the great benefits of the transaction
to the bank, to their future careers as well as to the banking
industry in general.

BCA is indeed the largest processing and settlement bank, with
more than 8 million accounts, 800 branches, over 2,100 ATMs and
total assets of almost Rp 100 trillion ($9.5 billion) as of last
year. But, like all other major national banks, BCA is still
fragile, as Rp 58 trillion of its assets consist of illiquid
government bonds and its loan portfolio is largely
underdeveloped, with a loan-to-deposit ratio of only about 17
percent.

It is precisely because of this fragility that BCA's new
controlling owners must be highly credible and respectable within
the banking industry. Only investors with such an impeccable
track record would be able to help strengthen market confidence
in the bank as an institution of trust.

But most strategically, a fair and transparent BCA sale will
jump-start the process of restoring investor confidence in the
country, and a privatized BCA with an international standard of
operations will speed up the restructuring of the national
banking industry.