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.