to be used on Jan. 2

to be used on Jan. 2

;JP;VIN;
ANPAk..r..
Bank-BCA-bidding
Best investor for BCA
JP/4/edit-2

Best investor for BCA

Given the fragile state of Indonesia's banking industry,
despite the almost $65 billion in taxpayers' money already spent
on its restructuring and recapitalization, it is market
credibility and a good track record in bank management, not the
highest price, that should become the primary criteria for
selecting the winning bidder for a 51 percent stake in Bank
Central Asia (BCA).

True, a higher price will generate more revenue for the cash-
starved government. But if the equity stake is awarded to the
bidder offering the highest price and the reputation of the
successful bidder does not generate public trust, BCA will remain
in a fragile condition as its market credibility will continue to
depend mainly on the government's blanket guarantee on bank
deposits and credits.

Notwithstanding BCA's position as the largest retail bank in
the country, with over 8 million accounts, 800 branches, 2,100
ATMs and total assets of Rp 99 trillion (US$.9.9 billion), the
bank is still vulnerable. One should not forget that Rp 60
trillion of the bank's assets consist of virtually illiquid bonds
issued by a government that is groaning under mountains of debt.
The bank's loan-to-deposit ratio is only about 17.2 percent,
meaning that its income is still derived largely from taxpayers'
money (bond interest).

Yes, BCA is potentially a solid bank, but this potential will
be meaningless if it is not developed by a highly-capable
management team and supervised and supported by highly credible
shareholders. BCA is a feasible investment proposition only for
investors with a long time horizon, as it will take at least
three years to develop BCA into a strong financial institution
that meets international standards under Indonesia's adverse
economic and political conditions.

Obviously, the ideal winning bidder would be one offering the
highest price and possessing a high level of market credibility
and a good track record in bank management. But such an ideal
outcome may well remain elusive, given the considerable political
and economic risks that banking operations currently face in this
country.

Moreover, it is probably unreasonable to expect a high premium
price from the transaction because the House has required that
the divestment be conducted in two stages -- 30 percent in the
first stage and 21 percent in the second.

This condition has made the deal much riskier, especially
since the government has become notorious for failing to fully
meet its commitments. Not a single bonafide investor would be
willing to shell out sufficient capital to acquire a 30 percent
share of BCA without also being able to control its management.

If the government were rational enough to adopt confidence-
building as its primary objective for the BCA sale, then seven of
the nine shortlisted final bidders would be automatically
excluded from the race.

None of these seven bidders, including the three foreign-led
consortia (Thailand's Dynamic Choice and Malaysian Plantation and
Farallon Capital of the U.S.) can demonstrate an impressive
record in international-standard bank management. Their
acquisition of BCA would not in any way contribute to raising
BCA's market credibility above the other national banks.

The four locally-led consortia in this group of seven are also
unable to boast of any achievements in banking operations.
Furthermore, they are all part of business conglomerates which,
in the eyes of the public, would be unable to manage the bank as
an independent, arm's-length lender to business. The people still
clearly remember how excessive connected lending practices had
contributed to the downfall of most major banks in 1997-1998.

The market will remain jittery about a bank controlled by a
business group, unless the blanket guarantee remains in effect.
But this guarantee scheme is merely an emergency measure intended
to remain in force for only another one to two years, after which
market forces will be allowed to screen out unviable national
banks.

This leaves two worthy candidates -- Standard Chartered Bank
of Britain and investment company Newbridge Capital of the United
States. These two bidders not only boast good records in bank
management but have also demonstrated their long-term commitment
to investing in the country.

Standard Chartered tried to acquire 20 percent of Bank Bali in
1999 but failed after the exposure of what eventually became
known as the Bank Bali scandal. Newbridge, buoyed by its
successful acquisition of an Astra International electronics
subsidiary in Batam, has taken part in almost all tenders for
major state assets over the past two years, though without any
success. Newbridge was in fact one of the two final bidders in
the first BCA tender in June, which was abruptly canceled by the
government without clear explanation.

Hopefully, building international trust in BCA will become
the primary criterion for selecting the winning bidder, which is
scheduled to be announced within the next few weeks.